**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 March 31, 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   o No x




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
                  filer o





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


Yes
                oNo x





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**




Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after
      the distribution of securities under a plan confirmed by a court.
      Yes 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 April 30, 2008: 18,370,456 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 March 31, 2008 (Unaudited) and December 31, 2007
            
            1Consolidated
                Statements of Income and Other Comprehensive Income
                (Unaudited)
              For
                the Three Months Ended March 31, 2008 and 2007
            
            2Consolidated
                Statements of Stockholders’ Equity (Unaudited)
            
            3Consolidated
                Statements of Cash Flows (Unaudited)
              For
                the Three Months Ended March 31, 2008 and 2007
            
            4Notes
                to the Consolidated Financial Statements (Unaudited)
            
            5Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            32Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            36Item
                4. Controls and Procedures
            
            36**Part
                II. Other Information**Item
                1. Legal Proceedings.
            
            37Item
                1A. Risk Factors.
            
            37Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.
            
            41Item
                3. Defaults upon Senior Securities.
            
            41Item
                4. Submission of Matters to a Vote of Securities Holders.
            
            41Item
                5. Other Information.
            
            41Item
                6. Exhibits.
            
            42Signatures
            
            46Index
                to Exhibits
            
            46







**PART
      I. FINANCIAL INFORMATION**





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




HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      MARCH 31, 2008 AND DECEMBER 31, 2007




March 31,
            
            December 31,2008
            
            2007UNAUDITEDA
                S S E T SCURRENT
                ASSETS:Cash
            
            $
            36,904,184
            
            $
            45,533,893Accounts
                receivable, net of allowance for doubtful accounts of
                $121,071and
                $116,238 as of March 31, 2008 and December 31, 2007,
                respectively
            
            
            29,575,532
            
            
            23,216,543Inventories
            
            
            2,554,312
            
            
            2,570,929Other
                receivables
            
            
            1,149,591
            
            
            326,639Advances
                on inventory purchases
            
            
            2,738,306
            
            
            1,772,204Total
                current assets
            
            
            72,921,925
            
            
            73,420,208PLANT
                AND EQUIPMENT, net
            
            
            26,838,936
            
            
            23,858,035OTHER
                ASSETS:Debt
                issue costs, net of amortization
            
            
            1,986,537
            
            
            2,214,717Advances
                on equipment purchases
            
            
            31,277,020
            
            
            24,328,386Advances
                on intangible assets
            
            
            1,442,280
            
            
            1,384,710Deposits
                on acquisition
            
            
            714,000
            
            
            -Intangible
                assets, net of accumulated amortization
            
            
            5,897,800
            
            
            5,899,989Other
                assets
            
            
            413,676
            
            
            397,263Cross
                currency hedge receivable
            
            
            121,837
            
            
            145,945Deposit
                in derivative hedge
            
            
            1,000,000
            
            
            1,000,000Total
                other assets
            
            
            42,853,150
            
            
            35,371,010Total
                assets
            
            $
            142,614,011
            
            $
            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
            
            $
            128,504
            
            $
            263,314Other
                payables
            
            
            221,636
            
            
            1,380,119Other
                payables - related party
            
            
            -
            
            
            45,491Accrued
                liabilities
            
            
            63,024
            
            
            83,099Customer
                deposits
            
            
            345,172
            
            
            333,253Taxes
                payable
            
            
            1,772,402
            
            
            839,299Interest
                payable
            
            
            253,823
            
            
            1,122,000Total
                current liabilities
            
            
            2,784,561
            
            
            4,066,575NOTES
                PAYABLE, net of debt discount $15,745,236 and $16,878,269 as ofMarch
                31, 2008 and December 31, 2007, respectively
            
            
            32,465,660
            
            
            33,121,731FAIR
                VALUE OF DERIVATIVE INSTRUMENT
            
            
            15,338,258
            
            
            10,844,372Total
                liabilities
            
            
            50,588,479
            
            
            48,032,678COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -SHAREHOLDERS'
                EQUITY:Common
                Stock, $0.00001 par value, 100,000,000 shares authorized,18,370,456
                and 18,143,156 shares issued and outstandingas
                of March 31, 2008 and December 31, 2007, respectively
            
            
            183
            
            
            181Paid-in-capital
            
            
            46,212,369
            
            
            44,970,589Retained
                earnings
            
            
            36,643,931
            
            
            32,281,312Statutory
                reserves
            
            
            10,005,079
            
            
            9,014,462Accumulated
                other comprehensive loss
            
            
            (836,030
            )
            
            (1,649,969
            )Total
                shareholders' equity
            
            
            92,025,532
            
            
            84,616,575Total
                liabilities and shareholders' equity
            
            $
            142,614,011
            
            $
            132,649,253





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








HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2008 AND 2007





(UNAUDITED)





FOR THE THREE MONTHSENDED MARCH 31,2008
            
            2007REVENUES
            
            $
            22,458,185
            
            $
            13,626,214COST
                OF SALES
            
            
            11,698,708
            
            
            6,768,286GROSS
                PROFIT
            
            
            10,759,477
            
            
            6,857,928RESEARCH
                AND DEVELOPMENT EXPENSE
            
            
            97,695
            
            
            217,840SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            2,025,959
            
            
            1,514,463INCOME
                FROM OPERATIONS
            
            
            8,635,823
            
            
            5,125,625OTHER
                EXPENSE (INCOME), NETOther
                income, net
            
            
            (4,787
            )
            
            (2,456
            )Non-operating
                expense (income), net
            
            
            13,977
            
            
            (6,321
            )Interest
                expense, net
            
            
            2,282,780
            
            
            1,730,339Total
                other expense (income), net
            
            
            2,291,970
            
            
            1,721,562INCOME
                BEFORE PROVISION FOR INCOME TAXES
            
            
            6,343,853
            
            
            3,404,063PROVISION
                FOR INCOME TAXES
            
            
            990,617
            
            
            -NET
                INCOME
            
            
            5,353,236
            
            
            3,404,063OTHER
                COMPREHENSIVE INCOME (LOSS)Foreign
                currency translation adjustment
            
