**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-QSB**





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




For
      the
      quarterly period ended September 30, 2006




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**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **98-0403396**
              (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:
      215-854-8104**


(Issuer’s
      telephone number)







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




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




**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**




Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after
      the distribution of securities under a plan confirmed by a court.
      Yes 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 September 30, 2006: 16,600,451 shares of common stock, par value $0.00001
      per share.




Transitional
      Small Business Disclosure Format (Check one): Yes o No x
















**TABLE
      OF CONTENTS**




**Page**




**Part
                I. Financial Information**Item
                1. Financial Statements (Unaudited)
            1Consolidated
                Balance Sheet (Unaudited) as of September 30, 2006
            1Consolidated
                Statements of Operations (Unaudited)For
                the Three and Nine months Ended September 30, 2006 and
                2005
            2Consolidated
                Statements of Cash FlowsFor
                the Nine months Ended September 30, 2006 and 2005
            3Notes
                to the Consolidated Financial Statements
            4Item
                1A. Risk Factors
            18Item
                2. Management’s Discussion and Analysis or Plan of
                Operation
            24Item
                3. Controls and Procedures
            33**Part
                II. Other Information**Item
                1. Legal Proceedings.
            33Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.
            33Item
                3. Defaults upon Senior Securities.
            33Item
                4. Submission of Matters to a Vote of Securities Holders.
            33Item
                5. Other Information.
            33Item
                6. Exhibits.
            34Signatures
            35Index
                to Exhibits
            36













**PART
      I. FINANCIAL INFORMATION**




**Item
      1.**  **Financial
      Statements**


**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**(UNAUDITED)**


**As
              of September 30, 2006****ASSETS**CURRENT
                ASSETSCash & cash equivalents
            
            $
            60,593,769Accounts receivable, net of allowance of $29,837
            
            
            9,586,547Inventory
            
            
            464,116Advances to suppliers
            
            
            2,642,269Other assets
            
            
            2,546,286Debt issue cost, net of amortization of $39,656
            
            
            2,914,977Total
                current assets
            
            
            78,747,964PROPERTY
                AND EQUIPMENT, net
            
            
            8,284,718INTANGIBLE
                ASSETS, net
            
            
            320,380TOTAL
                ASSETS
            
            $
            87,353,062**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts payable
            
            $
            1,199,870Interest payable
            
            
            277,778Payment in advance
            
            
            435,165Total
                current liabilities
            
            
            1,912,813NOTES
                PAYABLE, net of debt discount $22,543,435
            
            
            27,456,565WARRANT
                LIABILITY
            
            
            20,740,142TOTAL
                LIABILITIES
            
            
            50,109,520STOCKHOLDERS'
                EQUITYCommon stock, .00001 par value; authorized shares
                100,000,000;issued
                and outstanding 16,600,451 shares
            
            
            166Additional paid in capital
            
            
            12,039,975Statutory reserves
            
            
            3,496,829Accumulated other comprehensive income
            
            
            1,140,392Retained earnings
            
            
            20,566,179Total
                stockholders' equity
            
            
            37,243,541TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            87,353,062







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







-
            1
            -





**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




**FOR
                THE THREE MONTH**
            
            **FOR
                THE NINE MONTH****PERIODS
                ENDED**
            
            **PERIODS
                ENDED****Sept.
                30, 2006**
            
            **Sept.
                30, 2005**
            
            **Sept.
                30, 2006**
            
            **Sept.
                30, 2005**Net
                revenue
            
            $
            9,817,053
            
            $
            7,044,014
            
            $
            28,407,056
            
            $
            16,446,753Cost
                of revenue
            
            
            5,012,556
            
            
            3,665,271
            
            
            14,528,032
            
            
            8,263,351Gross
                profit
            
            
            4,804,497
            
            
            3,378,743
            
            
            13,879,024
            
            
            8,183,402Operating
                expenses:Selling expenses
            
            
            227,566
            
            
            100,923
            
            
            652,172
            
            
            225,256General and administrative expenses
            
            
            1,804,274
            
            
            302,586
            
            
            3,637,275
            
            
            696,587Total
                operating expenses
            
            
            2,031,840
            
            
            403,509
            
            
            4,289,447
            
            
            921,843Income
                from operations
            
            
            2,772,657
            
            
            2,975,234
            
            
            9,589,577
            
            
            7,261,559Non-operating
                incomeRealized gain on sale of marketable securities
            
            
            -
            
            
            -
            
            
            571,143
            
            
            -Interest income
            
            
            26,569
            
            
            -
            
            
            57,601
            
            
            -Other expense
            
            
            (697,040
            )
            
            -
            
            
            (643,893
            )
            
            -Change
                in fair value of warrants
            
            
            2,180,970
            
            
            8,810
            
            
            2,180,970
            
            
            22,928Net
                income
            
            
            4,283,156
            
            
            2,984,044
            
            
            11,755,399
            
            
            7,284,487Other
                comprehensive item:Unrealized
                gain(loss) on marketable securities
            
            
            -
            
            
            120,400
            
            
            -
            
            
            (25,245
            )Translation
                gain
            
            
            407,742
            
            
            -
            
            
            730,097
            
            
            -Reclassification
                adjustment for gainson
                sale of marketable securities
            
            
            -
            
            
            -
            
            
            (587,171
            )
            
            -Comprehensive
                income
            
            
            4,690,898
            
            
            3,104,444
            
            
            11,898,324
            
            
            7,259,242Basic
                weighted average shares outstanding
            
            
            16,600,451
            
            
            15,539,580
            
            
            16,600,451
            
            
            14,929,350Basic
                net earnings per share
            
            $
            0.26
            
            $
            0.19
            
            $
            0.71
            
            $
            0.49Diluted
                weighted average shares outstanding
            
            
            17,495,254
            
            
            15,554,012
            
            
            19,235,134
            
            
            14,929,350Diluted
                net earnings per share
            
            $
            0.24
            
            $
            0.19
            
            $
            0.61
            
            $
            0.49







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





-
            2
            -





**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




**FOR
                THE NINE MONTH****PERIODS
                ENDED****September
                30, 2006**
            
            **September
                30, 2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            11,755,399
            
            $
            7,284,487Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
            
            
            180,438
            
            
            317,915Amortization
            
            
            34,402
            
            
            14,924Change
                in fair value of warrants
            
            
            (2,180,970
            )
            
            -Realized gain on sale of marketable securities
            
            
            (571,143
            )
            
            -Stock
                based compensation
            
            
            701,918
            
            
            -(Increase) decrease in current assets:Accounts receivable
            
            
            (3,540,547
            )
            
            (3,888,253
            )Inventory
            
            
            894,533
            
            
            (495,409
            )Advances to suppliers
            
            
            769,575
            
            
            (2,468,746
            )Other assets
            
            
            (3,134,032
            )
            
            -Increase in current liabilities:Accounts payable
            
            
            773,880
            
            
            326,322Payment in advance
            
            
            429,661
            
            
            -Accrued expenses
            
            
            -
            
            
            (208,096
            )Net
                cash provided by operating activities
            
            
            6,113,114
            
            
            883,144CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from sale of marketable securities
            
            
            1,093,165
            
            
            -Acquisition
                of intangible assets
            
            
            -
            
            
            (266,200
            )Acquisition
                on property & equipment
            
            
            (534,113
            )
            
            (2,108,171
            )Net
                cash provided by (used in) investing activities
            
            
            559,052
            
            
            (2,374,371
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Debt issuance cost
            
            
            (2,914,977
            )
            
            -Debt discounts
            
            
            (22,543,435
            )
            
            -Notes payable
            
            
            50,000,000
            
            
            -Interest payable
            
            
            277,778
            
            
            -Warrant liabilities
            
            
            22,921,112
            
            
            -Capital contribution
            
            
            39,081
            
            
            -Advances to related party
            
            
            -
            
            
            84,520Cash received from shares
            
            
            -
            
            
            4,800,000Net
                cash provided by financing activities
            
            
            47,779,559
            
            
            4,884,520EFFECT
                OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
            
            
            403,025
            
            
            -NET
                INCREASE IN CASH & CASH EQUIVALENTS
            
            
            54,854,750
            
            
            3,393,293CASH
                & CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            5,739,019
            
            
            2,210,803CASH
                & CASH EQUIVALENTS, END OF PERIOD
            
            $
            60,593,769
            
            $
            5,604,096




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




-
            3
            -





**HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**




**1.
      ORGANIZATION AND DESCRIPTION OF BUSINESS**





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




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




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




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




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




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




As
      a part
      of the merger, Torch was renamed to Harbin Electric, Inc. (the “Company”) and
      the Company declared a stock dividend of one-half share on each share of its
      common stock outstanding for all shareholders on record as of January 26, 2005.
      All per share data including earnings per share has been retroactively restated
      to reflect the stock split. Subsequently, the Torch Subsidiary changed its
      name
      to Advanced Electric Motors, Inc. (“AEM”).




