**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**Form
      10-Q**









x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      period ended June 30, 2008




o
            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 in its charter)




**Nevada**
            **98-0403396**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                Number)







**No. 9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu**


**Harbin
      Kai Fa Qu, Harbin, People’s Republic of China 150060**


(Address
      and telephone number of principal executive offices)




**Telephone:
      86-451-86116757**


(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
o




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





Large
                accelerated filero
            Accelerated
                filerx
            Non-accelerated
                filero





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


YesoNox





**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 x No o




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of June 30, 2008: 21,870,456 shares of common stock, par value $0.00001
      per
      share.











**TABLE
      OF CONTENTS**




**Page****Part
                I. Financial Information**Item
                1. Financial Statements
            
            1Consolidated
                Balance Sheets
              As
                of June 30, 2008 (Unaudited) and December 31, 2007
            
            1Consolidated
                Statements of Income and Other Comprehensive Income
                (Unaudited)
              For
                the Three Months and Six Months Ended June 30, 2008 and
                2007
            
            2Consolidated
                Statements of Stockholders’ Equity (Unaudited)
            
            3Consolidated
                Statements of Cash Flows (Unaudited)
              For
                the Six Months Ended June 30, 2008 and 2007
            
            4Notes
                to the Consolidated Financial Statements (Unaudited)
            
            5Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            34Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            39Item
                4. Controls and Procedures
            
            39**Part
                II. Other Information**Item
                1. Legal Proceedings.
            
            40Item
                1A. Risk Factors.
            
            40Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.
            
            45Item
                3. Defaults upon Senior Securities.
            
            45Item
                4. Submission of Matters to a Vote of Securities Holders.
            
            45Item
                5. Other Information.
            
            45Item
                6. Exhibits.
            
            45Signatures
            
            50Index
                to Exhibits
            
            50








**PART
      I. FINANCIAL INFORMATION**




**Item
      1. Financial Statements (Unaudited)**




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      JUNE 30, 2008 AND DECEMBER 31, 2007





June
                  30,
              
              December
                  31,2008
              
              2007UNAUDITEDA
                  S S E T SCURRENT
                  ASSETS:Cash
                  and Cash equivalents
              
              $
              87,775,039
              
              $
              45,533,893Accounts
                  receivable, net of allowance for doubtful accounts of $123,699
                  and
                  $116,238 as of June 30, 2008 and December 31, 2007,
                  respectively
              
              
              26,151,560
              
              
              23,216,543Inventories
              
              
              2,201,708
              
              
              2,570,929Other
                  receivables
              
              
              140,023
              
              
              326,639Advances
                  on inventory purchases
              
              
              3,660,168
              
              
              1,772,204Total
                  current assets
              
              
              119,928,498
              
              
              73,420,208PLANT
                  AND EQUIPMENT, net
              
              
              32,252,654
              
              
              23,858,035OTHER
                  ASSETS:Debt
                  issue costs, net of amortization
              
              
              1,862,770
              
              
              2,214,717Advances
                  on equipment purchases
              
              
              36,907,824
              
              
              24,328,386Advances
                  on intangible assets
              
              
              1,473,590
              
              
              1,384,710Deposits
                  on acquisition
              
              
              729,500
              
              
              -Intangible
                  assets, net of accumulated amortization
              
              
              5,772,903
              
              
              5,899,989Other
                  assets
              
              
              424,870
              
              
              397,263Cross
                  currency hedge receivable
              
              
              192,731
              
              
              145,945Deposit
                  in derivative hedge
              
              
              1,000,000
              
              
              1,000,000Total
                  other assets
              
              
              48,364,188
              
              
              35,371,010Total
                  assets
              
              $
              200,545,340
              
              $
              132,649,253L
                  I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T
                  YCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              163,182
              
              $
              263,314Other
                  payables & Accrued Liabilities
              
              
              198,880
              
              
              1,463,218Other
                  payables - related party
              
              
              -
              
              
              45,491Customer
                  deposits
              
              
              306,925
              
              
              333,253Taxes
                  payable
              
              
              2,020,409
              
              
              839,299Interest
                  payable
              
              
              1,041,769
              
              
              1,122,000Total
                  current liabilities
              
              
              3,731,165
              
              
              4,066,575NOTES
                  PAYABLE, net of debt discount $14,575,398 and $16,878,269 as of
                  June 30,
                  2008 and December 31, 2007, respectively
              
              
              33,424,602
              
              
              33,121,731FAIR
                  VALUE OF DERIVATIVE INSTRUMENT
              
              
              11,094,006
              
              
              10,844,372Total
                  liabilities
              
              
              48,249,773
              
              
              48,032,678COMMITMENTS
                  AND CONTINGENCIES
              
              
              -
              
              
              -SHAREHOLDERS'
                  EQUITY:Common
                  Stock, $0.00001 par value, 100,000,000 shares authorized, 21,870,456
                  and
                  18,143,156 shares issued and outstanding as of June 30, 2008 and
                  December
                  31, 2007, respectively
              
              
              219
              
              
              181Paid-in-capital
              
              
              92,959,310
              
              
              44,970,589Retained
                  earnings
              
              
              41,815,734
              
              
              32,281,312Statutory
                  reserves
              
              
              11,064,220
              
              
              9,014,462Accumulated
                  other comprehensive loss
              
              
              6,456,084
              
              
              (1,649,969
              )Total
                  shareholders' equity
              
              
              152,295,567
              
              
              84,616,575Total
                  liabilities and shareholders' equity
              
              $
              200,545,340
              
              $
              132,649,253





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




1




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES


CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THE
        THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 
 (UNAUDITED)
 
 FOR
                  THE THREE MONTHS
              
              FOR
                  THE SIX MONTHSENDED
                  JUNE 30,
              
              ENDED
                  JUNE 30,2008
              
              2007
              
              2008
              
              2007REVENUES
              
              $
              23,959,073
              
              $
              13,989,693
              
              $
              46,417,258
              
              $
              27,615,907COST
                  OF SALES
              
              
              12,502,939
              
              
              6,769,323
              
              
              24,201,647
              
              
              13,537,609GROSS
                  PROFIT
              
              
              11,456,134
              
              
              7,220,370
              
              
              22,215,611
              
              
              14,078,298RESEARCH
                  AND DEVELOPMENT EXPENSE
              
              
              186,676
              
              
              235,519
              
              
              284,371
              
              
              453,359SELLING,
                  GENERAL AND ADMINISTRATIVE EXPENSES
              
              
              3,044,821
              
              
              1,445,858
              
              
              5,070,780
              
              
              2,960,321INCOME
                  FROM OPERATIONS
              
              
              8,224,637
              
              
              5,538,993
              
              
              16,860,460
              
              
              10,664,618OTHER
                  EXPENSE (INCOME), NETOther
                  income, net
              
              
              (24,824
              )
              
              (6,854
              )
              
              (29,611
              )
              
              (9,310
              )Non-operating
                  income, net
              
              
              (231,555
              )
              
              (757,087
              )
              
              (217,578
              )
              
              (763,408
              )Interest
                  expense, net
              
              
              1,194,731
              
              
              1,746,778
              
              
              3,477,511
              
              
              3,477,117Total
                  other expense, net
              
              
              938,352
              
              
              982,837
              
              
              3,230,322
              
              
              2,704,399INCOME
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              7,286,285
              
              
              4,556,156
              
              
              13,630,138
              
              
              7,960,219PROVISION
                  FOR INCOME TAXES
              
              
              1,055,342
              
              
              -
              
              
              2,045,959
              
              
              -NET
                  INCOME
              
              
              6,230,943
              
              
              4,556,156
              
              
              11,584,179
              
              
              7,960,219OTHER
                  COMPREHENSIVE INCOME (LOSS)Foreign
                  currency translation adjustment
              
              
              3,047,862
              
              
              1,638,750
              
              
              8,355,687
              
              
              2,343,418Change
                  in fair value of derivative instrument
              
              
              4,244,252
              
              
              (3,945,951
              )
              
              (249,634
              )
              
              (3,945,951
              )COMPREHENSIVE
                  INCOME
              
              $
              13,523,057
              
              $
              2,248,955
              
              $
              19,690,232
              
              $
              6,357,686EARNINGS
                  PER SHAREBasicWeighted
                  average number of shares
              
              
              18,639,687
              
              
              16,600,562
              
              
              18,424,832
              
              
              16,600,507Earning
                  per share
              
              $
              0.33
              
              $
              0.27
              
              $
              0.63
              
              $
              0.48DilutedWeighted
                  average number of shares
              
              
              20,023,990
              
              
              18,740,981
              
              
              19,998,192
              
              
              18,739,186Earning
                  per share
              
              $
              0.31
              
              $
              0.24
              
              $
              0.58
              
              $
              0.42
 
 The
        accompanying notes are an integral part of these consolidated
        statements.
  2




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 
 Common
                  stock
              
              Additional
              
              Retained
                  earnings
              
              Accumulated
                  otherPar
              
              paid-in
              
              Unrestricted
              
              Statutory
              
              comprehensiveShares
              
              value
              
              capital
              
              earnings
              
              reserves
              
              income
                  (loss)
              
              TotalBALANCE,
                  December 31, 2006
              
              
              16,600,451
              
              $
              166
              
              $
              12,252,064
              
              $
              26,222,408
              
              $
              4,523,715
              
              $
              2,031,891
              
              $
              45,030,244Reclassification
                  of warrant liabilities to equity
              
              
              
              
              
              
              
              
              22,921,113
              
              
              (6,353,033
              )
              
              
              
              
              
              
              
              16,568,080Exercise
                  of warrants
              
              
              2,500
              
              
              
              
              
              8,750
              
              
              
              
              
              
              
              
              
              
              
              8,750Stock
                  based compensation
              
              
              
              
              
              
              
              
              492,916
              
              
              
              
              
              
              
              
              
              
              
              492,916Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              7,960,219
              
              
              
              
              
              
              
              
              7,960,219Foreign
                  currency translation gain
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,343,418
              
              
              2,343,418Net
                  change related to cash flow hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,945,951
              )
              
              (3,945,951
              )BALANCE,
                  June 30, 2007 (Unaudited)
              
              
              16,602,951
              
              
              166
              
              
              35,674,843
              
              
              27,829,594
              
              
              4,523,715
              
              
              429,358
              
              
              68,457,676Exercise
                  of stock warrants at $3.50
              
              
              152,698
              
              
              2
              
              
              534,441
              
              
              
              
              
              
              
              
              
              
              
              534,443Exercise
                  of stock warrants at $7.80
              
              
              150,000
              
              
              1
              
              
              1,169,999
              
              
              
              
              
              
              
              
              
              
              
              1,170,000Stock
                  based compensation
              
              
              
              
              
              
              
              
              892,207
              
              
              
              
              
              
              
              
              
              
              
              892,207Stock
                  issued in acquisition
              
              
              473,354
              
              
              5
              
              
              6,499,995
              
              
              
              
              
              
              
              
              
              
              
              6,500,000Cashless
                  exercised of warrants / options
              
              
              764,153
              
              
              7
              
              
              (7
              )
              
              
              
              
              
              
              
              
              
              
              -Capital
                  contribution
              
              
              
              
              
              
              
              
              199,111
              
              
              
              
              
              
              
              
              
              
              
              199,111Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              8,942,465
              
              
              
              
              
              
              
              
              8,942,465Adjustment
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              (4,490,747
              )
              
              4,490,747
              
              
              
              
              
              -Foreign
                  currency translation gain
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,819,094
              
              
              4,819,094Net
                  change related to cash flow hedge
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,898,421
              )
              
              (6,898,421
              )BALANCE,
                  December 31, 2007
              
              
              18,143,156
              
              
              182
              
              
              44,970,588
              
              
              32,281,312
              
              
              9,014,462
              
              
              (1,649,969
              )
              
              84,616,575Exercise
                  of stock warrants at $3.50
              
              
              202,300
              
              
              2
              
              
              708,049
              
              
              
              
              
              
              
              
              
              
              
              708,051Exercise
                  of stock options at $3.10
              
              
              25,000
              
              
              0.25
              
              
              77,500
              
              
              
              
              
              
              
              
              
              
              
              77,500Stock
                  issuance for cash at $14.13
              
              
              3,500,000
              
              
              35
              
              
              46,290,708
              
              
              
              
              
              
              
              
              
              
              
              46,290,743Amortization
                  of stock compensation
              
              
              
              
              
              
              
              
              912,465
              
              
              
              
              
              
              
              
              
              
              
              912,465Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              11,584,179
              
              
              
              
              
              
              
              
              11,584,179Adjustment
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              (2,049,758
              )
              
              2,049,758
              
              
              
              
              
              -Foreign
                  currency translation gain
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,355,687
              
              
              8,355,687Net
                  change related to cash flow hedge
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (249,634
              )
              
              (249,634
              )BALANCE,
                  June 30, 2008 (Unaudited)
              
              
              21,870,456
              
              $
              219
              
              $
              92,959,310
              
              $
              41,815,734
              
              $
              11,064,220
              
              $
              6,456,084
              
              $
              152,295,567
  The
        accompanying notes are an integral part of these consolidated
        statements.
  3
  HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  2008
              
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              11,584,179
              
              $
              7,960,219Adjustments
                  to reconcile net income to cash provided by (used in) operating
                  activities:Depreciation
              
              
              433,706
              
              
              209,399Amortization
                  of intangible assets
              
              
              505,517
              
              
              47,304Amortization
                  of debt issuance costs
              
              
              351,948
              
              
              246,218Amortization
                  of debt discount
              
              
              2,302,871
              
              
              2,266,066Gain
                  on derivative instrument
              
              
              (192,731
              )
              
              (297,637
              )Stock
                  based compensation
              
              
              912,465
              
              
              492,916Change
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              (1,413,683
              )
              
              (1,473,337
              )Inventories
              
              
              518,092
              
              
              (782,505
              )Other
                  receivables
              
              
              199,856
              
              
              (108,294
              )Other
                  receivables - related parties
              
              
              -
              
              
              45,528Advances
                  on inventory purchases
              
              
              (1,730,440
              )
              
              (1,650,174
              )Other
                  assets
              
              
              (589
              )
              
              (9,914
              )Accounts
                  payable
              
              
              (112,265
              )
              
              (74,302
              )Other
                  payables & Accrued Liabilities
              
              
              (1,281,544
              )
              
              88,634Other
                  payables - Related Party
              
              
              (47,064
              )
              
              -Customer
                  deposits
              
              
              (46,390
              )
              
              15,395Taxes
                  payable
              
              
              1,096,594
              
              
              (69,427
              )Interest
                  payable
              
              
              (80,231
              )
              
              -Net
                  cash provided by operating activities
              
              
              13,000,291
              
              
              6,906,089CASH
                  FLOWS FROM INVESTING ACTIVITIES:Decrease
                  of advances on intangible assets
              
              
              -
              
              
              505,709Increase
                  of advances on equipment purchases
              
              
              (10,716,226
              )
              
              (11,741,760
              )Additions of
                  intangible assets
              
              
              (707,875
              )
              
              (198,998
              )Additions
                  to plant and equipment
              
              
              (7,114,655
              )
              
              (861,752
              )Deposit
                  on acquisition
              
              
              (698,850
              )
              
              -Net
                  cash used in investing activities
              
              
              (19,237,606
              )
              
              (12,296,801
              )CASH
                  FLOWS FINANCING ACTIVITIES:Net
                  proceeds from stock issuance 3.5 million shares
              
              
              46,290,743
              
              
              -Proceeds
                  received from conversion of warrants and options
              
              
              785,551
              
              
              8,750Deposit
                  to secure investment in cross currency hedge
              
              
              -
              
              
              (1,000,000
              )Proceeds
                  from cross currency hedge
              
              
              145,945
              
              
              297,637Repayment
                  of notes payable
              
              
              (2,000,000
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              45,222,239
              
              
              (693,613
              )EFFECTS
                  OF EXCHANGE RATE CHANGE IN CASH
              
              
              3,256,222
              
              
              1,470,999INCREASE
                  (DECREASE) IN CASH
              
              
              42,241,146
              
              
              (4,613,326
              )Cash
                  and Cash equivalents, beginning of period
              
              
              45,533,893
              
              
              67,313,919Cash
                  and Cash equivalents, end of period
              
              $
              87,775,039
              
              $
              62,700,593
 
 The
        accompanying notes are an integral part of these consolidated
        statements.
  4




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS


JUNE
      30,
      2008


(UNAUDITED)


**Note
      1 – Organization and description of business**





Harbin
      Electric, Inc, (the “Company”), is a Nevada corporation incorporated on July 9,
      2003. The Company through its indirect wholly-owned subsidiary, Harbin Tech
      Full
      Electric Co., Ltd. (“HTFE”), develops, engineers, manufactures and sells a wide
      array of customized linear motors, controller automation systems, automobile
      specialty micro-motors, and other special motors.





On
      April
      9, 2007, the Company entered into an Agreement with Shelton Technology, LLC
      (“Shelton”), Shaotang Chen (“Dr Chen”) and Xiaogang Luo (“Dr Luo”) whereby the
      Company and Shelton agreed to work together through the Company’s newly formed,
      wholly-owned subsidiary, Advanced Automation Group, LLC (“AAG”) to design,
      develop and manufacture custom industrial automation controllers. The Company
      is
      required to contribute $3,000,000 to AAG in 3 installments: $1.2 million was
      paid on April 16, 2007, $800,000 was paid on July 16, 2008 and $1,000,000 is
      due
      by March 31, 2009. Shelton
      contributed an exclusive worldwide royalty-free license for motorized automation
      technology. Shelton is entitled to receive 49% of any profits earned by AAG
      through the initial term of the Agreement. The initial term begins April 9,
      2007
      and terminates August 31, 2008.