            
            5,307,825
            
            
            704,668Change
                in fair value of derivative instrument
            
            
            (4,493,886
            )
            
            -COMPREHENSIVE
                INCOME
            
            $
            6,167,175
            
            $
            4,108,731EARNINGS
                PER SHAREBasicWeighted
                average number of shares
            
            
            18,209,978
            
            
            16,600,451Earning
                per share
            
            $
            0.29
            
            $
            0.21DilutedWeighted
                average number of shares
            
            
            19,952,721
            
            
            18,016,627Earning
                per share
            
            $
            0.27
            
            $
            0.19





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 otherNumber
            
            Par
            
            paid-in
            
            Unrestricted
            
            Statutory
            
            comprehensiveof shares
            
            value
            
            capital
            
            earnings
            
            reserves
            
            income (loss)
            
            TotalBALANCE,
                January 1, 2007
            
            
            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
            )
            
            
            
            
            
            
            
            16,568,080Stock
                based compensation
            
            
            
            
            
            
            
            
            246,458
            
            
            
            
            
            
            
            
            
            
            
            246,458Net
                income
            
            
            
            
            
            
            
            
            
            
            
            3,404,063
            
            
            
            
            
            
            
            
            3,404,063Foreign
                currency translation gain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            704,668
            
            
            704,668BALANCE,
                March 31, 2007 (Unaudited)
            
            
            16,600,451
            
            $
            166
            
            $
            35,419,635
            
            $
            23,273,438
            
            $
            4,523,715
            
            $
            2,736,559
            
            $
            65,953,513Exercise
                of stock warrants at $3.50
            
            
            155,198
            
            
            2
            
            
            543,191
            
            
            
            
            
            
            
            
            
            
            
            543,193Exercise
                of stock warrants at $7.80
            
            
            150,000
            
            
            1
            
            
            1,169,999
            
            
            
            
            
            
            
            
            
            
            
            1,170,000Stock
                based compensation
            
            
            
            
            
            
            
            
            1,138,665
            
            
            
            
            
            
            
            
            
            
            
            1,138,665Stock
                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
            
            
            
            
            
            
            
            
            
            
            
            13,498,621
            
            
            
            
            
            
            
            
            13,498,621Adjustment
                to statutory reserve
            
            
            
            
            
            
            
            
            
            
            
            (4,490,747
            )
            
            4,490,747
            
            
            
            
            
            -Foreign
                currency translation gain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,457,844
            
            
            6,457,844Net
                change related to cash flow hedge
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,844,372
            )
            
            (10,844,372
            )BALANCE,
                December 31, 2007
            
            
            18,143,156
            
            $
            181
            
            $
            44,970,589
            
            $
            32,281,312
            
            $
            9,014,462
            
            $
            (1,649,969
            )
            $
            84,616,575Exercise
                of stock warrants at $3.50
            
            
            202,300
            
            
            2
            
            
            708,048
            
            
            
            
            
            
            
            
            
            
            
            708,050Exercise
                of stock options at $3.10
            
            
            25,000
            
            
            -
            
            
            77,500
            
            
            
            
            
            
            
            
            
            
            
            77,500Amortization
                of stock compensation
            
            
            
            
            
            
            
            
            456,232
            
            
            
            
            
            
            
            
            
            
            
            456,232Net
                income
            
            
            
            
            
            
            
            
            
            
            
            5,353,236
            
            
            
            
            
            
            
            
            5,353,236Adjustment
                to statutory reserve
            
            
            
            
            
            
            
            
            
            
            
            (990,617
            )
            
            990,617
            
            
            
            
            
            -Foreign
                currency translation gain
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,307,825
            
            
            5,307,825Net
                change related to cash flow hedge
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,493,886
            )
            
            (4,493,886
            )BALANCE,
                March 31, 2008 (Unaudited)
            
            
            18,370,456
            
            $
            183
            
            $
            46,212,369
            
            $
            36,643,931
            
            $
            10,005,079
            
            $
            (836,030
            )
            $
            92,025,532




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


-
          3 -





HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2008 AND 2007


(UNAUDITED)





2008
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            5,353,236
            
            $
            3,404,063Adjustments
                to reconcile net income to cashprovided
                by (used in) operating activities:Depreciation
            
            
            211,710
            
            
            103,730Amortization
                of intangible assets
            
            
            242,303
            
            
            22,946Amortization
                of debt issuance costs
            
            
            228,181
            
            
            123,109Amortization
                of debt discount
            
            
            1,343,929
            
            
            1,133,033Gain
                on derivative instrument
            
            
            (168,214
            )
            
            -Stock
                based compensation
            
            
            456,232
            
            
            246,458Change
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (5,286,259
            )
            
            (637,101
            )Inventories
            
            
            120,299
            
            
            (297,191
            )Other
                receivables
            
            
            (815,265
            )
            
            (176,578
            )Other
                receivables - related parties
            
            
            -
            
            
            (6,321
            )Advances
                on inventory purchases
            
            
            (877,424
            )
            
            (692,308
            )Other
                assets
            
            
            -
            
            
            (133,507
            )Accounts
                payable
            
            
            (139,993
            )
            
            (87,502
            )Other
                payables
            
            
            (1,172,757
            )
            
            (1,906
            )Other
                payables - Related Party
            
            
            (46,377
            )
            
            14,882Accrued
                liabilities
            
            
            (18,598
            )
            
            -Customer
                deposits
            
            
            (1,896
            )
            
            8,480Taxes
                payable
            
            
            879,686
            
            
            (223,419
            )Interest
                payable
            
            
            (868,177
            )
            
            (1,122,000
            )Net
                cash (used in) provided by operating activities
            
            
            (559,384
            )
            
            1,678,868CASH
                FLOWS FROM INVESTING ACTIVITIES:Advances
                on intangible assets
            
