<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For the quarterly period ended September 30, 1998.



[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________

                          Commission File No.  0-3132

                              SUNBASE ASIA, INC.
            (Exact name of Registrant as specified in its charter)

        Nevada                                           94-1612110
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                  Identification Number)

                        19/F, First Pacific Bank Centre
                             51-57 Gloucester Road
                              Wanchai, Hong Kong
                   (Address of principal executive offices)

Registrant's telephone number, including area code:  (852) 2865-1511


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                  Yes      X             No     
                          ---                   ___    

As of September 30, 1998, the Company had 13,576,116 shares of common stock
issued and outstanding.

                                       1
<PAGE>
 
                     SUNBASE ASIA , INC. AND SUBSIDIARIES
                     ------------------------------------


                                     INDEX
<TABLE>
<CAPTION>
                                        

                                                                                           Page
                                                                                           ----
PART I:  FINANCIAL INFORMATION

        <S>                                                                                <C> 
         Item 1  --  Financial statements
                     Consolidated Condensed Balance Sheets (unaudited)              
                     - December 31, 1997 and September 30, 1998                             3-4
                                                                                    
                     Consolidated Condensed Statements of Income (unaudited)        
                     - Three months and nine months ended                           
                     September 30, 1997 and 1998                                              5
                                                                                    
                     Consolidated Condensed Statements of Cash Flows (unaudited)    
                     -Nine months ended September 30, 1997 and 1998                           6
                                                                                    
                     Notes to Consolidated Condensed Financial Statements           
                     (unaudited)                                                    
                     - Three months and nine months ended                           
                     September 30, 1997 and 1998                                           7-12
 
         Item 2  --  Management's Discussion and Analysis of
                     Financial Condition and Results of Operations                        13-21
 
         Item 3  --  Factors that may Affect Future Results                               22-23
 
PART II: OTHER INFORMATION
 
         Item 6  --  Exhibits and Reports on Form 8-K                                        24
 
SIGNATURES                                                                                   25
 
EXHIBIT 11        Computation of Earnings Per Common Share                                26-27
 
</TABLE>

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
         --------------------

                      SUNBASE ASIA, INC. AND SUBSIDIARIES

               CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
                 AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
                      (Amounts in thousands, except number
                         of shares and per share data)
<TABLE>
<CAPTION>
                                                                   12/31/97              9/30/98
                                                             --------------------   --------------------
                                                     Notes      RMB         US$        RMB         US$
                                                     -----      ---         ---        ---         ---
ASSETS
<S>                                                  <C>        <C>         <C>        <C>         <C>
Current assets
    Cash and bank balances                                     39,343      4,740      15,503     1,868
    Deposits with a financial institution                      23,750      2,861           -         -
    Accounts receivable, net                                  480,400     57,880     459,611    55,375
    Notes receivable                                            6,190        746       1,085       131
    Inventories, net                                     4    477,217     57,496     630,252    75,934
    Other receivables                                          40,330      4,859      82,960     9,995
    Due from related companies                                300,023     36,147     316,090    38,083
                                                            ---------   --------  ----------   -------
Total current assets                                        1,367,253    164,729   1,505,501   181,386
Fixed assets                                                  631,812     76,122     585,691    70,565
Deferred asset                                                 14,383      1,733      12,152     1,464
Long term investments                                           1,012        122       1,012       122
Goodwill                                                       10,760      1,296      10,135     1,221
                                                            ---------   --------  ----------   -------
Total assets                                                2,025,220    244,002   2,114,491   254,758
                                                            =========   ========  ==========   =======
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Short term bank loans                                     435,403     52,458     452,953    54,573
    Long term bank loans, current portion                     140,772     16,960     140,772    16,960
    Accounts payable                                          115,646     13,933     145,453    17,524
    Accrued liabilities and other payables                    131,536     15,848     212,251    25,572
    Short term obligations under capital leases                20,441      2,463      20,806     2,507
    Short term portion of
      secured promissory note                            5     12,450      1,500      24,900     3,000
    Income tax payable                                         50,392      6,071      39,104     4,711
    Taxes other than income                                    38,972      4,696      65,288     7,866
    Due to related companies                                   18,730      2,257      22,292     2,686
    Convertible debentures                               6     95,450     11,500      95,450    11,500
                                                            ---------   --------  ----------   -------
Total current liabilities                                   1,059,792    127,686   1,219,269   146,899
Long term bank loans                                            4,005        483       4,005       483
Long term obligations under capital leases                     68,483      8,251      52,949     6,380
Long term portion of secured promissory note             5     12,450      1,500           -         -
Minority interests                                            441,490     53,192     429,360    51,730
                                                            ---------   --------  ----------   -------
                                                            1,586,220    191,112   1,705,583   205,492
 
</TABLE>
                                                                   Continued/...

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

                                       3
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED CONDENSED BALANCE SHEETS
     AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) (CONTINUED)
                      (Amounts in thousands, except number
                         of shares and per share data)
<TABLE>
<CAPTION>
                                                                12/31/97                  9/30/98
                                                             ---------------          --------------
                                                             RMB         US$          RMB        US$
                                                             ---         ---          ---        ---
<S>                                                         <C>          <C>          <C>          <C> 
Shareholders' equity:
Common Stock, par value US$ 0.001 each,
   50,000,000 shares authorized;
   13,576,116 (12,700,142 - 1997) shares issued,
   and fully paid up                                         107          13           116        14
Preferred Stock, par value US$ 0.001 each,
   25,000,000 shares authorized;
        Convertible Preferred Stock - Series A;
        36 shares issued and outstanding                  44,533       5,365        44,533     5,365
        Convertible Preferred Stock - Series B;
        765 (6,800 - 1997) shares issued and
        outstanding                                   7   28,288       3,408         3,179       383
Contributed surplus                                      188,019      22,653       213,119    25,677
Reserves                                                  27,971       3,370        27,971     3,370
Retained earnings                                        150,082      18,081       119,990    14,457
                                                       ---------    --------    ----------   -------
Total shareholders' equity                               439,000      52,890       408,908    49,266
                                                       ---------    --------    ----------   -------
Total liabilities and shareholders' equity             2,025,220     244,002     2,114,491   254,758
                                                       =========    ========    ==========   =======
 
</TABLE>


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

                                       4
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

            CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
     FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
       (Amounts in thousands, except number of shares and per share data)

