UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549










FORM
10-K/A





x           Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934





For
the fiscal year ended: June 30, 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 000-31091




ZHONGCHAI
MACHINERY, INC.


(Exact
Name of Registrant as Specified in Its Charter)





NEVADA
            33-0652593(State
      of Incorporation)
            (I.R.S.
      Employer I.D. Number)224
      Tianmushan Road,Zhongrong
      Chengshi Huayuan 5-1-602,
            310007Hangzhou,
      P.R. China
            (zip
      code)(Address
      of principal executive offices)





(904)
418-9133


(Issuer’s
Telephone Number, Including Area Code)




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




None


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




Common
Stock, par value $.001 per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ̈  Nox





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 ̈  Nox





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. Yesx   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).    Yes   ̈     No ̈  .





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





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer   ̈    Accelerated
filer   ̈Non-accelerated filer   ̈  Smaller
reporting company  x





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ̈ Nox





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity as of the last
business day or registrant’s most recently completed second fiscal quarter. As
of December 31, 2009, the aggregate market value of the common stock held by
non-affiliates of the Registrant (8,224,445 shares) was approximately
$1,233,667.





State the
number of shares outstanding of each of the issuer’s classes of common equity:
27,613,019 as of December 9, 2010.








ZHONGCHAI MACHINERY,
INC.




Form
10-K


Fiscal
Year Ended June 30, 2010


Table
of Contents




PageNo.PART
      IItem
      1
                            
                            Description
      of Business
                            
                            1Item 1A.
                            
                            Risk
      Factors
                            
                            5Item 1B.
                            
                            Unresolved
      Staff Comments
                            
                            15Item
      2
                            
                            Description
      of Properties
                            
                            15Item
      3
                            
                            Legal
      Proceedings
                            
                            16Item
      4
                            
                            [Reserved]
                            
                            16PART
      IIItem
      5
                            
                            Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                            
                            17Item
      6
                            
                            Selected
      Financial Data.
                            
                            18Item
      7
                            
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            20Item
      7A
                            
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            
                            26Item
      8
                            
                            Financial
      Statements and Supplementary Data
                            
                            26Item
      9
                            
                            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                            
                            26Item
      9A
                            
                            Controls
      and Procedures
                            
                            26Item
      9B
                            
                            Other
      Information
                            
                            27PART
      IIIItem
      10
                            
                            Directors,
      Executive Officers and Corporate Governance
                            
                            28Item
      11
                            
                            Executive
      Compensation
                            
                            31Item
      12
                            
                            Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters
                            
                            33Item
      13
                            
                            Certain
      Relationships and Related Transactions and Director
      Independence
                            
                            34Item
      14
                            
                            Principal
      Accountant Fees and Services
                            
                            34PART
      IVItem
      15.
                            
                            Exhibits
      and Financial Statement Schedules
                            
                            35





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
report contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, and Section 27A of the Securities Act of
1933. Any statements contained in this report that are not statements of
historical fact may be forward-looking statements. When we use the words
“anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will”
and similar expressions, we are identifying forward-looking statements.
Forward-looking statements involve risks and uncertainties, which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by forward-looking statements. These factors include
our current dependence on a limited number of sources of products and customers,
continuing demand for our products, pricing pressures on our products caused by
demand and competition, delivery deadlines, customer satisfaction, our ability
to generate sales and expand our customer base, warranty obligations and claims,
integrating any enterprises acquired, operating a portion of our business in the
People’s Republic of China, currency controls and exchange rate exposure and
future need for capital to expand our business.




Except as
may be required by applicable law, we do not undertake or intend to update or
revise our forward-looking statements, and we assume no obligation to update any
forward-looking statements contained in this report as a result of new
information or future events or developments. Thus, you should not assume that
our silence over time means that actual events are bearing out as expressed or
implied in such forward-looking statements. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the SEC that attempt to advise interested parties of the risks,
uncertainties and other factors that may affect our business.




For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under “Part I, Item 1A -
Risk Factors.”





EXPLANATORY
NOTE





This
amendment to the Annual Report on Form 10-K is being filed to expand the
disclosure in Legal Proceedings and Management’s Discussion and Analysis, to
change certain catagorizations of items in the Consolidated Balance Sheet and
Cash Flow Statement and to expand Notes 4 and 5 to the notes to the financial
statements.







PART
I
  Item 1.
              DESCRIPTION
      OF BUSINESS
  Background
of Zhongchai
  Reincorporation
of Equicap
  Equicap,
Inc. (“Equicap”) was incorporated in the State of Nevada on March 13, 2002, for
the purpose of entering into a merger with and re-domiciling its predecessor,
Equicap, Inc., a California corporation ("Equicap California"). Effective
January 25, 2005, Equicap California was merged with and into Equicap in a
statutory merger based on management's belief that Nevada law is more
advantageous to a corporation than California law. Equicap was considered a
blank check company until its March 2007 acquisition of Usunco Automotive
Limited, a British Virgin Islands company (“Usunco”). Equicap, Inc. changed its
name to Zhongchai Machinery, Inc. (“Zhongchai” or the “Company”) on May 21,
2010.
  2007
Share Exchange
 
 Equicap
and Usunco entered a Share Exchange Agreement on March 7, 2007, which was
consummated on March 9, 2007. Under the Exchange Agreement, Equicap acquired all
the outstanding equity securities of Usunco in exchange for 18,323,944 shares of
common stock of Equicap, and thereby Equicap acquired Usunco as a wholly owned
subsidiary. Usunco was deemed to have been the acquiring company in the Share
Exchange, and for accounting purposes, the Share Exchange transaction was
treated as a reverse acquisition with Usunco as the acquirer and Equicap as
the acquired party.
  Private Placement Offering in Connection with Share
Exchange
 
 As a condition to the Share Exchange, Equicap conducted
a private placement offering of its common stock to accredited and institutional investors in which it
raised gross proceeds of $12 million (“Offering”).  After commissions and expenses related to
the Offering and the $450,000 advisory fee payable to Fountainhead, Equicap
received net proceeds of approximately $10 million
in the Offering.  The investors were issued an aggregate of 8,450,704
shares of common stock, then representing approximately 30% of the issued and
outstanding common stock of Equicap. The price per share of common stock was
$1.42. vFinance was the exclusive placement agent for the
Offering.
  Share
Transfer between Usunco and Zhongchai Holding (Hong Kong) Limited
  On
December 16, 2009, Equicap, Inc., its wholly owned subsidiary, Usunco, and its
wholly owned subsidiary Zhongchai Holding (Hong Kong) Limited, a Hong Kong
company (Zhongchai Holding”), took action to approve a transfer of the shares of
Zhejiang Zhongchai Machinery Co., from Usunco to Zhongchai
Holding.  The transfer was completed on December 23, 2009. The purpose
of the transfer was to take advantage of the tax treaty between the People’s
Republic of China and the Special Administrative Region of Hong Kong, which
reduces the withholding tax rate of the PRC on payments to entities outside of
China. Usunco then discontinued all its business activities
  -
1 -
  Usunco
Automotive Limited
  Usunco
was organized in the British Virgin Islands as a limited liability company on
April 24, 2006. Until December 23, 2009, Usunco owned 75% of the equity interest
of Zhejiang ZhongChai Machinery Co., Ltd. (“ZhongChai China”), which in turn
owns all of Zhejiang Shengte Transmission Co., Ltd., that makes gears and
gearboxes (transmissions) in China.  Until June 15, 2009, Usunco also
owned 100% of the equity interest of IBC Automotive Products, Inc. (“IBC”),
which distributed automotive parts in North America.  Until June 2009
Usunco operated with two business segments of the Company, represented by the
China/Gear Segment of ZhongChai China and its subsidiary, which focuses on
manufacturing and distribution of gears and gearboxes in China and by the North
America/Auto Parts Segment of IBC, which focused on sourcing automotive parts
and products from China and distributing them in North America and other
regions. Pursuant to the share transfer described above, Unsunco
discontinued all of its business activities.
  Zhongchai Holding (Hong Kong)
Limited
  Zhongchai
Holding was incorporated in the Special Administrative Region of Hong Kong on
April 24, 2009. On December 23, 2009, Zhongchai Holding acquired the 75% equity
interest of ZhongChai China from Usunco, and on April 26, 2010, Zhongchai
Holding acquired the remaining 25% of the equity interest of Zhongchai China
from Xinchang Keyi Machinery Co., Ltd.. After the acquisition, Zhongchai China
became a Wholly Owned Foreign Enterprises and wholly owned subsidiary of
Zhongchai Holding.
  Zhejiang
Zhongchai Machinery Co., Ltd.
  ZhongChai
China was a Sino-foreign equity joint venture established in the People’s
Republic of China (the “PRC”) by Usunco, and a local party in China, Xinchang
Keyi Machinery Co., Ltd. (“Keyi”), the successor in interest to Xinchai Holding
Group Co., Ltd. with respect to the 25% joint venture interest. ZhongChai China
manufacturers and sells drivetrain products consisting mainly of gears,
transmission gearboxes, and transaxles in China. The products are sold to
engine, gearbox, and equipment manufacturers for their engine, gearbox, and
equipment products. ZhongChai China was approved by local authorities in the PRC
as a Sino-foreign joint venture company with limited liability to be operated
for a term of 25 years, with $10.6 million in registered capital. The registered
capital may be used as general working capital for it operations and other
corporate purposes.
 On July
6, 2007, ZhongChai China completed the acquisition of all the outstanding equity
of Zhejiang Shengte Transmission Co., Ltd. (“Shengte”).  Shengte is a
company organized under the laws of the PRC.  The equity interest was
acquired for approximately $3,700,000 in cash. Shengte manufactures and
distributes gears and gearboxes mainly used in or together with diesel engines
for industrial and agricultural machinery.  Shengte was founded in
2006.
  Products
  The
Company, through its wholly owned subsidiaries, is focused on the manufacturing
and distribution of drivetrain products, mainly transmission gearboxes, gears,
and transaxles. These products are primarily used for making industrial,
agricultural, and construction machinery, such as forklift trucks, excavators,
tractors, diesel engines, and other machines.
  The gears
produced by the Company are used for internal production of transmission
gearboxes and sold mainly to Chinese diesel engine manufacturers. In order to
meet market and internal demand, the Company gradually increases its gear
production capacity and upgrades the production facilities to improve the
overall quality of the production and product.
  The
Company started to produce and deliver transmission gearboxes in 2008. Since
then it has sold 92 sets, 1767 sets, and 9,924 sets of transmission gearboxes
during the fiscal years in 2008, 2009, and 2010 respectively. The Company
expects the sales of the transmission gearboxes will continue to grow in the
fiscal year of 2011. Zhongchai China produces two series of transmission
gearboxes, JDS for mechanical shift control and YQX for hydraulic shift control
with three classes for 1 ton, 2 ton, and 3 ton internal combusting forklift
trucks. Zhongchai has finished the development of a 1-ton class transmission
gearbox for electrical forklift trucks and will start to deliver to customers
before the end of 2010.
  -
2 -
  The
Company has started to deliver its first transaxle product, PSD-331, to its
customers in fiscal year 2010. This new product will be produced in Zhongchai,
China under a technology license from Wooyoung Hydraulic Corporation. This
product integrates the functions of transmission and drive axle using a new
hydrodynamic design concept.
  Market
Overview
  The
Company is primarily focused on the domestic market in China. As a result of the
continued expansion of the Chinese economy and various government initiatives,
the Company believes its best opportunity at this time is to concentrate its
commercial efforts in that market.  The domestic market in China for
drivetrain products has grown in recent years because of the increase in
domestic demand driven by countrywide economic growth and urban expansion. In
addition, beginning in 2005, because of the favorable government policies
towards farmers, the Chinese agricultural equipment market has experienced
growth for the kinds of products that the Company produces and sells. As a
result, the Company has seen growth of the gear and gearbox business in recent
years, and it expects it to continue.
  The main
customers of the Company are manufacturers of engines and industrial
equipment.  The Company’s products are used as components in its
customers’ final products. Typically the gears are used in diesel engines, and
transmission gearboxes and transaxles that are incorporated into equipment and
machinery for the industrial and agricultural markets, such as forklift trucks,
excavators, construction equipment, and agricultural machinery.
  Principal
Customers
  The
Company’s main customers in its drivetrain business are both Chinese and global
diesel engine and forklift truck manufacturers. The Company has business
relations with more than thirty diesel engine and equipment manufacturers,
including the two top Chinese diesel engine manufacturers and the five top
Chinese forklift truck manufacturers.
  NameofMajorCustomers
                  
                  Percentageof
                    TotalRevenuein
                    2010 (fiscalyear)Zhejiang
      Xinchai Co., Ltd.
                  
                  
                  39.5
                  %Lonking
      (Shanghai) Forklift Co., Ltd.
                  
                  
                  25.2
                  %Hangcha
      Forklift Co., Ltd.
                  
                  
                  6.3
                  %Xiamen
      Xiagong Machinery Co., Ltd.
                  
                  
                  5.0
                  %Hunan
      Sunway Machinery Co., Ltd.
                  
                  
                  4.1
                  %Zhejiang
      Hengchun Machinery Co., Ltd.
                  
                  
                  3.0
                  %Hangzhou
      Global Friend Precision Machinery Co., Ltd.
                  
                  
                  2.8
                  %Shandong
      Guangming Machinery Co., Ltd.
                  
                  
                  2.6
                  %Anhui
      Hecha Forklift Co., Ltd.
                  
                  
                  1.8
                  %Ningbo
      Ruyi Joint Stock Co., Ltd.
                  