            
            -
            
            
            331,350Advances
                on equipment purchases
            
            
            (5,813,976
            )
            
            (12,530,558
            )Additions
                to intangible assets
            
            
            (697,544
            )
            
            (198,998
            )Additions
                to plant and equipment
            
            
            (2,164,933
            )
            
            (284,156
            )Deposit
                on acquisition
            
            
            (698,850
            )
            
            -Net
                cash used in investing activities
            
            
            (9,375,303
            )
            
            (12,682,362
            )CASH
                FLOWS FINANCING ACTIVITIES:Proceeds
                received from conversion of warrants and options
            
            
            785,548
            
            
            -Repayment
                of notes payable
            
            
            (2,000,000
            )
            
            -Net
                cash used in financing activities
            
            
            (1,214,452
            )
            
            -EFFECTS
                OF EXCHANGE RATE CHANGE IN CASH
            
            
            2,519,430
            
            
            657,437DECREASE
                IN CASH
            
            
            (8,629,709
            )
            
            (10,346,057
            )CASH,
                beginning of period
            
            
            45,533,893
            
            
            67,313,919CASH,
                end of period
            
            $
            36,904,184
            
            $
            56,967,862




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




-
          4 -




HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        1 – Organization and description of business**
 
 Harbin
        Electric, Inc, (the “Company”) is a Nevada corporation, incorporated on July 9,
        2003 under the name Torch Executive Services Ltd. 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 by May 1, 2008 and $1,000,000 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. The Company is
        negotiating to contibute assets in lieu of cash for the May 1, 2008
        payement due.
 
 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 $17.14 million in construction on plant through March 31, 2008.
        Shanghai Tech Full is expected to begin production in 2008.
 
 **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.
  -
            5 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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-KSB.
 
 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
        three 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 March
        31, 2008 and December 31, 2007, the Company had deposits in excess of federally
        insured limits totaling $36,901,461 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
 MARCH
        31,
        2008
 (UNAUDITED)
 
 Five
        major customers accounted for approximately 73% of the net revenue for the
        three
        months ended March 31, 2008, with each customer individually accounting for
        22%,
        18%, 16%, 10%, and 7%, respectively.  At
        March
        31, 2008, the total receivable balance due from these customers was $24,204,386,
        representing 82% of total accounts receivable. Three major customers accounted
        for 84% of the net revenue for the three months ended March 31, 2007, with
        each
        customer individually accounting for 34%, 29%, and 21%, respectively.
 
 Five
        major vendors provided approximately 80% of the Company’s purchases of raw
        materials for the period ended March 31, 2008, with each vendor individually
        accounting for 28%, 22%, 12%, 10% and 7%, respectively. The Company’s accounts
        payable to these vendors was $0 at March 31, 2008. Five vendors provided
        86% of
        the Company’s purchase of raw materials for the three months ended March 31,
        2007, with each vendor individually accounting for 30%, 23%, 15%, 12% and
        6%,
        respectively.
 
 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 Company had accounts receivable,
        net of allowance for doubtful accounts of $29,575,532and $23,216,543 as of
        March
        31, 2008 and December 31, 2007, respectively. The allowance for doubtful
        accounts amounted to $121,071 and $116,238 as
        of March
        31,
        2008 and December 31, 2007, respectively.
 
 The
        following table consists of allowance for doubtful accounts at March 31,
        2008
        and December 31, 2007.
 
 Allowance
                  for doubtful accounts at December 31, 2007
              
              $
              116,238Effect
                  of foreign currency translation gain
              
              
              4,833Allowance
                  for doubtful accounts at March 31, 2008
              
              $
              121,071
  -
            7 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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 March
        31,
        2008 and December 31, 2007, there were no impairments of its long-lived
        assets.
 
 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.
  -
            8 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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 three
        months ended March 31, 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 related to costs of goods sold are included in selling,
        general and administrative costs and totaled and $230,426 and $98,355 for
        the
        three months ended March 31, 2008 and 2007, respectively.
 
 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.
  -
            9 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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 March 31, 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 15% 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. 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.
 
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the years ended March 31, 2008 and 2007:
 
 March
                  31,
              
              March
                  31,2008
              
              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
              %
              
              -
              %
  -
            10 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 The
        estimated tax savings for the three months ended March 31, 2008 and 2007
        amounted to $1,485,926 and $2,099,652. The net effect on earnings per share
        had
        the income tax been applied would decrease earnings per share from $0.29
        to
        $0.21 in 2008 and $0.21 to $0.08 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 three months ended March 31, 2008. The net operating loss carry forwards
        for
        United States income taxes amounted to $14,817,863 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 three months ended March 31, 2008 was an increase of
        approximate $5,000,000. Management will review this valuation allowance
        periodically and make adjustments as warranted.
 
 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.
 
 VAT
        on
        sales and VAT on purchases amounted to $3,213,074 and $1,800,380 for the
        three
        months ended March 31, 2008 and $2,077,141 and $1,108,163  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:
 
 March 31, 2008
              
              December 31, 2007VAT
                  tax payable
              
              $
              697,639
              
              $
              781,372Individual
                  income tax payable
              
              
              2,907
              
              
              2,049Corporation
                  income tax payable
              
              
              1,012,092
              
              
              -Others
                  misc. tax payable
              
              
              59,764
              
              
              55,878Total
              
              $
              1,772,402
              
              $
              839,299
  -
            11 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 Advertising
        costs
 
 The
        Company expenses the cost of advertising as incurred in selling, general
        and
        administrative costs. There were no advertising costs incurred during the
        quarters ended March 31, 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.
 ·
              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 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 March 31, 2008, the outstanding principle amounted
        to $32,465,660. 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.
  -
            12 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 As
        of
        March 31, 2008, the outstanding principle amounted to $32,465,660. 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.
 
 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. Under
        SFAS 157, market value is to represent fair value. As of March 31, 2008,
        the
        Company has a $15 million derivative instrument. Management obtains fair
        value
        of the derivative instrument from the financial institution using Level 3
        inputs
        since there is no observable market price.
 
