China Power Equipment, Inc. - FORM 10-K

Attached files

file	filename
EX-31.1 - China Power Equipment, Inc.	ex31-1.htm
EX-14.1 - China Power Equipment, Inc.	ex14-1.htm
EX-32.1 - China Power Equipment, Inc.	ex32-1.htm
EX-31.2 - China Power Equipment, Inc.	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended December 31, 2010

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

For the transition period from ________________ to ________________

Commission File Number 333-147349

CHINA POWER EQUIPMENT, INC.

(Name of small business issuer in its charter)

Maryland	20-5101287
(State or other jurisdiction of	(IRS. Employer
incorporation or organization)	Identification No.)

Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University,

No. 168 Kechuang Road, Hi-tech Industrial Development Zone

Xi’an, Shaanxi, China 710065

(Address of principal executive offices)

Issuer’s telephone number, including area code +86-29-8831-0282/8831-0560

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

Securities registered pursuant to Section 12(g) of the Act: None.

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

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 þ 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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was Required to submit and post such files).* o Yes o No *The Company has not yet been phased in to the Interactive Data requirements.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (as defined in Rule 12b-2 of the Exchange Act). Check one:

Large accelerated filer ¨ Accelerated Filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (8,794,527 shares) based on the price of $2.25 at which the registrant’s common stock was last sold as of the last business day of the registrant’s most recently completed second quarter, was $19.8 million. For purposes of this computation, all officers, directors, and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 5% beneficial owners are, in fact, affiliates of the registrant.

As of March 28, 2011, there were outstanding 19,382,013 shares of the registrant’s common stock, par value $0.001 per share.

Documents incorporated by reference: None.

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China Power Equipment, Inc.

Form 10-K

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		Page
PART I

ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	12
ITEM 2.	PROPERTIES	22
ITEM 3.	LEGAL PROCEEDINGS	22
ITEM 4.	REMOVED AND RESERVED	22

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES	23
ITEM 6.	SELECTED FINANCIAL DATA	24
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	33
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	36
ITEM 9A.	CONTROLS AND PROCEDURES	36
ITEM 9B.	OTHER INFORMATION	37

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	38
ITEM 11.	EXECUTIVE COMPENSATION	42
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	45
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	46
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	46

PART IV

ITEM 15.	EXHIBITS	47

SIGNATURES		48

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PREDICTIVE STATEMENTS AND ASSOCIATED RISK

Certain statements in this Report, and the documents incorporated by reference herein, constitute predictive statements. Such predictive statements involve known and unknown risks, uncertainties and other factors which may cause deviations in actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied. Such factors include, but are not limited to: market and customer acceptance and demand for our products; our ability to market our products; the impact of competitive products and pricing; the ability to develop and launch new products on a timely basis; the regulatory environment, including government regulation in the PRC; our ability to obtain the requisite regulatory approvals to commercialize our products; fluctuations in operating results, including spending for research and development and sales and marketing activities; and other risks detailed from time-to-time in our filings with the Securities and Exchange Commission.

The words “believe, expect, anticipate, intend and plan” and similar expressions identify predictive statements. These statements are subject to risks and uncertainties that cannot be known or quantified and, consequently, actual results may differ materially from those expressed or implied by such predictive statements. Readers are cautioned not to place undue reliance on these predictive statements, which speak only as of the date they are made.

Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to “RMB” or “yuan” are to the Chinese renminbi (also known as the yuan). According to the currency exchange rate published by People’s Bank of China , as of December 31, 2010, US $1.00 = RMB 6.591.

PART I

ITEM 1.

BUSINESS

Corporate History

China Power Equipment, Inc. (“China Power”, the “Company”, or “we”) was incorporated in the State of Maryland on May 17, 2006 for the purpose of acquiring an existing company with continuing operations. China Power formed An Sen (Xi’an) Power Science & Technology Co., Ltd. (“An Sen”) which was granted a license as a wholly-owned foreign enterprise in the city of Xi’an under the laws of the People’s Republic of China (“PRC”) on November 3, 2006. An Sen is a wholly-owned subsidiary of China Power and a limited liability company organized under the laws of the PRC.

Pursuant to the Agreement, An Sen has the right to manage and control Zhongxi, receive the financial benefits and is exposed to the financial risks of Zhongxi, including, without limitation, the assumption of any risk of loss from Zhongxi’s operations, the obligation to pay the outstanding liabilities of Zhongxi, including debt, if Zhongxi does not have sufficient cash on hand to do so, and any deficiencies if net assets are less than registered capital as a result of any losses. While neither China Power nor An Sen will co-sign Zhongxi contracts, An Sen will continue to be exposed to the financial risks of Zhongxi for its future obligations with third parties through the operation of Management Entrustment Agreement. Mr. Song, the legal representative for Zhongxi and Yarong Feng, the legal representative for An Sen, hold positions as directors and executive officers of each of An Sen and Zhongxi; therefore the Management Entrustment Agreement was not entered into at arm’s length because the parties to the agreement were related prior to the transaction and under common control immediately thereafter. Under the Management Entrustment Agreement and pursuant to consent of the shareholders of Zhongxi, Zhongxi and its shareholders entrusted to An Sen its management rights, the rights and powers of its shareholders and board of directors, and the right to receive all of Zhongxi’s profits in exchange for An Sen’s assumption of the obligation to fund all operating losses and liabilities of Zhongxi. In addition, An Sen has the right to vote as if it holds 100% of the common stock of Zhongxi on all matters that are brought before Zhongxi’s shareholders. As a result of entering into the Management Entrustment Agreement, An Sen has functional control over Zhongxi and for purposes of US GAAP we can consolidate the financial results of Zhongxi. DeHeng Law Office, our PRC counsel, has advised us that in their opinion the Management Entrustment Agreement is legal and enforceable under PRC law. In the event of a breach of the Management Entrustment Agreement, the breaching party is liable for monetary damages and there is no right of termination for breach.

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To date, none of Zhongxi’s profits have been paid to An Sen, nor has Zhongxi paid any other fees to An Sen pursuant to the Management Entrustment Agreement as available funds have been used for working capital.

The Management Entrustment Agreement was utilized instead of a direct acquisition of the assets or common stock of Zhongxi, because of the lack of clarity in the implementation of current PRC laws regarding the use of a non-PRC entity’s equity as consideration to acquire a PRC entity’s equity or assets. This makes it highly uncertain, if not impossible, for a non-PRC entity (such as China Power) to use its equity to acquire a PRC entity (such as Zhongxi). While PRC law does allow for the purchase of equity interests in, or assets of a PRC entity by a non-PRC entity for cash, the purchase price must be based on the appraised value of the equity or assets. Because the Company did not have sufficient cash to pay the estimated full value of all of the assets of Zhongxi, the Company, through An Sen, entered into the Management Entrustment Agreement in exchange for the right to exercise functional control over Zhongxi.

Neither China Power nor An Sen have any operations or plan to have any operations in the future other than acting as a holding company and management company for Zhongxi and raising capital for its operations. However, we reserve the right to change our operating plans regarding China Power and An Sen.

Business Overview

China Power Equipment, Inc. (“China Power” or the “Company”) is a holding company. Through its wholly owned subsidiary, An Sen and its affiliated operating company, Zhongxi, it designs, manufactures, and distributes amorphous alloy transformer cores and amorphous alloy distribution transformers in the People’s Republic of China.

The use of amorphous alloy cores creates a new generation of energy saving electrical power transformers that are used to step down voltage in the final phase of electricity distribution – near consumers and companies.

In China, electricity is generated at 6,000 to 10,000 volts and then stepped up to high voltages for long-distance distribution. When the electricity reaches the user’s district, the voltage is stepped down, the electricity is sent onward to the transformer near the users, and then is stepped down again to either 220 volts or 380 volts to make the electricity ready to use.

China Power creates a range of amorphous alloy transformer cores for the transformers that perform this final voltage reduction.

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A typical amorphous alloy transformer consumes 70% less electricity compared with traditional silicon steel transformer in operation, which gives more net electricity to the consumers. For example, for a 500KVA transformer, typical silicon steel transformer consumes 960W while comparable amorphous alloy transformer consumes only 240W.

Since the amorphous alloy transformer consumes less electricity, it reduces the need to generate electricity. In turn, less coal is burned to provide the same net electricity to the consumers. The result is lower air pollution and more affordable electricity with greater availability.

Therefore, as an energy-efficient power equipment, amorphous alloy transformer has received the same strong support from Chinese government as the new type clean energy has, which leads to significant potential demand in the market.

Products

China Power (through Zhongxi) designs, manufactures, and distributes amorphous alloy cores in the PRC that are the main component in a new generation of energy saving electrical power transformers. Zhongxi also sells amorphous alloy transformers and is expanding its manufacturing of this type of transformers.

China Power has discontinued its legacy silicon steel transformer business, and no longer a manufacturer or distributor of silicon steel transformers. Traditional steel core transformers were approximately 0.4% of the Company's sales in 2009. Amorphous alloy cores and amorphous alloy transformers constituted all of the Company’s sales in 2010.

China Power currently manufactures 59 different products, primarily amorphous alloy cores and, to a lesser extent, amorphous alloy core transformers that are subcontracted to other companies.

The amorphous alloy core, on the right, has 3,030 layers of amorphous alloy strip, weighs about 68 kilograms (149.94 pounds), and is used in an electric transformer to step down 10,000 volts to 220 volts. The assembly of the core is done by a combination of computer-controlled cutting and precision alignment of each delicate thin alloy strip, careful shaping by hand to the final form, computer-controlled heat treatment matched to the core’s specific application, then final assurance testing, finishing, and protective packaging. The typical price for this core is about RMB 2,584 (about $392).

China Power discontinued the manufacturing of steel core and distribution of steel core transformers made by other companies in 2010.

China Power currently produces the amorphous alloy core series SH15, SBH15, and DH15, as well as the transformer series that use those cores, as shown below. The transformer production is currently subcontracted to other companies but will be taken in-house when China Power’s transformer capacity is established in 2011.

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Amorphous Alloy Cores and Transformer Products

Zhongxi uses a patented, innovative production technology for making amorphous alloy transformers cores. The underlying technology relies on the electrical and magnetic properties of amorphous alloy materials. Amorphous alloys exhibit conductivity properties that are far superior to silicon steel that is used in traditional power transformers. As a result, Zhongxi believes that an amorphous alloy transformer can result in energy savings for its customers. In addition, we use technologies that are more environmentally friendly and energy-saving than technologies that are used to make traditional steel cores and transformers.

The amorphous alloy strip, the key raw material used in our manufacturing process, is made by our supplier using flat plate flow liquid state chilling technology to make the molten alloy steel. The molten alloy steel is then put through a super-freezing process where the cooling speeds are up to one million degrees per second. The micro-mechanism of the resulting metal possesses long range unordered glass state features, completely different from traditional metal alloy material. The resulting amorphous metal is characterized by high intensity, high saturation induction density, high magnetic permeability, rigidity, anticorrosion, wearability, resistivity, low coercivity, low loss, good frequency characteristics and temperature characteristic and good tenacity together with improved electromechanical coupling coefficients, thermal conductivity, and surfactivity. These qualities significantly improve the operational efficiencies of electrical power transformers. We believe this new material will replace silicon steel and permalloy, and will be extensively used in transformer, mutual-inductor, reactance unit, and similar products to further electronic product miniaturization, high frequency, high efficiency, environment protection and energy-saving, which is superior when compared with traditional core materials.

A series of Chinese government regulations have encouraged the use of amorphous alloy core transformers since 1998 because of their energy saving properties. These regulations specified new energy codes for the manufacture and sale of transformers, setting stricter regulations regarding a transformer’s maximum energy consumption limit. In 1998 the Chinese government confirmed the policy of proposing domestic amorphous alloy materials and transformers. In 2000 the Chinese government listed the amorphous alloy transformer as an important environmental protection product. In 2005 the Chinese government listed energy saving transformer industry as an industry encouraged by the nation. In the “Eleventh Five Year Plan” announced in 2006, the Chinese government set up the goal for all the local governments to reduce energy consumption by 20%.

In 2007, the amorphous alloy industry was considered by the government as one of the industries with significant growing potential. In 2008, the Chinese government launched an “Economic Stimulation Program” that is expected to accelerate the construction of both infrastructure and the electric power grid in rural areas. In 2009, the State Grid Corporation of China entered into a letter of intent for a clean development mechanism program with the World Bank to install high-efficiency amorphous alloy transformers that will gradually replace 166,000 of the most inefficient transformers in China. In November 2010, the China’s Development and Reform Commission( NDRC ) and relevant government officials announced “the Guidance for Power Supply Management” in order to accelerate the adoption of products and technologies that would dramatically improve the energy efficiency of electricity grid , reduce emissions, and increase the availability of electricity. The guidance is effective on January 1, 2011. In the guidance, the government not only sets up specific energy-saving targets for grid companies, but also encourages grid companies to install energy-saving transformers. The government also provides a series of incentives, including surcharge on users to encourage grid companies to adopt new technologies to save energy consumption.

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Exit Strategy For Silicon Steel Cores and Transformers Business

Zhongxi no longer manufactures, markets, sells, or distributes silicon steel cores or silicon steel transformers since it exited those product lines in 2009.

Originally, Zhongxi started the business of steel cores and transformers in 2004. On January 1, 2005, Zhongxi leased facilities owned by Xi’an Zhongxi Zhengliu Dianlu Transformer Factory Ltd. (“ZD”), so Zhongxi could manufacture traditional steel core transformers, for an initial lease fee of RMB 30,000 plus RMB 100,000 per year in rent payable after Zhongxi completed certain agreed upon leasehold improvements (the “2005 Lease”). The term of the 2005 Lease runs from the execution date to 2028, with a 10 year option to renew by Zhongxi. The agreement can be terminated by mutual agreement or the parties with provisions that provide that a breaching party will owe a non-breaching party 10% of the lease fee in liquidated damages.

In 2006, Zhongxi outsourced the production of traditional steel core transformers to ZD in order to be able to allocate Zhongxi’s resources to producing amorphous alloy cores and transformers. On March 25, 2006, in order to transform its primary business to the manufacture of amorphous alloy cores and transformers, Zhongxi subleased (the “2006 Sub-Lease”) its manufacturing facilities back to ZD for RMB 500,000 per year for a period of three years ending on March 31, 2009. The Sub-Lease was renewed in 2009 on a month to month basis with a monthly lease payment of RMB 41,666.67 (the “2009 Sub-Lease”).

During term of the 2009 Sub-Lease, no rental payments will be due under the 2005 Lease. Under the terms of the 2009 Sub-Lease, ZD will give priority to the steel core transformers ordered by Zhongxi. ZD is responsible for all of the costs and expenses related to the operation of the manufacturing facility. Upon termination of the 2009 Sub-Lease, ZD has a right of first refusal to re-lease the facilities from Zhongxi and manufacture steel core transformers for Zhongxi upon the same terms and conditions as in the 2006 Sub-Lease in the event that Zhongxi decides to continue to outsource these operations. In the event that ZD does not exercise its right of first refusal, the 2009 Sub-Lease terminates and the provisions of the 2005 Lease continue to apply.

Market For Zhongxi’s Products

China’s traditional steel core transformer market is extremely competitive, with several high profile participants. The rising price of raw materials used in steel core transformers has resulted in relatively narrow profit margins for the steel core transformer makers.

The energy-saving performance and environmental improvements that come from amorphous alloy transformers and China’s national policy guidance that encourages their use make traditional silicon steel transformers account less in the transformer market while the adoption of energy-saving transformers is continuously growing. As a result, we believe that demand for high-efficiency amorphous alloy cores and transformers greatly exceeds the current supply.

We made the strategic business decision to focus our manufacturing resources on amorphous alloy cores and amorphous alloy core transformers to gain a larger share of the lucrative amorphous alloy power products market, enjoy the financial benefits of premium pricing, earn an internal rate of return greater than the cost of capital, contribute to improving China’s environment by reducing air and solids pollution and to help China meet its commitment to reduce greenhouse gases, and help improve the quality of life for China’s citizens by increasing the net amount of electricity in both urban and rural regions, at affordable prices.

We believe that our decision to focus on the market for amorphous alloy transformer cores, and later transformers, will enable us to establish a leadership position in the market and to participate in this growth on a broad scale.

China Power’s strategy is designed to establish the Company as a leader in the global amorphous alloy core and transformer market.

China Power has completed its transition to manufacturing amorphous alloy core. The Company expects to control the raw material cost by large-scale production and procurement, and reduce the cost of amorphous alloy transformers by improving process and technology, thus improve the gross margin.

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The Company plans to strengthen its sales and marketing efforts, build relationships with appropriate state and national government agencies, and establish relationships with additional major transformer manufacturers.

China Power intends to continue to develop new products to improve transformer efficiency and meet customer and market demand.