                  
                  1.8
                  %Total
                  
                  
                  92.1
                  %
 
 The
customers of the Company were more concentrated in the last fiscal year when two
customers accounted for 69% and 17%, respectively, of the net revenue in
China.
  The
Company performs appropriate credit checks before orders are accepted and
invoices are issued. Most accounts are collected within 120 days. Customers
generally do not provide long-term volume purchase commitments. Rather,
transactions are based on non-binding purchase plans that provide only purchase
forecasts and state basis terms. Sales are based on purchase
orders.
  -
3 -
  Product
Returns and Warranties
  The
Company provides only a limited right of return for non-conforming products if
returned in a timely fashion. The Company generally provides a one-year limited
warranty covering manufacturing defects and functional failures of its
transmission gearbox products.  After evaluation and confirmation, the
Company will either replace the defective product or accept returns by crediting
the customer account.  The Company, thus, becomes responsible for the
costs and expenses of the returns.
  Sales
and Marketing
  Because
the principal market for the Company is for equipment manufacturers, the Company
undertakes sales and marketing principally designed to acquaint those types of
enterprises with its products.  Therefore, the Company focuses on
direct sales on a business-to-business basis, by developing contacts with engine
and gearbox producers and original equipment manufacturers.  These
contacts are developed through direct relationships, referrals and trade
shows.  One of the principal aspects of its marketing strategy is to
focus customers on the Company’s commitment to quality products, customer
service and after sales support.
  Once a
sale is developed, the customer typically will provide the Company with a
forecast and a desired shipment schedule up to one year in advance, which are
reviewed quarterly, and in some cases monthly.  These forecasts and
schedules are dependent on the demand for the Company’s products and the
delivery schedules developed with the ultimate finished goods
buyer.  The Company’s customers usually will issue to the Company an
irrevocable purchase order combined with the firm shipment schedule three months
prior to shipment.
  Principal
Suppliers
  The
Company sources parts and components and semi-finished products mainly from
Zhejiang Yuyang Machinery Co., Ltd., Zhongqing Shenjian Auto Transmission Co.,
Ltd., Hangzhou Qianjin General Machinery Co., Ltd., Changzhou No. 2 Gears Co.,
Ltd., and Wuxi Hydraulic Machinery Co., Ltd. for Zhongchai’s for further fine
processing and assembly.
  Five
major suppliers, Zhejiang Yuyang Machinery Co.,Ltd, Chongqing Shenjian Auto
Transmission Parts Co.,Ltd., Zhejiang Hengchun Machinery Co., Ltd., Hangzhou
Qianjin General Machinery Co., Ltd., and Xinchang Liyuan Foundry Co., Ltd.,
accounted for approximately 18%, 7%, 5%, 5%, and 4%, respectively, of the
Company’s total purchases for the years ended June 30, 2010. The Company’s
sources for parts and components and semi-finished products were less
concentrated in fiscal year 2010 compare to fiscal year 2009 when four main
suppliers provided 32%, 13%, 5%, and 4%, respectively, of the Company’s
consolidated purchases for the fiscal year.
  The
Company does not have any long term supply agreements with any of these
companies, and it purchases products on the basis of purchase orders. None of
our suppliers have any ownership in the Company or any relationship with the
insiders of the Company.
  Distribution
  For our
drivetrain business, currently the Company ships finished products directly to
its customers from the factory warehouse in Zhejiang, China, or customers pick
up finished products from our factory warehouse.
  -
4 -
  Competition
  As the
demand for drivetrain products has grown in China, the competition within that
market has also grown and has become intense.  There are many local
manufacturers making gears, transmission gearboxes, and transaxles, and most of
them are willing to compete for customers and market share through low pricing.
These producers typically offer small production and their products vary greatly
in quality. There are also many global manufacturers interested in the large
Chinese market that are entering the market and selling gear and gearbox
products having better quality and design than many Chinese
suppliers.  Zhongchai China faces the many challenges of being a new
entrant to compete for new and existing customers.  Management
believes it will take Zhongchai China a few years to establish a solid customer
base for itself. Zhongchai China competes on the basis of its quality and sales
support, and as the Company develops, it will increasingly compete on the basis
of diversified products and larger production capabilities.
  Employees
  As of
June 30, 2010, the Company employed directly and through its subsidiaries
approximately 151 individuals in the United States and China, consisting of 4
executives and managers, 15 technical personnel, 6 sales and marketing
personnel, and 21 administrative and support personnel, and 105 production
personnel. The largest increase in the number of the employees was for
production personnel due the increase of production capacity. Employees are not
represented by any labor union or similar collective bargaining
group.
  Item 1A.
              RISK
      FACTORS
  An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this Annual Report on Form
10-K, including the consolidated financial statements and notes thereto, when
evaluating our Company and our business before deciding to invest in our common
stock. The risks described below are not the only ones facing us.
Additional risks not presently known to us or that we presently consider
immaterial may also harm us. If any of the following risks occur, our business,
financial condition and results of operations and the value of our common stock
could be materially harmed.
  Risks
Related to Our Business
  We
anticipate that a significant portion of our revenue will be from the sale of
gears and transmission gearboxes to a few customers. We have considerable risk
related to the reliance on those few customers, which could have a detrimental
consequence to our long-term viability.
  We
anticipate that a significant portion of our revenues will be from the sale of
gear and transmission gearbox products to Zhejiang Xinchai Co., Ltd., Lonking
(Shanghai) Forklift Co., Ltd., Hangcha Forklift Co., Ltd., Xiamen Xiagong
Machinery co., Ltd., and Hunan Sunway Machinery Co., Ltd., which represents
about 39.5%, 25.2%, 6.3%, 5%, and 4.1% of our sales respectively. If any of our
significant customers experiences any events that affect their purchases of our
products, there could be considerable detrimental consequences to our financial
results and long term viability.
  Our
revenues will decrease if there is less demand for the kinds of products in
which our products are component parts.
  Our
principal customers are manufacturers of engines, gearboxes and industrial
equipment. Our products are part of the larger end product of these
manufacturers, including things such as forklifts, excavators, construction
equipment, tractors, and other machinery. If sales of these kinds of end
products decrease, then the demand for our products and our revenues would
likewise decrease.  Therefore, we are dependent on a limited market
segment.
  -
5 -
  Because
of competition, we could experience downward pricing pressure on our products
from our customers, which may adversely affect our growth, profit margins and
net income.
  We could
face downward pricing pressure from our customers as a result of the intense
competition in our industry.  To retain our existing customers and
gain new ones, we will have to continue to keep our unit prices competitive and
possibly improve or expand our product offerings.  In view of our need
to maintain competitive prices on our products, our growth, profit margins and
net income will be affected if we cannot effectively continue to control our
sourcing and other costs.
  We
receive a significant portion of our revenues from a small number of customers
which may make it difficult to negotiate price increases for our
products.
  A
significant portion of our revenues depends on a small number of customers.
Dependence on a few major customers could make it difficult to negotiate price
increases for our products.  Therefore, in addition to competitive
pressures, we may face limitations on our ability to increase our prices to
account for raw material price increases, increases in wages and production
costs and other expenses of production. In such event, our profit margins may be
reduced and our overall profitability reduced.
  Our
contracts with our customers generally are short-term and do not require the
purchase of a minimum amount, which may result in periods of time during which
we have limited orders for our products.
  Our
customers generally do not provide long-term volume purchase
commitments.  Although we anticipate receiving non-binding purchase
plans from significant customers who will have continuing demand for certain
products, these plans provide only purchase forecasts and state terms such as
price, payment method, payment period, quality standards and inspection and
similar matters rather than provide firm, long-term commitments to purchase
products.  As we are not likely to have many long term contracts for
the majority of our sales, we could have periods during which we have no or only
limited orders for our products, but will continue to have to pay the costs of
maintaining our work force and our operating facilities and to service our
indebtedness without the benefit of current revenues.
  We
face short lead-times for delivery of products to customers.  Failure
to meet delivery deadlines could result in the loss of customers and damage to
our reputation and goodwill.
  Our
customers’ purchase agreements typically contain short lead-times for the
delivery of products, leading to production and manufacturer supply schedules
that can reduce our profit margins on the products procured from our suppliers.
Our suppliers may lack sufficient capacity at any given time to meet all of our
customers’ demands if orders exceed their production capacity. We will strive
for rapid response to customer demand which can lead to reduced purchasing
efficiency and increased procurement costs, therefore reducing
margins.  If we are unable to sufficiently meet our customers’
demands, we may lose our customers.  Moreover, failure to meet
customer demands may damage our reputation and goodwill.
  If
our selling efforts generate growth in demand, we may not be able to respond
effectively if our capacity or sources of supply or capital are not adequate,
resulting in lost business opportunity.
  If our
marketing plans result in market growth and demand for our products, we will be
required to deliver larger volumes of products to our
customers.  Meeting customer order demand will require us to increase
our capacity to produce, or ability to source quality products. Such demand
would require us to expand our current production capacities, or it will
necessitate our securing additional qualified suppliers.  In addition,
we may require more working capital than we currently have available to support
new supply arrangements or additional inventory.  The failure to meet
demand for our products may result in customers seeking other sources of supply
and may adversely affect our reputation as a ready and consistent
supplier.
  -
6 -
  Because
of market conditions, we will have to grant relatively long payment terms for
accounts receivable which can adversely affect our cash flow.
  As is
customary in China, for competitive reasons, we grant relatively long payment
terms to most of our customers.  As a result of the size of many of
our orders, these payment terms may adversely affect our cash flow and our
ability to fund our operations out of our operating cash flow. In addition, the
reserves we establish for our receivables may not prove to be adequate in view
of an actual experience of bad debts. The failure of our customers to pay us
timely would negatively affect our working capital, which could in turn
adversely affect our cash flow.
  Because
our customers are likely to be large manufacturers, they generally will be
placing large orders for our products and require their prompt delivery which
will impact our working capital.  If our customers do not use our
products and sell the final end products in a timely fashion to generate their
income, they, in turn may not pay us in a timely fashion.  This
failure to pay our invoices in a timely manner may defer or delay further
product orders from us, which may adversely affect our cash flows, sales or
income in subsequent periods.
  We
may not be able to finance the development of new products, which could
negatively impact our competitiveness.
  Our
future operating results will depend, to some extent, on our ability to continue
to provide new products that compare favorably on the basis of cost and
performance with the products of our competitors.  Some of our
competitors have design and manufacturing capabilities and technologies that
compete well with our products, particularly in markets outside of
China.  To remain competitive, we believe that in the future we will
have to incur product development expense and invest in research for new
products.  These costs could result in greater operating expenses. All
of these factors will create demands on our working capital and our ability to
fund our current and future marketing and distribution activities and the
expansion of our business.
  Our
ability to effectively implement our business strategy depends upon, among other
factors, the successful recruitment and retention of additional skilled and
experienced management and other key personnel, and we cannot assure that we
will be able to hire or retain such employees.
  We must
attract, recruit and retain a sizeable workforce of technically competent
management and employees, particularly in the areas of marketing and sales,
production and technical personnel.  These individuals can be
difficult to find in China, and as the economy in China expands, there is
increasing competition for these types of educated and trained
workers.  We cannot give assurance that we will be able to find, hire
or retain such management persons and employees, or even if we are able to so
hire such persons, that the financial costs associated with such persons may
have an adverse effect on our net income.
  It
may be difficult to find or integrate acquisitions which could have an adverse
effect on our expansion plans.
  Although
we have no commitments or agreements for any acquisitions at this time, a
component of our growth strategy is to invest in or establish strategic
alliances such as joint ventures with other companies, or acquire companies or
divisions of companies that design, manufacture or distribute complementary
products such as other sizes or designs of diesel engines, gearboxes or parts.
We may be unable to identify suitable investments or acquisition candidates or
to make these investments, alliances or acquisitions on a commercially
reasonable basis, if at all.  If we complete an investment, alliance
or acquisition, we may not realize the anticipated benefits from the
transaction.
  Integrating
an acquired company, division or product line is complex, distracting and time
consuming, as well as a potentially expensive process.  The successful
integration of an acquisition would require us to:
  -
7 -
  l
              integrate
      and retain key management, sales, research and development, and other
      personnel;
  l
              incorporate
      the acquired products or capabilities into our offerings both from an
      engineering and sales and marketing
perspective;
  l
              coordinate
      research and development efforts;
  l
              integrate
      and support pre-existing supplier, distribution and customer
      relationships; and
  l
              consolidate
      duplicate facilities and functions and combine back office accounting,
      order processing and support
functions.
  The
geographic distance between the companies, the complexity of the technologies
and operations being integrated and the disparate corporate cultures being
combined may increase the difficulties of combining an acquired
company.  Acquired businesses are likely to have different standards,
controls, contracts, procedures and policies, making it more difficult to
implement and harmonize company-wide financial, accounting, billing, information
and other systems.  Management’s focus on integrating operations may
distract attention from our day-to-day business and may disrupt key research and
development, marketing or sales efforts.
  The
cyclical nature of industrial and agricultural equipment and medium and light
duty commercial vehicle production and sales could result in a reduction in
gears and gearboxes sales, which could adversely affect our financial
condition.
  Our sales
to manufacturers rely on industrial and agricultural equipment and medium and
light duty commercial vehicle production and sales by our customers, which are
cyclical and depend on general economic conditions and other factors, including
consumer spending and preferences.  They also can be affected by
government policies, labor relations issues, regulatory requirements, and other
factors. All or any one of these factors may result in fluctuations in the
demand for our products with an impact on our financial condition.
  Increasing
costs of goods from our suppliers as a result of increasing costs for
manufactured components and raw materials may adversely affect our
profitability.
  A broad
range of manufactured components and raw materials are used in the production of
gears and gearboxes.  The prices of these products are increasing as a
result of the growth of the Chinese economy.  Our suppliers may
further increase the price of raw materials and components we use in our
production.  Because it may be difficult for us to pass increased
costs on to our customers, any significant increase in the prices of our
purchased goods could materially increase our operating costs and adversely
affect our profit margins and profitability.
  We
may be subject to product liability and warranty and recall claims, which may
increase the costs of doing business and adversely affect our reputation,
financial condition and liquidity.
  We face
an inherent business risk of exposure to product liability and warranty claims
if our products actually or allegedly fail to perform as expected or the use of
our products results, or are alleged to result, in bodily injury and/or property
damage.  We may be exposed to potential liability even if we have
product liability insurance. We cannot give any assurance that we will not incur
significant costs to defend these claims or that we will not experience any
product liability losses in the future.  In addition, if any of our
designed products are or are alleged to be defective; we may be required to
participate in a recall of such products.  We cannot assure you that
the future costs associated with providing product warranties
and/or bearing the cost of repair or replacement of our products will not
have an adverse effect on our financial condition and
liquidity.
  -
8 -
  We
are subject to environmental and safety regulations, which may increase our
compliance costs.
  We are
subject to the requirements of environmental and occupational safety and health
laws and regulations in China.   To the extent that we expect to
expand our operations into other geographic areas, we will become subject to
such laws and regulations of those countries as well.  We cannot
provide assurance that at all times we have been or will be in full compliance
with all of these requirements, or that we will not incur material costs or
liabilities in connection with these requirements.  The capital
requirements and other expenditures that may be necessary to comply with
environmental requirements could increase and become a material expense of doing
business.
  Our
business depends on our ability to protect and enforce our intellectual property
effectively which may be difficult particularly in China.
  The
success of our business depends in some measure on the legal protection of
proprietary rights in the technology we hold.  We will protect our
proprietary rights in our products and operations through contractual
obligations, including nondisclosure agreements.  If these contractual
measures fail to protect our proprietary rights, any advantage those proprietary
rights provide us would be negated.
  Monitoring
infringement of intellectual property rights is difficult, and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
intellectual property and know-how, particularly in China and other countries in
which the laws may not protect our proprietary rights as fully as the laws of
the United States.  Accordingly, other parties, including competitors,
may duplicate our products using our proprietary
technologies.  Pursuing legal remedies against persons infringing our
patents or otherwise improperly using our proprietary information is a costly
and time consuming process that would divert management’s attention and other
resources from the conduct of our other business, and could cause delays and
other problems with the marketing and sales of our products, as well as delays
in deliveries.
  Our
commercial viability depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third
parties.
  In the
event that our technologies infringe or violate the patent or other proprietary
rights of third parties, we may be prevented from pursuing product development,
commercialization or distribution of our products that utilize such
technologies. There may be patents held by others of which we are unaware that
contain claims that our products or operations infringe. In addition, given the
complexities and uncertainties of patent laws, there may be patents of which we
know that we may ultimately be held to infringe, particularly if the claims of
the patent are determined to be broader than we believe them to be. As a result,
avoiding patent infringement may be difficult.
  If a
third party claims that we infringe its patents, any of the following may
occur:
  l
              we
      may become liable for substantial damages for past infringement if a court
      decides that our technologies infringe upon a competitor’s
      patent;
  l
              a
      court may prohibit us from selling or licensing our product without a
      license from the patent holder, which may not be available on commercially
      acceptable terms or at all, or which may require us to pay substantial
      royalties or grant cross-licenses to our patents;
  and
  l
              we
      may have to redesign our product so that it does not infringe upon others’
      patent rights, which may not be possible or could require substantial
      funds or time.
  -
9 -
  In
addition, employees, consultants, contractors, suppliers and others may use the
trade secret information of others in their work for us or disclose our trade
secret information to others. Either of these events could lead to disputes over
the ownership of inventions derived from that information or expose us to
potential damages or other penalties. If any of these events occurs, our
business will suffer and the market price of our common stock will likely
decline.
  International
expansion may subject us to risks inherent in doing business internationally,
such as protectionist limitations, higher sales costs and additional importation
taxes, all of which could affect our profitability.
  Our
long-term business strategy includes plans to expand sales outside China by
targeting markets, such as Europe and the United States.  Risks
affecting international expansion include challenges caused by distance,
language and cultural differences, conflicting and changing laws and
regulations, international import and export legislation, trading and investment
policies, foreign currency fluctuations, the burdens of complying with a wide
variety of laws and regulations, protectionist laws and business practices that
favor local businesses, foreign tax consequences, higher costs associated with
doing business internationally, restrictions on the export or import of
technology, difficulties in staffing and managing international operations,
trade and tariff restrictions, and variations in tariffs, quotas, taxes and
other market barriers.  These risks could restrain international
expansion, which in turn could limit our opportunities and the sought benefits
of international sales. Such expansion may require us to incur additional
expenses, which are not recovered through improved sales.
  We
do not intend to pay dividends on shares of our common stock in the foreseeable
future.
  We have
never paid cash dividends on our common stock.  Our current board of
directors does not anticipate that we will pay cash dividends in the foreseeable
future.  Instead, we intend to retain future earnings for reinvestment
in our business and/or to fund future acquisitions.  Determination of
net income under PRC accounting standards and regulations may differ from
determination under U.S. GAAP in significant aspects, such as the use of
different principles for recognition of revenues and expenses.  Under
PRC law, our PRC subsidiary is required to set aside a portion of its net income
each year to fund designated statutory reserve funds.  Therefore,
there may be limitations on the availability of cash for the payment of
dividends.
  Risks
Related to Doing Business in China
  We
are subject to the risks associated with doing business in the People’s Republic
of China.
  Our
operations, assets and sales are located in China. Therefore, we are subject to
special considerations and significant risks not typically associated with
companies operating in North America and Western Europe. These include risks
associated with, among other things, the political, economic and legal
environment of China which is a partially controlled economy. Our results may be
adversely affected by changes in the political and social conditions in China
and by changes in governmental policies with respect to social and commercial
laws and regulations, anti-inflationary measures, currency controls, conversion
restrictions and remittances abroad.  The recent changes in the tax
laws will also have an impact on the operations of the Company.
  Although
a large portion of the productive assets in China are owned by the Chinese
government, in the past years the government has implemented economic reform
measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
  l
              We
      will be able to capitalize on economic
reforms;
  l
              The
      Chinese government will continue its pursuit of economic reform
      policies;
  -
10 -
  l
              The
      economic policies, even if pursued, will be
  successful;
  l
              Economic
      policies will not be significantly altered from time to time;
      and
  l
              Business
      operations in China will not become subject to the risk of
      nationalization.
  Economic
reform policies or nationalization could result in a total loss of investment in
our common stock.
  Since
1979, the Chinese government has implemented policies to reform its economic
system, which reforms have accelerated in the last 15 years. Because many
reforms are unprecedented or experimental in the China context, they are
expected to be changed over time. Other political, economic and social factors,
such as political changes, changes in the rates of economic growth, unemployment
or inflation, or in the disparities in per capita wealth between regions within
China, could lead to readjustment of the reform measures so far taken. Any
refining and readjustment may negatively affect our operations or our
profits.
  Over the
last few years, China’s economy has registered a particularly high growth rate.
Recently, there have been indications that rates of inflation have
increased.  For example, employee costs are increasing as are the
costs of raw materials. In response, the Chinese government has taken some
measures to regulate the growth of the economy. These measures include
restrictions on the availability of domestic credit, monitoring international
currency transactions, reducing the purchasing capability of certain of its
customers, and limited re-centralization of the approval process for purchases
of some foreign products.  There has been some revaluation of the
currency which has increased the costs of imported products.  The
Chinese government may adopt additional measures to further combat inflation,
including the establishment of freezes or restraints on certain projects or
markets. These measures may adversely affect our manufacturing operations and
margins.
  To date,
the basic reforms to China’s economic system have not adversely impacted our
operations and are not expected to adversely impact operations in the
foreseeable future.  We, however, will be affected by the change in
the tax structure and rising costs of an expanding and increasingly
sophisticated economy.  We cannot assure you that the reforms to
China’s economic system will continue or that we will not be adversely affected
by changes in China’s political, economic, and social conditions and by changes
in policies of the Chinese government, such as changes in laws and regulations,
measures which may be introduced to control inflation and changes in the rate or
method of taxation.
  On
November 11, 2001, China signed an agreement to become a member of the World
Trade Organization, sometimes referred to as the WTO, the international body
that sets most trade rules, further integrating China into the global economy
and significantly reducing the barriers to international commerce. China’s
membership in the WTO was effective on December 11, 2001. China has agreed upon
its accession to the WTO to reduce tariffs and non-tariff barriers, remove
investment restrictions and provide trading and distribution rights for foreign
firms. The tariff rate reductions and other enhancements will enable us to
develop better investment strategies. In addition, the WTO’s dispute settlement
mechanism provides a credible and effective tool to enforce members’ commercial
rights. Also, with China’s entry to the WTO, it is believed that the relevant
laws on foreign investment in China will be amplified and will follow common
practices.
 -
11 -
  The
legal authorities in China are in the process of changing heretofore tax and fee
benefits provided to foreign investors and companies to encourage development
within the country such that these benefits will be lessened or removed with the
consequence that expenses may rise and adversely impact margins and net
income.
  The legal
authorities are in the process of changing business income tax and fee benefits
that have been available to foreign investors and foreign companies operating in
China and reducing the availability of tax holidays for new
enterprises.  In the near term, there will be changes that reduce or
eliminate many, if not all, the tax and other governmental fee advantages that
heretofore have been available to foreign entities and newly created entities
whether or not such new entities are foreign.  The goal is to
institute greater equalization of tax and government fee treatment of all
corporate and similar entities organized and operating in
China.  China is being encouraged to create this more equal treatment
because of its WTO obligations and public opinion within China. There may be
phase-ins of various taxes and fees for entities that currently benefit from
either no or lower tax rates and fees compared to wholly Chinese companies and
entities, but there can be no assurance of this.  Even if there are
phase-in periods, the length of such periods is not known.  Some tax
benefits may also be extended for certain industries.  Overall, it is
expected that the cost of operating in China will increase for those companies
and entities that have had various tax and fee advantages in
the past.  As a result, Zhongchai Holding, a company which has
had and expected to have benefits from some forms of preferential tax and fee
rates, expects that in the near term certain of its costs will increase which
may have an adverse impact on operating margins and will have an impact on net
income.
  The
Chinese legal system is not fully developed and has inherent uncertainties that
could limit the legal protections available to investors.
  The
Chinese legal system is a system based on written statutes and their
interpretation by the Supreme People’s Court. Prior court decisions may be cited
for reference but have limited legal precedents. Since 1979, the Chinese
government has been developing a comprehensive system of commercial laws, and
considerable progress has been made in introducing laws and regulations dealing
with economic matters such as foreign investment, corporate organization and
governance, commerce, taxation and trade. Two examples are the promulgation of
the Contract Law of the People’s Republic of China to unify the various economic
contract laws into a single code, which went into effect on October 1, 1999, and
the Securities Law of the People’s Republic of China, which went into effect on
July 1, 1999. However, because these laws and regulations are relatively new,
and because of the limited volume of published cases and their non-binding
nature, interpretation and enforcement of these laws and regulations involve
uncertainties. In addition, as the Chinese legal system develops, changes in
such laws and regulations, their interpretation or their enforcement may have a
material adverse effect on our business operations.
  Enforcement
of regulations in China may be inconsistent.
  Although
the Chinese government has introduced new laws and regulations to modernize its
securities and tax systems, China does not yet possess a comprehensive body of
business law. As a result, the enforcement, interpretation and implementation of
regulations may prove to be inconsistent and it may be difficult to enforce
contracts.
  We
may experience lengthy delays in resolution of legal disputes.
  As China
has not developed a dispute resolution mechanism similar to the Western court
system, dispute resolution over Chinese projects and joint ventures can be
difficult and we cannot assure you that any dispute involving our business in
China can be resolved expeditiously and satisfactorily.
  Impact
of the United States Foreign Corrupt Practices Act on our business.
  We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are
not subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft and other fraudulent practices occur from time-to-time in mainland China.
We have attempted to implement safeguards to prevent and discourage such
practices by our employees and agents. We cannot assure you, however, that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and
results of operations.
  -
12 -
  It
may be difficult to serve us with legal process or enforce judgments against our
management or us.
  Most of
our assets are located in China.  In addition, some of our directors
and officers are non-residents of the United States, and all, or substantial
portions of the assets of such non-residents, are located outside the United
States.  As a result, it may not be possible to effect service of
process within the United States upon such persons.  Moreover, there
is doubt as to whether the courts of China would enforce:
  l
              Judgments
      of United States courts against us, our directors or our officers based on
      the civil liability provisions of the securities laws of the United States
      or any state; or
  l
              Original
      actions brought in China relating to liabilities against non-residents or
      us based upon the securities laws of the United States or any
      state.
  The
Chinese government could change its policies toward private enterprise or even
nationalize or expropriate it, which could result in the total loss of your
investment.
  Our
business may be adversely affected by political, economic and social
developments in China.  Over the past several years, the Chinese
government has pursued economic reform policies including the encouragement of
private economic activity and greater economic decentralization.  The
Chinese government may not continue to pursue these policies or may
significantly alter them to our detriment from time to time with little, if any,
prior notice.  Changes in policies, laws and regulations or in their
interpretation or the imposition of confiscatory taxation, restrictions on
currency conversion, restrictions or prohibitions on dividend payments to
stockholders, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business.  Nationalization or expropriation could even result in
the total loss of our investment in China and in the total loss of your
investment.
  The
source of funds for any dividend and other equity based distributions will be
from our operating subsidiary in China, which is subject to various legal and
contractual restrictions.
  We
conduct our business operations through our wholly owned Chinese
subsidiaries.  As a result, our profits available for distribution to
our shareholders are dependent on the profits available for distribution from
our subsidiary.  Under current PRC law, our PRC subsidiary is regarded
as a foreign-invested enterprise in China.  PRC law permits payment of
dividends only out of net income as determined in accordance with PRC accounting
standards and regulations.  Determination of net income under PRC
accounting standards and regulations may differ from determination under U.S.
generally accepted accounting principles in significant aspects, such as the use
of different principles for recognition of revenues and
expenses.  Under PRC law, our PRC subsidiary is required to set
aside 10% of its net income each year to fund a designated statutory reserve
fund until such funds reach 50% of registered share capital.  These
reserves are not distributable as cash dividends. As a result, our primary
internal source of funds for dividend payments is subject to these and other
legal and contractual restrictions, which may limit or impair our ability to pay
dividends to our shareholders although we do not presently anticipate paying any
dividends.  Moreover, any transfer of funds from us to our PRC
subsidiary, either as a shareholder loan or as an increase in registered
capital, is subject to registration with or approval by PRC governmental
authorities.  These limitations on the flow of funds between us and
our PRC subsidiary could restrict our ability to act in response to changing
market conditions.  Distributions will also be subject to taxation and
withholding requirements, imposed by the PRC and under United States tax
law.
  -
13 -
  Foreign
Exchange Control Risks
  Fluctuations
in the value of the Chinese Renminbi relative to foreign currencies could affect
our operating results.
  Our
revenues and expenses are China based, whose currency is the Chinese
Renminbi.  However, we use the United States dollar for financial
reporting purposes.  The value of Chinese Renminbi against the United
States dollar and other currencies may fluctuate.  The Chinese
government is valuing the exchange rate of the Chinese Renminbi against a number
of currencies, rather than just exclusively to the United States
dollar.  Although the Chinese government has stated its intention to
support the current international value range of the Chinese Renminbi, we cannot
assure you that the government will not take steps to revalue it.  As
our operations are in China, any significant revaluation of the Chinese Renminbi
may materially and adversely affect our cash flows, revenues and financial
condition. To date, we have not engaged in any hedging transactions in
connection with our operations.
  The PRC
government imposes control over the conversion of the Chinese Renminbi into
foreign currencies.  Under the current unified floating exchange rate
system, the People’s Bank of China publishes an exchange rate, which we refer to
as the PBOC exchange rate, based on the previous day’s dealings in the
inter-bank foreign exchange market.  Financial institutions authorized
to deal in foreign currency may enter into foreign exchange transactions at
exchange rates within an authorized range above or below the PBOC exchange rate
according to market conditions.
  Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs,
for use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible.  FIEs are permitted to
convert their after-tax dividends and profits to foreign exchange and remit such
foreign exchange to their foreign exchange bank accounts in the
PRC.
  Conversion
of Renminbi into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still subject to certain
restrictions.  On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an important
provision, which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account
items.
  Enterprises
in the PRC (including FIEs) which require foreign exchange for transactions
relating to current account items, may, without approval of the State
Administration of Foreign Exchange, or SAFE, effect payment from their foreign
exchange account or convert and pay at the designated foreign exchange banks by
providing valid receipts and proofs.
  Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
  Risks
Related to Our Common Stock
  An
active trading market for Zhongchai’s common stock may not develop or be
sustained.
  Currently,
there is very limited trading in our common stock.  There can be no
assurance that an active trading market will develop for such
shares.   If an active public trading market does not develop or
continue, you may have limited liquidity and may be forced to hold your
investment in the Company for an indefinite period of time.  Further,
the prices and volume of trading in the common stock may be adversely affected
if its securities are not listed or quoted.
  -
14 -
  There
may be substantial sales of the common stock by stockholders, which could cause
the price of the stock to fall.
  Future
sales of substantial amounts of the common stock in the public market, if one
develops, or the perception that such sales might occur, could cause the market
price for our common stock to decline and could prevent an active market
developing.  Such “overhang” could impair the value of an investment
in the common stock.  These factors could also restrict the Company’s
ability to raise equity capital in the future.  A relatively small
proportion of the outstanding shares are free trading.  All the shares
that were issued as restricted stock and the shares held by our affiliates,
which represent the majority of our outstanding shares of common stock, may be
sold pursuant to Rule 144 as applicable to former shell companies, subject to
the limitations on the number of shares held by affiliates that can be sold from
time to time. The sales of common stock by the stockholders able to sell under
Rule 144 may depress any trading market that develops.
  The
common stock of Zhongchai will be subject to the “penny stock” rules for the
foreseeable future.
  Zhongchai
is subject now and expects in the future to be subject to the SEC’s “penny
stock” rules if its common stock sells below $5.00 per share.  Penny
stocks generally are equity securities with a price of less than $5.00. The
penny stock rules require broker-dealers to deliver a standardized risk
disclosure document prepared by the SEC that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson, and monthly account statements showing the market value of each
penny stock held in the customer’s account. The bid and offer quotations,
and the broker-dealer and salesperson compensation information must be given to
the customer orally or in writing prior to completing the transaction and must
be given to the customer in writing before or with the customer’s
confirmation.
  In
addition, the penny stock rules require that prior to a transaction, the broker
and/or dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction.  The penny stock rules are burdensome
and may reduce purchases of any offerings and reduce the trading activity for
the common stock. As long as the common stock is subject to the penny stock
rules, the holders of its shares may find it more difficult to sell their
securities.
  Zhongchai’s
articles of incorporation authorize the issuance of shares of preferred stock,
the rights, preferences, designations and limitations of which may be set by the
board of directors.
  Zhongchai’s
articles of incorporation have authorized the issuance of up to 10,000,000
shares of preferred stock in the discretion of its board of
directors.  Any undesignated shares of preferred stock may be issued
by the Zhongchai board of directors; no further shareholder action is
required.  If issued, the rights, preferences, designations and
limitations of such preferred stock would be set by the board of directors and
could operate to the disadvantage of the holders of outstanding common
stock.  Such terms could include, among others, preferences as to
dividends and distributions on liquidation, or could be used to prevent possible
corporate takeovers.
  Item 1B.
              UNRESOLVED
      STAFF COMMENTS
 None.
  Item 2.
              DESCRIPTION
      OF PROPERTIES
  The
Company has an office in China and one operating facility in China.
  The
principal executive office of the Company is located in the city of Hangzhou in
China, where the Company leases an aggregate of approximately 1,400 square feet
at an approximate, aggregate annual rental of $6,160.  The lease has
term of one year, which can be renewed at similar rates. This office mainly
handles general corporate affairs, administrative matters, accounting activities
and other supporting functions.
  -
15 -
  The
ZhongChai China and Shengte conduct operations from a facility in Xinchang
County, Zhejiang Province in China, with an aggregate leased space of
approximately 32,000 square feet, for an annual rental of approximately $38,633.
The Company has reached an agreement to purchase the land with the building and
some utility facility from Xinchai Holding Group. The Company has paid the
deposit and is currently waiting for the value appraisal, government approval,
and title transfer.
  Item 3.
              LEGAL
      PROCEEDINGS
  The
Company is not currently a party to any material legal proceeding.
  In July
2009, the Company and Mr. Peter Wang agreed upon the terms of a settlement
agreement to the investor law suit filed November 6, 2008.  The
settlement agreement provided (i) for a third party, Ruihua International
Limited ("Ruihua"), to purchase all the shares of common stock of the Company
owned and held by the plaintiffs, (ii) upon the purchase of the shares, for the
Company and Mr. Wang and each of the plaintiffs to exchange general mutual
releases as to all matters arising concerning the plaintiffs' purchase and
holding of the common shares of the Company, and (iii) for a stipulation to
dismiss the action.  The settlement agreement was consummated on July
31, 2009.  The action was discontinued with prejudice by stipulation
among all the parties which was signed and filed on July 31, 2009, and the
stipulation was "so ordered" by the court on August 4, 2009.
  In
connection with the purchase by Ruihua of the shares sold to it as part of the
settlement of the above described action, Ruihua also bought shares from another
shareholder who was not a party to the action.  As a result of the two
share acquisitions, Ruihua acquired a total of 17,431,104 shares, currently
representing 61.88% of the issued and outstanding shares of common stock of the
Company.  Ruihua does not have any registration rights with respect to
the shares or other provisions related to control of the Company, such as the
right to have specific representation on the board of directors or nominate
potential directors for election, other than their rights as a shareholder under
the certificate of incorporation and by laws of the Company and under the
provisions of Nevada law and the United States securities laws. No change of
control was consummated as a result of the above mentioned share purchase by
Ruihua.
  There was
no accounting impact on the Company because the purchases by Ruihua as a
third-party were of issued and outstanding shares.
  Item 4.
              [RESERVED]
  -
16 -