On
      June
      16, 2007, the Company through HTFE entered into an asset purchase agreement
      with
      Harbin Taifu Auto Electric Co., Ltd., a company that was owned 98% by the
      Company’s Chairman and Chief Executive Officer and 2% by other Company
      management. The aggregate purchase totaled $10,500,000 consisting of $4,000,000
      in cash and $6,500,000 in newly issued Company common stock or 473,354 shares,
      based on the average price for the immediately preceding fifteen consecutive
      trading days of $13.73. All assets will be used to produce electric motors
      with
      technical support and certified patents. An appraisal report dated July 16,
      2007
      assessed the fair market value of the acquired assets at RMB 79,550,756,
      approximately $10.5 million. The Company recorded the asset acquisition at
      fair
      value; none of the purchase price was allocated to goodwill.





In
      December 2006, the Company formed Shanghai Tech Full Electric (Shanghai Tech
      Full) a wholly-owned subsidiary, to develop and manufacture automobile specialty
      micro-motors and their components and accessories. The Company invested
      approximately $44.2 million on the plant through June 30, 2008.





On
      July
      14, 2008, the
      Company through HTFE completed its previously announced acquisition
      of Weihai
      Hengda Electric Motor (Group) Co. Ltd, a PRC corporation (“Hengda”), for RMB 375
      million (approximately $54.7million) payable in cash. The purchase price was
      determined in accordance with the guidelines agreed by all. See Note 19 -
      Subsequent events. To fund the acquisition, the Company issued 3,500,000 common
      stocks at a price of $14.13 per share through a private placement to raise
      $49,455,000 on June 24, 2008. See Note 15 - Shareholders’ equity.




5


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)
  **Note
        2 – Accounting policies**





Use
      of
      estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles 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.
      For
      example, the Company estimates the fair value of options using subjective
      assumptions including estimated length of time employees will retain their
      options before exercising them, forfeitures, and expected volatility of
      Company’s stock price over the expected term. Changes in these assumptions
      materially affect the estimated fair value and the resulting expense. Actual
      results could differ from management’s estimates.





Management
      has included all normal recurring adjustments considered necessary to give
      a
      fair presentation of operating results for the periods presented. Interim
      results are not necessarily indicative of results for a full year. The
      information included in this Form 10-Q should be read in conjunction with
      information included in the 2007 annual report filed on Form 10-K.





Basis
      of presentation





The
      consolidated financial statements of Harbin Electric Inc. reflect the activities
      of the following subsidiaries:





Place
                incorporated
            
            Ownership
                percentageAdvanced
                Electric Motors, Inc
            
            Delaware,
                USA
            
            100%Harbin
                Tech Full Electric Co., Ltd
            
            Harbin,
                China
            
            100%Advanced
                Automation Group, LLC
            
            Delaware,
                USA
            
            100%Shanghai
                Tech Full Electric Co., Ltd
            
            Shanghai,
                China
            
            100%





T he
      accompanying financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America. All
      material intercompany transactions and balances have been eliminated in the
      consolidation.





Concentration
      of risks





The
      Company considers all highly liquid investments with original maturities of
      six
      months or less at the time of purchase to be cash equivalents, for cash flow
      statement purposes. Cash includes cash on hand and demand deposits in accounts
      maintained with state owned banks within the People’s Republic of China (“PRC”)
      and the United States. Certain f inancial
      instruments, which subject the Company to concentration of credit risk, consist
      of cash. The Company maintains balances at financial institutions which, from
      time to time, may exceed Federal Deposit Insurance Corporation insured limits
      for the banks located in the Unites States. Balances at financial institutions
      or state owned banks within the PRC are not covered by insurance. As of June
      30,
      2008 and December 31, 2007, the Company had deposits in excess of federally
      insured limits totaling $87,496,362 and $45,228,035, respectively. The Company
      has not experienced any losses in such accounts and believes it is not exposed
      to any significant risks on its cash in bank accounts.




6




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


Five
      major customers accounted for approximately 74% of the net revenue for the
      six
      months ended June 30, 2008, with each customer individually accounting for
      23%,
      20%, 15%, 9%, and 7%, respectively. At June 30, 2008, the total receivable
      balance due from these customers was $23,600,431, representing 90% of total
      accounts receivable. Five major customers accounted for 86% of the net revenue
      for the six months ended June 30, 2007, with each customer individually
      accounted for 27%, 23%, 19%, 12% and 5%, respectively. At December 31, 2007,
      the
      total receivable balance due from these customers was $15,801,713, representing
      68% of total accounts receivable.





Five
      major vendors provided approximately 78% of the Company’s purchases of raw
      materials for the period ended June 30, 2008, with each vendor individually
      accounting for 28%, 21%, 12%, 10% and 7%, respectively. The Company’s accounts
      payable to these vendors was $0 at June 30, 2008. Five vendors provided 82%
      of
      the Company’s purchase of raw materials for the six months ended June 30, 2007,
      with each vendor individually accounting for 31%, 20%, 16%, 11% and 5%,
      respectively. The Company’s accounts payable to these vendors was $0 at December
      31, 2007.





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.





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 allowance for doubtful accounts
      amounted to $123,699 and $116,238 as
      of June
      30,
      2008 and December 31, 2007, respectively.




7


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


The
      following table consists of allowance for doubtful accounts at June 30, 2008
      and
      December 31, 2007.





Allowance
                for doubtful accounts at December 31, 2007
            
            $
            116,238Effect
                of foreign currency translation gain
            
            
            7,461Allowance
                for doubtful accounts at June 30, 2008
            
            $
            123,699





Inventories





Inventory
      is composed of raw material for manufacturing electrical motors, work in
      process, and finished goods. Inventory is valued at the lower of cost or market
      value using weighted average method. Management compares the cost of inventory
      with the market value and an allowance is made for writing down the inventory
      to
      its market value, if lower than cost.





Plant
      and equipment





Plant
      and
      equipment are stated at cost. Expenditures for maintenance and repairs are
      charged to earnings as incurred; additions, renewals and betterments are
      capitalized. When assets are retired or otherwise disposed of, the related
      cost
      and accumulated depreciation are removed from the respective accounts, and
      any
      gain or loss is included in operations. Depreciation of plant and equipment
      is
      provided using the straight-line method for substantially all assets with
      estimated lives as follows:





Estimated Useful LifeBuildings
            
            
            20
                yearsVehicle
            
            
            5
                yearsOffice
                equipment
            
            
            5
                yearsProduction
                equipment
            
            
            10
                years





Construction
      in progress represents the costs incurred in connection with the construction
      of
      buildings or new additions to the Company’s plant facilities. No depreciation is
      provided for construction in progress until such time as the assets are
      completed and placed into service.





The
      Company periodically evaluates the carrying value of long-lived assets in
      accordance with SFAS 144. When estimated cash flows generated by those assets
      are less than the carrying amounts of the asset, the Company recognizes an
      impairment loss. Based on its review, the Company believes that, as of June
      30,
      2008 and December 31, 2007, there were no impairments of its long-lived
      assets.




8


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)
  Stock-based
        compensation





The
      Company records stock based compensation expense pursuant to FAS 123R. The
      Company estimates the fair value of the award using the Black-Scholes Option
      Pricing Model. Under FAS 123R, the Company’s expected volatility assumption is
      based on the historical volatility of 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 is recognized based on awards expected to vest, and there
      were no estimated forfeitures as the Company has a short history of issuing
      options. FAS 123R requires forfeitures to be estimated at the time of grant
      and
      revised in subsequent periods, if necessary, if actual forfeitures differ from
      those estimates.





Revenue
      recognition





The
      Company's revenue recognition policies are in compliance with Staff Accounting
      Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectability is reasonably assured. For products that are required to
      be
      examined by customers, sales revenue is recognized after the customer
      examination is passed. Payments received before all of the relevant criteria
      for
      revenue recognition are recorded as customer deposits.





In
      addition, revenue recognition could be negatively impacted by returns. However,
      the Company makes custom products which are customer specific, and no returns
      are allowed. The Company warrants the product for repair only in the event
      of
      defects for two years from the date of shipment. Historically, the Company
      has
      not experienced significant defects, and replacements for defects have not
      been
      material. The Company charges such costs to cost of goods sold. For the six
      months ended June 30, 2008 and 2007 and three months ended June 30, 2008 and
      2007, such returns and allowances amounted to $0. Should returns increase in
      the
      future it would be necessary to adjust the estimates, in which case recognition
      of revenues could be delayed.





Shipping
      and handling costs are included in selling, general and administrative costs
      and
      totaled $433,887 and $218,175 for the six months ended June 30, 2008 and 2007
      and $203,461 and $122,357 for the three months ended June 30, 2008 and
      2007.




9


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)
 Income
          taxes
 
 The
          Company utilizes Statement of Financial Accounting Standards (FAS) 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. The
          Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
          Taxes”, as of January 1, 2007. A tax position is recognized as a benefit only
          if
          it is “more likely than not” that the tax position would be sustained in a tax
          examination, with a tax examination being presumed to occur. The amount
          recognized is the largest amount of tax benefit that is greater than 50%
          likely
          of being realized on examination. For tax positions not meeting the “more likely
          than not” test, no tax benefit is recorded. The adoption had no affect on the
          Company’s financial statements.


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.
      There are no deferred tax amounts at June 30, 2008 and December 31, 2007,
      respectively.





The
      charge for taxation is based on the results for the quarter as adjusted for
      items, which are non-assessable or disallowed. It is calculated using tax rates
      that have been enacted or substantively enacted by the balance sheet
      date.





The
      new
      Chinese Enterprise Income Tax (“EIT”) law was effective on January 1, 2008.
      Under the new Income Tax Laws of PRC, a company is generally subject to income
      tax at an effective rate of 25% on income reported in the statutory financial
      statements after appropriated tax adjustments. The Company is located in a
      specially designated region where the Company is subject to a 10% EIT rate.





The
      previous Income Tax Laws of PRC which was abolished on December 31, 2007 allowed
      foreign enterprises a two-year income tax exemption and a 50% income tax
      reduction for the following three years. The income tax rate after 50% reduction
      should not be lower than 10%. The new Chinese EIT law allows companies
      established before March 16, 2007 to continue to enjoy tax holiday treatment
      approved by local government for a grace period of the next 5 years or until
      the
      tax holiday term is completed, whichever is sooner. The Company was established
      before March 16, 2007 and thus entitled to tax holiday treatment.





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 exempt from income tax from July 1, 2004 through December 31, 2007,
      and has been approved to have its tax rate reduced by 50%, which is 10%, from
      January 1, 2008 to December 31, 2010.




10


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


The
      following table reconciles the U.S. statutory rates to the Company’s effective
      tax rate for the years ended June 30, 2008 and 2007:





June
                30,
            
            June
                30,2008
            
            2007U.S.
                Statutory rates
            
            
            34
            %
            
            34
            %Foreign
                income not recognized in USA
            
            
            (34
            )
            
            (34
            )China
                income taxes
            
            
            25
            
            
            33Tax
                exemption
            
            
            (15
            )
            
            (33
            )Total
                provision for income taxes
            
            
            10
            %
            
            -
            %





The
      estimated tax savings for the six months ended June 30, 2008 and 2007 amounted
      to $3,074,637 and $4,608,753. The net effect on earnings per share had the
      income tax been applied would decrease earnings per share from $0.63 to $0.46
      in
      2008 and $0.48 to $0.18 in 2007. The estimated tax savings for the three months
      ended June 30, 2008 and 2007 amounted to $1,588,711 and $2,509,101. The net
      effect on earnings per share had the income tax been applied would decrease
      earnings per share from $0.33 to $0.23 in 2008 and $0.27 to $0.12 in
      2007.





Harbin
      Electric, Inc. and Advanced Electric Motors, Inc. were incorporated in the
      United States and have incurred net operating losses for income tax purposes
      for
      the six months ended June 30, 2008. The net operating loss carry forwards for
      United States income taxes amounted to $16,985,762 which may be available to
      reduce future years’ taxable income. These carry forwards will expire, if not
      utilize, through 2024 and 2027. Management believes that the realization of
      the
      benefits from these losses appears uncertain due to the Company’s limited
      operating history and continuing losses for United States income tax purposes.
      Accordingly, the Company has provided a 100% valuation allowance on the deferred
      tax asset benefit to reduce the asset to zero. The net change in the valuation
      allowance for the six months ended June 30, 2008 was an increase of approximate
      $5,775,000. Management will review this valuation allowance periodically and
      make adjustments accordingly.





Value
      added tax





Sales
      revenue represents the invoiced value of goods, net of a value-added tax
      (“VAT”). All of the Company’s products that are sold in the PRC are subject to a
      Chinese value-added tax at a rate of 17% of the gross sales price. This VAT
      may
      be offset by VAT paid by the Company on raw materials and other materials
      included in the cost of producing their finished product. The Company recorded
      VAT Payable and VAT receivable net of payments in the financial statements.
      The
      VAT tax return is filed offsetting the payables against the
      receivables.




11




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


VAT
      on
      sales and VAT on purchases amounted to $6,866,810 and $3,719,861 for the six
      months ended June 30, 2008 and $4,176,354 and $2,246,373 for the same period
      of
      2007, respectively. VAT on sales and VAT on purchases amounted to $3,653,736
      and
      $1,919,481 for the three months ended June 30, 2008 and $2,099,213 and
      $1,138,210 for the same period of 2007, respectively. Sales and purchases are
      recorded net of VAT collected and paid as the Company acts as an agent for
      the
      government. VAT taxes are not impacted by the income tax holiday.





Taxes
      payable consisted of the following:





June 30, 2008
            
            December 31, 2007VAT
                tax payable
            
            $
            856,060
            
            $
            781,372Individual
                income tax payable
            
            
            3,083
            
            
            2,049Corporation
                income tax payable
            
            
            1,063,014
            
            
            -Others
                misc. tax payable
            
            
            55,557
            
            
            55,878Total
            
            $
            1,977,714
            
            $
            839,299





Advertising
      costs


The
      Company expenses the cost of advertising as incurred in selling, general and
      administrative costs. The Company incurred $5,929 and $0 for the six months
      ended June 30, 2008 and 2007, $0 for the three months ended June 30, 2008 and
      2007.





Research
      and development costs





Research
      and development costs are expensed as incurred. The costs of material and
      equipment that are acquired or constructed for research and development
      activities and have alternative future uses are classified as plant and
      equipment and depreciated over their estimated useful lives.





Fair
      value of financial instruments





On
      January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
      Measurements, defines fair value, establishes a three-level valuation hierarchy
      for disclosures of fair value measurement and enhances disclosures requirements
      for fair value measures. The carrying amounts reported in the balance sheets
      for
      current assets and current liabilities qualify as financial instruments are
      a
      reasonable estimate of fair value because of the short period of time between
      the origination of such instruments and their expected realization and their
      current market rate of interest. The three levels are defined as
      follow:





•
Level
      1  inputs
      to
      the valuation methodology are quoted prices (unadjusted) for identical assets
      or
      liabilities in active markets.




12


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


•
Level
      2  inputs
      to
      the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the assets
      or
      liability, either directly or indirectly, for substantially the full term of
      the
      financial instruments.





•
Level
      3  inputs
      to
      the valuation methodology are unobservable and significant to the fair
      value.





The
      Company did not identify any assets and liabilities that are required to be
      presented on the balance sheet at fair value in accordance with SFAS No.
      157.





The
      Company analyzes all financial instruments with features of both liabilities
      and
      equity under SFAS 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company’s Own Stock.” As of June 30, 2008, the outstanding principal amounted to
      $33,424,602. As fixed prices are set for the principal payments and the attached
      warrants, the Company is in a position to be sure it had adequate cash flow
      for
      the future payment and conversion of the warrants. Therefore, no embedded
      derivatives and warrants are required to be recorded at fair value and
      marked-to-market at each reporting period. Since there is no quoted or
      observable market price for the fair value of similar notes, the Company then
      used the level 3 inputs for its valuation methodology, and used the Black
      Scholes Model to calculate the fair market value of the discount of the note.
      In
      addition, due to the notes are expiring in 2012 and the Company does not
      anticipate any nonperformance risk, the Company determined that the fair value
      of the notes approximated the carrying value.





As
      of
      June 30, 2008, the Company has an $11 million derivative instrument. Management
      obtains the fair value of the derivative instrument from a financial institution
      using Level 3 inputs since there is no observable market price.





Derivative
      instrument





The
      Company uses a cross currency hedge, a derivative financial instrument, to
      hedge
      the risk of rising interest rates on their variable interest rate debt. This
      type of derivative financial instrument is known as a cash flow hedge. The
      Company accounts for this interest rate swap in accordance with FAS 133,
“Accounting for Derivatives Instruments and Hedging Activity,” which requires
      the derivative to be carried on the balance sheet at fair value and to meet
      certain documentary and analytical requirements to qualify for hedge accounting
      treatment. The above derivative qualifies for hedge accounting under FAS 133
      and, accordingly, changes in the fair value is reported in accumulated other
      comprehensive income, net of related income tax effects. Amounts included in
      accumulated other comprehensive income are reclassified into earnings when
      the
      hedged transaction effects earnings.




