**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





**[X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
      OF 1934**




For
      the
      quarterly period ended March 31, 2006





**[
      ] 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  000-51006





**HARBIN
      ELECTRIC, INC.**


(Exact
      name of small business issuer as specified in its charter)





Nevada
            98-0403396(State
                or other jurisdiction of incorporation)
            (IRS
                Employer Identification No.)





No.
                9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu
              Harbin
                Kai Fa Qu, Harbin, People’s Republic of China 150060(Address
                of principal executive offices)





(215)
      854-8104


(Issuer’s
      telephone number)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or 15(d) of the Securities Exchange Act of 1934, during the past 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes [X] No [ ]




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




**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**




**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**




Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after
      the distribution of securities under a plan confirmed by a court. Yes [ ] No
      [
      ]




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of May 15, 2006: 16,600,451 shares of common stock, par value $0.00001 per
      share.




Transitional
      Small Business Disclosure Format (Check one): Yes [ ] No [X]












**Table
      of Contents**






**Page****Part
                    I. Financial Information****Item
                    1. Financial Statements (Unaudited)**
                **1****Consolidated
                      Balance Sheet (Unaudited) as of March 31,
                      2006**
                **1****Consolidated
                    Statements of Operations
                    (Unaudited)****For the Three Months Periods Ended March 31, 2006 and
                    2005**
                **2****Consolidated
                    Statements of Cash Flows****For the Three Months Ended March 31, 2006 and
                    2005**
                **3****Notes
                    to the Consolidated Financial Statements**
                **4****Item
                    1A. Risk Factors**
                **15****Item
                    2. Management’s Discussion and Analysis or Plan of
                    Operation**
                **20****Item
                    3. Controls and Procedures**
                **22****Part
                    II. Other Information****Item
                    1. Legal Proceedings.**
                **22****Item
                    2. Unregistered Sales of Equity Securities and Use of
                    Proceeds.**
                **22****Item
                    3. Defaults upon Senior Securities.**
                **22****Item
                    4. Submission of Matters to a Vote of Securities
                    Holders.**
                **22****Item
                    5. Other Information.**
                **22****Item
                    6. Exhibits.**
                **23****Signatures**
                **24****Index
                    to Exhibits**
                **25**










**PART
      I. FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**(UNAUDITED)**




**ASSETS**
            
            **AS
                OF MARCH 31, 2006**CURRENT
                ASSETS:Cash
                & cash equivalents
            
            $
            9,042,762Accounts
                receivable, net of allowance for uncollectible accounts of
                $30,000
            
            
            7,944,125Inventory
            
            
            607,174Advances
                to suppliers
            
            
            3,209,657Other
                assets
            
            
            732Total
                current assets
            
            
            20,804,451PROPERTY
                AND EQUIPMENT, net
            
            
            7,778,662INTANGIBLE
                ASSETS, net
            
            
            321,281TOTAL
                ASSETS
            
            $
            28,904,394**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accrued
                expenses
            
            $
            539,406STOCKHOLDERS'
                EQUITYCommon
                stock, $0.00001 par value; authorized shares 100,000,000;issued
                and outstanding 16,600,451 shares
            
            
            166Additional
                paid in capital
            
            
            11,610,676Statutory
                reserves
            
            
            2,415,898Accumulated
                other comprehensive income
            
            
            652,038Retained
                earnings
            
            
            13,686,210Total
                stockholders' equity
            
            
            28,364,988TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            28,904,394




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






1







**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**





**FOR
                THE THREE MONTH**
              **PERIODS
                ENDED****March
                31, 2006**
            
            **March
                31, 2005**Net
                revenue
            
            $
            8,878,658
            
            $
            4,128,297Cost
                of revenue
            
            
            4,604,923
            
            
            2,078,060Gross
                profit
            
            
            4,273,736
            
            
            2,050,237Operating
                expenses:Selling
                expenses
            
            
            208,007
            
            
            106,588General
                and administrative expenses
            
            
            908,758
            
            
            251,700Total
                operating expenses
            
            
            1,116,765
            
            
            358,288Income
                from operations
            
            
            3,156,971
            
            
            1,691,948Non-operating
                IncomeRealized
                gain on sale of marketable securities
            
            
            571,143
            
            
            -Other
                income
            
            
            54,062
            
            
            -Interest
                income
            
            
            12,321
            
            
            294Net
                income
            
            
            3,794,497
            
            
            1,692,242Other
                comprehensive item:Unrealized
                gain on marketable securities
            
            
            -
            
            
            14,000Reclassification
                adjustment
            
            
            (587,171
            )
            
            -Comprehensive
                Income
            
            $
            3,207,326
            
            $
            1,706,242Basic
                weighted average shares outstanding
            
            
            16,600,451
            
            
            15,000,450Basic
                net earnings per share
            
            $
            0.23
            
            $
            0.11Diluted
                weighted average shares outstanding
            
            
            16,700,451
            
            
            15,100,450Diluted
                net earnings per share
            
            $
            0.23
            
            $
            0.11







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





2




**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**







**For
                The Three Months Ended****MARCH
                31, 2006**
            
            **MARCH
                31, 2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            3,794,497
            
            $
            1,692,242Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            68,854
            
            
            29,471Stock
                based compensation
            
            
            313,000
            
            
            -(Increase)
                decrease in current assets:Accounts
                receivable
            
            
            (2,054,991
            )
            
            (819,162
            )Inventory
            
            
            741,419
            
            
            189,373Advances
                to suppliers
            
            
            (447,757
            )
            
            (545,086
            )Advances
                to related parties
            
            
            -
            
            
            71,283Other
                assets
            
            
            3,377
            
            
            (161,237
            )Increase
                in current liabilities:Accrued
                expenses
            
            
            344,487
            
            
            91,874Net
                cash provided by operating activities
            
            
            2,762,887
            
            
            548,758CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of intangible assets
            
            
            -
            
            
            (266,200
            )Acquisition
                on property & equipment
            
            
            (65,203
            )
            
            (131,600
            )Net
                cash used in investing activities
            
            
            (65,203
            )
            
            (397,800
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from sale of marketable securities
            
            
            1,093,166
            
            
            -Increase
                in subscription Receivable
            
            
            -
            
            
            (125,859
            )Net
                cash provided by (used in) financing activities
            
            
            1,093,166
            
            
            (125,859
            )EFFECT
                OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
            
            
            (487,107
            )
            
            -NET
                INCREASE IN CASH & CASH EQUIVALENTS
            
            
            3,790,850
            
            
            25,099CASH
                & CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            5,739,019
            
            
            2,210,803CASH
                & CASH EQUIVALENTS, END OF PERIOD
            
            $
            9,042,762
            
            $
            2,235,902






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





3


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)





**1.
      ORGANIZATION AND DESCRIPTION OF BUSINESS**




Harbin
      Tech Full Electric Co., Ltd. (“HTFE”) was incorporated and formerly known as
      Harbin Tech Full Technology Development Co., Ltd. (“HTFTD”). On July 12, 2004,
      the Board of Directors of HTFTD approved to change the name of HTFTD to Harbin
      Tech Full Electric Co., Ltd. HTFE is engaged in the business of manufacturing
      and marketing of Linear Motors and special electric motors. HTFE has domestic
      patents for commercial applications of linear motors.