<TABLE>
<CAPTION>

                                         Nine Months Ended September 30,                     Three Months Ended September 30,
                                      ---------------------------------------             --------------------------------------
                                      1997             1998             1998              1997             1998             1998
                        Notes         RMB              RMB               US               $RMB             RMB              US$
                        -----         ----             ----             -----             ----             -----            ----
<S>                                  <C>              <C>              <C>               <C>              <C>              <C>
Net sales to
  - third parties                     427,571          346,675            41,768          158,047          108,059          13,019
  - related parties                   219,095           31,958             3,850            2,776            9,962           1,200
                                   ----------       ----------        ----------       ----------       ----------      ----------
                                      646,666          378,633            45,618          160,823          118,021          14,219
Cost of sales                        (394,097)        (276,254)          (33,284)         (98,272)         (85,837)        (10,342)
                                   ----------       ----------        ----------       ----------       ----------      ----------
Gross profit                          252,569          102,379            12,334           62,551           32,184           3,877
Selling, general and
    administrative expenses
   - third parties                    (49,614)         (66,970)           (8,069)         (14,332)         (38,832)         (4,679)

   - related parties                  (33,693)         (15,341)           (1,848)          (8,747)          (6,327)           (762)
                                   ----------       ----------        ----------       ----------       ----------      ----------
                                      (83,307)         (82,311)           (9,917)         (23,079)         (45,159)         (5,441)
Interest expense, net
   - third parties                    (43,431)         (56,463)           (6,802)         (11,726)         (20,287)         (2,444)
    
   - related parties                   (6,446)          (5,220)             (629)          (2,051)          (1,633)           (196)
                                   ----------       ----------        ----------       ----------       ----------      ----------
                                      (49,877)         (61,683)           (7,431)         (13,777)         (21,920)         (2,640)
                                   ----------       ----------        ----------       ----------       ----------      ----------

Income/(Loss)before income
 taxes                                119,385          (41,615)           (5,014)          25,695          (34,895)         (4,204)

 
Provision for income taxes:
    - Current                         (19,885)            (607)              (73)          (4,162)            (498)            (60)
    - Deferred                             -                -                 -                -                -               -
                                   ----------       ----------        ----------       ----------       ----------      ----------
 
Income/(Loss) before
    minority interests                 99,500          (42,222)           (5,087)          21,533          (35,393)         (4,264)

Minority interests                    (54,728)          12,130             1,461          (11,457)          14,695           1,769
                                   ----------       ----------        ----------       ----------       ----------      ----------
Net income/(loss)                      44,772          (30,092)           (3,626)          10,076          (20,698)         (2,495)
                                   ==========       ==========        ==========       ==========       ==========      ==========
 
Earnings per common share      2               
 - Basic                                 3.53            (2.28)            (0.27)            0.79            (1.53)          (0.18)
                                   ==========       ==========        ==========       ==========       ==========      ==========
 - Diluted                               2.77            (2.28)            (0.27)            0.67            (1.53)          (0.18)
                                   ==========       ==========        ==========       ==========       ==========      ==========
 
Number of shares outstanding   2               
 - Basic                           12,700,141       13,215,509        13,215,509       12,700,141       13,576,116      13,576,116
                                   ==========       ==========        ==========       ==========       ==========      ==========
 - Diluted                         19,280,141       13,215,509        13,215,509       19,280,141       13,576,116      13,576,116
                                   ==========       ==========        ==========       ==========       ==========      ==========
</TABLE>
  The accompanying notes form an integral part of these consolidated condensed
                             financial statements.

                                       5
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

          CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                       Nine Months Ended September 30,
                                                                      ---------------------------------
                                                                      1997          1998          1998
                                                                      RMB            RMB           US$
                                                                      ----          -----         -----
<S>                                                                   <C>           <C>           <C>
Cash flows from operating activities:
Net income (loss)                                                    44,772       (30,092)       (3,626)
Adjustments to reconcile income to net cash
    used in operating activities:
    Minority interests                                               54,728       (12,130)       (1,462)
    Depreciation                                                     53,170        48,798         5,879
    Loss on disposal of fixed assets                                    582             -             -
    Amortization of goodwill                                            633           625            75
    Exchange difference on secured promissory
      note and convertible debentures                                  (145)            -             -
    Amortization of present value discount on deferred asset           (587)        2,231           269
    Amortization of deferred debenture issue expense                  1,021             -             -
Changes in operating assets and liabilities-
(Increase) decrease in assets:
    Accounts receivable                                             (64,070)       20,789         2,505
    Notes receivable                                                  8,747         5,105           615
    Inventories                                                     (12,832)     (153,035)      (18,438)
    Other receivables                                               (27,112)      (42,630)       (5,136)
    Receivable from disposal of an investment                        13,419             -             -
    Due from related companies                                     (200,012)      (16,067)       (1,936)
Increase (decrease) in liabilities
    Accounts payable                                                (26,653)       29,807         3,593
    Accrued liabilities and other payables                           44,573        80,715         9,724
    Secured Promissory Note                                               -        12,450         1,500
    Income tax payable                                               25,696       (11,288)       (1,360)
    Taxes other than income                                          56,760        26,316         3,170
    Due to related companies                                          6,100       (11,607)       (1,398)
                                                                   --------      --------      --------
Net cash used in operating activities                               (21,210)      (50,013)       (6,026)
                                                                   --------      --------      --------
 
Cash flows from investing activities:
    Proceeds from disposal of fixed assets                             (134)            -             -
    Additions to fixed assets                                       (35,147)       (2,677)         (322)
                                                                   --------      --------      --------
Net cash used in investing activities                               (35,281)       (2,677)         (322)
                                                                   --------      --------      --------

Cash flows from financing activities:
    Net increase in bank loans                                       19,329        17,550         2,115
    Secured Promissory Note                                               -       (12,450)       (1,500)
                                                                   --------      --------      --------
Net cash provided by financing activities                            19,329         5,100           615
                                                                   --------      --------      --------
 
Net decrease in cash and cash equivalents                           (37,162)      (47,590)       (5,733)
Cash and cash equivalents, at beginning of period                    87,428        63,093         7,601
                                                                   --------      --------      --------
Cash and cash equivalents, at end of period                          50,266        15,503         1,868
                                                                   ========      ========      ========
Non-cash transaction:
Financing of lease arrangements                                       6,446        15,169         1,827
                                                                   ========      ========      ========
</TABLE>
  The accompanying notes form an integral part of these consolidated condensed
                             financial statements.

                                       6
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                       FINANCIAL STATEMENTS (UNAUDITED)
                     FOR THE THREE MONTHS AND NINE MONTHS
                       ENDED SEPTEMBER 30, 1997 AND 1998
      (Amounts in thousands, except number of shares and per share data)


1. GENERAL

         Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in
   the design, manufacture and distribution of a broad range of bearing products
   in the People's Republic of China ("PRC") and certain western countries,
   including the United States.

        The Company acquired 100% of the issued share capital of China Bearing
   Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share
   Exchange Agreement with Asean Capital Limited in exchange for 10,261,000
   shares of common stock.  The transaction has been treated as a
   recapitalization of China Bearing with China Bearing as the acquirer (reverse
   acquisition).  The historical financial statements prior to December 2, 1994
   are those of China Bearing.