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




**Joint
      Venture with Baldor Electric Company**




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




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







-
            4
            -





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




**2.
      BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUTING
      POLICIES**





**Basis
      of presentation**




The
      accompanying unaudited financial statements of the Company have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information. Accordingly, they do not include all of the information required
      by
      generally accepted accounting principles for complete financial statements.
      In
      the opinion of management, all adjustments (consisting of normal recurring
      adjustments) considered necessary for a fair presentation have been included.
      Operating results for the interim periods are not necessarily indicative of
      the
      results for any future period. These statements should be read in conjunction
      with the Company's audited financial statements and notes thereto for the fiscal
      year ended December 31, 2005. The results of the nine month period ended
      September 30, 2006 are not necessarily indicative of the results to be expected
      for the full year ending December 31, 2006.




**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.
      Actual results could differ from those estimates.




**Cash
      and cash equivalents**





Cash
      and
      cash equivalents include cash in hand and cash in deposits, certificates of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.




**Accounts
      receivable**





The
      Company’s policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves. The Company had accounts receivable
      of
      $9,586,547 as of September 30, 2006. Allowance for doubtful debts amounted
      to
      $29,837 as of September 30, 2006.




**Investment
      in marketable securities**





Securities
      available for sale are carried at fair value with unrealized gains and losses
      reported as other comprehensive income in the stockholders’ equity section of
      the balance sheet. Realized gains and losses on securities available for sale
      are included in other income (expense) and, when applicable, are reported as
      a
      reclassification adjustment in other comprehensive income. Gains and losses
      on
      the sale of available for sale securities are determined using the
      specific-identification method.




The
      total
      proceeds from the sale of marketable security were $1,093,165 during the nine
      month period ended September 30, 2006 and the realized gain was $571,143 during
      the nine month period ended September 30, 2006. The company determines cost
      on
      specific identification method. The reclassification adjustment in the statement
      of operations and comprehensive income relates to the release of unrealized
      gain
      on marketable securities on the marketable securities sold during the period.
      As
      of September 30, 2006, the Company did not have any marketable securities on
      hand.








-
            5
            -





**Inventory**





Inventory
      is composed of raw material for manufacturing the electrical motor, work in
      process, and finished goods. Inventory is valued at the lower of cost or market
      value using weighted average method. The management compares the cost of
      inventory with the market value and allowance is made for writing down the
      inventory to its market value, if lower. Inventory amounted to $464,116 as
      of
      September 30, 2006.





**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 collectibility is reasonably assured. Revenue from sales requiring
      installment services is recognized as the installments are performed. Payments
      received before all of the relevant criteria for revenue recognition are
      satisfied are recorded as payment in advance.





**Income
      taxes**





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





According
      to the Provisional Regulations of the People's Republic of China on Income
      Tax,
      the Document of Reductions and Exemptions of Income Tax for the Company has
      been
      approved by the local tax bureau and the Management Regulation of Harbin
      Economic and Technological Development Zone for the reporting period. The
      Company is exempted from income tax from July 1, 2004 through December 31,
      2007.
      The Company is approved to have half tax rate from January 1, 2008 to December
      31, 2010.





**Fair
      value of financial instruments**





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





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





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





**Segment
      reporting**





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





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








-
            6
            -





**Recent
      pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
      This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods' financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between "retrospective application" of an
      accounting principle and the "restatement" of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005.





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





In
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's first quarter of fiscal 2006.





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, determining the Amortization
      Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides guidance
      on
      determining the amortization period for leasehold improvements acquired in
      a
      business combination or acquired subsequent to lease inception. The guidance
      in
      EITF 05-6 will be applied prospectively and is effective for periods beginning
      after June 29, 2005. EITF 05-6 is not expected to have a material effect on
      its
      consolidated financial position or results of operations.




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




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


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


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


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


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




This
      Statement is effective as of the beginning of the Company’s first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the consolidated financial
      statements.





In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.




-
          7
          -




In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization. This Statement also improves financial reporting by requiring
      an
      employer to measure the funded status of a plan as of the date of its year-end
      statement of financial position, with limited exceptions. An employer with
      publicly traded equity securities is required to initially recognize the funded
      status of a defined benefit postretirement plan and to provide the required
      disclosures as of the end of the fiscal year ending after December 15, 2006.
      An
      employer without publicly traded equity securities is required to recognize
      the
      funded status of a defined benefit postretirement plan and to provide the
      required disclosures as of the end of the fiscal year ending after June 15,
      2007. However, an employer without publicly traded equity securities is required
      to disclose the following information in the notes to financial statements
      for a
      fiscal year ending after December 15, 2006, but before June 16, 2007, unless
      it
      has applied the recognition provisions of this Statement in preparing those
      financial statements. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for fiscal years ending after December 15,
      2008.
      The management is currently evaluating the effect of this pronouncement on
      financial statements.





**Reclassifications** ******





Certain
      prior period amounts have been reclassified to conform to the current period
      presentation.





**3.
      PRINCIPLES OF CONSOLIDATION**





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





**4.
      MAJOR CUSTOMERS AND VENDORS**





Four
      major customers accounted for 82% of the net revenue for the nine month period
      ended September 30, 2006. One major customer accounted for 31% of the net
      revenue for the nine month period ended September 30, 2006. At September 30,
      2006, the total receivable balance due from these customers was $9,266,100.
      Two
      major customers accounted for 67% of the net revenue for the nine month period
      ended September 30, 2005. At September 30, 2005, the total receivable balance
      due from these two customers was $3,526,085.




Five
      vendors provided 87% of the Company’s purchase of raw materials for the nine
      month period ended September 30, 2006. The Company’s accounts payable to these
      vendors was $0 at September 30, 2006. Three vendors provided 73% of the
      Company’s raw materials for the nine month period ended September 30, 2005. The
      Company’s accounts payable to these vendors was $1,815 at September 30,
      2005.





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





In
      addition, the Company enters into non-cancelable purchase commitments with
      its
      vendors. As of December 31, 2004, December 31, 2005, March 31, 2006, June 30,
      2006, and September 30, 2006, the Company was obligated under the non cancelable
      commitments to purchase materials amounting to $223,000, $793,000, $428,000,
      $670,400, and $982,900, respectively.








-
            8
            -





**5.
      INTANGIBLE ASSETS**





Intangible
      assets consist of Patents and software. The Company is amortizing the intangible
      assets over 6 year period. The Company evaluates intangible assets for
      impairment, at least on an annual basis and whenever events or changes in
      circumstances indicate that the carrying value may not be recoverable from
      its
      estimated future cash flows. Recoverability of intangible assets, other
      long-lived assets and, goodwill is measured by comparing their net book value
      to
      the related projected undiscounted cash flows from these assets, considering
      a
      number of factors including past operating results, budgets, economic
      projections, market trends and product development cycles. If the net book
      value
      of the asset exceeds the related undiscounted cash flows, the asset is
      considered impaired, and a second test is performed to measure the amount of
      impairment loss. As of September 30, 2006, no impairment of intangible assets
      has been recorded.





Net
      intangible assets at September 30, 2006 were as follows:


Patents
            
            $
            419,474Less
                accumulated amortization
            
            
            (99,094
            )$
            320,380





Amortization
      expense for the nine month periods ended September 30, 2006 and 2005 amounted
      to
      $36,112 and $33,881 respectively.





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





**6.**  **ADVANCES
      TO SUPPLIERS**





The
      Company advances to certain vendors for purchase of its material. The advances
      to suppliers amounted to $2,642,269 as of September 30, 2006.




**7.**  **OTHER
      ASSETS**





As
      of
      September 30, 2006, other assets were $2,546,286, including $1,277,650 deposit
      for land use leases, $1,265,000 R&D expense, and other prepaid expenses.





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 lease and use of 40,800 square meters of State-owned land
      in the Shanghai Zhuqiao Airport Industrial Zone (the "Site"). The term of the
      lease is 50 years and the aggregate amount that HTFE shall pay to Shanghai
      Lingang is approximately US$2.54 million ("Fee"), 50% of which has been paid
      and
      45% of which is 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 provides that HTFE shall
      invest approximately US$15 million in the Site over the next year. 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 September 30, 2006, the application of the land
      use lease is still in process.





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 and 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.