 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.
 
 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.
 
 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.
        On
        April 2, 2007, $5,387,485 was recorded as a loss on the derivative investment
        in
        other comprehensive income (loss) upon entering into the hedge agreement.
        As of
        March 31, 2008 and December 31, 2007, the fair value of the derivative
        instrument totaled $15,338,258 and $10,844,372, respectively, and was recorded
        in other comprehensive loss.
  -
            13 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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 $5,325,188 and $704,668
        as
        of March 31, 2008 and 2007, respectively. The balance sheet amounts with
        the
        exception of equity at March 31, 2008 were translated 7.00 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 three months ended March 31, 2008 and
        2007
        were 7.10 RMB and 7.75 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.
 
 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 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 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.
  -
            14 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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.
 
 Recently
        issued accounting pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—Including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies 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 objective of FAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently without having to apply hedge
        accounting provisions. FAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities. The Company
        chose not to elect the option to measure the fair value of eligible financial
        assets and liabilities.
 
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. The Company
        has
        adopted FSP EITF 07-3 and expensed the research and development as it
        incurred.
 
 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.
  -
            15 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company is currently evaluating the
        impact that adopting SFAS No. 141R will have on its financial
        statements.
 
 In
        March
        2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
        Derivative Instruments and Hedging Activities - An Amendment of SFAS
        No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for
        derivative instruments and hedging activities by requiring enhanced disclosures
        regarding the impact on financial position, financial performance, and cash
        flows. To achieve this increased transparency, SFAS 161 requires (1) the
        disclosure of the fair value of derivative instruments and gains and losses
        in a
        tabular format; (2) the disclosure of derivative features that are credit
        risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is
        effective on January 1, 2009. The Company is in the process of evaluating
        the new disclosure requirements under SFAS 161.
 
 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.
  -
            16 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **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 the quarters ended March 31, 2008 and 2007:
 
 2008
              
              2007For
                  the three months ended March 31, 2008 and 2007Net
                  income for basic and diluted earnings per share
              
              $
              5,353,236
              
              $
              3,404,063Weighted
                  average shares used in basic computation
              
              
              18,209,978
              
              
              16,600,451Diluted
                  effect of stock options and warrants
              
              
              1,742,743
              
              
              1,416,176Weighted
                  average shares used in diluted computation
              
              
              19,952,721
              
              
              18,016,627Earnings
                  per share:Basic
              
              $
              0.29
              
              $
              0.21Diluted
              
              $
              0.27
              
              $
              0.19
 
 At
        December 31, 2007, a total of 260,000 options with an exercise price of $15.60
        were excluded from diluted earnings per share due to the anti-dilutive effect.
        At March 31, 2008, all outstanding stock options and warrants have been included
        in the diluted earnings per share calculation for the three months ended
        March
        31, 2008.
 
 **Note
        4 – Inventories**
 
 Inventories
        consist of the following at March 31, 2008 and December 31, 2007:
 
 March 31,
              
              December 31,2008
              
              2007Raw
                  and packing materials
              
              $
              839,893
              
              $
              925,085Work
                  in process
              
              
              1,345,280
              
              
              792,903Finished
                  goods
              
              
              369,139
              
              
              852,941Total
              
              $
              2,554,312
              
              $
              2,570,929
  **Note
        5 – Plant and equipment**
 
 Plant
        and
        equipment consist of the following at March 31, 2008 and December 31,
        2007:
  -
            17 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 March 31,
              
              December 31,2008
              
              2007Buildings
              
              $
              5,904,491
              
              $
              5,668,808Office
                  equipment
              
              
              398,992
              
              
              378,849Production
                  equipment
              
              
              4,759,590
              
              
              4,333,797Vehicles
              
              
              362,973
              
              
              348,485Construction
                  in progress
              
              
              17,135,987
              
              
              14,575,134Total
              
              
              28,562,033
              
              
              25,305,073Less:
                  accumulated depreciation
              
              
              (1,723,097
              )
              
              (1,447,038
              )Property
                  and equipment, net
              
              $
              26,838,936
              
              $
              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 three months ended March 31, 2008 and 2007 amounted to $211,710
        and $103,730, respectively.
 
 As
        of
        March 31, 2008 and December 31, 2007, a total of $1,374,092 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 and
        cannot be sold to any individual or company. 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 18. Capitalized
        patent
        costs are amortized on a straight method over the related patent terms from
        6 to
        10 years.
  -
            18 -
  HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 The
        Company evaluates intangible assets for impairment, at least on an annual
        basis
        and whenever events or changes in circumstances indicate that the carrying
        value
        may not be recoverable from its estimated future cash flows. Recoverability
        of
        intangible assets, other long-lived assets, and goodwill is measured by
        comparing their net book value to the related projected undiscounted cash
        flows
        from these assets, considering a number of factors including past operating
        results, budgets, economic projections, market trends and product development
        cycles. If the net book value of the asset exceeds the related undiscounted
        cash
        flows, the asset is considered impaired, and a second test is performed to
        measure the amount of impairment loss. As of March 31, 2008, management believes
        there was no impairment.
 
 Net
        intangible assets at March 31, 2008 and December 31,2007 were as
        follows:
 
 March
                  31,
              
              December
                  31,2008
              
              2007Land
                  use rights
              
              $
              410,850
              
              $
              394,451Patents
              
              
              6,460,998
              
              
              6,202,854Less:
                  accumulated amortization
              
              
              (974,048
              )
              
              (697,316
              )Intangible
                  assets,
                  net
              
              $
              5,897,800
              
              $
              5,899,989
 
 Amortization
        expense for the three months ended March 31, 2008 and 2007 amounted to $242,303
        and $22,946, 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 $2,738,306 and $1,772,204 as of March 31, 2008 and December
        31,2007 respectively. Additionally, the Company made advances on equipment
        purchases totaling $31,277,020 at March 31, 2008 and $24,328,386 as of December
        31,2007, respectively.
 