        The Company owns, through various subsidiaries and joint venture
   interests, a 51.4% indirect ownership in Harbin Bearing Company Limited
   ("Harbin Bearing"), a joint stock limited company organized under the law of
   the PRC.  Harbin Bearing is located in Harbin, the PRC, and has been in
   business since 1950.  Harbin Bearing manufactures a wide variety of bearings
   in the PRC for use in commercial, industrial and aerospace applications and
   are sold primary in the PRC and certain western countries, including the
   United States.

        On January 16, 1996 (effective December 29, 1995), the Company acquired
   Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest
   Products"), a bearing manufacturing company located in Los Angeles County,
   California, that has been in business since 1945.  Southwest Products
   manufactures precision spherical bearings that are sold primarily to the
   aerospace and commercial aviation industries.  Its major customers are
   located in the United States.


2. BASIS OF PRESENTATION

            The accompanying consolidated condensed financial statements have
   been prepared in accordance with generally accepted accounting principles in
   the United States of America.  All material intercompany accounts and
   transactions were eliminated on consolidation.

            The accompanying consolidated condensed financial statements are
   unaudited but, in the opinion of the management of the Company, contain all
   adjustments, necessary to present fairly the financial position at September
   30, 1998, the results of operations for the three months and nine months
   ended September 30, 1997 and 1998, and the changes in cash flows for the nine
   months ended September 30, 1997 and 1998.  These adjustments are of a normal
   recurring nature.

                                       7
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                       FINANCIAL STATEMENTS (UNAUDITED)
                     FOR THE THREE MONTHS AND NINE MONTHS
                       ENDED SEPTEMBER 30, 1997 AND 1998
      (Amounts in thousands, except number of shares and per share data)


2. BASIS OF PRESENTATION (continued)

            The consolidated balance sheet as of December 31, 1997, is derived
   from the Company's audited financial statements.  Certain information and
   footnote disclosures normally included in financial statements that have been
   prepared in accordance with generally accepted accounting principles have
   been condensed or omitted pursuant to the rules and regulations of the
   Securities and Exchange Commission, although management of the Company
   believes that the disclosures contained in these financial statements are
   adequate to make the information presented therein not misleading.  For
   further information, refer to the consolidated financial statements and notes
   thereto included in the Companys Annual Report on Form 10-K for the fiscal
   year ended December 31, 1997 as filed with the Securities and Exchange
   Commission.

            In 1997, the Financial Accounting Standards Board issued Statement
   No.128, "Earnings per Share" ("SFAS 128").  SFAS 128 replaced the calculation
   of primary and fully diluted earnings per share with basic and diluted
   earnings per share.  Unlike primary earnings per share, basic earnings per
   share excludes any dilutive effects of options, warrants and convertible
   securities.  Diluted earnings per share is very similar to the previously
   reported fully diluted earnings per share.  All earnings per share amounts
   for the three months and nine months ended September 30, 1997 and 1998 have
   been presented and, where appropriate, restated to conform to SFAS 128
   requirements.

            The diluted loss per share for the three months and nine months
   ended September 30, 1998 is the same as the basic loss per share as there was
   an anti-dilution effect, which reduces the loss per share. The calculation
   which resulted in such an anti-dilution was based on the assumptions that the
   conversion rights under the Convertible Debentures had been fully exercised,
   at the adjusted exercise price as stated in note 6, and the redemption of
   preferred shares, both on January 1, 1998. On this basis, the net income
   calculated by adding back the interest expenses on the Convertible Debentures
   net of income tax is RMB 4,713 and RMB 14,139 respectively, for the three
   months and nine months ended September 30, 1998. As a result of the
   aforesaid, an anti-dilution effect was resulted and therefore the diluted
   loss per share was the same as the basic loss per share.

            The results of operations for the three months and nine months ended
   September 30, 1998 are not necessarily indicative of the results of
   operations to be expected for the full fiscal year ending December 31, 1998.


3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE

            In preparing the consolidated financial statements, the financial
   statements of the Company are measured using Renminbi ("RMB") as the
   functional currency.  All foreign currency transactions are translated into
   RMB using the applicable floating rates of exchange quoted by the People's
   Bank of China prevailing at the dates of the transactions.  Monetary assets
   and liabilities denominated in foreign currencies have been translated into
   RMB using the unified exchange rate prevailing at the balance sheet dates.
   The resulting exchange gains or losses have been credited or charged to the
   statements of income for the periods in which they occur.

                                       8
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                       FINANCIAL STATEMENTS (UNAUDITED)
                     FOR THE THREE MONTHS AND NINE MONTHS
                       ENDED SEPTEMBER 30, 1997 AND 1998
      (Amounts in thousands, except number of shares and per share data)


3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued)

            The Company's share capital is denominated in United States dollars
   (US$) and the reporting currency is the RMB.  For financial reporting
   purposes, the US$ share capital amounts have been translated into RMB at the
   applicable rates prevailing on the transaction dates.

            For financial reporting purposes, translation of amounts from RMB
   into US$ for the convenience of the reader has been made at the exchange rate
   quoted by the People's Bank of China on September 30, 1998 of US$ 1.00 = RMB
   8.30.  No representation is made that the RMB amounts could have been, or
   could be, converted into US$ at the rate on September 30, 1998 or at any
   other certain rate on September 30, 1998.


4. INVENTORIES

            Inventories consist of the following at December 31, 1997 and
   September 30, 1998:

<TABLE>
<CAPTION>
                                                  December 31, 1997      September 30, 1998
                                                  -----------------      ------------------
RMB                                                RMB         US$         RMB         US$
-----------------------------------                ---         ---         ---         ---
<S>                                             <C>         <C>          <C>         <C> 
Raw materials                                     92,039      11,089      117,472      14,153
Work-in-progress                                 141,214      17,014      186,097      22,422
Finished goods                                   282,634      34,052      365,353      44,018
                                                --------    --------     --------     -------
                                                 515,887      62,155      668,922      80,593
Less: Allowance for obsolescence                 (38,670)     (4,659)     (38,670)     (4,659)
                                                --------    --------     --------     -------
Inventories, net                                 477,217      57,496      630,252      75,934
                                                ========    ========     ========     =======
 </TABLE>

5. SECURED PROMISSORY NOTE

            A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued
   to Asean Capital Limited ("Asean") in connection with the Share Exchange
   Agreement and is secured by a continuing security interest in all of the
   Company's title and interest in the outstanding capital stock of its wholly-
   owned subsidiary China Bearing.  The Note is denominated in and is repayable
   in full in United States dollars, and bears interest at 8% per annum.