13




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


At
      the
      inception of the transaction, the Company documents the relationship between
      hedging instruments and hedged items, as well as its risk management objective
      and the strategy for undertaking various hedge transactions. This process
      includes linking all derivatives designated to specific firm commitments of
      forecast transactions. The Company also documents its assessment, both at
      inception and on an ongoing basis, of whether the derivative financial
      instruments that are used in hedging transactions are highly effective in
      offsetting changes in fair values or cash flows of hedged items. Any portion
      deemed ineffective is recorded in earnings with the effective portion reflected
      in accumulated other comprehensive. Changes in the fair values of derivative
      instruments accounted for as cash flow hedges, to the extent they qualify for
      hedge accounting, are recorded in accumulated other comprehensive income. For
      the six months ended June 30, 2008 and 2007, $249,634 and $3,945,951 was
      recorded as a loss on the derivative instrument in other comprehensive income.
      For the three months ended June 30, 2008 and 2007, $4,244,252 gain and
      $3,945,951 loss was recorded on the derivative instrument in other comprehensive
      income. As of June 30, 2008 and December 31, 2007, the fair value of the
      derivative instrument totaled $11,094,006 and $10,844,372, respectively, and
      was
      recorded in other comprehensive loss.





Foreign
      currency transactions





The
      reporting currency of the Company is the US dollar. The functional currency
      of
      HTFE is the Chinese Renminbi. The financial statements of HTFE are translated
      to
      United States dollars using quarter-end exchange rates as to assets and
      liabilities and average exchange rates as to revenues, expenses and cash flows.
      Capital accounts are translated at their historical exchange rates when the
      capital transaction occurred. Translation adjustments resulting from this
      process are included in accumulated other comprehensive income in the statement
      of shareholders’ equity. Transaction gains and losses that arise from exchange
      rate fluctuations on transactions denominated in a currency other than the
      functional currency are included in the results of operations as
      incurred.





Translation
      adjustments resulting from this process amounted to $8,355,687 and $2,343,418
      for the six months ended June 30, 2008 and 2007, respectively. Translation
      adjustments resulting from this process amounted to $3,047,862 and $1,638,750
      for the three months ended June 30, 2008 and 2007, respectively. The balance
      sheet amounts with the exception of equity at June 30, 2008 were translated
      6.854 RMB to $1.00 USD as compared to 7.20 RMB at December 31, 2007. The equity
      accounts were stated at their historical rate. The average translation rates
      applied to the income and cash flow statement amounts for the six months ended
      June 30, 2008 and 2007 were 7.05 RMB and 7.73 RMB to $1.00 USD,
      respectively.




In
      accordance with FAS 95, "Statement of Cash Flows," cash flows from the Company's
      operations is calculated based upon the local currencies. As a result, amounts
      related to assets and liabilities reported on the statement of cash flows will
      not necessarily agree with changes in the corresponding balances on the balance
      sheet.




14




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


Change
      in accounting for registration rights penalties





On
      January 1, 2007, the Company adopted FASB Staff Position No. EITF 00-19-2,
      “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP
      EITF 00-19-2 requires contingent obligations under a registration payment
      arrangement to be recognized and measured in accordance with FAS 5,
“Accounting for Contingencies”. FAS 5 requires loss contingencies to be accrued
      and expensed if they are probable and reasonably estimable.





In
      connection with the convertible debt and warrants issued in October 2006, the
      Company filed a registration statement with the Securities and Exchange
      Commission to register for resale the common shares underlying the convertible
      debt and warrants. Initially, pursuant to EITF 00-19, “Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settle in, a Company’s Own
      Stock,” the existence of contingent cash penalties in the Registration Rights
      Agreement triggered derivative accounting treatment.





As
      a
      result the Company recorded the warrants as a liability at their fair value
      on
      the date they were issued and then marked them to market each subsequent
      reporting period. Upon adoption of FSP EITF 00-19-2, any warrants originally
      classified as a liability under EITF 00-19 that would have been classified
      as
      equity without regard to the registration payment arrangement should be
      reclassified. The transition to the accounting treatment under FSP EITF 00-19-2
      is shown in the accompanying financial statements through 1) a cumulative-effect
      adjustment to the opening balance of retained earnings, as of January 1, 2007
      and 2) reclassifying the warrants to equity at their fair value on the date
      of
      grant. The adjustment totaled $6,353,033 and was equal to the change in fair
      value of the warrants between October 6, 2006, the date the warrants were
      issued, and December 31, 2006, the last reporting period. Additionally, the
      warrants were reclassified as equity at $22,921,113, their fair value on October
      6, 2006. The adoption of FSP EITF 00-19-2 did not have an impact on prior year
      financial statements.





Recent
      accounting pronouncements





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
      choose to measure many financial instruments and certain other items at fair
      value that are not currently required to be measured at fair value. The SFAS
      159
      became effective for us on January 1, 2008. The Company chose not to elect
      the
      option to measure the fair value of eligible financial assets and liabilities.




15




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
      ownership interests ** in
      subsidiaries held by parties other than the parent, the amount of consolidated
      net income attributable to the parent and to the noncontrolling interest,
      changes in a parent’s ownership interest and the valuation of retained
      non-controlling equity investments when a subsidiary is deconsolidated. The
      Statement also establishes reporting requirements that provide sufficient
      disclosures that clearly ** identify
      and distinguish between the interests of the parent and the interests of the
      non-controlling owners. SFAS 160 is effective for ** fiscal
      years beginning after December 15, 2008. The Company has not determined the
      effect that the application of SFAS 160 will ** have
      on
      its consolidated financial statements.





In
      December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
      to all transactions or other events in which an entity obtains control of one
      or
      more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
      consideration. This statement replaces FASB Statement No. 141 and applies to
      all
      business entities, including mutual entities that previously used the
      pooling-of-interests method of accounting for some business combinations. The
      Company believes that adoption of the FAS 141R will have a material effect
      on
      future acquisitions.





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.” This Statement identifies the sources of accounting
      principles and the framework for selecting the principles to be used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States (the GAAP hierarchy). This Statement will not have an impact
      on the Company’s financial statements.




In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
      this Statement is limited to financial guarantee insurance (and reinsurance)
      contracts, as described in this Statement, issued by enterprises included within
      the scope of Statement 60. Accordingly, this Statement does not apply to
      financial guarantee contracts issued by enterprises excluded from the scope
      of
      Statement 60 or to some insurance contracts that seem similar to financial
      guarantee insurance contracts issued by insurance enterprises (such as mortgage
      guaranty insurance or credit insurance on trade receivables). This Statement
      also does not apply to financial guarantee insurance contracts that are
      derivative instruments included within the scope of FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities.” This Statement
      will not have an impact on the Company’s financial statements.




16




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)
  In
          June
          2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
          an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
          No. 07-5”). This Issue is effective for financial statements issued for fiscal
          years beginning after December 15, 2008, and interim periods within those
          fiscal
          years. Early application is not permitted. Paragraph 11(a) of Statement
          of
          Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
          Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
          definition of a derivative but is both (a) indexed to the Company’s own
          stock and (b) classified in stockholders’ equity in the statement of
          financial position would not be considered a derivative financial instrument.
          EITF No.07-5 provides a new two-step model to be applied in determining
          whether
          a financial instrument or an embedded feature is indexed to an issuer’s own
          stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
          Management is currently evaluating the impact of adoption of EITF No. 07-5
          on
          the accounting for the convertible notes and related warrants transactions.


In
      June
      2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
      Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
      is to provide transition guidance for conforming changes made to EITF No. 98-5,
      “Accounting for Convertible Securities with Beneficial Conversion Features or
      Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
      150, “Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity”. This Issue is effective for financial statements issued
      for fiscal years ending after December 15, 2008. Early application is
      permitted. Management is currently evaluating the impact of adoption of
      EITF No. 07-5 on the accounting for the convertible notes and related warrants
      transactions.





Reclassifications **





Certain
      prior period amounts have been reclassified to conform to the current period
      presentation. These reclassifications have no effect on net income or cash
      flows.





**Note
      3 – Earnings per share**





The
      Company reports earnings per share in accordance with the provisions of FAS
      128,
“Earnings Per Share.” FAS No. 128 requires presentation of basic and diluted
      earnings per share in conjunction with the disclosure of the methodology used
      in
      computing such earnings per share. Basic earnings per share excludes dilution
      and is computed by dividing
      income available to common stockholders by the weighted average common shares
      outstanding during the period. Diluted earnings per share takes into account
      the
      potential dilution that could occur if securities or other contracts to issue
      common stock were exercised and converted into common stock. The
      following is a reconciliation of the basic and diluted earnings per share
      computations for period ended June 30, 2008 and 2007:





17


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)





2008
            
            2007For
                the six months ended June 30, 2008 and 2007Net
                income for basic and diluted earnings per share
            
            $
            11,584,179
            
            $
            7,960,219Weighted
                average shares used in basic computation
            
            
            18,424,832
            
            
            16,600,507Diluted
                effect of stock options and warrants
            
            
            1,573,360
            
            
            2,138,679Weighted
                average shares used in diluted computation
            
            
            19,998,192
            
            
            18,739,186Earnings
                per share:Basic
            
            $
            0.63
            
            $
            0.48Diluted
            
            $
            0.58
            
            $
            0.42For
                the three months ended June 30, 2008 and 2007Net
                income for basic and diluted earnings per share
            
            $
            6,230,943
            
            $
            4,556,156Weighted
                average shares used in basic computation
            
            
            18,639,687
            
            
            16,600,562Diluted
                effect of stock options and warrants
            
            
            1,384,303
            
            
            2,140,419Weighted
                average shares used in diluted computation
            
            
            20,023,990
            
            
            18,740,981Earnings
                per share:Basic
            
            $
            0.33
            
            $
            0.27Diluted
            
            $
            0.31
            
            $
            0.24





At
      June
      30, 2007 and June 30, 2008, all outstanding stock options and warrants have
      been
      included in the diluted earnings per share calculation.





**Note
      4 – Inventories**





Inventories
      consist of the following at June 30, 2008 and December 31, 2007:





June
                30, 2008
            
            December 31, 2007(unaudited)Raw
                and packing materials
            
            $
            1,251,009
            
            $
            925,085Work
                in process
            
            
            649,551
            
            
            792,903Finished
                goods
            
            
            301,148
            
            
            852,941Total
            
            $
            2,201,708
            
            $
            2,570,929




18


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


**Note
      5 – Plant and equipment**





Plant
      and
      equipment consist of the following at June 30, 2008 and December 31,
      2007:





June
                30, 2008
            
            December 31, 2007(unaudited)Buildings
            
            $
            6,032,671
            
            $
            5,668,808Office
                equipment
            
            
            437,723
            
            
            378,849Production
                equipment
            
            
            4,950,983
            
            
            4,333,797Vehicles
            
            
            523,129
            
            
            348,485Construction
                in progress
            
            
            22,293,438
            
            
            14,575,134Total
            
            
            34,237,944
            
            
            25,305,073Less:
                accumulated depreciation
            
            
            (1,985,290
            )
            
            (1,447,038
            )Property
                and equipment, net
            
            $
            32,252,654
            
            $
            23,858,035





Construction
      in progress represents labor costs, material, capitalized interest incurred
      in
      connection with the construction of new plant facility in Shanghai and the
      construction and installation of manufacturing equipment in Harbin manufacture
      plan. The management expects that the construction of the new plant will be
      completed by the end of 2008. No depreciation is provided for construction
      in
      progress until such time until the constructions are completed and are placed
      into service. Those assets will subject to the depreciation based upon the
      nature of the fixed assets.





Depreciation
      expense for the six months ended June 30, 2008 and 2007 amounted to $433,706
      and
      $209,399, respectively. Depreciation expense for the three months ended June
      30,
      2008 and 2007 amounted to $221,996 and $105,669, respectively.





As
      of
      June 30, 2008 and December 31, 2007, a total of $1,737,901 and $980,154 interest
      was capitalized into construction in progress, respectively.





**Note
      6 - Intangible assets**





Land
      use
      rights - all land in the People’s Republic of China is government owned.
      However, the government grants the user a “land use right” (the Right) to use
      the land. The Company acquired land use rights during 2005 for $344,804. The
      Company has the right to use the land for 50 years and amortizes the Right
      on a
      straight line basis over 50 years.





Patents –
      capitalized patent costs represent legal costs incurred to establish patents
      and
      the portion of the acquisition price paid attributed to patents upon the assets
      acquisition in July 16, 2007 as discussed further in Note 17. Capitalized patent
      costs are amortized on a straight method over the related patent terms from
      6 to
      10 years.




19


HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)


The
      Company evaluates intangible assets for impairment, at least annually 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 June 30, 2008, management believes
      there was no impairment.





Net
      intangible assets at June 30, 2008 and December 31,2007 were as
      follows:





June
                30, 2008
            
            December 31, 2007(unaudited)Land
                use rights
            
            $
            428,148
            
            $
            394,451Patents
            
            
            6,592,878
            
            
            6,202,854Less:
                accumulated amortization
            
            
            (1,248,123
            )
            
            (697,316
            )Intangible
                assets, net
            
            $
            5,772,903
            
            $
            5,899,989





Amortization
      expense for the six months ended June 30, 2008 and 2007 amounted to $505,517
      and
      $47,304, respectively. Amortization expense for the three months ended June
      30,
      2008 and 2007 amounted to $263,214 and $24,358, respectively.





**Note
      7 – Advances to suppliers**





The
      Company makes advances to certain vendors’ inventory purchases, construction
      projects and research and development expenses. The advances on inventory
      purchases were $3,660,168 and $1,772,204 as of June 30, 2008 and December
      31,2007 respectively. Additionally, the Company made advances on equipment
      purchases amounted to $36,907,824 and $24,328,386 as of June 30, 2008 and
      December 31, 2007, respectively.





**Note
      8 – Advance for intangible assets**





The
      advances for intangible assets consisted of land use right prepayment. As of
      June 30, 2008 and December 31, 2007, advance for intangible assets amounted
      to $
      1,473,590 and $1,384,710, respectively.





On
      September 8, 2006, HTFE entered into an agreement ("Land Use Agreement") with
      Shanghai Lingang Investment and Development Company Limited ("Shanghai Lingang")
      with respect to HTFE’s use of 40,800 square meters of State-owned land in the
      Shanghai Zhuqiao Airport Industrial Zone (the "Site").




20




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


The
      term
      of the land use agreement is 50 years and the aggregate amount HTFE shall pay
      to
      Shanghai Lingang is approximately $2.74 million ("Fee"), 55% or $1,384,710
      has
      been paid with the balance payable upon Shanghai Lingang's completion of certain
      regulatory applications on behalf of HTFE. The balance of the Fee is payable
      within seven days of receipt of a regulatory permit for work commencement.
      The
      Site will be used for industrial purposes. The Land Use Agreement requires
      HTFE
      to invest approximately $16.5 million in the site through December 2008. This
      investment amount includes fees, improvement costs, constructing a factory
      building and installing necessary equipment. HTFE shall register a Sino-foreign
      joint venture company at the location of Shanghai Lingang, with taxes payable
      at
      the same location. HTFE has agreed to compensate Shanghai Lingang for certain
      local taxes due to the local tax authority in connection with applicable tax
      generation requirements. As of June 30, 2008, the application of the land use
      lease is still in process.





**Note
      9 – Other assets**





Other
      assets as of June 30, 2008 and December 31, 2007 consist of the
      following:





June
                30, 2008
            
            December 31, 2007(unaudited)Research
                and development prepayment
            
            $
            405,194
            
            $
            380,754Deferred
                expenses
            
            
            19,676
            
            
            16,509Total
            
            $
            424,870
            
            $
            397,263




On
      August
      21, 2006, HTFE entered into a joint research and development agreement (the
      “R&D Agreement”) with the Institute of Electrical Engineering of the Chinese
      Academy of Sciences (“IEECAS”) to produce a train system to be tested at the
      Beijing Airport railway line in the People’s Republic of China (“PRC”) by the
      end of 2008. The Agreement provides that the term of the project shall commence
      on August 2006 and terminate in early 2009.





The
      R&D Agreement provides for a budget of approximately $3.65 million (RMB 25
      million), consisting of $2.19 million (RMB 15 million) to be invested by HTFE
      and the remainder to be invested by IEECAS. Of this amount, approximately $1.46
      million (RMB 10 million) has been invested to date by HTFE. The balance of
      approximately $0.73 million (RMB 5 million) will be invested prior to
      termination of the agreement at the end of 2008 as testing and evaluation
      occurs. The Company has started to amortize the R&D prepayment based on the
      progress of the project. A total of $1,053,806 has been amortized and netted
      with R&D prepayment to the amount of $405,194.




21




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


The
      research and development prepayment is being expensed based on the service
      incurred pursuant to SFAS 2 and EITF 07-3. A total of $0 and $316,303 has been
      expensed as research and development for the six months ended June 30, 2008
      and
      2007 ad $0 and $165,580 for three months ended June 30, 2008 and
      2007.





**Note
      10** **–
      Additional product sales information**





The
      Company has a single operating segment. The majority of the Company’s revenue
      was generated from local sales. Summarized
      financial information concerning the Company’s revenues based on geographic area for
      the
      six months and three months ended June 30, 2008 and 2007 are as
      follows:





2008
            
            2007For
                the six months ended June 30, 2008 and 2007China
            
            $
            39,521,395
            
            $
            24,500,947International
            
            
            6,895,863
            
            
            3,114,960Total
                sales
            
            
            46,417,258
            
            
            27,615,907Cost
                of sales - China
            
            
            20,336,133
            
            
            12,159,184Cost
                of sales - International
            
            
            3,865,514
            
            
            1,378,425Total
                cost of sales
            
            
            24,201,647
            
            
            13,537,609Gross
                profit
            
            $
            22,215,611
            
            $
            14,078,298For
                the three months ended June 30, 2008 and 2007China
            
            $
            20,867,836
            
            $
            12,282,841International
            
            
            3,091,237
            
            
            1,706,852Total
                sales
            
            
            23,959,073
            
            
            13,989,693Cost
                of sales - China
            
            
            10,530,775
            
            
            6,015,340Cost
                of sales - International
            
            
            1,972,164
            
            
            753,983Total
                cost of sales
            
            
            12,502,939
            
            
            6,769,323Gross
                profit
            
            $
            11,456,134
            
            $
            7,220,370





**Note
      11 – Financing**





On
      August
      29, 2006, the Company, Citadel Equity Fund Ltd. (“Citadel”) and Merrill Lynch
      International (“Merrill Lynch” and, together with Citadel, the “Investors”)
      entered into a financing term sheet dated as of August 2, 2006 (the “Term
      Sheet”). The Term Sheet relates to the proposed issuance of Senior Secured Notes
      in a purchase agreement (the “Purchase Agreement”) relating to the purchase and
      sale of (a) $50 million aggregate principal amount of the Company's Guaranteed
      Senior Secured Floating Rate Notes (collectively, the “Notes”) and (b) fully
      detachable warrants (the “Warrants”) to purchase an aggregate of 3,487,368
      shares of our common stock. The transaction closed on August 30,
      2006.




