U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q










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





For the quarterly period ended
September 30, 2010





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934





For
the transition period from _____ to _____





Commission
file number: 000-31091





ZHONGCHAI
MACHINERY, INC.


(Exact
Name of Registrant as Specified in Its Charter)





NEVADA
                (State
      of Incorporation)
              
              33-0652593
                (I.R.S.
      Employer I.D. Number)224
      Tianmushan Road,
                Zhongrong
      Chengshi Huayuan 5-1-602,
                Hangzhou,
      P.R. China
                (Address
      of principal executive offices)
              
              310007
                (zip
      code)





(904)
418-9133


(Issuer’s
Telephone Number, Including Area Code)





Not
Applicable


(Former
name, former address and former


fiscal
year, if changed since last report)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the 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  xNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files.    Yes  ̈No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non accelerated filer, or smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
accelerated filer  ̈   Accelerated
Filer  ̈   Non
accelerated filer  ̈
Smaller reporting company x





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





APPLICABLE
ONLY TO CORPORATE ISSUERS





Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date: 27,613,019 shares of common stock,
par value $.001 per share, outstanding as of November 15, 2010.










ZHONGCHAI
MACHINERY, INC.





-
INDEX -





PageNo.PART
      I
                
                FINANCIAL
      INFORMATIONItem
      1
                
                Financial
      Statements
                1Unaudited
      Consolidated Balance Sheet as of September 30, 2010 and
    2009
                1Unaudited
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the three months ended September 30, 2010 and 2009
                2Unaudited
      Consolidated Statements of Cash Flows for the three months ended September
      30, 2010 and 2009
                3Notes
      to Consolidated Financial Statements
                4Item
      2
                
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                10Item
      3
                
                Quantitative
      and Qualitative Disclosures about Market Risk
                12Item
      4
                
                Controls
      and Procedures
                12PART
      II
                
                OTHER
      INFORMATIONItem
      5
                
                Exhibits
                12Signatures
                
                
                13





FORWARD-LOOKING
STATEMENTS





Statements
made in this Form 10-Q (the “Quarterly Report”) that are not historical or
current facts are “forward-looking statements” made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These statements often can be identified by the use of terms
such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”,
“approximate”, or “continue”, or the negative thereof. Zhongchai Machinery, Inc.
(the “Company”) intends that such forward-looking statements be subject to the
safe harbors for such statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. Any forward-looking statements represent management’s best
judgment as to what may occur in the future. However, forward-looking statements
are subject to risks, uncertainties and important factors beyond the control of
the Company that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or
projected. These factors include our current dependence on a limited number of
products and customers, the focus of the business on the gear and transmission
gearbox markets in the Peoples Republic of China, the need to develop new
products and create demand for them, the effect of the global recession and
availability of credit, pricing pressures on our products and margins, product
quality, customer satisfaction and the ability to sustain and grow sales and
expand the customer base, warranty obligations and claims, operating a business
primarily in the Peoples Republic of China, currency controls and exchange rate
exposure, and the other risk factors discussed in our reports filed with the
Securities and Exchange Commission. The Company disclaims any obligation to
revise any forward-looking statements to reflect events or circumstances after
the date of such statement or to reflect the occurrence of anticipated or
unanticipated events.





PART I – FINANCIAL
INFORMATION




Item
1.  Financial Statements.





ZHONGCHAI
MACHINERY, INC.





Consolidated
Balance Sheets


(Unaudited)


September
      31,
                        
                        
                        June
      30,2010
                        
                        
                        2010AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        954,508
                        
                        
                        $
                        1,495,597Restricted
      cash
                        
                        
                        52,395
                        
                        
                        
                        90,810Accounts
      receivable, net of allowance for doubtful accounts of $46,039 and $37,670
      at September 30, 2010 and June 30, 2010, respectively
                        
                        
                        3,804,123
                        
                        
                        
                        3,618,030Inventories
                        
                        
                        2,802,893
                        
                        
                        
                        2,680,666Notes
      receivable
                        
                        
                        460,956
                        
                        
                        
                        463,465Advance
      payments
                        
                        
                        239,377
                        
                        
                        
                        33,132Other
      current assets
                        
                        
                        399,791
                        
                        
                        
                        110,131Total
      current assets
                        
                        
                        8,714,043
                        
                        
                        
                        8,491,831Property
      and equipment, net
                        
                        
                        3,065,029
                        
                        
                        