            In connection with the issuance of convertible debentures described
   at Note 6, Asean has undertaken that for so long as any of the debentures are
   outstanding, no amounts are to be repaid on the Note unless there is
   sufficient working capital and the repayment is made in accordance with the
   following schedule:

                                       9
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                       FINANCIAL STATEMENTS (UNAUDITED)
                     FOR THE THREE MONTHS AND NINE MONTHS
                       ENDED SEPTEMBER 30, 1997 AND 1998
      (Amounts in thousands, except number of shares and per share data)


5. SECURED PROMISSORY NOTE (continued)


       Payment Period                     Amount
       --------------                     ------

       August 1, 1996 to July 31, 1997    up to US$ 2,000 plus accrued interest
       August 1, 1997 to July 31, 1998    up to US$ 1,500 plus accrued interest
       August 1, 1998 to July 31, 1999    up to US$ 1,500 plus accrued interest

            Pursuant to the above described repayment schedule, a principal
   payment of US$ 2,012 (RMB 16,700) was made on the Note on September 10, 1996.
   The directors do not envisage any other repayments being made in the
   foreseeable future.


6. CONVERTIBLE DEBENTURES

         Pursuant to a Subscription Agreement dated August 2, 1996, (the
   "Subscription Agreement"), among China Bearing, Asean Capital Limited, China
   International Bearing Holdings Limited, the Company and Southwest Products
   (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China
   Investment Trust, MC Private Equity Partners Asia Limited and Chine
   Investissement 2000 (collectively the "Investors"), on August 23, 1996, China
   Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible
   Debentures (the "Convertible Debentures") to the Investors.  Unless the
   Convertible Debentures have been converted, the Convertible Debentures are
   due and payable in August, 1999 (the "Maturity Date").  The Convertible
   Debentures bear interest at the rate of the higher of (i) 5% per annum (net
   of withholding tax, if applicable) and (ii) such percentage of the dividend
   yield calculated by reference to dividing the annual dividend declared per
   share of Common Stock of the Company by the Conversion Price (as hereinafter
   defined).  Interest is payable quarterly.

         The Investors have the right to convert at any time, in whole or in
   part, the principal amount of the Convertible Debentures into shares of the
   Common Stock of the Company. The Conversion Price (the "Conversion Price")
   was initially $5.00 per share, subject to adjustment for (a) change in par
   value of the Common Stock, (b) issuance of shares by way of capitalization of
   profits or reserves, (c) capital distributions, (d) rights offering at a
   price which is less than the lower of the then market price or Conversion
   Price, (e) issuance of derivative securities where the total consideration
   per share initially received is less than the lower of the then market price
   or Conversion Price, (f) issuance of shares at a price per share which is
   less than the lower of the then market price or the Conversion Price, and (g)
   if the cumulative audited earnings per common share for any two consecutive
   fiscal years commencing with the fiscal year ended December 31, 1996 and
   ending with the fiscal year ending December 31, 1998 are less than the
   specified projection of cumulative earnings per common share for such
   periods. Due to the Company's failure to achieve the projected cumulative
   audited earnings per common share of US$1.79 for the two years ended December
   31, 1997, the Conversion Price has been adjusted to US$1.84 per share
   pursuant to the terms of the Subscription Agreement.

                                       10
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                       FINANCIAL STATEMENTS (UNAUDITED)
                     FOR THE THREE MONTHS AND NINE MONTHS
                       ENDED SEPTEMBER 30, 1997 AND 1998
      (Amounts in thousands, except number of shares and per share data)

                                        
6.      CONVERTIBLE DEBENTURES (continued)

         The Convertible Debentures are required to be redeemed on the
   Maturity Date at its principal amount outstanding together with any accrued
   but unpaid interest together with an amount that would enable the Investors
   to yield an aggregate internal rate of return of 12% per annum on the cost of
   their investment.  In addition, if any of the events of default specified in
   the Convertible Debentures occur, the Convertible Debentures are
   automatically due and payable at the principal amount outstanding together
   with accrued interest and an amount that would enable the Investors to yield
   an aggregate internal rate of return on their investment of 19.75% per annum.
   Events of default include the delisting of the shares from NASDAQ or its
   suspension thereof; default in performance after failure to cure after
   notice; failure to pay principal or interest; failure to pay indebtedness for
   borrowed money; bankruptcy, insolvency or unsatisfied judgment; failure to
   achieve earning per common share of at least $.55 for fiscal years commencing
   January 1, 1996; and accounts receivable reaching a certain level in
   relationship to net sales.

         The obligations of China Bearing under the Subscription Agreement are
   guaranteed by the other members of the Sunbase Group.

         Due to the failure of the Company in achieving the defined earnings per
   common share of US $0.55 in 1997, an event of default had occurred.  Although
   the Convertible Debentures bear an interest charge at the rate of 5% per
   annum, interest was being accrued at the rate of 19.75% per annum to provide
   for the condition of default.

         Pursuant to a Settlement Agreement, dated October 16, 1998,(the
   "Settlement Agreement") among China Bearing, Asean Capital Limited, China
   International Bearing Holdings Limited, the Company, Southwest Products
   (collectively, the "Default Parties") and the Investors, the Investors have
   agreed not to demand the immediate repayment of the Convertible Debentures
   and accrued interest. from the Default Parties for the event of default under
   the Subscription Agreement.

         Under the Settlement Agreement, the Convertible Debentures, together
   with accrued interest at a simple interest rate of 12.375% per annum until
   July 22, 1998 less interest paid, have been restructured into a debt at a
   principal amount of US$13,173,490.  The debt, which carries a simple
   interest rate of 10% per annum, shall be repaid, according to the repayment
   schedule stipulated in the Settlement Agreement, over  a period of three
   years ending on July 23, 2001.  In connection with the Settlement Agreement,
   the Company has agreed to issue to the Investors 466,667 shares of common
   stock with a three-year legend.  In addition, the Default Parties jointly and
   severally undertake that 50% of any public market funds raised by the Company
   or its subsidiaries shall be applied immediately towards discharging the then
   outstanding debt and interest accrued thereon.

         The obligations of China Bearing under the Settlement Agreement are
   guaranteed by other members of the Sunbase Group.

                                       11
<PAGE>
 
7.  CONVERTIBLE PREFERRED STOCK  -  SERIES  B

       During April and May 1998, the Series B Convertible Preferred stock was
  converted to common stock of Sunbase Asia, Inc.  The shares, originally issued
  to the former Southwest Products Company shareholders, were converted at the
  rate as agreed upon in the Sunbase Asia, Inc.\Southwest Products Company
  purchase agreement.  Although all of the Series B Convertible Preferred stock
  was eligible for conversion, as of September 30, 1998, not all of the Series B
  Convertible Preferred stock was converted.

                                       12
<PAGE>
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         -----------------------------------------------------------------------
OF OPERATIONS
-------------


OVERVIEW

         The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership in Harbin Bearing. Harbin Bearing
manufactures a wide variety of bearings in the PRC for use in commercial,
industrial and aerospace applications that are sold primarily in the PRC and
certain western countries, including the United States. On January 16, 1996
(effective December 29, 1995), the Company acquired Southwest Products, which
manufactures precision spherical bearings that are sold primarily to the
aerospace and commercial aviation industries. The acquisition of Southwest
Products has been accounted for under the purchase method of accounting. The
results of Southwest Products have been consolidated into the Company's
consolidated results of operations commencing January 1, 1996.

