<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 March 31, 1997.



[ ]  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 March 31, 1997, the Company had 12,700,109 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, 1996 and March 31, 1997                                       3-4
 
                  Consolidated Condensed Statements of Income (unaudited)
                  - Three months ended March 31, 1996 and 1997                                   5
 
                  Consolidated Condensed Statements of Cash Flows (unaudited)
                  - Three months ended March 31, 1996 and 1997                                   6
 
                  Notes to Consolidated Condensed Financial Statements
                  (unaudited)
                  - Three months ended March 31, 1996 and 1997                                7-11
 
        Item 2 -- Management's Discussion and Analysis of
                  Financial Condition and Results of Operations                              12-17
 
PART II: OTHER INFORMATION
 
        Item 6 -- Exhibits and Reports on Form 8-K                                              18
 
SIGNATURES                                                                                      19
 
EXHIBIT 11  Computation of Earnings Per Common Share                                         20-21
</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, 1996 AND MARCH 31, 1997
                      (Amounts in thousands, except number
                         of shares and per share data)
<TABLE>
<CAPTION>
                                                                   12/31/96                3/31/97
                                                             --------------------   --------------------
                                                     Notes         RMB        US$          RMB       US$
                                                     -----         ---        ---          ---       ---
<S>                                                  <C>     <C>         <C>        <C>          <C>
ASSETS
Current assets
    Cash and bank balances                                      87,428     10,533       70,028     8,437
    Accounts receivable, net                                   313,791     37,806      366,762    44,188
    Notes receivable                                            15,212      1,833        2,735       329
    Inventories, net                                     4     476,409     57,399      467,587    56,336
    Other receivables                                           70,075      8,442       84,756    10,212
    Receivable from disposal
      of an investment                                          13,419      1,617       13,419     1,617
    Due from related companies                                 205,275     24,732      295,350    35,584
                                                             ---------   --------   ----------   -------
Total current assets                                         1,181,609    142,362    1,300,637   156,703
Fixed assets                                                   656,071     79,045      645,349    77,753
Deferred asset                                                  22,204      2,675       21,981     2,648
Long term investments                                            1,012        122        1,012       122
Goodwill                                                        11,587      1,396       11,380     1,371
                                                             ---------   --------   ----------   -------
Total assets                                                 1,872,483    225,600    1,980,359   238,597
                                                             =========   ========   ==========   =======
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Short term bank loans                                      358,847     43,235      369,075    44,467
    Long term bank loans, current portion                       98,641     11,884       93,811    11,303
    Accounts payable                                           151,971     18,310      131,999    15,903
    Notes payable                                                2,800        337        2,300       277
    Accrued liabilities and other payables                      55,544      6,692      102,996    12,409
    Short term obligations under capital leases                 18,788      2,264       19,188     2,312
    Short term portion of
      secured promissory note                            5      12,450      1,500       12,450     1,500
    Income tax payable                                          38,368      4,623       49,066     5,912
    Taxes other than income                                     25,225      3,038       51,329     6,184
    Due to related companies                                    14,357      1,730       18,524     2,232
                                                             ---------   --------   ----------   -------
Total current liabilities                                      776,991     93,613      850,738   102,499
Long term bank loans                                            35,000      4,217       35,000     4,217
Long term obligations under capital leases                      88,924     10,714       83,974    10,117
Long term portion of secured promissory note             5      12,450      1,500       12,450     1,500
Convertible debentures                                   6      95,450     11,500       95,450    11,500
Minority interests                                             420,484     50,661      442,645    53,331
                                                             ---------   --------   ----------   -------
                                                             1,429,299    172,205    1,520,257   183,164
</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, 1996 AND MARCH 31, 1997 (UNAUDITED) (CONTINUED)
                      (Amounts in thousands, except number
                         of shares and per share data)
<TABLE>
<CAPTION>
                                                           12/31/96                3/31/97
                                                     --------------------   --------------------
                                                           RMB        US$          RMB       US$
                                                           ---        ---          ---       ---
<S>                                                  <C>         <C>        <C>          <C>
 