PART
II





Item 5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
      EQUITY SECURITIES




Market
Information




Our
common stock price is quoted on the OTC Bulletin Board, or OTCBB, under the
symbol “EQPI.OB”. There is a very limited trading market for our stock. There
can be no assurance that a liquid market for our securities will ever develop.
The following table sets forth for the periods indicated the high and low prices
per share traded for our common stock as reported on the OTCBB.




QuarterEnded
                    
                    High
                    
                    Low2008September
      30
                    
                    $
                    0.20
                    
                    $
                    0.05December
      31
                    
                    $
                    0.07
                    
                    $
                    0.012009March
      31
                    
                    $
                    0.05
                    
                    $
                    0.01June
      30
                    
                    $
                    0.06
                    
                    $
                    0.02September
      30
                    
                    $
                    0.12
                    
                    $
                    0.061December
      31
                    
                    $
                    0.25
                    
                    $
                    0.052010March
      31
                    
                    $
                    0.35
                    
                    $
                    0.18June
      30
                    
                    $
                    0.35
                    
                    $
                    0.06





The
quotations shown above reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.




Our
common stock is designated as “penny stock” and thus may be illiquid for that
reason.  The SEC has adopted rules (Rules 15g-2 through l5g-6 of the
Exchange Act), which regulate broker-dealer practices in connection with
transactions in “penny stocks.”  Penny stocks generally are any
non-NASDAQ equity securities with a price of less than $5.00, subject to certain
exceptions.  The penny stock rules require a broker-dealer to deliver
a standardized risk disclosure document to provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, monthly account statements showing the
market value of each penny stock held in the customer’s account, to make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a stock that is subject to
the penny stock rules.  Since our common shares are subject to the
penny stock rules, persons holding or receiving such shares may find it more
difficult to sell their shares.  The market liquidity for the shares
could be severely and adversely affected by limiting the ability of
broker-dealers to sell the shares and the ability of stockholders to sell their
stock in any secondary market.




The
trading volume in our common stock has been and is extremely limited. The
limited nature of the trading market can create the potential for significant
changes in the trading price for the common stock as a result of relatively
minor changes in the supply and demand for our common stock and perhaps without
regard to our business activities.


-
17 -




The
market price of our common stock may be subject to significant fluctuations in
response to numerous factors, including: variations in our annual or quarterly
financial results or those of our competitors; conditions in the economy in
general; announcements of key developments by competitors; loss of key
personnel; unfavorable publicity affecting our industry or us; adverse legal
events affecting us; and sales of our common stock by existing
stockholders.




Holders




We have
approximately 426 record holders of our common stock. In addition to the record
ownership, there are additional beneficial owners who hold their shares in
street name or through other nominees, but we have not ascertained the number of
such persons.




Dividend
Policy




We plan
to retain all earnings generated by our operations, if any, for use in our
business. We do not anticipate paying any cash dividends to our stockholders in
the foreseeable future. The payment of future dividends on the common stock and
the rate of such dividends, if any, and when not restricted, will be determined
by our board of directors in light of our earnings, financial condition, capital
requirements, the requirements of PRC law and other factors.




Recent
Sales of Unregistered Securities




None.




Transfer
Agent




The
transfer agent and registrar for our common stock is Olde Monmouth Stock
Transfer Co., Inc., 200 Memorial Parkway, Atlantic Highlands,
NJ  07716.




Equity
Compensation Plan Information




The
following table gives information about our common stock that may be issued upon
the exercise of options, warrants or rights under our existing equity
compensation plans. The information in this table is as of June 30,
2010.




PlanCategory
                        
                        Numberofsecuritiestobe
                          issueduponexerciseof
                          outstandingoptions,
                          warrantsandrights
                        
                        Weightedaverage
                          exercisepriceof
                          outstandingoptions,
                          warrants,andrights
                        
                        Numberofsecurities
                          remainingavailableEquity
      compensation plans approved by security holders
                        
                        
                        -0-
                        
                        
                        -0-
                        
                        
                        -0-Equity
      compensation plans not approved by security holders
                        
                        
                        183,275
                        
                        $
                        1.065
                        
                        
                        1,604,148Total
                        
                        
                        183,275
                        
                        $
                        1.065
                        
                        
                        1,604,148




ITEM 6.
            SELECTED
      FINANCIAL DATA




The
following selected financial data for the four years ended June 30 are derived
from the audited consolidated financial statements of Zhongchai Machinery, Inc.
after the Share Exchange between Equicap and Usunco in March 2007. Prior to the
Share Exchange, Equicap was a shell company with nominal assets and operations
and with a different fiscal year end. The data should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information.