-
            9
            -





The
      R&D Agreement provides for a budget of approximately US$3.13 million (RMB 25
      million), consisting of US$1.88 million (RMB 15 million) to be invested by
      HTFE
      and the remainder to be invested by IEECAS  Of this amount, approximately
      US$1.25 million (RMB 10 million) has been invested to date by HTFE, with the
      balance of approximately US$0.625 million (RMB 5 million) to be invested 
prior to termination of the agreement in early 2009 as testing and evaluation
      occurs. The US$1.25 million (RMB 10 million) has been recorded in other assets
      as of September 30, 2006





**8.**  **FINANCING**




On
      August
      29, 2006, we, AEM ,
      Citadel
      Equity Fund Ltd. (“Citadel”) and Merrill Lynch International (“Merrill Lynch”
and, together with Citadel, the “Investors”) entered into an
      indicative 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)
      $50.0 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 us,
      AEM,
      as guarantor, and The Bank of New York, as trustee for the Notes (the
“Indenture”). Of the $50.0 million aggregate principal amount of the Notes,
      Citadel subscribed to $38.0 million of the principal amount of the Notes, which
      mature on September 1, 2012 (the “2012 Notes”), and Merrill Lynch subscribed to
      $12.0 million of the principal amount of the Notes, which mature on September
      1,
      2010 (the “2010 Notes”). Pursuant to the indenture, AEM has agreed, and all of
      our other existing and future subsidiaries (other than subsidiaries domiciled
      in
      the People's Republic of China) are obligated, to guarantee, on a senior secured
      basis, to the Investors and to the trustee the payment and performance of our
      obligations.




The
      2010
      Notes bear interest, payable semi-annually in arrears commencing March 1, 2007,
      at a rate equal to LIBOR (which, at November 14, 2006 was 5.37688%) plus 4.75%.
      In the event that the Company’s common stock shall not have been approved for
      listing on the Nasdaq Global Market or the Nasdaq Capital Market by July 1,
      2007
      and continue to be approved for listing as of such date (the “Listing
      Requirement”), the interest rate will increase by 2%. 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
      2012
      Notes bear interest, payable semi-annually in arrears commencing March 1, 2007,
      at a rate equal to LIBOR plus 3.35%. In the event that the Listing Requirement
      shall not be satisfied, the interest rate will increase by 2%. 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, 2008 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 and March 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.





The
      Indenture contains numerous affirmative and negative covenants. The Indenture
      requires the payment of liquidated damages in the amount of (i) $750,000 if
      the
      Company’s common stock shall not have been approved for listing on the Nasdaq
      Global Market or the Nasdaq Capital Market by April 1, 2007 and if such listing
      is not being maintained as of such date, (ii) $1,500,000 if the Company’s common
      stock shall not have been approved for listing on the Nasdaq Global Market
      or
      the Nasdaq Capital Market by July 1, 2007 and if such listing is not being
      maintained as of such date, (ii) $2,500,000 if the Company shall not have
      engaged a permitted independent accounting firm by January 1 of each year and
      such engagement is in effect as of March 1 of such year, commencing with 2007;
      and (iv) $1,200,000 if a full time senior financial officer knowledgeable with
      respect to the capital markets in the United States and proficient in the
      English language shall not have been appointed within 120 days after August
      30,
      2006, with the same aggregate amount for each 120 day period thereafter during
      which such senior financial officer shall not have been appointed.








-
            10
            -





The
      Indenture sets forth numerous Events of Default including the failure to pay
      interest on the Notes when due (where such failure continues for 5 days), the
      failure to timely pay principal or premium on the Notes (including the
      liquidated damages referred to in the immediately preceding paragraph), the
      failure to observe certain covenants, and certain events relating to the
      bankruptcy or insolvency of the Company or its significant subsidiaries. If
      an
      Event of Default shall have occurred and be continuing, the maturity of the
      Notes may be accelerated.





As
      security for the Notes, we 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 us as
      collateral.




The
      Warrants are governed by a warrant agreement, dated August 30, 2006, between
      us
      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.




In
      addition, we, Mr. Tianfu Yang and Citadel entered into a voting agreement,
      dated
      August 30, 2006, pursuant to which Mr. Yang has 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.




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 as our
      Chief
      Executive Officer 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, we agreed to file a shelf
      registration statement covering the resale of the common stock underlying the
      Warrants. We agreed to use reasonable best efforts to cause the registration
      statement to be declared effective as soon as reasonably practical after the
      initial filing and to remain effective, subject to certain exceptions, during
      the life of Warrants. If there is no effective registration statement by March
      30, 2007, the Company must pay a $250,000 liquidated damages penalty, payable
      pro-rata to the then current holders of the Warrants, for each month until
      the
      registration statement becomes effective. This liquidated damages penalty is
      capped at $2 million.





The
      Company believes that, in light of its obligations under the registration rights
      agreement, the Warrants and the registration rights agreement are combined
      agreements as outlined in EITF 00-19, EITF 05-4, and FAS 133. The registration
      rights agreement is a derivative under FAS 133 and, when combined with the
      Warrants, causes both instruments to fail the equity classification criteria
      in
      EITF 00-19, specifically the requirement that the Company may only deliver
      registered shares in connection with the warrant agreement. The Company does
      not
      have the specific ability in the registration rights agreement to deliver
      unregistered shares and, therefore it is out of the Company’s control and a
      net-cash settlement alternative is assumed. This analysis therefore results
      in
      classification of the Warrants and the registration rights agreement as a
      combined agreement which must be classified as a liability.





Therefore,
      the allocation between the combined Warrants and registration rights agreement
      and the Notes is based on the full fair value of the warrants with the residual
      to the Notes. The Company uses the Black-Scholes Option Pricing Model to value
      its options and warrants, and considering certain key input, including the
      trading price on date of issue, volatility of its stock, risk-free interest
      rate, conversion price, dividend rate, and warrant life.





The
      Company believes that the Black-Scholes Option pricing model is the appropriate
      methodology to value the Warrants as they have used it consistently for pricing
      similar securities. The amount allocated to the Notes is the face value of
      the
      Notes issued less the amount allocated to the combined Warrants and registration
      rights agreement as calculated under the Black-Scholes model. The Company
      believes that the face value of the Notes includes a significant discount,
      in
      that the rate of interest charged on the Notes is below a rate which we could
      have obtained in the open market if the Notes had been issued without the
      Warrants. The Company amortizes the discount on the Notes, which is equal to
      the
      value of the combined Warrants and registration rights agreement, as additional
      interest expense over the term of the Notes using the effective-interest method.








-
            11
            -





The
      Company allocates the proceeds received between the Notes and the combined
      Warrants and registration rights agreement based upon the fair values on the
      dates the proceeds were received. The value of the Warrants was determined
      using
      the Black Scholes model calculation with input variables consistent with the
      valuation of our stock options (volatility 66%; risk free interest rate 4.0%;
      no
      dividend; price on date of issuance $10.24; expected life of 6 years for
      Warrants issued in connection with the 2012 Notes; expected life of 3 years
      for
      Warrants issued in connection with the 2010 Notes). Based on this calculation,
      the fair value of the Warrants on the date of issuance was $22,921,112. In
      accordance with EITF 00-19, the Warrants have been included as a liability
      and
      were originally valued at fair value on the date of issuance. Subsequent to
      the
      initial recording, the change in the fair value of the combined Warrants and
      registration rights agreement, determined under the Black-Scholes option pricing
      formula, at each reporting date will result in either an increase or decrease
      the amount recorded as a liability, with a corresponding adjustment to other
      income/expense. As of September 30, 2006, based on the revaluation of the
      warrant liability, the Warrants liability was decreased by $2,180,970 to
      $20,740,142. Debt discount equaling the fair value of the Warrants liabilities
      on the date of issuance is recorded against the Warrant liabilities, and is
      amortized over the terms. At the issuance date, short term debt discount is
      $4,532,132 and long term debt discount is $18,388,980. As of September 30,
      2006,
      short term debt discount amounted to $4,457,455, and long term debt discount
      amounted to $18,085,980, with total amortization expenses of $377,677charged
      to
      other expenses.





LONG-TERM
                DEBT:Principal
                amount
            
            $
            50.000.000Less
                unamortized discount
            
            
            (22,543,435
            )Long-term
                debt less unamortized discount
            
            $
            27,456,565





The
      Company has capitalized bond issuance cost $2,914,977 and will amortize it
      over
      the terms. As of September 30, 2006, the accumulated amortization expense for
      the debt issuance was $39,656.





**9.**  **SHAREHOLDER’S
      EQUITY**





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





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





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





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








-
            12
            -





On
      January 12, 2005 HTFE entered into an agreement with related party Harbin Tech
      Full Industry Co., Ltd. (“HTFI”), pursuant to which HTFI agreed to transfer all
      of its interests in joint venture with Baldor Electric Company to HTFE in
      exchange for the Company to issue 1,000,000 shares of its common stock to HTFI.
      On May 12, 2005, HTFE and the Company signed a written Consent amending the
      Share Transfer Agreement whereby HTFE and the Company agreed that the Company
      is
      to issue786,885 shares of the Company’s common stock for the transfer of HTFE’s
      interest in the joint venture, as opposed to the 1,000,000 shares as set forth
      in the original Share Transfer Agreement dated January 12, 2005. The Company
      allocated 786,885 shares of its common stock for issuance in connection with
      the
      transfer of the joint venture interest. The shares have not been issued as
      of
      December 31, 2005. As the transaction was between entities under common control,
      the transaction was recorded at the historical cost basis The Company issued
      shares at fair value equal to the recorded cost On November 20 2005, HTFI,
      HTFE
      and the Company signed a written consent to terminate the Share Transfer
      Agreement (see note 1).