In 2010, China Power was granted three patents regarding its products and specialized equipment, and has received patent certificates for two of them. These new product designs are expected to effectively enrich our product portfolio, and should provide more options for our customers.

Meanwhile, our R&D department is actively testing the performance of domestic amorphous materials. Producing amorphous alloy cores with domestic amorphous materials should offer more options for the Company, thus, enhancing the Company’s competitiveness.

In 2007, the Company exported its products to South Korea due to a policy of the South Korean government that at least 3 percent of all newly-installed power transformers should be amorphous core transformers. We have since then expanded our capacity and are able to secure sufficient supply of our products to all of our customers in China, accordingly the Company plans in the future to actively pursue markets outside of China. In the view of the global trends in this industry, China and India are currently the biggest markets for amorphous alloy transformers. In addition, in Asia (besides the existing market in Taiwan and South Korea) other markets include the Philippines and Vietnam . The North America and Brazil markets for these products are also expected to develop very fast.

Customers Of Zhongxi

China Power’s direct and indirect customers, include China’s primary electricity generator and supplier, the State Grid Corporation of China, provincial electric suppliers, large suppliers of electrical equipment to the electrical power industry, and other electric power transformers manufacturers.

The State Grid Corporation of China (“State Grid”) builds and operates the electric power grids and provides secure and reliable power supply for the development of the Chinese society. Its service area covers 26 provinces, autonomous regions, and municipalities directly under the jurisdiction of the Chinese Central Government, which accounts for 88 percent of the China’s national territory. The State Grid is an entity owned and managed by the Chinese government and is the major buyer of electric power transformers in China.

Marketing And Production Strategy Of Zhongxi

Through Zhongxi, China Power’s strategy for marketing and production consists of the following:

·	Increase its market share in amorphous alloy transformer cores by effective marketing and direct selling to the transformer makers, and by cooperating with their customers (the Chinese governments and their government agencies).

Market to transformer makers by assisting them with the specification, design, engineering, prototyping, and final product performance validation for the amorphous alloy transformers they will need for specific applications. The customers accept China Power’s technical assistance in exchange for the customers’ commitments to purchase all their cores from China Power.

·	Increase the supply of amorphous alloy strip to develop a diversified supply portfolio, which effectively provides options to the users.

·	China Power will prudently expand capacity so that it can deliver all new orders promptly, consistent with the customers’ just-in-time specifications. Customers will then have high assurance that their high-quality cores will arrive at the times and performances specified

·	Expand its capacity in its production plants in phases to optimize the company’s return on assets.

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Increase its market share in high-performance electrical transformers that use the company’s amorphous alloy transformer cores by introducing its new line of amorphous alloy transformers and by expanding sales in geographic regions not served by China Power’s current customers that make transformers. About 90 percent of China’s installed distribution transformers do not yet have amorphous alloy cores. This is a large market with enough room for both China Power and its customers to supply transformers without significant competitive conflict.

·	Make transformer customers the first priority on its core production. China Power will fill all its customers’ orders for cores at the time specified – before it supplies cores to its own transformer production line.

Actively develop the power transmission products needed for the new type of energy- such as clean energy, including the transformer applied to wind power. The company is also targeting manufacturers who are seeking to change from traditional transformers to energy-saving products, and making them potential customers for our amorphous alloy cores.

Raw Materials And Principal Suppliers Of Zhongxi

Zhongxi’s amorphous alloy cores have three main raw materials: amorphous alloy strip, silicon steel sheet, and epoxy resin. Except for amorphous alloy strip, these materials are currently readily available in its domestic or the international market.

The current supplier of raw amorphous alloy strip for manufacturing amorphous alloy core is Hitachi Metals Co., Ltd.(“Hitachi”), which is the biggest manufacturer of amorphous alloy strip in the world. As the biggest manufacturer of amorphous alloy cores in western China, the Company has been maintaining a good relationship with Hitachi. Notwithstanding the fact that the supply of Hitachi’s amorphous alloy strip is outpaced by the global demand for its product, we believe our relationship with Hitachi will generally permit us to purchase sufficient amounts of material to keep up with our demand. Meanwhile, we expect that Beijing Advanced Technology & Materials Co. Ltd. ("AT&M") will soon provide materials in large amount to reduce any potential risks relating to the materials, and to enrich our product portfolios. We have signed an agreement with AT&M whereby we have been given priority to purchase amorphous alloy strip products.

In September 2009, AT&M completed their test production of amorphous alloy strip, using their facility that has an annual capacity of 10,000 metric tons. Zhongxi has used some of AT&M’s test strip to manufacture test cores and transformers that are permitting electric power grid organizations and other transformer makers to test and to validate that the cores and transformers using AT&M’s amorphous alloy will perform as expected, are equivalent in quality and performance to production that uses Hitachi’s amorphous alloy, and are qualified for production purchases. Zhongxi believes that this second source for amorphous alloy strip, when approved for production, is likely to help alleviate the raw material constraint that has been a concern in the global transformer industry.

Competition

While many manufacturers are capable of producing traditional transformers, fewer than 20 manufacturers in China have the technology to produce amorphous alloy core transformers and only four are capable of large scale production. For the production of amorphous alloy cores, Zhongxi is one of only three major manufacturers in China. The other two are Shanghai Zhixin Electric Co., Ltd. and Beijing Zhong Ji Lian Gong Co., Ltd.

Comparative data for Zhongxi and its two main competitors in the amorphous alloy and steel core business is shown in the table below.

	China Power		Shanghai Zhixin Electric Co. Ltd. (1)		Beijing Zhong Ji Lian Gong Co., Ltd.
Year established	2004		1998		2005
Sales in 2010 in RMB		200,484,074		1,110,319,472		228,000,000
Sales in 2010 in US $ (2)		29,657,846		168,459,941		34,592,626
Geographic market coverage	National		National		National
Annual production capacity, in metric tons		6,500		20,000		6,000

(1) 2010 sales for Shanghai Zhixin Electric Co. Ltd. were estimated based on its sales through September 30, 2010 because their audited year 2010 financial statements are not yet available.

(2) US$ amounts were translated using year 2010 average exchange rate of $1 = RMB 6.7599

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While Zhongxi’s competitors are larger, we believe Zhongxi has a number of advantages over its competitors which will help us expand our market in a short time.

(1) Geographic: The Company is located in western China, and is the only professional manufacturer of amorphous alloy cores in western China. This unique geographic advantage best suits the energy-saving effect of amorphous alloy transformers since the transportation of the products is more convenient because it lies in the center of the country.

(2) Technology: The Company has six patents, including design of the cores and transformers, equipment for core production and transformer production. The extensive coverage of our patents shows that our company has a comprehensive knowledge in amorphous alloy transformer industry. These technologies have enabled the Company to lower production cost and provide comprehensive service and optimal design to our customers.

(3) Capacity. After the completion of capacity expansion in 2010, the Company has become one of the top manufacturers in amorphous industry.

(4) Extensive experiences: As a pioneer of the research and development of amorphous alloy transformers in China, the Company has maintained a good relationship with relevant state ministries and AT&M in Beijing. The Company has started the application of domestic amorphous alloy strip with AT&M since 2009, and has tested two types of materials so far, including the newest type of material developed by AT&M. The technologies we have accumulated and the good relationship within the industry will effectively improve our competitiveness.

Research and Development

Research and development has been and continues to be a chief component of Zhongxi’s strategy, and it has strong independent research and development abilities. Zhongxi has six Chinese national patents: 3-phase oil-immersed amorphous alloy transformer (patent number ZL01212922.4), dry type transformer (patent number ZL98234558.5), Consecutive Anneal Stove For Amorphous Metal Distribution Transformer Core (patent number ZL200620078995.4), a new amorphous alloy transformer (patent number ZL 2010 2 0195940), vacuum oiling device for amorphous alloy transformers, patent number(ZL 2010 2 0195939.5), three-phase three-column amorphous alloy transformer core (application number 201020510531.2) which has already been granted, but has yet to receive the certificate.

Zhongxi’s leading researcher, Mr. Xu Zewei, is one of the forerunners in the research of amorphous alloy core transformers in China. He has extensive research experience in electromagnetism and has initiated and participated in more than 20 research projects and made ground-breaking discoveries. Zhongxi’s research team consists of PhDs and graduate students who collectively have decades of experience in transformer design and development. The Company is also dedicated to bringing new talents to the group; the newcomers have successfully served in helping to keep the research team at the leading edge of power transformer research and development.

In 2007, Zhongxi was recognized by the Xi’an municipal government as the only R&D and production technology center for amorphous alloy cores.

As of December 31, 2010, we had 6 full-time employees engaged in the company-sponsored research and development.

Intellectual Property

Trademarks

The Company has no registered trademarks.

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Patents

Zhongxi has six Chinese national patents: (i) 3-phase oil-immersed amorphous alloy core transformer, patent number ZL01212922.4, which expired on January 10, 2011, (ii) dry type transformer, patent number ZL98234558.5, which will expire on June 30, 2012, and (iii) Consecutive Anneal Stove For Amorphous Metal Distribution Transformer Core, patent number ZL200620078995.4, which will expire on May 18, 2016.(iv) a new amorphous alloy transformer, patent number ZL 2010 2 0195940, which will expire on May 19, 2020, (v) vacuum oiling device for amorphous alloy transformers, patent number, ZL 2010 2 0195939.5, which will expire on May 19, 2020, (vi) three-phase three-column amorphous alloy transformer core, application number 201020510531.2, which has already been granted, but has yet to receive the certificate.

Domain Names

Zhongxi owns and operates a website under the internet domain name of http://www.chinapower-equipment.com.

Government Regulation

Zhongxi is not subject to any requirements for governmental permits or approvals or any self regulatory professional associations for the manufacture and sale of amorphous alloy cores or amorphous alloy transformers. Zhongxi is not subject to any significant government regulation of the business or production, or any other government permits or approval requirements, except for the laws and regulations of general applicability for corporations formed under the laws of the PRC.

Compliance With Environmental Laws

To our knowledge, neither the production nor the sale of our products constitute activities or generate materials, in a material manner, which causes Zhongxi’s operations to be subject to the PRC environmental laws.

Risk Of Loss And Product Liability Insurance

Delivery of Zhongxi’s products is arranged by Zhongxi. Usually, Zhongxi delivers its products primarily through independent logistics companies. Its current shipping companies include Shaanxi Haoyuntong Logistic, Ltd. and Xi’an Haina Logistic Company.

Zhongxi currently does not carry any product liability or other similar insurance, nor does Zhongxi have property insurance covering our plants, manufacturing equipment, and office buildings. While product liability lawsuits in the PRC are rare and Zhongxi has never experienced significant failures of its products, we cannot assure you that Zhongxi would not face liability in the event of any failure of any of its products.

Employees

The table below presents the number of our employees on December 31, 2010 and 2009.

Category	2010		2009

Administration		17		22
Manufacturing		31		30
Research & development		6		5
Sales & support		8		4
Total		62		61

Executive Office

Our principal executive offices are located at: Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China 710065. Our telephone number at that address is 86-29-8831-0282.

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ITEM 1A.

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider all of the risks described below, together with the other information contained in this report, before making a decision to purchase our common stock. You should only purchase our common stock if you can afford to lose your entire investment.

An Investment In Our Common Stock Involves A High Degree Of Risk. You Should Carefully Consider The Risks Described Below And The Other Information Contained In This Prospectus Before Deciding To Invest In Our Common Stock.

The risks and uncertainties described below are not the only ones we may face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, and or operating results. If any of the following risks, or any other risks not described below, actually occur, it is likely that our business, financial condition, and operating results could be seriously harmed. As a result, the trading price of our common stock could decline, and you could lose part or all of your investment.

We Do Not Have Any Equity Ownership Interest in Zhongxi, Our Operating Business, And Our Executives Are Also Affiliates of Zhongxi and An Sen, The Parties To The Management Entrustment Agreement.

We do not have any equity ownership interest in Zhongxi. We control Zhongxi through a Management Entrustment Agreement between Zhongxi and our wholly owned subsidiary An Sen. Both An Sen and Zhongxi are controlled by affiliates of Zhongxi and Alloy Science, including Mr. Song, our CEO and Chairman who holds approximately 43.8% of the shares of common stock of Zhongxi and 15.2% of our common stock, and by Ms. Yarong Feng and Mr. Gouan Zhang who are affiliates of Zhongxi and An Sen who manage approximately 19.6% of our common stock as trustees for the shareholders of Alloy Science. Mr. Song is also the President and CEO of An Sen, acting CEO and President of Alloy Science, and one of the trustees for 93.75% of the Alloy Science shares held by shareholders of Alloy Science. Ms. Feng is a Director of China Power, Director of An Sen, Chief Financial Officer and Director of Zhongxi, Secretary to the Board of Directors of Alloy Science, and a Trustee for the shareholders of Alloy Science. Mr. Zhang is a Vice General Manager of China Power, Vice General Manager of An Sen, Vice General Manager and director of Zhongxi, and Trustee under Voting Trust and Escrow Agreement for Alloy Science.

RISKS RELATED TO OUR BUSINESS

Our Limited Operating History May Not Serve As An Adequate Basis To Judge Our Future Prospects And Results Of Operations.

Zhongxi commenced its business operations in 1999. Its limited operating history may not provide a meaningful basis on which to evaluate its business. We cannot assure you that Zhongxi will maintain our profitability or that it will not incur net losses in the future. We expect that the operating expenses of Zhongxi will increase as it expands. Any significant failure to realize anticipated revenue growth could result in significant operating losses. Zhongxi will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to: (a) raise adequate capital for expansion and operations; (b) implement the business model and strategy and adapt and modify them as needed; (c) increase awareness of the brands of Zhongxi, protect its reputation and develop customer loyalty; (d) manage the expanding operations and service offerings of Zhongxi, including the integration of any future acquisitions; (e) maintain adequate control of the expenses of Zhongxi; (f) anticipate and adapt to changing conditions in the transformer and electric power market in which Zhongxi operates as well as the effect of any changes in government regulations, mergers and acquisitions involving our competitors, technological developments, and other significant competitive and market dynamics.

If Zhongxi is not successful in addressing any or all of these risks, our business may be materially and adversely affected.

The Failure Of Zhongxi To Compete Effectively May Adversely Affect Its Ability To Generate Revenue.

Zhongxi competes primarily on the basis of its ability to find purchasers for our transformer cores. There can be no assurance that it will continue to find such purchasers in new areas as we attempt to expand or that its competitors will not negotiate more favorable arrangements.

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We expect that we will be required to continue to invest in expansion capacity and research and development efforts in order for Zhongxi to remain competitive. Zhongxi’s contemplated expansion will require large amounts of capital. Zhongxi’s competitors may have better resources and better strategies to raise capital which could have a material adverse effect on its business, results of operations and financial condition.

Zhongxi May Not Be Able To Effectively Control And Manage Its Growth.

If business of Zhongxi and its markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. Any expansion would increase demands on the existing management, workforce, and facilities of Zhongxi. Failure to satisfy such increased demands could interrupt or adversely affect the operations of Zhongxi, cause delays in production and delivery of amorphous alloy cores and create administrative inefficiencies.

We May Require Additional Financing In The Future And A Failure To Obtain Such Required Financing Will Inhibit The Ability Of Zhongxi To Grow.

The continued growth of the business of Zhongxi may require additional funding from time to time. Funding would be used for general corporate purposes, which could include acquisitions, investments, repayment of debt, capital expenditures, and repurchase of our capital stock, among other things. Obtaining additional funding would be subject to a number of factors, including market conditions, operating performance, and investor sentiment, many of which are outside of our control. These factors could make the timing, amount, and terms and conditions of additional funding unattractive or unavailable to us.

The Terms Of Any Future Financing May Adversely Affect Your Interest As Stockholders.

If we require additional financing in the future, we may be required to incur indebtedness or issue equity securities, the terms of which may adversely affect your interests in us. For example, the issuance of additional indebtedness may be senior in right of payment to your shares upon liquidation of the Company. In addition, indebtedness may be under terms that make the operation of the business of Zhongxi more difficult because the lender’s consent could be required before we take certain actions. Similarly the terms of any equity securities we issue may be senior in right of payment of dividends to your common stock and may contain superior rights and other rights as compared to your common stock. Further, any such issuance of equity securities may dilute your interest in us.

The Protection Of Intellectual Property Rights In The PRC Is Not As Effective As In The United States Or Other Countries.

Our success depends, in part, on our ability to protect the proprietary technologies of Zhongxi. As of the date of this annual report, Zhongxi has six patents, four patents for the production technology of amorphous alloy transformers and two patents for equipment for the production of amorphous alloy cores and transformer.