Tech
      Full
      International, Inc. (“TFI”) was a Delaware corporation, incorporated on August
      24, 2004. TFI was a non-operative holding company of HTFE.





On
      August
      31, 2004, TFI entered into an agreement with all the shareholders of HTFE to
      exchange all of the outstanding stock of TFI for all the outstanding stock
      of
      HTFE. After the consummation of the agreement, the former shareholders of HTFE
      owned 1,500 shares of common stock of TFI, which represented 100% of TFI’s
      issued and outstanding shares. For U.S. Federal income tax purposes, the
      transaction is intended to be qualified as a tax-free transaction under section
      351 of the Internal Revenue Code of 1986, as amended.





The
      exchange of shares between TFI and the shareholders of HTFE has been accounted
      for as a reverse acquisition under the purchase method of accounting since
      the
      shareholders of HTFE obtained control of the consolidated entity. Accordingly,
      the merger of the two companies has been recorded as a recapitalization of
      HTFE,
      with HTFE being treated as the continuing entity.  The historical financial
      statements presented are those of HTFE. The continuing company has retained
      December 31 as its fiscal year end. The financial statements of the legal
      acquirer are not significant; therefore, no pro forma financial information
      is
      submitted.





On
      January 24, 2005, the TFI consummated a merger agreement with Torch Executive
      Services Ltd. (“Torch”), a Nevada corporation, under which Torch issued
      8,000,000 shares of Torch to the shareholders of TFI, and under which TFI merged
      into Torch Subsidiary, Inc., a Delaware corporation (“TSI”) and an acquisition
      subsidiary of Torch, with TSI being the surviving entity. As a part of the
      merger, Torch cancelled 5,000,000 shares of its issued and outstanding stock
      owned by its former president. The exchange of shares with Torch has been
      accounted for as a reverse acquisition under the purchase method of accounting
      since the shareholders of TFI obtained control of Torch. Accordingly, the merger
      of the two companies has been recorded as a recapitalization of TFI, with TFI
      being treated as the continuing entity. The financial statements of legal
      acquiree are not significant; therefore, no pro forma financial information
      is
      submitted.





Torch
      was
      incorporated in the State of Nevada on July 9, 2003. Torch was a development
      stage company in the business of providing luxury travel and concierge services
      on a personalized one-to-one basis as well as through the internet.





As
      a part
      of the merger, Torch was renamed to Harbin Electric, Inc. (the “Company”) and
      the Company declared a stock dividend of one-half share on each share of its
      common stock outstanding for all shareholders on record as of January 26, 2005.





In
      connection with the transactions described above, the Company changed its fiscal
      year end to December 31.





4


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)






**Joint
      Venture with Baldor Electric Company**




On
      January 12, 2005, HTFE entered into an agreement with Harbin Tech Full Industry
      Co., Ltd. (“HTFI”), pursuant to which HTFI agreed to transfer all of its
      interests in a joint venture with Baldor Electric Company (“Baldor”) to HTFE. In
      exchange for the transfer of the interests in the joint venture, HTFE agreed
      to
      cause its publicly traded holding company to issue 1,000,000 shares of Harbin
      Electric, Inc.'s common stock to HTFI as a payment for the transfer of the
      joint
      venture interests. On May 12, 2005, HTFE and the Company signed a written
      Consent amending the Share Transfer Agreement whereby HTFE and the Company
      agreed that the Company is to issue 786,885 shares of the Company’s common stock
      for the transfer of HTFE’s interest in the joint venture, as opposed to the
      1,000,000 shares as set forth in the original Share Transfer Agreement dated
      January 12, 2005. The paid in capital for the shares to be issued in
      consideration for the interest in the Joint Venture is $2,400,000.





In
      accordance with the Joint Venture Agreement, HTFI has a 65% equity ownership
      in
      the joint venture and Baldor has the remaining 35%. HTFI will receive 55% of
      the
      profits from the joint venture with the remainder of the profits going to
      Baldor. The Chief Executive Officer and Chairman of the Company and the
      Company’s majority shareholder is also the principal owner of HTFI.





Effective
      as of November 20, 2005, HTFI, HTFE and the Company signed a written consent
      to
      terminate the Share Transfer Agreement which was dated as of January 12, 2005,
      and amended and restated as of May 12, 2005. The initial transaction was
      recorded at the carrying value in the books of HTFE in accordance with FAS
      141
      as the transaction was between entities under common control. On termination,
      the joint venture was deconsolidated, the initial transaction was reversed
      and
      no gain or loss was recorded. The joint venture had no operations during the
      year. The shares contemplated in the transaction were never issued.





**2.
      BASIS OF PRESENTATION**





The
      accompanying unaudited financial statements of the Company have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information. Accordingly, they do not include all of the information required
      by
      generally accepted accounting principles for complete financial statements.
      In
      the opinion of management, all adjustments (consisting of normal recurring
      adjustments) considered necessary for a fair presentation have been included.
      Operating results for the interim periods are not necessarily indicative of
      the
      results for any future period. These statements should be read in conjunction
      with the Company's audited financial statements and notes thereto for the fiscal
      year ended December 31, 2005.





**Accounts
      Receivable**





The
      Company’s policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves. The Company had accounts receivable
      of
      $7,944,125 as of March 31, 2006.





**Advances
      to suppliers**





The
      Company advances to certain vendors for purchase of its material. The advances
      to suppliers amounted to $3,209,657 as of March 31, 2006.





5


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)




**Investment
      in marketable securities**





The
      Company’s investments in marketable securities are classified as “available for
      sale” securities, and are carried on the financial statements at fair market
      value. Realized gains and losses are included in earnings, unrealized holding
      gains and losses are reported as a separate component of stockholders’ equity as
      a component of “Other Comprehensive Income.” The average cost method is used to
      determine cost of securities. The Company sold its marketable securities in
      the
      three-month period ended March 31, 2006 at a realized gain of
      $571,143.





**Inventory**





Inventory
      is mainly the raw material for manufacturing the electrical motor. Inventory
      is
      valued at the lower of cost or market. The management compares the cost of
      inventory with the market value and allowance is made for writing down the
      inventory to its market value, if lower.





**Income
      Taxes**




The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.





According
      to the Provisional Regulations of the People's Republic of China on Income
      Tax,
      the Document of Reductions and Exemptions of Income Tax for the Company has
      been
      approved by the local tax bureau and the Management Regulation of Harbin
      Economic and Technological Development Zone for the reporting period. The
      Company is exempted from income tax from July 1, 2004 through June 30,
      2006.