-
18 -




SELECTED
FINANCIAL DATA




Year ended June 30,2010
                
                
                2009
                
                
                2008
                
                
                2007OPERATIONS
      DATARevenues
                
                $
                10.983,800
                
                
                $
                4,923,918
                
                
                $
                3,333,325
                
                
                $
                1,817,264Net
      income (Loss)
                
                $
                1,072,405
                
                
                $
                (1,132,190
                )
                
                $
                (1,964,725
                )
                
                $
                (5,279,437
                )Income/(loss)
      per common share (basic and diluted)
                
                $
                0.04
                
                
                $
                (0.04
                )
                
                $
                (0.07
                )
                
                $
                (0.24
                )BALANCE
      SHEET DATATotal
      assets
                
                $
                19,896,194
                
                
                $
                17,102,682
                
                
                $
                14,790,817
                
                
                $
                13,893,621Shareholders'
      equity
                
                $
                10,892,510
                
                
                $
                9,578,269
                
                
                $
                10,701,893
                
                
                $
                10,046,397





QUARTERLY
FINANCIAL DATA




Unaudited
quarterly results of operations for the fiscal years ended June 30, 2010 and
2009 should be read in conjunction with the consolidated financial statements,
related notes and other financial information and the Company's quarterly
reports on Forms 10-Q, for the fiscal years 2010 and 2009.




First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  FourthQuarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  YearYear
      Ended June 30, 2010Revenues
                  
                  $
                  1,948,406
                  
                  
                  
                  1,889,823
                  
                  
                  
                  3,202,350
                  
                  
                  
                  3,943,221
                  
                  
                  $
                  10,983,800Gross
      profit
                  
                  $
                  405,232
                  
                  
                  
                  406,470
                  
                  
                  
                  747,397
                  
                  
                  
                  1,065,215
                  
                  
                  $
                  2,624,314Net
      loss/Net Income
                  
                  $
                  (28,355
                  )
                  
                  
                  46,332
                  
                  
                  
                  263,861
                  
                  
                  
                  790,567
                  
                  
                  $
                  1,072,405Loss
      per common share - basic and diluted
                  
                  $
                  (0.00
                  )
                  
                  
                  0.00
                  
                  
                  
                  0.01
                  
                  
                  
                  0.03
                  
                  
                  $
                  0.04Year
      Ended June 30, 2009Revenues
                  
                  $
                  1,186,570
                  
                  
                  
                  820,527
                  
                  
                  
                  976,967
                  
                  
                  
                  1,939,854
                  
                  
                  $
                  4,923,918Gross
      profit
                  
                  $
                  334,483
                  
                  
                  
                  126,630
                  
                  
                  
                  206,421
                  
                  
                  
                  416,895
                  
                  
                  $
                  1,084,429Net
      loss
                  
                  $
                  (130,538
                  )
                  
                  
                  (366,701
                  )
                  
                  
                  (319,817
                  )
                  
                  
                  (315,134
                  )
                  
                  $
                  (1,132,190
                  )Loss
      per common share -basic and diluted
                  
                  $
                  (0.00
                  )
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )
                  
                  $
                  (0.04
                  )




-
19 -


Item 7.
            MANAGEMENT’S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULT OF
  OPERATIONS





The
following is management’s discussion and analysis of certain significant factors
that have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management.  This
report includes forward-looking statements.  Generally, the words
“believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,”
“estimate,” “continue,” and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking
statements.  Such statements are subject to certain risks and
uncertainties, including, but not limited to, those described in the “Risk
Factors” set forth in Item 1A – Risk Factors and the matters set forth in other
reports or documents we file with the Securities and Exchange Commission
from time to time, which could cause actual results or outcomes to differ
materially from those projected.  Undue reliance should not be placed
on these forward-looking statements that speak only as of the date
hereof.  We undertake no obligation to update these forward-looking
statements.




The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included in this
report.





Overview




The
Company does business through its wholly owned subsidiary, Zhongchai China, a
Wholly Foreign Owned Enterprise established under the laws of the People’s
Republic of China and Zhejiang Shengte Transmission Co., Ltd. (“Shengte”) a
company established under the laws of the PRC and wholly owned by Zhongchai
China. Through its operating subsidiaries, the Company is currently engaged in
manufacturing and sale of drivetrain products, mainly gears, transmission
gearboxes, and transaxles in China.





The
Company owns the following interests in four entities organized in the PRC and
Hong Kong as of June 30, 2010 and June 30, 2009.





Percentage of InterestsName of Entity
                              
                              Place of Filing
                              
                              June 30, 2010
                              
                              
                              June 30, 2009Zhongchai Holding (Hong Kong) Limited
                              
                              Hong Kong
                              
                              
                              100
                              %
                              
                              
                              N/A(“Zhongchai
      Holding”)Zhejiang
      Zhongchai Machinery Co., Ltd.
                              
                              PRC
                              
                              
                              100
                              %
                              
                              
                              75
                              %(“Zhongchai
      China”, 100% subsidiary of Zhongchai Holding)Zhejiang
      Shengte Transmission Co., Ltd.
                              
                              PRC
                              
                              
                              100
                              %
                              
                              
                              100
                              %(“Shengte”,
      100% subsidiary of Zhongchai China)Xinchang
      Lisheng Machinery Co., Ltd.
                              
                              PRC
                              
                              
                              60
                              %
                              
                              
                              N/A(“Lisheng”,
      60% subsidiary of Zhongchai China)





Critical
Accounting Policies and Estimates





Below is
a description of accounting policies that we consider critical to the
preparation and understanding of our financial statements.  In
addition, certain amounts included in or affecting our financial statements and
related disclosure must be estimated, which requires us to make assumptions with
respect to values or conditions which cannot be known with certainty at the time
the financial statements are prepared.  Actual results may differ from
these estimates under different assumptions or conditions.  The
selection of critical accounting policies, the judgments and other uncertainties
affecting the application of those policies and the sensitivity of reported
results to changes in conditions and assumptions are factors to be considered
when reviewing our consolidated financial statements.


-
20 -




We
believe that the critical accounting policies set forth below involve the most
significant judgments and estimates used in the preparation of our consolidated
financial statements.  We regularly evaluate these policies, in light
of historical results and experience, consultation with experts, trends and
other methods we consider reasonable in the particular circumstances, as well as
our forecasts as to how these might change in the future.




Principles
of Consolidation




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United Stated of America.
The consolidated financial statements include the accounts of Zhongchai
Machinery, Inc. and its wholly and majority owned subsidiaries. All
inter-company transactions and balances have been eliminated in
consolidation.




Accounts
Receivable and Bad Debt Reserves


Trade
accounts receivable are stated at the amount management expects to collect from
balances outstanding at the end of the period. Based on its assessment of the
credit history with customers having outstanding balances and current
relationships with them, management makes conclusions whether any realization of
losses on balances outstanding at the end of the period will be deemed
uncollectible based on the age of the receivables. The Company reserves 0.5% of
accounts receivable balances that have been outstanding below three months, 5%
of accounts receivable balances that have been outstanding between three months
and six months, 20% of receivable balances that have been outstanding within one
year, 50% of receivable balances that have been outstanding for between one year
and two years, and 100% of receivable balances that have been outstanding more
than two years. The balance of allowance for doubtful accounts amounted to
$37,670 and $7,732 as of June 30, 2010 and 2009, respectively.




Inventory




Inventories
are stated at the lower of cost or net realizable value. Cost is calculated on
the weighted-average basis and includes all costs to acquire and other costs
incurred in bringing the inventories to their present location and condition.
The Company evaluates the net realizable value of its inventories on a regular
basis and records a provision for loss to reduce the computed weighted-average
cost if it exceeds the net realizable value. The Company did not record any
provision for slow-moving and obsolete inventory as of June 30, 2010 and
2009.




Property
and Equipment




Property
and equipment is recorded at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets. Repairs and maintenance
expenditures, which do not extend the useful lives of the related assets, are
expensed as incurred.




Under
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets",
the Company's long-lived assets are evaluated for impairment when events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company also assesses these assets for
impairment based on their estimated future cash flows. The Company has not
incurred any losses in connection with the adoption of this
statement.


-
21 -




Goodwill
and Other Intangible Assets




Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses. Goodwill and intangible assets deemed to have indefinite
lives are not amortized. All other intangible assets are amortized over their
estimated useful lives. Goodwill and indefinite-lived intangible assets are
subject to annual impairment testing using the guidance and criteria described
in Statement of Financial Accounting Standard No. 142, “Goodwill and Other
Intangible Assets”. This testing compares carrying values to fair values and,
when appropriate, the carrying value of these assets is reduced to fair value.
As of June 30, 2010, the Company concluded that there were no impairments
on goodwill or indefinite-lived intangibles. The carrying value of goodwill
increased from $3,407,262 for the year ended June 30, 2009, to $3,425,868 for
the year ended June 30, 2010, which was attribute to the effect of foreign
currency translation $18,606.




Revenue
Recognition




Revenue
consists of sales of automotive parts, gears and gearboxes. In accordance with
the provisions of Staff Accounting Bulletin No. 103, revenue is recognized when
merchandise is shipped, title and risk of loss pass to the customer and
collectability is reasonably assured. Revenue is recorded as the sales price of
goods and services, net of rebates and discounts and is reported on a gross
basis. The gross basis is used mainly due to the fact that the Company acts as
principal in each transaction and is responsible for fulfillment and
acceptability of the products purchased, the Company takes title to its products
before the products are ordered by its customers, the Company has risk of
inventory loss as title of the products is transferred to the Company, the
Company is responsible for collection of sales and delivery of products, and the
Company does not act as an agent or broker and is not compensated on a
commission or fee basis.




Research
and Development Costs




Research
and development ("R&D) costs are classified as general and administrative
expenses and are expensed as incurred.




Comprehensive
Income (Loss)




The
Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes rules for the reporting and display of comprehensive income, its
components and accumulated balances. SFAS No. 130 defines comprehensive income
(loss) to include all changes in equity, including adjustments to minimum
pension liabilities, accumulated foreign currency translation, and unrealized
gains or losses on available-for-sale marketable securities, except those
resulting from investments by owners and distributions to
owners.




Foreign
Currency Translation


A
significant portion of the Company's operations are conducted in China and the
financial statements are translated from Chinese RMB, the functional currency,
into U.S. Dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Accordingly, all foreign currency assets and liabilities are
translated at the period-end exchange rate and all revenues and expenses are
translated at the average exchange rate for the period. The effects of
translating the financial statements of foreign subsidiaries into U.S.
Dollars are reported as a cumulative translation adjustment, a separate
component of comprehensive income in stockholder's equity.





Fair
Value of Financial Instruments




The
Company considers the carrying amounts reported in the consolidated balance
sheet for current assets and current liabilities qualifying as financial
instruments and approximating fair value.


-
22 -




Income
Taxes




Deferred
income taxes are computed using the asset and liability method, such that
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between financial reporting amounts and
the tax basis of existing assets and liabilities based on currently enacted tax
laws and tax rates in effect in the United States of America for the periods in
which the differences are expected to reverse. Income tax expense is the tax
payable for the period plus the change during the period in deferred income
taxes. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. No
differences were noted between the book and tax bases of the Company’s assets
and liabilities, respectively. Therefore, there are no deferred tax assets or
liabilities for the year ended June 30, 2010. For the China/Gear segment, the
Zhongchai China is located in the PRC, and is therefore subject to central
government and provincial and local income taxes within the PRC at the
applicable tax rate on the taxable income as reported in the PRC statutory
financial statements in accordance with relevant income tax
laws.




Use
of Estimates




The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosures at the date of the
financial statements and during the reporting period. Actual results could
differ from those estimates.




Operating
Results




The
Fiscal Year Ended June 30, 2010 Compared to the Fiscal Year Ended June 30,
2009




Revenue




Revenue
increased by $6,059,882 or 123% to $10,983,800 for the year ended June 30, 2010,
compared with $4,923,918, for the fiscal year ended June 30, 2009. Revenue for
the year ended June 30, 2010, consisted of sales of gears and transmission
gearboxes in China, for $5,061,608 and $5,922,192, respectively. The increase in
gears and gearboxes sales in fiscal 2010 compared to the 2009 fiscal year was
attributable to the Company’s expansion of its production capacity, the
completion of new products and introduction of them into the market and the
successful continued marketing efforts. Management believes that the overall
economic recovery and economic stimulus efforts by the Chinese government has
generated an expansive business climate which has created an environment
conducive to sales by the Company. Management believes that the Chinese GDP will
continue to grow at a robust rate over the next few years, which will have a
beneficial effect on overall industrial development within the country, which
can be expected to generate demand for the products that the Company
sells.




Cost of
Sales and Gross Margin




Cost of
sales was $8,359,486 for the year ended June 30, 2010, increasing by $4,519,997
or 118%, from $3,839,489 for the year ended June 30, 2009. The increased cost of
sales was a reflection of the increased sales. The gross margin was
approximately 24% for the year ended June 30, 2010 compared to approximately 22%
for the year ended June 30, 2009. The 2% increase in gross margin is mainly
attributed to the Company’s achievement of a larger economy of scale, despite
the introduction of new gearbox products which bear a relatively low
margin.




Selling,
General and Administrative Expenses




Selling,
general and administrative (“SG&A”) expenses for the company generally
consist labor cost and related overhead costs for sales, marketing, finance,
legal, human resources and general management. They also include the expenses
recognized for stock-based compensation pursuant to FAS 123(R).


-
23 -




SG&A
expenses decreased by $760,796 to $1,287,359 in the year ended June 30, 2010,
from $2,048,155 in year ended June 30, 2009. SG&A expenses for fiscal years
2010 and 2009 mainly consist of selling expenses, research and development,
labor costs and costs related to being a public company, including professional
services related to auditing, legal and other
services.   .




The decrease in SG&A expenses from
2009 fiscal year to 2010 fiscal year was mainly attributable to (i) a reduction
in legal expenses of about $212,649 as a result of settling litigation in 2009,
no continuing legal expenses for disposal of IBC Automotive and no continuing
legal expenses for attempted restructuring, (ii) the disposal of IBC Automotive
which resulted in a reduction of about $213,902 of associated SG&A expenses,
and (iii) a reduction in certain promotion and research and development related
expenses of $ 110,458. The promotion and research and development expenses fell
by 31.05%, because product development for certain gearbox products was
completed in fiscal year 2009 and as a result there were no continuing costs.
The decrease was also due to savings from the consolidation of Shengte of
$48,539. The Company reduced its personal count at the corporate level and
implemented cost cutting measures in the fiscal year 2010, resulting in a
reduction of payroll expense of approximately $152,790.  There was a
non-cash expense of $63,606 recognized for stock based compensation related to
stock options and warrants granted in the period pursuant to SFAS 123(R),
however, this was less than in fiscal year 2009 by approximately
$45,183.





Notwithstanding
the overall decrease in expenses, there was an increase in SG&A expenses for
Zhongchai China of about $81,896 to $636,837 in the year ended June 30, 2010,
from $554,941 in fiscal year 2009, or 14.76%. This increase is mainly caused by
the increase of production scale of Zhongchai China. Management believes that
the SG&A of Zhongchai China will continue to increase as the production
scale of Zhongchai China increases. Even though, the R&D expenses were
decreased in fiscal year 2010, the management believes that it also will
increase as the Company seeks to develop and introduce more new products in the
near future.





Income
Tax





The
income tax expense was $264,418 for the year ended June 30, 2010, compared to
$57,246 for the year ended June 30, 2009, an increase of $207,172, due mainly to
increased sales volume and operating profit.





Net
Income




Net
Income was $1,072,405 in the year ended June 30, 2010 compared with net loss of
$1,132,190 in the year ended June 30, 2009. The net loss for fiscal year of 2009
was mainly attributed to the increase in SG&A related to a lawsuit, increase
in R&D expenses, and the loss on disposal of IBC. Net profit for the fiscal
year of 2010 was mainly attributed to the increase in production and
sales.




Accounts
Receivable




Accounts
receivable was $3,618,030 after reduction of $37,670 for doubtful accounts at
June 30, 2010, compared to accounts receivable of $1,540,402 after reduction of
$7,732 for doubtful accounts at June 30, 2009. The increase in the amount of
accounts receivable is mainly attributable to the increased operations of the
Company during the period reported upon. The payment term for sold products
usually is 60-90 days, and, to date, accounts receivable are generally within
the payment terms.




Notes
Receivable




Notes
receivable was $463,465 at June 30, 2010, compared to $448,655 at June 30, 2009.
The increase in the amount was minimal. Of the total amount, $22,500 was an
unpaid balance of promissory notes due from two individuals, and $440,965 was
from product sales to customers using bank accepted forward notes. Even though
the notes receivable amount is almost the same compared to the amount at June
30, 2009, the situation has improved significantly since sales have increased by
123%.




-
24 -





Liquidity
and Capital Resources




As of
June 30, 2010, Zhongchai China had assets equal to $19,896,194 that primarily
was comprised of cash and cash equivalents and restricted cash of $1,586,407,
net of account receivables, notes receivable and other receivables of
$4,191,626, inventory of $2,680,666, and an advance payment of
$4,993,607.  The advance payment $ 4,577,495 represented an advance
payment made by the Zhongchai China to Zhejiang Xinchai Holdings Co., Ltd.
("Xinchai Holdings"), for purchase of the land use right and plant building for
Zhongchai China’s future production expansion. Zhongchai’s current liabilities
as of June 30, 2010 were $9,003,684, which primarily were comprised of trade
accounts payable and accrued expenses, notes payable, short-term loan and other
payable. The $2.6 million due to Keyi to purchase the remaining 25% of
non-controlling interests of Zhongchai China has been extended to the end of
2010. The Company anticipates being able to finance this obligation through
either equity financing, subsidiary dividend, or a bank loan. At June 30, 2010,
Zhongchai had a working capital shortage of about $511,853. Zhongchai believes
that it will have sufficient working capital for its current operations by
increasing current bank loans. Zhongchai believes that it has sufficient bank
credit to increase current loan levels.





