<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 June 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 June 30, 1998, the Company had 13,576,115 shares of common stock issued
and outstanding.

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

                                     INDEX
                                        
<TABLE>
<CAPTION>
                                                                                      PAGE
                                                                                      ----
<S>                                                                                   <C>
PART I:  FINANCIAL INFORMATION
 
         Item 1 -- Financial statements

                   Consolidated Condensed Balance Sheets (unaudited)
                   - December 31, 1997 and June 30, 1998                               3-4
 
                   Consolidated Condensed Statements of Income (unaudited)
                   - Three months and six months ended
                     June 30, 1997 and 1998                                             5
 
                   Consolidated Condensed Statements of Cash Flows (unaudited)
                   -Six months ended June 30, 1997 and 1998                             6
 
                   Notes to Consolidated Condensed Financial Statements
                   (unaudited)
                   - Three months and six months ended
                     June 30, 1997 and 1998                                            7-11
 
         Item 2 -- Management's Discussion and Analysis of
                   Financial Condition and Results of Operations                      12-19
 
PART II: OTHER INFORMATION
 
         Item 6 -- Exhibits and Reports on Form 8-K                                    20
 
SIGNATURES                                                                             21
 
EXHIBIT 11     Computation of Earnings Per Common Share                               22-23
</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 JUNE 30, 1998
                      (Amounts in thousands, except number
                         of shares and per share data)
<TABLE>
<CAPTION>

                                                                     12/31/97                6/30/98
                                                                 ---------------         -------------
                                                       Notes     RMB         US$         RMB       US$
                                                       -----     ---         ---         ---       ---
<S>                                                     <C>    <C>        <C>         <C>        <C>
ASSETS
Current assets
    Cash and bank balances                                      39,343      4,740       16,974     2,045
    Deposits with a financial institution                       23,750      2,861       23,750     2,861
    Accounts receivable, net                                   480,400     57,880      434,749    52,379
    Notes receivable                                             6,190        746        4,180       504
    Inventories, net                                     4     477,217     57,496      572,926    69,027
    Other receivables                                           40,330      4,859       69,862     8,417
    Due from related companies                                 300,023     36,147      326,423    39,328
                                                             ---------   --------   ----------   -------
Total current assets                                         1,367,253    164,729    1,448,864   174,561
Fixed assets                                                   631,812     76,122      598,946    72,162
Deferred asset                                                  14,383      1,733       11,962     1,441
Long term investments                                            1,012        122        1,012       122
Goodwill                                                        10,760      1,296       10,347     1,247
                                                             ---------   --------   ----------   -------
Total assets                                                 2,025,220    244,002    2,071,131   249,533
                                                             =========   ========   ==========   =======
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Short term bank loans                                      435,403     52,458      457,583    55,130
    Long term bank loans, current portion                      140,772     16,960      140,772    16,960
    Accounts payable                                           115,646     13,933      120,429    14,510
    Accrued liabilities and other payables                     131,536     15,848      144,663    17,429
    Short term obligations under capital leases                 20,441      2,463       20,682     2,492
    Short term portion of
      secured promissory note                            5      12,450      1,500       12,450     1,500
    Income tax payable                                          50,392      6,071       39,240     4,728
    Taxes other than income                                     38,972      4,696       62,137     7,486
    Due to related companies                                    18,730      2,257       29,371     3,539
    Convertible debentures                               6      95,450     11,500       95,450    11,500
                                                             ---------   --------   ----------   -------
Total current liabilities                                    1,059,792    127,686    1,122,777   135,274
Long term bank loans                                             4,005        483        4,005       483
Long term obligations under capital leases                      68,483      8,251       58,238     7,017
Long term portion of secured promissory note             5      12,450      1,500       12,450     1,500
Minority interests                                             441,490     53,192      444,055    53,500
                                                             ---------   --------   ----------   -------
                                                             1,586,220    191,112    1,641,525   197,774
 