*Fair
      value of financial instruments*





Statement
      of financial accounting standard No. 107, “Disclosures about Fair Value of
      Financial Instruments,” requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value.





**Foreign
      currency transactions and comprehensive income (loss)**





Assets
      and liabilities in foreign currency are recorded at the balance sheet date
      at
      the rate prevailing on that date. Items of income statement are recorded at
      the
      average exchange rate. Gain or loss on foreign currency transactions are
      reflected on the income statement. Gain or loss on financial statement
      translation from foreign currency are recorded as a separate component in the
      equity section of the balance sheet, as component of comprehensive income.
      The
      functional currency of the Company is Chinese Renminbi.





6


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)






**Segment
      Reporting**





Statement
      of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About
      Segments of an Enterprise and Related Information” requires use of the
“management approach” model for segment reporting. The management approach model
      is based on the way a company's management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.




SFAS
      131
      has no effect on the Company's financial statements as substantially all of
      the
      Company's operations are conducted in one industry segment. The Company consists
      of one reportable business segment. All of the Company's assets are located
      in
      People's Republic of China.





**Recent
      Pronouncements**





In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company’s first fiscal year that begins
      after September 15, 2006. The Company has not evaluated the impact of this
      pronouncement its financial statements.




In
      March
      2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.”
SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities,” with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This Statement:






1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.






2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if practicable.






3.
            Permits
                an entity to choose ‘Amortization method’ or  Fair value measurement
                method’ for each class of separately recognized servicing assets and
                servicing liabilities.






4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling
              into
                question the treatment of other available-for-sale 
                securities under Statement 115,  provided  that  the
                 available-for-sale  securities are identified in  some
                manner as
              offsetting
                the entity’s exposure to changes in fair value of servicing assets or
                servicing liabilities that a servicer elects to subsequently measure
                at
                fair value.




7


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)






5.
            Requires
                separate presentation  of  servicing assets and servicing
                 liabilities subsequently measured at fair value in the statement
                of
                financial position  and  additional
              disclosures
                for all separately recognized servicing assets and servicing liabilities.




This
      Statement is effective as of the beginning of the Company’s first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not


have
      a
      significant impact on the consolidated financial statements.





**3.
      PRINCIPLES OF CONSOLIDATION**





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiary, HTFE. All significant inter-company
      accounts and transactions have been eliminated in consolidation.





**4.
      MAJOR CUSTOMERS AND VENDORS**





Three
      major customers accounted for 80% of the net revenue for the three-month period
      ended March 31, 2006. One major customer accounted for 74% of the net revenue
      for the three-month period ended March 31, 2005. As of March 31, 2006, the
      total
      receivable balance due from these three customers was $7,419,460.





Three
      vendors provided 76% of the Company’s purchase of raw materials for the
      three-month period ended March 31, 2006; three vendors provided 79% of the
      Company’s raw materials for the three-month period ended March 31, 2005. The
      Company's accounts payable to these vendors was $1,815 at March 31, 2005. The
      Company’s accounts payable to these vendors was $0 as of March 31, 2006.





The
      Company extends credit to its customers based upon its assessment of their
      credit worthiness and generally does not require collateral. Credit losses
      have
      not been significant.





**5.
      INTANGIBLE ASSETS**





Intangible
      assets consist of Patents. The Company is amortizing the intangible assets
      over
      3 year period. The Company evaluates intangible assets for impairment, at least
      on an annual basis and whenever events or changes in circumstances indicate
      that
      the carrying value may not be recoverable from its estimated future cash flows.
      Recoverability of intangible assets, other long-lived assets and, goodwill
      is
      measured by comparing their net book value to the related projected undiscounted
      cash flows from these assets, considering a number of factors including past
      operating results, budgets, economic projections, market trends and product
      development cycles. If the net book value of the asset exceeds the related
      undiscounted cash flows, the asset is considered impaired, and a second test
      is
      performed to measure the amount of impairment loss. As of March 31, 2006, no
      impairment of intangible assets has been recorded.





8




**HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006**


(Unaudited)





Net
      intangible assets as of March 31, 2006 were as follows:




Patents
            
            $
            398,044Less
                Accumulated amortization
            
            
            (76,763
            )$
            321,281





Amortization
      expense for the three-month periods ended March 31, 2005 and March 31, 2006
      amounted to $ 1,412 and $13,781 respectively.





Amortization
      expense for the Company’s current amortizable intangible assets over the next
      five twelve month periods is estimated to be: 2007 -$60,145; 2008-$60,145;
      2009-$60,145; 2010 - $60,145; 2011 - $10,024.





**6.
      SHAREHOLDER’S EQUITY**





Harbin
      Tech Full Electric Co. Ltd. (“HTFE”) was founded in the People’s Republic of
      China on April 10, 2003. Upon its inception, HTFE issued 6,000,000 shares of
      its
      common stock for $726,000 to four shareholders. On July 12, 2004, HTFE issued
      47,000,000 shares of its common stock for subscription receivable of $5,771,842
      from a related party. Immediately after the issuance, HTFE had 53,000,000 shares
      of stock issued and outstanding. Through December 31, 2004, HTFE had
      subscription receivable $4,862,256 from its shareholders. The Company accrued
      interest at 5.86% on the subscription receivable amounting to $125,859 through
      December 31, 2004. The Company completed the process of acquiring the plant
      facility in exchange of the subscription receivable in the beginning of year
      2005. This transaction was with a company owned by the majority shareholder
      of
      the Company. Because the transfer of assets was between entities under common
      control, the assets were recorded at cost which was the carryover basis in
      the
      books of HTFE.





On
      August
      31, 2004 all shareholders of HTFE entered into an agreement with Tech Full
      International, Inc. (TFI) to exchange all of their outstanding shares of HTFE
      for 1,500 shares of common stock of TFI which constituted 100% of TFI’s issued
      and outstanding shares. After the consummation of the agreement, the former
      shareholders of HTFE owned all outstanding and issued shares of TFI.





On
      January 12, 2005, TFI and its shareholders entered into a merger agreement
      (“Merger Agreement”) with Torch Executive Services, Inc. (Torch) and a wholly
      owned subsidiary of Torch, Torch Subsidiary, Inc. (“TSI”). At the closing which
      occurred on January 24, 2005, TFI was merged with and into TSI and the separate
      existence of TFI ceased. On the date of the merger, there were 7,000,300 shares
      of common stock of Torch outstanding. As a part of the merger, 8,000,000
      restricted shares of Torch were issued to the shareholders of TFI and the former
      president, sole director and majority shareholder of Torch returned 5,000,000
      shares of Torch to the treasury which was subsequently cancelled. After the
      merger, there were 10,000,300 shares of stock of Torch outstanding.





On
      January 24, 2005, the Company declared a stock dividend of one-half share for
      each share of its stock outstanding to all stockholders of record as of January
      26, 2005, after the Merger Agreement. The stock dividend was payable on January
      27, 2005. The Company has a total of 16,600,451 shares of common stock
      outstanding as of December 31, 2005.