22




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS


JUNE
      30,
      2008


(UNAUDITED)




The
      Notes
      are governed by an indenture, dated August 30, 2006, entered into among the
      Company, as guarantor, and The Bank of New York, as trustee for the Notes (the
      “Indenture”). Of the $50 million aggregate principal amount of the Notes,
      Citadel subscribed to $38 million of the principal amount of the Notes, which
      mature on September 1, 2012 (the “2012 Notes”), and Merrill Lynch subscribed to
      $12 million of the principal amount of the Notes, which mature on September
      1,
      2010 (the “2010 Notes”). Pursuant to the indenture, our subsidiary AEM has
      agreed, and all of the Company’s other existing and future subsidiaries (other
      than subsidiaries domiciled in the People's Republic of China) are obligated,
      to
      guarantee, on a senior secured basis, to the Investors and to the trustee the
      payment and performance of our obligations.





The
      2010
      Notes bear interest, payable semi-annually in arrears commencing March 1, 2007,
      at a rate equal to LIBOR (approximately 2.61% and 4.6% at June 30, 2008 and
      December 31, 2007, respectively), plus 4.75%. The 2010 Notes bear an additional
      4% interest on any overdue principal and premium, if any, including interest
      on
      overdue interest, to the extent permitted by law.





The
      2010
      Notes are redeemable at the option of the Company, in whole but not in part,
      at
      any time after September 1, 2007, initially at 106% of the principal amount
      thereof and declining to 100% of the principal amount on September 1, 2009.
      The
      2010 Notes are subject to mandatory redemption semi-annually commencing March
      1,
      2008 in the principal amount $2,000,000 at price equal to 100% of such principal
      amount. The Company repaid $3,000,000 to The Bank of New York, the collateral
      agent on March 1, 2008. In April 2008, Merrill Lynch returned the $1,000,000
      to
      the Company.





The
      2012
      Notes bear interest, payable semi-annually in arrears commencing March 1, 2007,
      at a rate equal to LIBOR plus 3.35%. See below for discussion of swap agreement
      changing the variable interest to 7.2% fixed. The 2012 Notes bear an additional
      4% interest on any overdue principal and premium, if any, including interest
      on
      overdue interest, to the extent permitted by law. The 2012 Notes are redeemable
      at the option of the Company, in whole but not in part, at any time after
      September 1, 2007, initially at 106% of the principal amount thereof and
      declining to 100% of the principal amount on September 1, 2011. The 2012 Notes
      are subject to mandatory redemption semi-annually commencing September 1, 2009
      in the principal amount $2,400,000 on September 1, 2009, $3,800,000 on March
      1,
      2010, $9,900,000 on September 1, 2010 and March 1, 2011, and $4,000,000 on
      September 1, 2011, March 1, 2012 and September 1, 2012, in each instance at
      price equal to 100% of such principal amount. Holders of the 2012 Notes may
      require the Company to repurchase such Notes at 100% of the principal amount
      thereof at any time after September 1, 2011.





Upon
      a
      Change of Control (as defined in the indenture), holders of the Notes may
      require the Company to repurchase any or all such Notes at a price equal to
      102.5% of the principal amount thereof. The Company is required to offer to
      purchase Notes at a price equal to 100% of the principal amount thereof with
      the
      proceeds of certain asset sales. As security for the Notes, the Company and
      The
      Bank of New York, as collateral agent, entered into a share pledge agreement,
      dated August 30, 2006, to secure the Notes with all of the shares of AEM common
      stock held by the Company as collateral.




23


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


The
      Warrants are governed by a warrant agreement, dated August 30, 2006, between
      AEM
      and The Bank of New York, as warrant agent. The Warrants consist of (i) six-year
      warrants to purchase an aggregate of 2,192,308 shares of our common stock,
      at an
      exercise price of $7.80 per share (the “First Tranche 2012 Warrants”), (ii)
      six-year warrants to purchase an aggregate of 525,830 shares of our common
      stock
      at an exercise price of $10.84 per share (the “Second Tranche 2012 Warrants”)
      and (iii) six-year warrants to purchase an aggregate of 769,230 shares of our
      common stock at an exercise price of $7.80 per share (the “2009 Warrants”).





The
      First
      Tranche 2012 Warrants and the Second Tranche 2012 Warrants were issued to
      Citadel, and the 2009 Warrants were issued to Merrill. Each Warrant is
      exercisable at the option of the Warrant holder at any time through the maturity
      date of such Warrant.





The
      warrant agreements contain a cashless exercise provision. During the six month
      period ended June 30, 2008, no warrants had been converted to common stock
      through cashless transaction.





In
      addition, Mr. Tianfu Yang, the Company’s CEO, and Citadel entered into a voting
      agreement, dated August 30, 2006, pursuant to which Mr. Yang agreed to vote
      his
      shares of the capital stock of the Company to elect up to two members of the
      Company’s board of directors designated by Citadel. On
      March
      19, 2007, Citadel exercised its right to terminate that certain Voting Agreement
      dated August 30, 2006. The Company incurred no termination expenses or penalties
      in connection with the termination of the Voting Agreement .





The
      Investors and Mr. Tianfu Yang also entered into a non-competition covenant
      and
      agreement, dated August 30, 2006, relating to Mr. Yang's employment and his
      ability to engage in a business that is competitive with our business for so
      long as any of the Notes remain outstanding.


In
      connection with the issuance of the Notes, the Company filed a shelf
      registration statement which was declared effective February 9,
      2007.





On
      January 1, 2007, the Company adopted FASB Staff Position No. EITF 00-19-2,
      “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP
      EITF 00-19-2 requires contingent obligations under a registration payment
      arrangement to be recognized and measured in accordance with FAS 5, “Accounting
      for Contingencies”. FAS 5 requires loss contingencies to be accrued and expensed
      if they are probable and reasonably estimable.




24




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


In
      connection with the debt and warrants issued in August 2006, the Company filed
      registration statement with the Securities and Exchange Commission to register
      for resale the common shares underlying the convertible debt and warrants.
      Initially, pursuant to EITF 00-19, “Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settle in, a Company’s Own Stock,” the
      existence of contingent cash penalties in the Registration Rights Agreement
      triggered derivative accounting treatment. As a result the Company recorded
      the
      warrants as a liability at their fair value on the date they were issued and
      then marked them to market each subsequent reporting period. Upon adoption
      of
      FSP EITF 00-19-2, any warrants originally classified as a liability under EITF
      00-19 that would have been classified as equity, without regard to the
      registration payment arrangement, should be reclassified.




The
      transition to the accounting treatment under FSP EITF 00-19-2 is shown in the
      accompanying financial statements through 1) a cumulative-effect adjustment
      to
      the opening balance of retained earnings, as of January 1, 2007 and 2)
      reclassifying the warrants to equity at their fair value on the date of grant.
      The adjustment totaled $6,353,033 was equal to the change in fair value of
      the
      warrants between October 6, 2006, the date the warrants were issued, and
      December 31, 2006, the last reporting period. Additionally, the warrants were
      reclassified as equity at $22,921,113, their fair value on October 6, 2006.
      The
      adoption of FSP EITF 00-19-2 did not have an impact on prior year financial
      statements.





The
      fair
      value of the warrants upon issuance totaled $22,921,113, was treated as a
      discount on carrying value of the debt, and is being amortized over the life
      of
      the loan using the effective interest method. $2,302,871 and $2,266,066 was
      amortized to interest expense for the six months ended June 30, 2008 and 2007,
      respectively. The carrying value of the debt is as follows:





June
                30, 2008
            
            December
                31, 2007(unaudited)Principal
                amount
            
            $
            48,000,000
            
            $
            50,000,000Less
                unamortized discount
            
            
            (14,575,398
            )
            
            (16,878,269
            )Long-term
                debt, net of unamortized discount
            
            $
            33,424,602
            
            $
            33,121,731





Debt
      issuance costs totaled $2,954,625 are carried in other assets and are amortized
      over the life of the loan using the effective interest method. $351,948 and
      $246,218 was amortized to interest expense for the six months ended June 30,
      2008 and 2007, respectively. As of June 30, 2008 and December 31, 2007, the
      unamortized debt issuance costs totaled $1,862,770 and $2,214,717, respectively.




25




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


Net
      interest expense for the six months and three months ended June 30, 2008 and
      2007 was comprised of the following:





2008
            
            2007For
                the six months ended June 30, 2008 and 2007
            
            
            (Unaudited)
            
            
            (Unaudited)Amortization
                of debt discount
            
            $
            2,302,871
            
            $
            2,266,066Amortization
                of debt issuance costs
            
            
            351,948
            
            
            246,218Interest
                expense
            
            
            1,425,219
            
            
            1,575,119Interest
                earned on cash deposits
            
            
            (409,796
            )
            
            (312,649
            )Interest
                earned on derivative instrument
            
            
            (192,731
            )
            
            (297,637
            )Interest
                expense, net
            
            $
            3,477,511
            
            $
            3,477,117For
                the three months ended June 30, 2008 and 2007Amortization
                of debt discount
            
            $
            958,942
            
            $
            1,133,033Amortization
                of debt issuance costs
            
            
            123,767
            
            
            123,109Interest
                expense
            
            
            331,590
            
            
            698,223Interest
                earned on cash deposits
            
            
            (195,051
            )
            
            90,050Interest
                earned on derivative instrument
            
            
            (24,517
            )
            
            (297,637
            )Interest
                expense, net
            
            $
            1,194,731
            
            $
            1,746,778





**Note
      12 – Derivative instrument**





The
      Company's operations are exposed to a variety of global market risks, including
      the effect of changing interest rates. This exposure is managed, in part, with
      the use of financial derivatives. The Company uses financial derivatives only
      to
      hedge exposures in the ordinary course of business and dose not invest in
      derivative instruments for speculative purposes.





Effective
      April 17, 2007, the Company entered into a cross currency swap agreement with
      Merrill Lynch exchanging the LIBOR plus 3.35% variable rate interest payable
      on
      the $38 million Merrill Lynch debt for 7.2% (3.6% semi-annually) fixed rate
      interest. The agreement requires semi-annual payments on March 1 and September
      1
      through the maturity of the agreement on September 1, 2012. Merrill Lynch
      required the Company to deposit $1,000,000 with them to secure the agreement.
      The deposit may be increased to $2,500,000 if the exchange rate for Renminbi
      to
      USD falls below 6.5, and to $4,000,000 if the exchange rate falls below 5.5.
      This swap is designated and qualified as a cash flow hedge.





The
      fair
      value of this swap agreement at inception date was a payable of $249,634, and
      at
      June 30, 2008 and December 31, 2007, was a payable of $11,094,006 and
      $10,844,372, respectively. During the six months ended June 30, 2008, the
      Company recognized $192,731, which was recorded as a gain from derivative
      transactions, and the Company received $145,945 proceeds from cross currency
      hedge for the six months ended June 30, 2008.




26


HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)


Changes
      of cross currency hedge receivable are as follows,





Balance
                at December 31, 2007
            
            $
            145,945Proceeds
                from cross currency hedge
            
            
            (145,945
            )Gain
                from derivative transactions
            
            
            192,731Balance
                at June 30, 2008
            
            $
            192,731





**Note
      13 – Accumulated other comprehensive income**





The
      components of accumulated other comprehensive income as follows:





Balance,
                January 1, 2007
            
            $
            2,031,891Foreign
                currency translation gain
            
            
            2,343,418Change
                in fair value of derivative instrument
            
            
            (3,945,951
            )Balance,
                June 30, 2007
            
            
            429,358Foreign
                currency translation gain
            
            
            4,819,094Change
                in fair value of derivative instrument
            
            
            (6,898,421
            )Balance,
                December 31, 2007
            
            
            (1,649,969
            )Foreign
                currency translation gain
            
            
            8,355,687Change
                in fair value of derivative instrument
            
            
            (249,634
            )Balance
                at June 30, 2008
            
            $
            6,456,084





**Note
      14 – Commitments and contingencies**





The
      Company enters into non-cancelable purchase commitments with its vendors. As
      of
      June 30, 2008 and December 31, 2007, the Company was obligated under the non
      cancelable commitments to purchase materials totaling to $1,756,328 and
      $1,686,222, respectively. These commitments are short-term and expire within
      one
      year. The Company has experienced no losses on these purchase commitments over
      the years.





As
      discussed in more detail in Note 1, the Company entered into an agreement with
      Shelton Technology, LLC on April 9, 2007. Under the terms of the agreement,
      the
      Company is required to contribute $3,000,000 to AAG in 3 installments: $1.2
      million was paid on April 16, 2007, $800,000 was paid on July 16, 2008 and
      $1,000,000 by March 31, 2009.





As
      discussed in Note 12, the Company entered into a swap agreement that required
      a
      $1,000,000 deposit to secure the transaction. If the exchange rate for Renminbi
      to US Dollars drops below certain levels, the Company will be required to
      deposit up to $4,000,000.





As
      discussed in Note 12, the 2010
      Notes are subject to mandatory redemption semi-annually commencing March 1,
      2008
      in the principal amount $2,000,000 at price equal to 100% of such principal
      amount. The 2012 Notes are subject to mandatory redemption semi-annually
      commencing September 1, 2009 in the principal amount $2,400,000 on September
      1,
      2009, $3,800,000 on March 1, 2010, $9,900,000 on September 1, 2010 and March
      1,
      2011, and $4,000,000 on September 1, 2011, March 1, 2012 and September 1, 2012,
      in each instance at price equal to 100% of such principal amount. Holders of
      the
      2012 Notes may require the Company to repurchase such Notes at 100% of the
      principal amount thereof at any time after September 1, 2011.




27


HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)


The
      Company is subject to a 5 year lease agreement dated February 1, 2004 for office
      space requiring monthly payments of $2,700. The agreement expires on April
      30
      2009. On April 30, 2008, the Company signed a Lease Cancellation Agreement
      with
      the landlord to terminate the lease, effective May 1, 2008. Pursuant to the
      Lease Cancellation Agreement, the Company paid a cancellation fee of $16,411.98,
      which is 50% of the future obligations.





**Note
      15 – Shareholders’ equity**





Private
      placement.





On
      June
      24, 2008, Harbin Electric, Inc. sold to the Investors 3.5 million shares of
      common stock, at $14.13 per share for a total aggregate purchase price of
      $49,455,000. The Company agreed to file a registration statement with the
      Securities Exchange Commission registering the shares within 30 days of closing
      and to achieve the effectiveness of the registration within an agreed upon
      period. The Company agreed to pay penalties up to 10% of the proceeds if the
      registration was not filed or made effective timely. The Company filed Form
      S-3
      on July 24, 2008, which was declared effective, and therefore, was not subject
      to any penalties. The Company paid a placement fee equal to 6% of the proceeds
      totaling $2,967,258.


28
  HARBIN
          ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2008
 (UNAUDITED)


Warrants





Following
      is a summary of the warrant activity:





Outstanding
                as of January 1, 2007
            
            
            3,967,368Granted
            
            
            -Forfeited
            
            
            -Exercised
            
            
            -Outstanding
                as of June 30, 2007
            
            
            3,967,368Granted
            
            
            -Forfeited
            
            
            -Exercised
            
            
            (1,512,408
            )Outstanding
                as of December 31, 2007
            
            
            2,454,960Granted
            
            
            -Forfeited
            
            
            -Exercised
            
            
            (202,300
            )Outstanding
                as of June 30, 2008
            
            
            2,252,660





Following
      is a summary of the status of warrants outstanding at June 30, 2008:





Outstanding Warrants
            
            Exercisable WarrantsExercise Price
            
            Number
            
            Average
              Remaining
              Contractual Life
            
            Average
              Exercise Price
            
            Number
            
            Average
              Remaining
              ContractualLife$
            3.50
            
            
            122,502
            
            
            2.77
            
            $
            3.50
            
            
            122,502
            
            
            2.77$
            10.84
            
            
            366,697
            
            
            4.52
            
            $
            10.84
            
            
            366,697
            
            
            4.52$
            7.80
            
            
            1,528,846
            
            
            1.52
            
            $
            7.80
            
            
            1,528,846
            
            
            1.52$
            7.80
            
            
            234,615
            
            
            1.46
            
            $
            7.80
            
            
            234,615
            
            
            1.46Total
            
            
            2,252,660
            
            
            
            
            
            
            
            
            2,252,660





Options





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. The fair values of stock options
      granted to employees and the independent directors were estimated at the date
      of
      grant using the Black-Scholes option-pricing model with the following
      assumptions:


29




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


**Expected**
            
            **Expected**
            
            **Dividend**
            
            **Risk Free**
            
            **Grant Date****Life**
            
            **Volatility**
            
            **Yield**
            
            **Interest Rate**
            
            **Fair Value**Employees
                - 2005
            
            
            3.0
                yrs
            
            
            66
            %
            
            0
            %
            
            4.00
            %
            $
            3.93Directors
                - 2005
            
            
            5.0
                yrs
            
            
            66
            %
            
            0
            %
            
            4.13
            %
            $
            3.10Employees
                - 2006
            
            
            5.0
                yrs
            
            
            66
            %
            
            0
            %
            
            4.13
            %
            $
            8.10Directors
                - 2006
            
            
            5.0
                yrs
            
            
            66
            %
            
            0
            %
            
            4.13
            %
            $
            8.10Employees
                - 2007
            
            
            3.0
                yrs
            
            
            81
            %
            
            0
            %
            
            4.50
            %
            $
            12.40Executives
                - 2007
            
            
            3.0
                yrs
            
            
            77
            %
            
            0
            %
            
            4.50
            %
            $
            15.60





The
      Company determined its expected volatility and dividend yield based on the
      historical changes in stock price and dividend payments. 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. The Company determined the option’s
      expected life based on historical exercise behavior.