Protection of intellectual property in the PRC has historically been weak, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in the PRC may not be as effective as they are in the United States and other countries. Policing unauthorized uses of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of Zhongxi’s proprietary rights or those of others. Such litigation could require significant expenditure of cash and management efforts and could harm our business, financial condition, and results of operations. An adverse determination in any such litigation would impair our intellectual property rights and could harm our business, competitive position, business prospects, and reputation. There is no guarantee that Zhongxi’s intellectual property is or will be sufficiently protected. Nor is there any guarantee that its current or potential competitors that do not have such technology, will not obtain or develop, similar technology, which could negatively impact our competitive advantage over such companies and our business.

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We And Or Zhongxi May Be Exposed To Intellectual Property Infringement And Other Claims By Third Parties, Which, If Successful, Could Cause Us And or Zhongxi To Pay Significant Damage Awards And Incur Other Costs.

Although we believe that the technology Zhongxi uses, including its patented technology and technology for which Zhongxi has applied for patents, is significantly distinguished from other patented technology, and any infringement claim relating to the technology of Zhongxi would be unlikely to succeed, we cannot assure you that our assessment is or will remain correct. In addition, as litigation becomes more common in the PRC in commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims. The validity and scope of claims relating to patents for amorphous alloy core and transformer technology and related devices and machines involve complex technical, legal, and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceeding to which we and or Zhongxi may become a party could subject us and or Zhongxi to significant liability to third parties, including damage awards, and could require Zhongxi to seek licenses from third parties, pay ongoing royalties, or to redesign products or subject Zhongxi to injunctions preventing the manufacture and sale of its products. Protracted litigation could also result in the customers or potential customers of Zhongxi deferring or limiting their purchase or use of its products until resolution of such litigation.

Zhongxi Depends On A Concentration Of Raw Materials Suppliers. Any Significant Fluctuation In Price Of Raw Materials May Have A Material Adverse Effect On The Manufacturing Cost Of The Products Of Zhongxi.

Zhongxi relies on raw materials, especially amorphous alloy strip, silicon steel sheets and epoxy resin, to produce its products. Zhongxi enters into supply contracts for these raw materials. Therefore, the availability of raw materials is subject to risks of contract fulfillment from the counterparties of Zhongxi. The support of government on amorphous alloy transformer industry may increase the demand of amorphous alloy strip, silicon steel sheet and epoxy resin, which will bring the increase of price. For the major material, amorphous alloy strip, the only supplier is Hitachi Metals Co., Ltd. Currently, Hitachi’s amorphous alloy strip global supply falls short of demand. In the event that Hitachi is unable to provide us with the amorphous alloy strip we require, Zhongxi may be unable to find alternate sources, or find alternate sources at reasonable prices. In such event, the business and financial results of Zhongxi would be materially and adversely affected.

AT&M may become second supplier for amorphous alloy strip, which is the main material used in our production. Beijing Advanced Technology & Materials Co., Ltd. is the company’s English name, while the translation of its Chinese name into English is China An Tai Technology Co., Ltd. The company uses both names. The supply of amorphous alloy strip from AT&M may help relieve the potential shortage of amorphous alloy strip in the future. However, with the increasing demand in both China’s and the world’s market, a shortage for the raw material may still exist in the future. In such event, if our company can not find any alternatives, the business and financial results of Zhongxi would be materially and adversely affected.

While Zhongxi Has Some Long Term Supply Contracts With Its Suppliers Of Raw Materials, Any Significant Fluctuation In Price Of Raw Materials May Have A Material Adverse Effect On Its Manufacturing Costs.

Silicon steel sheet and epoxy resin are two other raw materials that Zhongxi uses, in addition to amorphous alloy strip. The prices of the sheet steel and epoxy resin are subject to market conditions. Our operating company has certain long-term contracts or arrangements with its suppliers; however, the contracts may not be sufficient to cover its needs. While some of these raw materials are generally available, other raw materials for the amorphous alloy cores and transformers produced by Zhongxi have limited suppliers, and we cannot assure you that prices will not rise because of changes in market conditions. An increase in component or raw material costs relative to the product prices of Zhongxi could have a material adverse effect on its gross margins and earnings.

Potential Environmental Liability Could Have A Material Adverse Effect On Operations And The Financial Condition Of Zhongxi.

To the knowledge of our management team, neither the manufacture of transformer cores nor the sale and distribution of transformer cores and transformers requires Zhongxi to comply with PRC environmental laws other than laws of general applicability. Zhongxi has never been the subject of allegations of any environmental regulation; however, there can be no assurance that the PRC government will not amend its current environmental protection laws and regulations. The business and operating results of Zhongxi could be materially and adversely affected if Zhongxi were to increase expenditures to comply with environmental regulations affecting its operations.

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We May Engage In Future Acquisitions That Could Dilute The Ownership Interests Of Our Stockholders, Cause Us To Incur Debt, And Assume Contingent Liabilities.

We may review acquisition and strategic investment prospects that we believe would complement our current product offerings, augment our market coverage, or enhance our technical capabilities, or otherwise offer growth opportunities. From time to time we review investments in new businesses, and we expect to make investments in and or to acquire businesses, products, or technologies in the future. In the event of any future acquisitions, we could issue equity securities which would dilute current stockholders’ percentage ownership; incur substantial debt; assume contingent liabilities; or expend significant cash.

These actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if we do obtain benefits in the form of increased sales and earnings, there may be a lag between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and or products; unanticipated costs associated with the acquisition or investment transaction; the diversion of management’s attention from other business concerns; adverse effects on existing business relationships with suppliers and customers; risks associated with entering markets in which we have no or limited prior experience; the potential loss of key employees of acquired organizations; and substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items. We cannot ensure that we will be able to successfully integrate any businesses, products, technologies, or employees that we might acquire in the future, and our failure to do so could have a material adverse effect on our business, operating results, and financial condition.

We Are Responsible For The Indemnification Of Our Officers And Directors.

Our Articles of Incorporation provide for the indemnification and or exculpation of our directors, officers, employees, and agents to the maximum extent provided, and under the terms provided, by the laws and decisions of the courts of the state of Maryland. This indemnification policy could result in substantial expenditures, which we may be unable to recoup, which could adversely affect our business and financial conditions.

We May Have Difficulty Establishing Adequate Management, Legal, And Financial Controls In The PRC.

The PRC historically has not adopted a western style of management and financial reporting concepts and practices, as well as modern banking, computer, and other control systems. Zhongxi may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, it 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.

We May Not Have Adequate Internal Accounting Controls. While We Have Certain Internal Procedures In Our Budgeting And Forecasting And In The Management And Allocation Of Funds, Our Internal Controls May Not Be Adequate.

We are constantly striving to improve our internal accounting controls. We hope to develop an adequate internal accounting control to budget, forecast, manage, and allocate our funds and account for them. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast, and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under the US securities laws.

Our Internal Controls Over Financial Reporting May Not Be Effective, Which Could Have A Significant And Adverse Effect On Our Business.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. Our lack of familiarity with Section 404 may unduly divert management’s time and resources in executing the business plan. If, in the future, management identifies one or more material weaknesses, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and or subject us to sanctions or investigation by regulatory authorities.

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We Do Not Have Key Man Insurance On Our President And CEO, Mr. Song, On Whom We Rely For The Management Of Zhongxi’s Business.

We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Yongxing Song. The loss of the services of Mr. Song, for any reason, may have a material adverse effect on our business and prospects. We cannot assure you that we will be able to find a suitable replacement for Mr. Song. We do not carry key man life insurance for any of our key employees.

We May Not Be Able To Hire And Retain Qualified Employees To Support The Growth Of Zhongxi And If We Are Unable To Retain Or Hire These Employees In The Future, Our Ability To Improve Our Products And Implement Our Business Objectives Could Be Adversely Affected.

Competition for senior management and employees in the PRC is intense, the pool of qualified candidates in the PRC is very limited, and Zhongxi may not be able to retain the services of its senior executives or senior employees, or attract and retain high-quality senior executives or senior employees in the future. This failure could materially and adversely affect our future growth and financial condition.

Zhongxi Does Not Presently Maintain Fire, Theft, Product Liability, Or Any Other Property or Business Interruption Insurance, Which Leaves Us With Exposure In The Event Of Loss Or Damage To Its Properties, Those of Our Principal Suppliers or Customers Or Claims Filed Against Us And/Or Zhongxi.

Neither we nor Zhongxi maintains fire, theft, product liability, or other insurance of any kind. We bear the economic risk with respect to loss of or damage or destruction to our property and to the interruption of our business as well as liability to third parties for personal injury or damage or destruction to their property that may be caused by our personnel or products. This liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business, financial condition and prospects. However product liability lawsuits in the PRC are rare, and Zhongxi has never experienced significant failure of its products. In addition, catastrophic events, including natural disasters such as hurricanes and earthquakes; war or terrorist activities; unplanned outages; supply disruptions; and failures of equipment or systems at any of our facilities could adversely affect our results of operation. Hitachi Metals, headquartered in Tokyo, Japan, is our largest supplier of amorphous alloy strip, the primary raw material for making our amorphous alloy electricity transformer cores and is the largest manufacturer of amorphous alloy in the world. Its alloy manufacturing operations are located in southern Japan. Although to date Hitachi Metals appears not to have been affected by the earthquake, aftershocks, or the tsunami that hit northeastern Japan or the nuclear radiation leaks that have followed, the consequences of closing more nuclear power stations in Japan might eventually reduce Hitachi Metals' ability to produce or ship alloy to us. If these conditions persist, they may have an adverse effect on our result of operations.

Neither We Nor Zhongxi Maintains A Reserve Fund For Warranty Or Defective Equipment Claims. Zhongxi’s Costs Could Substantially Increase If We Experience A Significant Number Of Warranty Claims.

Currently, Zhongxi provides a one-year warranty to its customers who have purchased its transformers. The warranties require us to replace defective equipment. As of March 29, 2011, Zhongxi has received no warranty claims for its products. Consequently, the costs associated with its warranty claims have historically been minimal, and we have therefore not established any reserve funds for potential warranty claims. If Zhongxi begins to receive warranty claims, our financial condition and results of operations could be materially adversely affected.

RISKS RELATED TO OUR INDUSTRY

A Drop In The Retail Price Of The Traditional Transformer Cores In The PRC May Have A Negative Effect On The Business Of Zhongxi.

If the retail price of traditional steel transformer cores is reduced, the purchaser may choose not to purchase the more expensive amorphous alloy transformer cores. Such decrease of demand may lead to a decrease in profits of Zhongxi and us. Although management of Zhongxi believes that current retail amorphous alloy transformer cores prices support a reasonable return on investment for its products, there can be no assurance that future retail pricing will remain at such levels.

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Existing Regulations And Changes To Existing Regulations May Significantly Reduce Demand For The Products Of Zhongxi.

The development of the market for amorphous alloy cores and transformers is supported by relevant government regulations. Even though we believe such supporting policies of the government will not change in the near future, there is no guarantee that changes will not happen in the long run. We are responsible for knowing the requirements of individual cities and must design equipment to comply with varying standards. Any new government regulations or utility policies that relate to our amorphous alloy transformer cores products may result in significant additional expenses to us, our resellers, and their customers and, as a result, could cause a significant reduction in demand for our products.

If Amorphous Alloy Technology Is Not Suitable For Widespread Adoption, Or Sufficient Demand For Amorphous Alloy Products Does Not Develop Or Takes Longer To Develop Than We Anticipate, The Sales Of Zhongxi Would Not Significantly Increase And Neither We Nor Zhongxi Would Be Able To Achieve Or Sustain Profitability.

The market for amorphous alloy products is emerging and rapidly evolving, and its future success is uncertain. If amorphous alloy technology proves to be unsuitable for widespread commercial deployment or if demand for amorphous alloy products fails to develop sufficiently, Zhongxi would be unable to generate enough revenues to achieve and sustain profitability. In addition, demand for amorphous alloy products in the markets and geographic regions Zhongxi targets may not develop or may develop more slowly than we anticipate. Many factors will influence the widespread adoption of amorphous alloy technologies and demand for amorphous alloy products, including (i) cost-effectiveness of amorphous alloy technologies as compared with conventional steel transformer technologies; (ii) performance and reliability of amorphous alloy products as compared with conventional steel transformer technologies; and (iii) capital expenditures by customers that tend to decrease if the PRC or global economy slows down.

RISKS RELATED TO DOING BUSINESS IN THE PRC.

Changes In The Policies Of The PRC Government Could Have A Significant Effect On The Business We May Be Able To Conduct In The PRC And The Profitability Of Such Business.

The PRC’s economy is in a transition from a planned economy to a market oriented economy, subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic, and social life.

The PRC Laws And Regulations Governing The Current Business Operations Of Zhongxi Are Sometimes Vague And Uncertain. Any Changes In Such PRC Laws And Regulations May Harm The Business Of Zhongxi.

The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the laws and regulations governing the business of Zhongxi, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy, and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. New laws and regulations that affect existing and new businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.

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A Slowdown Or Other Adverse Developments In The PRC Economy May Harm Our Customers And The Demand For Our Services And Our Products.

All of our operations are conducted in the PRC and all of our revenues are currently generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that this growth will continue. The amorphous alloy industry in the PRC is relatively new and growing. However, a slowdown in overall economic growth, an economic downturn, a recession, or other adverse economic developments in the PRC could significantly reduce the demand for our products and harm our business.

Inflation In The PRC Could Negatively Affect Our Profitability And Growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth could lead to growth in the money supply and rising inflation. If prices for the products of Zhongxi rise at a rate that is insufficient to compensate for the rise in the costs of its supplies, it may harm the profitability of Zhongxi. In order to control inflation in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

Governmental Control Of Currency Conversion May Affect The Value Of Your Investment.

The PRC government imposes controls on the convertibility of the renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.

The PRC government may also in the future restrict access to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.

The Fluctuation Of The Renminbi May Harm Your Investment.

The value of the Chinese renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of the renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into renminbi for the operations of Zhongxi, appreciation of the renminbi against the U.S. dollar would diminish the value of the proceeds of the offering and this could harm the business, financial condition, and results of operations for us and Zhongxi. Conversely, if we decide to convert renminbi from Zhongxi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the renminbi, the U.S. dollar equivalent of the renminbi we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the renminbi to the U.S. dollar. Under the new policy, the renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the renminbi against the U.S. dollar. While the international reaction to the renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the renminbi against the U.S. dollar.

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PRC State Administration Of Foreign Exchange (“SAFE”) Regulations Regarding Offshore Financing Activities By PRC Residents May Increase The Administrative Burden We Face. The Failure By Our Shareholders Who Are PRC Residents To Make Any Required Applications And Filings Pursuant To Such Regulations May Prevent Us From Being Able To Distribute Profits And Could Expose Us And Our PRC Resident Shareholders To Liability Under PRC Law.

In October 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a public notice the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE notice (“SAFE #75”), which requires PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred to as an “offshore special purpose company,” for the purpose of overseas equity financing involving onshore assets or equity interests held by them. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment, or creation of any security interest over any assets located in China. Moreover, if the offshore special purpose company was established and owned the onshore assets or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer, or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We believe that our PRC resident controlling shareholder, Mr. Song, has taken all necessary steps as instructed by the local SAFE branch to comply with SAFE #75 by filing a disclosure form regarding his ownership status; however, we cannot assure you that this disclosure document will be sufficient. It is also unclear exactly whether our other PRC resident shareholders must make disclosure to SAFE. While our PRC counsel has advised us that only the PRC resident shareholders who receive ownership of the foreign holding company in exchange for ownership in the PRC operating company are subject to SAFE #75, there can be no assurance that SAFE will not require our other PRC resident shareholders to register and make the applicable disclosure. In addition, SAFE #75 requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however, there is no indication of what the penalty will be for failure to comply or if shareholder non-compliance will be considered to be a violation of SAFE #75 by us or otherwise affect us. In the event that the proper procedures are not followed under SAFE #75, we could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions. Our PRC resident shareholders could be subject to fines, other sanctions and even criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.

The PRC’s Legal And Judicial System May Not Adequately Protect The Business And Operations Of Zhongxi And The Rights Of Foreign Investors

The PRC legal and judicial system may negatively affect foreign investors. In 1982, the National People’s Congress amended the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the PRC. However, the PRC’s system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in the PRC lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the PRC judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC’s legal system is based on the civil law regime, that is, it is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the PRC’s political, economic, or social life, will not affect the PRC government’s ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.

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As a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws impose standards concerning corporate formation and governance, which are qualitatively different from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices, which are not consistent with U.S. generally accepted accounting principles. PRC’s accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. While the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Any award rendered by an arbitration tribunal is enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.

Any Recurrence Of Severe Acute Respiratory Syndrome, Or SARS, Or Another Widespread Public Health Problem, Could Harm Our Operations.

A renewed outbreak of SARS or another widespread public health problem (such as bird flu) in the PRC, where all of our revenues are derived, could significantly harm our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could significantly harm our operations.