9


**HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006**


(Unaudited)






On
      January 12, 2005, HTFE entered into an agreement with related party Harbin
      Tech
      Full Industry Co., Ltd. (“HTFI”), pursuant to which HTFI agreed to transfer all
      of its interests in joint venture with Baldor Electric Company to HTFE in
      exchange for the Company to issue 1,000,000 shares of its common stock to HTFI.
      On May 12, 2005, HTFE and the Company signed a written Consent amending the
      Share Transfer Agreement whereby HTFE and the Company agreed that the Company
      is
      to issue 786,885 shares of the Company’s common stock for the transfer of HTFE’s
      interest in the joint venture, as opposed to the 1,000,000 shares as set forth
      in the original Share Transfer Agreement dated January 12, 2005. The Company
      allocated 786,885 shares of its common stock for issuance in connection with
      the
      transfer of the joint venture interest. The shares have not been issued as
      of
      December 31, 2005. As the transaction was between entities under common control,
      the transaction was recorded at the historical cost basis. The Company issued
      shares at fair value equal to the recorded cost . On November 20 2005, HTFI,
      HTFE and the Company signed a written consent to terminate the Share Transfer
      Agreement (see Note 1).





On
      August
      31, 2005, Harbin Electric, Inc. entered into Securities Purchase Agreements
      with
      institutional investors and other accredited investors to sell an aggregate
      of
      1,600,000 shares of the Company’s common stock, par value $0.00001 at a price of
      $3.00 per share together with options to purchase an aggregate of 480,000 shares
      of common stock at $3.50 per share (the “Private Placement”). The Private
      Placement is being entered into pursuant to Regulation D of the Securities
      Act
      of 1933. The options have registration rights, however, there is no penalty
      or
      liquidated damages clause if the Company fails to register the shares upon
      exercise of the options. The Company is not obligated to buy back the options.
      Accordingly, in accordance with EITF 00-19, the options are classified as
      equity. The fair value of the options was calculated using the Black-Scholes
      options pricing model using the following assumptions: Volatality 66%; risk
      free
      interest rate 4.13% and expected term of 5 years.





On
      September 18, 2005, the Company received $4,800,000 from the Private Placement.
      HTFE’s total registered capital as of March 31, 2006 has been increased to
      $11,200,000.





**7.** **STOCK-BASED
      COMPENSATION PLAN** ****





In
      May
      2005 the Board of Directors of the Company adopted and approved the 2005
      Stock Option Plan (the “Plan”) which authorized the issuance of up
      to 1,500,000 shares under the Plan.




On
      January 31, 2005, the Company granted a total of 150,000 stock options to
      purchase shares of its common stock to three directors of the Company under
      the
      Company's 2005 Stock Option Plan, pursuant to a written agreement (the
“Agreement”). The options terminate five (5) years from the date of grant. Per
      the Agreement, the options shall become exercisable during the term that
      Optionee serves as a Director of the Company as follows: (i) 50% of the shares
      of Stock subject to this Option became exercisable immediately as of the date
      of
      this Agreement; and (ii) the balance of the shares of Stock subject to this
      Option shall become exercisable in eight (8) equal quarterly installments of
      three thousand one hundred twenty five (3,125) shares of Stock subject to this
      Option, the first installment to be exercisable as of the last day of the first
      quarter of calendar year 2005, with an additional 3,125 of such Shares becoming
      exercisable as of the last day of each subsequent quarter. The Company granted
      to Optionee the right to purchase the number of shares of Stock set forth in
      the
      Agreement, for cash (or other consideration as is authorized under the Plan
      and
      acceptable to the Board of Directors of the Company, in their sole and absolute discretion)
      at $3.10 per share (the “Exercise Price”), such price being not less than
      eighty-five percent (85%) of the fair market value per share of the Shares
      covered by this Option as of the date of the Agreement.





10


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)






On
      September 26, 2005, the Company granted options (the “Options”) to Mr. Barry
      Raeburn to purchase 250,000 shares of the Company's common stock (the
“Common Stock”) at an exercise price $3.93 per share, the closing price on
      September 23, 2005. One-fifth (1/5) of the Options (50,000 shares) have been
      vested immediately. The remaining Options shall vest over a 3-year period,
      with
      13.33 % (33,333 shares) vesting on the 180th day of the Effective Date and
      the
      balance vesting thereafter on a semi-annual basis, proportionately over the
      course of the following three (3) years. The options were valued using the
      Black-Scholes option pricing model using the following assumptions: Volatility
      66%; risk free interest rate 4.13% and expected term of 3 years.





During
      the three months ended March 31, 2006, the Company issued 480,000 options to
      employees and 20,000 options to two directors. The options vest over a period
      of
      three years and have a life of 5 years. The Company recorded $198,000 of
      compensation based on the fair value method under FAS 123R using the following
      assumptions: Volatility of 66%, risk free interest rate of 4.13% , 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.





No
      options have been exercised as of March 31, 2006.





The
      Company adopted SFAS No. 123-R effective January 1, 2006 using the
      modified prospective method. Under this transition method, stock compensation
      expense recognized in the first quarter of 2006 includes compensation expense
      for all stock-based compensation awards granted on or after January 1,
      2006, based on the grant-date fair value estimated in accordance with the
      provisions of SFAS No. 123-R. and the fair value of options granted
      before January 1, 2006 that have vested during the quarter.





Prior
      to
      January 1, 2006, the Company measured stock compensation expense using the
      intrinsic value method of accounting in accordance with Accounting Principles
      Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,”
and related interpretations (APB No. 25). Thus, expense was generally not
      recognized for the Company’s employee stock option and purchase
      plans.





**Impact
      of adoption of SFAS No. 123-R in Q1 2006**





Stock
      compensation expense measured in accordance with SFAS No. 123-R totaled
      approximately $313,000 or $ 0.02 per basic and diluted share in the first
      quarter of 2006. The adoption of SFAS No. 123-R resulted in increased
      expense of approximately $313,000 as compared to the stock compensation
      expense that would have been recorded pursuant to APB No. 25. In the first
      quarter of 2005, no expense was recorded as the Company did not have any stock
      options awarded during that period that had intrinsic value.  Had the fair
      value method been adopted during the first quarter of 2005, pro forma net income
      and earnings per share would have been as follows: ($
      in
      thousands, except per share amounts):





11


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)





Three-month
                Period ended March 31, 2005Net
                Income - as reported
            
            $
            1,692Stock-Based
                employee compensation expense included in reported net income, net
                of
                taxTotal
                stock-based employee compensation under fair-value-based method for
                all
                rewards, net of tax
            
            
            (97
            )Pro
                forma net income
            
            $
            1,595







Earnings
                per share
            Three-month
                period ended
              March
                31, 2005Basic,
                as reported
            $0.11Diluted,
                as reported
            $0.11Basic,
                pro forma
            $0.11Diluted,
                pro forma
            $0.11





**Methods
      of estimating fair value**





Under
      both SFAS No. 123-R and under the fair value method of accounting under
      SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of
      restricted stock is determined based on the number of shares granted and the
      quoted price of the Company’s common stock on the date of grant. The fair value
      of stock options is determined using the Black-Scholes model.