Following
      is a summary of the stock option activity:





Options
              Outstanding
            
            Weighted
              Average
              Exercise Price
            
            Aggregate
              Intrinsic
              ValueOutstanding
                as of January 1, 2007
            
            
            900,000
            
            $
            6.08
            
            $
            1,863,000Granted
            
            
            25,000
            
            
            12.40
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding
                as of June 30, 2007
            
            
            925,000
            
            $
            6.28
            
            $
            9,453,500Granted
            
            
            260,000
            
            
            15.32Forfeited
            
            
            (66,667
            )
            
            3.93Exercised
            
            
            (357,083
            )
            
            5.96Outstanding
                as of December 31, 2007
            
            
            761,250
            
            $
            9.69
            
            $
            12,370,313Granted
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -Exercised
            
            
            (25,000
            )
            
            3.10Outstanding
                as of June 30, 2008
            
            
            736,250
            
            $
            10.05
            
            $
            3,062,800




30




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


Following
      is a summary of the status of options outstanding at June 30, 2008:





Outstanding
                Options
            
            Exercisable
                OptionsExercise
                Price
            
            Number
            
            Average
              Remaining
              Contractual Life
            
            Average
              Exercise Price
            
            Number
            
            Average
              Remaining
              Contractual Life$
            3.10
            
            
            125,000
            
            
            1.58
            
            $
            3.10
            
            
            125,000
            
            
            1.58$
            8.10
            
            
            326,250
            
            
            2.58
            
            $
            8.10
            
            
            221,250
            
            
            2.58$
            12.40
            
            
            25,000
            
            
            1.92
            
            $
            12.40
            
            
            12,525
            
            
            1.92$
            15.60
            
            
            260,000
            
            
            2.46
            
            $
            15.60
            
            
            85,800
            
            
            2.46Total
            
            
            736,250
            
            
            
            
            
            
            
            
            444,575




Stock
      compensation expense recognized 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. 123R requires forfeitures to be estimated at the time of
      grant and revised in subsequent periods, if necessary, if actual forfeitures
      differ from those estimates.





**Note
      16 – Supplemental disclosure of cash flows**





The
      Company prepares its statements of cash flows using the indirect method as
      defined under the FAS 95. The following information relates to non-cash
      investing and financing activities for 2008 and 2007.





Total
      interest paid amounted to $2,120,346 and $1,998,896 for the six months ended
      June 30, 2008 and 2007, respectively.





Total
      income tax paid amounted to $1,018,431 and $0 for the six months ended June
      30,
      2008 and 2007, respectively.





On
      July
      19, 2007, the Company issued 473,354
      shares of common stock valued
      at
      $6,500,000 plus $4,000,000 of cash to acquire
      the assets of Harbin Taifu Auto Electric Co., Ltd., owned 98% by the CEO and
      2%
      by management. The fair values of assets acquired are as follow:





Items
            
            Book value
            
            Assessed Fair ValueCurrent
                assets
            
            $
            2,186,039
            
            $
            2,186,039Equipment
            
            
            2,987,640
            
            
            2,987,640Patent
                rights
            
            
            1,223,522
            
            
            5,326,321Total
                assets acquired
            
            $
            6,397,201
            
            $
            10,500,000





On
      July
      12, 2007, the Company’s CEO transferred 280,000 of his own shares to the Company
      employees and consultants. The shares vest over 5 to 10 years starting July
      12,
      2007. The Company valued the shares at $13.73 per share, based on the average
      price for the immediately preceeding fifteen consecutive trading days before
      June 16, 2007, the date when the Company and HTFZ entered into the asset
      purchase agreement with Harbin Taifu Auto Electric Co., Ltd., as a capital
      contribution totaling $3,844,904 by the CEO, the value was amortized over the
      vesting period. For the six months ended June 30, 2008, total of $199,111 has
      been expensed and included in the stock compensation expense. For the three
      months ended June 30, 2008, total of $99,556 has been expensed and included
      in
      the stock compensation expense.




31




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS


JUNE
      30,
      2008


(UNAUDITED)




**Note
      17 – Employee pension**





Regulations
      in the People’s Republic of China require the Company to contribute to a defined
      contribution retirement plan for all employees. All Joint Venture employees
      are
      entitled to a retirement pension amount calculated based upon their salary
      at
      their date of retirement and their length of service in accordance with a
      government managed pension plan. The PRC government is responsible for the
      pension liability to the retired staff. 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 $49,278 and $24,107 contributions of employment benefits,
      including pension for the six months ended June 30, 2008 and 2007. The Company
      made $19,019 and $16,979 contributions of employment benefits, including pension
      for the three months ended June 30, 2008 and 2007.





**Note
      18 – Legal proceedings**





From
      time
      to time, the Company becomes involved in various lawsuits and legal proceedings
      which arise in the ordinary course of business.





In
      June
      2006, an action was filed against the Company by Leong Sing Lye in the United
      States District Court for the District of Nevada, seeking specific performance
      of the Company's alleged obligation to issue 228,000 shares of Common Stock
      and
      warrants to purchase 38,400 shares of common stock, or, in the alternative,
      the
      value of securities alleged to be owed to Mr. Lye under, or, monetary damages
      allegedly arising from, a so-called Appointment Agreement pursuant to which
      Mr.
      Lye alleges to have been appointed the Company's Consultant of Corporate
      Strategy, as well as court costs and reasonable attorneys' fees. The Company
      has
      filed an answer to Mr. Lye's complaint denying the material allegations thereof
      and a counterclaim against Mr. Lye for fraud and related claims. The Company
      intends to vigorously defend itself against Mr. Lye's claim, if not withdrawn,
      and pursue its counterclaim. The parties are in the discovery process. The
      Company has filed a motion for summary judgment to eliminate portions of Mr.
      Lye's case and Mr. Lye has filed a cross-motion.





On
      January 22, 2008, the Company, without admitting any guilt, made an offer of
      Judgment to settle the claim against the Company and in favor of Mr. Lye in
      full
      and final resolution of all claims and counterclaims for the sum of $1 million.
      On February 1, 2008, Mr. Lye accepted the Company’s offer. On February 14, 2008,
      the Company made the $1 million payment in full to Mr. Lye to settle the case.




32


HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2008
 (UNAUDITED)


**Note
      19 – Subsequent events**





Wendeng





On
      July
      10, 2008, the Company’s subsidiary, HTFE entered into an Equity and Assets
      Transfer Agreement (the “Agreement”) with Wendeng Second Electric Motor Factory,
      a PRC corporation (”Wendeng”), the Committee of Labor Union of Wendeng Second
      Electric Motor Factory (the “Labor Committee”) and the People’s Government of
      Zhangjiachan Town and Wendeng County (“Zhangjiachan Town”) with respect to the
      acquisition by HTFE of Weihai Hengda Electric Motor (Group) Co. Ltd., a PRC
      corporation (“Hengda”) . Wendeng is the owner of 97.15% of the equity of Hengda
      and the Labor Committee is the owner of the remaining 2.85% of the equity of
      Hengda. Zhangjiachan Town is the shareholder and governing authority of
      Wendeng.





Pursuant
      to the terms of the Agreement, HTFE agreed to acquire (i) all of the outstanding
      shares of Hengda, (ii) all other assets of Wendeng, and (iii) all remaining
      equity of Hengda’s subsidiaries not currently owned by Hengda, which consist of
      9.1% of Wendeng Wanda Chemical Products Limited Liability Company, 4.4% of
      Wendeng Wenbao Electrical Motors Limited Liability Company, 10% of Wendeng
      Chengxin Electrical Motors Limited Liability Company and 9.1% of Wendeng
      Yongheng Electrical Instruments Limited Liability Company, for an aggregate
      price of $54.7 million payable in cash. On March 27, 2008 Harbin Tech Full
      deposited approximately $0.7 million toward the purchase price. The Company
      paid
      $46 million during July 2008 and expects to pay another $7.3 million before
      September 30, 2008 according to a mutual agreement. The remaining $0.7 million
      will be paid within two years pursuant to the Agreement.





Shelton





On
      April
      9, 2007, the Company entered into an Agreement with Shelton Technology, LLC
      (“Shelton”) to work together through the Company’s newly formed, wholly-owned
      subsidiary, Advanced Automation Group, LLC (“AAG”) to design, develop and
      manufacture custom industrial automation controllers. The Company was required
      to contribute $3,000,000 to AAG in 3 installments; $1.2 million was paid on
      April 16, 2007, $800,000 was paid on July 16, 2008 and $1,000,000 is due by
      March 31, 2009.




33




**Item
        2.**  **Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 **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.
 
 **OVERVIEW**
  We
        are
        incorporated under the laws of the state of Nevada, and, along with our
        wholly-owned subsidiaries, are headquartered in Harbin, China. We manufacture,
        design, supply and service of customized linear motors, motor/controller
        automation systems, automobile specialty micro-motors, and other special
        motors
        for domestic China and other international markets. Our products are purchased
        by a broad range of customers, including those involved in oil services,
        factory
        automation, packaging, logistic systems, food industry, automotive industry,
        and
        mass transportation systems.
  Our
        expenses have consisted primarily of those incurred with sales and marketing
        of
        our products, general and administrative costs associated with our operations
        and costs of maintaining our facilities, salaries and research and development.
        To date, we have funded our operations primarily through earnings and the
        sale
        of equity securities.
  We
        are
        subject to risks common to companies operating in China, including risks
        inherent in our distribution and commercialization efforts, uncertainty of
        foreign regulatory and marketing approvals and laws, reliance on key customers,
        enforcement of patent and proprietary rights, the need for future capital
        and
        retention of key employees. We cannot provide assurance that we will generate
        revenues or achieve and sustain profitability in the future.
 
 **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
 
 We
        believe that the application of the following accounting policies, which
        are
        important to our financial position and results of operations, requires
        significant judgments and estimates on the part of management. Our critical
        accounting policies and estimates present an analysis of the uncertainties
        involved in applying a principle while the accounting policy note in the
        financial statements describe the method used to apply the accounting principle.
        For a summary of our significant accounting policies, see Note 2 of the
        consolidated financial statements appearing elsewhere in this Quarterly
        Report.
 
 ***Accounts
        Receivable***
 
 We
        use
        estimates in determining our allowance for bad debts that are based on our
        historical collection experience, current trends, credit policy and a percentage
        of our accounts receivable by aging category. In determining these percentages,
        we review historical write-offs in our receivables. In determining the
        appropriate reserve percentages, we also review current trends in the credit
        quality of our customers, as well as changes in our internal credit
        policies.
 
 We
        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. Reserves are recorded primarily on a specific identification
        basis. Additional allowances for doubtful accounts may be required if there
        is
        deterioration in past due balances, if economic conditions are less favorable
        than anticipated, or for customer-specific circumstances, such as financial
        difficulty.
  Reserve
        for potential credit losses was $123,699 as of June 30, 2008 and $116,238
        as of
        December 31, 2007. No amounts were written off during the periods indicated.
        If
        the estimate of our allowance is understated in future periods, operating
        income
        would be reduced.
 
 ***Inventories***
  Inventory
        levels are based on projections of future demand and market conditions.
        Inventories are stated at cost, which is not in excess of market using the
        weighted average cost method. Any sudden decline in demand and/or rapid product
        improvements and technological changes can result in excess and/or obsolete
        inventories. Because most of our products are customized and unique to a
        particular customer, there is a risk that we will forecast inventory needs
        incorrectly and purchase or produce excess inventory. As a result, actual
        demand
        may differ from forecasts, and such differences, if not managed, may have
        a
        material adverse effect on future results due to excess or obsolete inventory
        that must be written off. To mitigate such exposure, we require a binding
        purchase order or a signed agreement by our customers agreeing to pay for
        and
        take possession of finished goods inventory parts for the duration of the
        agreement.
  34
 
 On
        an
        ongoing basis, inventories are reviewed for potential write down for estimated
        obsolescence or unmarketable inventories equal to the difference between
        the
        costs of inventories and the estimated net realizable value based upon forecasts
        for future demand and market conditions. We have experienced no inventory
        write
        downs since our inception. Accordingly, we have not created any reserve for
        obsolete inventory consistent with our historical experience. To the extent
        we
        increase our reserves for future periods, operating income will be
        reduced.
 
 ***Revenue
        Recognition***
  Our
        revenue recognition policies are structured to comply with Staff Accounting
        Bulletin (SAB) 104 and SFAS 48. These standards require that revenue be
        recognized only when it is realized or realizable and earned. Revenue generally
        is realized or realizable and earned when all four of the following criteria
        have been met: (1) persuasive evidence of an arrangement exists; (2) delivery
        has occurred or services rendered; (3) the price is fixed and determinable;
        and
        (4) collectability is reasonably assured. For products that are required
        to be
        examined by customers upon receiving shipments, sales revenue is recognized
        after the customer examination is passed.
  Determination
        of criterion (4) is based on our judgment regarding the collectability of
        those
        amounts. Historically, we have not encountered significant problems with
        collectability and thus have determined that it is not necessary to defer
        revenue recognition on that basis. Should changes in conditions cause us
        to
        determine this criterion is not met for certain future transactions, revenues
        for any reporting period could be adversely affected by delaying recognition
        of
        such revenues.
  In
        addition, our revenue recognition could be negatively impacted by returns.
        However, we make customized products which are customer specific, and no
        returns
        are allowed. We warrant our products for repair only in the event of defects
        for
        two years from the date of shipment. Historically, we have not experienced
        significant defects, and replacements for defects have not been material.
        We
        charge such costs to cost of goods sold. For the years ended December 31,
        2007
        and for the six months ended June 30, 2008, such returns and allowances were
        $0.
        Should returns increase in the future it would be necessary to adjust our
        estimates, in which case recognition of revenues could be delayed.
 
 ***Stock-Based
        Compensation***
  The
        Company accounts for stock-based compensation in accordance with the fair
        value
        recognition provisions of SFAS 123R. The Company uses the Black-Scholes-Merton
        option-pricing model which requires the input of highly subjective assumptions.
        These assumptions include estimating the length of time employees will retain
        their stock options before exercising them (“expected term”), the estimated
        volatility of the Company’s common stock price over the expected term and the
        number of options that will ultimately not complete their vesting requirements
        (“forfeitures”). Changes in the subjective assumptions can materially affect the
        estimate of fair value of stock-based compensation and consequently, the
        related
        amount recognized on the consolidated statements of earnings.
 
 ***Derivative
        Financial Instruments***
 
 The
        Company uses derivative financial instrument, a cross-currency swap, to hedge
        risks of changing in interest rates. The derivative is initially recognized
        in
        the balance sheet at cost and subsequently re-measured at fair value for
        each
        reporting period. Changes in the fair value of the derivative accounted for
        as
        cash flow hedges, to the extent they qualify for hedge accounting, are recorded
        in accumulated other comprehensive income, net of deferred taxes. Changes
        in
        fair values of derivative financial instruments not qualifying as hedges
        are
        reported in the income statement.
 
 At
        the
        inception of the transaction, the Company documents the relationship between
        hedging instruments and hedged items, as well as its risk management objective
        and the strategy for undertaking various hedge transactions. This process
        includes linking all derivatives designated to specific firm commitments
        of
        forecast transactions. The Company also documents its assessment, both at
        inception and on an ongoing basis, of whether the derivative financial
        instruments that are used in hedging transactions are highly effective in
        offsetting changes in fair values or cash flows of hedged items.
 
 ***Fair
        Value of Financial Instruments***
 
 SFAS
        No.
        157, Fair Value Measurements, defines fair value, establishes a three-level
        valuation hierarchy for disclosures of fair value measurement and enhances
        disclosures requirements for fair value measures. The Company adopted SFAS
        No.
        157 and did not identify any assets and liabilities that are required to
        be
        presented on the balance sheet at fair value in accordance with SFAS No.
        157.
 
 **RESULTS
        OF OPERATIONS**
 
 SIX
        MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30,
        2007
 
 ***Revenue***
 For
        the
        six-month period ended June 30, 2008, we generated net revenues of $46.42
        million compared to $27.62 million for the six-month period ended June 30,
        2007,
        representing a 68% year-over-year growth. Linear motors and related integrated
        application systems contributed 44% to total revenues, automobile
        specialty micro-motors contributed 38%, and controllers, armatures, and other
        special motors contributed 18% compared to 76%, 0%, and 24%, respectively,
        for
        the six months ended June 30, 2007.
  35
 
 The 68%
        year-over-year increase in revenues was primarily driven by new product sales
        from the automobile specialty micro-motors and the tower-type permanent magnetic
        linear motor driven oil pump, which contributed approximately $18 million,
        and
        $5 million to total revenues, respectively. The growth in new product sales
        was
        partially offset by slightly lower sales in other product types. Contributions
        from the automobile specialty micro-motors business and from the sales of
        the
        oil pump did not begin until the second half of 2007.
 