Shareholders' equity:
Common Stock, par value US$ 0.001 each,
    50,000,000 shares authorized;
    12,700,109 shares issued, and fully paid up            107        13          107        13
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;
        6,800 shares issued and outstanding             28,288     3,408       28,288     3,408
Contributed surplus                                    188,019    22,653      188,019    22,653
Reserves                                                27,866     3,357       27,866     3,357
Retained earnings                                      154,371    18,599      171,289    20,637
                                                     ---------   -------   ----------   -------
Total shareholders' equity                             443,184    53,395      460,102    55,433
                                                     ---------   -------   ----------   -------
Total liabilities and shareholders' equity           1,872,483   225,600    1,980,359   238,597
                                                     =========   =======   ==========   =======
</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 ENDED MARCH 31, 1996 AND 1997
       (Amounts in thousands, except number of shares and per share data)

<TABLE>
<CAPTION>
                                                  Three Months Ended March 31, 
                                      -------------------------------------------------
                                           1996             1997             1997
                              Notes        RMB              RMB               US$
                              -----   --------------   --------------   ---------------
<S>                                   <C>              <C>              <C>
Net sales to
  - Third parties                           203,432          138,146            16,644
  - Related parties                          12,648          103,071            12,418
                                         ----------       ----------        ----------
                                            216,080          241,217            29,062
 
Cost of sales                           (   132,889)     (   147,368)       (   17,755)
                                         ----------       ----------        ----------
 
Gross profit                                 83,191           93,849            11,307
 
Selling, general and
    administrative expenses
   - Third parties                      (    17,263)     (    16,549)      (     1,994)
   - Related parties                    (    10,960)     (    12,492)      (     1,505)
                                         ----------       ----------        ----------
                                        (    28,223)     (    29,041)      (     3,499)
                                                                           
Interest expense, net                                                      
   - Third parties                      (    11,356)     (    15,431)      (     1,859)
   - Related parties                    (     2,614)     (     2,246)      (       271)
                                         ----------       ----------        ----------
                                        (    13,970)     (    17,677)      (     2,130)
                                         ----------       ----------        ----------
 
Income before income taxes                   40,998           47,131             5,678
 
Provision for income taxes:
    - Current                           (     6,645)     (     8,052)      (       970)
    - Deferred                                    -                -                 -
                                         ----------       ----------        ----------
 
Income before minority interests             34,353           39,079             4,708
 
Minority interests                      (    18,288)     (    22,161)      (     2,670)
                                         ----------       ----------        ----------
 
Net income                                   16,065           16,918             2,038
                                         ==========       ==========        ==========
 
Earnings per common share        2
  - Primary                                    1.00             1.00              0.12
                                         ==========       ==========        ==========
  - Fully diluted                              1.00             1.02              0.12
                                         ==========       ==========        ==========
 
Number of shares outstanding  2, 7
  - Primary                              15,980,063       16,980,109        16,980,109
                                         ==========       ==========        ==========
  - Fully diluted                        15,980,063       19,280,109        19,280,109
                                         ==========       ==========        ==========
</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 THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                    Three Months Ended March 31,         
                                                              -----------------------------------------  
                                                                 1996           1997          1997      
                                                                  RMB            RMB           US$      
                                                                  ---            ---           ---       
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
Net income                                                     16,065         16,918         2,038
Adjustments to reconcile income to net
    cash provided by (used in) operating activities:
    Minority interests                                         18,288         22,161         2,670
    Depreciation                                               15,771         17,792         2,144
    Loss on disposal of fixed assets                                -            583            70
    Amortization of goodwill                                      188            207            25
    Exchange difference on secured promissory note                 50              -             -
    Amortization of present value discount
      on deferred asset                                           715      (     195)     (     23)
    Amortization of deferred debenture issue expense                -            418            50
Changes in operating assets and liabilities-
(Increase) decrease in assets:
    Accounts receivable                                     ( 132,884)     (  52,971)     (  6,382)
    Notes receivable                                           11,452         12,477         1,504
    Inventories                                                16,009          8,822         1,063
    Prepaid VAT                                                24,256              -             -
    Other receivables                                       (  14,093)     (  14,681)     (  1,770)
    Due from related companies                              (  48,014)     (  90,075)     ( 10,852)
Increase (decrease) in liabilities:
    Accounts payable                                           21,397      (  19,972)     (  2,407)
    Notes payable                                           (     655)     (     500)     (     60)
    Accrued liabilities and other payables                  (  13,861)        47,452         5,717
    Income tax payable                                          8,348         10,698         1,289
    Taxes other than income                                         -         26,104         3,146
    Due to related companies                                   77,600      (     383)     (     47)
    Due  to shareholders                                        2,652              -             -
                                                             --------       --------       -------
Net cash provided by (used in) operating activities             3,284      (  15,145)     (  1,825)
 