**Significant
      assumptions used to estimate fair value**





Under
      SFAS No 123-R, the Company’s expected volatility assumption is based on the
      historical volatility of the Company’s stock. The expected life assumption is
      primarily based on historical exercise patterns and employee post-vesting
      termination behavior. The risk-free interest rate for the expected term of
      the
      option is based on the U.S. Treasury yield curve in effect at the time of grant.





Stock
      compensation expense recognized in the first quarter of 2006 is based on awards
      expected to vest, and there were no estimated forfeitures as the Company has
      a
      short history of issuing options. SFAS No. 123-R requires forfeitures to be
      estimated at the time of grant and revised in subsequent periods, if necessary,
      if actual forfeitures differ from those estimates.





**8.
      SUPPLEMENTAL DISCLOSURE OF CASH FLOWS**





The
      Company prepares its statements of cash flows using the indirect method as
      defined under the Financial Accounting Standard No. 95.





The
      Company paid $0 for interest and income tax during the three-month periods
      ended
      March 31, 2006 and 2005.





12


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)





**9.
      STATUTORY COMMON WELFARE FUND**





As
      stipulated by the Company Law of the People’s Republic of China (PRC), net
      income after taxation can only be distributed as dividends after appropriation
      has been made for the following:




(i)
            Making
                up cumulative prior years’ losses, if
                any;





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





(iii)
            Allocations
                of 5-10% of  income after  tax, as determined  under PRC
                 accounting  rules and  regulations, to the Company's
                “Statutory common welfare fund”,which
              is
                established for the purpose of providing employee facilities and
                other
                collective benefits to the Company's employees; and




(iv)
            Allocations
                to the discretionary surplus reserve, if approved in the shareholders’
                general meeting.







The
      Company established a reserve for the annual contribution of 5% of net income
      to
      the welfare fund. The amount included in the statutory reserve for the
      three-month periods ended March 31, 2006 and 2005 amounted to $174,115 and
      $0,
      respectively.





**10.
      STATUTORY RESERVE**





In
      accordance with the Chinese Company Law (note 9), the Company has allocated
      10%
      of its annual net income, amounting to $348,230 and $0, as statutory surplus
      reserve for the three-month periods ended March 31, 2006 and 2005, respectively.
      The Statutory Surplus Reserve and Statutory common welfare fund are aggregated
      on the balance sheet as Statutory Reserve.





**11.
      EMPLOYEE PENSION**





The
      employee pension in Harbin generally includes two parts: The first part to
      be
      paid by the Company is 20% of the employees’ actual salary in the prior year. If
      the average salary falls below $1,165 for each individual, $1,165 will be used
      as the basis. The other part paid by the employees is 8% of actual salary with
      the same minimum requirement. The Company made no contributions of employment
      benefits, including pension in the three-month period ended March 31, 2005.
      The
      Company made $ 5,065 in contributions of employment benefits, including pension
      in the three-month period ended March 31, 2006.





**12.
      EARNINGS PER SHARE**





Earnings
      per share for three-month periods ended March 31, 2006 and March 31, 2005 were
      determined by dividing net income for the periods by the weighted average number
      of both basic and diluted shares of common stock and common stock equivalents
      outstanding.





13


**HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 (Unaudited)






The
      following is an analysis of the differences between basic and diluted earnings
      per common share in accordance with Statement of Financial Accounting Standards
      No. 128, “Earnings Per Share.”







For
                  the three month
                periods
                  ended March 312006
              2005Weighted
                  average common shares outstanding
              16,600,451
              15,000,450Effect
                  of dilutive securities:
                Stock
                  options
              100,000
              100,000Weighted
                  average common shares
                outstanding
                    and common share
                    equivalents
              16,700,451
              15,100,450








**13.
      CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**




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, and by the general state
      of the PRC's economy.






The
      Company's operations in the PRC are subject to specific considerations and
      significant risks not typically associated with companies in the North America
      and Western Europe. These include risks associated with, among others, the
      political, economic and legal environments and foreign currency exchange. The
      Company's results may be adversely affected by changes in governmental policies
      with respect to laws and regulations, anti-inflationary measures, currency
      conversion and remittance abroad, and rates and methods of taxation, among
      other
      things.




**14.
      RECLASSIFICATIONS**





Certain
      prior period amounts have been reclassified to conform to the three-month period
      ended March 31, 2006 presentation.




14




**Item
      1A. Risk Factors**




You
      should carefully consider these risk factors as each of these risks could
      adversely affect our business, operating results and financial condition.
      Additional risks and uncertainties not presently foreseeable to us may also
      impair our business operations. If any of the following risks actually occurs,
      our business, financial condition or operating results could be materially
      and
      adversely affected. In such case, the trading price of our common stock could
      decline, and you may lose all or part of your investment.




**RISKS
      RELATING TO OUR BUSINESS**




**Our
      management owns a significant amount of our common stock, giving them influence
      or control in corporate transactions and other matters, and their interests
      could differ from those of other stockholders** .




As
      of May
      15, 2006, our principal executive officers, Tianfu Yang, Tianli Yang, Suofei
      Xu,
      and Zedong Xu, beneficially owned approximately 68.7% of our outstanding common
      stock. As a result, they are in a position to significantly influence or control
      the outcome of matters requiring shareholders’ vote, including the election of
      directors, the adoption of any amendment to our certificate of incorporation
      or
      bylaws, and the approval of significant corporate transactions. Their control
      may delay or prevent a change of control on terms favorable to our other
      stockholders and may adversely affect the voting and other rights of our other
      shareholders.




**We
      need to manage growth in operations to maximize our potential growth and
      achieve our expected revenues.**




In
      order
      to maximize potential growth in our current and potential markets, we believe
      that we must expand our manufacturing and marketing operations. We experience
      growth in our revenues of over three hundred eighty-seven percent (387%) over
      the last year (when comparing our revenues in 2005 to those in 2004); however,
      there can be no assurance that we will be able to maintain such growth or any
      growth of our business. To fund our anticipated expansion, we need an increased
      amount of working capital. This expansion will place a significant strain on
      our
      management and our operational, accounting, and information systems. We expect
      that we will need to continue to improve our financial controls, operating
      procedures, and management information systems. We will also need to effectively
      train, motivate, and manage our employees. Our failure to manage our growth
      could disrupt our operations and ultimately prevent us from generating the
      revenues we expect.