 The
        Company’s products that were exported directly to markets outside China amounted
        to 15% of total sales in the six months ended June 30, 2008.
 
 ***Gross
        Profit***
 The
        Company achieved a gross profit of $22.22 million for the six months ended
        June
        30, 2008 compared to $14.08 million for the six months ended June 30, 2007.
        The
        increase is directly related to our increases in sales levels. Gross margin
        was
        48% for the six months ended June 30, 2008 compared to 51% for the six months
        ended June 30, 2007. The slight decline in gross profit margin was mainly
        due to
        changes in the product mix that is attributable to the new product line of
        the
        automobile micro-motor business, which has lower gross profit margin. By
        segment, the average gross profit margin was 52% for linear motors and 40%
        for
        automobile specialty micro-motors. Changes in raw materials prices did not
        have
        a material impact on gross margins for the quarter.
 
 ***Operating
        Profit***
 The
        Company achieved a 58% year-over-year growth in operating profit, to $16.86
        million in the six months ended June 30, 2008 from $10.66 million in the
        six
        months ended June 30, 2007. The significant growth in operating profit was
        primarily attributable to the growth in sales from the automobile micro-motors
        and from the oil pumps. Operating margin was 36% for the six months ended
        June
        30, 2008 versus 39% for the same six-month period in the prior year. The
        slight
        decline in operating margin was mainly due to lower gross profit margin in
        our
        automobile micro-motors business.
 
 Selling,
        general and administrative expense accounts for expenses associated with
        sales
        and marketing of the Company's products, costs of maintaining the Company's
        facilities, salaries, including stock based compensation, as well as expenses
        associated with the Company’s listing on NASDAQ such as fees related to legal,
        auditing, board of directors, liability insurance, professional consultation,
        financial reporting and filing. SG&A expenses totaled $5.07 million for the
        six months ended June 30, 2008, compared to $2.96 million in the same period
        of
        2007. The year-over-year dollar increase in SG&A was primarily a result of
        business expansion and increased sales activities. Shipping and handling
        costs
        were $433,887 for the six months ended June 30, 2008 compared to $218,175
        for
        the same six month period in 2007. Stock based compensation totaled $912,465
        and
        $492,916 for the six months ended June 30, 2008 and 2007, respectively.
 
 As
        a
        percentage of total sales, the total SG&A expenses were maintained
        relatively stable at 12% for both periods, which stayed within the Company’s
        expected range.
 
 ***Interest
        expense***
 
 Net
        interest expense was comprised of the amortization of debt discount,
        amortization of debt issuance costs, accrued interest expense for the semiannual
        interest due on our $50 million debt, and offset by interest income earned
        on
        cash deposits and interest rate swap agreement with Merrill Lynch signed
        April
        2, 2007.
 
 Net
        interest expense was $3.48 million for the six months ended June 30, 2008,
        which
        was at about the same level of 2007. Included in the net interest expense
        was
        $409,796 and $312,649 interest income earned on cash deposits for the six
        months
        ended June 30, 2008 and 2007, respectively.
 
 During
        the six months ended June 30, 2008 and 2007, the Company recorded interest
        income of $192,731 and $297,637, respectively, from Merrill Lynch on the
        cross
        currency swap agreement. As of 06/30/2008, $192,731 was recorded as hedge
        receivable, and $297,637 was received by the Company in July 2007.
 
 The
        non-cash charge of amortization expense of the debt discount and debt issuance
        cost totaled $2.65 and $2.51 million for the six months ended June 30, 2008
        and
        2007, respectively. This non-operating charge reduced earnings by $0.13 per
        diluted share for both periods. As of June 30, 2008, the unamortized debt
        discount totaled $14,575,398.
 
 The
        Company paid $2,120,346 for interest for the six months ended June 30, 2008
        and
        $1,998,896 for interest for the six months ended June 30, 2007.
  36
 
 ***Income
        Tax***
 According
        to the Provisional Regulations of the People's Republic of China on Income
        Tax
        and the approval by the local tax bureau and the Management Regulation of
        Harbin
        Economic and Technological Development Zone, from July 1, 2004 through December
        31, 2007, the Company was exempted from income tax. From January 1, 2008
        to
        December 31, 2010, the Company has been approved to have its tax rate reduced
        to
        10% and the local government has further approved to rebate 2.5% of the tax
        to
        the Company. This rebate is included in Non-Operating Income.
 
 The
        Company recorded a provision for income tax of $2.05 million for the six
        months
        ended June 30, 2008 versus none for the six months period in 2007.
 
 ***Net
        Income***
 Net
        Income for the six months ended June 30, 2008 was $11.58 million compared
        to
        $7.96 million for the six months ended June 3, 2007, representing a
        year-over-year increase of 46%. This increase in net income was mainly due
        to
        new sales driven primarily by automobile micro-motor business and the tower-type
        permanent magnetic linear motor oil pumps. Earnings per diluted share grew
        36%
        from $0.42 in the six months ended June 30, 2008 to $0.58 in the six months
        ended June 30, 2007. The income tax that the Company began to pay on earnings
        has resulted in a significant reduction in our growth of net earnings compared
        to previous periods.
 
 THREE
        MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30,
        2007
 
 ***Revenue***
 
 For
        the
        three months ended June 30, 2008, we generated net revenues of $23.96 million
        compared to $13.99 million for the three months ended June 30, 2007,
        representing an increase of 71% year-over-year. Linear motors and related
        integrated application systems contributed 45% to total revenues,
        automobile specialty micro-motors contributed 38%, and controllers, armatures,
        and other special motors contributed 17% compared to 66%, 0%, and 34%,
        respectively, for the three months ended June 30, 2007.
 
 The 71%
        year-over-year increase in revenues was primarily driven by new product sales
        from the automobile specialty micro-motors and vertical type permanent magnetic
        oil pumps, which contributed approximately $9 million and $3 million to total
        revenues, respectively.
 
 The
        Company’s products that were exported directly to markets outside China amounted
        to 13% of total sales in the three months ended June 30, 2008.
 
 ***Gross
        Profit***
 
 The
        gross
        profit for the three months ended June 30, 2008 was $11.46 million compared
        to
        $7.22 million for the three months ended June 30, 2007, a 59% year-over-year
        growth primarily driven by increased sales. The overall gross profit margin
        was
        48% in the second quarter of 2008 compared to 52% in the second quarter of
        2007.
        The slight decline in gross profit margin was mainly due to changes in the
        product mix that is attributable to the new product line of the automobile
        micro-motor business, which has lower gross profit margin. By segment, the
        gross
        profit margin was 52% for linear motors and 40% for automobile specialty
        micro-motors. Changes in raw materials prices did not have a material impact
        on
        gross margins for the quarter.
 
 ***Operating
        Profit***
 
 The
        Company achieved a 48% year-over-year growth in operating profit, to $8.22
        million in the three months ended June 30, 2008 from $5.54 million in the
        three
        months ended June 30, 2007. The significant growth in operating profit was
        primarily attributable to new sales from the automobile micro-motors business
        and vertical type permanent magnetic oil pumps. Operating margin declined
        to 34%
        for the three months ended June 30, 2008 versus 40% for the same quarter
        of
        prior year, primarily due to lower gross profit margin in our automobile
        micro-motors business and higher selling, general and administrative
        expenses.
 
 Selling,
        general and administrative expense (SG&A) was $3.04 million for the quarter,
        compared to $1.45 million in the same quarter of 2007. The year-over-year
        dollar
        increase in SG&A was primarily a result of business expansion and increased
        sales activities. Shipping and handling costs were $203,461 for the quarter
        ended June 30, 2008 compared to $122,357 for the same quarter in 2007. Stock
        based compensation totaled $456,233 and $246,458 for the quarter ended June
        30,
        2008 and 2007, respectively.
  As
        a
        percentage of total sales, the Company’s total SG&A expenses increased to
        13% in this quarter from 10% in the same quarter last year. The Company expects
        the total SG&A expenses as a percentage of sales to be in the range of 10% -
        12% on average.
 
 ***Interest
        expense***
 
 Net
        interest expense was $1.20 million and $1.75 million for the three months
        ended
        June 30, 2008 and 2007, respectively. The net interest expense also includes
        a
        non-cash charge of amortization expense of the debt discount and debt issuance
        cost totaled $1.08 million and $1.26 million for the three month ended June
        30,
        2008 and 2007, respectively.
  37
 
 ***Income
        Tax***
 
 According
        to the Provisional Regulations of the People's Republic of China on Income
        Tax
        and the approval by the local tax bureau and the Management Regulation of
        Harbin
        Economic and Technological Development Zone, from July 1, 2004 through December
        31, 2007, the Company was exempted from income tax. From January 1, 2008
        to
        December 31, 2010, the Company has been approved to have its tax rate reduced
        to
        10% and the local government has further approved to rebate 2.5% of the tax
        to
        the Company. This rebate is included in Non-Operating Income.
 
 The
        Company recorded a provision for income tax of $1.06 million for the three
        months ended June 30, 2008 versus none for the three months ended June 30,
        2007.
        Total income tax paid amounted to $1,02 million and $0 for the three months
        ended June 30, 2008 and 2007, respectively.
 
 ***Net
        Income***
 
 Net
        Income for the three months ended June 30, 2008 was $6.23 million compared
        to
        $4.56 million for the three months ended June 30, 2007, representing a
        year-over-year increase of 37%. Earnings per diluted share were $0.31 and
        $0.24
        for the three months ended June 30, 2008 and 2007, respectively. The income
        tax
        that the Company began to pay on earnings has resulted in a significant
        reduction in our growth of net earnings compared to previous periods. Higher
        SG&A costs for the second quarter of 2008 versus the second quarter of 2007
        also negatively affected the net earnings. Additionally, the Company received
        $763,408 in government grants in the second quarter of 2007, while none in
        the
        second quarter of 2008, also affected the comparison of the two periods
        unfavorably.
 
 
 **Liquidity
        and Capital Resources**
 
 As
        of
        June 30, 2008, cash and cash equivalents were $87.78 million, compared to
        $45.53
        million on December 31, 2007. The net increase during the six months ended
        June
        30, 2008 was due mainly to the proceeds received from the equity offerings
        closed on June 24, 2008, which were partially offset by increases in accounts
        receivables, debt repayment during the period, and prepayments made for
        equipment purchases and fixed assets construction.
 
 Beginning
        on March 1, 2008, the Company is required to make principal payments on the
        $12
        million 2010 Notes, which mature on September 1, 2010. In March 2008, the
        Company made a $2 million principal payment due on March 1, 2008. The next
        $2
        million payment is due on September 1, 2008. The Company is required to make
        a
        $2 million payment semi-annually through the maturity of the 2010
        Notes.
 
 On
        August
        25, 2006 the Company’s subsidiary HTFE signed an R&D Agreement with IEECAS.
        Under the R&D Agreement, HTFE is obligated to invest approximately $2.19
        million (of which approximately $1.46 million previously has been paid) during
        the period ending in early 2009. On September 8, 2006 the Company’s subsidiary
        HTFE signed a Land Use Agreement for a plot of land in Shanghai. HTFE is
        obligated to make an additional Fee payment of approximately $1.27 million
        (the
        timing of which is dependent upon completion of certain regulatory applications
        and receipt of a regulatory permit for work commencement) as well as to invest
        approximately $15 million in Site investments. It is anticipated that, as
        permitted by the Indenture, the Company will use a portion of the proceeds
        from
        placement of the Notes to Merrill Lynch and Citadel for such
        purposes.
 
 On
        April
        9, 2007, the Company entered into an Agreement with Shelton Technology, LLC
        (“Shelton”), whereby the Company and Shelton agreed to work together through the
        Company’s newly formed, wholly-owned subsidiary, AAG to design, develop and
        manufacture customized industrial automation controllers. Pursuant to the
        terms
        of the Letter of Agreement, the Company is required to contribute $3,000,000
        to
        AAG in 3 installments: $1.2 million was paid on April 16, 2007, $800,000
        was
        paid on July 16, 2008, and $1,000,000 is due by March 31, 2009.
 
 On
        March
        27, 2008, HTFE, entered into a letter of intent to acquire Weihai Hengda
        Electric Motor Co. Ltd., a PRC corporation (“Hengda Electric Motor”) and Wendeng
        Second Electric Motor Factory, a PRC corporation (“Wendeng Second Electric
        Motor”) which is operated and managed by Hengda Electric Motor. The Company
        financed the acquisition using existing cash and proceeds from an equity
        offering closed on June 24, 2008.
 
 On
        June
        24, 2008, the Company entered into a Purchase Agreement with certain investors,
        pursuant to which, on June 25, 2008, the Company sold to the Investors 3.5
        million shares of the Company’s common stock, par value $0.00001 per share at
        $14.13 per share for a total aggregate purchase price of $49,455,000, in
        a
        transaction exempt from registration under the Securities Act of 1933, as
        amended.
 
 ***Cross
        currency hedge***
 
 The
        Company's operations are exposed to a variety of global market risks, including
        the effect of changes in foreign currency exchange rates and interest rates.
        These exposures are managed, in part, with the use of financial derivatives.
        The
        Company uses financial derivatives only to hedge exposures in the ordinary
        course of business and does not invest in derivative instruments for speculative
        purposes.
  38
 
 Effective
        April 17, 2007, the Company entered into a cross currency swap agreement
        with
        Merrill Lynch exchanging the LIBOR plus 3.35% variable rate interest payable
        on
        the $38 million Merrill Lynch debt for 7.2% (3.6% semi-annually) fixed rate
        interest. The agreement requires semi-annual payments on March 1 and September
        1
        through the maturity of the agreement on September 1, 2012. Merrill Lynch
        required the Company to deposit $1,000,000 with them to secure the agreement.
        The deposit may be increased to $2,500,000 if the exchange rate for Renminbi
        to
        USD falls below 6.5, and to $4,000,000 if the exchange rate falls below 5.5.
        This swap is designated and qualified as a cash flow hedge.
 
 The
        fair
        value of this swap agreement on December 31, 2007 was a payable of $10,844,372,
        and on June 30, 2008 was a payable of $11,094,006. From the December 31,
        2007 to
        June 30, 2008, changes in fair value of the swap resulted in other comprehensive
        loss of $249,634, net of taxes and an increase to liability. During the six
        months ended June 30, 2008, the Company recognized $192,731 as gain from
        derivative transactions. For the six months ended June 30, 2008, there were
        no
        amounts recorded in the consolidated statement of income in relation to this
        interest rate swap related to ineffectiveness.
  The
        Company accounts for this interest rate swap in accordance with FAS No. 133,
        “Accounting for Derivatives Instruments and Hedging Activity,” which requires
        all derivatives to be carried on the balance sheet at fair value and to meet
        certain documentary and analytical requirements to qualify for hedge accounting
        treatment. The above derivative qualifies for hedge accounting under FAS
        133
        and, accordingly, changes in the fair value are reported in accumulated other
        comprehensive income, net of related income tax effects.
 
 
 **Item
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
 
 While
        our
        reporting currency is the U.S. dollar, 99.45% of our consolidated revenues
        and
        80% of consolidated costs and expenses are denominated in Renminbi (“RMB”), with
        the balance denominated in U.S. dollars. Substantially all of our assets
        are
        denominated in RMB. As a result, we are exposed to foreign exchange risk
        as our
        revenues and results of operations may be affected by fluctuations in the
        exchange rate between U.S. dollars and RMB. If the RMB depreciates against
        the
        U.S. dollar, the value of our RMB revenues, earnings and assets as expressed
        in
        our U.S. dollar financial statements will decline. We have not entered into
        any
        hedging transactions in an effort to reduce our exposure to foreign exchange
        risk.
 
 **Item
        4. Controls and Procedures**
 
 **(a)
        Evaluation of Disclosure Controls and Procedures**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports filed pursuant to the
        Exchange Act is recorded, processed, summarized and reported within the time
        periods specified in the SEC’s rules, regulations and related forms, and that
        such information is accumulated and communicated to our principal executive
        officer and principal financial officer, as appropriate, to allow timely
        decisions regarding required disclosure.
  Our
          management is also responsible for establishing and maintaining adequate
          internal control over financial reporting. The Company’s internal control over
          financial reporting is designed to provide reasonable assurance regarding
          the
          reliability of financial reporting and the preparation of financial statements
          for external purposes in accordance with generally accepted accounting
          principles.
 
 Our
          internal control over financial reporting includes those policies and procedures
          that:
 
 ·
                Pertain
                    to the maintenance of records that, in reasonable detail, accurately
                    and
                    fairly reflect the transactions and dispositions of the assets
                    of the
                    Company;
 ·
                  Provide
                      reasonable assurance that transactions are recorded as necessary
                      to permit
                      preparation of financial statements in accordance with generally
                      accepted
                      accounting principles, and that our receipts and expenditures
                      are being
                      made only in accordance with authorizations of the Company’s management
                      and directors; and
  ·
                  Provide
                      reasonable assurance regarding prevention or timely detection
                      of
                      unauthorized acquisition, use or disposition of our assets
                      that could have
                      a material effect on the financial
                      statements.
  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. 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 the
            inherent limitations of internal control, there is a risk that material
            misstatements may not be prevented or detected on a timely basis by internal
            control over financial reporting. However, these inherent limitations
            are known
            features of the financial reporting process. Therefore, it is possible
            to design
            into the process safeguards to reduce, though not eliminate, this
            risk.
 As
            of the
            end of the period covered by this report, the Company conducted an evaluation,
            under the supervision and with the participation of our principal executive
            officer and our principal financial officer of the effectiveness of the
            design
            and operation of our disclosure controls and procedures. Based on this
            evaluation, our principal executive officer and our principal financial
            officer
            concluded that our disclosure controls and procedures were effective
            as of the
            end of the period covered by this report.
 