Because Our Principal Assets Are Located Outside Of The United States And Most Of Our Directors And All Of Our Officers Reside Outside Of The United States, It May Be Difficult For You To Enforce Your Rights Based On U.S. Federal Securities Laws Against Us And Our Officers Or To Enforce U.S. Court Judgment Against Us Or Them In The PRC.

Most of our directors and all of our officers reside outside of the United States. In addition, Zhongxi is located in the PRC and substantially all of its assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.

The Relative Lack Of Public Company Experience Of Our Management Team May Put Us At A Competitive Disadvantage.

Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior management have never had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory compliance, and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.

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RISKS RELATED TO OUR COMMON STOCK.

Our Officers And Directors Control Us Through Their Positions and Stock Ownership And Their Interests May Differ From Other Stockholders.

As of March 28, 2011, there were 19,382,013 shares of our common stock issued and outstanding. Our officers and directors beneficially own approximately 18.0% of our common stock. Mr. Song, our Chairman and Chief Executive Officer, beneficially owns approximately 15.2% of our common stock. As a result, he is able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions including business combinations. Yet Mr. Song’s interests may differ from those of other stockholders. Furthermore, ownership of 18.0% of our common stock by our officers and directors reduces the public float and liquidity, and may affect the market price, of our common stock. Mr. Song, Ms. Feng, who is our Director, and Mr. Xu, the Chief Engineer of Zhongxi, each respectively own 35.0%, 3.6%, and 2.3% of Alloy Science, 43.8%, 6.3%, and 5.0% of Zhongxi, and 15.2%, 0.9% and 1.6% of China Power. Mr. Zhang, Vice General Manager for Zhongxi, and Ms. Feng, our Director, hold 19.6% of our common stock as trustees for the shareholders of Alloy Science. In addition, Ms. Feng, our Director, and Mr. Gouang Zhang, our Vice General Manager, hold voting power over approximately 19.6% of the shares of Alloy Science as Trustees for Alloy Science stockholders. Alloy Science is not engaged in any business operations and all of the ownership rights of our officers and directors in Zhongxi are held by An Sen pursuant to the Management Entrustment Agreement.

We Are Not Likely To Pay Cash Dividends In The Foreseeable Future.

We intend to retain any future earnings for use in the operation and expansion of the business of Zhongxi. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.

Our Common Stock Has Limited Liquidity And Subject To Price Volatility Unrelated To Our Operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets, or other developments affecting our competitors or us. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

A Large Number Of Shares Will Be Eligible For Future Sale And May Depress Our Stock Price.

We may be required, under terms of future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.

Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.

We Are Authorized To Issue “Blank Check” Preferred Stock, Which, If Issued Without Stockholders Approval, May Adversely Affect The Rights Of Holders Of Our Common Stock.

We are authorized to issue 10,000,000 shares of preferred stock, of which 5,000,000 shares have been designated as Series B Preferred Convertible Stock. As of March 29, 2011 there were 4,149,667 shares of Series B Convertible Preferred Stock issued and outstanding. The Board of Directors is authorized under our Articles of Incorporation, as amended and corrected, to provide for the issuance of additional shares of preferred stock by resolution, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations, or restrictions thereof without any further vote or action by the stockholders. Any shares of preferred stock so issued are ikely to have priority over the common stock with respect to dividend or liquidation rights. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control, which could have the effect of discouraging bids for our company and thereby prevent stockholders from receiving the maximum value for their shares. We have no present intention to issue any shares of our preferred stock in order to discourage or delay a change of control. However, there can be no assurance that preferred stock will not be issued at some time in the future.

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ITEM 2.

PROPERTIES

All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants landholders a “land use right” after a purchase price for such “land use right” is paid to the government. The “land use right” allows the holder the right to use the land for a specified long-term period of time and enjoys all the ownership incidents to the land. The following are the details regarding our land use rights with regard to the land that Zhongxi uses in its business.

Zhongxi currently maintains two factories: a transformer factory and an amorphous alloy transformer core factory. The transformer factory is in the Xizhang Industrial Park, Daxingxi Road, Xi’an. Its total area is 5,803 square meters, and has more than 50 machines in a manufacturing area of 2,000 square meters. The land use rights of 2,000 square meters of land at Daxinxi Road, Xizhang Industry Village are leased from Xi’an Zhengliu Dianlu Transformer Co., Ltd. for an annual rent of RMB 100,000 yuan ($14,626). The term of the lease is 24 years, which expires in 2028. Zhongxi currently rents the factory built on the 2,000 square meters land to Xi’an Zhongxi Zengliu Dianlu Transformer Factory, Ltd. for an annual rent of RMB 500,000 ($73,129). The lease is currently on a month to month basis.

In July 2010, we completed the construction of amorphous alloy transformer cores which is in the Jingyang Yongle Industrial Zone. It has 35 acres; the plant is 5,000 square meters. It has administrative building, dormitory for the staff, dining room and other supporting areas. Currently, the plant is mainly engaged in the production of amorphous alloy cores. It has land use right purchase agreement, and is currently in the process of obtaining the land use right certificate.

Zhongxi corporate headquarters are now located at: Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China, with approximately 460 square meters of usable space.

Certain equipments in the old factory located at No. 15 Gaoxin 6 Road, Hi-tech Industrial Development Zone, Xi’an, have been taken to the new factory in Jingyang. The empty plant and the administrative building are left for future use.

ITEM 3.

LEGAL PROCEEDINGS

Neither we nor any of our subsidiaries, nor is Zhongxi a party to any pending legal proceedings, nor are we aware of any such proceedings threatened.

ITEM 4.

REMOVED AND RESERVED

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PART II

ITEM 5.

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

Market Information

Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the trading symbol “CPQQ.OB”. The table below sets forth the high and low bid price for each quarter since there has been a market for our common stock, as reported by the Yahoo Finance website at http://finance.yahoo.com/q?s=CPQQ.OB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions.

	High		Low
Fourth Quarter 2010	$	2.75	$	1.40
Third Quarter 2010	$	2.65	$	1.71
Second Quarter 2010	$	3.60	$	2.08

Holders

As of March 28, 2011, there were 19,382,013 shares of our common stock issued and outstanding, and there were approximately 51 holders of record of our outstanding shares of common stock.

Dividends

We have not declared or paid any cash dividends on our common stock during either of our two most recent fiscal years. The payment of dividends, if any, is at the discretion of the Board of Directors and is contingent on the Company’s revenues and earnings, capital requirements, and financial conditions. We currently intend to retain all earnings, if any, for use in business operations. Accordingly, we do not anticipate declaring any dividends in the near future.

The PRC’s national currency, the renminbi, is not a freely convertible currency. Please refer to the risk factors “Governmental Control Of Currency Conversion May Affect The Value Of Your Investment”, “The Fluctuation Of The Renminbi May Harm Your Investment”, and “PRC State Administration Of Foreign Exchange (“SAFE”) Regulations Regarding Offshore Financing Activities By PRC Residents May Increase The Administrative Burden We Face. The Failure By Our Shareholders Who Are PRC Residents To Make Any Required Applications And Filings Pursuant To Such Regulations May Prevent Us From Being Able To Distribute Profits And Could Expose Us And Our PRC Resident Shareholders To Liability Under PRC Law.”

Securities Authorized For Issuance Under Equity Compensation Plans.

We do not have any equity compensation plans.

Recent Sales of Unregistered Securities

We have reported all sales of our unregistered equity securities that occurred during 2010 in our Reports on Form 10-Q or Form 8-K, as applicable.

Transfer Agent

The Company’s stock transfer agent is OTC Corporate Transfer Service Co., located at 52 Maple Run Drive Jericho, New York 11753. Their telephone number is 516-932-2080, and their facsimile is 516-932-2078.

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ITEM 6.

SELECTED FINANCIAL DATA

Not required

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the notes thereto that appear elsewhere in this report (the “Consolidated Financial Statements”). The results shown herein are not necessarily indicative of the results to be expected in future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. In some cases, you can identify forward-looking statements by words such as anticipate, believe, continue, could, estimate, expect, intend, likely, may, might, ongoing, plan, potential, predict, should, will, or the negative of these terms or other comparable terms. All forward-looking statements included in this document are based on information available to the management as of the date of this document. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review the risk factors shown in other reports and documents that we file with the Securities and Exchange Commission.

Overview

We design, manufacture, and distribute amorphous alloy transformer cores and amorphous alloy transformers in the People's Republic of China (“PRC”), devices that are used to step down voltage at the final phase of the distribution of electricity to consumers, businesses, and industry. Amorphous alloy cores are contained within the amorphous alloy electric transformers and constitute the main operating component of a new generation of energy saving electrical power transformers. We have discontinued our legacy distribution of traditional silicon steel transformer cores and transformers, and no longer make, sell, or distribute those products. Our sales of amorphous alloy cores and amorphous alloy transformers now account for all of our revenues. We expect that amorphous alloy cores and amorphous alloy core transformers will continue to be our major products for the foreseeable future.

Our business is conducted primarily through our operating company, Xi’an Amorphous Alloy Zhongxi & Technology Co., Ltd. (“Zhongxi”), a PRC company that is controlled through our wholly owned PRC-based subsidiary An Sen (Xi'an) Power Science & Technology Co., Ltd. (“An Sen”), a “wholly foreign-owned enterprise” (“WOFE”) under Chinese law.

Critical Accounting Policies, Judgments, and Estimates

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 generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to receivables from customers, bad debts, inventory, investments, intangible assets, income taxes, financing operations, and contingencies. We base our estimates on historical experience and on various other assumptions that are 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. Actual results may differ from these estimates under different assumptions or conditions. For further information on our critical accounting policies, please see the discussion in the financial notes of the Consolidated Financial Statements.

We believe the following critical accounting policies rely on the significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

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Fair Value of Financial Instruments

Our financial instruments consist of cash, accounts receivable, accounts payable, and accrued liabilities. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short-term maturity of these instruments. Significant judgment is required to assess whether the impairment is other-than-temporary. Our judgment of whether an impairment is other-than-temporary is based on an assessment of factors including the severity of the impairment, expected duration of the impairment, and forecasted recovery of fair value.

Accounts Receivable

Accounts receivable includes billings for the products delivered. We recognize an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. Bad debt reserves are maintained for all customers based on a variety of factors, including our historical collection experience, the customers’ ability to pay and general economic conditions.

Inventory

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future pricing and market conditions. If actual future demands, future pricing or market conditions are less favorable than those projected by management, additional inventory write-downs may be required and the differences could be material. Such differences might significantly impact cash flows from operating activities.

Property, Plant,and Equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Judgment is required to determine the estimated useful lives of assets. We have determined that our plant, property, and equipment have the following estimated useful lives:

Plant and office buildings	20 years
Machinery and production equipment	10 years
Automobile	10 years
Office equipment	5 years

Changes in these estimates and assumptions could materially affect our financial position and results of operations.

Intangible and Other Long-lived Assets

Intangibles and other long-lived assets are stated at cost, less accumulated amortization and impairments. Our intangible assets are being amortized over the expected useful economic life of 10 years.

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We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the assets. Changes in these estimates and assumptions could materially affect our financial position and results of operations.

Foreign Currency Translation

Our functional currency and reporting currency is the United States dollar (“USD”). The functional currency of An Sen and Zhongxi is the Chinese renminbi (“RMB”).

Our assets and liabilities are translated into United States dollars at the end-of-period exchange rate. Revenues and expenses are translated into United States dollars at weighted average exchange rates. Equity transactions are translated using historical rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carry-forwards. Management must make assumptions, judgments, and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions, and estimates involved in our current provision for income taxes takes into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for income taxes in our consolidated financial statements.

Equity Investments

We use the equity method to account for equity investments in entities in which we exercise significant influence but do not own a majority equity interest or control. We evaluate our equity investments for impairment whenever events and changes in business circumstances indicate the carrying amount of the equity investment may not be fully recoverable.

Stock-based Compensation

Our stock-based compensation expense is estimated at the grant date, based on the award’s fair value as calculated using the Black-Scholes-Merton (BSM) option-pricing model, and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and option life. Changes in these assumptions could materially affect the financial position and results of operations.

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Recently Issued Accounting Pronouncements

In April 2010, the FASB issued the amendment to ASC Topic 718, “Compensation – Stock Compensation”, which provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should not be considered to contain a condition that is not a market, performance, or service condition. As a result, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This topic will be effective for periods beginning on or after December 15, 2010. The Company does not expect the adoption of this topic to have a material effect on its financial statements.

Results of Operations

Revenues

	Year Ended December 31,										%
	2010					2009					change
	Revenue		%			Revenue		%
Amorphous Alloy Cores	$	20,463,541		69.0	%	$	16,209,389		67.9	%		26.2	%
Amorphous Alloy Transformers		9,194,305		31.0	%		7,558,544		31.7	%		21.6	%
Traditional Steel Silicon Cores & Transformers		-		0.0	%		98,306		0.4	%		-100.0	%
Total:	$	29,657,846		100.0	%	$	23,866,239		100.0	%		24.3	%

Total net revenues increased $5,791,607 or 24.3% during the year ended December 31, 2010, compared to the same period of 2009. This was primarily due to higher tonnage of amorphous alloy cores and more high capacity amorphous alloy transformers sold, offset in part by lower average selling prices of our amorphous alloy cores. To help fill customers’ orders, we subcontracted the manufacturing of some cores and transformers to other companies in the first half of 2010 before our new plant began production in July 2010. The revenues from traditional silicon steel cores and transformers were zero in the year ended December 31, 2010 because we have focused on amorphous alloy cores and transformers as our major products and have exited all manufacturing, marketing, and distribution of steel cores and transformers.

During the year ended December 31, 2010, the average sales prices per ton of amorphous alloy cores were 10.9% lower, compared with the same period of 2009. The lower average prices of amorphous alloy cores were the result of the lower prices obtained for amorphous alloy strip, the primary raw material used to make amorphous alloy cores.

During the year ended December 31, 2010, the average sales prices per unit of amorphous alloy transformers were 33.5% higher, compared with the same period of 2009. The higher average prices of amorphous alloy transformer were primarily due to a change in the product mix sold in favor of more expensive high capacity transformers.

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Cost of Goods Sold

	Year Ended December 31,										%
	2010					2009					change
	COGS		%			COGS		%
Amorphous Alloy Core	$	14,885,277		68.1	%	$	12,269,445		67.5	%		21.3	%
Amorphous Alloy Transformer		6,983,619		31.9	%		5,806,964		32.0	%		20.3	%
Traditional Steel Silicon Cores & Transformer		-		0.0	%		91,359		0.5	%		-100.0	%
Total:	$	21,868,896		100.0	%	$	18,167,768		100.0	%		20.4	%

Cost of goods sold increased $3,701,128 or 20.4% during the year ended December 31, 2010, compared to the same period of 2009. This was primarily due to higher tonnage of amorphous alloy cores and more high capacity amorphous alloy transformers sold.

The increases in cost of goods sold were partly offset by lower prices for the primary raw material, amorphous alloy strip. For the year ended December 31, 2010, the average prices of amorphous alloy strip decreased 15.4%, compared to the same period of 2009. The world’s main supplier of amorphous alloy strip has been setting its price for amorphous alloy strip lower in order to promote sales of amorphous alloy transformers at more affordable prices.

Gross Profit

	Year Ended December 31,										%
	2010					2009					change
	Gross Profit		Gross Margin			Gross Profit		Gross Margin
Amorphous Alloy Core	$	5,578,264		27.3	%	$	3,939,944		24.3	%		41.6	%
Amorphous Alloy Transformer		2,210,686		24.0	%		1,751,580		23.2	%		26.2	%
Traditional Steel Silicon Cores & Transformer		-		n/a			6,947		7.1	%		-100.0	%
Total:	$	7,788,950		26.3	%	$	5,698,471		23.9	%		36.7	%

Gross profit increased $2,090,479 or 36.7% during the year ended December 31, 2010, compared to the same period of 2009. This was primarily due to higher sales revenues of amorphous alloy cores and transformers.

The gross profit margin (gross profit as a percent of total revenues) increased 2.4 percentage points to 26.3% in the year ended December 31, 2010 from 23.9% in the year ended December 31, 2009. This was primarily due to the lower prices for amorphous alloy strip in the year ended December 31, 2010 compared to the same period of 2009.

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Selling, General, and Administration Expenses

	Year Ended December 31,
	2010			2009			% Change
Selling, general and administrative expenses	$	1,371,183		$	1,196,629			14.6	%
% of Revenue		4.6	%		5.0	%

Selling, general, and administrative (“SG&A”) expenses increased by $174,554 or 14.6% during the year ended December 31, 2010, compared to the same period of 2009. For the year 2010, higher SG&A expenses were mainly due to an increase in shipping expenses of $116,363 resulting from higher revenues, an increase in administrative employee expenses of $60,677, an increase in stock-based compensation of $52,078, and an increase in depreciation and amortization of $56,675 as a result of the addition in plant and equipment. The increase in SG&A was partly offset by decrease in professional fees and recovery in bad debt.