Consolidated
Statements of Cash Flows




Year endedJune 30Statements
      of Cash Flows
                
                2010
                
                
                2009Net
      cash provided by operating activities
                
                
                1,357,047
                
                
                
                1,439,627Net
      cash used in investing activities
                
                
                (3,085,822
                )
                
                
                (604,777
                )Net
      cash provided by (used in) financing activities
                
                
                (777,351
                )
                
                
                2,197,500Effect
      of foreign currency translation on cash
                
                
                10,956
                
                
                
                1,444L
      Net increase (decrease) in cash and cash equivalents and restricted
      cash
                
                
                (2,495,170
                )
                
                
                3,033,794





Net cash
provided by operating activities decreased by $82,580 or 5.74% to $1,357,047 for
the year ended June 30, 2010 compared with $1,439,627 for the year ended June
30, 2009. The change in the amount was minimal.





Net cash
used in investing activities increased by $2,481,045 to $3,085,822for the year
ended June 30, 2010, compared with $604,777 for the year ended June 30, 2009.
This was attribute to advance payment about $2.6 million for purchase of land
use rights and building.





The
change in net cash provided by (used in) financing activities was mainly because
the Company had sufficient money to repay the loan from Agricultural Bank of
China which was due on August 26, 2009.





Through
the fiscal year ended June 30, 2010, Zhongchai has funded its operations from
income generated by its PRC subsidiaries and loans for working
capital.




We expect
that future cash flows generated from the operation of gear, transmission
gearbox, and transaxle business will be sufficient to cover the Company’s
working capital requirements for its business.


-
25 -




As
Zhongchai expands its operations and considers additional acquisitions of
private companies, divisions or product lines, it may require additional capital
for its business development and operations.  Zhongchai does not have
any specific sources of capital at this time; therefore, it would need to find
additional funding for its capitalization needs.  Such capital may be
in the form of either debt or equity or a combination.  To the extent
that financing is in the form of debt, it is anticipated that the terms will
include various restrictive covenants, affirmative covenants and credit
enhancements such as guarantees or security interests.  The terms of
any proposed financing may not be acceptable to Zhongchai.  There is
no assurance that funding will be identified or accepted by Zhongchai or, that
if offered, it will be concluded.




Off-Balance
Sheet Arrangements




The
Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
“special purpose entities” (SPEs).




Item
7A.             QUANTATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





Item
8.                FINANCIAL
STATEMENTS





The
information required by this Item is incorporated herein by reference to the
financial statements beginning on page F-1.





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





None.





Item
9A.             CONTROLS
AND PROCEDURES




Our
management, with the participation of our Chief Executive Officer and acting
Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by
this Annual Report on Form 10-K. Based upon such evaluation, the Certifying
Officers have concluded that, as of the end of such period, June 30, 2010, the
Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is made known to management, including our Certifying
Officers, and that such information is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms.




In
designing and evaluating our disclosure controls and procedures, our 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 our management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to the Company’s 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. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
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.


-
26 -




Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of June 30, 2010. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control—Integrated Framework. Based on our
assessment, we believe that, as of June 30, 2010, the Company’s internal control
over financial reporting is effective based on those criteria.




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




Item
9B.             OTHER
INFORMATION




None.




-
27 -





PART
III




Item
10.              DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE


The
following table sets forth certain information about each of the members of the
Board of Directors and each executive officer:




Name
              
              Age
              
              Positionwithcompany
              
              Servingasa
                Directororan
                OfficerSincePeter
      Wang
              
              56
              
              Chairman,
      President and acting Chief Financial Officer
              
              2007Rong
      Shi
              
              36
              
              Director
              
              2010Chris
      Chen
              
              39
              
              Director
              
              2010




Mr. Peter Wang has been the
Chairman of the board of directors and President since the inception of Usunco
in April 2006, and acting Chief Financial Officer since February 2010. He has
more than 20 years of experience in technology and service area with strong
background in research and development, operations and corporate management. Mr.
Wang successfully co-founded a telecom venture in China, Unitech Telecom (now
named UTStarcom, NASDAQ: UTSI) in 1990 and was the Executive Vice President
until August 30, 1995. From August 1995 to December 2000, Mr. Wang was the
Chairman and CEO of World Communication Group.  From December 2000 to
2009, Mr. Wang was Chairman and CEO of China Quantum Communication Limited
(later changed to Techedge, Inc. and then to China Biopharma,
Inc.)  Before forming his own companies, Mr. Wang worked at AT&T
Bell Labs during 1987-1990 and Racal-Milgo Information System during
1983-1987.  Mr. Wang was also a co-chairman of Business Advisory
Council of the National Republican Congressional Committee during the period
1994-1995. In 2004, Mr. Wang received Outstanding 50 Asian Americans in Business
Award. Mr. Wang earned his BS in Math & Computer Science and MS in
Electrical Engineering from University of Illinois in 1983, as well as MBA
in Marketing from Southeast-Nova University in 1986. We believe Mr. Wang’s
qualifications to serve on our Board of Directors include his intimate knowledge
of our operations as a result of his day to day leadership as our
President.




Mr. Rong Shihas been
Chairman and founder of Zhejiang Shengte Investment Co., Ltd. since August 2004.
Mr. Shi founded and worked as General Manager of Zhejiang Bokai Auto A/C
Compressor Co., Ltd. between March 2003 and October 2005. He was member of
Oversight Committee of Rongda Trading Company during 2005 and 2006. Mr. Shi
earned his MBA degree from Macao University of Science and Technology in 2003
and his BA degree from Shaoxin Liberal Arts College in 1997. We believe
Mr. Shi’s qualifications to serve on our Board of Directors include his
knowledge of compliance matters as evidenced by his Certificate for Sarbanes
Oxley Training Program from Shanghai Financing University and Certificate for
Compliance Officer for Public Company from China Stock Exchanges.





Mr. Chris Chenhas been the
General Manager of Manheim China, since February of 2007, where he manages
Manheim’s overall business operation in China. From April 2005 to January of
2007, Mr. Chen worked as Principal, Director, and Marketing Manager of SAP AG
for its global business operations in Germany, Singapore, and Canada, from
January, 2001 to August, 2003, as a Project Manager of IBM Global Service in
Canada, and from 1995 to 1999, as a Sales Industry Manager of Oracle
Corporation, in China. Mr. Chen earned his MBA from INSEAD in France in 2004 and
MS in Software Engineering from McMaster University in Canada in 2001, as well
as his Bachelor of Engineering from Jiaotong University in China in 1992. We
believe Mr. Chen’s qualifications to serve on our Board of Directors include his
knowledge and expertise in the global and Chinese market for mechanical and
computer engineering.





All
directors are elected to annual terms by the holders of common
stock.  All directors hold office until the next annual meeting of
shareholders and the election and qualification of their
successors.  Officers are elected annually by the board of directors
and serve at the discretion of the Board.


-
28 -




There are
no family relationships (whether by blood, marriage or adoption) among the
Zhongchai directors or executive officers.




The
business address of the directors is: 224 Tianmushan Road, Zhongrong Chengshi
Huayuan 5-1-602, Hangzhou 310007, P.R. China.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires Zhongchai’s officers and
directors, and persons who own more than ten percent of a registered class of
Zhongchai’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the “Commission”).
Officers, directors and greater than ten percent beneficial owners are required
by Commission regulations to furnish the Company with copies of all forms they
file pursuant to Section 16(a). Based solely on the Company’s review of the
copies of such forms it received and written representations from reporting
persons required to file reports under Section 16(a), to Zhongchai’s knowledge,
all of the Section 16(a) filing requirements applicable to such persons with
respect to fiscal 2010 were complied with.




Board
Committees




The board
of directors considers all major decisions.  The board has established
an operations committee and a compensation committee. The operations committee
consists of three members and they are Mr. Xianwei Zhu who is Chairman of the
committee and is Company’s senior advisor, Mr. Mengxing who is president of
Zhongchai China, and Mr. Rong Shi who is independent director. The Compensation
Committee consists of three members and they are Mr. Peter Wang who is Chairman
of the committee and is director, Mr. Rong Shi who is independent director, and
Mr. Harry Zhu who is director of Zhonchai China. The Company plans to establish
an audit committee by March, 2011. The board has affirmatively determined that
Messrs. Rong Shi and Chris Chen are independent directors as defined by
applicable securities law and corporate governance guidelines.




The board
of directors does not have a nominations committee because there are a limited
number of directors, and the board believes that shareholder suggestions would
be known to the entire board if and when communicated to the Company. As such,
the board of directors believes there will be sufficient communication by
shareholders with the board about matters and nominees to be brought to its
attention.




Currently
the board of directors functions as an audit committee and performs some of the
same functions as an audit committee including: (1) selection and oversight of
our independent accountant; (2) establishing procedures for the receipt,
retention and treatment of complaints regarding accounting, internal controls
and auditing matters; and (3) engaging outside advisors.  The Company
is not a "listed company" under SEC rules and is therefore not required to have
an audit committee comprised of independent directors. The board has determined
that its members do not include a person who is an "audit committee financial
expert" within the meaning of the rules and regulations of the
SEC.  The board has determined, however, that each of its members is
able to read and understand fundamental financial statements and has substantial
business experience that results in that member's financial
sophistication.  Accordingly, the board believes that each of its
members have the sufficient knowledge and experience necessary to fulfill the
duties and obligations that an audit committee would have.




-
29 -


Code
of Ethics




A code of
ethics relates to written standards that are reasonably designed to deter
wrongdoing and to promote:




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




2)           Full,
fair, accurate, timely and understandable disclosure in reports and documents
that are filed with, or submitted to the Securities and Exchange Commission and
in other public communications made by Zhongchai;




3)           Compliance
with applicable government laws, rules and regulations;




4)           The
prompt internal reporting of violations of the code to an appropriate person or
persons identified in the code; and




5)           Accountability
for adherence to the code.




Zhongchai
adopted a formal code of ethics statement that is designed to deter wrong doing
and to promote ethical conduct and full, fair, accurate, timely and
understandable reports that Zhongchai files or submits to the SEC and
others.  A copy of the form of Zhongchai’s code of ethics is filed as
an exhibit to a Report on Form 8-K dated March 9, 2007.  Requests for
copies of Zhongchai’s code of ethics should be sent in writing to 224
Tianmushan  Road, Zhongrong Chengshi  Huayuan 5-1-602,
Hangzhou 310007, P.R. China, Attention: Secretary.




Limitation
of Director Liability; Indemnification




Under its
bylaws, the Company is required to indemnify its officers, directors, employees
and agents in certain situations.  In some instances, a court must
approve such indemnification.  As permitted by Nevada statutes, the
articles of incorporation eliminate in certain circumstances the monetary
liability of its directors for a breach of their fiduciary
duties.  These provisions do not eliminate a director’s liability
for:




l
            a
      willful failure to deal fairly with us or our shareholders in connection
      with a matter in which the director has a material conflict of
      interest,





l
            a
      violation of criminal law unless the director had reasonable cause to
      believe that his or her conduct was lawful or no reasonable cause to
      believe that his or her conduct was
unlawful,





l
            a
      transaction from which the director derived an improper personal profit,
      and





l
            willful
      misconduct.





As to
indemnification for liabilities arising under the Securities Act of 1933 for
directors, officers or persons controlling the Company, we have been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and therefore
unenforceable.




-
30 -


Item
11.              EXECUTIVE
COMPENSATION




The table
below sets forth for the fiscal year ended June 30, 2010, the compensation of
the President and the three other most highly compensated executive officers of
Zhongchai.





SUMMARY
COMPENSATION TABLE




Nameand
                                          PrincipalPosition
                                        
                                        Fiscal
                                          Year
                                        
                                        Salary
                                        
                                        Bonus
                                        
                                        Option
                                          Awards($)
                                        
                                        Non-Equity
                                          IncentivePlan
                                          Compensation
                                          ($)
                                        
                                        AllOther
                                          Compensation
                                          ($)
                                        
                                        Total
                                          ($)Peter
      Wang, Chairman
                                        
                                        2009
                                        
                                        $
                                        50,000
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        $
                                        50,000and
      President
                                        
                                        2010
                                        
                                        $
                                        50,000
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        $
                                        50,000David
      Ming He, Chief
                                        
                                        2009
                                        
                                        $
                                        48,000
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        $
                                        48,000Financial
      Officer(1)
                                        
                                        2010
                                        
                                        $
                                        32,000
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        $
                                        32,000




(1)
            Mr.
      David He resigned from the position of chief financial officer of the
      Company on February 28, 2010.




The
following table sets forth information concerning the other compensation granted
to the named executive officers for the fiscal year ended June 30,
2010.




Name
                        
                        Year
                        
                        MedicalPremiums
                        
                        401KEmployer
                          MatchPeter
      Wang
                        
                        2010
                        
                        $
                        12,000
                        
                        
                        -David
      Ming He
                        
                        2010
                        
                        $
                        8,000
                        
                        
                        -





Employment
Agreements




Currently,
all employees of Zhongchai are employed on “at will” employment agreements. The
Company intends to establish formal employment contracts for certain other key
employees in the future.




2010
Performance Equity Plan




Zhongchai
adopted its 2010 Performance Equity Plan (“Option Plan”) on April 16, 2010 by
the board of directors, and the Option Plan was approved by the shareholders on
May 21, 2010.





Under the
Option Plan, the Compensation Committee in its sole discretion may grant stock
options, restricted stock and deferred stock, among other forms of awards, to
the Company's employees, directors and consultants (or those of the Company's
affiliates). The Company has reserved a total of 3,750,000 shares of common
stock for issuance under the Option Plan.





The
Compensation Committee may grant two types of options under the Option Plan: (a)
options qualifying as "incentive stock options" under the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "IRC"), or any
successor provision, and designated as such ("ISOs"), and (b) non-qualified
stock options ("Non-Qualified").





The
Compensation Committee determines the vesting schedule, the exercise price per
share and other terms and conditions for each option. In the case of options
intended to constitute ISOs or performance-based compensation within the meaning
of Section 162(m) of the IRC, the exercise price may not be less than the
fair market value of the Company's common stock on the date of grant. The
Compensation Committee will determine the term of each option, which may not
exceed ten years and is subject to further limitations as described
herein.


-
31 -





ISOs may
be granted only to employees. To the extent required by Section 422(d) of the
IRC, the aggregate fair market value of shares of common stock with respect to
which ISOs are exercisable for the first time by any individual during any
calendar year may not exceed $100,000. ISOs granted to a person considered to
own more than 10% of the total combined voting power of all classes of the
Company's outstanding stock, or the stock of any subsidiary or affiliate, may
not be exercisable after the expiration of five years from the grant date and
the option exercise price must be at least 110% of the fair market value of the
common stock subject to the option.





Each
option shall be evidenced by an option agreement. An option agreement may
provide for the payment of the exercise price, in whole or in part, by the
delivery of a number of shares of the Company's common stock (plus cash if
necessary) having a fair market value equal to such exercise price. Moreover, an
option agreement may provide for a "cashless exercise" of the option by
establishing procedures whereby the holder, by a properly-executed written
notice, directs (a) an immediate market sale or margin loan respecting all or a
part of the shares of common stock to which he or she is entitled upon exercise
pursuant to an extension of credit by the Company to the holder equal to the
exercise price, (b) the delivery of shares of the Company's common stock from
the Company directly to a brokerage firm, and (c) the delivery of the exercise
price from sale or margin loan proceeds from the brokerage firm directly to the
Company.





No stock
options were awarded during the fiscal year ended June 30, 2010. Currently,
there are 183,275 shares, which Usunco has issued as incentive stock option
grants under the 2006 Option Plan at exercise of $1.065 per share.  On
July 7, 2010, the compensation committee and the board of directors have
approved the issuance of options to purchase 1,300,000 shares of the Company’s
common stock, of which 500,000 options were granted to one of the Company’s
directors, at exercise price of $0.20 per share.





Executive
Compensation Determination




It is the
intention of Zhongchai to determine executive compensation by a decision of the
majority of the members of compensation committee, at a meeting at which the
chief executive officer will not be present.




From time
to time key employees may receive a cash bonus as rewards for their job
performance that meet or exceed the operation goals and results set up by the
board of directors or high-level management. The Company will also consider
other employee benefits for which it will assume the cost, such as health and
dental insurance benefits.  The Company also will reimburse employees
for their travel expenses.





Director
Compensation




The board
of directors will consider granting stock options or additional equity
compensation to outside directors as it determines from time to time, but there
is no established plan at this time for such awards.  Zhongchai
Machinery does not provide cash compensation to directors for attending
meetings, but it does reimburse them for their out-of-pocket expenses for
attending meetings.




The
following Director Compensation Table summarizes the compensation of our
non-employee directors for services rendered by Zhongchai during the fiscal year
ended June 30, 2010.




NON-EMPLOYEE
DIRECTOR COMPENSATION TABLE




Name
                  
                  FeesEarned
                    orPaidinCash
                  
                  
                  OptionAwards
                  
                  
                  TotalRong
      Shi
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-Chris
      Chen
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-




-
32 -





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





The
following table sets forth certain information regarding common stock
beneficially owned on August 31, 2010, for (i) each stockholder known to be the
beneficial owner of 5% or more of the outstanding common stock, (ii) each
current executive officer and director, and (iii) all executive officers and
directors as a group.  The table is based on a total of 27,613,019
shares of common stock outstanding.