</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 JUNE 30, 1998 (UNAUDITED) (CONTINUED)
                      (Amounts in thousands, except number
                         of shares and per share data)
<TABLE>
<CAPTION>
                                                                       12/31/97               6/30/98     
                                                                    --------------         -------------- 
                                                     NOTES          RMB        US$         RMB        US$ 
                                                     -----          ---        ---         ---        --- 
<S>                                                   <C>       <C>         <C>       <C>         <C>
Shareholders' equity:                                                                                     
Common Stock, par value US$ 0.001 each,                                                                   
    50,000,000 shares authorized;                                                                         
    13,576,115 (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     140,688     16,950
                                                                ---------   -------   ---------   --------
Total shareholders' equity                                        439,000    52,890     429,606     51,759
                                                                ---------   -------   ---------   --------
Total liabilities and shareholders' equity                      2,025,220   244,002   2,071,131    249,533
                                                                =========   =======   =========   ======== 
 
</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 SIX MONTHS ENDED JUNE 30, 1997 AND 1998
       (Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
                                                 Six Months Ended June 30,                       Three Months Ended June 30,
                                           -------------------------------------             ---------------------------------
                                           1997            1998             1998             1997            1998         1998
                              Notes        RMB             RMB              US$              RMB             RMB          US$  
                              -----        ---             ---              ---              ---             ---          ---
<S>                           <C>      <C>            <C>              <C>              <C>              <C>          <C>
Net sales to
  - third parties                      269,524        238,616           28,749          131,378          146,877          17,696
  - related parties                    216,319         21,996            2,650          113,248           13,539           1,631
                                    ----------     ----------       ----------      -----------       ----------      ----------  
                                       485,843        260,612           31,399          244,626          160,416          19,327
                                                                                                                                
Cost of sales                       (  295,825)    (  190,417)      (   22,942)     (   148,457)      (  116,959)     (   14,091)
                                    ----------     ----------       ----------      -----------       ----------      ----------
                                                                                                                                
Gross profit                           190,018         70,195            8,457           96,169           43,457           5,236
                                                                                                                                
Selling, general and                                                                                                            
    administrative expenses                                                                                                     
   - third parties                  (   35,282)    (   28,138)      (    3,390)     (    18,733)      (   12,123)     (    1,460)
   - related parties                    24,946)    (    9,014)      (    1,086)     (    12,454)      (    8,196)     (      988)
                                    ----------     ----------       ----------      -----------       ----------      ----------  
                                    (   60,228)    (   37,152)      (    4,476)     (    31,187)      (   20,319)     (    2,448)
                                                                                                                                  
Interest expense, net                                                                                                             
   - third parties                  (   31,705)    (   36,176)      (    4,359)     (    16,274)      (   17,091)     (    2,059)
   - related parties                (    4,395)    (    3,587)      (      432)     (     2,149)      (    2,035)     (      246) 
                                    ----------     ----------       ----------      -----------       ----------      ----------  
                                    (   36,100)    (   39,763)      (    4,791)     (    18,423)      (   19,126)     (    2,305)
                                    ----------     ----------       ----------      -----------       ----------      ----------  
                                                                                                                                  
Income before income taxes              93,690     (    6,720)      (      810)          46,559            4,012             483  
                                                                                                                                  
Provision for income taxes:                                                                                                       
    - Current                       (   15,723)    (      109)      (       13)     (     7,671)      (      109)     (       13) 
    - Deferred                               -              -                -                -                -               -  
                                    ----------     ----------       ----------      -----------       ----------      ----------  
                                                                                                                                  
Income before minority 
  interests                             77,967     (   6,829)       (      823)          38,888            3,903             470  
Minority interests                  (   43,271)    (   2,565)       (      308)     (    21,110)      (    4,330)     (      521) 
                                    ----------     ----------       ----------      -----------       ----------      ----------  
                                                                                                                                  
Net income                              34,696     (    9,394)      (    1,131)          17,778       (      427)     (       51) 
                                    ==========     ==========       ==========      ===========       ==========      ==========  
                                                                                                                                  
                                                                                                                                  
Earnings per common share     2                                                                                    
 - Basic                                  2.73          (0.72)           (0.09)            1.40            (0.03)          (0.00) 
                                    ==========     ==========       ==========      ===========       ==========      ==========  
 - Diluted                                2.10          (0.72)           (0.09)            1.07            (0.03)          (0.00) 
                                    ==========     ==========       ==========      ===========       ==========      ==========  
                                                                                                                                  