**We
      may require additional financing in the future and a failure to obtain such
      required financing will inhibit our ability to grow.**




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




**We
      may not be able to adequately protect and maintain our intellectual property.**




Our
      success will depend on our ability to continue to develop and market linear
      motor and other motor products. While we have been granted 3 patents in China
      relating to linear motor applications, we currently have not applied for patents
      for our technical processes and designs, as we believe an application for such
      patents would result in public knowledge of our proprietary technology and
      designs.




15





**Because
      of our dependence on a few key customers, the loss of any key customer could
      cause a significant decline in our revenues.**




Three
      major customers accounted for 80% of the net revenue for the three-month period
      ended March 31, 2006. The loss of any of our major customers, or a significant
      reduction in sales to any such customers, would adversely affect our
      revenues.





**We
      depend on the supply of raw materials, and any adverse changes in such supply
      or
      the costs of raw materials may adversely affect our
      operations.**




Three
      vendors provided 76% of our purchase of raw materials for the three-month period
      ended March 31, 2006. We currently obtain most of our raw materials from Acheng
      Relay Company Limited, Jiangnan Aluminum Material Factory and Linear Motor
      Institute of the Zhejiang University and Rui’an Fangzhuang Motor Fittings
      Factory. Any material change in the spot and forward rates could have a material
      adverse effect on the cost of our raw materials and on our operations.  In
      addition, if we need alternative sources for key component parts for any reason,
      these component parts may not be immediately available to us. If alternative
      suppliers are not immediately available, we will have to identify and qualify
      alternative suppliers, and production of these components may be delayed. We
      may
      not be able to find an adequate alternative supplier in a reasonable time
      period, or on commercially acceptable terms, if at all. Shipments of affected
      products have been limited or delayed as a result of such problems in the past,
      and similar problems could occur in the future. Our inability to obtain our
      key
      source supplies for the manufacture of our products may require us to delay
      shipments of products, harm customer relationships or force us to curtail or
      cease operations.




**Our
      success depends on our management team and other key personnel, the loss of
      any
      of whom could disrupt our business operations.**




Our
      future success will depend in substantial part on the continued service of
      our
      senior management, including Mr. Tianfu Yang, our Chairman and Chief
      Executive Officer, Mr. Xu Soufei, our Vice President and Board Member,
      Mr. Tianli Yang, our Vice President, and Mr. Zedong Xu, our Chief
      Financial Officer. The loss of the services of one or more of our key personnel
      could impede implementation of our business plan and result in reduced
      profitability. We do not carry key person life insurance on any of our officers
      or employees. Our future success will also depend on the continued ability
      to
      attract, retain and motivate highly qualified technical sales and marketing
      customer support.




Because
      of the rapid growth of the economy in China, competition for qualified personnel
      is intense. We cannot assure you that we will be able to retain our key
      personnel or that we will be able to attract, assimilate or retain qualified
      personnel in the future.





**Our
      directors and officers control a majority of our common stock and, as a result,
      they may exercise voting control.**




Our
      directors and executive officers, directly or through entities that they
      control, currently beneficially own, as a group, approximately 68.9% of our
      issued and outstanding common stock as of May 15, 2006. This significant
      concentration of share ownership may adversely affect the trading price of
      our
      common stock because investors often perceive a disadvantage in owning shares
      in
      a company with just one or several controlling shareholders. Furthermore, our
      directors and officers, as a group, has the ability to control the outcome
      of
      all matters requiring shareholder approval, including the election of directors
      and approval of significant corporate transactions, such as mergers,
      consolidations or the sale of substantially all of our assets. This
      concentration of ownership may have the effect of delaying or preventing a
      change of control, including a merger, consolidation or other business
      combination involving us, or discouraging a potential acquirer from making
      a
      tender offer or otherwise attempting to obtain control.





16





**RISKS
      RELATING TO THE PEOPLE’S REPUBLIC OF CHINA**





**China’s
      economic policies could adversely affect our business.**





Substantially
      all of our assets are located in China and substantially all of our revenue
      is
      derived from our operations in China. Accordingly, our results of operations
      and
      prospects are subject, to a significant extent, to the economic, political
      and
      legal developments in China.




While
      China’s economy has experienced a significant growth in the past twenty years,
      growth has been uneven, both geographically and among various sectors of the
      economy. The Chinese government has implemented various measures to encourage
      economic growth and guide the allocation of resources. Some of these measures
      benefit the overall economy of China, but may also have a negative effect on
      us.
      For example, our operating results and financial condition may be adversely
      affected by the government control over capital investments or changes in tax
      regulations.




The
      economy of China has been transitioning from a planned economy to a more
      market-oriented economy. In recent years the Chinese government has implemented
      measures emphasizing the utilization of market forces for economic reform and
      the reduction of state ownership of productive assets and the establishment
      of
      corporate governance in business enterprises; however, a substantial portion
      of
      productive assets in China are still owned by the Chinese government. In
      addition, the Chinese government continues to play a significant role in
      regulating industry development by imposing industrial policies. It also
      exercises significant control over China’s economic growth through the
      allocation of resources, controlling payment of foreign currency-denominated
      obligations, setting monetary policy and providing preferential treatment to
      particular industries or companies.




**Capital
      outflow policies in The People’s Republic of China may hamper our ability to
      remit income to the United States.**




The
      PRC
      has adopted currency and capital transfer regulations. These regulations may
      require that we comply with complex regulations for the movement of capital.
      Although we believe that we are currently in compliance with these regulations,
      should these regulations or the interpretation of them by courts or regulatory
      agencies change we may not be able to remit all income earned and proceeds
      received in connection with our operations or from the sale of our operating
      subsidiary to the United States or to our shareholders.





**If
      preferential tax concessions granted by the PRC government are changed or
      expire, our financial results and results of operations would be materially
      and
      adversely.**





Our
      results of operation may be adversely affected by changes to or expiration
      of
      preferential tax concessions that our subsidiary in the PRC currently enjoys.
      The statutory tax rate generally applicable to domestic Chinese companies is
      33%. A reduced income tax rate of 15% may be possible for productive foreign
      investment enterprises in the Economic and Technological Development Zones
      and
      for enterprises engaged in production or business operations in the Special
      Economic Zones. As a result of preferential tax rate incentives, our operations
      have been subject to relatively low tax liabilities. Tax that would otherwise
      have been payable without preferential tax treatment amounted to approximately
      $0.34 million and $1.5 million in 2004 and 2005, respectively.





17






Tax
      laws
      in China are subject to interpretations by relevant tax authorities. The
      preferential tax treatment may not remain in effect or may change, in which
      case
      we may be required to pay the higher income tax rate generally applicable to
      Chinese companies, or such other rate as is required by the laws of
      China.