On
      August
      31, 2005, Harbin Electric, Inc. entered into Securities Purchase Agreements
      with
      institutional investors and other accredited investors to sell an aggregate
      of
      1,600,000 shares of the Company’s common stock, par value $0.00001 at a price of
      $3.00 per share together with options to purchase an aggregate of 480,000 shares
      of common stock at $3.50 per share (the "Private Placement"). The Private
      Placement is being entered into pursuant to Regulation D of the Securities
      Act
      of 1933. The options have registration rights, however, there is no penalty
      or
      liquidated damages clause if the Company fails to register the shares upon
      exercise of the options. The Company is not obligated to buy back the options.
      Accordingly, in accordance with EITF 00-19, the options are classified as
      equity. The fair value of the options was calculated using the Black-Scholes
      options pricing model using the following assumptions: Volatility 66%; risk
      free
      interest rate 4.13%, dividend yield of 0% and expected term of 5
      years.





On
      September 18, 2005, the Company received $4,800,000 from the Private Placement.
      HTFE’s total registered capital as of September 30, 2006 has been increased to
      $11,200,000.





On
      July
      2006, the Company received $40,381 from Chinese government. This fund is to
      encourage and support local companies to develop international market. This
      amount has been recorded into paid in capital.





On
      August
      29, 2006, the Company, Advanced Electric Motors, Inc. (AEM), a wholly-owned
      subsidiary of the Company, Citadel Equity Fund Ltd. (“Citadel”) and Merrill
      Lynch International (“Merrill Lynch” and, together with Citadel, the
“Investors”) entered into a purchase agreement (the “Purchase Agreement”)
      relating to the purchase and sale of (a) $50.0 million aggregate principal
      amount of the Company's Guaranteed Senior Secured Floating Rate Notes
      (collectively, the “Notes”), of which (i) Citadel subscribed to $38.0 million of
      the principal amount of the Notes, which mature on September 1, 2012 (the “2012
      Notes”), and (ii) Merrill Lynch subscribed to $12.0 million of the principal
      amount of the Notes, which mature on September 1, 2010 (the “2010 Notes”) and
      (b) fully detachable warrants (the “Warrants”) to purchase an aggregate of
      3,487,368 shares of the Company's common stock, par value $0.00001 per share
      (the “Common Stock”), consisting of (i) six-year warrants to purchase an
      aggregate of 2,192,308 shares of 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 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 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. The offer and sale of the Notes and Warrants were made in
      an
      offshore transaction pursuant to Regulation S under the Securities Act of
      1933.





**Warrants**





Following
      is a summary of the warrant activity:





Outstanding,
                December 31, 2005
            
            
            480,000Granted
            
            
            3,487,368Forfeited
            
            
            -Exercised
            
            
            -Outstanding,
                September 30, 2006
            
            
            3,967,368








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            13
            -








Following
      is a summary of the status of warrants outstanding at September 30, 2006:





Outstanding
                Warrants
            Exercisable
                WarrantsExercise
              Price
            Number
            Average
                Remaining Contractual Life
            Average
                Exercise Price
            Number
            Average
                Exercise Price$3.50
            480,000
            4.17
            $3.50
            480,000
            $3.50$10.84
            525,830
            5.92
            $10.84
            525,830
            $10.84$7.80
            2,192,308
            5.92
            $7.80
            2,192,308
            $7.80$7.80
            769,230
            2.92
            $7.80
            769,230
            $7.80





10.  **STOCK-BASED
      COMPENSATION PLAN** ****





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




On
      January 31, 2005, the Company granted a total of 150,000 stock options to
      purchase shares of its common stock to three directors of the Company under
      the
      Company's 2005 Stock Option Plan, pursuant to a written agreement (the
      "Agreement"). The option terminates five (5) years from the date of grant.
      Per
      the Agreement, option shall become exercisable during the term that Optionee
      serves as a Director of the Company as follows: (i) 50% of the shares of Stock
      subject to this Option became exercisable immediately as of the date of this
      Agreement; and (ii) the balance of the shares of Stock subject to this Option
      shall become exercisable in eight (8) equal quarterly installments of three
      thousand one hundred twenty five (3,125) shares of Stock subject to this Option,
      the first installment to be exercisable as of the last day of the first quarter
      of calendar year 2005, with an additional 3,125 of such Shares becoming
      exercisable as of the last day of each subsequent quarter. The Company granted
      to Optionee the right to purchase the number of shares of Stock set forth in
      the
      Agreement, for cash (or other consideration as is authorized under the Plan
      and
      acceptable to the Board of Directors of the Company, in their sole and absolute
      discretion) at $3.10 per share (the "Exercise Price"), such price being not
      less
      than eighty-five percent (85%) of the fair market value per share of the Shares
      covered by this Option as of the date of the Agreement. The options were valued
      using the Black-Scholes option pricing model using the following assumptions:
      Volatility 66%; risk free interest rate 4.13%, dividend yield of 0% and expected
      term of 5 years.





On
      September 26, 2005, the Company granted options (the “Options”) to purchase
      250,000 shares of the Company's common stock (the “Common Stock”) at an exercise
      price $3.93 per share, the closing price on September 23, 2005. One-fifth (1/5)
      of the Options (50,000 shares) have been vested immediately. The remaining
      Options shall vest over a 3-year period, with 13.33 % (33,333 shares) vesting
      on
      the 180th day of the Effective Date and the balance vesting thereafter on a
      semi-annual basis, proportionately over the course of the following three (3)
      years. The options were valued using the Black-Scholes option pricing model
      using the following assumptions: Volatility 66%; risk free interest rate 4.13%,
      dividend yield of 0% and expected term of 3 years.





In
      February, 2006, the Company issued 480,000 options to employees and 20,000
      options to two directors. The options vest over a period of three years and
      have
      a life of five years. During the three month period ended September 30, 2006,
      the Company recorded $198,000 of compensation based on the fair value method
      under FAS 123R using the following assumptions: Volatility of 66%, risk free
      interest rate of 4.13% , dividend yield of 0% and expected life of 5 years.
      No
      estimate of forfeitures was made as the company has a short history of granting
      options.





The
      Company adopted SFAS No. 123-R effective January 1, 2006 using the
      modified prospective method. Under this transition method, stock compensation
      expense recognized in the nine month period ended September 30, 2006 includes
      compensation expense for all stock-based compensation awards granted on or
      after
      January 1, 2006, based on the grant-date fair value estimated in accordance
      with the provisions of SFAS No. 123-R. and the fair value of options
      granted before January 1, 2006 that have vested during the nine month period
      ended September 30, 2006.








-
            14
            -





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





Following
      is a summary of the stock option activity:





Options
                outstanding
            
            Weighted
                Average Exercise Price
            
            Aggregate
                Intrinsic ValueOutstanding,
                December 31, 2005
            
            
            400,000
            
            $
            3.55
            
            $
            1,818,409Granted
            
            
            500,000
            
            $
            8.10
            
            $
            1,450,000Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding
                September 30, 2006
            
            
            900,000
            
            $
            6.11
            
            $
            3,052,500





Following
      is a summary of the status of options outstanding at September 30, 2006:





Outstanding
                Options
            
            Exercisable
                OptionsExercise
              Price
            Number
            Average
                Remaining Contractual Life
            Average
                Exercise Price
            Number
            Average
                Exercise Price$3.10
            150,000
            3.34
            $3.10
            140,625
            $3.10$3.93
            250,000
            1.99
            $3.93
            116,666
            $3.93$8.10
            500,000
            4.35
            $8.10
            111,111
            $8.10





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





Stock
      compensation expense measured in accordance with SFAS No. 123-R totaled
      approximately $701,918 or $0.04 per basic and diluted share in the nine month
      period ended September 30, 2006. The adoption of SFAS No. 123-R resulted in
      increased expense of approximately $701,918 as compared to the stock
      compensation expense that would have been recorded pursuant to APB No. 25.
      In the nine month period ended September 30, 2005, no expense was recorded
      as
      the company did not have any stock options awarded during that period that
      had
      material intrinsic value.  Had the fair value method been adopted during
      the nine month period ended September 30, 2005, pro forma net income and
      earnings per share would have been as follows: ($ in thousands, except per
      share
      amounts):





Nine
                month period ended
              September
                30, 2005Net
                Income - as reported
            $7,284Stock-Based
                employee compensation expense included in reported net income, net
                of
                tax
            -Total
                stock-based employee compensation under fair-value-based method for
                all
                rewards, net of tax
            (289)Pro
                forma net income
            $6,995





Earnings
                per share:
            Nine
                month period endedSeptember
                30, 2005Basic,
                as reported
            $0.49Diluted,
                as reported
            $0.49Basic,
                pro forma
            $0.47Diluted,
                pro forma
            $0.47








-
            15
            -





**Methods
      of estimating fair value**





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





**Significant
      assumptions used to estimate fair value**





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





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





**11.**  **SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS**





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





The
      Company paid $0 for interest and income tax during the nine month periods ended
      September 30, 2006 and 2005.