 **Note
        8 – Advance for intangible assets**
 
 The
        advances for intangible assets as of March 31, 2008 and December 31, 2007
        consist of the following:
 
 March
                  31,
              
              December
                  31,2008
              
              2007Land
                  use right prepayment
              
              
              1,442,280
              
              
              1,384,710Advances
                  on intangible assets
              
              $
              1,442,280
              
              $
              1,384,710
 
 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").
  -
            19 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        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 March 31, 2008, the application of the land
        use
        lease is still in process.
 
 **Note
        9 – Other assets**
 
 Other
        assets as of March 31, 2008 and December 31, 2007 consist of the
        following:
  March
                  31,
              
              December
                  31,2008
              
              2007Research
                  and development prepayment
              
              $
              396,584
              
              $
              380,754Deferred
                  expenses
              
              
              17,092
              
              
              16,509Total
              
              $
              413,676
              
              $
              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 $3.13 million (RMB 25 million), consisting of $1.88
        million (RMB 15 million) to be invested by HTFE and the remainder to be invested
        by IEECAS. Of this amount, approximately $1,428,000 (RMB 10 million) has
        been
        invested to date by HTFE. The balance of approximately $0.714 million (RMB
        5
        million) will be invested prior to termination of the agreement at the end
        of
        2008 as testing and evaluation occurs.
 
 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 $217,840 has
        been
        expensed as research and development for the three months ended March31,
        2008
        and 2007.
  -
            20 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        10** **–
        Related parties**
 
 Other
        payable – related parties
 
 As
        of
        December 31, 2007, the Company owes $45,491 to CEO Mr. Yang for travel
        reimbursements. The Company repaid the amounts to Mr. Yang during the first
        quarter of 2008.
 
 **Note
        11** **–
        Additional product sales information**
 
 The
        Company has a single operating segment. Majority of the Company’s revenue were
        generated from local sales. Summarized
        financial information concerning the Company’s revenues based on geographic area for
        the
        three months ended March 31, 2008 and 2007 are as follows:
 
 2008
              
              2007China
              
              $
              18,653,559
              
              $
              12,218,106International
              
              
              3,804,626
              
              
              1,408,108Total
                  sales
              
              
              22,458,185
              
              
              13,626,214Cost
                  of sales - China
              
              
              9,805,358
              
              
              6,143,844Cost
                  of sales - International
              
              
              1,893,350
              
              
              624,442Total
                  cost of sales
              
              
              11,698,708
              
              
              6,768,286Gross
                  profit
              
              $
              10,759,477
              
              $
              6,857,928
 
 **Note
        12 – 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.
 
 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.
  -
            21 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 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 March 31, 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, and the overpaid amount of $1,000,000 was recorded
        as
        other receivable at March 31, 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.
  -
            22 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        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) three-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 first
        quarter of 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.
  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 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.
  -
            23 -
  HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
  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. $1,343,929 and $1,133,033 was
        amortized to interest expense for the three months ended March 31, 2008 and
        2007, respectively. The carrying value of the debt is as follows:
 
 March
                  31,
              
              December
                  31,2008
              
              2007Principal
                  amount
              
              $
              48,000,000
              
              $
              50,000,000Less
                  unamortized discount
              
              
              (15,534,340
              )
              
              (16,878,269
              )Long-term
                  debt, net of unamortized discount
              
              $
              32,465,660
              
              $
              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. $228,181 and
        $123,109 was amortized to interest expense for the three months ended March
        31,
        2008 and 2007. As of March 31, 2008 and December 31, 2007, the unamortized
        debt
        issuance costs totaled $1,986,537 and $2,214,717, respectively.
 
 Net
        interest expense for the three months ended March 31, 2008 and 2007 was
        comprised of the following:
  2008
              
              2007Amortization
                  of debt discount
              
              $
              1,343,929
              
              $
              1,133,033Amortization
                  of debt issuance costs
              
              
              228,181
              
              
              123,109Interest
                  expense
              
              
              1,093,629
              
              
              876,896Interest
                  earned on cash deposits
              
              
              (214,745
              )
              
              (402,699
              )Interest
                  earned on derivative instrument
              
              
              (168,214
              )
              
              -Interest
                  expense, net
              
              $
              2,282,780
              
              $
              1,730,339
  -
            24 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        13 – 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 $5,387,487,
        and
        at March 31, 2008 and December 31, 2007, was a payable of $15,338,258 and
        $10,844,372, respectively. During the three months ended March 31, 2008,
        the
        Company recognized $168,214, which was recorded as a gain from derivative
        transactions. For the
        three months ended December 31, 2007, the Company received $192,322, and
        the
        difference of $121,837 was recorded as cross currency hedge receivable. For
        the
        three months ended March 31, 2008, there were no amounts recorded in the
        consolidated statement of income in relation to this interest rate swap related
        to ineffectiveness.
 
 Changes
        of cross currency hedge receivable are as follows,
  Balance
                  at December 31, 2007
              
              $
              145,945Subtract
                  :Cash received during the 3 months of 2008
              
              
              (192,322
              )Plus:
                  Recognized gain from derivative transactions
              
              
              168,214Balance
                  at March 31, 2008
              
              $
              121,837
  -
            25 -
  HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        14 – Accumulated other comprehensive income**
 
 The
        components of accumulated other comprehensive income as follows:
 
 Balance,
                  January 1, 2007
              
              $
              2,031,891Foreign
                  currency translation gain
              
              
              704,668Unrealized
                  loss on investment
              
              
              -Balance,
                  March 31, 2007
              
              
              2,736,559Foreign
                  currency translation gain
              
              
              6,457,844Change
                  in fair value of derivative instrument
              
              
              (10,844,372
              )Balance,
                  December 31, 2007
              
              
              (1,649,969
              )Foreign
                  currency translation gain
              
              
              5,307,825Change
                  in fair value of derivative instrument
              
              
              (4,493,886
              )Balance
                  at March 31, 2008
              
              $
              (836,030
              )
 