Number of shares outstanding  2                                                                                    
 - Basic                            12,700,140     13,032,215       13,032,215       12,700,140       13,360,637      13,360,637  
                                    ==========     ==========       ==========      ===========       ==========      ==========  
 - Diluted                          19,280,140     13,032,215       13,032,215       19,280,140       13,360,637      13,360,637  
                                    ==========     ==========       ==========      ===========       ==========      ==========  
</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 SIX MONTHS ENDED JUNE 30, 1997 AND 1998
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                          ----------------------------------------
                                                              1997          1998          1998
                                                              RMB            RMB           US$
                                                          ------------   -----------   -----------
<S>                                                       <C>            <C>           <C>
Cash flows from operating activities:
Net income                                                     34,696      (  9,394)      ( 1,131)
Adjustments to reconcile income to net cash
    used in operating activities:
    Minority interests                                         43,271         2,565           308
    Depreciation                                               35,736        35,543         4,282
    Loss on disposal of fixed assets                              582             -             -
    Amortization of goodwill                                      427           413            49
    Exchange difference on secured promissory
      note and convertible debentures                        (    145)            -             -
    Amortization of present value discount
      on deferred asset                                      (    391)        2,421           292
    Amortization of deferred debenture issue expense              721             -             -
Changes in operating assets and liabilities-
(Increase) decrease in assets:
    Accounts receivable                                      ( 50,761)       45,651         5,501
    Notes receivable                                            3,833         2,010           242
    Inventories                                                23,663      ( 95,709)      (11,531)
    Other receivables                                        ( 22,704)     ( 29,532)      ( 3,558)
    Due from related companies                               (211,863)     ( 26,400)      ( 3,181)
Increase (decrease) in liabilities:
    Accounts payable                                         ( 19,731)        4,783           577
    Accrued liabilities and other payables                     60,744        13,127         1,581
    Income tax payable                                         20,699      ( 11,152)      ( 1,343)
    Taxes other than income                                    52,176        23,165         2,790
    Due to related companies                                    9,439           637            77
                                                             --------      --------       -------
Net cash used in operating activities                        ( 19,608)     ( 41,872)      ( 5,045)
                                                             --------      --------       -------
 
Cash flows from investing activities:
    Proceeds from disposal of fixed assets                   (    134)            -             -
    Additions to fixed assets                                ( 13,345)     (  2,677)      (   322)
                                                             --------      --------       -------
Net cash used in investing activities                        ( 13,479)     (  2,677)      (   322)
                                                             --------      --------       -------
 
Cash flows from financing activities:
    Net increase in bank loans                                 16,896        22,180         2,672
                                                             --------      --------       -------
    Net cash provided by financing activities                  16,896        22,180         2,672
                                                             --------      --------       -------
 
Net increase (decrease) in cash and cash equivalents         ( 16,191)     ( 22,369)      ( 2,695)
Cash and cash equivalents, at beginning of period              87,428        63,093         7,601
                                                             --------      --------       -------
Cash and cash equivalents, at end of period                    71,237        40,724         4,906
                                                             ========      ========       =======
Non-cash transaction:
Financing of lease arrangements                                 4,395        10,004         1,205
                                                             ========      ========       =======
</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 SIX MONTHS
                          ENDED JUNE 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 June 30,
   1998, the results of operations for the three months and six months ended
   June 30, 1997 and 1998, and the changes in cash flows for the six months
   ended June 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 SIX MONTHS
                          ENDED JUNE 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 Company's 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 six months ended June 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 six months
   ended June 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 9,426, respectively, for the three
   months and six months ended June 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 six months ended
   June 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 SIX MONTHS
                          ENDED JUNE 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 June 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 June 30, 1998 or at any other certain rate
   on June 30, 1998

4. INVENTORIES

             Inventories consist of the following at December 31, 1997 and June
   30, 1998:
<TABLE>
<CAPTION>
                                            December 31, 1997         June 30, 1998
                                           --------------------    -------------------
<S>                                        <C>         <C>         <C>         <C>
                                              RMB         US$         RMB         US$
                                           --------    --------    --------    ------- 
Raw materials                                92,039      11,089     107,264     12,923
Work-in-progress                            141,214      17,014     170,298     20,518
Finished goods                              282,634      34,052     334,034     40,245
                                           --------    --------    --------    -------
                                            515,887      62,155     611,596     73,686
Less: Allowance for obsolescence          (  38,670)    ( 4,659)   ( 38,670)   ( 4,659)
                                           --------    --------    --------    -------
 