**12.**  **STATUTORY
      COMMON WELFARE FUND**





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




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





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





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





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





The
      Company established a reserve for the annual contribution of 5% of net income
      to
      the welfare fund. Statutory common welfare fund amounted to $1,165,610 and
      $479,597, as of September 30, 2006 and 2005, respectively.





**13.**  **STATUTORY
      RESERVE**





In
      accordance with the Chinese Company Law (note 9), the Company has allocated
      10%
      of its annual net income, as statutory surplus reserve. Statutory surplus
      reserve amounted to $2,331,219 and $959,194, as of September 30, 2006 and 2005,
      respectively.





The
      Statutory surplus reserve and statutory common welfare fund are aggregated
      on
      the balance sheet as Statutory Reserve.








-
            16
            -





**14.**  **EMPLOYEE
      PENSION**





The
      employee pension in Harbin generally includes two parts: The first part to
      be
      paid by the company is 20% of the employees’ actual salary in the prior year. If
      the average salary falls below $1,165 for each individual, $1,165 will be used
      as the basis. The other part paid by the employees is 8% of actual salary with
      the same minimum requirement. The Company made $13,648 contributions of
      employment benefits, including pension in the nine month period ended September
      30, 2005. The Company made $10,767 in contributions of employment benefits,
      including pension in the nine month period ended September 30, 2006.





**15.**  **EARNINGS PER SHARE**





Earnings
      per share for three and nine month periods ended September 30, 2006 and 2005
      were determined by dividing net income for the periods by the weighted average
      number of both basic and diluted shares of common stock and common stock
      equivalents outstanding.





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


For
                  the three month
                periods
                  ended September 30
              For
                  the nine month
                periods
                  ended September 302006
              2005
              2006
              2005Basic
                  weighted average common shares outstanding
              16,600,451
              15,539,580
              16,600,451
              14,929,350Effect
                  of dilutive securities:
                Stock
                  options and warrants
              894,803
              14,432
              2,634,683
              -Diluted
                  weighted average common shares
                outstanding
              17,495,254
              15,554,012
              19,235,134
              14,929,350





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





The
      Company's operations are carried out in the PRC. Accordingly, the Company's
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, and by the general state
      of the PRC's economy.





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





**17.**  **LEGAL
      PROCEEDINGS**





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




Following
      is the summary of the current litigation as of September 30,
      2006.




Leong
      Sing Lye v. Harbin Electric, Inc. United States District Court, District of
      Nevada, Case No. 2:06-CV-00796




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. There has
      been
      no discovery to date and no trial is scheduled. The Company intends to
      vigorously defend against Mr. Lye’s claim, if not withdrawn, and pursue its
      counterclaim. The Company does not believe that the ultimate outcome of this
      matter will have a material adverse effect on the Company.








-
            17
            -





**18.**  **SUBSEQUENT
      EVENTS**





None.




**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**




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




As
      of
      November 10, 2006, our principal executive officers, Tianfu Yang, Tianli Yang,
      Suofei Xu, and Zedong Xu, beneficially owned approximately 68.7% of our
      outstanding common stock. As a result, they are in a position to significantly
      influence or control the outcome of matters requiring stockholders’ vote,
      including the election of directors, the adoption of any amendment to our
      certificate of incorporation or bylaws, and the approval of significant
      corporate transactions. Their control may delay or prevent a change of control
      on terms favorable to our other stockholders and may adversely affect the voting
      and other rights of our other stockholders.




***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 three hundred eighty-seven percent (387%) over
      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.







-
            18
            -





***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)
      and
      redeem or repurchase our capital stock.





The
      indenture 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 September 30, 2006, we had approximately $1.45
      million of total current liabilities, in addition to $50 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:





·
            require
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments on our indebtedness, which could reduce the availability
                of our
                cash flow to fund future working capital, capital expenditures,
                acquisitions and other general corporate purposes;·
            limit
                our ability to obtain additional financing for working capital, capital
                expenditures, and other general corporate requirements;·
            expose
                us to interest rate fluctuations because the interest rate 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.








-
            19
            -





***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. 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 three patents in
      China relating to linear motor applications, we currently have not applied
      for
      patents for our technical processes and designs, as we believe an application
      for such patents would result in public knowledge of our proprietary technology
      and designs.





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




Four
      major customers accounted for 82% of the net revenue for the nine month period
      ended September 30, 2006. The loss of any of our major customers, or a
      significant reduction in sales to any such customers, would adversely affect
      our
      revenues.




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




Five
      vendors provided 87% of our purchase of raw materials for the nine month period
      ended September 30, 2006. We currently obtain most of our raw materials from
      Acheng Relay Company Limited, Jiangnan Aluminum Material Factory and Linear
      Motor Institute of the Zhejiang University and Rui’an Fangzhuang Motor Fittings
      Factory. Any material change in the spot and forward rates could have a material
      adverse effect on the cost of our raw materials and on our operations. In
      addition, if we need alternative sources for key component parts for any reason,
      these component parts may not be immediately available to us. If alternative
      suppliers are not immediately available, we will have to identify and qualify
      alternative suppliers, and production of these components may be delayed. We
      may
      not be able to find an adequate alternative supplier in a reasonable time
      period, or on commercially acceptable terms, if at all. Shipments of affected
      products have been limited or delayed as a result of such problems in the past,
      and similar problems could occur in the future. Our inability to obtain our
      key
      source supplies for the manufacture of our products may require us to delay
      shipments of products, harm customer relationships or force us to curtail or
      cease operations.





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




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




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




***We
      may issue additional shares of common stock which, without your approval, may
      be
      granted rights and preferences more favorable than those of the shares being
      offered in this prospectus.***




Our
      Articles of Incorporation authorize the issuance of up to 100,000,000 shares
      of
      common stock, and, as of November 10, 2006, approximately 16,600,451 shares
      of
      our common stock have been issued and outstanding. We may issue shares
      authorized but unissued shares without further stockholder approval, and these
      shares may be granted rights and preferences that are greater than those of
      common shares being offered pursuant to this prospectus.







-
            20
            -





***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 69.5% of our
      issued and outstanding common stock as of November 10, 2006. This significant
      concentration of share ownership may adversely affect the trading price of
      our
      common stock because investors often perceive a disadvantage in owning shares
      in
      a company with just one or several controlling stockholders. Furthermore, our
      directors and officers, as a group, has the ability to 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.





***If
      we breach certain performance obligations made in connection with our recent
      financing, we may be subject to substantial financial
      penalties*** .




In
      connection with our August 30, 2006 financing transaction involving the issuance
      of Notes and Warrants to Citadel and Merrill Lynch, we may be required to pay
      substantial financial penalties if we fail to satisfy certain performance
      obligations under the transaction agreements. In addition, under the
      registration rights agreement, we agreed that, in the event that the
      registration statement relating to the shares underlying the Warrants has not
      been declared effective by the SEC on or before March 30, 2007 or if
      effectiveness of such registration statement is suspended at any time while
      any
      registrable securities relating to the Warrants remain outstanding, we agreed
      to
      pay an aggregate of $250,000 in cash to the warrant holders for each thirty-day
      period for which that remains uncured (but which amount shall not exceed
      $2,000,000 in the aggregate). Under the indenture, we will be required to pay
      an
      additional interest of 2.0% per annum on the Notes if we have not obtained
      a
      listing of our common stock on either the Nasdaq Capital Market or the Nasdaq
      Global Market on or before July 1, 2007 and if we are not at that time currently
      maintaining such listing. See “Business - Recent Developments - New Financing”.
      Pursuant to the indenture, AEM has agreed, and all of our 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
      purchasers of the Notes and to the trustee the payment and performance of our
      obligations. If we are required to pay any of these penalties, which could
      be
      substantial, this could have a material and adverse effect on our financial
      results and results of operations.




**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.







-
            21
            -





***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 “The Company
      - PRC Regulations.”




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




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





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




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




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




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




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




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




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




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





-
            22
            -




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





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




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




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







-
            23
            -





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




**INFORMATION
      REGARDING FORWARD LOOKING STATEMENTS**




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




**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 linear motors and 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 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.




**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. 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
      maintain reserves for potential credit losses on accounts receivable. Management
      reviews the composition of accounts receivable and analyze historical bad debts,
      customer concentrations, customer credit worthiness, current economic trends
      and
      changes in customer payment patterns to evaluate the adequacy of these
      reserves.




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.




Reserves
      are recorded primarily on a specific identification basis. Reserve for potential
      credit losses were $0, $29,249 and for the years ended December 31, 2004 and
      2005 and for the nine months ended September 30, 2006, respectively. No amounts
      were written off during the periods indicated. If our estimate of our allowance
      is understated in future periods, operating income would be
      reduced.







-
            24
            -





***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 against such exposure,
      we require a binding purchase order or a signed agreement by our customer
      agreeing to pay for and take possession of finished goods inventory parts for
      the duration of the agreement.