         Unless specifically stated, all amounts are in thousands ('000).


RESULTS OF OPERATION

THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998:

         The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the three months ended September
30, 1997 and 1998.

<TABLE>
<CAPTION>
                                                       Three Months Ended September 30,
                                                 -------------------------------------------
                                                      1997                     1998
                                                      ----                     ----
                                                   RMB         %            RMB         %
                                                   ---        ---           ---        ---  
<S>                                           <C>           <C>       <C>            <C>
     Sales                                       160,823     100.0        118,021     100.0
     Cost of sales                               (98,272)    (61.1)       (85,837)    (72.7)
                                                 -------     -----       --------     -----
                                                  
     Gross profit                                 62,551      38.9         32,184      27.3
                                                  
     Selling expenses                            ( 4,619)     (2.9)        (2,773)     (2.3)
     General and administrative expenses         (18,460)    (11.5)       (42,386)    (35.9)
     Interest expenses                           (13,777)     (8.6)       (21,920)    (18.6)
                                                 -------     -----       --------     -----
                                                  
     Income before income taxes                   25,695      15.9        (34,895)    (29.5)
     Provision for income taxes                   (4,162)     (2.6)          (498)     (0.4)
                                                 -------     -----       --------     -----
                                                  
     Income before minority interests             21,533      13.3        (35,393)    (29.9)
     Minority interests                          (11,457)     (7.1)        14,695      12.4
                                                 -------     -----       --------     -----
                                                 
     Net income/(loss)                            10,076       6.2        (20,698)    (17.5)
                                                 =======     =====       ========     =====
</TABLE>

                                       13
<PAGE>
 
Sales
-----

         Sales for the three months ended September 30, 1998 decreased by RMB
42,802 or 26.6% to RMB 118,021 as compared to RMB 160,823 for the three months
ended September 30, 1997. The decrease in sales was due to adverse market
conditions in the PRC primarily due to the financial crisis in Asia. Moreover,
stringent control on capital expenditures of PRC enterprises by the government
has caused the decrease in demand and thus the sales of the Company's products,
which are components of machinery and equipment. Competition within the PRC
bearing industry increased in 1998 for the limited sales orders in the bearing
market. In addition, there were no material price increases from the prior
twelve-month period.

         Sales for Harbin Bearing for the three months ended September 30, 1998
decreased by RMB 41,525 or 27.9% to RMB 107,183 as compared to RMB 148,708 for
the three months ended September 30, 1997. The decrease was mainly caused by the
decrease in domestic demand for bearings in the PRC.


Cost of Sales/Gross Profit
--------------------------

         Cost of sales for the three months ended September 30, 1998 decreased
to RMB 85,837 as compared to RMB 98,272 for the three months ended September 30,
1997. The cost of sales for Harbin Bearing for the three months ended September
30, 1998 and 1997 was calculated using the gross profit method by reference to
average annual gross profit ratios. The cost of sales for Southwest Products for
the three months ended September 30, 1998 and 1997 was calculated on an actual
cost basis.

         Gross profit decreased by RMB 30,367 or 48.5% to RMB 32,184 for the
three months ended September 30, 1998 as compared to RMB 62,551 for the three
months ended September 30, 1997. The decrease in gross profit was mainly
attributable to the decrease in sales caused by the adverse market conditions in
the PRC, which led to a plunge in units of bearings produced in 1998. This
resulted in production inefficiency and an under-utilization of machinery and
equipment capacity causing an increase in overhead absorbed by each unit
produced and thus the unit cost of goods sold. Also, there was no material
change in selling prices during the two periods under review.


Selling Expenses
----------------

         Selling Expenses for the three months ended September 30, 1998
decreased by RMB 1,846 or 40% to RMB 2,773 as compared to RMB 4,619 for the
three months ended September 30, 1997. The decrease in selling expenses was due
to the decrease in sales.


General and Administrative Expenses
-----------------------------------

         General and Administrative Expenses for the three months ended
September 30, 1998 increased by RMB 23,926 or 129.6% to RMB 42,386 as compared
to RMB 18,460 for the three months ended September 30, 1997. The significant
increase in general and administrative expenses was caused by a specific
provision made for deposits with a Chinese financial institution, in the amount
of RMB 23,750, during the period ended September 30, 1998. The provision was
required due to liquidity problems of the Chinese financial institution. The
Company considers that the possibility of recovering the deposits is remote and
therefore, the full amount of RMB 23,750 was reserved for.

                                       14
<PAGE>
 
Interest Expense
----------------

         Interest Expense for the three months ended September 30, 1998
increased by RMB 8,143 or 59.1% to RMB 21,920 as compared to RMB 13,777 for the
three months ended September 30, 1997. The increase in interest expense was
primarily attributable to the increase in Convertible Debentures interest and
the increase in average bank loans during the period. The rise in Convertible
Debentures interest was due to an increase in the interest accrual rate from 12%
to 19.75% per annum as a result of the Company's default on a condition of the
Subscription Agreement governing the Convertible Debentures.

         Had the Settlement Agreement mentioned in Note 6 been executed, the
interest expense for the three months ended September 30, 1998 and 1997 would
have decreased by RMB 1,865 and increased by RMB 89, respectively.

Net Income
----------

         As a result of the aforementioned factors, net income decreased by RMB
30,774 or 305% to a loss of RMB 20,698 for the three months ended September 30,
1998 as compared to a net income of RMB 10,076 for the three months ended
September 30, 1997.

         Had the Settlement Agreement mentioned in Note 6 been executed, the net
loss for the three months ended September 30, 1998 and the net income for the
three months ended September 30, 1997 would have been adjusted to RMB 18,833 and
RMB 9,987, respectively.

                                       15
<PAGE>
 
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998:

         The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the nine months ended September
30, 1997 and 1998.