**Fluctuations
      in the value of the RMB could materially affect our financial condition and
      results of operations.**




The
      value
      of the RMB against the U.S. dollar and other currencies may fluctuate and is
      affected by, among other things, changes in the PRC's political and economic
      conditions. As the majority of our net revenue is denominated in RMB, any
      significant revaluation of the RMB may materially and adversely affect our
      cash
      flows, revenues and financial condition. For example, to the extent that we
      need
      to convert U.S. dollars we receive from an offering of our securities into
      RMB
      for our operations, appreciation of the RMB against the U.S. dollar could have
      a
      material adverse effect on our business, financial condition and results of
      operations. Conversely, if we decide to convert our RMB into U.S. dollars for
      the purpose of making payments for business purposes and the U.S. dollar
      appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert
      would be reduced. In addition, the depreciation of significant U.S. dollar
      denominated assets could result in a charge to our income statement and a
      reduction in the value of these assets.




On
      July
      21, 2005, the PRC government changed its policy of tying the value of the RMB
      to
      the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within
      a narrow and managed band against a basket of certain foreign currencies. This
      change in policy has resulted in an approximately 2.0% appreciation of the
      RMB
      against the U.S. dollar. While the international reaction to the RMB revaluation
      generally has been positive, there remains significant international pressure
      on
      the PRC government to adopt an even more flexible currency policy, which could
      result in a further and more significant appreciation of the RMB against the
      U.S. dollar.




**We
      may experience currency fluctuation and longer exchange rate payment
      cycles.**




The
      local
      currencies in the countries in which we sell our products may fluctuate in
      value
      in relation to other currencies. Such fluctuations may affect the costs of
      our
      products sold and the value of our local currency profits. While we are not
      conducting any meaningful operations in countries other than China at the
      present time, we may expand to other countries and may then have an increased
      risk of exposure of our business to currency fluctuation.




**We
      may face obstacles from the Communist system in the PRC.**




Foreign
      companies conducting operations in the PRC face significant political, economic
      and legal risks. The Communist regime in the PRC, including a stifling
      bureaucracy, may hinder Western investment.




**We
      may have difficulty establishing adequate management, legal and financial
      controls in the PRC.**




The
      PRC
      historically has been deficient in Western style management and financial
      reporting concepts and practices, as well as in modern banking, computer and
      other control systems. We may have difficulty in hiring and retaining a
      sufficient number of qualified employees to work in the PRC. As a result of
      these factors, we may experience difficulty in establishing management, legal
      and financial controls, collecting financial data and preparing financial
      statements, books of account and corporate records and instituting business
      practices that meet Western standards.




18


**It
      will be extremely difficult to acquire jurisdiction and enforce liabilities
      against our officers, directors and assets based in the
      PRC.**




Because
      our executive officers and several of our directors, including our chairman
      of
      the Board of Directors, are Chinese citizens, it may be difficult, if not
      impossible, to acquire jurisdiction over these persons in the event a lawsuit
      is
      initiated against us and/or our officers and directors by a shareholder or
      group
      of shareholders in the United States. Also, because the majority of our assets
      are located in the PRC, it would also be extremely difficult to access those
      assets to satisfy an award entered against us in U.S. court.




**The
      legal system in China has inherent uncertainties that may limit the legal
      protections available in the event of any claims or disputes with third
      parties.**




The
      legal
      system in China is based on written statutes. Prior court decisions may be
      cited
      for reference but have limited precedential value. Since 1979, the central
      government has promulgated laws and regulations dealing with economic matters
      such as foreign investment, corporate organization and governance, commerce,
      taxation and trade. As China’s foreign investment laws and regulations are
      relatively new and the legal system is still evolving, the interpretation of
      many laws, regulations and rules is not always uniform and enforcement of these
      laws, regulations and rules involve uncertainties, which may limit the remedies
      available in the event of any claims or disputes with third parties. In
      addition, any litigation in China may be protracted and result in substantial
      costs and diversion of resources and management attention.




**We
      may face political and/or judicial corruption in the PRC.**




Another
      obstacle to foreign investment is corruption. There is no assurance that we
      will
      be able to obtain recourse, if desired, through the PRC’s poorly developed and
      often corrupt judicial systems.





Most
      of
      our assets are located in China, any dividends of proceeds from liquidation
      is
      subject to the approval of the relevant Chinese government
      agencies.





19





**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation**





**INFORMATION
      REGARDING FORWARD LOOKING STATEMENTS**





The
      following discussion should be read in conjunction with the unaudited condensed
      consolidated financial statements and notes thereto set forth in Item 1 of
      this
      Quarterly Report. In addition to historical information, this discussion and
      analysis contains forward-looking statements that relate to future events and
      expectations and, as such, constitute forward-looking statements.
      Forward-looking statements include those containing such words as” anticipates,”
“believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” will,” “will
      likely result,” “forecast,” “outlook,” “projects” or similar expressions. Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors that may cause actual results, performance or achievements of
      the
      Company to be materially different from those expressed or implied in the
      forward-looking statements.





**Three
      Months Ended March 31, 2006 Compared To Three Months Ended March 31,
      2005**





**Revenue**





For
      the
      three-month period ended March 31, 2006, we generated net revenues of
      $8,878,658. During the three-month period ended March 31, 2005 **,** we
      produced net revenues of $4,128,297. Sales
      of
      linear motor and special motor products drove the growth in the period.
      Industrial electric linear motors and other special motors continued to comprise
      significantly all of our total product sales in both comparable periods. The
      increase for the three-month period ended March 31, 2006 was due to the
      Company’s success in recruiting new customers and increased sales to our
      existing customers.





**Gross
      Profit**





The
      Company achieved a gross profit of $4,273,736 for the three months ended March
      31, 2006 compared to $2,050,237 for the three months ended March 31, 2005.
      The
      increase is directly related to our increases in sales. Gross margin, as a
      percentage of revenues, was 48.1% for the three months ended March 31, 2006
      compared to 49.7% for the three months ended March 31, 2005. The change in
      gross
      margin is normal as it reflects the different mix of products shipped in their
      corresponding periods.





**Operating
      Expenses**





Our
      total
      operating expenses consist of costs associated with sales and marketing,
      research and development expenditures, general administrative costs, and amounts
      to account for stock based compensation. The Company incurred total operating
      expenses of $1,116,765, or 12.6% of sales, for the three months ended March
      31,
      2006. This represents an increase of $758,477 compared to $358,288, or 8.7%
      of
      sales for the three months ended March 31, 2005. Aggregated selling expenses
      of
      $208,007, or 2.3% of sales, account for expenses associated with sales and
      marketing of the Company’s products. Selling expenses for the corresponding
      period last year were $106,588 or 2.6% of sales. The increase is due to our
      increased revenues and sales activity. General and administrative expenses
      include the costs of maintaining the company’s facilities, salaries, research
      and development, and amounts allocated to stock based compensation through
      options grants. General and administrative expenses for the three months ended
      March 31, 2006 were $908,758, or 10.2% of sales compared to $251,700 or 6.1%
      of
      sales in March 31, 2005. The increases were due to the inclusion of stock based
      compensation expense and the opening of our new offices in the U.S. Excluding
      the stock based compensation, our General and administrative expenses for the
      three months ended March 31, 2006 were $595,758 or 6.7% of sales versus $251,700
      or 6.1% of sales in March 31, 2005.