Inventories, net                            477,217      57,496     572,926     69,027
                                           ========    ========    ========    =======
 
</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 SIX MONTHS
                          ENDED JUNE 30, 1997 AND 1998
       (Amounts in thousands, except number of shares and per share data)


5. SECURED PROMISSORY NOTE (continued)
<TABLE>
<CAPTION>
   Payment Period                               Amount
   --------------                               ------
   <S>                                          <C>
   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
</TABLE>
             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 SIX MONTHS
                          ENDED JUNE 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 $0.55 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.

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 June 30, 1998, not all of
   the Series B Convertible Preferred stock was converted.
 

                                       11
<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 June 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 June 30,
1997 and 1998.
<TABLE>
<CAPTION>
 
                                                        Three Months Ended June 30,
                                                        ----------------------------
                                                        1997                    1998
                                                        ----                    ----
                                                   RMB         %           RMB          %
                                                   ---         -           ---          -
<S>                                           <C>           <C>       <C>           <C>
     Sales                                       244,626     100.0       160,416      100.0
     Cost of sales                              (148,457)    (60.7)     (116,959)     (72.9)
                                                --------     -----      --------     ------
 
     Gross profit                                 96,169      39.3        43,457       27.1
 
     Selling expenses                           (  6,115)    ( 2.5)     (  4,099)    (  2.6)
     General and administrative expenses        ( 25,072)    (10.3)     ( 16,220)    ( 10.1)
     Interest expenses                          ( 18,423)    ( 7.5)     ( 19,126)    ( 11.9)
                                                --------     -----      --------     ------
 
     Income before income taxes                   46,559      19.0         4,012        2.5
     Provision for income taxes                 (  7,671)    ( 3.1)     (    109)    (  0.1)
                                                --------     -----      --------     ------
 
     Income before minority interests             38,888      15.9         3,903        2.4
     Minority interests                         ( 21,110)    ( 8.6)     (  4,330)     ( 2.7)
                                                --------     -----      --------     ------
 
     Net income                                   17,778       7.3      (    427)    (  0.3)
                                                ========     =====      ========     ======
</TABLE>

                                       12
<PAGE>
 
     Sales
     -----

            Sales for the three months ended June 30, 1998 decreased by RMB
     84,210 or 34.4% to RMB 160,416, as compared to RMB 244,626 for the three
     months ended June 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 twelvemonth period.

            Sales for Harbin Bearing for the three months ended June 30, 1998
     decreased by RMB 83,955 or 36% to RMB 149,387 as compared to RMB 233,342
     for the three months ended June 30, 1997. This decrease was mainly caused
     by the decrease in domestic demand for bearing in the PRC.


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

            Cost of sales for the three months ended June 30, 1998 decreased to
     RMB 116,959 as compared to RMB 148,457 for the three months ended June 30,
     1997.  The cost of sales for Harbin Bearing for the three months ended June
     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 June 30, 1998 and 1997 was calculated
     on an actual cost basis.

            Gross profit decreased by RMB 52,712 or 54.8% for the three months
     ended June 30, 1998 as compared to the three months ended June 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 June 30, 1998 decreased
     by RMB 2,016 or 33% to RMB 4,099 as compared to RMB 6,115 for the three
     months ended June 30, 1997.  The decrease in selling expenses was in line
     with the decrease in sales.

                                       13
<PAGE>
 
     General and Administrative Expenses
     -----------------------------------

            General and Administrative Expenses for the three months ended June
     30, 1998 decreased by RMB 8,852 or 35.3% to RMB 16,220 as compared to RMB
     25,072 for the three months ended June 30, 1997.  Significant factors
     affecting the change in General and Administration Expenses between 1997
     and 1998 are as follows:-

            a.  A provision for management fee of RMB 5,200 was made at Harbin
     Bearing for the three months ended June 30, 1997.  No such provision was
     made for the three months ended June 30, 1998.

            b.    A general provision for doubtful accounts of RMB 2,000 was
     made at Harbin Bearing for the three months ended June 30, 1997 but none
     for the three months ended June 30, 1998.