<TABLE>
<CAPTION>
                                                           Nine Months Ended September 30,
                                                     -------------------------------------------
                                                            1997                   1998
                                                            ----                   ----
                                                       RMB          %          RMB         %
                                                       ---         ---         ---        ---
    <S>                                              <C>          <C>       <C>          <C>
 
     Sales                                            646,666     100.0      378,633      100.0
     Cost of sales                                   (394,097)    (60.9)    (276,254)     (73.0)
                                                     --------     -----     --------     ------
 
     Gross profit                                     252,569      39.1      102,379       27.0
 
     Selling expenses                                 (16,565)     (2.6)     (10,915)      (2.9)
     General and administrative expenses              (66,742)    (10.3)     (71,396)     (18.9)
     Interest expenses                                (49,877)     (7.7)     (61,683)     (16.3)
                                                     --------     -----     --------     ------
 
     Income (loss)/before income taxes                119,385      18.5      (41,615)     (11.1)
     Provision for income taxes                       (19,885)     (3.1)        (607)        (0)
                                                     --------     -----     --------     ------
 
     Income (loss)/before minority interests           99,500      15.4      (42,222)     (11.1)
     Minority interests                               (54,728)     (8.5)      12,130        3.2
                                                     --------     -----     --------     ------
 
     Net income/(loss)                                 44,772       6.9      (30,092)      (7.9)
                                                     ========     =====     ========     ======
</TABLE>

Sales
-----

         Sales for the nine months ended September 30, 1998 decreased by RMB
268,033 or 41.4% to RMB 378,633 as compared to RMB 646,666 for the nine months
ended September 30, 1997. The decrease in sales was due to adverse market
conditions in the PRC primarily due to the financial crisis in Asia. Moreover,
stringent control on capital expenditure of PRC enterprises by the government
has caused the decrease in demand and thus the sales of the Company's products,
which are components of machinery and equipment. Competition within the PRC
bearing industry increased in 1998 for the limited sales orders in the bearing
market. In addition there were no material price increases from the prior
twelve-month period.

         Sales for Harbin Bearing for the nine months ended September 30, 1998
decreased by RMB 266,776 or 43.5% to RMB 346,354 as compared to RMB 613,130 for
the nine months ended September 30, 1997. This decrease was mainly caused by the
decrease in domestic demand for bearings in the PRC.


Cost of Sales/Gross Profit
--------------------------

         Cost of sales for the nine months ended September 30, 1998 decreased to
RMB 276,254 as compared to RMB 394,097 for the nine months ended September 30,
1997. The cost of sales for Harbin Bearing for the nine months ended September
30, 1998 and 1997 was calculated using the gross profit method by reference to
average annual gross profit ratios. The cost of sales for Southwest Products for
the nine months ended September 30, 1998 and 1997 was calculated on an actual
cost basis.

                                       16
<PAGE>
 
         Gross profit decreased by RMB 150,190 or 59.5% for the nine months
ended September 30, 1998 as compared to the nine months ended September 30,
1997. The decrease in gross profit was mainly attributable to the decrease in
sales caused by the adverse market conditions in the PRC, which led to a plunge
in units of bearings produced in 1998. This resulted in production inefficiency
and an under-utilization of machinery and equipment capacity causing an increase
in overhead absorbed by each unit produced and thus the unit cost of goods sold.
Also, there was no material change in selling prices during the two periods
under review.


Selling Expenses
----------------

         Selling Expenses for the nine months ended September 30, 1997 decreased
by RMB 5,650 or 34.1% to RMB 10,915 as compared to RMB 16,565 for the nine
months ended September 30, 1997. The significant factors affecting the change in
selling expenses between the nine months ended September 30, 1998 and 1997 were
as follows:

         a.  A decrease in royalty paid of RMB 1,333 for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997.

         b.  A decrease in government tax paid of RMB 2,885 during the nine
months ended September 30, 1998 as compared to the nine months ended September
30, 1997.


General and Administrative Expenses
-----------------------------------

         General and Administrative Expenses for the nine months ended September
30, 1998 increased by RMB 4,654 or 7% to RMB 71,396 as compared to RMB 66,742
for the nine months ended September 30, 1997. The significant factors affecting
the change in general and administration expenses between the nine months ended
September 30, 1998 and 1997 were as follows:

         a.  A provision for management fees of RMB 15,790 was made at Harbin
Bearing for the nine months ended September 30, 1997. No such provision was made
for the nine months ended September 30, 1998.

         b.  A general provision for doubtful accounts of RMB 2,000 was made at
Harbin Bearing for the nine months ended September 30, 1997. No such provision
was made for the nine months ended September 30, 1998.

         c.  A decrease in staff costs of RMB 1,385 associated with the U.S.
engineering program at Harbin Bearing. These Expenses were discontinued in the
third quarter of 1997.

         d.  A specific provision was made for deposits with a Chinese financial
institution in the amount of RMB 23,750 during the period ended September 30,
1998. The provision was required due to liquidity problems of the financial
institution. The Company considers the possibility of recovering the deposits is
remote and therefore, the full amount of RMB 23,750 was reserved for.


Interest Expense
----------------

         Interest Expense for the nine months ended September 30, 1998
increased by RMB 11,806 or 23.7% to RMB 61,683 as compared to RMB 49,877 for the
nine months ended September 30, 1997. The increase in interest expense was
primarily attributable to the increase in Convertible Debentures interest and
the increase in average bank loans during the period. The rise in Convertible
Debentures interest was due to an increase in the interest accrual rate from 12%
to 19.75% per annum

                                       17
<PAGE>
 
as a result of the Company's default on a condition of the Subscription
Agreement governing the Convertible Debentures.

         Had the Settlement Agreement mentioned in Note 6 been executed, the
interest expense for the nine months ended September 30, 1998 and 1997
would have decreased by RMB 5,385 and increased by RMB 267, respectively.


Net Income
----------

         As a result of the aforementioned factors, net income decreased by RMB
74,864 or 167% to a net loss of RMB 30,092 for the nine months ended September
30, 1998 as compared to a net income of RMB 44,772 for the nine months ended
September 30, 1997.

         Had the Settlement Agreement mentioned in Note 6 been executed, the net
loss for the nine months ended September 30, 1998 and the net income for the
nine months ended September 30, 1997 would have been adjusted to RMB 24,707 and
RMB 44,505, respectively.

                                       18
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

         For the nine months ended September 30, 1998, the Company's operations
utilized cash resources of RMB 50,013 as compared to RMB 21,210 utilized for the
nine months ended September 30, 1997.  The Company's net working capital
decreased by RMB 21,229 at September 30, 1998 to RMB 286,232  as compared to RMB
307,461 at December 31, 1997 and the Company's current ratio at September 30,
1998 was 1.23:1 as compared to 1.29:1 at December 31, 1997 and 1.54:1 at
September 30, 1997.

         Accounts receivable decreased by RMB 20,789 or 4.3% to RMB 459,611 at
September 30, 1998, as compared to RMB 480,400 at December 31, 1997.  Due from
related companies increased by RMB 16,067 during the nine months ended September
30, 1998.  The net decrease was mainly due to tight control in credit and review
procedures by limiting sales to customers where collectability was uncertain in
the period.

INVESTING ACTIVITIES

         Capital expenditures for the nine months ended September 30, 1998 of
RMB 2,677 related to renovation of existing facilities and equipment and were
financed by internally generated funds, as well as short-term and long-term bank
loans. There are no other material capital expenditures expected in the near
future.