                        3,017,569Goodwill
                        
                        
                        3,481,687
                        
                        
                        
                        3,425,868Advance
      payments – non current portion
                        
                        
                        5,830,629
                        
                        
                        
                        4,960,475Other
    assets
                        
                        
                        183
                        
                        
                        
                        451Total
      assets
                        
                        $
                        21,091,571
                        
                        
                        $
                        19,896,194LiabilitiesCurrent
      liabilities:Accounts
      payable and accrued expenses
                        
                        $
                        3,722,774
                        
                        
                        $
                        3,504,923Trade
      notes payable
                        
                        
                        52,395
                        
                        
                        
                        142,365Short-term
      bank loans
                        
                        
                        1,497,000
                        
                        
                        
                        1,428,810Taxes
      payable
                        
                        
                        241,107
                        
                        
                        
                        224,108Dividend
      payable
                        
                        
                        385,942
                        
                        
                        
                        381,201Other
      current liabilities
                        
                        
                        3,556,299
                        
                        
                        
                        3,322,277Total
      current liabilities
                        
                        
                        9,455,517
                        
                        
                        
                        9,003,684Total
      liabilities
                        
                        
                        9,455,517
                        
                        
                        
                        9,003,684EquityStockholders’
      equity:Common
      stock, $.001 par value, 500,000,000 shares authorized, 27,613,019 shares
      issued and outstanding at September 30, 2010 and June 30, 2010,
      respectively
                        
                        
                        27,613
                        
                        
                        
                        27,613Stock
      subscription receivable
                        
                        
                        (33,120
                        )
                        
                        
                        (33,120
                        )Additional
      paid-in capital
                        
                        
                        16,486,450
                        
                        
                        
                        16,484,097Statutory
      reserves
                        
                        
                        315,152
                        
                        
                        
                        315,152Accumulated
      deficit
                        
                        
                        (7,047,332
                        )
                        
                        
                        (7,558,542
                        )Accumulated
      other comprehensive income
                        
                        
                        1,591,450
                        
                        
                        
                        1,361,646Total
      stockholders’ equity
                        
                        
                        11,340,213
                        
                        
                        
                        10,596,846Noncontrolling
      interest
                        
                        
                        295,841
                        
                        
                        
                        295,664Total
      equity
                        
                        
                        11,636,054
                        
                        
                        
                        10,892,510Total
      liabilities and equity
                        
                        $
                        21,091,571
                        
                        
                        $
                        19,896,194





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


1


ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Operations and Comprehensive Income (Loss)


(Unaudited)





For
      the Three Months EndedSeptember 30,2010
                          
                          
                          2009Sales
                          
                          $
                          3,983,545
                          
                          
                          $
                          1,948,406Cost
      of sales
                          
                          
                          2,972,551
                          
                          
                          
                          1,543,174Gross
      profit
                          
                          
                          1,010,994
                          
                          
                          
                          405,232Operating
      expensesSelling,
      general and administrative
                          
                          
                          344,444
                          
                          
                          
                          344,240Income
      from operations
                          
                          
                          666,550
                          
                          
                          
                          60,992Other
      income (expenses):Interest
      expenses, net
                          
                          
                          (15,955
                          )
                          
                          
                          (18,767
                          )Other
      income
                          
                          
                          34,852
                          
                          
                          
                          4,240Total
      other income (expenses)
                          
                          
                          18,897
                          
                          
                          
                          (14,527
                          )Income
      before provision for income taxes
                          
                          
                          685,447
                          
                          
                          
                          46,465Provision
      for income taxes
                          
                          
                          174,060
                          
                          
                          
                          35,505Net
      income
                          
                          
                          511,387
                          
                          
                          
                          10,960Less:
      Net income attributable to noncontrolling interest
                          
                          
                          177
                          
                          
                          
                          39,315Net
      income (loss) attributable to Zhongchai Machinery, Inc.
                          