SG&A expenses as a percentage of revenue decreased for the year 2010 because most of the general and administrative expenses are fixed and do not increase in proportion to increases in revenues.

Impairment Loss On Equipment

For the year ended December 31, 2010, we had impairment loss on equipment of $161,597 due to obsolescence write-offs associated with certain old equipments left at our old plant.

Gain on Investment

	Year Ended December 31,
	2010		2009		% change
Gain on investment	$	94,274	$	89,755		5.0	%

Gain on investment for the year ended December 31, 2010 increased $4,519 or 5.0%, compared to the same period of 2009. This increase was primarily due to higher earnings from our 20% equity method investment.

We invested $165,377 (using the exchange rate of RMB 6.591 to $1.00 as of December 31, 2010) or RMB 1,090,000 in Shaanxi Yan An Amorphous Alloy Transformer Co., Ltd. (“Yan An”) for 20% of its ownership in 2005. We recorded this investment using the equity method because of our significant influence on the entity. At December 30, 2010, we sold the shares of Yan An back to Xi'an Amorphous Alloy Science And Technology Co., Ltd. (Alloy Science) from whom we purchased the shares of Yan An in 2005, for its carrying balance of $329,466. We sold our investment in Yan An's shares to avoid any potential conflicts of interest in bidding for new work, as both companies produce and sell alloy transformers.

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The following table summarizes the income statement of Yan An for the year ended December 31, 2010 and 2009:

Yan An Amorphous Alloy Transformer Co., Ltd
	Year Ended December 31,
	2010		2009
Exchange rate		6.5910		6.8372
Sales	$	4,808,975	$	4,401,629
Gross profit	$	711,211	$	743,875
Income from continuing operations	$	388,008	$	357,012
Net income	$	388,008	$	357,012
20% investment earnings	$	77,602	$	71,402
Dividends received	$	60,689	$	43,878

The following table provides the summary of balance sheet information for Yan An as of December 31, 2010 and 2009:

Yan An Amorphous Alloy Transformer Co., Ltd
	December 31, 2010				December 31, 2009
	RMB		USD		RMB		USD
Total assets		25,683,913		3,896,816		26,419,407		3,864,068
Total liabilities		12,100,441		1,835,904		13,393,299		1,958,887
Net assets		13,583,472		2,060,912		13,026,108		1,905,182
Zhongxi's 20% ownership		2,716,694		412,182		2,605,222		381,036
Ending balance of investment account		2,171,510		329,466		1,934,226		282,897
Difference		545,184		82,716		670,996		98,139

The difference of $82,716 was mainly due to the discount of RMB 843,672 when Alloy Science purchased the 20% ownership in Yan An. Yan An’s net assets were RMB 9,668,360 and Alloy Science invested RMB 1,090,000 (instead of RMB 1,933,672) to purchase the 20% ownership in Yan An.

Other Income

Other income consists of mainly technical support consulting fee and rental income. In the year ended December 31, 2010, other income decreased to $193,188 from $393,224 in the year ended December 31, 2009 mainly due to the decrease in consulting fees. We provide occasional consulting service to certain potential customers to help them get their amorphous alloy transformer production started earlier or up to the speed so that the customers can start ordering transformer cores from us.

Income Taxes

	Year Ended December 31,
	2010			2009
Income taxes	$	1,107,393		$	763,455
Effective tax rate		16.8	%		15.3	%

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The increase in the income taxes for the year ended December 31, 2010 compared to the same period of 2009 was mainly due to the higher net income before income taxes that resulted from higher revenues. Our Chinese operating company, Zhongxi, is subject to a 25% standard enterprise income tax in China. However, due to Zhongxi’s high-tech enterprise status, the National Tax Bureau in Xi’an High-Tech Development Zone granted Zhongxi tax exemptions for the years ended December 31, 2005 and 2004, and a reduced tax rate of 15% for the years ended December 31, 2010 and 2009 and as long as Zhongxi meets the high-tech enterprise qualification.

Net Income

For the year ended December 31, 2010, net income was $5,496,145 compared to $4,220,000 for the corresponding period of 2009, an increase of $1,276,145 or 30.2%. The increase in net income for the year ended December 31, 2010 was mainly due to higher revenues and lower raw material prices that were partly offset by higher SG&A expenses, impairment loss on equipment and higher income taxes.

Liquidity and Capital Resources

We have funded our operations and capital expenditures using cash generated from operations and funds raised from issuing convertible preferred stock. We will continue our investment in the development and enhancement of the production facilities for amorphous alloy cores and transformers. Cash generated from operations and funds raised from issuing convertible preferred stock will be used to fulfill such commitments. We believe our existing cash will be sufficient to maintain our operations at the present level for at least the next 12 months.

The following table summarizes our liquidity and capital resources for the periods presented:

	December 31, 2010		December 31, 2009
Cash	$	17,932,447	$	8,883,188
Working capital	$	18,544,621	$	9,793,699
Stockholders' equity	$	27,865,352	$	17,141,382

The following table shows the movements of our cash for the periods presented.

	Year Ended December 31,
	2010			2009
Net cash provided by operating activities	$	6,719,135		$	5,380,655
Net cash (used in) investing activities		(2,475,520	)		(2,509,214	)
Net cash provided by financing activities		4,454,702			4,937,502
Effect of exchange rate changes on cash		350,942			3,207
Net increase in cash	$	9,049,259		$	7,812,150

Operating activities:

For the year ended December 31, 2010, net cash provided by operating activities was $6,719,135. This was primarily due to net income of $5,496,145, adjusted by non-cash related expenses including depreciation and amortization of $433,230, stock-based compensation of $77,775 and impairment loss on equipment of $161,597, and adjusted by a recovery of bad debts of $18,977 and a non-cash related gain on investment of $94,274, then increased by cash provided by working capital activities of $663,639. The increase in cash from changes in working capital activities was mainly due to an decrease in accounts receivable of $477,579, and an increase in accounts payable of $546,782, partly offset by an increase in inventory of $262,175, and an increase in prepaid expenses and other receivables of $168,758.

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For the year 2009, net cash provided by operating activities was $5,380,655. This was primarily due to the net income of $4,220,000, adjusted by non-cash related expenses including depreciation and amortization of $249,592 and stock-based compensation of $25,697, and adjusted by a non-cash related gain on investment of $89,755, then increased by a net increase in working capital items of $884,527. The net increase in working capital items was mainly due to the decrease in prepaid expenses and other receivables of $810,289 resulting from the decrease in advances to suppliers, a decrease in inventory of $99,416 due to higher demand to our products, and an increase in income tax payables of $129,834 that resulted from the increased revenues. The net increase in working capital items was partly offset by the decrease in accounts payable of $163,094.

Investing activities:

Net cash used in investing activities was $2,475,520 for the year ended December 31, 2010. It was primarily due to the capital expenditures of $2,534,692 in plant and equipment for the new plant, partially offset by the dividend of $59,172 received from the 20% equity investment in Yan An.

Net cash used in investing activities was $2,509,214 for the year 2009. The use was primarily attributable to capital expenditures of $1,620,844 for construction in progress for the new plant, $219,270 in intangible assets (amorphous transformer technology), and deposit for the purchase of equipment of $767,445, partly offset by a dividend of $43,854 received from the 20% equity investment and repayment from related parties of $72,913.

Financing activities:

Net cash provided by financing activities was $4,454,702 for year ended December 31, 2010 mainly due to the $4,456,883 net proceeds from the exercise of outstanding warrants originally issued with our Series A convertible preferred stock.

Net cash provided by financing activities was $4,937,502 for the year 2009 primarily due to the $4,939,450 net proceeds from issuance of Series B convertible preferred stock.

Contractual Obligations

As of December 31, 2010, we were committed to equipment purchase contracts of $2,491,731. The cash commitment remaining for these contracts is $1,988,165 which is payable upon the progress of the equipment installation.

We prepaid $201,790 for the land use right of the new plant and are obligated to pay the remaining balance of $106,205 upon receiving the land use right certificate.

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

China Power Equipment, Inc.

Index to Consolidated Financial Statements

Contents

	Page(s)

Reports of Independent Registered Public Accounting Firm	34-35

Consolidated Financial Statements

Consolidated Balance Sheets	F-1

Consolidated Statements of Income	F-2

Consolidated Statements of Stockholders’ Equity	F-3

Consolidated Statements of Cash Flows	F-4

Notes to Consolidated Financial Statements	F-5

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Report of Independent Registered Public Accounting Firm

To the Audit Committee, Board of Directors and Stockholders of

China Power Equipment, Inc.

We have audited the accompanying consolidated balance sheet of China Power Equipment, Inc. and its subsidiary and contractually controlled entity (“the Company”) as of December 31, 2010, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and 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 the Company as of December 31, 2010, and the consolidated results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Mazars CPA Limited

Mazars CPA Limited

Certified Public Accountants

Hong Kong

March 30, 2011

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ACSBAcquavella, Chiarelli, Shuster, Berkower & Co., LLP

517 Route one	1 Penn Plaza
Iselin, New Jersey, 08830	36the Floor
732.855.9600	New York, NY 10119

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of

China Power Equipment, Inc.

We have audited the accompanying consolidated balance sheet of China Power Equipment, Inc. as of December 31, 2009, and the related consolidated statement of income, stockholders’ equity and comprehensive income, and cash flow for the year ended December 31, 2009. China Power Equipment’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that out audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Power Equipment, Inc. as of December 31, 2009, and the consolidated results of its operations and its cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ Acquavella, Chiarelli, Shuster, Berkower & Co., LLP

Certified Public Accountants

New York, N.Y.

March 25, 2010

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China Power Equipment, Inc.
Consolidated Balance Sheets

	December 31, 2010			December 31, 2009

Assets
Current Assets
Cash	$	17,932,447		$	8,883,188
Accounts receivable, net		1,552,298			1,949,818
Inventory (Note 3)		645,777			363,312
Prepaid expenses and other receivables		402,637			221,670
Related party receivable (Note 14)		329,466			-
Total Current Assets		20,862,625			11,417,988

Property, plant and equipment, net (Note 4)		7,110,549			4,593,068
Intangible assets, net (Note 5)		348,483			391,513
Long-term investment (Note 6)		-			282,897
Deposit on contract rights (Note 7)		1,365,498			1,316,328
Deposit for purchase of equipment		503,565			767,858
Prepaid capital lease (Note 9)		109,939			111,482
Total Assets	$	30,300,659		$	18,881,134

Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	1,130,368		$	549,065
Other payables and advance from customers		740,927			648,814
Lease payable - current portion (Note 9)		2,473			2,156
Short-term loan (Note 8)		60,689			58,503
Income taxes payable (Note 13)		383,547			365,751
Total Current Liabilities		2,318,004			1,624,289

Long-term Liabilities
Lease payable - non current portion (Note 9)		117,303			115,463
Total Long-term Liabilities		117,303			115,463

Total Liabilities		2,435,307			1,739,752

Stockholders' Equity
Series B convertible preferred stock, $0.001 par value, 5,000,000 shares authorized,
4,149,667 and 4,166,667 shares issued and outstanding at December 31, 2010 and 2009, respectively (Note 10)		4,150			4,167
Undesignated preferred stock, $0.001 par value, 5,000,000 shares authorized,
None issued and outstanding		-			-
Common stock: par value $0.001 per share, 100,000,000 shares authorized;
19,382,013 and 14,908,313 shares issued and outstanding at December 31, 2010 and 2009, respectively (Note 10)		19,382			14,908
Additional paid in capital		25,712,227			21,182,026
Statutory surplus reserve fund (Note 12)		1,232,532			642,819
Accumulated deficit		(821,698	)		(5,728,130	)
Accumulated other comprehensive income		1,718,759			1,025,592
Total stockholders' equity		27,865,352			17,141,382

Total Liabilities and Stockholders' Equity	$	30,300,659		$	18,881,134

The accompanying notes are an integral part of these financial statements.

F-1

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China Power Equipment, Inc.
Consolidated Statements of Income

	Year Ended December 31,
	2010			2009

Revenue, net	$	29,657,846		$	23,866,239
Cost of goods sold		(21,868,896	)		(18,167,768	)
Gross profit		7,788,950			5,698,471

Operating expenses:
Selling, general and administrative expenses		1,371,183			1,196,629
Impairment loss on equipment		161,597			-
Total operating expenses		1,532,780			1,196,629

Net income from operations		6,256,170			4,501,842

Other income (expenses)
Gain on investment		94,274			89,755
Other income		193,188			393,224
Other expenses		(95	)		-
Interest income		65,918			12,902
Interest expense		(5,917	)		(14,268	)
Total other income		347,368			481,613

Net income before income taxes		6,603,538			4,983,455

Income taxes		1,107,393			763,455

Net income	$	5,496,145		$	4,220,000

Deemed dividend from beneficial conversion feature of preferred stocks		-			(9,045,005	)

Net income (loss) applicable to common shareholders	$	5,496,145		$	(4,825,005	)

Earnings (loss) per share - basic	$	0.31		$	(0.32	)
Earnings (loss) per share - diluted	$	0.25		$	(0.32	)

Weighted average common shares outstanding:
Basic		17,804,357			14,908,313
Diluted		22,135,123			14,908,313

The accompanying notes are an integral part of these financial statements.

F-2

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China Power Equipment, Inc.
Consolidated Statements of Stockholders' Equity

															Retained			Accumulated
											Additional		Statutory		Earnings			Other		Total
	Preferred Stock						Capital Stock				Paid-in		Surplus		(Accumulated			Comprehensive		Stockholders'
	Shares			Amount			Shares		Amount		Capital		Reserve		deficit)			Income		Equity

BALANCE, JANUARY 1, 2009		-		$	-			14,908,313	$	14,908	$	7,176,041	$	202,665	$	(462,971	)	$	1,004,575	$	7,935,218

Issuance of preferred stock		4,166,667			4,167			-		-		4,935,283		-		-			-		4,939,450
Deemed dividend on preferred stock		-			-			-		-		9,045,005		-		(9,045,005	)		-		-
Stock-Based Compensation		-			-			-		-		25,697		-		-			-		25,697
Transfer to statutory reserve		-			-			-		-		-		440,154		(440,154	)		-		-
Comprehensive income:																					-
Net income		-			-			-		-		-		-		4,220,000			-		4,220,000
Foreign currency translation adjustment		-			-			-		-		-		-		-			21,017		21,017
Total comprehensive income		-			-			-		-		-		-		-			-		4,241,017

BALANCE, DECEMBER 31, 2009		4,166,667			4,167			14,908,313		14,908		21,182,026		642,819		(5,728,130	)		1,025,592		17,141,382

Conversion of Series B preferred stock		(17,000	)		(17	)		17,000		17		-		-		-			-		-
Exercise of warrants		-			-			4,456,700		4,457		4,452,426									4,456,883
Stock-Based Compensation		-			-			-		-		77,775		-		-			-		77,775
Transfer to statutory reserve		-			-			-		-		-		589,713		(589,713	)		-		-
Comprehensive income:
Net income		-			-			-		-		-		-		5,496,145			-		5,496,145
Foreign currency translation adjustment		-			-			-		-		-		-		-			693,167		693,167
Total comprehensive income		-			-			-		-		-		-		-			-		6,189,312

BALANCE, DECEMBER 31, 2010		4,149,667		$	4,150			19,382,013	$	19,382	$	25,712,227	$	1,232,532	$	(821,698	)	$	1,718,759	$	27,865,352

The accompanying notes are an integral part of these financial statements.

F-3

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China Power Equipment, Inc.
Consolidated Statements of Cash Flows

	Year Ended December 31,
	2010			2009

Cash Flows from Operating Activities
Net income	$	5,496,145		$	4,220,000
Adjustments to reconcile net income to net cash:
Depreciation and amortization expense		433,230			249,592
Stock-Based Compensation		77,775			25,697
Provision/(Recovery) of bad debts		(18,977	)		90,594
Impairment loss on equipment		161,597			-
Gain on investment		(94,274	)		(89,755	)
Changes in operating assets and liabilities:
Accounts receivable		477,579			(22,138	)
Inventory		(262,175	)		99,416
Prepaid expenses and other receivables		(168,758	)		810,289
Accounts payable		546,782			(163,094	)
Other payables and advance from customers		66,181			30,220
Income taxes payable		4,030			129,834
Net cash provided by (used in) operating activities		6,719,135			5,380,655

Cash Flows from Investing Activities
Addition in plant and equipment		(2,534,692	)		(18,422	)
Addition in construction in progress		-			(1,620,844	)
Acquisitions of intangible assets		-			(219,270	)
Deposit for purchase of equipment		-			(767,445	)
Repayment from related parties		-			72,913
Dividend from investment		59,172			43,854
Net cash (used in) investing activities		(2,475,520	)		(2,509,214	)

Cash Flows from Financing Activities
Principal payments on capital lease		(2,181	)		(1,948	)
Proceeds from issuing preferred stock		-			4,939,450
Proceeds from warrant exercise		4,456,883			-
Net cash provided by (used in) financing activities		4,454,702			4,937,502

Effect of exchange rate changes on cash and cash equivalents:		350,942			3,207

Increase (decrease) in cash and cash equivalents		9,049,259			7,812,150
Cash and cash equivalents, beginning of period		8,883,188			1,071,038
Cash and cash equivalents, end of period	$	17,932,447		$	8,883,188

Supplemental disclosure of cash flow information
Interest paid in cash	$	5,917		$	14,268
Income taxes paid in cash	$	1,103,363		$	633,621

Non-cash investing and financing activities:
Conversion of preferred stock to common stock	$	17		$	-
Construction in progress in lieu of repayment from related party	$	-		$	23,794

The accompanying notes are an integral part of these financial statements.