 **Note
        15 – Commitments and contingencies**
 
 The
        Company enters into non-cancelable purchase commitments with its vendors.
        As of
        March 31, 2008 and December 31, 2007, the Company was obligated under the
        non
        cancelable commitments to purchase materials amounting 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. The Company will contribute $800,000
        by May
        1, 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.
  -
            26 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        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 April 30
        2009.
        Rent expense for the three months ended March 31, 2008 and 2007 amounted to
        $13,539 and $9,541, respectively. Total future minimum lease payments at
        March
        31, 2008 are as follows:
 
 AmountNine
                  months ending December 31, 2008
              
              $
              24,300Year
                  ending December 31, 2009
              
              
              10,940Thereafter,
              
              
              -
 
 **Note
        16 – Shareholders’ equity**
 
 Warrants
 
 Following
        is a summary of the warrant activity:
 
 Outstanding
                  as of January 1, 2007
              
              
              3,967,368Granted
              
              
              -Forfeited
              
              
              -Exercised
              
              
              -Outstanding
                  as of March 31, 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 March 31, 2008
              
              
              2,252,660
 
 Following
        is a summary of the status of warrants outstanding at March 31, 2008:
 
 Outstanding Warrants
              
              Exercisable WarrantsExercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life
              
              Average
                Exercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life$3.50
              
              
              122,502
              
              
              3.02
              
              $
              3.50
              
              
              122,502
              
              
              3.02$10.84
              
              
              366,697
              
              
              4.77
              
              $
              10.84
              
              
              366,697
              
              
              4.77$7.80
              
              
              1,528,846
              
              
              1.77
              
              $
              7.80
              
              
              1,528,846
              
              
              1.77$7.80
              
              
              234,615
              
              
              1.71
              
              $
              7.80
              
              
              234,615
              
              
              1.71Total
              
              
              2,252,660
              
              
              
              
              
              
              
              
              2,252,660
  -
            27 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        17 – 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:
 
 **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
              
              $
              3,052,500Granted
              
              
              25,000
              
              
              12.40
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Outstanding
                  as of March 31, 2007
              
              
              925,000
              
              
              6.28
              
              
              3,052,500Granted
              
              
              260,000
              
              
              15.32
              
              
              1,308,150Forfeited
              
              
              (66,667
              )
              
              3.93
              
              
              680,882Exercised
              
              
              (357,083
              )
              
              5.96
              
              
              4,572,141Outstanding
                  as of December 31, 2007
              
              
              761,250
              
              $
              9.69
              
              $
              7,950,312Granted
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -Exercised
              
              
              (25,000
              )
              
              3.10
              
              
              416,250Outstanding
                  as of March 31, 2008
              
              
              736,250
              
              $
              10.05
              
              $
              2,245,563
  -
            28 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 Following
        is a summary of the status of options outstanding at March 31, 2008:
 
 Outstanding
                  Options
              
              Exercisable
                  OptionsExercise
                  Price
              
              Number
              
              Average
                Remaining
                Contractual****Life
              
              Average
                Exercise****Price
              
              Number
              
              Average
                Remaining
                Contractual****Life$3.10
              
              
              125,000
              
              
              1.83
              
              $
              3.10
              
              
              125,000
              
              
              1.83$8.10
              
              
              326,250
              
              
              2.83
              
              $
              8.10
              
              
              181,250
              
              
              2.83$12.40
              
              
              25,000
              
              
              2.17
              
              $
              12.40
              
              
              10,500
              
              
              2.17$15.60
              
              
              260,000
              
              
              2.71
              
              $
              15.60
              
              
              52,000
              
              
              2.71Total
              
              
              736,250
              
              
              
              
              
              
              
              
              368,750
 
 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
        18 – 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 2007 and 2006.
 
 Total
        interest paid amounted to $2,312,668 and $1,998,896 for the three months
        ended
        March 31, 2008 and 2007, respectively. Total income tax paid amounted to
        $0 for
        the three months ended March 31, 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:
 
 Item
              
              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
 
 The
        Company’s CEO transferred 280,000 of shares to the Company employees and
        consultants. The Company has accounted for this transfer valued at $14.63
        per
        share, the trading price of the stock on the date of transfer, as a capital
        contribution by the CEO, the value was amortize over the vesting period.
        For the
        three months ended March 31, 2008, total of $99,556 has been expensed and
        included in the stock compensation expense.
  -
            29 -
  HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        19** **–** **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 $8,376 and $7,128 contributions of employment benefits,
        including pension for the three months ended March 31, 2008 and 2007.
 
 **Note
        20 – 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.
  -
            30 -
 
 HARBIN
        ELECTRIC, INC. AND SUBSIDIARIES
 
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (UNAUDITED)
 
 **Note
        21 – Subsequent events**
 
 On
        March
        27, 2008, Harbin Tech Fu 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. Hengda Electric Motor is based in China’s costal Weihai City,
        Shandong Province, and manufactures and distributes various industrial rotary
        motors.  Hengda
        Electric Motor is currently 97.15% owned by Wendeng Second Electric Motor
        which
        is controlled by the People’s Government of Zhangjiachan Township, Wendeng
        County under the jurisdiction of Weihai City. The remaining 2.85% of Hengda
        Electric Motor is owned by the Committee of the Labor Union of Wendeng Second
        Electric Motor. Wendeng Second Electric Motor is operated and managed by
        Hengda
        Electric Motor. In connection with the share acquisition of Hengda Electric
        Motor, Harbin Tech Full has also agreed to purchase the entire assets owned
        by
        Wendeng Second Electric Motor as of March 31, 2008.
  -
            31 -




**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
      were
      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, 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 the sale of equity
      securities and retained earnings.




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 were $121,071 and $116,238 for the three months
      ended March 31, 2008 and December 31, 2007, respectively. 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 of operations due to required
      write-offs of excess or obsolete inventory. 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.