 Based
        on
        their evaluation of our disclosure controls and procedures (as defined in
        Rules
        13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
        1934,
        as amended (the "Exchange Act"), as of the end of the period covered by this
        report, our chief executive officer and chief financial officer have concluded
        that our disclosure controls and procedures are designed to ensure that
        information required to be disclosed by us in the reports that we file or
        submit
        under the Exchange Act is recorded, processed, summarized, and reported within
        the time periods specified in the SEC's rules and forms and is accumulated
        and
        communicated to the company’s management, as appropriate, to allow timely
        decisions regarding required disclosure, and are operating in an effective
        manner.
  (b) **Changes
        in Internal Control over Financial Reporting**
 
 There
        were no changes in internal controls over
        financial reporting that occurred during the first six months of 2008 that
        have
        materially affected, or are reasonably likely to materially affect, the
        Company’s internal control over financial reporting.
  39
  **PART
        II. OTHER INFORMATION**
  **Item
        1.**  **Legal Proceedings**
  We
        are
        not currently a party to any material legal proceedings. From time to time,
        however, we may become involved in various lawsuits and legal proceedings
        which
        arise in the ordinary course of business.
  **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.
 
 **GENERAL
        RISKS RELATING TO OUR BUSINESS**
  **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 experienced
        growth in our revenues of over seventy percent (71%) in fiscal 2006 and over
        sixty percent (62%) during the last fiscal year; however, there can be no
        assurance that we will be able to maintain such growth or any growth of our
        business. An expansion of our operations 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.
 
 **The
        terms of any future financing may adversely affect your interest as
        stockholders.**
 
 If
        we
        require additional financing in the future, we may be required to incur
        indebtedness or issue equity securities, the terms of which may adversely
        affect
        your interests in the Company. For example, the issuance of additional
        indebtedness may be senior in right of payment to your shares upon liquidation
        of the Company. In addition, indebtedness may be under terms that make the
        operation of our business more difficult because the lender’s consent will be
        required before we take certain actions. Similarly the terms of any equity
        securities we issue may be senior in right of payment of dividends to your
        common stock and may contain superior rights and other rights as compared
        to
        your common stock. Further, any such issuance of equity securities may dilute
        your interest in the Company.
  40
  **Covenants
        in our debt instruments restrict or prohibit our ability to engage in or
        enter
        into a variety of transactions.**
  The
        indenture governing our Notes contains various covenants that may limit our
        discretion in operating our business. In particular, we are limited in our
        ability to merge, consolidate or transfer substantially all of our assets,
        issue
        preferred stock of subsidiaries and create liens on our assets to secure
        debt.
        In addition, if there is default, and we do not maintain certain financial
        covenants or we do not maintain borrowing availability in excess of certain
        pre-determined levels, we may be unable to incur additional indebtedness,
        make
        restricted payments (including paying cash dividends on our capital stock)
        or
        redeem or repurchase our capital stock.
  The
        indenture governing our Notes requires us to maintain certain financial ratios
        and limits our ability to make capital expenditures. These covenants and
        ratios
        could have an adverse effect on our business by limiting our ability to take
        advantage of financing, merger and acquisition or other corporate opportunities
        and to fund our operations. Any future debt could also contain financial
        and
        other covenants more restrictive than those imposed under the indenture
        governing our Notes.
 
 **Our
        debt may have significant consequences, and cash flows and capital resources
        may
        be insufficient to make required payments on our substantial indebtedness
        and
        future indebtedness.**
 
 We
        have a
        substantial amount of debt. As of June 30, 2008, we had approximately $373
        million of total current liabilities, in addition to $48 million outstanding
        under our indenture relating to the Notes issued in August 2006. Our substantial
        debt could have important consequences to you. For example, it
        could:
  -
                  reduce the availability of our cash flow to fund future working
                  capital,
                  capital expenditures, acquisitions and other general corporate
                  purposes;
  -
                  limit our ability to obtain additional financing for working capital,
                  capital expenditures, and other general corporate
                  requirements;
  -
                  expose us to interest rate fluctuations because the interest rate
                  for a
                  portion of our debt is variable;
  -
                  increase our vulnerability to general adverse economic and industry
                  conditions;
  -
                  require us to sell assets to reduce indebtedness or influence our
                  decisions about whether to do so;
  -
                  restrict us from making strategic acquisitions or pursuing business
                  opportunities;
  -
                  limit our flexibility in planning for, or reacting to, changes
                  in our
                  business and the industry in which we
                  operate;
  -
                  limit, along with the financial and other restrictive covenants
                  in our
                  indebtedness, among other things, our ability to borrow additional
                  funds;
                  and
  -
                  place us at a competitive disadvantage compared to competitors
                  that may
                  have proportionately less debt.
  In
        addition, our ability to make scheduled payments or refinance our obligations
        depends on our successful financial and operating performance, cash flows,
        and
        capital resources, which in turn depend upon prevailing economic conditions
        and
        certain financial, business, and other factors, many of which are beyond
        our
        control. If our cash flows and capital resources are insufficient to fund
        our
        debt obligations, we may be forced to reduce or delay capital expenditures,
        sell
        material assets or operations, obtain additional capital, restructure our
        debt,
        or declare bankruptcy. In the event that we are required to dispose of material
        assets or operations to meet our debt service and other obligations, the
        value
        realized on such assets or operations will depend on market conditions and
        the
        availability of buyers. Accordingly, we may be forced to sell at an unfavorable
        price. Furthermore, our obligations under various debt instruments are secured
        by our equity interests in Advanced Electric Motors, Inc. These security
        interests may limit our ability to dispose of material assets or operations.
        We
        also may not be able to restructure our debt on favorable economic terms,
        if at
        all.
  41
 
 In
        order
        to mitigate our exposure to volatility in interest rates and foreign currency
        exchange rates fluctuation associated with $38 million 2012 senior notes,
        on
        April 3, 2007, the Company entered into a cross currency interest rate swap
        transaction (the SWAP) with Merrill Lynch International. The SWAP, with a
        notional principal value of $38 million, converts the LIBOR plus 3.35% variable
        interest to a 7.2% per annum RMB fixed interest rate. The Company uses this
        derivative instrument only to hedge exposures in the ordinary business course
        and does not invest in derivative instruments for speculative
        purposes.
 
 The
        Company management watches closely and measures the risk of the SWAP on a
        regular basis, which includes effectiveness analysis and pricing model
        discussion with third party that provides market value pricing on quarterly
        basis. With the new enforced SFAS 157, *Fair
        Value Measurements* , the
        Company realizes that there is risk inherent in a particular valuation technique
        used to measure fair value of financial derivative liability and risk inherent
        in the inputs to the valuation technique.
  **We
        do not anticipate paying cash dividends on our common
        stock.**
  We
        have
        never paid cash dividends on our common stock and do not anticipate paying
        cash
        dividends in the foreseeable future. Presently, we intend to follow a policy
        of
        retaining all of our earnings, if any, to finance development and expansion
        of
        our business.
 
 **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
        motors and other motor products. While we have been granted twelve patents
        in
        China relating to linear motor and automobile specialty micro-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.
  **Because
        of our dependence on a few key customers, the loss of any key customer could
        cause a significant decline in our revenues.**
  Five
        major customers accounted for 74% of the net revenue for the six months ended
        June 30, 2008. 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 key component parts, and any adverse
        changes in such supply or the costs of raw materials may adversely affect
        our
        operations.**
  Five
        major vendors provided approximately 78% of the Company’s purchases of raw
        materials for the six months ended June 30, 2008. 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
        the
        members of our senior management. 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.
 
 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 and be able to take actions that may be
        adverse
        to your interests.**
 
 Our
        directors and executive officers, directly or through entities that they
        control, currently beneficially own, as a group, approximately 51% of our
        issued
        and outstanding common stock as of June 30, 2008. 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 stockholders. Furthermore, our directors
        and officers, as a group, have the ability to significantly influence or
        control
        the outcome of all matters requiring stockholder 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.
  42
  **RISKS
        RELATING TO DOING BUSINESS IN 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 stockholders. Please see “Description
        of Business - PRC Regulations.”
 
 **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 affected.**
  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
        was
        33% before January 1, 2008. On January 1, 2008, the new Chinese Enterprise
        Income Tax (“EIT”) law has replaced the existing laws for Domestic Enterprises
        (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of
        25% is now applicable to both DES and FIEs. A reduced income tax rate of
        10% 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 lower
        tax
        liabilities. The estimated tax savings for the six months ended June 30,
        2008
        and 2007 without preferential tax treatment amounted to $3,074,637 and
        $4,608,753, respectively. The estimated tax savings for the three months
        ended
        June 30, 2008 and 2007 amounted to $1,588,711 and $2,509,101,
        respectively.
 
 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.
 
 The
        legal
        authorities in China are in the process of evaluating heretofore tax and
        fee
        benefits provided to foreign investors and companies to encourage development
        within the country such that these benefits may be lessened or removed with
        the
        consequence that expenses may rise impacting margins and net
        income.
  Other
        than the above tax law changes, the legal authorities are continuing the
        evaluation of tax and fee benefits that have been available to foreign investors
        and companies operating in China and tax holidays for new enterprises. It
        is
        anticipated, in the near term, there are going to be more changes that
        substantially 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 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. 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.
  43
 
 **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 the 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.
 
 **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 stockholder or
        group
        of stockholders 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 the 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.
  44
  **Item
        2.**  **Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
 On
        June
        24, 2008, we entered into a Purchase Agreement with certain investors pursuant
        to which, on June 25, 2008, we sold to the investors 3.5 million shares of
        the
        our common stock, par value $0.00001 per share (the “Shares”) at $14.13 per
        share for a total aggregate purchase price of $49,455,000. The proceeds were
        used to pay for the acquisition by Harbin Tech Full Electric Co. Ltd., our
        wholly-owned subsidiary and a PRC company (“HTFE”) of Weihai Hengda Electric
        Motor (Group) Co. Ltd., a PRC corporation (“Hengda”).
 
 On
        July
        24, 2008, the Company filed a registration statement for the resale of the
        3.5
        million shares issued on June 25, 2008.
 
 
 **Item
        3.**  **Defaults upon Senior Securities**
  None.
 
 **Item
        4.**  **Submission of Matters to a Vote of Securities Holders**
  None.
 
 **Item
        5.**  **Other Information**
 
 On
        March
        27, 2008, Harbin Tech Full Electric Co., Ltd. (HTFE), a wholly owned subsidiary
        of the Company, entered into a letter of intent (the “Letter of Intent”) to
        acquire Weihai Hengda Electric Motor Co. Ltd., a PRC corporation (“Hengda”) and
        Wendeng Second Electric Motor Factory, a PRC corporation (“Wendeng”) which is
        operated and managed by Hengda Electric Motor. Hengda Electric Motor is based in
        China’s costal Weihai City, Shandong Province. Hengda manufactures and
        distributes various industrial rotary motors such as high/low voltage motors,
        AC/DC motors and speed control motors through its established sales network
        and
        distribution channels.
 
 On
        July
        10, 2008, HTFE entered into an Equity and Assets Transfer Agreement (the
        “Agreement”) with Wendeng, the Committee of Labor Union of Wendeng (the “Labor
        Committee”) and the People’s Government of Zhangjiachan Town and Wendeng County
        (“Zhangjiachan Town”) with respect to the acquisition by HTFE of Hengda. Wendeng
        was the owner of 97.15% of the equity of Hengda and the Labor Committee was
        the
        owner of the remaining 2.85% of the equity of Hengda. Zhangjiachan Town was
        the
        shareholder and governing authority of Wendeng.
 
 Pursuant
        to the terms of the Agreement, HTFE has agreed to acquire (i) all of the
        outstanding shares of Hengda, (ii) all other assets of Wendeng, and (iii)
        all
        remaining equity of Hengda’s subsidiaries not currently owned by Hengda, which
        consist of 9.1% of Wendeng Wanda Chemical Products Limited Liability Company,
        4.4% of Wendeng Wenbao Electrical Motors Limited Liability Company, 10% of
        Wendeng Chengxin Electrical Motors Limited Liability Company and 9.1% of
        Wendeng
        Yongheng Electrical Instruments Limited Liability Company, for an aggregate
        price of RMB375,000,000 (approximately US$54,000,000) payable in cash. The
        purchase price was determined in accordance with the guidelines agreed by
        all
        parties and based upon Hengda’s audited total revenues of approximately US$48.7
        million and net profits of approximately US$6.5 million, in each case, for
        the
        twelve month period ending March 31, 2008.
 
 On
        July
        14, 2008, HTFE completed the acquisition of Hengda. As of the closing, HTFE
        has
        completed the required PRC legal procedures regarding the share and assets
        transfer and business registration of Hengda with respect to the acquisition,
        as
        contemplated by the Agreement signed on July 10, 2008.
 
 **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.
  45
  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.3.3
                
                Amendment
                    to the Bylaws of the Company
                
                Filed
                    as Exhibit 4.1 to the current report on Form 8-K filed with the
                    Commission on December 20, 2006 and incorporated herein by
                    reference.10.1
                
                Registration
                    Rights Agreement dated as of August 31, 2005
                
                Filed
                    as Exhibit 10.1 to the registration statement on Form SB-2 filed
                    with the
                    Commission on April 27, 2006 and incorporated herein by
                    reference.10.2
                
                Common
                    Stock Purchase Agreement dated as of August 31, 2005
                
                Filed
                    as Exhibit 10.2 to the registration statement on Form SB-2 filed
                    with the
                    Commission on April 27, 2006 and incorporated herein by
                    reference.10.3
                
                Option
                    Agreement dated as of August 31, 2005
                
                Filed
                    as Exhibit 10.3 to the registration statement on Form SB-2 filed
                    with the
                    Commission on April 27, 2006 and incorporated herein by
                    reference.10.4
                
                Employment
                    Agreement, dated October 12, 2005, between the Company and Mr.
                    Barry
                    Raeburn
                
                Filed
                    as Exhibit 10.1 to the current report on Form 8-K filed with
                    the
                    Commission on October 17, 2005 and incorporated herein by
                    reference.10.5
                
                Term
                    Sheet dated August 2, 2006
                
                Filed
                    as Exhibit 10.5 to the current report on Form 8-K filed with
                    the
                    Commission on August 2, 2006 and incorporated herein by
                    reference.10.6
                
                Agreement
                    on Cooperation between Harbin Tech Full Electric Co., Ltd. and
                    Institute
                    of Electrical Engineering of the Chinese Academy of
                    Sciences
                
                Filed
                    as Exhibit 10.6 to the current report on Form 8-K filed with
                    the
                    Commission on August 25, 2006 and incorporated herein by
                    reference.10.7
                
                Purchase
                    Agreement among the Company, Advanced Electric Motors, Inc.,
                    Citadel
                    Equity Fund Ltd. and Merrill Lynch International, dated August
                    29,
                    2006
                
                Filed
                    as Exhibit 4.1 to the current report on Form 8-K filed with the
                    Commission
                    on September 1, 2006 and incorporated herein by
                    reference.10.8
                
                Indenture
                    among the Company, Advanced Electric Motors, Inc. and The Bank
                    of New
                    York, as trustee, dated August 30, 2006
                
                Filed
                    as Exhibit 4.2 to the current report on Form 8-K filed with the
                    Commission
                    on September 1, 2006 and incorporated herein by
                    reference.10.9(a)
                
                2010
                    Global Note
                
                Filed
                    as Exhibit 4.3(a) to the current report on Form 8-K filed with
                    the
                    Commission on September 1, 2006 and incorporated herein by
                    reference.
  46
  10.9(b)
                
                2012
                    Global Note
                
                Filed
                    as Exhibit 4.3(b) to the current report on Form 8-K filed with
                    the
                    Commission on September 1, 2006 and incorporated herein by
                    reference.10.10
                
                Registration
                    Rights Agreement between the Company and the Investors, dated
                    August 30,
                    2006
                
                Filed
                    as Exhibit 4.4 to the current report on Form 8-K filed with the
                    Commission
                    on September 1, 2006 and incorporated herein by
                    reference.10.11
                
                Share
                    Pledge Agreement between the Company and The Bank of New York,
                    as
                    collateral agent, dated August 30, 2006
                
                Filed
                    as Exhibit 4.5 to the current report on Form 8-K filed with the
                    Commission
                    on September 1, 2006 and incorporated herein by
                    reference.10.12
                
                Warrant
                    Agreement between the Company and The Bank of New York, as warrant
                    agent,
                    dated August 30, 2006
                
                Filed
                    as Exhibit 4.6 to the current report on Form 8-K filed with the
                    Commission
                    on September 1, 2006 and incorporated herein by
                    reference.10.13(a)
                
                Global
                    First Tranche 2012 Warrants
                
                Filed
                    as Exhibit 4.7(a) to the current report on Form 8-K filed with
                    the
                    Commission on September 1, 2006 and incorporated herein by
                    reference.10.13(b)
                
                Global
                    Second Tranche 2012 Warrants
                
                Filed
                    as Exhibit 4.7(b) to the current report on Form 8-K filed with
                    the
                    Commission on September 1, 2006 and incorporated herein by
                    reference.10.13(c)
                
                Global
                    2009 Warrants
                
                Filed
                    as Exhibit 4.7(c) to the current report on Form 8-K filed with
                    the
                    Commission on September 1, 2006 and incorporated herein by
                    reference.10.14
                
                Voting
                    Agreement among the Company, Tianfu Yang and Citadel Equity Fund
                    Ltd.,
                    dated August 30, 2006
                
                Filed
                    as Exhibit 4.8 to the current report on Form 8-K filed with the
                    Commission
                    on September 1, 2001 and incorporated herein by
                    reference.10.15
                
                Noncompetition
                    Covenant and Agreement among Citadel Equity Fund Ltd., Merrill
                    Lynch
                    International and Tianfu Yang, dated August 30, 2006
                
                Filed
                    as Exhibit 10.15 to the Registration Statement on SB-2 filed
                    with the
                    Commission on October 4, 2006 and incorporated herein by
                    reference.10.16
                
                Agreement
                    between Harbin Tech Full Electric Co., Ltd. and Shanghai Lingang
                    Investment and Development Company Limited, dated September 8,
                    2006
                
                Filed
                    as Exhibit 10.15 to the Registration Statement on SB-2 filed
                    with the
                    Commission on October 4, 2006 and incorporated herein by
                    reference.10.17
                
                Letter
                    Agreement dated April 9, 2007 by and among Harbin Electric, Inc,
                    Shelton
                    Technology LLC, Shaotang Chen and Xioagang Luo
                
                Filed
                    as Exhibit 10.1 to the current report on Form 8-K filed with
                    the
                    Commission on April 13, 2007 and incorporated herein by
                    reference.
  47
  10.18
                
                License
                    Agreement dated as of April 9, 2007 by and among Advanced Automation
                    Group. LLC, Shelton Technology, LLC, Shaotang Chen and Xiaogang
                    Luo
                
                Filed
                    as Exhibit 10.2 to the current report on Form 8-K filed with
                    the
                    Commission on April 13, 2007 and incorporated herein by
                    reference.10.19
                
                Employment
                    Agreement dated April 9, 2007 by and between Advanced Automation
                    Group,
                    LLC and Shaotang Chen
                
                Filed
                    as Exhibit 10.3 to the current report on Form 8-K filed with
                    the
                    Commission on April 13, 2007 and incorporated herein by
                    reference.10.20
                
                Employment
                    Agreement dated April 9, 2007 by and between Advanced Automation
                    Group,
                    LLC and Xiaogang Luo.
                