                          
                          511,210
                          
                          
                          
                          (28,355
                          )Other
      comprehensive incomeForeign
      currency translation adjustment
                          
                          
                          229,804
                          
                          
                          
                          16,862Comprehensive
      income (loss)
                          
                          $
                          741,014
                          
                          
                          $
                          (11,493
                          )Earnings
      (loss) per common share:Basic
                          
                          $
                          0.02
                          
                          
                          $
                          (0.00
                          )Diluted
                          
                          $
                          0.02
                          
                          
                          $
                          (0.00
                          )Weighted
      average number of common shares outstanding:Basic
                          
                          
                          27,613,019
                          
                          
                          
                          27,613,019Diluted
                          
                          
                          27,883,333
                          
                          
                          
                          27,613,019





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


2


ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Cash Flows


(Unaudited)





For
      the Three Months EndedSeptember 30,2010
                      
                      
                      2009Cash
      flows from operating activities:Net
      income
                      
                      $
                      511,387
                      
                      
                      $
                      10,960Adjustments
      to reconcile net income to net cash Provided by (used in) operating
      activities:Depreciation
      and amortization
                      
                      
                      84,722
                      
                      
                      
                      72,159Provision
      for bad debts
                      
                      
                      7,662
                      
                      
                      
                      2,776Stock-based
      payments
                      
                      
                      2,353
                      
                      
                      
                      27,198Changes
      in assets and liabilities:Restricted
      cash
                      
                      
                      39,415
                      
                      
                      
                      (98,419
                      )Accounts
      receivable
                      
                      
                      (133,276
                      )
                      
                      
                      (153,312
                      )Inventory
                      
                      
                      (77,606
                      )
                      
                      
                      (8,217
                      )Notes
      receivable-trade
                      
                      
                      9,577
                      
                      
                      
                      (129,301
                      )Advance
      payments
                      
                      
                      (203,232
                      )
                      
                      
                      (170,037
                      )Other
      current assets
                      
                      
                      (286,002
                      )
                      
                      
                      11,207Accounts
      payable and accrued expenses
                      
                      
                      159,987
                      
                      
                      
                      308,956Trade
      notes payable
                      
                      
                      (91,180
                      )
                      
                      
                      98,419Taxes
      payable
                      
                      
                      13,187
                      
                      
                      
                      3,507Other
      current liabilities
                      
                      
                      222,986
                      
                      
                      
                      (6,773
                      )Total
      adjustments
                      
                      
                      (251,407
                      )
                      
                      
                      (41,837
                      )Net
      cash used in operating activities
                      
                      
                      259,980
                      
                      
                      
                      (30,877
                      )Cash
      flows from investing activities:Advance
      payments for purchase of equipment
                      
                      
                      (779,841
                      )
                      
                      
                      -Advance payments forpurchase of land use rights and building
                      
                      
                      
                      
                      
                      
                      (2,199,150
                      )Additions
      to property and equipment
                      
                      
                      (82,770
                      )
                      
                      
                      (127,626
                      )Proceeds
      form notes receivable
                      
                      
                      -
                      
                      
                      
                      7,500Net
      cash used in investing activities
                      
                      
                      (862,611
                      )
                      
                      
                      (2,319,276
                      )Cash
      flows from financing activities:Proceeds
      from (repayment of) short-term bank loans
                      
                      
                      44,370
                      
                      
                      
                      (777,033
                      )Contribution
      from minority shareholders
                      
                      
                      -
                      
                      
                      
                      293,220Net
      cash provided by (used in) financing activities
                      
                      
                      44,370
                      
                      
                      
                      (483,813
                      )Effect
      of foreign currency translation on cash
                      
                      
                      17,172
                      
                      
                      
                      3,451Net
      decrease in cash and cash equivalents  and restricted
      cash
                      
                      
                      (541,089
                      )
                      
                      
                      (2,830,515
                      )Cash
      and cash equivalents -beginning
                      
                      
                      1,495,597
                      
                      
                      
                      3,990,767Cash
      and cash equivalents -ending
                      
                      $
                      954,508
                      
                      
                      $
                      1,160,252





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


3


ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements


September
30, 2010 and 2009


(Unaudited)





ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements


September
30, 2010 and 2009


(Unaudited)




Note 1 – Organization and Nature
of Business





Zhongchai
Machinery, Inc. (“Zhongchai Machinery” or “the Company”) (Formerly “Equicap,
Inc.”), a Nevada corporation, is a manufacturer and distributor of gears and
gearboxes and drive axles, which are marketed and sold to equipment
manufacturers in China.