NameandAddressofBeneficialOwner
                                                                        
                                                                        NumberofShares
                                                                          BeneficiallyOwned(1)
                                                                        
                                                                        
                                                                        %ofcommonstock
                                                                          BeneficiallyOwnedSinoquest
      Management Ltd. (2)224
      Tianmushan Road, Zhongrong Chengshi  Huayuan 5-1-602,
      Hangzhou, 310007 P.R.C.
                                                                        
                                                                        
                                                                        4,120,990
                                                                        
                                                                        
                                                                        14.92
                                                                        %Peter
      Wang (2)224
      Tianmushan  Road, Zhongrong Chengshi  Huayuan
      5-1-602,Hangzhou,
      310007 P.R.C.
                                                                        
                                                                        
                                                                        1,957,470
                                                                        
                                                                        
                                                                        7.09
                                                                        %Rong
      Shi (3)224
      Tianmushan  Road, Zhongrong Chengshi  Huayuan
      5-1-602,Hangzhou,
      310007 P.R.C.
                                                                        
                                                                        
                                                                        200,000
                                                                        
                                                                        
                                                                        *Chris
      Chen224
      Tianmushan  Road, Zhongrong Chengshi  Huayuan
      5-1-602,Hangzhou,
      310007 P.R.C.
                                                                        
                                                                        
                                                                        -0-
                                                                        
                                                                        
                                                                        *Ruihua
      International Ltd. (4)11/F
      Front Block, Hang Lok Building, 130 Wing Lok Street, Sheung Wan, Hong
      Kong
                                                                        
                                                                        
                                                                        17,431,104
                                                                        
                                                                        
                                                                        63.13
                                                                        %All
      Directors and Executive Officers as a Group (3 persons)
(5)
                                                                        
                                                                        
                                                                        2,157,470
                                                                        
                                                                        
                                                                        7.81
                                                                        %




*
                  Less
      than 1%




(1)
            Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission, which include holding voting and investment power
      with respect to the securities. Shares of common stock subject to options
      or warrants currently exercisable, or exercisable within 60 days, are
      deemed outstanding for computing the percentage of the total number of
      shares beneficially owned by the designated person, but are not deemed
      outstanding for computing the percentage for any other
    person.





(2)
            Peter
      Wang has a 47.5% beneficial ownership in Sinoquest Management
      Limited.





(3)
            Rong
      Shi was granted 500,000 shares of options on July 7, 2010. 200,000 of
      500,000 were vested on July 7,
2010.





(4)
            Ruihua
      International Limited ("Ruihua") has an address at 11/F Front Block, Hang
      Lok Building, 130 Wing Lok Street, Sheung Wan, Hong Kong.  The
      officer and director of Ruihua who has the right to vote and dispose of
      the shares is Mr. Yang Yong HU.  The foregoing information is
      derived from an amended 13D filed by Ruihua with the SEC on August 4,
      2009.





(5)
            Consists
      of Peter Wang, Rong Shi and Chris
Chen.




-
33 -


Item
13.              CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE





During
the fiscal year ended June 30, 2010, the Company did not enter into any related
party transactions with any director, officer, nominee for director, beneficial
owner of 5% or more of the equity securities of the Company, or their family
members.





Director
Independence





We
undertook a review of the independence of our directors and, using the
definitions and independence standards for directors provided in the rules of
The NASDAQ Stock Market, although not required as the standard for the Company
as its stock is traded on the Over-the-Counter Bulletin Board, considered
whether any director has a material relationship with us that could interfere
with his or her ability to exercise independent judgment in carrying out their
responsibilities. As a result of this review, we determined that Rong Shi and
Chris Chen were "independent directors" as defined under the rules of The NASDAQ
Stock Market.




Item
14.              PRINCIPAL
ACCOUNTANT FEES AND SERVICES




The
following table shows the fees paid or accrued for the audit and other services
provided by Patrizio & Zhao for the fiscal years ended June 30, 2009 and
June 30, 2010:




June30,2010
                                
                                
                                June30,2009Audit
      Fees
                                
                                $
                                93,000
                                
                                
                                $
                                93,000Audit
      Related Fees
                                
                                
                                2,897
                                
                                
                                
                                -Tax
      Fees
                                
                                
                                -
                                
                                
                                
                                -All
      Other Fees
                                
                                
                                -
                                
                                
                                
                                -$
                                95,897
                                
                                
                                $
                                93,000




Audit
services of Patrizio & Zhao for the fiscal years 2009 and 2010 consisted of
the audit of the yearend financial statements and the review of the quarterly
financial statements of Zhongchai and registration statements and other SEC
filings.




Because
the board of directors of Zhongchai does not have an audit committee, the above
services and engagements were approved by the board of directors.




-
34 -


PART
IV





Item
15.              Exhibits,
Financial Statement Schedules.





Exhibits





Exhibit No.
                
                Description3.1
                
                Certificate
      of Incorporation – (Incorporated by reference from Form 10-KSB for fiscal
      year ended December 31, 2004, Exhibit 3.1)3.2
                
                By-laws
      (Incorporated by reference from Form 10-KSB for fiscal year ended December
      31, 2004, Exhibit 3.2)3.3
                
                Amendment
      to Certificate of Incorporation – Change of Name(Incorporated by reference
      from Form 8-K, Current Report, Event dated May 21, 2010, Exhibit
      3.1)4.1
                
                Form
      of Common Stock Purchase Warrant Agreement issued to vFinance Investments,
      Inc. dated March 7, 2007 (Incorporated by reference from Form 8-K, Current
      Report, Event dated March 9, 2007, Exhibit 4.1)10.1
                
                Form
      of Securities Purchase Agreement with investor in March 2007 private
      placement. (Incorporated by reference from Form 8-K, Current Report, Event
      dated March 9, 2007, Exhibit 10.1)10.2
                
                Form
      of Registration Rights Agreement with investors and others dated March 7,
      2007 (Incorporated by reference from Form 8-K, Current Report, Event dated
      March 9, 2007, Exhibit 10.4)10.3
                
                Joint
      Venture Agreement dated July 4, 2007 2006 between Xinchai Holding Group
      Co., Ltd and Usunco Automotive Limited in respect of Zhejiang Zhongchai
      Machinery Co., Ltd. (Incorporated by reference from Form 8-K, Current
      Report, Event dated March 9, 2007, Exhibit 10.1)10.4
                
                Exclusive
      Distribution Agreement between  Xinchai Holding Group C., Ltd
      and Zhejiang Zhongchai Machinery Co., Ltd., Dated as of January 28, 2007
      (Incorporated by reference from Form 8-K, Current Report, Event dated
      March 9, 2007, Exhibit 10.6)10.5
                
                Share
      Exchange Agreement dated March 7, 2007, among Usunco Automotive Limited
      and Equicap, Inc. (Incorporated by reference from Form 8-K, Current
      Report, Event dated March 9, 2007, Exhibit 10.7)10.6
                
                Convertible
      Note Conversion Agreement dated March 7, 2007 with Fountainhead Capital
      Partners Limited (Incorporated by reference from Form 8-K, Current Report,
      Event dated March 9, 2007, Exhibit 10.8)10.7
                
                Consulting
      Agreement with Fountainhead Capital Partners Limited dated March 7, 2007
      (Incorporated by reference from Form 8-K, Current Report, Event dated
      March 9, 2007, Exhibit 10.9)10.8
                
                Share
      Exchange Agreement dated June 15, 2009, among Usunco Automotive Limited
      and IBC Automotive Products, Inc. and Equicap, Inc. (Incorporated by
      reference from Form 8-K, Current Report, Event dated June 15, 2009,
      Exhibit 10.1)10.9
                
                Form
      of Acquisition Agreement for 25% Interest in ZhongChai JV.( Incorporated
      by reference from Form 8-K, Current Report, Event dated June 7, 2010,
      Exhibit 10.1)14.1
                
                Code
      of Ethics (Incorporated by reference from Form 8-K, Current Report, Event
      dated March 9, 2007, Exhibit 14.1)31.1
                
                Certificate
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Peter
      Wang*32.1
                
                Certificate
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Peter
      Wang*


* Filed
herewith


-
35 -


ZHONGCHAI
MACHINERY, INC.


Consolidated
Financial Statements


June 30,
2010 and 2009




Table
of Contents





PageConsolidated
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
                  
                  F-1Consolidated
      Balance Sheets
                  
                  F-2Consolidated
      Statements of Operations and Comprehensive Income (Loss)
                  
                  F-3Consolidated
      Statements of Stockholders’ Equity
                  
                  F-4Consolidated
      Statements of Cash Flows
                  
                  F-5Notes
      to Consolidated Financial Statements
                  
                  F-6









Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders


Zhongchai
Machinery, Inc.





We
have audited the accompanying consolidated balance sheets of Zhongchai
Machinery, Inc. (the “Company”) as of June 30, 2010 and 2009, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our 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
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 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 consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Zhongchai
Machinery, Inc. as of June 30, 2010 and 2009, and the consolidated results of
their operations and their consolidated cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.





/s/
Patrizio & Zhao, LLC





Parsippany,
New Jersey


September
07, 2010


(Except
for Note 18, as to which the date is December 10, 2010)





F-1




ZHONGCHAI
MACHINERY, INC.




Consolidated
Balance Sheets





June 30, 2010
                              
                              
                              June 30, 2009AssetsCurrent
      assets:Cash and cash
      equivalents
                              
                              $
                              1,495,597
                              
                              
                              $
                              3,990,767Restricted cash
                              
                              
                              90,810
                              
                              
                              
                              315,151Accounts receivable, net of
      allowance for doubtful accounts of $37,670
                              
                              
                              3,618,030
                              
                              
                              
                              1,540,402and $7,732 at June
      30, 2010 and 2009, respectivelyInventory
                              
                              
                              2,680,666
                              
                              
                              
                              1,568,445Notes receivable
                              
                              
                              463,465
                              
                              
                              
                              448,655Advance
      payments-trade
                              
                              
                              33,132
                              
                              
                              
                              2,988,235Other current
    assets
                              
                              
                              110,131
                              
                              
                              
                              115,266Total current
    assets
                              
                              
                              8,491,831
                              
                              
                              
                              10,966,921Property
      and equipment, net
                              
                              
                              3,017,569
                              
                              
                              
                              2,662,924Goodwill
                              
                              
                              3,425,868
                              
                              
                              
                              3,407,262Advance
      payments-non current portion
                              
                              
                              4,960,475Other
      assets:
                              
                              
                              451
                              
                              
                              
                              65,575Total assets
                              
                              $
                              19,896,194
                              
                              
                              $
                              17,102,682Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts payable and accrued
      expenses
                              
                              $
                              3,504,923
                              
                              
                              $
                              1,562,217Trade notes
    payable
                              
                              
                              142,365
                              
                              
                              
                              315,151Short-term bank
    loans
                              
                              
                              1,428,810
                              
                              
                              
                              2,197,500Taxes payable
                              
                              
                              224,108
                              
                              
                              
                              54,292Dividend
      payable
                              
                              
                              381,201
                              
                              
                              
                              -Other current
      liabilities
                              
                              
                              3,322,277
                              
                              
                              
                              635,408Total current
      liabilities
                              
                              
                              9,003,684
                              
                              
                              
                              4,764,568Total liabilities
                              
                              
                              9,003,684
                              
                              
                              
                              4,764,568Stockholders’
      equity:Common stock, $.001 par value,
      500,000,000 shares authorized,27,613,019 and
      27,613,019 shares issued and outstanding atJune 30, 2010 and
      2009, respectively
                              
                              
                              27,613
                              
                              
                              
                              27,613Stock subscription
      receivable
                              
                              
                              (33,120
                              )
                              
                              
                              (33,120
                              )Additional paid-in
      capital
                              
                              
                              16,484,097
                              
                              
                              
                              16,484,097Statutory
reserves
                              
                              
                              315,152
                              
                              
                              
                              124,460Retained earnings (Accumulated
      deficit)
                              
                              
                              (7,558,542
                              )
                              
                              
                              (8,440,255
                              )Accumulated other comprehensive
      income
                              
                              
                              1,361,646
                              
                              
                              
                              1,415,474Total stockholders’
      equity
                              
                              
                              10,596,846
                              
                              
                              
                              9,578,269Noncontrolling
      interest
                              
                              
                              295,664
                              
                              
                              
                              2,759,845Total
      equity
                              
                              
                              10,892,510
                              
                              
                              
                              12,338,114Total liabilities and
      equity
                              
                              $
                              19,896,194
                              
                              
                              $
                              17,102,682





F-2




ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Operations and Comprehensive Income (Loss)





For the Years Ended June 30,2010
                  
                  
                  2009Sales
                  
                  $
                  10,983,800
                  
                  
                  $
                  4,923,918Cost
      of sales
                  
                  
                  8,359,486
                  
                  
                  
                  3,839,489Gross
      profit
                  
                  
                  2,624,314
                  
                  
                  
                  1,084,429Operating
      expensesSelling, general and
      administrative
                  
                  
                  1,287,359
                  
                  
                  
                  2,048,155Income
      (loss) from operations
                  
                  
                  1,336,955
                  
                  
                  
                  (963,726
                  )Other
      income (expenses):Interest income (expense),
      net
                  
                  
                  (82,096
                  )
                  
                  
                  16,145Other income, net
                  
                  
                  345,867
                  
                  
                  
                  138,697Loss on disposal of a
      subsidiary-IBC
                  
                  
                  -
                  
                  
                  
                  (220,782
                  )Total other income
      (expenses)
                  
                  
                  263,771
                  
                  
                  
                  (65,940
                  )Income
      (loss)  before provision for income taxes
                  
                  
                  1,600,726
                  
                  
                  
                  (1,029,666
                  )Provision
      for income taxes
                  
                  
                  264,418
                  
                  
                  
                  57,246Net
      income (loss)
                  
                  
                  1,336,308
                  
                  
                  
                  (1,086,912
                  )Less:
      Net income attributable to noncontrolling interest
                  
                  
                  263,903
                  
                  
                  
                  45,278Net
      income (loss) attributable to Zhongchai Machinery, Inc.
                  
                  
                  1,072,405
                  
                  
                  
                  (1,132,190
                  )Other
      comprehensive income (loss)Foreign currency translation
      adjustment
                  
                  
                  (53,828
                  )
                  
                  
                  42,646Comprehensive
      income (loss)
                  
                  $
                  1,018,577
                  
                  
                  $
                  (1,089,544
                  )Earnings
      (loss) per common share:Basic
                  
                  $
                  0.04
                  
                  
                  $
                  (0.04
                  )Diluted
                  
                  $
                  0.04
                  
                  
                  $
                  (0.04
                  )Weighted
      average number of common shares outstanding:Basic
                  
                  
                  27,613,019
                  
                  
                  
                  28,146,164Diluted
                  
                  
                  27,613,019
                  
                  
                  
                  28,146,164





F-3




ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Stockholders’ Equity





AccumulatedStock
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      Retained
                      
                      
                      Other
                      
                      
                      TotalCommon Stock
                      
                      
                      Subscriptions
                      
                      
                      Paid-in
                      
                      
                      Statutory
                      
                      
                      Earnings
                      
                      
                      Comprehensive
                      
                      
                      Stockholders’Shares
                      
                      
                      Amount
                      
                      
                      Receivable
                      
                      
                      Capital
                      
                      
                      Reserves
                      
                      
                      (Deficit)
                      
                      
                      Income
                      
                      
                      EquityBalance
      June 1, 2008
                      
                      
                      28,169,013
                      
                      
                      $
                      28,169
                      
                      
                      $
                      (32,400
                      )
                      
                      $
                      16,516,901
                      
                      
                      $
                      62,253
                      
                      
                      $
                      (7,245,858
                      )
                      
                      $
                      1,372,828
                      
                      
                      $
                      10,701,893Cancellation
      of common stock
                      
                      
                      (555,994
                      )
                      
                      
                      (556
                      )
                      
                      
                      -
                      
                      
                      
                      (32,804
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (33,360
                      )Shareholder
      Contribution
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (720
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (720
                      )Net
      Loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,132,190
                      )
                      
                      
                      -
                      
                      
                      
                      (1,132,190
                      )Statutory
      reserves
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      62,207
                      
                      
                      
                      (62,207
                      )
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      42,646
                      
                      
                      
                      42,646Balance
      June 30, 2009
                      
                      
                      27,613,019
                      
                      
                      $
                      27,613
                      
                      
                      $
                      (33,120
                      )
                      
                      $
                      16,484,097
                      
                      
                      $
                      124,460
                      
                      
                      $
                      (8,440,255
                      )
                      
                      $
                      1,415,474
                      
                      
                      $
                      9,578,269Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,072,405
                      
                      
                      
                      -
                      
                      
                      
                      1,072,405Statutory
      reserves
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      190,692
                      
                      
                      
                      (190,692
                      )
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (53,828
                      )
                      
                      
                      (53,828
                      )Balance
      June 30, 2010
                      
                      
                      27,613,019
                      
                      
                      $
                      27,613
                      
                      
                      $
                      (33,120
                      )
                      
                      $
                      16,484,097
                      
                      
                      $
                      315,152
                      
                      
                      $
                      (7,558,542
                      )
                      
                      $
                      1,361,646
                      
                      
                      $
                      10,596,846





F-4




ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Cash Flows





For the Years Ended June 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    1,072,405
                    
                    
                    $
                    (1,132,190
                    )Adjustments
      to reconcile net income (loss) to net cashprovided by operating
      activities:Noncontrolling
      interest
                    
                    
                    263,903
                    
                    
                    
                    45,278Depreciation and
      amortization
                    
                    
                    323,734
                    
                    
                    
                    215,844Loss
      on disposal of assets
                    
                    
                    4,847
                    
                    
                    
                    -Provision for bad
      debts
                    
                    
                    29,768
                    
                    
                    
                    92,017Stock based
      compensation
                    
                    
                    63,606
                    
                    
                    
                    108,789Non-cash payments of
      rent
                    
                    
                    -
                    
                    
                    
                    3,750Loss on disposal of a
      subsidiary-IBC
                    
                    
                    -
                    
                    
                    
                    390,431Changes in assets and
      liabilities:Change
      in restricted cash
                    
                    
                    225,094
                    
                    
                    
                    (315,151
                    )Accounts
      receivable
                    
                    
                    (2,090,134
                    )
                    
                    
                    (1,154,135
                    )Inventory
                    
                    
                    (1,098,936
                    )
                    
