UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549


FORM
10-K





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





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





(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 September 1, 2010.













ZHONGCHAI
MACHINERY, INC.




Form
10-K


Fiscal
Year Ended June 30, 2010


Table
of Contents




Page No.PART
      IItem
      1
                              Description
      of Business
                              3Item
      1A.
                              Risk
      Factors
                              8Item
      1B.
                              Unresolved
      Staff Comments
                              19Item
      2
                              Description
      of Properties
                              19Item
      3
                              Legal
      Proceedings
                              19Item
      4
                              [Reserved]
                              19PART
      IIItem
      5
                              Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                              20Item
      6
                              Selected
      Financial Data.
                              21Item
      7
                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              23Item
      7A
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              29Item
      8
                              Financial
      Statements and Supplementary Data
                              29Item
      9
                              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                              29Item
      9A
                              Controls
      and Procedures
                              29Item
      9B
                              Other
      Information
                              30PART
      IIIItem
      10
                              Directors,
      Executive Officers and Corporate Governance
                              30Item
      11
                              Executive
      Compensation
                              33Item
      12
                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                              35Item
      13
                              Certain
      Relationships and Related Transactions and Director
      Independence
                              36Item
      14
                              Principal
      Accountant Fees and Services
                              36PART
      IVItem
      15.
                              Exhibits
      and Financial Statement Schedules
                              37


2





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.”


3





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


4





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.


5





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.




Name of Major Customers
                  
                  Percentage of Total
                    Revenue in 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.


6


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.




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.


7





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.


8




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.


9




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.


10




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:




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.


11




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.


12





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:


13





l
            We
      will be able to capitalize on economic
reforms;





l
            The
      Chinese government will continue its pursuit of economic reform
      policies;





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.




14




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.


15





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.




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.


16




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.


17





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.




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.


18





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.




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.




Item
4. 
                  
[RESERVED]


19


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.




Quarter Ended
                    
                    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.


20


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.





Plan Category
                          
                          Number of securities to be
                            issued upon exercise of
                            outstanding options,
                            warrants and rights
                          
                          
                          Weighted average
                            exercise price of
                            outstanding options,
                            warrants, and rights
                          
                          
                          Number of securities
                            remaining availableEquity
      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.


21




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
                        
                        
                        $
                        1,072,405LoLoss
      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
                        )


22


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.


23




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.


24





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.


25





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.




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 year ended June 30, 2009. Revenue for the year
ended June 30, 2010 consists 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 last year was attributed to the
Company’s expansion in production capacity and continuous marketing efforts, and
taking advantage of the recovery of the domestic market in China for gear and
gearbox products as a result of Chinese government’s economic stimulus
plan.




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.


26


Selling,
General and Administrative Expenses




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




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, and costs related to being a
public company including professional services related to auditing, legal and
other services, costs associated with the operating expenses in China, and
non-cash expenses amounting to $63,606  recognized for stock based
compensation related to stock options and warrants granted in the period
pursuant to SFAS 123(R). The decrease of SG&A in fiscal year 2010 is mainly
attributed to less professional expenses as the Company moves forwards with more
stable operations; and Zhongchai China’s decrease in R&D expenses of
approximately $44,377 and in rental expense of approximately $16,214 in the
fiscal 2010.





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%.





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 account receivables, note receivable and other receivables of $4,191,626,
inventory of $2,680,666, and an advance payment of $4,993,607.  The advance
payment 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. At June 30, 2010, Zhongchai had
working capital of $4,448,622. ,Zhongchai believes that it has sufficient
operating capital for its current operations.


27





Consolidated
Statements of Cash Flows


Year ended June 30Statements
      of Cash Flows
                      
                      2010
                      
                      
                      2009Net
      cash provided by operating activities
                      
                      
                      3,350,611
                      
                      
                      
                      1,754,778Net
      cash used in investing activities
                      
                      
                      (5,304,480
                      )
                      
                      
                      (604,777
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      (777,351
                      )
                      
                      
                      2,197,500Effect
      of foreign currency translation on cash
                      
                      
                      11,709
                      
                      
                      
                      1,444Net
      increase (decrease) in cash and cash equivalents and restricted
      cash
                      
                      
                      (2,719,511
                      )
                      
                      
                      3,348,945





Net cash
provided by operating activities increased by $1,595,833 or 90.94% to $3,350,611
for the year ended June 30, 2010 compared with $1,754,778 for the year ended
June 30, 2009. The increase mainly because the Company gained more in the
achievement of a larger economy of scale, at the same time, accounts payable and
accrued expenses, accounts receivable, and inventory also increased.
Advance payments were divided into two parts, one is advance payments for trade
which was listed in this part, the other is advance payments for purchase of
land use rights and building which was listed in the following part: investing
activities.Thirdly,
the Company had to pay Keyi $2,600,000 for the purchase of the residual 25%
equity of Zhejiang Zhongchai.