F-4

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

China Power Equipment, Inc. (“China Power”) was incorporated in the State of Maryland on May 17, 2006 for the purpose of acquiring an existing company with continuing operations. China Power formed An Sen (Xi’an) Power Science & Technology Co., Ltd. (“An Sen”) which was granted a license as a wholly-owned foreign enterprise in the city of Xi’an under the laws of the People’s Republic of China (“PRC”) on November 3, 2006. An Sen is a wholly-owned subsidiary of China Power and a limited liability company organized under the laws of the PRC.

On November 8, 2006, An Sen entered into a Management Entrustment Agreement (“the Agreement”) with Xi’an Amorphous Zhongxi Transformer Co., Ltd. (“Zhongxi”) whereby An Sen assumed financial and operating control over Zhongxi. In exchange for entering into this agreement, shareholders of Zhongxi were issued 9,000,000 shares of China Power common stock, resulting in a change of control of China Power. As discussed in Principles of Consolidation in Note 2, An Sen has been determined to have a controlling financial interest in Zhongxi as a result of the Agreement, allowing the accounts of Zhongxi to be consolidated with those of An Sen. Applying the rules of Accounting Standards Codification (‘ASC”) 805, Business Combinations, Zhongxi was determined to be the accounting acquirer and the transaction was accounted for as a reverse acquisition resulting in the recapitalization of Zhongxi. Costs and expenses incurred by China Power and An Sen were made in anticipation of the transaction with Zhongxi and have therefore been pushed down and included in the consolidated financial statements.

Zhongxi was founded in Xi’an China under the laws of the PRC on June 29, 2004, and currently manufactures 59 different products, including amorphous alloy core and transformers.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and include the accounts of China Power, its wholly owned subsidiary An Sen, and Zhongxi, a contractually controlled entity (together “the Company”). An Sen controls Zhongxi through the Management Entrustment Agreement dated November 8, 2006.

Under the Management Entrustment Agreement,

1. Zhongxi agrees to irrevocably entrust the right of operation management and the responsibilities and authorities of its shareholders’ meeting and the board of directors to An Sen.

2. The contents of the entrusted operation shall include but not be limited to the following:

1) An Sen shall be in charge of all aspects of Zhongxi’s operations; nominate and replace the members of Zhongxi’s board of directors, engage Zhongxi’s management staff and decide their compensation.

2) An Sen shall manage and control all the funds of Zhongxi. The account of Zhongxi shall be managed and decided solely by An Sen. The seals and signatures for such account shall be the seals and signatures of the personnel appointed and confirmed by An Sen. All the cash of Zhongxi shall be kept in this entrusted account and shall be handled through this account, including but not limited to receipt of all Zhongxi’s business income, current working capital, recovered accounts receivable, etc., and the payment of all accounts payable and operation expenses, employee salaries and asset purchases, etc.

3) All the matters of Zhongxi, including internal financial management, day-to-day operation, external contact execution and performance, tax filing and payment, change of rights and personnel, etc., shall be controlled and managed by An Sen in all aspects.

4) An Sen shall enjoy all the other responsibilities and rights enjoyed by Zhongxi’s shareholders’ meeting in accordance with the Company Law and the articles of association of Zhongxi.

5) An Sen enjoys all the other responsibilities and rights enjoyed by Zhongxi’s board of directors.

As of November 8, 2006, the date the Management Entrustment Agreement became effective, the Company determined to consolidate the results of Zhongxi based on the ASC 810, Consolidation. According to that topic, the execution of the Agreement is considered to be a business combination. Accordingly, Zhongxi was determined to be the accounting acquirer and the consolidation with China Power is considered to be a recapitalization of Zhongxi. Periods prior to the combination contain the accounts of Zhongxi and periods subsequent to the combination include the accounts of Zhongxi combined with those of China Power and An Sen. Assets and liabilities are recorded at their historical cost basis and the combination resulted in no gain, loss, or goodwill. All inter-company accounts have been eliminated in consolidation.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

In concluding that the accounts of Zhongxi should be consolidated, the Company reviewed An Sen’s relationship with Zhongxi under the provisions of the Management Entrustment Agreement and determined that there was a controlling financial interest based on the criteria of ASC 810 relating to the term of the Agreement; An Sen’s ability to exercise control over the operations of Zhongxi and the relationship with its employees and directors; and the fact that An Sen maintains a significant financial interest in Zhongxi.

ASC 810 requires the term of the Agreement be at least the entire remaining life of Zhongxi or a period of 10 years or more. The Company determined that it met the term criteria because termination is prohibited by Zhongxi, making termination within the control of the Company.

In addition, the Company determined that the control criteria under ASC 810 was met because the Agreement assigns to An Sen the charge of normal business operations as well as the ability to nominate and replace the board of directors, hire and fire management staff, and determine compensation.

Finally, the financial interest criteria under ASC 810 require that An Sen be able to control the ability to sell or transfer the operations of Zhongxi and the income generated by Zhongxi. The Agreement specifically gives An Sen the responsibility of formulating plans regarding matters including merger, division, change of corporate form and dissolution of Zhongxi and assigns the income and operations of Zhongxi to An Sen.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued liabilities. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

Foreign Currency Translation

The functional currency of China Power is the United States dollar. The functional currency of An Sen and Zhongxi is the Chinese Renminbi (RMB). The reporting currency of the Company is the United States dollar (USD).

The financial statements of An Sen and Zhongxi are translated into USD in accordance with ASC 830, Foreign Currency Matters. According to the topic, all assets and liabilities are translated at the current exchange rate, stockholders equity transactions are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the statements of income. During the year ended December 31, 2010, the foreign currency translation adjustments to the Company’s comprehensive income were $693,167.

Inventory

Inventories are stated at the lower of cost (weighted-average method) or market value. Inventory quantities on-hand is regularly reviewed, and where necessary, reserves for excess and unusable inventories are recorded. Once the inventories are written-down to the lower of cost or market, the new inventory cost basis cannot subsequently be marked up based on changes in underlying facts and circumstances.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

Plant and office building	20 years
Machinery and production equipment	10 years
Automobile	10 years
Office equipment	5 years

Revenue Recognition

Revenue is recognized when product is shipped to customers and a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and cash collection is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as advance from customers. The Company is subject to value added tax (VAT) withholdings and payments. Sales are recorded net of VAT.

The material terms of the Company’s revenue generating agreements include the following.

Sales contract for Amorphous Metal Distribution Transformer Core:

Payment term: the goods shall be delivered after the payment is received from the buyer.

Responsibility of any breach: if the buyer cannot pay on time, the fine for any breach should be paid by the buyer, the fine is 20% of the part of the contract not executed.

Time for quality guarantee and raising an objection: within 10 days if find defective after receiving the goods.

Sales contract for transformer:

Method, time and venue for settlement: complete the payment within two weeks after delivery.

The ownership of goods: will be transferred upon the shipping of goods.

Seller's obligation related to the quality: warranty for one year from delivery.

For transformer core, the customer can make return or exchange within 10 days after receiving the goods if the goods are found defective. As the historically return was very minimal, no sales return and allowance is estimated based on the historical return rate.

For transformer, there’s no specific return or exchange policy because in the transformer industry, transformer is purchased according to careful project design and planning, thus return or exchange rarely happens. The Company provides one year warranty from delivery for product defects. As there has had almost no historical warranty claim, no anticipated warranty liability is accrued based on the historical warranty claim rate.

Shipping Costs

The Company’s shipping and handling costs are included in selling, general and administrative expenses. For the years ended December 31, 2010 and 2009, the shipping costs were $332,185 and $215,822, respectively.

Intangible and Other Long-Lived Assets

Intangibles and other long-lived assets are stated at cost, less accumulated amortization and impairments. The Company’s intangible assets are being amortized over their expected useful economic lives of 10 years.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. During the year ended December 31, 2010, there was an impairment loss on equipment of $161,597. There was no impairment write-off in 2009.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

Income Taxes

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net of operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

Accounts Receivable

Accounts receivable includes billings for the products delivered and services rendered. The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. Bad debt reserves are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An allowance for doubtful accounts has been established in amounts of $147,896 and $154,020 at December 31, 2010 and 2009, respectively.

Stock-Based Compensation

The Company has elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of stock options on the dates of grant. Also, the Company recognizes stock-based compensation using the straight-line method over the vesting period.

In the years ended December 31, 2010 and 2009, the Company recognized stock-based compensation of $77,775 and $25,697, respectively.

Segment Reporting

ASC 280, Segment Reporting, requires the use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

During the years ended December 31, 2010 and 2009, revenues of the Company represented net sales of amorphous alloy core and transformers. No financial information by business segment is presented. Furthermore, as all revenues are derived from the PRC, no geographic information by geographical segment is presented. In addition, all tangible and intangible assets are located in the PRC.

Recently Issued Accounting Pronouncements

NOTE 3 – INVENTORY

Inventory consists of:

	December 31,		December 31,
	2010		2009

Raw materials	$	225,425	$	261,584
Work in progress		12,880		12,180
Finished goods		407,472		89,548

Total inventory	$	645,777	$	363,312

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Table of Contents

China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

	December 31,			December 31,
	2010			2009

Construction in progress	$	-		$	2,232,462
Plant and office building		5,802,773			2,389,244
Machinery and production equipment		2,562,506			956,564
Automobile		123,081			4,825
Office equipment		34,867			4,530
Total		8,523,227			5,587,625
Less accumulated depreciation		(1,412,678	)		(994,557	)

Property, plant and equipment, net	$	7,110,549		$	4,593,068

NOTE 5 – INTANGIBLE ASSETS

Intangible assets, net consist of:

	December 31,			December 31,
	2010			2009

Technical know-how	$	227,583		$	219,388
Amorphous Transformer Technique		348,961			336,395
Total		576,544			555,783
Less: accumulated amortization		(228,061	)		(164,270	)

Intangible assets, net	$	348,483		$	391,513

On June 18, 2009, Zhongxi purchased an amorphous transformer aluminum wire technology for $227,583. The technology is being amortized over 10 years based on estimated useful life.

In April 14, 2005, Zhongxi purchased technical know-how from Xi’an Northwest Industry University Gaoshang Science & Technology Co., Ltd for $75,861. The technical know-how is being amortized over 10 years based on useful life estimation.

On September 2, 2004, Zhongxi purchased technical know-how from Xi'an Amorphous Alloy Science And Technology Co., Ltd. (“Alloy Science”), which is a related party of the Company, with common owners and directors for $151,722. The technical know-how is being amortized over 10 years based on useful life estimation.

On July 24, 2004, Zhongxi purchased amorphous transformer core manufacturing technology from Beijing Advanced Technology & Materials Co., Ltd. (“AT&M”) for $121,378. The technology is being amortized over 10 years based on useful life estimation.

Estimated annual amortization expense for each of the next five years is $56,214.

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Table of Contents

China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

NOTE 6 – LONG-TERM INVESTMENT

In May 2005, Zhongxi made a long-term investment in Shaanxi Yan An Amorphous Alloy Transformer Co., Ltd (“Yan An”) to purchase 20% of Yan An’s equity interest from Alloy Science for approximately $165,377 (RMB1,090,000). The equity method has been used to account for this investment for the years ended December 31, 2010 and 2009, respectively. At December 30, 2010, Zhongxi sold the 20% equity interest in Yan An back to Alloy Science for its carrying balance of $329,466.

The following table summarizes the income statement of Yan An for the years ended December 31, 2010 and 2009:

Yan An Amorphous Alloy Transformer Co., Ltd
	Year Ended December 31,
	2010		2009
Exchange rate		6.5910		6.8372
Sales	$	4,808,975	$	4,401,629
Gross profit	$	711,211	$	743,875
Income from continuing operations	$	388,008	$	357,012
Net income	$	388,008	$	357,012
20% investment earnings	$	77,602	$	71,402
Dividends received	$	60,689	$	43,878

The following table provides the summary of balance sheet information for Yan An as of December 31, 2010 and 2009:

Yan An Amorphous Alloy Transformer Co., Ltd
	December 31, 2010				December 31, 2009
	RMB		USD		RMB		USD
Total assets		25,683,913		3,896,816		26,419,407		3,864,068
Total liabilities		12,100,441		1,835,904		13,393,299		1,958,886
Net assets		13,583,472		2,060,912		13,026,108		1,905,182
Zhongxi's 20% ownership		2,716,694		412,182		2,605,222		381,036
Ending balance of investment account		2,171,510		329,466		1,934,226		282,897
Difference		545,184		82,716		670,996		98,139

The difference of $82,716 was mainly due to the discount of RMB 843,672 when Alloy Science purchased the 20% ownership in Yan An. Yan An’s net asset was RMB 9,668,360 and Alloy Science invested RMB 1,090,000 (instead of RMB 1,933,672) to purchase the 20% ownership in Yan An.

The discount is amortized over 10 years, the estimated useful lives of Yan An’s equipment and machinery which are considered the hard to value assets. According to ASC 323, Investments—Equity Method and Joint Ventures, “A difference between the cost of an investment and the amount of underlying equity in net assets of an investee should be accounted for as if the investee were a consolidated subsidiary.” When consolidating with Yan An, an entry would be made to reduce the depreciable value of Yan An’s hard to value fixed assets by the discount amount in order to properly allocate the consideration paid to the fair value of assets received and liabilities assumed. The reduction in the book value of the newly acquired fixed assets would result in a lower depreciation expense over the future lives of those fixed assets than that shown on the books of Yan An. Consequently, the Company would recognize income that is slightly higher than its proportionate share of Yan An’s reported income, which exactly is the effect of amortizing the discount into income over the lives of the fixed assets acquired.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

NOTE 7 – CONTRACT RIGHTS DEPOSIT

The contract right was purchased from AT&M for $1,365,498 (RMB9,000,000) to guarantee the supply of amorphous raw material for 3 years starting from the first date of supplying raw material by AT&M. The contract rights deposit is expected to be amortized in 3 years starting from the date of purchasing raw materials from AT&M. The Company conducted the evaluation for the impairment of the asset at December 31, 2010 and there is no impairment needed to be recorded as of the date of evaluation. As of December 31, 2010, amorphous raw material received from AT&M has been for testing purpose and is not considered purchase.

NOTE 8 – SHORT-TERM LOAN

On December 28, 2006, the Company signed a loan agreement with Xi’an New City District Science & Technology Bureau to borrow approximately $60,689 (RMB400,000) at 5% stated annual interest rate. The agreement expired on December 27, 2010. The Company extended this loan for one year until December 27, 2011.

Future minimum principal payments as of December 31, 2010 are as follows:

2011		$	60,689
Total		$	60,689

NOTE 9 –CAPITAL LEASES AND COMMITMENTS

CAPITAL LEASES

The Company is currently leasing a factory from Zhongxi Zhengliu Dianlu Transformer Co., Ltd. The term of the lease runs for a period of 24 years beginning January 1, 2005. The lease agreement contains ownership transfer terms at the end of the lease and calls for annual rent payments in the amount of approximately $2,473 for the year ended December 31, 2011 and annual rent payments are expected to increase every year by at least 10% until the expiration of the agreement.

As the result, approximately $144,183 (RMB950,308) was recorded as leased assets on January 1, 2005 when the lease commenced based on the 10% discounted factor. The lease was classified as a finance lease since a majority of the useful life would be used by the Company. The net leased asset account was $109,939 and $111,482 as of December 31, 2010 and 2009, respectively.

Future minimum lease payments as of December 31, 2010 are as follows based on the 10% discounted factor:

For the period ended December 31:
2011		2,473
2012		2,734
2013		3,026
2014		3,347
2015		3,701
Thereafter		104,495
Less Current Portion		(2,473	)
Long Term Portion	$	117,303

CAPITAL COMMITMENTS

As of December 31, 2010 and 2009, the Company had capital commitments for purchase of machineries and land use right of $2,094,000 and land use right of $102,000 respectively.