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

            Interest Expense for the three months ended June 30, 1998 increased
     by RMB 703 or 3.8% to RMB 19,126 as compared to RMB 18,423 for the three
     months ended June 30, 1997. The increase in interest expense was primarily
     attributable to the increase in Convertible Debentures interest.  The
     amount of Convertible Debentures interest charged for the three months
     ended June 30, 1998 was RMB 4,713 as compared to RMB2,864 for the three
     months ended June 30, 1997.  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.


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

            As a result of the aforementioned factors, net income decreased by
     RMB 18,205 to a loss of RMB 427 for the three months ended June 30, 1998 as
     compared to a profit of  RMB 17,778 for the three months ended June 30,
     1997.

                                       14
<PAGE>
 
Six Months Ended June 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 six months ended June 30,
1997 and 1998.
<TABLE>
<CAPTION>
                                                        Six Months Ended June 30,
                                                       ---------------------------
                                                       1997                   1998
                                                       ----                   ----
                                                  RMB         %          RMB          %
                                                  ---         -          ---          -
<S>                                            <C>          <C>       <C>           <C>
 
     Sales                                      485,843     100.0       260,612     100.0
     Cost of sales                             (295,825)    (60.9)     (190,417)    (73.1)
                                               --------     -----      --------     -----
 
     Gross profit                               190,018      39.1        70,195      26.9
 
     Selling expenses                         (  11,946)   (  2.5)     (  8,143)    ( 3.1)
     General and administrative expenses      (  48,282)   (  9.9)     ( 29,009)    (11.1)
     Interest expenses                        (  36,100)   (  7.4)     ( 39,763)    (15.3)
                                               --------     -----      --------     -----
 
     Income before income taxes                  93,690      19.3      (  6,720)    ( 2.6)
     Provision for income taxes               (  15,723)   (  3.2)     (    109)        0
                                               --------     -----      --------     -----
 
     Income before minority interests            77,967      16.1      (  6,829)    ( 2.6)
     Minority interests                       (  43,271)   (  8.9)     (  2,565)    ( 1.0)
                                               --------     -----      --------     -----
 
     Net income                                  34,696       7.2      (  9,394)    ( 3.6)
                                               ========     =====      ========     =====
</TABLE>
     Sales
     -----

              Sales for the six months ended June 30, 1998 decreased by RMB
     225,231 or 46.4% to RMB 260,612 as compared to RMB 485,843 for the six
     months ended June 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 twelvemonth period.

              Sales for Harbin Bearing for the six months ended June 30, 1998
     decreased by RMB 225,250 or 48.5% to RMB 239,171 as compared to RMB 464,421
     for the six months ended June 30, 1997. This decrease was mainly caused by
     the decrease in domestic demand for bearing in the PRC.


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

            Cost of sales for the six months ended June 30, 1998 decreased to
     RMB 190,417 as compared to RMB 295,825 for the six months ended June 30,
     1997.  The cost of sales for Harbin Bearing for the six months ended June
     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 six months ended June 30, 1998 and 1997 was calculated on
     an actual cost basis.

                                       15
<PAGE>
 
            Gross profit decreased by RMB 119,823 or 63.1% for the six months
     ended June 30, 1998 as compared to the six months ended June 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 six months ended June 30, 1998 decreased by
     RMB 3,803 or 31.8% to RMB 8,143 as compared to RMB 11,946 for the six
     months ended June 30, 1997.  As a result of the decrease in sales in 1998,
     there was a drop in royalty and government taxes.  The government tax and
     royalty charged for the six months ended June 30, 1998 was RMB 1,482 and
     RMB 1,196 as compared to RMB 5,660 and RMB 2,322 for the six months ended
     30 June 1997.


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

            General and Administrative Expenses for the six months ended June
     30, 1998 decreased by RMB 19,273 or 39.9% to RMB 29,009 as compared to RMB
     48,282 for the six months ended June 30, 1997.  General and administrative
     expenses as a percentage of sales increased from 9.9% in 1997 to 11.1% in
     1998.  Significant factors affecting the change in general and
     administrative expenses between 1997 and 1998 are as follows:

            a.  A provision for management fees of RMB 10,532 was made at Harbin
     Bearing for the six months ended June 30, 1997.  No such provision was made
     for the six months ended June 30, 1998.