Cash flows from investing activities:
    Disposal of long term investments                             426              -             -
    Proceeds from disposal of fixed assets                          -            133            16
    Additions to fixed assets                               (  20,476)     (   7,786)     (    938)
                                                             --------       --------       -------
Net cash used in investing activities                       (  20,050)     (   7,653)     (    922)
                                                             --------       --------       -------
 
Cash flows from financing activities:
    Net increase in bank loans                                 43,776          5,398           651
    Repayment of other loans                                (  33,810)             -             -
                                                             --------       --------       -------
Net cash provided by financing activities                       9,966          5,398           651
                                                             --------       --------       -------
 
Net decrease in cash and cash equivalents                   (   6,800)     (  17,400)     (  2,096)
Cash and cash equivalents, at beginning of period              30,944         87,428        10,533
                                                             --------       --------       -------
Cash and cash equivalents, at end of period                    24,144         70,028         8,437
                                                             ========       ========       =======
Non-cash transaction:
Financing of lease arrangements                                 4,182          4,550           549
                                                             ========       ========       =======
</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 ENDED MARCH 31, 1996 AND 1997
       (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 laws 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 primarily 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 March 31,
   1997, the results of operations for the three months ended March 31, 1996 and
   1997, and the changes in cash flows for the three months ended March 31, 1996
   and 1997.  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 ENDED MARCH 31, 1996 AND 1997
       (Amounts in thousands, except number of shares and per share data)


2. BASIS OF PRESENTATION (continued)

        The consolidated balance sheet as of December 31, 1996, 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,
   1996 as filed with the Securities and Exchange Commission.

        For the three months ended March 31, 1996 and 1997, primary earnings per
   common share have been calculated using the weighted average number of shares
   of common stock and common stock equivalents outstanding during the
   respective periods.  Common stock equivalents consist of convertible
   preferred stock and outstanding stock options.  The computation of fully
   diluted earnings per share, where appropriate, assumes the full conversion of
   the Convertible Debentures and the elimination of the related after tax
   interest expense effective August 23, 1996.

        The results of operations for the three months ended March 31, 1997 are
   not necessarily indicative of the results of operations to be expected for
   the full fiscal year ending December 31, 1997.


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.

        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 March 31, 1997 of US$ 1.00 = RMB 8.3.
   No representation is made that the RMB amounts could have been, or could be,
   converted into US$ at the rate on March 31, 1997 or at any other certain rate
   on March 31, 1997.

                                       8
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                        FINANCIAL STATEMENTS (UNAUDITED)
               FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
       (Amounts in thousands, except number of shares and per share data)


4. INVENTORIES

        Inventories consist of the following at December 31, 1996 and March 31,
   1997:
<TABLE>
<CAPTION>
 
                                          December 31, 1996         March 31, 1997
                                          -----------------         --------------
                                            RMB         US$         RMB        US$
                                            ---         ---         ---        ---
<S>                                     <C>          <C>         <C>         <C>
Raw materials                           102,856      12,392      78,299      9,434
Work-in-progress                        121,847      14,680     129,159     15,561
Finished goods                          257,121      30,979     265,959     32,043
                                        -------    --------     -------     ------
                                        481,824      58,051     473,417     57,038
Less: Allowance for obsolescence      (   5,415)   (    652)   (  5,830)   (   702)
                                        -------    --------     -------     ------
 
Inventories, net                        476,409      57,399     467,587     56,336
                                        =======    ========     =======     ======
 
</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:-

   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) plus accrued interest was made on the Note on
   September 10, 1996.

                                       9
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                        FINANCIAL STATEMENTS (UNAUDITED)
               FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
       (Amounts in thousands, except number of shares and per share data)


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
   of the principal amount of the Convertible Debentures into shares of the
   Common Stock of the Company.  The Conversion Price (the "Conversion Price")
   is 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 ending 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.

        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 Debenture 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.

        As a result of the foregoing, although the Convertible Debentures bear
   interest at the rate of 5% per annum, interest is accrued at the rate of 12%
   per annum.

        The obligations of China Bearing under the Convertible Debentures are
   guaranteed by the other members of the Sunbase Group.