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.




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 custom products which are customer specific, and no returns
      are
      allowed. We warrant our product 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, 2004
      and 2005 and for the nine months ended September 30, 2006, such returns and
      allowances were $0, $0 and $0, respectively. 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***




Prior
      to
      January 1, 2006, we accounted for share-based employee compensation plans
      using the intrinsic value method of accounting in accordance with APB 25. Under
      the provisions of APB 25, no compensation expense is recognized when stock
      options are granted with exercise prices equal to or greater than market value
      on the date of grant.




Effective
      January 1, 2006, 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.







-
            25
            -





**RESULTS
      OF OPERATIONS**




**NINE
      MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
      2005**




**Revenue**




For
      the
      nine month period ended September 30, 2006, we generated net revenues of $
      $28,407,056. During the nine-month period ended September 30, 2005, we produced
      net revenues of $ $16,446,753. Sales of linear motor and special motor products
      drove the growth in the period. Industrial electric linear motors and special
      motors continued to comprise significantly all of our total product sales in
      both comparable periods. The increase for the nine -month period ended September
      30, 2006 was due to the Company’s success in recruiting new customers and
      increased sales to our existing customers.




**Gross
      Profit**




The
      Company achieved a gross profit of $ 13,879,024 for the nine months ended
      September 30, 2006 compared to $ 8,183,402 for the nine months ended September
      30, 2005. The increase is directly related to our increases in sales and mix
      of
      product. Gross margin, as a percentage of revenues, was 48.9% for the nine
      months ended September 30, 2006 compared to 49.8% for the nine months ended
      September 30, 2005. The change in gross margin is normal as it reflects the
      different mix of products shipped in their corresponding periods.




**Operating
      Expenses**




Our
      total
      operating expenses consist of costs associated with sales and marketing,
      research and development expenditures, general administrative costs, and amounts
      to account for stock based compensation. The Company incurred total operating
      expenses of $  4,289,447,
      or 15.1% of sales, for the nine months ended September 30, 2006. This represents
      an increase of $  3,367,604
      compared to $  921,843,
      or 5.6% of sales for the nine months ended September 30, 2005. Aggregated
      selling expenses of $652,172, or 2.3% of sales, account for expenses associated
      with sales and marketing of the Company’s products. Selling expenses for the
      corresponding period last year were $225,256 or 1.4% of sales. The increase
      is
      due to our increased revenues and sales activity. General and administrative
      expenses include the costs of maintaining the Company’s facilities, salaries,
      research and development, and amounts allocated to stock based compensation
      through options grants. General and administrative expenses for the nine months
      ended September 30, 2006 were $3,637,275, or 12.8% of sales compared to $696,587
      or 4.2% of sales in September 30, 2005. The increases were due to the inclusion
      of stock based compensation expense, certain costs associated with our
      financing, and additional administrative expenses to support our offices in
      the
      U.S. Excluding the stock based compensation of $ 701,918 ,
      our
      General and administrative expenses for the nine months ended September 30,
      2006
      were $2,935,357 or 10.33% of sales versus $696,587 or 4.2% of sales in September
      30, 2005. There was no stock based compensation charge in the corresponding
      period last year.




Stock
      compensation expense measured in accordance with SFAS No. 123-R totaled
      approximately $701,918 or $0.04 per basic and diluted share in the
      nine month period ended September 30, 2006. The adoption of SFAS No. 123-R
      resulted in increased expense of approximately $701,908 or 2.5% of sales. In
      the
      nine month period ended September 30, 2005, no expense was recorded as the
      Company did not have any stock options awarded during that period that had
      intrinsic value.




Gain
      from
      the change in fair value from revaluation of warrants was $2,180,970 for the
      nine months ended September 30, 2006. The gain is on the warrants associated
      with the debenture financing dated August 30, 2006. Certain warrants were
      created at the time of the financing and those warrants are recorded at fair
      value on the accompanying balance sheet. The gain for the nine months ended
      September 30, 2006 is driven by a reduction in the Company’s stock price from
      time of issuance on August 30, 2006 to September 30, 2006, the period after
      which the derivates were granted during the quarter. There was no such gain
      or
      loss on warrants for the three months ended September 30, 2005.







-
            26
            -





**Net
      Income**




The
      Company's net income was $11,755,399 or 41.4% of sales for the nine month period
      ended September 30, 2006, compared to $ 7,284,487 or 44.3% of sales for the
      nine
      month period ended September 30, 2005. The increase for the nine month period
      is
      attributed to the continued increase in sales levels, a gain on sale of
      marketable securities and the contribution gains on change in fair value from
      revaluation of warrants issued in conjunction with our Indenture. The Company
      sold its marketable securities in first quarter of 2006 at a realized gain
      of
      $571,143 during resulting in a benefit to net income during the nine month
      period ended September 30, 2006. No other sales of marketable securities
      occurred during the nine month period ended September 30, 2006 and no sales
      of
      marketable securities occurred during the corresponding period last
      year.




**New
      Financing**




On
      August
      29, 2006, we, AEM, and the Investors entered into a purchase agreement (the
      “Purchase Agreement”) relating to the purchase and sale of $50.0 million
      aggregate principal amount of the Notes and Warrants to purchase an aggregate
      of
      3,487,368 shares of our common stock in an offshore transaction pursuant to
      Regulation S under the Securities Act of 1933. The transaction closed on August
      30, 2006.





***Indenture***




The
      Notes
      are governed by an indenture, dated August 30, 2006, entered into among us,
      AEM,
      as guarantor, and The Bank of New York, as trustee for the Notes. Of the $50.0
      million aggregate principal amount of the Notes, Citadel subscribed to $38.0
      million of the principal amount of the Notes, which mature on September 1,
      2012
      (the “2012 Notes”), and Merrill Lynch subscribed to $12.0 million of the
      principal amount of the Notes, which mature on September 1, 2010 (the “2010
      Notes”). Pursuant to the indenture, AEM has agreed, and all of our 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.




Under
      the
      indenture, we are prohibited, and we are obligated to preclude our subsidiaries,
      from incurring additional debt unless such debt has been designated as
      permissible debt under the terms of the indenture. The indenture imposes further
      limitations on our ability to (i) make investments in other companies, (ii)
      create liens, (iii) sell our assets if the fair market value of such sales
      exceeds, in the aggregate, $4.5 million per year, (iv) make distributions from
      our subsidiaries and (v) engage in transactions with our affiliates. We must
      also maintain a consolidated tangible net worth of not less than $25.0 million
      from the issuance date of the Notes until the first annual anniversary thereof,
      which amount increases at each annual anniversary of such issuance date by
      $10.0
      million. We will also be required to pay an additional interest of 2.0% per
      annum on the Notes if we have not obtained a listing of our common stock on
      either the Nasdaq Capital Market or the Nasdaq Global Market on or before July
      1, 2007 and if we are not at that time currently maintaining such listing.
      Pursuant to the indenture, AEM has agreed, and all of our 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
      purchasers of the Notes and to the trustee the payment and performance of our
      obligations. If we are required to pay any of these penalties, which could
      be
      substantial in aggregate amount, such payments could have a material and adverse
      effect on our financial results and results of operations.




In
      addition, we are obligated to pay liquidated damages upon failure to complete
      certain events. They include:




(i)
      an
      aggregate amount of $750,000 due and payable by us to the noteholders on a
      pro
      rata basis (proportionate to their holding of the Notes that are at that time
      outstanding) on or before April 9, 2007 if we have not obtained a listing of
      our
      common stock on either the Nasdaq Capital Market or the Nasdaq Global Market
      on
      or before April 1, 2007 and if we are not at that time currently maintaining
      such listing;




(ii)
      an
      aggregate amount of $1,500,000 due and payable by us to the noteholders on
      a pro
      rata basis (proportionate to their holding of the Notes that are at that time
      outstanding) on or before July 9, 2007 if we have not obtained a listing of
      our
      common stock on either the Nasdaq Capital Market or the Nasdaq Global Market
      on
      or before July 1, 2007 and if we are not at that time currently maintaining
      such
      listing;







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            27
            -





(iii)
      an
      aggregate amount of $2,500,000 due and payable by us to the noteholders on
      a pro
      rata basis (proportionate to their holding of the Notes that are at that time
      outstanding) on or before March 1 of each year, beginning March 1, 2007, if
      we
      have not appointed a new independent accounting firm from a list of pre-approved
      candidates by the January 1 immediately preceding each such March 1, and if
      an
      independent accounting firm identified as a pre-approved candidate in the
      indenture is not at each such March 1 engaged by us; and




(iv)
      an
      aggregate amount of $1,200,000 due and payable by us to the noteholders on
      a pro
      rata basis (proportionate to their holding of the Notes that are at that time
      outstanding) on or before the 125th day following the issuance date of the
      Notes, if we have not appointed a senior financial officer knowledgeable about
      the U.S. capital markets and proficient in English by the 120th day following
      the issuance date of the Notes, and the same aggregate amount for each
      subsequent 120-day period in which we fail to so comply.