FINANCING ACTIVITIES

         The Company has historically relied on both long and short term bank
loans from Chinese banks to support its operating and capital requirements.
Short-term bank loans have terms ranging from three months to six months, are
utilized to finance both operating and capital requirements, and are renewed on
a revolving basis.  Long-term bank loans are utilized to fund capital expansion
projects.  During the nine months ended September 30, 1998, the net increase in
bank loans (after deducting repayment) was RMB 17,550.    

         The Company believes that it will be able to continue to maintain and
expand its bank borrowings under existing terms and conditions.

         Pursuant to a Subscription Agreement dated August 2, 1996, (the
"Subscription Agreement"), among China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and Chine
Investissement 2000 (collectively the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible
Debentures (the "Convertible Debentures") to the Investors.  Unless the
Convertible Debentures have been converted, the Convertible Debentures are due
and payable in August, 1999 (the "Maturity Date").  The Convertible Debentures
bear interest at the rate of the higher of (i) 5% per annum (net of withholding
tax, if applicable) and (ii) such percentage of the dividend yield calculated by
reference to dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price (as hereinafter defined).  Interest is
payable quarterly.

         The Investors have the right to convert at any time, in whole or any
part, the principal amount of the Convertible Debentures into shares of the
Common Stock of the Company. The Conversion Price (the "Conversion Price") was
initially $5.00 per share, subject to adjustment for (a) change in par value of
the Common Stock, (b) issuance of shares by way of capitalization of profits or
reserves, (c) capital distributions, (d) rights offering at a price which is
less than the lower of the then market price or Conversion Price, (e) issuance
of derivative securities where the total consideration per share initially
received is less than the lower of the then market price or Conversion Price,
(f) issuance of shares at a price per share which is less than the lower of the
then market price or the Conversion Price, and (g) if the cumulative audited
earnings per

                                       19
<PAGE>
 
common share for any two consecutive fiscal years commencing with the fiscal
year ended December 31, 1996 and ending with the fiscal year ending December 31,
1998 are less than the specified projection of cumulative earnings per common
share for such period. Due to the Company's failure to achieve the projected
cumulative audited earnings per common share of US$1.79 for the two years ended
December 31, 1997, the Conversion Price has been adjusted to US$1.84 per share
pursuant to the terms of the Subscription Agreement.

         The Convertible Debentures are required to be redeemed on the Maturity
Date at its principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to yield an
aggregate internal rate of return of 12% per annum on the cost of their
investment. In addition, if any of the events of default specified in the
Convertible Debentures occurs, the Convertible Debentures are automatically due
and payable at the principal amount outstanding together with accrued interest
and an amount that would enable the Investors to yield an aggregate internal
rate of return on their investment of 19.75% per annum. Events of default
include the delisting of the shares from NASDAQ or its suspension thereof;
default in performance after failure to cure after notice; failure to pay
principal or interest; failure to pay indebtedness for borrowed money;
bankruptcy, insolvency or unsatisfied judgments; failure to achieve earning per
common share of at least $.55 for fiscal years commencing January 1, 1996; and
accounts receivable reaching a certain level in relationship to net sales.

         The obligations of China Bearing under the Subscription Agreement are
guaranteed by the other members of the Sunbase Group.

         Due to the failure of the Company in achieving the defined earnings per
common share of U.S. $0.55 in 1997, an event of default had occurred.  Although
the Convertible Debentures bear an interest charge at the rate of 5% per annum,
interest was being accrued at the rate of 19.75% per annum to provide for the
condition of the default.

         Pursuant to a Settlement Agreement, dated October 16, 1998, (the
"Settlement Agreement") among  China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company, Southwest Products
(collectively, the "Default Parties"), and the Investors, the Investors have
agreed not to demand the immediate repayment of the Convertible Debentures and
accrued interest from the Default Parties for the event of default under the
Subscription Agreement.

         Under the Settlement Agreement, the Convertible Debentures, together
with accrued interest at a simple interest rate of 12.375% per annum until July
22, 1998 less interest paid, have been restructured into a debt at a principal
amount of US$13,173,490. The debt, which carries a simple interest rate of 10%
per annum, shall be repaid according to the repayment schedule stipulated in the
Settlement Agreement over a period of three years ending on July 23, 2001. In
connection with the Settlement Agreement, the Company has agreed to issue to the
Investors 466,667 shares of common stock with a three-year legend. In addition,
the Default Parties jointly and severally undertake that 50% of any public
market funds raised by the Company or its subsidiaries shall be applied
immediately towards discharging the then outstanding debt and interest accrued
thereon.

         The obligations of China Bearing under the Settlement Agreement are
guaranteed by other members of the Sunbase Group.


         A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued to
Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement
and is secured by a continuing security interest in all of the Company's title
and interest in the outstanding capital stock of its wholly-owned subsidiary
China Bearing.  The Note is denominated in and is repayable in full in United
States dollars, and bears interest at 8% per annum.

        In connection with the issuance of Convertible Debentures described at
above, Asean has undertaken that for so long as any of the Convertible
Debentures are outstanding, no amounts are to be repaid

                                       20
<PAGE>
 
on the Note unless there is sufficient working capital and the repayment is made
in accordance with the following schedule:-

        Payment Period                     Amount
        --------------                     ------
        August 1, 1996 to July 31, 1997    up to US$ 2,000 plus accrued interest
        August 1, 1997 to July 31, 1998    up to US$ 1,500 plus accrued interest
        August 1, 1998 to July 31, 1999    up to US$ 1,500 plus accrued interest

         Pursuant to the above described repayment schedule, a principal payment
of US$ 2,012 (RMB 16,700) was made on the Note on September 10, 1996.  The
directors do not envisage any other repayments being made in the foreseeable
future.

         The Company anticipates that its cash flows from operations, combined
with cash and cash equivalents, bank lines of credit and other external sources
of debt and equity financing,  are adequate to finance the Company's operating
and debt service requirements for the foreseeable future.  Nevertheless, due to
the recent financial turmoil in Asia, management will cautiously and closely
monitor the funding position of the Company.



INFLATION AND CURRENCY MATTERS

         In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation.  During the nine
months ended September 30, 1998, the general inflation rate in the PRC was under
control and was below 10% on an average basis.  Since 1993, the Chinese
government has implemented and maintained an economic program designed to
control inflation, which has resulted in the tightening of working capital
available to Chinese business enterprises.  The success of the Company depends
in substantial part on the continued growth and development of the Chinese
economy.

         The Company continually monitors the effects of inflation. The Company
is generally able to raise its prices to shift a portion of the inflated costs
to the customers. However, the Company must also take into account market
conditions and competition and may not, in all circumstances, be able to raise
prices to offset increased costs to the Company. The price of bearing steel, the
major raw material used by the Company, remained fairly stable during 1997 and
1998. The major impact of inflation was on labor cost due to increases in
employee's wages. However, the Company has generally managed to offset the
effects of inflation through improved operational efficiency.

         Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies.  Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.