Net cash
used in investing activities increased by $4,699,703 to $5,304,480 for the year
ended June 30, 2010, compared with $604,777 for the year ended June 30, 2009.
This was attribute to advance payment about $2.2 million for purchase of land
use rights and building, and the payment about $2.5 million to noncontrolling
interest for ownership buyback.


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.





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).


28


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.




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.


29




Item
9B.                  OTHER
INFORMATION
 
 None.
 
 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
                    
                    Position with company
                    
                    Serving as a
                      Director or an
                      Officer SincePeter
      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.
  30
 
 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.
  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.
  31
  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.
  32
  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
                    
                    Medical Premiums
                    
                    
                    401K Employer
                      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.
  33
 
 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
                        
                        Fees Earned
                          or Paid in Cash
                        
                        
                        Option Awards
                        
                        
                        TotalRong
      Shi
                        
                        $
                        -0-
                        
                        
                        $
                        -0-
                        
                        
                        $
                        -0-Chris
      Chen
                        
                        $
                        -0-
                        
                        
                        $
                        -0-
                        
                        
                        $
                        -0-
  34
 
 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.
  Name and Address of Beneficial Owner
                        
                        Number of Shares
                          Beneficially Owned (1)
                        
                        
                        % of common stock
                          Beneficially OwnedSinoquest
      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
      Chen
                          224 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.
  35
  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:
  June 30, 2010
                      
                      
                      June 30, 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.
  36
  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)21.1
                  
                  Subsidiaries
      of the Registrant*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
  37
  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
  38
  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
  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 and $7,732
      at June 30, 2010 and 2009, respectively
                    
                    
                    3,618,030
                    
                    
                    
                    1,540,402Inventory
                    
                    
                    2,680,666
                    
                    
                    
                    1,568,445Notes
      receivable
                    
                    
                    463,465
                    
                    
                    
                    448,655Advance
      payments
                    
                    
                    4,993,607
                    
                    
                    
                    2,988,235Other
      current assets
                    
                    
                    110,131
                    
                    
                    
                    115,266Total
      current assets
                    
                    
                    13,452,306
                    
                    
                    
                    10,966,921Property
      and equipment, net
                    
                    
                    3,017,569
                    
                    
                    
                    2,662,924Goodwill
                    
                    
                    3,425,868
                    
                    
                    
                    3,407,262Other
      noncurrent 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 at June 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 cash provided 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:Accounts
      receivable
                      
                      
                      (2,090,134
                      )
                      
                      
                      (1,154,135
                      )Inventory
                      
                      
                      (1,098,936
                      )
                      
                      
                      (322,261
                      )Notes
      receivable - trade
                      
                      
                      (47,470
                      )
                      
                      
                      (95,257
                      )Advance
      payments
                      
                      
                      219,504
                      
                      
                      
                      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
                      
                      
                      2,684,033
                      
                      
                      
                      118,561Total
      adjustments
                      
                      
                      2,278,206
                      
                      
                      
                      2,886,968Net
      cash provided by operating activities
                      
                      
                      3,350,611
                      
                      
                      
                      1,754,778Cash
      flows from investing activities:Notes
      receivable - other
                      
                      
                      35,000
                      
                      
                      
                      (57,500
                      )Advance
      payments for purchase of land use rights and building
                      
                      
                      (2,200,050
                      )
                      
                      
                      -Additions
      to property and equipment
                      
                      
                      (393,720
                      )
                      
                      
                      (368,312
                      )Additions
      to construction in progress
                      
                      
                      (272,436
                      )
                      
                      
                      -Payments
      to noncontrolling interest for ownership buyback
                      
                      
                      (2,473,274
                      )
                      
                      
                      -Loss
      on disposal of a subsidiary –IBC, net of cash
                      
                      
                      -
                      
                      
                      
                      (178,965
                      )Net
      cash used in investing activities
                      
                      
                      (5,304,480
                      )
                      
                      
                      (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
                      
                      
                      11,709
                      
                      
                      
                      1,444Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      (2,719,511
                      )
                      
                      
                      3,348,945Cash
      and cash equivalents and restricted cash at beginning of
    year
                      
                      
                      4,305,918
                      
                      
                      
                      956,973Cash
      and cash equivalents and restricted cash at end of year
                      
                      $
                      1,586,407
                      
                      
                      $
                      4,305,918
  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 $428,261through 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 andAllowance 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 accountsreceivable
balances that have been outstanding withinone year,
50% of accountsreceivable balances that have been outstanding for between one year and two years, and 100%
ofaccounts
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 discounted cash flows. If
the total of the expected future discounted 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 discounted 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
inASC 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 ofJune 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 arepassed to the
customers and
thecollectability 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 andprovincialand 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.Thestandard
corporate income tax
rate is25%.
 