-
          32 -




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. SAB 104 requires that revenue can only be
      recognized 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 judgments regarding the collectability of
      those
      amounts. Historically, we have not encountered any 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 three months ended March 31, 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 such as cross-currency swap. 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 values
      of 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.





**RESULTS
      OF OPERATIONS**





***Revenue***





For
      the
      three months ended March 31, 2008, we generated net revenues of $22.46 million
      compared to $13.63 million for the three months ended March 31, 2007,
      representing an increase of 65% year-over-year. Linear motors and related
      integrated application systems contributed 42% to total revenues,
      automobile specialty micro-motors contributed 39%, and controllers, armatures,
      and other special motors contributed 19% compared to 68%, 0%, and 32%,
      respectively, for the three months ended March 31, 2007.




-
          33 -




The 65%
      year-over-year increase in revenues was primarily driven by increased sales
      from
      the automobile specialty micro-motors, which contributed approximately $9
      million to total revenues.





The
      Company’s products that were exported directly to markets outside China amounted
      to 17% of total sales in the three months ended March 31, 2008.





***Gross
      Profit***





The
      gross
      profit for the three months ended March 31, 2008 was $10.76 million compared
      to
      $6.86 million for the three months ended March 31, 2007, a 57% year-over-year
      growth primarily driven by increased sales. The overall gross profit margin,
      as
      a percentage of revenues, was 47.91% in the first quarter of 2008 compared
      to
      50.33% in the first 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. By segment, the gross
      profit margin was 54% for linear motors and 42% 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 68% year-over-year growth in operating profit, to $8.64
      million in the three months ended March 31, 2008 from $5.13 million in the
      three
      months ended March 31, 2007. The significant growth in operating profit was
      primarily attributable to the growth in sales from the automobile micro-motors
      business. Operating margin was up slightly, 38.45% for the three months ended
      March 31, 2008 versus 37.62% for the same quarter of prior year, indicating
      improved operating efficiency.





Selling,
      general and administrative expense was $2.03 million for the quarter, compared
      to $1.51 million in the same quarter of 2007. The year-over-year dollar increase
      in SG&A was primarily associated with higher shipping and handling costs as
      a result of volume growth. As a percentage of total sales, the Company’s total
      SG&A expenses declined to 9.0% in the quarter from 11.1% in the same quarter
      last year. Going forward, the Company expects that 10%-12% of sales is a more
      reasonable range for the selling, general and administrative expense primarily
      due to increased expenses related to the compliance activities required by
      Section 404 of the Sarbanes-Oxley Act of 2002 as well as the acquisition of
      Weihai Hengda Electric Motor Co. Ltd., and Wendeng Second Electric Motor Factory
      announced on March 28, 2008.





***Interest
      expense***





Net
      interest expense was $2.28 million and $1.73 million for the three months ended
      March 31, 2008 and 2007, respectively. The interest expense in this quarter
      was
      offset by $382,959 interest income earned on cash deposits and interest rate
      swap agreement with Merrill Lynch executed on April 2, 2007.





The
      net
      interest expense also includes a non-cash charge of amortization expense of
      the
      debt discount totaled $1.34 million for the three month ended March 31, 2008
      and
      2007. This non-operating charge reduced the quarterly earnings by $0.07 per
      diluted share. This expense was due to the amortization of the debt discount
      for
      the $50 million notes issued on August 30, 2006. As of March 31, 2008, the
      unamortized debt discount totaled $15,534,340. For comparison, the non-cash
      charge of amortization expense of the debt discount was $1.13 million for the
      three month ended March 31, 2007.





***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 will be included in Non-Operating Income.





For
      the
      three months ended March 31, 2008, the Company recorded an income tax of
      $990,617. The estimated tax savings for the three months ended March 31, 2008
      and March 31, 2007 amounted to $1,485,926 and $2,099,652, respectively. The
      net
      effect on earnings per share had the income tax been applied would decrease
      earnings per share from $0.29 to $0.21 in 2008 and $0.21 to $0.08 in
      2007.





***Net
      Income***





Net
      Income for the three months ended March 31, 2008 was $5.35 million compared
      to
      $3.40 million for the three months ended March 31, 2007, representing a
      year-over-year increase of 57%. This increase in net income was mainly due
      to
      increased sales of the automobile specialty micro-motors business.





Earnings
      per diluted share grew 41% from $0.19 in the three month period ended March
      31,
      2007 to $0.27 in the three month period ended March 31, 2008.





**Liquidity
      and Capital Resources**




As
      of
      March 31, 2008, cash and cash equivalents were $36.90 million, compared to
      $45.53 million on December 31, 2007. The net decrease during the three months
      ended March 31, 2008 was due mainly to the increase in accounts receivable,
      debt
      repayment during the period, and prepayments made for equipment purchases and
      fixed assets construction.




-
          34 -




The
      Company is experiencing rapid business growth. During the three months ended
      March 31, 2008, the Company used more cash than generated by operating,
      investing and financing activities. The cash was mainly used to fund the
      increases in accounts receivables ($5.29 million), make prepayments on equipment
      purchases ($5.81 million), invest in property and plant constructions ($2.16
      million), pay interests due on debt ($0.87 million), and settle a lawsuit ($1
      million).




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 $1.88
      million (of which approximately $1.25 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 by
      May
      1, 2008 and $1,000,000 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. Pursuant to the
      terms of the letter of intent, the parties have agreed that HTFE will pay no
      higher than either (1) ten (10) times the total net profit that Hengda Electric
      Motor and Wendeng Second Electric Motor generated in the last consecutive 12
      months prior to March 31, 2008 (March 2008 included); or (2) the value appraised
      by a third party evaluation agent agreed by both parties in consideration for
      the purchase of the Hengda Electric Motor shares and the asset purchase from
      Wendeng Second Electric Motor. The Company expects to finance the acquisition
      using existing cash and may seek additional funds through either a debt or
      equity financing.