On July
6, 2007, the Board of Directors of Zhejiang Zhongchai Machinery Co., Ltd.
(“Zhejiang Zhongchai”), the China based and 75% owned subsidiary of the Company,
approved and finalized a Share Purchase Agreement (“Share Purchase Agreement”)
with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in
the People’s Republic of China. Pursuant to the Share Purchase Agreement,
Zhejiang Zhongchai purchased all the outstanding equity of Zhejiang Shengte
Transmission Co., Ltd. (“Shengte”) from Keyi, the sole owner of Shengte for
approximately $3.7 million





On March
7, 2007, the Company and Usunco Automotive, Ltd. (“Usunco”), a British Virgin
Islands company, entered into a Share Exchange Agreement (“Exchange Agreement”),
which was consummated on March 9, 2007. Under the terms of the Exchange
Agreement, the Company acquired all of the outstanding equity securities of
Usunco in exchange for 18,323,944 shares of the Company’s common
stock.





For
accounting purposes, because the Company had been a public shell company prior
to the share exchange, the share exchange was treated as a recapitalization of
the Company.  As such, the historical financial information prior to
the share exchange is that of Usunco and its subsidiaries. Historical share
amounts have been restated to reflect the effect of the share
exchange.





On June
18, 2006, Usunco acquired 100% of IBC Automotive Products Inc (“IBC”), a
California Corporation as of May 14, 2004 (date of inception), through a Share
Exchange Agreement of 28% of Usunco’s shares. IBC was considered a “predecessor”
business to Usunco as its operations constituted the business activities of
Usunco formed to consummate the acquisition of IBC.  The
consolidated financial statements reflect all predecessor statements of income
and cash flow activities from the inception of IBC in May 2004.





On June
15, 2009, IBC was sold to certain of the management persons of IBC in exchange
for the following: (i) the cancellation of an aggregate of 555,994 shares of
common stock of the Company which those individuals owned, and (ii) the payment
of $60,000 in installments pursuant to the terms of an unsecured promissory
note, the final payment of which will be November 15, 2010. As part of the
transaction, the Company cancelled $428,261 through the closing date, of
inter-company debt which funds had been used in the business of IBC prior to the
transaction.





On
September 22, 2009, Xinchang Xian Lisheng Machinery Co., Ltd. (“Lisheng”) was
incorporated by Zhejiang Zhongchai and two individual investors. Total
registered capital of Lisheng is RMB 5 million, of which Zhejiang Zhongchai
accounts for 60%. The Company plans to start production of die casting products
in 2010 for use in gearboxes, diesel engines and other machinery
products.





On
December 16, 2009, Zhongchai Machinery and its wholly owned subsidiaries, Usunco
and Zhongchai Holding (Hong Kong) Limited, a Hong Kong company (“Zhongchai
Holding”), took action to approve transfer of the shares of Zhejiang Zhongchai
Machinery Co., from Usunco to Zhongchai Holding. The transfer was completed on
December 23, 2009. The purpose of the transfer was to take advantage of the tax
treaty between the Peoples Republic of China and the Special Administrative
Region of Hong Kong which reduces the withholding tax rate of the PRC on
payments to entities outside of China. Usunco, which no longer had any assets
after transferring all of them to Zhongchai Holding was subsequently dissolved.
The consolidated financial statements will continue to account for Zhejiang
Zhongchai Machinery Co., in the same manner as Before
the transfer of the ownership. Shareholder approval by the shareholders of
Zhongchai Machinery was not required under Nevada law, as there was no sale of
all or substantially all the assets of the Company. The shareholder ownership
and shareholder rights of Zhongchai Machinery remain the same as before the
transaction.


4


ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements


September
30, 2010 and 2009


(Unaudited)


Note 1 – Organization and Nature
of Business (continued)




On April
26, 2010, Zhongchai Holding (Hong Kong) Limited (“Zhongchai Holding”), which
owned 75% of the equity in Zhejiang Zhongchai Machinery Co., Ltd. (“Zhejiang
Zhongchai”), executed a Share Purchase Agreement (“Share Purchase Agreement”)
with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in
the People’s Republic of China. Pursuant to the Share Purchase Agreement,
Zhongchai Holding purchased the residual 25% equity of Zhejiang Zhongchai
Machinery Co., Ltd. (“Zhejiang Zhongchai”) from Keyi at $2.6 million. The
agreement has been approved by the local government agency and a new business
license has been issued as Wholly Foreign Owned Enterprise.