                                       10
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                        NOTES TO CONSOLIDATED CONDENSED
                        FINANCIAL STATEMENTS (UNAUDITED)
               FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
       (Amounts in thousands, except number of shares and per share data)


7. SALE OF COMMON STOCK

        On June 10, 1996, the Company sold 1,000,000 shares of common stock (the
   "Private Placement Shares") at US$5.00 per share, which generated net
   proceeds of US$ 4,347 (RMB 36,077).  On October 23, 1996, the Company filed a
   registration statement with the Securities and Exchange Commission to
   register the resale of the Private Placement Shares.

                                       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 (RMB '000).


RESULTS OF OPERATION

      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 March 31,
1996 and 1997.
<TABLE>
<CAPTION>
 
                                                        Three Months Ended March 31,
                                                        ----------------------------
                                                           1996                 1997
                                                           ----                 ----
                                                      RMB         %           RMB         %
                                                      ---         -           ---         -
<S>                                           <C>           <C>       <C>           <C>
 
     Sales                                        216,080     100.0       241,217     100.0
     Cost of sales                              ( 132,889)   ( 61.5)   (  147,368)   ( 61.1)
                                                ---------    ------    ----------    ------
 
     Gross profit                                  83,191      38.5        93,849      38.9
 
     Selling expenses                           (   6,206)   (  2.9)   (    5,831)   (  2.4)
     General and administrative expenses        (  22,017)   ( 10.2)   (   23,210)   (  9.7)
     Interest expenses                          (  13,970)   (  6.5)   (   17,677)   (  7.3)
                                                ---------    ------    ----------    ------
 
     Income before income taxes                    40,998      18.9        47,131      19.5
     Provision for income taxes                 (   6,645)   (  3.1)   (    8,052)   (  3.3)
                                                ---------    ------    ----------    ------
 
     Income before minority interests              34,353      15.8        39,079      16.2
     Minority interests                         (  18,288)   (  8.4)   (   22,161)   (  9.2)
                                                ---------    ------    ----------    ------
 
     Net income                                    16,065       7.4        16,918       7.0
                                                =========    ======     =========    ======
</TABLE>

                                       12
<PAGE>
 
     Sales
     -----

            Sales for the three months ended March 31, 1997 increased by RMB
     25,137 or 11.6% to RMB 241,217, as compared to RMB 216,080 for the three
     months ended March 31, 1996.  The increase in sales was due to:

            i)  An increase in the domestic (Chinese) sales demand for bearings
     primarily in the automobile, motorcycle and machine-tooling industries.
     Sales for Harbin Bearing for the three months ended March 31, 1997
     increased by RMB 23,917 or 11.5% to RMB 231,079 as compared to RMB 207,162
     for the three months ended March 31, 1996.

            ii)  An increase in sales for Southwest Products by RMB 1,220 or
     13.7% to RMB 10,138 for the three months ended March 31, 1997 as compared
     to RMB 8,918 for the three months ended March 31, 1996.


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

            Cost of sales for the three months ended March 31, 1997 increased to
     RMB 147,368 as compared to RMB 132,889 for the three months ended March 31,
     1996.  The cost of sales for Harbin Bearing for the three months ended
     March 31, 1997 and 1996 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 March 31, 1997 and 1996 was
     calculated on an actual cost basis.

            Gross profit increased by RMB 10,658 or 12.8% for the three months
     ended March 31, 1997 as compared to the three months ended March 31, 1996.
     The increase in gross profit was attributable to the increase in sales.
     Gross profit as a percentage of sales increased slightly to 38.9% in 1997
     from 38.5% in 1996 due to different product mix from small and medium sized
     bearings to higher margin medium and large sized bearings.


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

            Selling expenses for the three months ended March 31, 1997 decreased
     by RMB 375 or 6% to RMB 5,831 as compared to RMB 6,206 for the three months
     ended March 31, 1996.  Although royalty costs and government taxes in the
     PRC increased following the surge in sales, the overall selling expenses
     decreased as a result of the successful charge back of certain marketing
     and transportation costs to customers.  Selling expenses as a percentage of
     sales decreased from 2.9% in 1996 to 2.4% in 1997.