                Filed
                    as Exhibit 10.4 to the current report on Form 8-K filed with
                    the
                    Commission on April 13, 2007 and incorporated herein by
                    reference.10.21
                
                Asset
                    Purchase Agreement dated June 16, 2007, by and between the Company,
                    Harbin
                    Tech Full Electric Co., Ltd., Harbin Taifu Auto Electric Co.,
                    Ltd., Tianfu
                    Yang, Tianli Yang, Suofei Xu, Zedong Xu and Harbin Tech Full
                    Industry Co.,
                    Ltd.
                
                Filed
                    as Exhibit 10.1 to the current report on Form 8-K filed with
                    the
                    Commission on June 19, 2007 and incorporated herein by
                    reference.10.22
                
                Equity
                    Registration Rights Agreement, dated October 17, 2007, by and
                    between the
                    Company, Hero Wave Investment Limited a British Virgin Islands
                    company,
                    and Tianfu Yang, as guarantor.
                
                Filed
                    as Exhibit 10.1 to the current report on Form 8-K filed with
                    the
                    Commission on October 23, 2007 and incorporated herein by
                    reference.10.23
                
                Employment
                    Agreement dated November 27, 2007 by and between the Company
                    and Ms.
                    Christy Young Shue
                
                Filed
                    as Exhibit 10.1 to the current report on Form 8-K filed with
                    the
                    Commission on November 30, 2007 and incorporated herein by
                    reference.10.24
                
                Letter
                    of Intent dated March 27, 2008, by and among Harbin Tech Full
                    Electric
                    Co., Ltd., Wendeng Second Electric Motor Factory, The Committee
                    of Labor
                    Union of Wendeng Second Eletric Motor Factory and The People’s Government
                    of Zhangjiachan Town, Wendeng County.
                
                Filed
                    as Exhibit 10.1 to the current report on Form 8-K filed with
                    the
                    Commission on March 31, 2008 and incorporated herein by
                    reference.14.1
                
                Code
                    of Ethics and Business Conduct
                
                Previously
                    filed.
  48
  21.1
                
                List
                    of subsidiaries
                
                Filed
                    as Exhibit 21.1 to the quarterly report on Form 10-QSB filed
                    with the
                    Commission on May 15, 2006 and incorporated herein by
                    reference.31.1
                
                Certification
                    by the Chief Executive Officer pursuant to Rule 13a-14(a) or
                    15d-14(a)
                
                Filed
                    herewith as Exhibit 31.1.31.2
                
                Certification
                    by the Chief Financial Officer pursuant to Rule 13a-14(a) or
                    15d-14(a)
                
                Filed
                    herewith as Exhibit 31.2.32.1
                
                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.
 
 (b)
                Reports
                    on Form 8-K during the first quarter ended June 30,
                    2008:
 
 (i)
                Form
                    8-K filed on February 6, 2008 disclosing the settlement of the
                    action
                    filed against the Company by Leong Sing Lye in the United States
                    District
                    Court for the District of Nevada.(ii)
                Form
                    8-K filed on March 13, 2008 disclosing the Company’s issuance of a press
                    release containing the Company’s operating results for the fourth quarter
                    of 2007 and the year ended December 31, 2007.(iii)
                Form
                    8-K filed on March 31, 2008 disclosing the Company’s entry into a Letter
                    of Intent to acquire Weihai Hengda Electric Motor Co. Ltd. and
                    Wendeng Second Electric Motor Factory.(iv)
                Form
                    8-K filed on May 19, 2008 disclosing that the Company held presentations
                    at the Third Annual China Discovery Tour hosted by Roth Capital
                    Partners
                    in Beijing - China regarding the Company’s business and acquisition
                    through May 2008.(v)
                Form
                    8-K filed on June 26, 2008 disclosing the Company’s entry into a Purchase
                    Agreement with certain investors, pursuant to which the Company
                    sold to
                    the investors 3.5 million shares of the Company’s common
                    stock.(vi)
                Form
                    8-K filed on July 11, 2008 disclosing that Harbin Tech Full Electric
                    Co.
                    Ltd., a PRC company and a wholly-owned subsidiary of the Company
                    entered
                    into an Equity and Assets Transfer Agreement with Wendeng Second
                    Electric
                    Motor Factory, a PRC corporation (“Wendeng”), and Weihai Hengda Electric
                    Motor (Group) Co. Ltd., a PRC corporation (“Hengda”).(vii)
                Form
                    8-K filed on July 16, 2008 disclosing that the Company completed
                    the
                    acquisition of Hengda and
                    Wendeng.
 
 49
 
 **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:
                  August 8, 2008
              By:
              /s/ Tianfu
                  YangTianfu
                  YangChief
                  Executive Officer, Director and Chairman of the Board
                (Principal
                  Executive Officer)
  Date:
                  August 8, 2008
              By:
              /s/ Zedong
                  XuZedong
                  XuChief
                  Financial Officer
                (Principal
                  Accounting Officer)
 
 **EXHIBIT
        INDEX**
 
 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.3.3
              
              Amendment
                  to the Bylaws of the Company
              
              Filed
                  as Exhibit 4.1 to the current report on Form 8-K filed with the
                  Commission on December 20, 2006 and incorporated herein by
                  reference.10.1
              
              Registration
                  Rights Agreement dated as of August 31, 2005
              
              Filed
                  as Exhibit 10.1 to the registration statement on Form SB-2 filed
                  with the
                  Commission on April 27, 2006 and incorporated herein by
                  reference.10.2
              
              Common
                  Stock Purchase Agreement dated as of August 31, 2005
              
              Filed
                  as Exhibit 10.2 to the registration statement on Form SB-2 filed
                  with the
                  Commission on April 27, 2006 and incorporated herein by
                  reference.10.3
              
              Option
                  Agreement dated as of August 31, 2005
              
              Filed
                  as Exhibit 10.3 to the registration statement on Form SB-2 filed
                  with the
                  Commission on April 27, 2006 and incorporated herein by
                  reference.
  50
  10.4
              
              Employment
                  Agreement, dated October 12, 2005, between the Company and Mr.
                  Barry
                  Raeburn
              
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on October 17, 2005 and incorporated herein by
                  reference.10.5
              
              Term
                  Sheet dated August 2, 2006
              
              Filed
                  as Exhibit 10.5 to the current report on Form 8-K filed with the
                  Commission on August 2, 2006 and incorporated herein by
                  reference.10.6
              
              Agreement
                  on Cooperation between Harbin Tech Full Electric Co., Ltd. and
                  Institute
                  of Electrical Engineering of the Chinese Academy of
                  Sciences
              
              Filed
                  as Exhibit 10.6 to the current report on Form 8-K filed with the
                  Commission on August 25, 2006 and incorporated herein by
                  reference.10.7
              
              Purchase
                  Agreement among the Company, Advanced Electric Motors, Inc., Citadel
                  Equity Fund Ltd. and Merrill Lynch International, dated August
                  29,
                  2006
              
              Filed
                  as Exhibit 4.1 to the current report on Form 8-K filed with the
                  Commission
                  on September 1, 2006 and incorporated herein by
                  reference.10.8
              
              Indenture
                  among the Company, Advanced Electric Motors, Inc. and The Bank
                  of New
                  York, as trustee, dated August 30, 2006
              
              Filed
                  as Exhibit 4.2 to the current report on Form 8-K filed with the
                  Commission
                  on September 1, 2006 and incorporated herein by
                  reference.10.9(a)
              
              2010
                  Global Note
              
              Filed
                  as Exhibit 4.3(a) to the current report on Form 8-K filed with
                  the
                  Commission on September 1, 2006 and incorporated herein by
                  reference.10.9(b)
              
              2012
                  Global Note
              
              Filed
                  as Exhibit 4.3(b) to the current report on Form 8-K filed with
                  the
                  Commission on September 1, 2006 and incorporated herein by
                  reference.10.10
              
              Registration
                  Rights Agreement between the Company and the Investors, dated August
                  30,
                  2006
              
              Filed
                  as Exhibit 4.4 to the current report on Form 8-K filed with the
                  Commission
                  on September 1, 2006 and incorporated herein by
                  reference.10.11
              
              Share
                  Pledge Agreement between the Company and The Bank of New York,
                  as
                  collateral agent, dated August 30, 2006
              
              Filed
                  as Exhibit 4.5 to the current report on Form 8-K filed with the
                  Commission
                  on September 1, 2006 and incorporated herein by
                  reference.10.12
              
              Warrant
                  Agreement between the Company and The Bank of New York, as warrant
                  agent,
                  dated August 30, 2006
              
              Filed
                  as Exhibit 4.6 to the current report on Form 8-K filed with the
                  Commission
                  on September 1, 2006 and incorporated herein by
                  reference.10.13(a)
              
              Global
                  First Tranche 2012 Warrants
              
              Filed
                  as Exhibit 4.7(a) to the current report on Form 8-K filed with
                  the
                  Commission on September 1, 2006 and incorporated herein by
                  reference.10.13(b)
              
              Global
                  Second Tranche 2012 Warrants
              
              Filed
                  as Exhibit 4.7(b) to the current report on Form 8-K filed with
                  the
                  Commission on September 1, 2006 and incorporated herein by
                  reference.
  51
  10.13(c)
              
              Global
                  2009 Warrants
              
              Filed
                  as Exhibit 4.7(c) to the current report on Form 8-K filed with
                  the
                  Commission on September 1, 2006 and incorporated herein by
                  reference.10.14
              
              Voting
                  Agreement among the Company, Tianfu Yang and Citadel Equity Fund
                  Ltd.,
                  dated August 30, 2006
              
              Filed
                  as Exhibit 4.8 to the current report on Form 8-K filed with the
                  Commission
                  on September 1, 2001 and incorporated herein by
                  reference.10.15
              
              Noncompetition
                  Covenant and Agreement among Citadel Equity Fund Ltd., Merrill
                  Lynch
                  International and Tianfu Yang, dated August 30, 2006
              
              Filed
                  as Exhibit 10.15 to the Registration Statement on SB-2 filed with
                  the
                  Commission on October 4, 2006 and incorporated herein by
                  reference.10.16
              
              Agreement
                  between Harbin Tech Full Electric Co., Ltd. and Shanghai Lingang
                  Investment and Development Company Limited, dated September 8,
                  2006
              
              Filed
                  as Exhibit 10.15 to the Registration Statement on SB-2 filed with
                  the
                  Commission on October 4, 2006 and incorporated herein by
                  reference.10.17
              
              Letter
                  Agreement dated April 9, 2007 by and among Harbin Electric, Inc,
                  Shelton
                  Technology LLC, Shaotang Chen and Xioagang Luo
              
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on April 13, 2007 and incorporated herein by
                  reference.10.18
              
              License
                  Agreement dated as of April 9, 2007 by and among Advanced Automation
                  Group. LLC, Shelton Technology, LLC, Shaotang Chen and Xiaogang
                  Luo
              
              Filed
                  as Exhibit 10.2 to the current report on Form 8-K filed with the
                  Commission on April 13, 2007 and incorporated herein by
                  reference.10.19
              
              Employment
                  Agreement dated April 9, 2007 by and between Advanced Automation
                  Group,
                  LLC and Shaotang Chen
              
              Filed
                  as Exhibit 10.3 to the current report on Form 8-K filed with the
                  Commission on April 13, 2007 and incorporated herein by
                  reference.10.20
              
              Employment
                  Agreement dated April 9, 2007 by and between Advanced Automation
                  Group,
                  LLC and Xiaogang Luo.
              
              Filed
                  as Exhibit 10.4 to the current report on Form 8-K filed with the
                  Commission on April 13, 2007 and incorporated herein by
                  reference.10.21
              
              Asset
                  Purchase Agreement dated June 16, 2007, by and between the Company,
                  Harbin
                  Tech Full Electric Co., Ltd., Harbin Taifu Auto Electric Co., Ltd.,
                  Tianfu
                  Yang, Tianli Yang, Suofei Xu, Zedong Xu and Harbin Tech Full Industry
                  Co.,
                  Ltd.
              
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on June 19, 2007 and incorporated herein by
                  reference.
  52
  10.22
              
              Equity
                  Registration Rights Agreement, dated October 17, 2007, by and between
                  the
                  Company, Hero Wave Investment Limited a British Virgin Islands
                  company,
                  and Tianfu Yang, as guarantor.
              
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on October 23, 2007 and incorporated herein by
                  reference.10.23
              
              Employment
                  Agreement dated November 27, 2007 by and between the Company and
                  Ms.
                  Christy Young Shue
              
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on November 30, 2007 and incorporated herein by
                  reference.10.24
              
              Letter
                  of Intent dated March 27, 2008, by and among Harbin Tech Full Electric
                  Co., Ltd., Wendeng Second Electric Motor Factory, The Committee
                  of Labor
                  Union of Wendeng Second Eletric Motor Factory and The People’s Government
                  of Zhangjiachan Town, Wendeng County.
              
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on March 31, 2008 and incorporated herein by
                  reference.14.1
              
              Code
                  of Ethics and Business Conduct
              
              Previously
                  filed.21.1
              
              List
                  of subsidiaries
              
              Filed
                  as Exhibit 21.1 to the quarterly report on Form 10-QSB filed with
                  the
                  Commission on May 15, 2006 and incorporated herein by
                  reference.31.1
              
              Certification
                  by the Chief Executive Officer pursuant to Rule 13a-14(a) or
                  15d-14(a)
              
              Filed
                  herewith as Exhibit 31.1.31.2
              
              Certification
                  by the Chief Financial Officer pursuant to Rule 13a-14(a) or
                  15d-14(a)
              
              Filed
                  herewith as Exhibit 31.2.32.1
              
              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.
  
 (b)
              Reports
                  on Form 8-K during the first quarter ended March 31,
                  2008:
 
 (i)
              Form
                  8-K filed on February 6, 2008 disclosing the settlement of the
                  action
                  filed against the Company by Leong Sing Lye in the United States
                  District
                  Court for the District of Nevada.
 (ii)
              Form
                  8-K filed on March 13, 2008 disclosing the Company’s issuance of a press
                  release containing the Company’s operating results for the fourth quarter
                  of 2007 and the year ended December 31, 2007.
 (iii)
              Form
                  8-K filed on March 31, 2008 disclosing the Company’s entry into a Letter
                  of Intent to acquire Weihai Hengda Electric Motor Co. Ltd. and
                  Wendeng Second Electric Motor Factory.(iv)
              Form
                  8-K filed on May 19, 2008 disclosing that the Company held presentations
                  at the Third Annual China Discovery Tour hosted by Roth Capital
                  Partners
                  in Beijing - China regarding the Company’s business and acquisition
                  through May 2008.(v)
              Form
                  8-K filed on June 26, 2008 disclosing the Company’s entry into a Purchase
                  Agreement with certain investors, pursuant to which the Company
                  sold to
                  the investors 3.5 million shares of the Company’s common
                  stock.(vi)
              Form
                  8-K filed on July 11, 2008 disclosing that Harbin Tech Full Electric
                  Co.
                  Ltd., a PRC company and a wholly-owned subsidiary of the Company
                  entered
                  into an Equity and Assets Transfer Agreement with Wendeng Second
                  Electric
                  Motor Factory, a PRC corporation (“Wendeng”), and Weihai Hengda Electric
                  Motor (Group) Co. Ltd., a PRC corporation (“Hengda”).(vii)
              Form
                  8-K filed on July 16, 2008 disclosing that the Company completed
                  the
                  acquisition of Hengda and Wendeng.
 
 53