F-11

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

NOTE 10 – STOCKHOLDERS’ EQUITY

Preferred Stock

Series B Convertible Preferred Stock

In a private placement closed on December 2, 2009, the Company issued an aggregate of 4,166,667 shares of its series B convertible preferred stock, par value $0.001 per share (the “Series B Preferred Stock”), with attached warrants (the “Warrants”) to purchase a total of 1,000,000 shares of its common stock, par value $0.001 per share (the “Common Stock”) to a number of accredited investors (the “Buyers”), in consideration of an aggregate purchase price of $5,000,000 (the “Private Placement”). The Series B Preferred Stock is convertible into 4,166,667 shares of Common Stock.

The Series B Preferred Stock does not pay annual dividends and shall not have any voting rights except as required by law. In case of the liquidation, the holders of shares of Series B Preferred Stock then outstanding are entitled to receive $1.20 per share (out of available assets) before any distribution or payment can be made to the holders of any junior securities.

As the Series B Preferred Stock does not require redemption by the Company, upon issuance, the Company recorded a one-time deemed dividend and as an increase in additional paid-in capital, the intrinsic value of the beneficial conversion feature (the “BCF”) of $9,045,005 in 2009. The intrinsic value of the BCF is the difference between the fair value of the common stock underlying the Series B Preferred Stock at issuance and the amount of proceeds to be allocated to the preferred stock. The proceeds of $5,000,000 were allocated to the preferred stock and warrants based on their relative fair values. The warrants were valued using the Black-Scholes-Merton (BSM) model and recorded in additional paid-in capital.

Common Stock

At December 31, 2010, the Company has 100,000,000 shares of common stock authorized and 19,382,013 shares issued and outstanding at par value $0.001 per share.

In connection with the Private Placement of the Series B Preferred Stock, the Company also entered into a Make Good Escrow Agreement dated as of November 30, 2009 with the Buyers and Escrow, LLC (the “Escrow Agent”), where the Company committed to place 2,080,000 shares of Common Stock into escrow to be delivered to the Buyers if the Company fails to achieve certain operating income targets.

The 2,080,000 shares of common stock held in escrow are not treated as outstanding at December 31, 2010 because the delivery of shares is contingent upon certain events, and any shares not delivered will be returned to the Company for cancellation.

For both the years ended December 31, 2010 and 2009, the Company achieved the target operating income, therefore, no common stock held in escrow will be issued.

Warrants

The Company has issued warrants in the series A convertible preferred stock private placement to purchase its common stock. The warrants are exercisable for three years at an exercise price of $1.00. All warrants were exercised in May 2010.

The warrants issued in conjunction with the January 2008 common stock issuance are exercisable for three years at an exercise price of $1.00. All warrants were exercised in May 2010.

The warrants issued in connection with the Series B Preferred Stock Private Placement are exercisable for a period of three years from the date of issuance at an initial exercise price of $2.40. The Company has the right, on at least ten (10) day written notice, to require that the holders of the warrants exercise the warrants in full and in the event the holders fail to do so, to redeem the outstanding warrants at a price of one cent ($0.01) per share, provided that the market price of the Company’s common stock shall equal or exceed $3.50 on each trading day for the consecutive twenty (20) trading days.

The warrants are equity classified and amounts attributable to the warrants are classified within additional paid-in capital.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

The following table summarizes the activities for the warrants for the years ended December 31, 2010 and 2009:

				Weighted
	Number of			Average
	Shares			Exercise Price
Warrants outstanding, January 1, 2009		4,456,700		$	1.00
Issued		1,000,000		$	2.40
Warrants outstanding, December 31, 2009		5,456,700		$	1.26
Exercised		(4,456,700	)	$	1.00
Warrants outstanding, December 31, 2010		1,000,000		$	2.40

Exercisable as of December 31, 2010		1,000,000		$	2.40

Stock Options

The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted in the periods presented:

	2010			2009
Risk-free interest rate (%)		1.6	%		1.6	%
Expected dividend yield (%)		-			-
Expected option life (years)		3.0			3.0
Expected volatility (%)		116.6	%		138.3	%
Weighted average grant date fair value	$	2.01		$	0.41

The following table summarizes the activities for the Company’s options for the year ended December 31, 2010:

	Options Outstanding
	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Life (in years)
Balance at December 31, 2009		100,000	$	0.44
Granted		50,000	$	2.90
Balance at December 31, 2010		150,000	$	1.26		3.8
Vested and exercisable as of December 31, 2010		125,000	$	0.93		3.7

F-13

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

The following table summarizes additional information regarding outstanding, and exercisable and vested stock options at December 31, 2010:

Exercise Price		Options Outstanding		Weighted-Average Remaining Life (in years)		Options Exercisable and Vested

$	0.23		25,000		3.5		25,000
$	0.51		75,000		3.5		75,000
$	2.90		50,000		4.4		25,000
			150,000				125,000

At December 31, 2010, there was $37,779 of total unrecognized stock-based compensation expense related to stock options expected to be recognized over a weighted-average period of 0.11 years.

For the year ended December 31, 2010, stock-based compensation expense of $77,775 was included in general and administrative expenses.

NOTE 11 -EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share of common stock:

	Year Ended December 31,
	2010		2009

Basic earnings per share:
Numerator:
Net income used in computing basic earnings per share	$	5,496,145	$	4,220,000
Deemed dividend from beneficial conversion feature of preferred stock		-		(9,045,005	)
Net income (loss) applicable to common shareholders	$	5,496,145	$	(4,825,005	)

Denominator:
Weighted average common shares outstanding		17,804,357		14,908,313
Basic earnings (loss) per share	$	0.31	$	(0.32	)

Diluted earnings per share:
Numerator:
Net income used in computing diluted earnings per share	$	5,496,145	$	4,220,000
Deemed dividend from beneficial conversion feature of preferred stock		-		(9,045,005	)
Net income (loss) applicable to common shareholders	$	5,496,145	$	(4,825,005	)

Denominator:
Weighted average common shares outstanding		17,804,357		14,908,313
Weighted average effect of dilutive securities:
Convertible preferred stocks		4,158,470		-
Stock warrants and options		172,296		-
Shares used in computing diluted earnings per share		22,135,123		14,908,313
Diluted earnings (loss) per share	$	0.25	$	(0.32	)

Dilutive securities having an anti-dilutive effect on diluted earnings (loss) per share are excluded from the calculation.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

NOTE 12 – STATUTORY SURPLUS RESERVE FUND

As stipulated by the new Corporate Law of the PRC effective on January 1, 2006, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

i. making up cumulative prior years’ losses, if any;

ii. allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

iii. allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

The Company has appropriated $1,232,532 and $642,819 as reserve for the statutory surplus reserve requirement as of December 31, 2010 and 2009.

NOTE 13 – INCOME TAXES

The Company was incorporated in the United States of America (“USA”) and has operations in two tax jurisdictions - the USA and the PRC. The Company generated substantially all of its net income from its PRC operations for the years ended December 31, 2010 and 2009 and has recorded income tax provision for the periods.

The Company’s China operation is subject to a PRC 25% standard enterprise income tax based on its taxable net profit. However, due to its high technology products status, the National Tax Bureau in Xi’an High-Tech Development Zone granted Zhongxi the annual tax exemptions for the years ended December 31, 2005 and 2004 and a reduced tax rate of 15% for the years ended December 31, 2010 and 2009 and as long as Zhongxi meets the high-tech enterprise qualification.

Current PRC Tax Law also imposes a 10% withholding tax on all dividends paid by PRC companies to non-PRC shareholders and contains rules governing such matters as international transfer pricing.

The provision for income taxes consists of the following:

	Years Ended December 31,
	2010		2009
Current tax
- PRC	$	1,107,393	$	763,455
Total	$	1,107,393	$	763,455

F-15

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

The reconciliation of USA statutory income tax rate to the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2010			2009

Income tax at USA statutory rate (34%)	$	2,245,203		$	1,694,375
State tax, net of federal effect		-			-
Foreign rate differential		(1,274,144	)		(992,641	)
Change in valuation allowance		136,334			61,721
Provision for income taxes	$	1,107,393		$	763,455

As of December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $1,041,759 available to offset future taxable income in the USA. The net operating loss carryforwards will expire, if unused, in varying amounts through the year ending December 31, 2030. The deferred tax assets for the USA operation at December 31, 2010 consists mainly of net operating loss carryforwards and for which a full valuation allowance has been provided, as the management believes it is more likely than not that these assets will not be realized in the future.

Uncertain Tax Positions

Interest associated with unrecognized tax benefits are classified as income tax and penalties are classified in selling, general and administrative expenses in the statements of income.

For the years ended December 31, 2010 and 2009, the Company had no unrecognized tax benefits and related interest and penalties expenses. Currently, the Company is not subject to examination by major tax jurisdictions.

NOTE 14 – RELATED PARTY TRANSACTIONS

As of December 31, 2010, the Company was owed $329,466 from Alloy Science, a related party with common directors. The receivable is related to selling the 20% equity interests in Yan An back to Alloy Science for its carrying balance.

As of December 31, 2009, the Company was owed $731 from one shareholder of the Company. The advances were non interest bearing and are payable on demand.

As of December 31, 2009, the Company owed $1,170 to one shareholder of the Company. The advance was non interest bearing and are payable on demand.

On November 8, 2006, An Sen and Zhongxi entered into a Management Entrustment Agreement with Zhongxi granting An Sen the right to manage and control Zhongxi, receive the financial benefits and be exposed to the financial risks of Zhongxi. An Sen and Zhongxi share common officers and directors. As a result, the Management Entrustment Agreement was not entered into at an arm’s length basis because the parties to the agreement are under common control.

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China Power Equipment, Inc.

Notes to Consolidated Financial Statements (Continued)

NOTE 15 – OTHER COMPREHENSIVE INCOME

The following table summarizes comprehensive income for the years ended December 31, 2010 and 2009:

	Year Ended December 31,
	2010		2009

Net income	$	5,496,145	$	4,220,000
Change in foreign currency translation adjustment		693,167		21,017
Comprehensive income	$	6,189,312	$	4,241,017

NOTE 16 – RECLASSIFICATION

Certain amounts in the prior year have been reclassified to conform to the current year’s presentation.

NOTE 17 – SUBSEQUENT EVENT

The Company has evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.

NOTE 18 - CONCENTRATION

For the year ended December 31, 2010, two suppliers accounted for 80.7% of the Company’s total purchases. The loss of any of these suppliers could have a material adverse effect on the Company’s financial position and results of operations.

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Yongxing Song, and our Chief Financial Officer, Ms. Elaine Zhao, assessing the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Based on its assessment, management concluded that, as of December 31, 2010, our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

·	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and

·	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements.

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Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the fourth fiscal quarter of the year 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

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PART II

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following are our officers and directors as of the date of this report. Some of our officers and directors are residents of the PRC and, therefore, it may be difficult for investors to effect service of process within the U.S. upon them or to enforce judgments against them obtained from the U.S. courts.

Directors and Executive Officers of China Power:

Name	Position	Age

Yongxing Song	Chairman of Board, President, CEO	48

Elaine Zhao	Chief Financial Officer	37

Michael Segal	Director	68

Yarong Feng	Director	33

Siu Kuen Leung	Director	48

Junyi Li	Director	56

The directors will serve until our next annual meeting, or until their successors are duly elected and qualified. The officers serve at the pleasure of the Board.

Mr. Michael Segal, Mr. Siu Kuen Leung, and Mr. Junyi Li are “independent directors” under the Rules of NASDAQ, Marketplace Rule 4200(a)(15).

Mr. Yongxing Song was appointed as our Chairman, President and Chief Executive Officer on November 1, 2007. Mr Song has been Chairman and Chief Executive Officer of Zhongxi since its inception in June 2004. Mr. Song served as the Chairman of Director for Alloy Science from 1999 to 2004 and remains as acting CEO and President of Alloy Science. Prior to joining us, Mr. Song served as the vice general manager at Xi’an Xianglong Co., Ltd. from 1996 to 1999. Prior to that, Mr. Song served from 1982 to 1996 as a manufacturing planner and manufacturing manager in Qing’an Aviation Electronic Equipment Co., Ltd., which was a subsidiary of Qing’an Group. Mr. Song obtained a master degree in International Trade from University of International Business and Economics in 2003. He graduated from Shaanxi Aviation Profession University in 1988.

Ms. Elaine Zhao has been our Chief Financial Officer since June 1, 2008. In 2005, she founded ELZ Accountancy Corp., a Los Angeles based accounting and financial advisory firm, and she has served as its president since that time. Ms. Zhao continues to work for ELZ. In her work with ELZ, Ms. Zhao has served clients including privately owned and publicly traded company in various industries and has worked with banks in financing small businesses. Ms. Zhao has held Series 7 and 66 licenses as a broker at a national brokerage firm and is an independent financial adviser. From October 2000 to October 2005, Ms. Zhao worked as accountant and auditor at Liang & Company Accountancy Corp. in Los Angeles. Ms. Zhao is a co-founder of the Southern California Chinese Professional Association. She holds an MS in Finance from the Kelley School of Business at Indiana University and is a Certified Public Accountant.

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Mr. Michael Segal has been our director since June 8, 2006 and was our President from June 9, 2006 until November 6, 2007. Since 2001, he has been President of Segal Cirone Services Inc., a financial consulting company that advises institutions, banks and high net worth individuals. He is President, General Securities Principal, an Options Compliance Principal and an Investment Banking Representative of Halcyon Cabot Partners LTD., a member of the Financial Industry Regulatory Authority(FINRA) since January 2010. From 2006 to 2009 and 2003 to 2005 Mr. Segal was a Principal, Option Compliance Principal and Branch Manager of Whitaker Securities LLC. Mr. Segal is also individually registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is a founding member of the Managed Funds Association. Mr. Segal received a B.B.A. in marketing and economics from the University of Miami in Florida. Mr. Segal sits on the board of directors of the following privately held companies: China Chanfang Pharmaceuticals Inc.; International American Capital Inc. and Segal Cirone Services Inc. Mr. Segal also sits on the board of directors of the following publicly held company: Asia Carbon Industries Inc. (ACRB.BB); China Agri-Business Inc. (CHBU.BB); China Printing &Packaging Inc.(CHPI.BB); China Pharmaceuticals Inc.(CFMI.BB); and DK Sinopharma Inc.(DKSP.BB). From March 2007 until December 2009, Mr. Segal was a member of the board of directors of Biostar Pharmaceuticals Inc.(BSPM). Mr. Segal received a B.B.A. in marketing and economics from the University of Miami in Florida.

Ms. Yarong Feng was appointed as the Chief Financial Officer of Zhongxi on June 5, 2007 and our director on November 6, 2007. On November 21, 2006, Ms. Feng was appointed as a trustee for certain stockholders of China Power who were former stockholders of Alloy Science. From 2002, Ms. Feng served as the Secretary to the board of Alloy Science, being mainly responsible for the management of shareholders and coordination for public affairs of the company. From 2001 to 2002, she served as a cashier and later the assistant to Financial Controller with Xi’an Jin Ruan Science and Technology Development Co., Ltd, which was the largest software development enterprise for house fund in Xi’an city. She was awarded “Excellent Secretary to Board of Directors” by Xi’an Hi-tech Industrious Development Zone in 2003. Ms. Feng graduated from Xi’an Finance and Economics Institute in 2001 and majored in finance management.

Mr. Siu Kuen Leung has been our director since March 10, 2010. He also serves as a director of Everpride Biopharmaceutical Company Limited, a company listed on the GEM board of the Hong Kong Stock Exchange, since November 2009. He was an executive director of China Golden Development Holdings Limited, a company listed on the main board of the Hong Kong Stock Exchange, from April 2007 to December 2008. From June 2006 to January 2007, Mr. Leung was the financial controller of Dragon Hill Holdings Ltd. From August 2004 to August 2005, he was the financial controller of Kader Industrial Co. Ltd. Mr. Leung received a Master’s degree in business administration and a Bachelor of Science (economics) degree from the Hong Kong Polytehnic (currently known as The Hong Kong Polytechnic University). He is a member of the Hong Kong Institute of Certified Public Accountants and an associate of the Chartered Institute of Management Accountants (U.K.). Mr. Leung has over 20 years of experience in accounting and finance.

Mr. Junyi Li has been our director since March 10, 2010. He has been active in the amorphous alloy industry for more than 30 years and has served as Vice President of Advanced Science & Technology Co., Ltd. (Public, SHE: 000969) since 2004. Mr. Li previously served as the Executive Deputy Chief of National Amorphous and Nano-Crystalline Engineering Center, and General Manager of the Amorphous Division. As a senior engineer in the industry, Mr. Li was named as an “Advanced Individual” of the “Ninth Five-Year National Key Science and Technology Research Programs” and awarded a special government allowance for scientists. He was also awarded the Second Prize of National Science and Technology Progress and the First Prize of Metallurgical Science and Technology Progress. Mr. Li has a Bachelor’s degree from the Northeastern University and serves as an instructor at the university.