Note 2 – Summary of Significant
Accounting Policies




Basis of Presentation





The
Company’s consolidated financial statements include the accounts of its
controlled subsidiaries. All intercompany balances and transactions are
eliminated in consolidation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles (“GAAP”) applicable to interim financial information and the
requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
disclosures required by accounting principles generally accepted in the United
States of America for complete financial statements. Interim results are not
necessarily indicative of results for a full year. In the opinion of management,
all adjustments considered necessary for a fair presentation of the
 financial position and the results of operations and cash flows for the
interim periods have been included.





In
preparing the accompanying unaudited consolidated financial statements, we
evaluated the period from September 30, 2010 through the date the financial
statements were issued, for material subsequent events requiring recognition or
disclosure. Events identified for this period is described in Note
18.





Interim Financial Statements





These
interim consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements for the years ended June 30,
2010 and 2009, as not all disclosures required by GAAP for annual consolidated
financial statements are presented. The interim consolidated financial
statements follow the same accounting policies and methods of computations as
the audited consolidated financial statements for the years ended June 30, 2010
and 2009.





Reclassification





Certain
amounts as of June 30, 2010 and September 30, 2009 were reclassified for
presentation purposes.


5


Note
3 – Accounts Receivable





Trade
accounts receivable are stated at original invoice amount less allowance for
doubtful receivables based on management’s periodic review of aging of
outstanding balances and customer credit history. If the financial condition of
the Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.





The
balance of allowance for doubtful accounts amounted to $46,039 and $37,670 as of
September 30, 2010 and June 30, 2010, respectively.





Note
4 – Inventory





Inventory
as of September 30, 2010 and June 30, 2010 consists of the
following:




September
      30, 2010
                    
                    
                    June
      30, 2010By
      TypeGears
      products
                    
                    $
                    1,642,581
                    
                    
                    $
                    1,372,326Gearbox
      products
                    
                    
                    1,133,949
                    
                    
                    
                    1,307,940Transaxles
      products
                    
                    
                    25,957
                    
                    
                    
                    -Other
                    
                    
                    406
                    
                    
                    
                    400Total
                    
                    $
                    2,802,893
                    
                    
                    $
                    2,680,666





September
      30, 2010
                    
                    
                    June
      30, 2010By
      Category:Raw
      materials
                    
                    $
                    982,216
                    
                    
                    $
                    896,273Work
      in process
                    
                    
                    502,716
                    
                    
                    
                    487,235Finished
      goods
                    
                    
                    1,317,961
                    
                    
                    
                    1,297,158Total
                    
                    $
                    2,802,893
                    
                    
                    $
                    2,680,666




Note
5 –Notes Receivable





Notes
receivable as of September 30, 2010 and June 30, 2010 consists of the
following:





September
      30, 2010
                    
                    
                    June
      30, 2010Notes
      receivable-trade
                    
                    $
                    438,456
                    
                    
                    $
                    440,965Notes
      receivable-other
                    
                    
                    22,500
                    
                    
                    
                    22,500Total
                    
                    $
                    460,956
                    
                    
                    $
                    463,465





Note
6 – Advance Payments





Advance
payments as of September 30, 2010 and June 30, 2010 consists of the
following:





September
      30, 2010
                    
                    
                    June
      30, 2010Inventory
                    
                    $
                    239,377
                    
                    
                    $
                    33,132Equipment
                    
                    
                    789,332
                    
                    
                    
                    -Land
      use rights and buildings
                    
                    
                    5,041,297
                    
                    
                    
                    4,960,475Total
                    
                    
                    6,070,006
                    
                    
                    
                    4,993,607Less:
      Current portion
                    
                    
                    239,377
                    
                    
                    
                    33,132Total
      non current portion
                    
                    $
                    5,830,629
                    
                    
                    $
                    4,960,475


6





Note
7 – Property and Equipment





Property
and equipment as of  September 30, 2010 and June 30, 2010 consists of
the following:





September
      30, 2010
                      
                      
                      June
      30, 2010Manufacturing
      equipment
                      
                      $
                      3,356,685
                      
                      
                      $
                      3,272,563Office
      equipment and furniture
                      
                      
                      55,722
                      
                      
                      
                      51,306Vehicles
                      
                      
                      124,968
                      
                      
                      
                      122,965Subtotal
                      
                      
                      3,537,375
                      
                      
                      
                      3,446,834Less:
      Accumulated depreciation
                      
                      
                      799,798
                      
                      
                      
                      702,8712,737,577
                      
                      
                      
                      2,743,963Add:
      Construction in progress
                      
                      
                      327,452
                      
                      
                      
                      273,606Total
                      
                      $
                      3,065,029
                      
                      
                      $
                      3,017,569





Depreciation
expense for the three months ended September 30, 2010 and 2009 was $84,451 and
$71,890, respectively.