***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.





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 March 31, 2008 was a payable of $15,338,258. From the December 31, 2007
      to March 31, 2008, changes in fair value of the swap resulted in other
      comprehensive loss of $4,493,886, net of taxes and an increase to liability.
      During the three months ended March 31, 2008, the Company recognized $168,214,
      which was recorded as gain from derivative transactions. For the three months
      ended March 31, 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.





Effective
      for fiscal year beginning after January 1, 2008, the Company adopts SFAS 157,
      “Fair Value Measurements”, to define fair value of derivative liability in
      company financial statements. The adoption did not have a material impact on
      the
      consolidated financial statements or results of operations of the
      Company.




-
          35 -




**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





While
      our
      reporting currency is the U.S. dollar, 100% of our consolidated revenues and
      95%
      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**





**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.




**Changes
      in Internal Control over Financial Reporting**





There
      were no changes in internal controls over financial reporting that occurred
      during the first quarter of 2008 that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





We
      will
      be subject to reporting obligations under the U.S. securities laws. The
      Securities and Exchange Commission (“SEC”), as required by Section 404 of
      the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), adopted rules requiring
      every public company to include a management report on such company’s internal
      controls over financial reporting in its annual report, which contains
      management’s assessment of the effectiveness of the company’s internal controls
      over financial reporting. In addition, an independent registered public
      accounting firm must attest to and report on management’s assessment of the
      effectiveness of the company’s internal controls over financial reporting. These
      requirements will first apply to our annual report on Form 10-K for the fiscal
      year ending December 31, 2008 with respect to the filing of an auditor's
      report.




-
          36 -




**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.




**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 March 31, 2008, we had approximately $2.78
      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:




-
          37 -




-
                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.





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 73% of the net revenue for the period ended March
      31, 2008. The loss of any of our major customers, or a significant reduction
      in
      sales to any such customers, would adversely affect our revenues.




-
          38 -




**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 80% of the Company’s purchases of raw
      materials for the three months ended March 31, 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 61.2% of our
      issued and outstanding common stock as of March 31, 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.




**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.”




-
          39 -




**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 15%
      may
      be possible for productive foreign investment enterprises in the Economic and
      Technological Development Zones and for enterprises engaged in production or
      business operations in the Special Economic Zones. As a result of preferential
      tax rate incentives, our operations have been subject to relatively lower tax
      liabilities. The estimated tax savings for the three months ended March 31,
      2008
      and 2007 without preferential tax treatment amounted to approximately $1.49
      million and $2.10 million, 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.





**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.




-
          40 -





**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.





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





None.





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




None.





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




None.





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





On
      March
      27, 2008, Harbin Tech Full Electric Co., Ltd., 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 Electric
      Motor”) and Wendeng Second Electric Motor Factory, a PRC corporation (“Wendeng
      Second Electric Motor”) which is operated and managed by Hengda Electric Motor.
      Hengda Electric Motor is based in China’s costal Weihai City, Shandong Province.
      Hengda Electric Motor 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.





Hengda
      Electric Motor is currently 97.15% owned by Wendeng Second Electric Motor which
      is controlled by the People’s Government of Zhangjiachan Township, Wendeng
      County under the jurisdiction of Weihai City. The remaining 2.85% of Hengda
      Electric Motor is owned by the Committee of the Labor Union of Wendeng Second
      Electric Motor. In connection with the share acquisition of Hengda Electric
      Motor, Harbin Tech Full has also agreed to purchase the entire assets owned
      by
      Wendeng Second Electric Motor.





Pursuant
      to the terms of the Letter of Intent, the parties have agreed that Harbin Tech
      Full will pay no higher than either (1) ten (10) times the total net profit
      that
      Hengda Electric Motor and Wendeng Second Electric Motor generated in the last
      consecutive 12 months prior to March 31, 2008 (March 2008 included); or (2)
      the
      value appraised by a third party evaluation agent agreed by both parties in
      consideration for the purchase of the Hengda Electric Motor shares and the
      asset
      purchase from Wendeng Second Electric Motor. The final financial terms of the
      transaction will be proposed within twenty days after the signing date of the
      Letter of Intent (signed on March 27, 2008) and the acquisition is scheduled
      to
      complete within ninety days after the signing date of the Letter of Intent.





The
      Company expects to finance the acquisition using existing cash and may seek
      additional funds through either a debt or equity financing.




-
          41 -




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




**Exhibit Number**
            
            **Description**
            
            **Method of Filing**3.1
            
            Articles
                of Incorporation of the Company
            
            Filed
                as Exhibit 3.1 to the registration statement on Form SB-2 filed with
                the
                Commission on October 10, 2003 and incorporated herein by
                reference.3.2
            
            Amended
                and Restated Bylaws of the Company
            
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on July 6, 2005 and incorporated herein by
                reference.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.




-
          42 -




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.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.




-
          43 -




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.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.




-
          44 -




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.




99.1
              
              Press
                  Release Announcing Financial Results for the First Quarter
                  Ended March 31, 2008
              
              Filed
                  herewith as Exhibit 99.1.


(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’sissuance
                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 27, 2008 disclosing the Company’s entry into a Letter
                of Intent to acquireWeihai
                Hengda Electric Motor Co. Ltd. and Wendeng Second Electric Motor
                Factory.




-
          45 -





**SIGNATURES**




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




**Harbin
                Electric, Inc.**Date:
                May 9, 2008
            By:
            /s/ Tianfu
                YangTianfu
                YangChief
                Executive Officer, Director and Chairman of the Board
              (Principal
                Executive Officer)




Date:
                May 9, 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.




-
          46 -




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.




-
          47 -




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.




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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.


99.1
                
                Press
                    Release Announcing Financial Results for the First Quarter
                    Ended March 31, 2008
                
                Filed
                    herewith as Exhibit
                    99.1.


(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’sissuance
                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 27, 2008 disclosing the Company’s entry into a Letter
                of Intent to acquireWeihai
                Hengda Electric Motor Co. Ltd. and Wendeng Second Electric Motor
                Factory.


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