Board Leadership Structure

The Board of Directors believes that Mr. Song’s service as both Chairman of the Board and Chief Executive Officer is in the best interest of the Company and its stockholders. Mr. Song possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company and its business and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the Company’s shareholders, employees, customers and suppliers.

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Family Relationships

There are no family relationships between or among any of our current directors, executive officers or persons nominated or charged by the Company to become directors or executive officers. There are no family relationships among our officers and directors and the officers and directors of our direct and indirect subsidiaries.

Involvement in Certain Legal Proceedings

None of our directors or executive officers has, during the past ten years:

(a)	Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

(b)	Been convicted in a criminal proceeding or subject to a pending criminal proceeding;

(c)

Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and

(d)	Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Compliance with Section 16(a) of the Exchange Act

Based solely on review of the copies of such forms furnished to the Company, or written representations that no reports were required, the Company believes that for the year ended December 31, 2010, our directors and executive officers complied with Section 16(a) filing requirements applicable to them.

Code of Ethics

On April 15, 2010, we adopted a code of ethics that applies to our officers, directors and employees, including our chief executive officer, senior executive officers, principal accounting officer, and other senior financial officers. Our code of ethics is available on our website at www.chinapower-equipment.com. A copy of our code of ethics will also be provided to any person without charge, upon written request sent to us at our offices located at Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China 710065

Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors

On April 15, 2010, we adopted a nominating committee charter. Under such charter, while there have been no material changes to the procedures by which our shareholders may recommend nominees to the board of directors, the board of directors may take into consideration as one of the factors in its evaluation of shareholder-recommended nominees, the size and duration of the share holdings of the recommending shareholder or shareholder group in relation to the total outstanding shares of the Company. The board of directors may also consider the extent to which the recommending shareholder intends to continue holding its interest in the Company, including, in the case of nominees recommended for election at an annual meeting of shareholders, whether the recommending shareholder intends to continue holding its interest at least through the time of such annual meeting.

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Board of Directors

Director Qualifications

We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our businesses. We also seek directors who possess the qualities of integrity and candor, who have strong analytical skills and who are willing to engage management and each other in a constructive and collaborative fashion. We also seek directors who have the ability and commitment to devote significant time and energy to service on the Board and its committees. We believe that all of our directors meet the foregoing qualifications.

Certain of our directors have strong technological backgrounds that are relevant to our industry. Certain of our directors have backgrounds in accounting, public company reporting, compliance and management. We believe that the backgrounds and skills of our directors bring a diverse range of perspectives to the Board.

Meetings of the Board of Directors and Committees

During the fiscal year ended December 31, 2010, the Board of Directors did not meet but took action by unanimous written consent four times. The Audit Committee did not meet but took action by unanimous written consent four times. The Compensation Committee and the Nominating and Corporate Governance Committee did not meet and did not take any action by unanimous written consent during the fiscal year ended December 31, 2010. Each director is expected to attend meetings of our Board of Directors and meetings of committees of our Board of Directors of which he is a member, and to spend the time necessary to properly discharge his respective duties and responsibilities.

Board Committees

The Board of Directors has an audit committee, a nominating committee and a compensation committee. The Board created the three committees and adopted charters for all of such committees on April 15, 2010. The Board has determined that Michael Segal, Siu Kuen Leung, and Junyi Li are independent directors within the meaning of Nasdaq Listing Rule 5605(a)(2). Accordingly, all of the members of the Audit Committee are independent within the meaning of Nasdaq Listing Rule 5605(a)(2).

Nominating and Corporate Governance Committee

The purpose of the Nominating and Corporate Governance Committee is to assist the Board of Directors in identifying qualified individuals to become members of our Board of Directors, in determining the composition of the Board of Directors and in monitoring the process to assess Board effectiveness. Each of Mr. Siu Kuen Leung, Mr. Michael Segal and Mr. Junyi Li is a member of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee operates under a written charter. Mr. Li is the Chairman of Nominating Committee.

Compensation Committee

The compensation committee is responsible for overseeing and, as appropriate, making recommendations to the Board regarding the annual salaries and other compensation of the Company’s executive officers and general employees and other policies, and for providing assistance and recommendations with respect to the compensation policies and practices of the Company. Each of Mr. Siu Kuen Leung, Mr. Michael Segal and Mr. Junyi Li is member of the Compensation Committee. The Compensation Committee operates under a written charter. Mr. Segal is the Chairman of Compensation Committee.

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Audit Committee

Our Audit Committee consists of Mr. Siu Kuen Leung, Mr. Michael Segal and Mr. Junyi Li, each of whom is considered “independent” under Rule 5605(a)(2) of the NASDAQ Marketplace Rules as determined by our Board of Directors. Mr. Leung was appointed to serve as the chairman of the audit committee. The Audit Committee assists Board oversight of (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent auditor, and prepares the report that the Securities and Exchange Commission requires to be included in the Company’s annual proxy statement. The audit committee operates under a written charter.

The Board of Directors determined that Mr. Leung possesses accounting or related financial management experience that qualifies him as financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and Section 803 of the NYSE Amex Company Guide and that he is an “audit committee financial expert” as defined by the rules and regulations of the SEC.

ITEM 11.

EXECUTIVE COMPENSATION

The following table shows the compensation paid to our principal executive officer. None of our executive officers earned more than $100,000 in any of the previous two years.

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)		Option Awards ($)	Non-Equity Incentive Plan Compensation ($)		Non- Qualified Deferred Compen-sation Earnings ($)	All Other Compensation ($)		Total ($)
Yongxing Song	2010	7,604	4,438		—	—		—	—		—	12,042
CEO, President	2009	6,876	10,308		—	—		—	—		—	17,184

Compensation Discussion and Analysis

We intend to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.

It is not uncommon for PRC private companies to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual, and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.

We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short- and long-term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.

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Employment Agreements

Pursuant to an employment agreement between Zhongxi and Mr. Yonxing Song dated July 1, 2004, Mr. Song is employed by Zhongxi as its Chief Executive Officer. The term of the agreement is from July 1, 2004 to June 30, 2014. The agreement provides for a salary of RMB 4,000 (US$ 573) per month with a performance bonus of RMB 6,000 (US$ 859) per month. The employment agreement follows the PRC labor laws which include the provision of labor-related insurance, the ability of either party to terminate for cause, termination on 30 days’ notice, termination without notice and the provision by Zhongxi of labor-related benefits.

Pursuant to an employment agreement between Zhongxi and Mr. Zewei Xu dated July 1, 2004, Mr. Xu is employed by Zhongxi as its Chief Engineer. The term of the agreement is from July 1, 2004 to December 31, 2009. The agreement provides for a salary of RMB 2,000 (US$ 286) per month with a performance bonus of up to RMB 3,000 (US$ 429) per month. The employment agreement follows the PRC labor laws which include the provision of labor-related insurance, the ability of either party to terminate for cause, termination on 30 days’ notice, termination without notice and the provision by Zhongxi of labor-related benefits.

Pursuant to an employment agreement between Zhongxi and Mr. Guoan Zhang dated May 1, 2007, Mr. Zhang is employed by Zhongxi as its Vice General Manager. The term of the agreement is from May 1, 2007 to April 30, 2012. The agreement provides for a salary of RMB 2,000 (US$ 286) per month with a performance bonus of up to 3,000 (US$ 429) per month. The employment agreement follows the PRC labor laws which include the provision of labor-related insurance, the ability of either party to terminate for cause, termination on 30 days’ notice, termination without notice and the provision by Zhongxi of labor-related benefits.

Pursuant to an employment agreement between Zhongxi and Ms. Yaron Feng dated July 1, 2004, Ms. Feng is employed by Zhongxi as its Chief Financial Officer. The term of the agreement is from July 1, 2004 to December 31, 2009. The agreement provides for a salary of RMB 2,000 (US$ 286) per month with a performance bonus of up to RMB 3,000 (US$ 429) per month. The employment agreement follows the PRC labor laws which include the provision of labor-related insurance, the ability of either party to terminate for cause, termination on 30 days’ notice, termination without notice and the provision by Zhongxi of labor-related benefits.

According to a Financial Service Contract entered into on May 17, 2010 between us and Elaine Zhao, Elaine Zhao provides financial service to us in consideration for the payment of $52,000 per year. According to a stock option agreement, Ms. Zhao has the right to purchase 50,000 shares of our common stock at an exercise price of $2.90 vested in four equal installments. All options expire five years from the date of grant. The agreement may be terminated by either party with four weeks notice.

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Outstanding Equity Awards at 2010 Fiscal Year-End

The following table reflects the unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of the end of the fiscal year ended December 31, 2010:

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares of Units of Stock that Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Elaine Zhao		25,000	(1)	—		—	$	0.23	7/1/2014			—		—	—		—
		75,000	(2)	—		—	$	0.51	7/1/2014			—		—	—		—
				50,000	(3)	25,000	$	2.90	5/16/2015			—		—	—		—

(1)	The vesting date of these options was July 1, 2009.

(2)	The vesting dates of these options were 50% on October 1, 2009 and 50% on January 1, 2010.

(3)	The vesting dates of these options were 25% of the options vest(ed) on August 16, 2010, November 16, 2010, February 16, 2011 and May 16, 2011.

Director Compensation

The following table reflects the compensation of directors for the year ended December 31, 2010:

Name of Director	Fees Earned or Paid in Cash ($)		Stock Awards ($)	Option Awards ($)		Non-Equity Incentive Plan Compensation ($)	Change in Pension value and Nonqualified Deferred Compensation Earnings		All Other Compensation ($)	Total ($)
Michael Segal		24,000	—		—	—		—	—		24,000
Yarong Feng		8,965	—		—	—		—	—		8,965
Siu Kuen Leung		8,800	—		—	—		—	—		8,800
Junyi Li		8,800	—		—	—		—	—		8,800

On March 10, 2010, Messrs. Leung and Li were appointed as directors of the Company. Each of Messrs Leung and Li entered into an Independent Director Agreement with the Company. A summary of the compensation for the directorship of each of Messrs. Leung and Li is set forth as follows:

An annual salary of RMB 60,000.00 (approximately $8,800) payable in arrears in equal installments on the last day of each quarter;

Reimbursement of pre-approved business-related expenses incurred in the performance of the director’s duties.

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ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 28, 2011 by (i) any person or group with more than 5% of our voting securities, (ii) each director, (iii) each executive officer and (iv) all executive officers and directors as a group. Barron Partners LP owns series B convertible preferred stock and warrants which, if fully converted, would result in the ownership of more than 5% of our outstanding common stock. However, the series B preferred stock may not be converted and the warrants may not be exercised if such conversion would result in Barron Partners LP and its affiliates owning more than 4.9% of our outstanding common stock. This limitation may not be waived.

		Amount and
	Name and Address of	Nature of	Percent of
Title of Class	Beneficial Owner	Beneficial Owner	Class (1)
Common Stock	Yongxin Song, Chairman of Board, President, CEO Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China 710065	2,953,125	15.2	%

Common Stock	Michael Segal, Director 11 East 86th Street, Suite 19B New York, NY 10028	65,323	0.34	%

Common Stock	Elaine Zhao, CFO 20955 Pathfinder Road, Suite 100 Diamond Bar, CA 91765	0	-

Common Stock	Yarong Feng, Director Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China 710065	166,583	0.86	%

Common Stock	ZeWei Xu, Chief Engineer Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China 710065	303,750	1.6	%

Common Stock	Guoan Zhang, Vice General Manager Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China 710065	0	-

Common Stock	All Directors and Officers of the Company as a group	3,488,781	18.0	%

Common Stock	Trustees for Alloy Science Shareholders (2)	3,803,625	19.6	%

Common Stock & Warrants	Barron Partners Lp 730 5th Avenue, 25th Floor New York, Ny 10019 (3)	3,295,080	17.0	%

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(1)

As of March 28, 2011 we had 19,382,013 outstanding shares of common stock. In determining the percent of common stock owned by a stockholder on March 28, 2011, (a) the numerator is the number of shares of common stock beneficially owned by such stockholder, including shares the beneficial ownership of which may be acquired, within 60 days upon the conversion of convertible securities or the exercise of warrants held by such stockholder, and (b) the denominator is the sum of (i) 19,382,013, the number of shares outstanding on March 29, 2011, and (ii) the total number of shares underlying the warrants, which each of the stockholders has the right to acquire within 60 days following March 29, 2011.

(2)

The trustees for the trust holding 3,803,625 shares of our common stock are: Ms. Yarong Feng and Mr. Guoan Zhang pursuant to the terms of the Voting Trust and Escrow Agreement by and among the members of the board of Zhongxi and the shareholders of China Power and Equipment who were parties thereto, dated November 21, 2006 (the “Voting Agreement”). Any holder may terminate the voting trust relationship upon written notice to the trustees at any time after November 21, 2008. The Voting Agreement gives the Trustees the right to vote on all matters brought before the shareholders holding our common stock. Ms. Feng and Mr. Zhang’s addresses are Room 602, 6/F, Block B, Science & Technology Park of Xi Dian University, No. 168 Kechuang Road, Hi-tech Industrial Development Zone, Xi’an, Shaanxi, China, 710065.

(3)	Andrew Barron Worden has voting and investment control for Barron Partners Lp.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

On November 8, 2006 An Sen and Zhongxi entered into a Management Entrustment Agreement with An Sen granting An Sen the right to manage and control Zhongxi, receive the financial benefits and be exposed to the financial risks of Zhongxi. An Sen and Zhongxi share common officers and directors. As a result, the Management Entrustment Agreement was not entered into at an arm’s length basis because the parties to the agreement were related prior to the transaction and were under common control immediately thereafter.

As previously described in this report under “Description of Business” our board of directors has the right to appoint the board of directors of Zhongxi and its officers and directors.

In May 2005, Zhongxi made a long-term investment in Shaanxi Yan An Amorphous Alloy Transformer Co., Ltd (“Yan An”) to purchase 20% of equity interest for approximately $165,377 (RMB 1,090,000). The equity method has been used for this investment. Zhongxi purchased the shares of Yan An from Alloy Science which is a related party of the Company.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following lists fees paid or accrued by us for the audit and other services provided or to be provided by the auditors for the year ended December 31, 2010 and 2009:

	2010		2009
Audit Fees		171,000		78,900
Audit Related Fees				-
Tax Fees				-
All Other Fees				-

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PART III

ITEM 15.

EXHIBITS

Number	Description
3.1	Articles of Incorporation filed with the Secretary of State of the State of Maryland on May 17, 2006. (1)
3.2	Articles of Amendment. filed with the Secretary of State of the State of Maryland on August 2, 2007.(1)
3.3	Articles of Amendment filed with the Secretary of State of the State of Maryland on September 14, 2007.(1)
3.4	Articles of Amendment filed with the Secretary of State of the State of Maryland on November 13, 2007.(1)
3.5	Bylaws of the Company.(1)
3.6	Articles of Amendment filed with the Secretary of State of the State of Maryland on February 29, 2008.(2)
3.7	Xi’an Amorphous Alloy Zhongxi Transformer Co., Ltd. Articles of Association.(3)
3.8	Articles Supplementary to the Articles of Incorporation of China Power Equipment, Inc. designating the Series B Convertible Preferred Stock. (4)
4.1	Form of $1.00 Common Stock Warrant.(1)
4.2	Form of $2.40 Common Stock Warrant. (4)
9.1	Voting Trust and Escrow Agreement, dated, November 21, 2006, by and among Zhongxi Shareholders and their trustees.(2)
10.1	Form of Independent Director Agreement.(5)
14.1	China Power Equipment, Inc. Code of Conduct*
21.1	List of Subsidiaries.(6)
31.1	Certification of Yongxing Song pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Elaine Zhao pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

Footnotes:

*	Filed herewith

(1)	Previously filed as an exhibit to the Company’s Registration Statement on Form SB-2 (File No. 333-147349) filed with the SEC on November 13, 2007.

(2)	Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A (File No. 333-147394) on February 29, 2008.

(3)	Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A (File No. 333-147394) on April 30, 2008.

(4)	Previously filed as an exhibit to the Company’s Current Report on Form 8-K on December 4, 2009.

(5)	Previously filed as an exhibit to the Company’s Current Report on Form 8-K on March 17, 2010.

(6)	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K on March 30, 2010.

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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 POWER EQUIPMENT, INC

Date: March 31, 2011	By:	/s/ Yongxing Song
		Yongxing Song
		Chief Executive Officer, President and Director (principal executive officer)


	By:	/s/ Elaine Zhao
		Elaine Zhao
		Chief Financial Officer (principal financial officer and principal accounting officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the indicated capacities on March 31, 2011.

/s/ Yongxing Song
Yongxing Song, Director

/s/ Yarong Feng
Yarong Feng, Director

/s/ Michael Segal
Michael Segal, Director

/s/ Siu Kuen Leung
Siu Kuen Leung, Director

/s/ Junyi Li
Junyi Li, Director

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Attached files

China Power Equipment, Inc. Reports

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