***Notes
      and Guarantee***




The
      Notes:


·
            are
                general senior secured obligations of the Company;·
            are
                secured on a first priority basis by all of the shares of AEM held by
                the Company;·
            rank
                equally in right of payment with all existing and future pari passu
                indebtedness of the Company; and·
            will
                rank senior in right of payment to all existing and future subordinated
                indebtedness of the Company.




The
      Notes
      are unconditionally guaranteed on a senior secured basis by AEM (the
“Guarantor”) and will be guaranteed on a senior secured basis by all of our
      other existing and future subsidiaries (other than subsidiaries domiciled in
      the
      People's Republic of China).





The
      Notes
      bear interest on the principal amount at the rate per annum, reset
      semi-annually, equal to (a) LIBOR plus 4.750% for the 2010 Notes and (b) LIBOR
      plus 3.350% for the 2012 Notes. The interest rate on the Notes is subject to
      increase pursuant to the provisions of the Indenture. The Company shall pay
      interest semi-annually in arrears on March 1 and September 1 of each year.
      Interest shall accrue from the most recent date to which interest has been
      paid
      on the Notes or, if no interest has been paid, from the date of issuance. If
      there is no existing default in the payment of interest, and if the Note is
      authenticated between a record date and the next succeeding interest payment
      date, interest shall accrue from such next succeeding interest payment date.
      The
      first interest payment date shall be March 1, 2007. The Company shall pay
      interest on overdue principal and premium, if any, from time to time at a rate
      that is 4% per annum in excess of the interest rate then in effect under the
      Indenture and the Notes. Interest shall be computed on the basis of a 360-day
      year of twelve 30-day months for the actual number of days elapsed. The interest
      rate on the Notes will in no event be higher than the maximum rate permitted
      by
      New York law as such rate may be modified by United States law of general
      application.





The
      2010
      Notes shall not be redeemable at the option of the Company prior to September
      1,
      2007. Starting on that date, the Company may redeem all (but not less than
      all)
      of the 2010 Notes, after giving notice. The 2012 Notes shall not be redeemable
      at the option of the Company prior to September 1, 2007. Starting on that date,
      the Company may redeem all (but not less than all) of the 2012 Notes, after
      giving notice.




Upon
      a
      change of control of the Company, each noteholder may require the Company to
      repurchase all or any part (equal to $1,000 or an integral multiple of $1,000)
      of such holder’s Notes at a purchase price in cash equal to 102.5% of the
      aggregate principal amount of the Notes repurchased, plus accrued and unpaid
      interest on the Notes repurchased to the purchase date (subject to the right
      of
      holders of record on the relevant record date to receive interest).




If
      the
      Company or any of its subsidiaries consummates an asset sale, they shall not
      be
      required to apply any net available cash in accordance with the Indenture until
      the aggregate net available cash from all asset sales following the date the
      Notes are first issued exceeds $2.0 million. Thereafter, the Company shall,
      after applying the additional aggregate $2.0 million of net available cash,
      commence an offer for Notes pursuant to the Indenture by applying the net
      available cash to purchase the maximum principal amount of Notes that may be
      purchased out of the net available cash at an offer price in cash equal to
      100%
      of the principal amount plus accrued and unpaid interest to the date fixed
      for
      the closing of such offer in accordance with the procedures set forth in the
      Indenture. To the extent that the aggregate amount of Notes tendered pursuant
      to
      an asset sale offer is less than the net available cash, the Company may use
      such deficiency for any purpose not prohibited by the Indenture. If the
      aggregate principal amount of Notes surrendered by Holders thereof exceeds
      the
      amount of net available cash, the Trustee shall select the Notes to be purchased
      on a pro rata basis. Holders of Notes that are the subject of an offer to
      purchase will receive an asset sale offer from the Company prior to any related
      purchase date and may elect to have such Notes purchased by completing the
      required form.







-
            28
            -





The
      Guarantee of the Notes:




·
            is
                a senior secured obligation of the Guarantor;·
            will
                be secured, on a first priority basis, by security interests in any
                other
                collateral owned by the Guarantor;·
            is
                senior in right of payment to all existing and future subordinated
                indebtedness of the Guarantor; and·
            ranks
                equally in right of payment with all existing and future pari passu
                indebtedness of the Guarantor.





***Share
      Pledge Agreement***




As
      security for the Notes, we and The Bank of New York, as collateral agent,
      entered into a share pledge agreement, dated August 30, 2006, pursuant to which
      the Notes were secured with all of the shares of AEM common stock held
      by us.




***Warrant
      Agreement and Warrants***




The
      Warrants are governed by a warrant agreement, dated August 30, 2006, between
      us
      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 beginning on the date of
      issuance through the maturity date of such Warrant.




The
      Warrant Agreement provides that upon the occurrence of certain events the
      exercise price of the Warrants may, subject to certain conditions, be adjusted.
      If the exercise price is adjusted, the Warrant Agreement provides that the
      number of shares of common stock issuable upon the exercise of each warrant
      shall be adjusted. No fractions of a share of common stock will be issued upon
      the exercise of any Warrant, but the Company will pay the cash value of the
      fractional share, determined as provided in the Warrant Agreement.




The
      applicable exercise price and the number of shares issuable upon the exercise
      of
      each Warrant are subject to adjustment from time to time upon the occurrence
      of
      certain events, including:




·
            if
                the Company makes a dividend payment or distribution on its common
                stock
                payable in shares of its common stock, subdivides, combines or
                reclassifies its share capital or makes a distribution on its common
                stock
                in shares of its capital stock other than common
                stock;




·
            if
                the Company distributes any rights, options or warrants to all holders
                of
                its common stock entitling them to subscribe for shares of common
                stock or
                securities convertible into, or exchangeable or exercisable for,
                shares of
                common stock, in either case, at a price per share less than the
                fair
                value per share;




·
            if
                the Company distributes to all holders of its common stock any of
                its
                assets (including cash), debt securities, preferred stock or any
                rights or
                warrants to purchase assets (including cash), debt securities, preferred
                stock or other securities of the
                Company;




·
            if
                the Company issues shares of common stock for a consideration per
                share
                less than the fair value per share on the date the Company fixes
                the
                offering price of such additional shares;
                or







-
            29
            -





·
            if
                the Company issues any securities convertible into or exchangeable
                or
                exercisable for common stock for a consideration per share of common
                stock
                initially deliverable upon conversion, exchange or exercise of such
                securities less than the fair value per share on the date of issuance
                of
                such securities or on the date the Company fixes the offering price
                of
                such securities.




The
      exercise price, however, shall not be less than $0.01 per share. In
      addition to the adjustments described above, the Company may, at any time,
      reduce the exercise price to any amount greater than or equal to $0.01 per
      share
      for any period of time.




The
      Warrant Agreement further provides that (i) each holder of 2012 Warrants shall
      have the right until August 30, 2012 and (ii) each holder of 2009 Warrants
      shall
      have the right until August 30, 2009 to receive from the Company the number
      of
      shares underlying such Warrants which the holder may at the time be entitled
      to
      receive on exercise of such Warrants and payment of the applicable exercise
      price.





***Equity
      Registration Rights Agreement***




In
      connection with the issuance of the Warrants, we and the Investors have entered
      into an equity registration rights agreement, dated August 30, 2006, pursuant
      to
      which we have agreed to file a shelf registration statement covering the resale
      of the shares underlying the Warrants. Under the registration rights agreement,
      we agreed that, in the event that the registration statement relating to the
      shares underlying the Warrants has not been declared effective by the SEC on
      or
      before March 30, 2007, or if effectiveness of such registration statement is
      suspended at any time while any registrable securities relating to the Warrants
      remain outstanding, we agreed to pay an aggregate of $250,000 in cash to the
      warrantholders for each thirty-day period for which that remains uncured (but
      which amount shall not exceed $2,000,000 in the aggregate). Payment shall be
      made on a pro rata basis in accordance with each warrantholder’s percentage
      holding of the then outstanding registrable securities. If a warrantholder
      fails
      to provide the Company with information that is required to be provided in
      the
      registration statement, the commencement of the liquidated damages period is
      to
      be extended until two business days following the date of receipt by the Company
      of such required information, and the amount payable to any warrantholder is
      to
      be prorated for the number of actual days during such liquidated damages period
      during which a default remains uncured. All expenses incident to the Company’s
      performance of and compliance with the registration rights agreement is to
      be
      borne by the Company.





The
      Company is obligated to deliver cash payment to the warrantholders by the
      seventh business day after the end of each liquidated damages period. If the
      Company fails to do so, the Company will be obligated to pay interest at a
      rate
      of 10% per annum (or such lesser maximum amount that is permitted to be paid
      by
      applicable law) to the warrantholders, accruing daily from the date such
      liquidated damages are due until such amounts, plus all such interest, are
      paid
      in full.