                    
                    (322,261
                    )Notes
      receivable - trade
                    
                    
                    (47,470
                    )
                    
                    
                    (95,257
                    )Advance
      payments
                    
                    
                    600,846
                    
                    
                    
                    2,091,724Other
      current assets
                    
                    
                    3,902
                    
                    
                    
                    184,912Accounts
      payable and accrued expenses
                    
                    
                    1,926,414
                    
                    
                    
                    838,019Trade
      notes payable
                    
                    
                    (173,760
                    )
                    
                    
                    315,151Taxes
      payable
                    
                    
                    168,795
                    
                    
                    
                    54,145Other
      current liabilities
                    
                    
                    84,033
                    
                    
                    
                    118,561Total adjustments
                    
                    
                    284,642
                    
                    
                    
                    2,571,817Net cash provided by operating
      activities
                    
                    
                    1,357,047
                    
                    
                    
                    1,439,627Cash
      flows from investing activities:Notes receivable -
      other
                    
                    
                    35,000
                    
                    
                    
                    (57,500
                    )Advance payments for purchase of
      land use rights and building
                    
                    
                    (2,581,392
                    )
                    
                    
                    -Additions to property and
      equipment
                    
                    
                    (393,720
                    )
                    
                    
                    (368,312
                    )Additions to construction in
      progress
                    
                    
                    (272,436
                    )
                    
                    
                    -Proceeds from Minority-40% equity
      of Lisheng
                    
                    
                    293,340
                    
                    
                    
                    -Adjustment
      in the distribution of dividends
                    
                    
                    (166,614
                    )Loss on disposal of a subsidiary
      –IBC, net of cash
                    
                    
                    -
                    
                    
                    
                    (178,965
                    )Net cash used in investing
      activities
                    
                    
                    (3,085,822
                    )
                    
                    
                    (604,777
                    )Cash
      flows from financing activities:Proceeds from (repayments of)
      short-term bank loans
                    
                    
                    (777,351
                    )
                    
                    
                    2,197,500Net cash provided by (used in)
      financing activities
                    
                    
                    (777,351
                    )
                    
                    
                    2,197,500Effect
      of foreign currency translation on cash
                    
                    
                    10,956
                    
                    
                    
                    1,444Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (2,495,170
                    )
                    
                    
                    3,033,794Cash
      and cash equivalents at beginning of year
                    
                    
                    3,990,767
                    
                    
                    
                    956,973Cash
      and cash equivalents at end of year
                    
                    $
                    1,495,597
                    
                    
                    $
                    3,990,767Supplemental
      Schedule of Non Cash ActivityOther
      current liability for noncontrolling interest ownership
      buyback
                    
                    $
                    2,600,000
                    
                    
                    $
                    -




F-5




ZHONGCHAI MACHINERY, INC.


Notes
to Consolidated Financial Statements





Note
1 – Organization and Nature of Business





Zhongchai
Machinery, Inc. (“Zhongchai Machinery” or “the Company”) (Formerly “Equicap,
Inc.”), a Nevada corporation, is a manufacturer and distributor of gears and
gearboxes and drive axles which are marketed and sold to equipment manufacturers
in China.





On July
6, 2007, the Board of Directors of Zhejiang Zhongchai Machinery Co., Ltd.
(“Zhejiang Zhongchai”), the China based and 75% owned subsidiary of the Company,
approved and finalized a Share Purchase Agreement (“Share Purchase Agreement”)
with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in
the People’s Republic of China. Pursuant to the Share Purchase Agreement,
Zhejiang Zhongchai purchased all the outstanding equity of Zhejiang Shengte
Transmission Co., Ltd. (“Shengte”) from Keyi, the sole owner of Shengte for
approximately $3.7 million.





On March
7, 2007, the Company and Usunco Automotive, Ltd. (“Usunco”), a British Virgin
Islands company, entered into a Share Exchange Agreement (“Exchange Agreement”)
which was consummated on March 9, 2007. Under the terms of the Exchange
Agreement, the Company acquired all of the outstanding equity securities of
Usunco in exchange for 18,323,944 shares of the Company’s common
stock.





For
accounting purposes, because the Company had been a public shell company prior
to the share exchange, the share exchange was treated as a recapitalization of
the Company.  As such, the historical financial information prior to
the share exchange is that of Usunco and its subsidiaries. Historical share
amounts have been restated to reflect the effect of the share
exchange.





On June
18, 2006, Usunco acquired 100% of IBC Automotive Products Inc (“IBC”), a
California Corporation as of May 14, 2004 (date of inception), through a Share
Exchange Agreement of 28% of Usunco’s shares. IBC was considered a “predecessor”
business to Usunco as its operations constituted the business activities of
Usunco formed to consummate the acquisition of IBC.  The consolidated
financial statements reflect all predecessor statements of income and cash flow
activities from the inception of IBC in May 2004.





On June
15, 2009, IBC was sold to certain of the management persons of IBC in exchange
for the following: (i) the cancellation of an aggregate of 555,994 shares of
common stock of the Company which those individuals owned, and (ii) the payment
of $60,000 in installments pursuant to the terms of an unsecured promissory
note, the final payment of which will be November 15, 2010. As part of the
transaction, the Company cancelled $428,261 through the closing date, of
inter-company debt which funds had been used in the business of IBC prior to the
transaction.





On
September 22, 2009, Xinchang Xian Lisheng Machinery Co., Ltd. (“Lisheng”) was
incorporated by Zhejiang Zhongchai and two individual investors. Total
registered capital of Lisheng is RMB 5 million, of which Zhejiang Zhongchai
accounts for 60%. The Company plans to start production of die casting products
in 2010 for use in gearboxes, diesel engines and other machinery
products.





On
December 16, 2009, Zhongchai Machinery and its wholly owned subsidiaries, Usunco
and Zhongchai Holding (Hong Kong) Limited, a Hong Kong company (“Zhongchai
Holding”), took action to approve transfer of the shares of Zhejiang Zhongchai
Machinery Co., from Usunco to Zhongchai Holding. The transfer was completed on
December 23, 2009. The purpose of the transfer was to take advantage of the tax
treaty between the People’s Republic of China and the Special Administrative
Region of Hong Kong which reduces the withholding tax rate of the PRC on
payments to entities outside of China. Usunco, which no longer had any assets
after transferring all of them to Zhongchai Holding, was subsequently dissolved.
The consolidated financial statements will continue to account for Zhejiang
Zhongchai Machinery Co., in the same manner as before the transfer of the
ownership. Shareholder approval by the shareholders of Zhongchai Machinery was
not required under Nevada law, as there was no sale of all or substantially
all the assets of the Company. The shareholder ownership and shareholder rights
of Zhongchai Machinery remain the same as before the transaction.




F-6




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements





Note
1 – Organization and Nature of Business (continued)





On April
26, 2010, Zhongchai Holding (Hong Kong) Limited. (“Zhongchai Holding”), which
owned 75% of the equity in Zhejiang Zhongchai Machinery Co., Ltd. (“Zhejiang
Zhongchai”), executed a Share Purchase Agreement (“Share Purchase Agreement”)
with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in
the People’s Republic of China. Pursuant to the Share Purchase Agreement,
Zhongchai Holding purchased the residual 25% equity of Zhejiang Zhongchai
Machinery Co., Ltd. (“Zhejiang Zhongchai”) from Keyi at $2.6 million. The
agreement has been approved by the local government agency and a new business
license has been issued as Wholly Foreign Owned Enterprise.





Note
2 – Summary of Significant Accounting Policies





Basis
Of Presentation





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United Stated of America.
The consolidated financial statements include the accounts of Zhongchai
Machinery, Inc. and its controlling subsidiaries. All inter-company
transactions and balances have been eliminated in consolidation.





Use
of Estimates





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include valuation reserves
for accounts receivable, inventory and income taxes and valuation of goodwill.
Actual results could differ from those estimates





Cash
And Cash Equivalents





In
accordance with ASC Topic 230, “Statement of Cash Flows,” the Company considers
all highly liquid instruments with original maturities of three months or less
to be “cash equivalents”.





Accounts
Receivable and Allowance for Doubtful Accounts





Trade
accounts receivable are stated at the amount management expects to collect from
balances outstanding at the end of the period. Based on its assessment of the
credit history with customers having outstanding balances and current
relationships with them, management makes conclusions whether any realization of
losses on balances outstanding at the end of the period will be deemed
uncollectible based on the age of the receivables. The Company reserves 0.5% of
accounts receivable balances that have been outstanding less than three
months, 5% of accounts receivable balances that have been outstanding
between three months and six months, 20% of accounts receivable balances that
have been outstanding within one year, 50% of accounts receivable balances that
have been outstanding for between one year and two years, and 100% of accounts
receivable balances that have been outstanding more than two years. The balance
of allowance for doubtful accounts amounted to $37,670 and $7,732 as of June 30,
2010 and 2009, respectively.





Inventory





Inventory
is stated at the lower of cost or net realizable value. Cost is calculated on
the weighted-average basis and includes all costs to acquire and other costs
incurred in bringing the inventory to their present location and condition. The
Company evaluates the net realizable value of its inventory on a regular basis
and records a provision for loss to reduce the computed weighted-average cost if
it exceeds the net realizable value. The Company did not record any provision
for slow-moving and obsolete inventory as of June 30, 2010 and
2009.




F-7




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
2 – Summary of Significant Accounting Policies (continued)





Property
and Equipment





Property
and equipment are stated at cost. Depreciation is calculated based on the
straight-line method over the estimated useful lives of the assets as
follows:





Vehicles
                
                5
      yearsFurniture,
      machinery and equipment
                
                3
      to 10 yearsBuildings
      and improvements
                
                20
      to 40 years


Construction
in progress primarily represents the renovation costs of plant, machinery and
equipment.  Costs incurred are capitalized and transferred to property
and equipment upon completion, at which time depreciation
commences.





Cost of
repairs and maintenance is expensed as incurred. Gain or loss on disposal of
property and equipment, if any, is recognized in the consolidated statements of
operations.





Long-Lived
Assets





In
accordance with ASC Topic 360-10-35, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” the Company reviews the recoverability of its
long-lived assets on a periodic basis in order to identify business conditions,
which may indicate a possible impairment. The assessment for potential
impairment is based primarily on the Company’s ability to recover the carrying
value of its long-lived assets from expected future undiscounted cash flows. If
the total of the expected future undiscounted cash flows is less than the total
carrying value of the assets, a loss is recognized for the difference between
the fair value (computed based upon the expected future undiscounted cash flows)
and the carrying value of the assets.





Goodwill
and Other Intangible Assets





Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses. Goodwill and intangible assets deemed to have indefinite
lives are not amortized. All other intangible assets are amortized over their
estimated useful lives. Goodwill and intangible assets with indefinite lives are
subject to annual impairment test using the guidance and criteria described in
ASC Topic 350, “Goodwill and Other Intangible Assets”. This test compares
carrying values to fair values and, when appropriate, the carrying value of
these assets is reduced to fair value. As of June 30, 2010, the Company
concluded that there were no impairments of goodwill or intangible assets with
indefinite lives.





Revenue
Recognition





Revenue
consists of sales of automotive parts, gears and gearboxes. In accordance with
the provisions of ASC Topic 605-10, revenue is recognized when merchandise is
shipped, title and risk of loss are passed to the customers and the
collectability is reasonably assured. Revenue is recorded as the sales price of
goods and services, net of rebates and discounts and is reported on a gross
basis.  The gross basis is used mainly due to the fact that the
Company acts as principal in each transaction and is responsible for fulfillment
and acceptability of the products purchased, the Company takes title to its
products before the products are ordered by its customers, the Company has risk
of inventory loss as title of the products is transferred to the Company, the
Company is responsible for collection of sales and delivery of products, and the
Company does not act as an agent or broker and is not compensated on a
commission or fee basis.





Sales
Returns and Warranties





Generally
the Company does not accept the return of products once sold to
customers.  The Company generally provides a one-year limited warranty
covering manufacturing defects and/or product functional failures. After
evaluation and confirmation of customer complaints, the Company either replaces
the defective products or accepts returns by crediting the customer's account,
and is responsible for the costs and expenses thus incurred. For auto parts
distribution business, replacements and returns, and handling costs are passed
through to supplying manufacturers.




F-8




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
2 – Summary of Significant Accounting Policies (continued)





Advertising
Costs





The
Company expenses the cost of advertising as incurred. Advertising costs for the
years ended June 30, 2009 and 2008 were insignificant.





Research
and Development Costs





Research
and development ("R&D”) costs are classified as general and administrative
expenses and are expensed as incurred. R&D costs amounted to $163,504 and
$207,881, respectively, for the years ended June 30, 2010 and 2009.





Income
Taxes





Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.





A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. No differences
were noted between the book and tax bases of the Company’s assets and
liabilities, respectively. Therefore, there are no deferred tax assets or
liabilities for the year ended June 30, 2010. For the China/Gear segment, the
Zhongchai JV is located in the PRC, and is therefore subject to central
government and provincial and local income taxes within the PRC at the
applicable tax rate on the taxable income as reported in the PRC statutory
financial statements in accordance with relevant income tax laws. The standard
corporate income tax rate is 25%.





Fair
Value of Financial Instruments





The
carrying amounts of the Company’s financial instruments, which include cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other obligations, approximate their fair value due to the short-term maturities
of the related instruments.





Foreign
Currency Translation and Transactions





The
financial position and results of operations of the Company is determined using
local currency (Chinese Yuan) as the functional currency. In accordance
with ASC Topic 830-10, Foreign Currency Translation, assets and
liabilities are translated at the prevailing exchange rate in effect at each
year end. Contributed capital accounts are translated using the historical rate
of exchange when capital is contributed. Income statement accounts are
translated at the average rate of exchange during the year. Currency translation
adjustments arising from the use of different exchange rates are included in
accumulated other comprehensive income (loss) in shareholders' equity. Gains and
losses resulting from foreign currency transactions are included in the
consolidated statements of operations.





Comprehensive
Income (Loss)





The
Company has adopted ASC Topic 220-10, Reporting Comprehensive Income, which
establishes rules for the reporting and display of comprehensive income, its
components and accumulated balances. ASC 220-10 defines comprehensive income
(loss) to include all changes in equity, including adjustments to minimum
pension liabilities, accumulated foreign currency translation, and unrealized
gains or losses on available-for-sale marketable securities, except those
resulting from investments by owners and distributions to owners.




F-9




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
2 – Summary of Significant Accounting Policies (continued)





Earnings
Per Share





In
accordance with ASC Topic 260-10, “Computation of Earnings Per Share” and EITF
No. 03-6, “Participating Securities and the Two-Class Method”, basic earnings
per share is computed by dividing net income attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding
during the year using the two-class method. Under the two class method, net
income is allocated between ordinary shares and other participating securities
based on their respective participating rights. Diluted earnings per share is
calculated by dividing net income attributable to ordinary shareholders as
adjusted for the effect of dilutive ordinary equivalent shares, if any, by the
weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the year. Ordinary equivalent shares consist of the ordinary
shares issuable upon the conversion of the convertible preferred shares (using
the if-converted method) and ordinary shares issuable upon the exercise of
outstanding share options (using the treasury stock method).





Recent
Accounting Pronouncements





In April
2010, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2010-17, Revenue Recognition—Milestone Method
(Topic 605) – Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance
on defining the milestone and determining when the use of the milestone method
of revenue recognition for research or development transactions is appropriate.
It provides criteria for evaluating if the milestone is substantive and
clarifies that a vendor can recognize consideration that is contingent upon
achievement of a milestone as revenue in the period in which the milestone is
achieved, if the milestone meets all the criteria to be considered substantive.
ASU 2010-17 is effective for us in fiscal 2012 and should be applied
prospectively. The adoption of this ASU will not have a material impact on the
Company’s consolidated financial statements.





In
January 2010, the FASB issued the following ASC Updates:


l
            ASU
      No. 2010-01— Equity (Topic 505): Accounting for Distributions to
      Shareholders with Components of Stock and Cash. This Update clarifies that
      the stock portion of a distribution to shareholders that allows them to
      elect to receive cash or stock with a potential limitation on the total
      amount of cash that all shareholders can elect to receive in the aggregate
      is considered a share issuance that is reflected in EPS prospectively and
      is not a stock dividend for purposes of applying Topics 505 and 260
      (Equity and Earnings Per Share). The amendments in this Update are
      effective for interim and annual periods ending on or after December 15,
      2009 with retrospective
application.





l
            ASU
      No. 2010-02— Consolidation (Topic 505): Accounting and Reporting for
      Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10
      and related guidance to clarify that the scope of the decrease in
      ownership provisions of the Subtopic and related guidance applies to (i) a
      subsidiary or group of assets that is a business or nonprofit activity;
      (ii) a subsidiary that is a business or nonprofit activity that is
      transferred to an equity method investee or joint venture; and (iii) an
      exchange of a group of assets that constitutes a business or nonprofit
      activity for a noncontrolling interest in an entity, but does not apply
      to: (i) sales of in substance real estate; and (ii) conveyances of oil and
      gas mineral rights. The amendments in this Update are effective beginning
      in the period that an entity adopts FAS 160 (now included in Subtopic
      810-10).





l
            ASU
      No. 2010-06— Fair Value Measurements and Disclosures (Topic 820):
      Improving Disclosures about Fair Value Measurements.  This
      Update amends Subtopic 820-10 that require new disclosures about transfers
      in and out of Levels 1 and 2 and activity in Level 3 fair value
      measurements. This Update also amends Subtopic 820-10 to clarify certain
      existing disclosures. The new disclosures and clarifications of existing
      disclosures are effective for interim and annual reporting periods
      beginning after December 15, 2009, except for the disclosures
      about purchases, sales, issuances, and settlements in the roll
      forward of activity in Level 3 fair value measurements, which are
      effective for fiscal years beginning after December 15,
    2010.




The
Company expects that the adoption of the above Updates issued in January 2010
did not and will not have any significant impact on its financial position and
results of operations.