 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. Inaccordance
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:
  ●
                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.
 
 ●
                ASU
      No. 2010-02— Consolidation
      (Topic 505): Accounting andReporting
      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).
 
 ●
                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 andwill 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:
  ●
                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.
  ●
                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 authoritativenongovernmental
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 June30, 2010and June 30,
2009, the
Company had
restricted cashof $90,810, and $315,151,respectively.
These restricted
cash balancesarereserved for settlement
of tradenotes payablein connection withinventory purchases.The cash
held in custody by bankissuing thetrade notes
payable is restricted as to withdrawal or use, and is currentlyearning
interest.
 
 Note
4 – Inventory
 
 Inventory
consisting of material, labor and manufacturing overhead at June30, 2010 and June 30,
2009 consists of the following:
 
 June
      30,
                      
                      
                      June
      30,2010
                      
                      
                      2009Gears
      products
                      
                      $
                      1,372,326
                      
                      
                      $
                      885,559Gearbox
      products
                      
                      
                      1,307,940
                      
                      
                      
                      680,317Other
                      
                      
                      400
                      
                      
                      
                      2,569Total
                      
                      $
                      2,680,666
                      
                      
                      $
                      1,568,445
 
 Note
5 – Advance Payments
 
 Advance
payments amounted to approximately $5million as of
June 30, 2010, approximately
$4.6million 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 June30, 2010 and June
30, 2009 consists of the following:
 
 June
      30,
                      
                      
                      June
      30,2010
                      
                      
                      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 June30, 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, 2009consist ofthe
following:
 
 June 30, 2010
                        
                        
                        June 30, 2009Computer
      Software
                        
                        $
                        3,241
                        
                        
                        $
                        3,223Less:
      accumulated amortization
                        
                        
                        2,790
                        
                        
                        
                        1,701Total
                        
                        $
                        451
                        
                        
                        $
                        1522
 
 Amortization
expensesfor the years
ended June30, 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 thefollowing:
 
 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
  -
  June
      30,
                          
                          
                          June
      30,2010
                          
                          
                          2009On
      May 25, 2009, the Company obtained a loan from Agricultural Bank
      of  China, which was re-paid on August 26, 2009. The annual
      interest was At the fixed interest rate of 4.374% and paid monthly. The
      loan was secured by a third party.
                          
                          $
                          -
                          
                          
                          $
                          776,450On
      June 15, 2009, the Company obtained a loan from Agricultural
      Bank  of China, which was re-paid on June 10, 2010. The
      interest  is calculated  Using an annual fixed
      interest rate of 5.31% and paid monthly. The loan is  secured by
      a third party.
                          
                          
                          -
                          
                          
                          
                          1,421,050On
      June 10, 2010, the Company obtained a loan from Agricultural
      Bank  of China, which is due on June 10, 2011. The
      interest  is calculated using an annual fixed interest rate of
      5.31% and paid monthly. The loan is  secured by a third
      party.
                          
                          
                          1,428,810
                          
                          
                          
                          -Total
      short-term bank loans
                          
                          $
                          1,428,810
                          
                          
                          $
                          2,197,500
 
 Note11–Other Current
Liabilities
 
 Other
current liabilitiesamounted to $3,322,277 and $635,408as ofJune 30, 2010 and 2009,
respectively, approximately
$425,588 and $424,854 of which representsthe 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 bychanges in
governmental policies with respect tolaws 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
 
 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.
  F-14
  ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements
  Note
15 – Earnings (Loss) Per Share (continued)
  For
      the Year Ended June 30,2010
                        
                        
                        2009Net
      income (loss)
                        
                        $
                        1,072,405
                        
                        
                        $
                        (1,132,190
                        )Weighted
      average common shares (denominator for basic loss per
    share)
                        
                        
                        27,613,019
                        
                        
                        
                        28,146,164Effect
      of dilutive securities:
                        
                        
                        -
                        
                        
                        
                        -Weighted
      average common shares (denominator for diluted loss per
    share)
                        
                        
                        27,613,019
                        
                        
                        
                        28,146,164Basic
      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 – 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
19 – 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
                                  
                                  Option
                                    Granted
                                  
                                  
                                  OptionPrice
                                  
                                  ExpiredOnRong
      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 Report to be signed on its behalf by the undersigned thereunto duly
authorized on September 21 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 acting Chief Financial Officer
                      
                      September 21, 2010Peter
      Wang
                      
                      (Principal Executive
      and Accounting Officer)/s/
      Rong Shi
                      
                      Director
                      
                      September 21, 2010Rong
      Shi/s/
      Chris Chen
                      
                      Director
                      
                      September 21, 2010Chris
      Chen
  39