The
      Company agreed to indemnify each warrantholder against any losses, claims,
      damages or liabilities arising out of or are based upon any untrue statement
      or
      alleged untrue statement of a material fact contained in, or a failure to state
      a material fact required to be stated in, the registration statement or related
      prospectus, and to provide reimbursement for any legal or other expenses
      reasonably incurred in connection with investigating or defending any such
      loss,
      claim, damage, liability or action. The Company, however, shall not be liable
      to
      the extent that such loss, claim, damage or liability arises out of or is based
      upon any untrue statement or omission made in the registration statement or
      related prospectus in reliance upon and in conformity with written information
      pertaining to such warrantholder and furnished to the Company by or on behalf
      of
      such warrantholder. In addition, a warrantholder shall not be indemnified to
      the
      extent that the prospectus was required to be delivered by such warrantholder
      and any such loss, claim, damage or liability of such warrantholder results
      from
      the fact that there was not sent or given to such person, at or prior to the
      written confirmation of the sale of such registrable securities to such person,
      a copy of the final prospectus if the Company had previously furnished copies
      to
      such warrantholder.




***Voting
      Agreement***




In
      addition, we, Mr. Tianfu Yang and Citadel entered into a voting agreement,
      dated
      August 30, 2006, relating to the voting rights associated with the capital
      stock
      of the Company held by Mr. Yang and Citadel. Under the voting agreement, Mr.
      Yang has agreed to vote all shares of the Company’s common stock owned by him to
      ensure that up to 2 nominees of Citadel are elected to the Company’s Board of
      Directors.







-
            30
            -





***Noncompetition
      Covenant and Agreement***




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




**Land
      Use Lease**





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 lease and use of 40,800 square meters of State-owned land
      in the Shanghai Zhuqiao Airport Industrial Zone (the "Site").





The
      term
      of the lease is 50 years and the aggregate amount that HTFE shall pay to
      Shanghai Lingang is approximately US$2.54 million ("Fee"), 50% of which has
      been
      paid and 45% of which is 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.





It
      is
      anticipated that the Site will be used in connection with the research and
      development project contemplated by the R&D Agreement. The Land Use
      Agreement provides that HTFE shall invest approximately US$15 million in the
      Site and 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.




**Liquidity
      and Capital Resources**




As
      of
      September 30, 2006, the Company had $ $60,593,769 cash and cash equivalents.
      The
      Company had net cash flows provided by operations of $ 6,113,114 for the nine
      month period ended September 30, 2006, as compared to net cash provided by
      operations of $ 883,144 in the corresponding period last year. The change in
      net
      cash flows from operations in the current period as compared to the corresponding
      period last year was mainly due to net income. Cash flows from investing
      activities contributed 559,052 in the nine month period ended September 30,
      2006 compared with a net usage of $2,374,371in the corresponding period last
      year. The contribution in the current period was mainly due to the proceeds
      from
      the sale of marketable securities during the first quarter of 2006. The Company
      had a net increase in cash and cash equivalent of $ 54,854,750 in the current
      period as compared to a net increase of $ 3,393,293 in the corresponding period
      last year. Our net increase in cash & cash equivalents during the nine month
      period ended September 30, 2006 was due mainly to the net funds raised through
      the Indenture
      related to our financing dated August 30, 2006 and
      the
      increased cash flow from operations.




On
      August
      29, 2006, the Company, AEM, Citadel and Merrill Lynch entered into the Purchase
      Agreement relating to the purchase and sale of (a) $50.0 million aggregate
      principal amount of the Company's Notes and (b) fully detachable 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 (the “Indenture”), entered
      into among the Company, AEM, as guarantor, and The Bank of New York, as trustee
      for the Notes. Of the $50.0 million aggregate principal amount of the Notes,
      Citadel subscribed to $38.0 million of the principal amount of the 2012 Notes,
      which mature on September 1, 2012, and Merrill Lynch subscribed to $12.0 million
      of the principal amount of the 2010 Notes, which mature on September 1, 2010.
      Pursuant to the indenture, AEM has agreed, and all of our 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.





As
      security for the Notes, we 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 us.





The
      Warrants are governed by a warrant agreement, dated August 30, 2006, between
      us
      and The Bank of New York, as warrant agent. The Warrants consist of (i) the
      First Tranche 2012 Warrants which permit the purchase of an aggregate of
      2,192,308 shares of our common stock, at an exercise price of $7.80 per share,
      (ii) the Second Tranche 2012 Warrants which permit the purchase of an aggregate
      of 525,830 shares of our common stock at an exercise price of $10.84 per share
      and (iii) the 2009 Warrants which permit the purchase of an aggregate of 769,230
      shares of our common stock at an exercise price of $7.80 per share. 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. All of the Warrants contain a cashless exercise feature.
      To the extent Warrants are exercised for cash, however, the Company would
      receive the payment of the exercise price.







-
            31
            -





On
      August
      25, 2006 the Company’s subsidiary HTFE signed an R&D Agreement with IEECAS.
      Under the R&D Agreement with IEECAS, 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. In addition, interest on the Notes is payable
      semi-annually in arrears, commencing March 1, 2007. The Company anticipates
      that
      existing cash reserves and cash flow from future operations will be used for
      such purposes.





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







-
            32
            -





**Item
      3. Controls and Procedures**




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




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




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




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




**PART
      II. OTHER INFORMATION**




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




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. There has
      been
      no discovery to date and no trial is scheduled. The Company intends to
      vigorously defend against Mr. Lye’s claim, if not withdrawn, and pursue its
      counterclaim. The Company does not believe that the ultimate outcome of this
      matter will have a material adverse effect on the Company.





**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**




None.







-
            33
            -





**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.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.10.1
            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.




-
          34
          -




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 10.156to the Registration Statement on SB-2 filed with
                the
                Commission on October 4, 2006 and incorporated herein by
                reference.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 Quarter Ended September
                  30, 2006
              
              Filed
                  herewith as Exhibit 99.1.







-
            35
            -





**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:
                November 14,2006
            By:
            /s/
                Tianfu YangTianfu
                YangChief
                Executive Officer, Director and Chairman of the Board
              (Principal
                Executive Officer)





Date:
                November 14,2006
            By:
            /s
                Zedong XuZedong
                XuChief
                Financial Officer
              (Principal
                Accounting Officer)




-
            36
            -





**EXHIBIT
      INDEX**




(a)  Exhibits:




**Exhibit
                Number**
            **Description**
            
            **Method
                of Filing**3.1
            Articles
                of Incorporation of the Company
            
            Filed
                as Exhibit 3.1 to the registration statement on Form SB-2 filed with
                the
                Commission on October 10, 2003 and incorporated herein by
                reference.3.2
            Amended
                and Restated Bylaws of the Company
            
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on July 6, 2005 and incorporated herein by
                reference.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.10.1
            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 10.156to the Registration Statement on SB-2 filed with
                the
                Commission on October 4, 2006 and incorporated herein by
                reference.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 Quarter Ended September
                  30, 2006
              
              Filed
                  herewith as Exhibit 99.1.




(b)
            Reports
                on Form 8-K during the quarter ended September 30,
                2006:




(i)
            Form
                8-K filed on August 3, 2006 disclosing the Company’s entry into an
                indicative financing term sheet dated as of August 2, 2006; and













(ii)
            Form
                8-K filed on August 25, 2006 disclosing that Harbin Tech Full Electric
                Co., Ltd. a wholly-owned subsidiary the Company, entered into a joint
                research and development agreement with the Institute of Electrical
                Engineering of the Chinese Academy of Sciences (“IEECAS”) to produce a
                train and system to be tested at the Beijing Airport railway line
                in the
                People’s Republic of China by the end of 2008.;
                and




(iii)
            Form
                8-K filed on August 31, 2006 disclosing the Company issued a press
                release
                announcing the closing of a US$50.0 million financing with Citadel
                Equity
                Fund Ltd. and Merrill Lynch International, pursuant to an indicative
                financing term sheet dated as of August 2, 2006.;
                and




(iv)
            Form
                8-K filed on September 1, 2006 disclosing the Company’s entry into a
                entered into a purchase agreement pursuant to an indicative financing
                term
                sheet dated as of August 2, 2006
                and;




(v)
            Form
                8-K filed on September 14, 2006 disclosing Harbin Tech Full Electric
                Co.,
                Ltd. ("HTFE”), a wholly-owned subsidiary of Harbin Electric, Inc., has
                entered into an agreement dated as of September 8, 2006 with Shanghai
                Lingang Investment and Development Company Limited with respect to
                HTFE’s
                lease and use of 40,800 square meters of State-owned land in the
                Shanghai
                Zhuqiao Airport Industrial Zone.;
                and




(vi)
            Form
                8-K filed on October 16, 2006 disclosing the Company’s Board of Directors
                approved an increase in size of the Board of Directors from five
                to seven
                members and elected Messrs. Bai Feng and Ye Yunyue to the Board of
                Directors to fill the two resulting vacancies, effective
                immediately