F-10




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements





Note
2 – Summary of Significant Accounting Policies (continued)





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of
those fiscal years. It is expected the adoption of this ASC Update will have no
material impact on the Company’s consolidated financial statements.




In
October 2009, the FASB concurrently issued the following ASC
Updates:


l
              ASU
      No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That
      Include Software Elements (formerly EITF Issue No. 09-3). This standard
      removes tangible products from the scope of software revenue recognition
      guidance and also provides guidance on determining whether software
      deliverables in an arrangement that includes a tangible product, such as
      embedded software, are within the scope of the software revenue
      guidance.




l
              ASU
      No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable
      Revenue Arrangements (formerly EITF Issue No. 08-1).  This
      standard modifies the revenue recognition guidance for arrangements that
      involve the delivery of multiple elements, such as product, software,
      services or support, to a customer at different times as part of a single
      revenue generating transaction.  This standard provides
      principles and application guidance to determine whether multiple
      deliverables exist, how the individual deliverables should be separated
      and how to allocate the revenue in the arrangement among those separate
      deliverables. The standard also expands the disclosure requirements for
      multiple deliverable revenue
arrangements.





ASU No.
2009-13 and 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application
permitted.  Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be adopted in
the same period using the same transition method.  The Company expects
to apply this standard on a prospective basis for revenue arrangements entered
into or materially modified beginning July 1, 2010.  It is expected
the adoption of these ASC Updates will not have a material impact on the
Company’s Consolidated Financial Statements.





In August
2009, the FASB issued an ASU regarding measuring liabilities at fair value. This
ASU provides additional guidance clarifying the measurement of liabilities at
fair value in circumstances in which a quoted price in an active market for the
identical liability is not available; under those circumstances, a reporting
entity is required to measure fair value using one or more of valuation
techniques, as defined. This ASU is effective for the first reporting period,
including interim periods, beginning after the issuance of this ASU. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.





On July
1, 2009, the FASB officially launched the FASB Accounting Standards Codification
(“ASC”), which has become the
single official source of authoritative nongovernmental U.S. GAAP,
in addition to guidance issued by the Securities and Exchange Commission. The
ASC is designed to simplify U.S. GAAP into a single, topically ordered
structure. All guidance contained in the ASC carries an equal level of
authority. The ASC is effective for all interim and annual periods ending after
September 15, 2009. The Company’s implementation of this guidance effective July
1, 2009 did not have a material effect on the Company’s condensed consolidated
financial statements.




F-11




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
2 – Summary of Significant Accounting Policies (continued)




On July
1, 2009, the Company adopted the accounting and disclosure requirements of
Statement of Financial Accounting Standard (“SFAS”) No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 51,
which is now included with ASC Topic 810 Consolidation.  This standard
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation.  On a
prospective basis, any changes in ownership will be accounted for as equity
transactions with no gain or loss recognized on the transactions unless there is
a change in control.


Note
3 – Restricted Cash





As of
June 30, 2010 and June 30, 2009, the Company had restricted cash of
$90,810, and $315,151, respectively. These restricted cash balances are
reserved for settlement of trade notes payable in connection with inventory
purchases.  The cash held in custody by bank issuing the trade notes
payable is restricted as to withdrawal or use, and is currently earning
interest.





Note
4 – Inventory





Inventory
at June 30, 2010 and 2009 by product type:





June 30, 2010
                          
                          
                          June 30, 2009Gears
      products
                          
                          $
                          1,372,326
                          
                          
                          $
                          885,559Gearbox
      products
                          
                          $
                          1,307,940
                          
                          
                          $
                          680,317Others
                          
                          $
                          400
                          
                          
                          $
                          2,569Total
                          
                          $
                          2,680,666
                          
                          
                          $
                          1,568,445




Inventory
consisting raw materials, labor and manufacturing overhead at June 30, 2010 and
2009 consists of the following:




June
      30, 2010
                        
                        
                        June
      30, 2009Raw
      materials
                        
                        $
                        896,273
                        
                        
                        $
                        676,471Work
      in process
                        
                        $
                        487,235
                        
                        
                        $
                        273,566Finished
      goods
                        
                        $
                        1,297,158
                        
                        
                        $
                        618,408Total
                        
                        $
                        2,680,666
                        
                        
                        $
                        1,568,445





Note
5 – Advance Payments





Advance
payments amounted to approximately $5 million as of June 30, 2010,
approximately $4.6 million of which represented an advance payment made by
the Zhongchai JV to Zhejiang Xinchai Holdings Co., Ltd. ("Xinchai Holdings"), a
corporation in China, for the purchase of land use rights and building for
Zhongchai JV’s future expansion of its production capabilities. Zhongchai JV is
currently leasing a portion of the land and building to be purchased. The total
land area to be purchased is approximately 250,000 square feet. The total
contract price for the land use rights, building and fixtures is approximately
$4.6 million. The Company is currently in the process of transferring
title.





Note
6 – Property and Equipment





Property
and equipment at June 30, 2010 and June 30, 2009 consists of the
following:





June 30,2010
                  
                  
                  June 30,2009Manufacturing
      equipment
                  
                  $
                  3,272,563
                  
                  
                  $
                  2,923,420Office
      equipment and furniture
                  
                  
                  51,306
                  
                  
                  
                  56,597Vehicles
                  
                  
                  122,965
                  
                  
                  
                  62,039Subtotal
                  
                  
                  3,446,834
                  
                  
                  
                  3,042,056Less:
      Accumulated depreciation
                  
                  
                  702,871
                  
                  
                  
                  379,1322,743,963
                  
                  
                  
                  2,662,924Add:
      Construction in progress
                  
                  
                  273,606
                  
                  
                  
                  -Total
                  
                  $
                  3,017,569
                  
                  
                  $
                  2,662,924





Depreciation
expense for the years ended June 30, 2010 and 2009 was $322,658 and $214,770,
respectively.




F-12




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
7 – Intangible Assets





Intangible
assets at June 30, 2010 and June 30, 2009 consist of the following:





June 30, 2010
                    
                    
                    June 30, 2009Computer
      Software
                    
                    $
                    3,241
                    
                    
                    $
                    3,223Less:
      accumulated amortization
                    
                    
                    2,790
                    
                    
                    
                    1,701Total
                    
                    $
                    451
                    
                    
                    $
                    1522





Amortization
expenses for the years ended June 30, 2010 and 2009 were $1,076 and
$1,074, respectively.





Note
8 – Goodwill





The
following table provides information related to the carrying value of
goodwill:





Balance
      as of June 30, 2008
                  
                  $
                  3,393,307Goodwill
      acquired during the year
                  
                  
                  -Effect
      of foreign currency translation
                  
                  
                  13,955Impairment
                  
                  
                  -Balance
      as of June 30, 2009
                  
                  
                  3,407,262Goodwill
      acquired during the year
                  
                  
                  -Effect
      of foreign currency translation
                  
                  
                  18,606Impairment
                  
                  
                  -Balance
      as of June 30, 2010
                  
                  $
                  3,425,868





Note
9 – Accounts Payable and Accrued Expenses





Accounts
payable and accrued expenses consist of the following:





June
      30,
                  
                  
                  June
      30,2010
                  
                  
                  2009Accounts
      payable
                  
                  $
                  3,419,595
                  
                  
                  $
                  1,400,162Accrued
      expenses
                  
                  
                  85,328
                  
                  
                  
                  162,055Total
                  
                  $
                  3,504,923
                  
                  
                  $
                  1,562,217





The
carrying value of accounts payable and accrued expenses approximates their fair
value due to the short-term nature of these obligations.


F-13
  ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements


Note
10 – Short Term Bank Loans





Short-term
bank loans consist of the following:





June
      30,
                                    
                                    
                                    June
      30,2010
                                    
                                    
                                    2009On
      May 25, 2009, the Company obtained a loan from Agricultural Bank
      ofChina,
      which was re-paid on August 26, 2009. The annual interest
    wasAt
      the fixed interest rate of 4.374% and paid monthly. The loan
      wassecured
      by a third party.
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    776,450


On
      June 15, 2009, the Company obtained a loan from Agricultural
      Bankof
      China, which was re-paid on June 10, 2010. The interest  is
      calculatedUsing
      an annual fixed interest rate of 5.31% and paid monthly. The loan
      issecured
      by a third party.
                              
                              
                              -
                              
                              
                              
                              1,421,050On
      June 10, 2010, the Company obtained a loan from Agricultural
      Bankof
      China, which is due on June 10, 2011. The interest  is
      calculated usingan
      annual fixed interest rate of 5.31% and paid monthly. The loan
      issecured
      by a third party.
                              
                              
                              1,428,810
                              
                              
                              
                              -Total short-term bank
      loans
                              
                              $
                              1,428,810
                              
                              
                              $
                              2,197,500





Note
11 – Other Current Liabilities





Other
current liabilities amounted to $3,322,277 and $635,408 as of June 30, 2010 and
2009, respectively, approximately $425,588 and $424,854 of which represents the
last payment due to Keyi from Shengte acquisition in July 2007 for both of the
above periods. Also included in the balance of $3,322,277 as of June 30, 2010
was $2,600,000 due to Keyi for the purchase of the residual 25% equity of
Zhejiang Zhongchai.





Note
12 – Risk Factors





The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC as well as by the general
state of the PRC’s economy. The Company’s business may be influenced
by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.





Note
13 – Risk of Concentrations in Sales and Purchases





Two
customers accounted for 39% and 25%, respectively, of the Company’s sales for
the years ended June 30, 2010.





One
supplier, Zhejiang Yuyang Machinery Co., Ltd, accounted for approximately 18% of
the Company’s total purchases for the year ended June 30, 2010.





Note
14 – Supplemental Disclosure of Cash Flow Information





For the Years Ended June 30,2010
                    
                    
                    2009Cash
      paid for interest
                    
                    $
                    132,529
                    
                    
                    $
                    3,786Cash
      paid for income taxes
                    
                    $
                    166,703
                    
                    
                    $
                    57,246




F-14




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
15 – Earnings (Loss) Per Share




The
Company presents earnings (loss) per share on a basic and diluted basis. Basic
earnings (loss) per share have been computed by dividing net earnings by the
weighted average number of shares outstanding. Diluted earnings (loss) per share
has been computed by dividing net earnings by the weighted average number of
shares outstanding including the dilutive effect of equity securities. All share
and per share data have been adjusted to reflect the recapitalization of the
Company after the share exchange agreement with Usunco. The weighted average
number of shares calculated for Diluted EPS excludes the potential common stock
that would be exercised under the options granted to employees and warrants
granted to agents because of their anti-dilutive effect.




For
      the Year Ended June 30,2010
                      
                      
                      2009Net
      income (loss)
                      
                      $
                      1,072,405
                      
                      
                      $
                      (1,132,190
                      )Weighted
      average common shares
                      
                      
                      27,613,019
                      
                      
                      
                      28,146,164(denominator
      for basic loss per share)Effect
      of dilutive securities:
                      
                      
                      -
                      
                      
                      
                      -Weighted
      average common shares
                      
                      
                      27,613,019
                      
                      
                      
                      28,146,164(denominator
      for diluted loss per share)Basic
      net income (loss) per share
                      
                      $
                      0.04
                      
                      
                      $
                      (0.04
                      )Diluted
      net income (loss) per share
                      
                      $
                      0.04
                      
                      
                      $
                      (0.04
                      )




Note
16 – Share-Based Payments





As of
June 30, 2010, there were 366,550 outstanding options to employees (“Employee
Options”) and 422,535 outstanding warrants to the private placement agent
(“Agent Warrants”). Both the Employee Options and Agent Warrants vest over three
years and have a life of five years. For the years ended June 30, 2010 and 2009,
the Company recorded approximately $63,606 and $108,789, respectively, of
stock-based compensation based on the fair value method of ASC Topic 718 using
the following assumptions: volatility of 34.94%, risk free interest rate of
4.63%, dividend yield of 0%, and expected life of 5 years. No estimate of
forfeitures was made as the Company has a short history of granting options and
warrants.





The fair
value of the options and warrants was determined based on the number of shares
granted and the quoted price of the Company’s common stock on the grant. The
fair value of stock-based compensation was determined using the Black-Scholes
model.





Note
17 – Stock Authorization and Issuance





On March
9, 2007, the Company completed the sale of an aggregate of 8,450,704 shares of
its common stock to a limited number of institutional investors in a private
placement transaction pursuant to offering exemptions under the Securities Act
of 1933.  The shares, which represented approximately 30% of the
outstanding common stock on an after-issued basis, were sold at a price of $1.42
per share, for net proceeds of approximately $10 million.





The
Company has a registration payment arrangement with regard to the common stock
issued in the private offering. The Company was required to file a registration
statement within 45 days of closing and cause the registration statement to
become effective on or prior to 150 days after the closing date. The
registration statement was filed within the 45 day limit thus fulfilling part of
this obligation. In addition, the Company is required to use reasonable
commercial efforts to maintain the registration statement’s effectiveness and
file additional registration statements in the future, to continue to provide to
the stockholders the opportunity to sell the shares of restricted stock that
they hold. This obligation ends if the shares can be sold pursuant to Rule
144.





In the
event the Company does not satisfy the registration obligations of the
registration rights agreement, (“Registration Default”), the Company shall pay
the investors an amount in cash equal to 1% of the aggregate investment amount
for each 30-day period of a Registration Default. The maximum penalty that the
Company may incur under this registration payment arrangement is 10% of the
aggregate investment amount, or $1,200,000. Any payments made are to be prorated
for the portion of a 30-day period of a Registration Default.




F-15




ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements




Note
17 – Stock Authorization and Issuance (continued)





Although
the Company has the obligation to register shares of common stock for other
persons under the above described registration rights agreement, the Company is
not obligated to pay liquidated damages in the event that their shares are not
registered or the registration statement is not available for their
sale.





Note
18 – Legal Proceedings





On
November 6, 2008, a group of the investors filed a law suit in federal court in
New York against the Company, Usunco Automotive Ltd., Mr. Peter Wang and
vFinance Investment, Inc. based on alleged violations of the Securities Exchange
Act of 1934 and Rule 10b-5, fraud, fraudulent inducement, professional
malpractice and negligent misrepresentation arising out of the private placement
closed on March 7, 2007. In July 2009, the Company and Mr. Peter Wang agreed
upon the terms of a settlement agreement to the above described law
suit.  The settlement agreement provided (i) for a third party, Ruihua
International Limited ("Ruihua"), to purchase all the shares of common stock of
the Company owned and held by the plaintiffs, (ii) upon the purchase of the
shares, for the Company and Mr. Wang and each of the plaintiffs to exchange
general mutual releases as to all matters arising concerning the plaintiffs'
purchase and holding of the common shares of the Company, and (iii) for a
stipulation to dismiss the action.  The settlement agreement was
consummated on July 31, 2009.  The action was discontinued with
prejudice by stipulation among all the parties which was signed and filed on
July 31, 2009, and the stipulation was "so ordered" by the court on August 4,
2009.





In
connection with the purchase by Ruihua of the shares sold to it as part of the
settlement of the above described action, Ruihua also bought shares from another
shareholder who was not a party to the action.  As a result of the two
share acquisitions, Ruihua acquired a total of 17,431,104 shares, currently
representing 61.88% of the issued and outstanding shares of common stock of the
Company.  Ruihua does not have any registration rights with respect to
the shares or other provisions related to control of the Company, such as the
right to have specific representation on the board of directors or nominate
potential directors for election, other than their rights as a shareholder under
the certificate of incorporation and by laws of the Company and under the
provisions of Nevada law and the United States securities laws. No change of
control was consummated as a result of the above mentioned share purchase by
Ruihua.





Note
19 – Employee Welfare Plan





The
Company has established an employee welfare plan in accordance with Chinese laws
and regulations. Full-time employees of the Company in the PRC participate in a
government-mandated multi-employer defined contribution plan pursuant to which
certain pension benefits, medical care, unemployment insurance, employee housing
fund and other welfare benefits are provided to employees. PRC labor regulations
require the Company to accrue for these benefits based on a certain percentage
of the employees’ salaries.





NOTE
20 – Subsequent Events





On July
7, 2010, Compensation Committee and Board of Directors have granted 1,300,000
shares of stock options to one director and four employees.





Name
                            
                            Position
                            
                            OptionGranted
                            
                            
                            Option
      Price
                            
                            Expired
      OnRong
      Shi
                            
                            Director
                            
                            
                            500,000
                            
                            
                            $
                            0.20
                            
                            2015/07/06Mengxin
      He
                            
                            General
      Manager
                            
                            
                            500,000
                            
                            
                            $
                            0.20
                            
                            2015/07/06Xianding
      Ge
                            
                            General
      Manager
                            
                            
                            100,000
                            
                            
                            $
                            0.20
                            
                            2015/07/06Tracy
      Lin
                            
                            Financial
      Director
                            
                            
                            100,000
                            
                            
                            $
                            0.20
                            
                            2015/07/06Min
      Guo
                            
                            Office
      Manager
                            
                            
                            100,000
                            
                            
                            $
                            0.20
                            
                            2015/07/06




These
stock options will be expired on July 6, 2015. 40% of these options were vested
on July 7, 2010 and the remaining 60% of the options will be vested 20% each
year for next three years. Note: The closing price of the stock was $0.15 and
the biding price was $0.05 as of July 6, 2010.




F-16




SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this Amended Report to be signed on its behalf by the undersigned thereunto duly
authorized on December 9, 2010.





ZHONGCHAI
      MACHINERY, INC.By:
              /s/
      Peter WangPeter
      WangPresident





In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities
indicated.





Signature
            
            Capacities
            
            Date/s/
      Peter Wang
            
            Chairman,
      President and actingChief Financial Officer (Principal
            
            December
      9,
              2010Peter
      Wang
            
            Executive
      and AccountingOfficer)/s/
      Rong Shi
            
            Director
            
            December
      9,
              2010Rong
      Shi/s/
      Chris Chen
            
            Director
            
            December
      9,
              2010Chris
      Chen