20


Stock
      compensation expense measured in accordance with SFAS No. 123-R totaled
      approximately $313,000 or $ 0.02 per basic and diluted share in the first
      quarter of 2006. The adoption of SFAS No. 123-R resulted in increased
      expense of approximately $313,000 or 3.5% of sales, as compared to the
      stock compensation expense that would have been recorded pursuant to APB
      No. 25. In the first quarter of 2005, no expense was recorded as the
      company did not have any stock options awarded during that period that had
      intrinsic value.





**Net
      Income**





The
      Company's net income was $3,794,497 or 42.7% of sales for the three months
      ended
      March 31, 2006, compared to $1,692,242 or 41.0% of sales for the three months
      ended March 31, 2005. The increase is attributed to the continued increase
      in
      sales levels and the contribution from the sale of our marketable securities.
      The Company sold its marketable securities in the three month period ended
      March
      31, 2006 at a realized gain of $571,143. Excluding the realized gain from the
      sale of marketable securities our net income was $3,223,354 or 36.3% of
      sales.





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2006, the Company had $9,042,762 cash and cash equivalents. The
      Company had net cash flows provided by operations of $2,762,887 for the
      three-month period ended March 31, 2006, as compared to net cash provided by
      operations of $548,758 in the corresponding period last year. The change in
      net
      cash flows from operations in the current period as compared to the
      corresponding period last year was mainly due to net income and increases in
      collections of accounts receivables. Cash flows from investing activities
      resulted in net usage of $65,203 in the current period as compared $397,800
      in
      the corresponding period last year. The usage in the current period was mainly
      due to investments in plant and equipment. The Company had a net increase in
      cash and cash equivalent of $3,790,850 in the current period as compared to
      a
      net increase of $25,099 in the corresponding period last year. Cash flow from
      financing activities was $1,093,166. This was a result of the sale of our
      marketable securities which were held as available for sale securities. Our
      net
      increase in cash & cash equivalents of $3,790,850 was due the increased cash
      flow from operations and the sale of marketable securities.





The
      majority of the Company's revenues and expenses were denominated primarily
      in
      Renminbi (“RMB”), the currency of the People's Republic of China. There is no
      assurance that exchange rates between the RMB and the U.S. dollar will remain
      stable. A revaluation of the RMB relative to the U.S. dollar could adversely
      affect our business, financial condition and results of operations. We do not
      engage in currency hedging, therefore inflation has not had a material impact
      on
      our business.




21





**Item
      3. Controls and Procedures**




(a) **Evaluation
      of Disclosure Controls and Procedures** .




The
      Company’s Chief Executive Officer and Chief Financial Officer conducted an
      evaluation of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures as defined in Securities Exchange Act of 1934
      Rule 13a-15(e), as of the end of the period covered by this report. Based on
      that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures were effective
      as of the end of the period covered by this report.





(b) **Changes
      in Internal Control over Financial Reporting** .




There
      were no changes in internal controls over financial reporting that occurred
      during the first quarter of 2006 that
      have materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.











**PART
      II. OTHER INFORMATION**




**Item
      1.** **Legal
      Proceedings**





We
      may
      from time to time become a party to various legal proceedings arising in the
      ordinary course of business. As of May 15, 2006, the Company was not involved
      in
      any material legal proceedings.




**Item
      2.** **Unregistered
      Sales of Equity Securities and Use of Proceeds**




None.




**Item
      3.** **Defaults
      upon Senior Securities**





None.





**Item
      4.** **Submission
      of Matters to a Vote of Securities Holders**





The
      Company has held no regularly scheduled, called or special meetings of
      shareholders during the reporting period.





**Item
      5.** **Other
      Information**







The
      deadline for submitting a stockholder proposal for inclusion in our proxy
      statement and form of proxy for our 2006 Annual Meeting is June 15, 2006.
      Submissions must be received by us at our offices at 2 Penn Center, Suite 200,
      Philadelphia, PA 19102 in writing and by that date. Any submissions not received
      in the manner described above will not be considered.





22




**Item
      6.**  **Exhibits.**




**Exhibit
                  Number**
            **Description**
            **Method
                of Filing**3.1
            Articles
                of Incorporation of the Company
            Filed
                as Exhibit 3.1 to the registration statement on Form SB-2 filed with
                the
                Commission on October 10, 2003 and incorporated herein by
                reference.3.2
            Amended
                and Restated Bylaws of the Company
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on July 6, 2005 and incorporated herein by
                reference.21.1
            List
                of subsidiaries
            Filed
                herewith as Exhibit 21.131.1
            Certification
                by the Chief Executive Officer pursuant to Rule 13a-14(a) or
                15d-14(a)
            Filed
                herewith as Exhibit 31.131.2
            Certification
                by the Chief Financial Officer pursuant to Rule 13a-14(a) or
                15d-14(a)
            Filed
                herewith as Exhibit 31.232.1
            Certification
                of the Chief Executive Officer and the Chief Financial Officer pursuant
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
            Filed
                herewith as Exhibit 32.1 99.1
            Press
              Release dated May 15, 2006
            Filed herewith
              as Exhibit 99.1







23


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.






**Harbin
                Electric, Inc.**Date: May
               15, 2006
            By:
            /s/ Tianfu
              YangTianfu
              YangChief
              Executive Officer


Date: May
               15, 2006
            By:
            /s/ Zedong
              XuZedong
              XuChief
              Financial Officer










24




**EXHIBIT
      INDEX**


(a)  Exhibits:







**Exhibit
                Number**
            **Description**
            **Method
                of Filing**3.1
            Articles
                of Incorporation of the Company
            Filed
                as Exhibit 3.1 to the registration statement on Form SB-2 filed with
                the
                Commission on October 10, 2003 and incorporated herein by
                reference.3.2
            Amended
                and Restated Bylaws of the Company
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on July 6, 2005 and incorporated herein by
                reference.21.1
            List
                of subsidiaries
            Filed
                herewith as Exhibit 21.131.1
            Certification
                by the Chief Executive Officer pursuant to
                Rule 13a-14(a) or 15d-14(a)
            Filed
                herewith as Exhibit 31.131.2
            Certification
                by the Chief Financial Officer pursuant to
                Rule 13a-14(a) or 15d-14(a)
            Filed
                herewith as Exhibit 31.232.1
            Certification
                of the Chief Executive Officer and the
                Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002
            Filed
                herewith as Exhibit 32.199.1
            Press
                Release dated May 15,
                2006
            Filed herewith
                as Exhibit 99.1







(b)  Reports
      on Form 8-K during the quarter ended March 31, 2006:




(i)
      Form
      8-K filed on April 3, 2006 disclosing the Company’s financial results for the
      year ended December 31, 2005 and certain other information.




(ii)
      Form
      8-K filed on February 8, 2006 disclosing the Company’s preliminary financial
      results for the year ended December 31, 2005.






25