         The Company conducts most of its business in the PRC and, accordingly,
the sale of its products is settled primarily in RMB. As a result, devaluation
of the RMB against the US$, could have a material adverse effect upon the
results of operations and financial position of the Company. Although prior to
1994 the RMB experienced significant devaluation against the US$, the RMB has
remained fairly stable from 1994 to present. The unified exchange rate was US$
1.00 to RMB 8.65 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB 8.32
at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.29 at September 30,
1997, RMB 8.3 for December 31, 1997 and September 30, 1998.

                                       21
<PAGE>
 
ITEM 3.  FACTORS THAT MAY AFFECT FUTURE RESULTS

FOREIGN INVESTMENT MATTERS

         The Company is currently being investigated by the Committee on Foreign
Investment in the United States ("CFIUS"), an inter-agency committee of the
United States Government, with respect to the Company's acquisition on January
1996 of Southwest Products Company ("Southwest").  CFIUS is in the second phase
of conducting a review to determine if the ownership of Southwest  by the
Company poses a threat to the national security interests of the United States.
This investigation will conclude on December 17, 1998.  At the conclusion of the
investigation, CFIUS will prepare a report and recommendation to the President
of the United States.  If CFIUS determines that such a threat may exist, then it
may recommend to the President of the United States that he order a divestiture
of Southwest by the Company.  Alternatively, CFIUS may take no action or may
propose that certain measures be taken by the Company to protect the national
security interests of the United States as a condition of the Company continuing
to own Southwest.  At this time, it is premature to evaluate the likelihood of
any action by CFIUS with respect to this matter.

         If the Company is require to divest its ownership of Southwest or
significant restrictions on its ownership are imposed, the Company believes it
has certain claims which it may bring against certain of its professional
advisors who assisted it in connection with its acquisition of Southwest.
However, no assurance can be given that any such claims by the Company would
fully reimburse it for any loss it might realize upon a divestiture of Southwest
or as a result of the imposition of conditions on its ownership.

ITAR REGULATIONS

         In December 1997, Southwest registered with the Office of Defense Trade
Controls of the Department of State ("DTC") as a manufacturer of defense
articles subject to regulation under the International Traffic in Arms
Regulations ("ITAR").  Southwest had not previously been registered with DTC,
although it appears that such registration was required.  Southwest is currently
reviewing its export history to determine if any of its exports may have been in
violation of ITAR.

         If it is determined that Southwest violated ITAR in the past, it could
be subjected to a variety of civil or criminal penalties.  At this time, no
proceedings related to any alleged non-compliance by Southwest with ITAR have
been instituted or threatened.  The Company believes that if any such
proceedings are instituted, any sanctions which might be imposed would take into
account the inadvertent nature of the violations of ITAR by Southwest, if any,
as well as Southwest's voluntary disclosure to DTC with respect to this matter.
However, no assurance can be given as to the outcome of any such proceedings.

NASDAQ NOTIFICATION

         The Company has received notice from the NASDAQ National Market System
for failure to meet the minimum acceptable level of a $5,000,000 market value of
the public float and for failure to meet the minimum continuing closing price of
the stock of $1.00.

         The Company has requested a written hearing with NASDAQ to review the
potential delisting. The hearing is scheduled for December 10, 1998 and if
NASDAQ decides on a delisting of the Company's shares, the delisting will take
place immediately following the hearing. The

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<PAGE>
 
Company has no assurance of a favorable outcome for the Company at the hearing.
In the event that the Company's stock is delisted from trading on NASDAQ NMS,
trading will be moved to the Bulletin Board.

LIQUIDITY

         The Company's operations used cash resources of RMB 50,013 for the nine
months ended September 30, 1998 as compared to RMB 21,210 for the nine months
ended September 30, 1997.  In addition, during the nine months ended September
30, 1998, the net increase in bank loans was RMB 17,550.   However, accounts
receivable trade decreased by 20,789 in the same period.  The economic
conditions is Asia and liquidity constraints in China may continue to adversely
affect the Company's operations and collectability of its accounts receivable.
Continuation of these trends could impair the Company's liquidity.

ACCOUNTS RECEIVABLE

         Although accounts receivable trade decreased by RMB 20,789 or 4.3%
during the nine months ended September 30, 1998, credit remains tight in China
and collection of outstanding accounts receivable remains difficult.  The
Company has continued to enhance its credit review procedures and continues to
limit its sales to customers where collectability remains uncertain.  The
Company is unable to predict how the current economic conditions and the credit
tightening policy of the Chinese government will effect the Company's collection
of accounts receivable.

FAILURE TO QUALIFY HRB TO AUTOMOTIVE AND AEROSPACE QUALITY STANDARDS

         To date Harbin Bearing has been unable to establish procedures that
would enable it to qualify to international quality standards, generally
accepted automotive quality standards or aerospace quality standards.  Such
failure has resulted in Harbin Bearing's inability to capture orders from the
U.S. automotive and aerospace industries.  At present, the Company has
temporarily suspended the active program at Harbin Bearing that would enable
Harbin Bearing to qualify to these standards.  If the program is not restarted,
it is unlikely that Harbin Bearing would be in a position to capture any
significant orders from either the U.S. automotive or aerospace sectors.
Restarting of the program will first require a review of and approval by
appropriate agencies within the United States Federal Government.  There is no
certainty that the U.S. Government will allow such a program to be commenced.
Failure to qualify Harbin Bearing will constrain the Company's future growth.

ABILITY TO REMAIN COMPETITIVE

         The Company's ability to remain competitive depends in significant part
on its ability and willingness to fund research and development, introduce new
products and retain key personnel for these functions.  Some of the Company's
competitors have substantially greater resources available for these purposes.
To the extent that the Company does not fund product development, the Company's
competitive position will probably be adversely effected, which may result in a
loss of sales or lower productivity.

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<PAGE>
 
PART II.  OTHER INFORMATION

Item 1  Legal Proceedings

        No material developments

Item 2  Changes in Securities

        None

Item 3  Defaults upon Senior Securities

        None

Item 4  Submission of Matters to a Vote of Security Holders

        None

Item 5  Other Information

        None

Item 6  Exhibits and Reports on Form 8-K
 
        (a)  Exhibits:

             11  Computation of Earnings per common share

             27  Financial Data Schedule

        (b)  Reports on Form 8-K:
 
             Three months ended September 30, 1998: None

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<PAGE>
 
                                  SIGNATURES

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


                                       Sunbase Asia, Inc.
                                       ------------------
                                       (Registrant)



Date:  November 19, 1998            By: /s/ William McKay
                                       --------------------------------
                                       William McKay
                                       Chief Executive Officer and
                                       President
                                       (Duly Authorized Officer)



Date:  November 19, 1998            By: /s/ (Roger) Li Yuen Fai
                                       --------------------------------
                                       (Roger) Li Yuen Fai
                                       Vice President and
                                       Chief Financial Officer
                                       (Principal Financial Officer)

                                       25