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

            c.  A decrease in staff costs of RMB 1,385 associated with the U.S.
     engineering program at Harbin Bearing, which only incurred in the six
     months ended June 30, 1997.

            d.  A management fee payable to Sunbase International of RMB 2,281
     for the six months ended June 30, 1997 where no such fee was paid during
     the six months ended June 30, 1998.  This management fee was for rent,
     utilities, and other administrative costs born by the parent.

            e.  A decrease in property tax of RMB 1,062  for the six months
     ended June 30, 1998 as compared to the six months ended June 30, 1997.

            f.  A decrease in administrative staff costs by RMB 1,647 as a
     result of increased compensation paid to workers in the six months ended
     June 30, 1997.  No such compensation was made during the six months ended
     June 30, 1998.

                                       16
<PAGE>
 
     Interest Expense
     ----------------

            Interest Expense for the six months ended June 30, 1998 increased by
     RMB 3,663 or 10.1% to RMB 39,763 as compared to RMB 36,100 for the six
     months ended June 30, 1997.  The increase in interest expense was primarily
     attributable to the increase in Convertible Debentures interest.  The
     amount of Convertible Debentures interest charged for the six months ended
     June 30, 1998 was RMB 9,426 as compared to RMB 5,728 for the six months
     ended June 30, 1997.  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.

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

            As a result of the aforementioned factors, net income decreased by
     RMB 44,090 to a  loss of  RMB 9,394 for the six months ended June 30, 1998
     as compared to a net income RMB 34,696 for the six months ended June 30,
     1997.


LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

      For the six months ended June 30, 1998, the Company's operations utilized
cash resources of RMB 41,872 as compared to RMB 19,608 for the six months ended
June 30, 1997.  The Company's net working capital increased by RMB 18,626 at
June 30, 1998 to RMB 326,087 as compared to RMB 307,461 at December 31, 1997,
and the Company's current ratio at June 30, 1998 was 1.29:1 as compared to
1.29:1 at December 31, 1997 and 1.52:1 at June 30, 1997.

      Accounts receivable decreased by RMB 45,651 or 9.5% to RMB 434,749 at June
30, 1998, as compared to RMB 480,400 at December 31, 1997.    Due from related
companies increased by RMB 26,400 during the six months ended June 30, 1998.
The net decrease was mainly due to tight control in credit review procedures by
limiting sales to customers where collectability  was uncertain in the period.


INVESTING ACTIVITIES

      Capital expenditures for the six months ended June 30, 1998 of RMB 2,677
consisted of costs relating to the 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 six months ended June 30, 1998, the net increase in bank
loans (after deducting repayment) was RMB 22,180. 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

                                       17
<PAGE>
 
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 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.

        In view of the inadequate funding position of the Company and the
guarantors to meet with an immediate redemption of the Convertible Debentures,
the Company has conducted negotiations with the Investors in rescheduling the
redemption payment.  The Company believes that a workable solution could be made
with the Investors in due course.  No assurance can be given that such
negotiations will result in a resolution that is favorable to the Company.

        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 

                                       18
<PAGE>
 
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 on the Note unless there
is sufficient working capital and the repayment is made in accordance with the
following schedule:-
<TABLE>
<CAPTION>
        Payment Period                   Amount
        --------------                   ------
        <S>                              <C>
        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
</TABLE>
        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 and the default on the Convertible Debentures,
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 six
months ended June 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.  In view of the
change in market conditions and increased competition, the Company may be unable
to shift a portion of the inflated costs to the customers.  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 employees 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$, and could have a material adverse effect upon the
results of operations and financial position of the Company.  Although prior to
1994 the RMB experienced significant devaluation against the US$, 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 8.3 for December 31,
1997 and June 30, 1998.

                                       19
<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 June 30, 1998: None

                                       20
<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:  August 12, 1998     By:  /s/ William McKay
                                -----------------
                                William McKay
                                Chief Executive Officer and
                                President
                                (Duly Authorized Officer)


Date:  August 12, 1998     By:  /s/ (Roger) Li Yuen Fai
                                -----------------------
                                (Roger) Li Yuen Fai
                                Vice President and
                                Chief Financial Officer
                                (Principal Financial Officer)

                                       21