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

            General and administrative expenses for the three months ended March
     31, 1997 increased by RMB 1,193 or 5.4% to RMB 23,210 as compared to RMB
     22,017 for the three months ended March 31, 1996.  General and
     administrative expenses as a percentage of sales decreased to 9.7% in 1997
     from 10.2% in 1996.  Significant factors affecting the change in general
     and administrative expenses between 1996 and 1997 are as follows:

            a.  An increase in staff costs by RMB 643 associated with the U.S.
     engineering program at Harbin Bearing that began in October 1996.

            b.  A loss on the disposal of fixed assets of RMB 583 for the three
     months ended March 31, 1997 whereas no gain or loss on the disposal of
     fixed assets was recorded during the three months ended March 31, 1996.


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

            Interest expense for the three months ended March 31, 1997 increased
     by RMB 3,707 or 26.5% to RMB 17,677 as compared to RMB 13,970 for the three
     months ended March 31, 1996.  The increase in interest expense was
     primarily attributable to the inclusion of RMB 2,839 of Convertible
     Debenture interest calculated at the rate of 12% per annum since August 23,
     1996 and the increase in principal amount of bank loans during the three
     months ended March 31, 1997 as compared to the three months ended March 31,
     1996.

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

            As a result of the aforementioned factors, net income increased by
     RMB 853 or 5.3% to RMB 16,918 for the three months ended March 31, 1997 as
     compared to RMB 16,065 for the three months ended March 31, 1996.

                                       14
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

      For the three months ended March 31, 1997, the Company's operations
utilized cash resources of RMB 15,145, as compared to RMB 3,284 generated for
the three months ended March 31, 1996.  The Company's net working capital
increased by RMB 45,281 at March 31, 1997 to RMB 449,899 as compared to RMB
404,618 at December 31, 1996, and the Company's current ratio at March 31, 1997
was 1.53:1 as compared to 1.52:1 at December 31, 1996 and 1.32:1 at March 31,
1996.

      Accounts receivable increased by RMB 52,971 or 17% to RMB 366,762 at March
31, 1997, as compared to RMB 313,791 at December 31, 1996.  The increase in
accounts receivable for the three months ended March 31, 1997 is comparable with
the increase in accounts receivable of RMB 132,884 or 50% to RMB 397,070 for the
three months ended March 31, 1996.

      Due from related companies increased by RMB 90,075 during the three months
ended March 31, 1997 as a result of the increase in trade receivable relating to
sales to related companies.

INVESTING ACTIVITIES

      Capital expenditures for the three months ended March 31, 1997 of RMB
7,786 consisted of costs relating to the construction of new plant and
buildings, and the renovation of existing facilities and equipment, and were
financed by internally generated funds, 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 expansions
projects.  During the three months ended March 31, 1997, the net increase in
bank loans (after deducting repayment) was RMB 5,398, which was utilized to fund
capital expenditures.  The Company believes that it will be able to continue to
maintain and expand its bank borrowings under existing terms and conditions.

      Southwest Products has relied upon a revolving accounts receivable line
of credit to supplement its capital requirements. Southwest Products 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.

                                       15
<PAGE>
 
      The Investors have the right to convert at any time the whole or any part
of the principal amount of the Convertible Debentures into shares of the Common
Stock of the Company.  The Conversion Price (the "Conversion Price") is
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 ending 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.

      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 Debenture 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.

      As a result of the foregoing, although the Convertible Debentures bear
interest at the rate of 5% per annum, interest is accrued at the rate of 12% per
annum.

      The obligations of China Bearing under the Convertible Debentures are
guaranteed by the 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 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:-

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) plus accrued interest was made on the Note on September
10, 1996.

                                       16
<PAGE>
 
      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, and the proceeds from the June 1996 sale of the
1,000,000 shares of common stock and the August 1996 issuance of the Convertible
Debentures, are adequate to finance the Company's operating and debt service
requirements for the foreseeable future.


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 three
months ended March 31, 1997, 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.  The price of bearing steel, the major raw material used by the
Company,  remained fairly stable during 1996 and 1997.  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$, could have a material adverse effect upon the results
of operations and financial position of the Company.  Although prior to 1994 the
RMB experienced significant devaluation against the US$, 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 and RMB 8.3 at March 31, 1997.

                                       17
<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 March 31, 1997: None               

                                       18
<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:  May 13, 1997                    By: /s/ William McKay
                                          -------------------------------------
                                          William McKay
                                          Chief Executive Officer and
                                          President
                                          (Duly Authorized Officer)



Date:  May 13, 1997                    By: /s/ (Roger) Li Yuen Fai
                                          -------------------------------------
                                          (Roger) Li Yuen Fai
                                          Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)

                                       19