Note
8 – Goodwill





The
following table provides information related to the carrying value of
goodwill:





Balance
      as of June 30, 2009
                      
                      $
                      3,407,262Goodwill
      acquired during the year
                      
                      
                      -Effect
      of foreign currency translation
                      
                      
                      18,606Impairment
                      
                      
                      -Balance
      as of June 30, 2010
                      
                      
                      3,425,868Goodwill
      acquired during the year
                      
                      
                      -Effect
      of foreign currency translation
                      
                      
                      55,819Impairment
                      
                      
                      -Balance
      as of September 30,
      2010
                      
                      $
                      3,481,687





Note
9 – Accounts Payable and Accrued Expenses





Accounts
payable and accrued expenses consist of the following:





September
      30, 2010
                    
                    
                    June
      30, 2010Accounts
      payable
                    
                    $
                    3,655,090
                    
                    
                    $
                    3,419,595Accrued
      expenses
                    
                    
                    67,684
                    
                    
                    
                    85,328Total
                    
                    $
                    3,722,774
                    
                    
                    $
                    3,504,923





The
carrying value of accounts payable and accrued expenses approximates their fair
value due to the short-term nature of these obligations.


7





Note
10 – Short Term Bank Loans





Short-term
bank loans consist of the following:





September
      30,
                                      
                                      
                                      June
      30,2010
                                      
                                      
                                      2010On
      June 10, 2010, the Company obtained a loan from Agricultural
      Bankof
      China, the principal of which was paid in pull by June 10, 2011.
      Theinterest  was
      calculated using an annual fixed interest rate of 5.31%
andpaid
      monthly. The loan was secured by a third party Zhejiang
      XinchaiCo.
      Ltd.
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,428,810On
      September 28, 2010, the Company obtained a loan from
      AgriculturalBank
      of China, the principal of which is due on September 20,
    2011.The
      interest is calculated using an annual fixed interest rate of
      5.31%and
      paid monthly. The loan is secured by a third party Zhejiang
      XinchaiCo.,
      Ltd.
                                      
                                      
                                      1,497,000
                                      
                                      
                                      
                                      -Total short-term bank
      loans
                                      
                                      $
                                      1,497,000
                                      
                                      
                                      $
                                      1,428,810





Note
11 – Other Current Liabilities





Other
current liabilities amounted to $3,556,299 and $3,322,277 as of September 30,
2010 and June 30, 2010, respectively, approximately $432,522 and $425,588 of
which represents the last payment due to Keyi from the Shengte acquisition in
July 2007 for both of the above mentioned periods, and approximately $2,600,000
was due to Keyi for the purchase of the residual 25% equity of Zhejiang
Zhongchai for both of the above mentioned periods.





Note
12 – Risk Factors





The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC as well as by the general
state of the PRC’s economy. The Company’s business may be influenced by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





Note
13 – Risk of Concentrations in Sales and Purchases





Two
customers, Lonking (Shanghai) Forklift Co., Ltd. and Zhejiang Xinchai Co., Ltd.,
accounted for 64% and 76% of the Company’s sales for the three months ended
September 30, 2010 and 2009, respectively.





One major
supplier, Zhejiang Yuyang Machinery Co. Ltd. accounted for approximately 20% and
28% of the Company’s total purchases for the three months ended September 30,
2010 and 2009, respectively.


.


Note
14 – Supplemental Disclosure of Cash Flow Information





For the Three Months Ended September
      30,2010
                    
                    
                    2009Cash
      paid for interest
                    
                    $
                    19,468
                    
                    
                    $
                    24,774Cash
      paid for income taxes
                    
                    $
                    117,367
                    
                    
                    $
                    42,642


8





Note
15 – Earnings (Loss) Per Share





The
Company presents earnings (loss) per share on a basic and diluted basis. Basic
earnings (loss) per share have been computed by dividing net earnings by the
weighted average number of shares outstanding. Diluted earnings (loss) per share
has been computed by dividing net earnings by the weighted average number of
shares outstanding including the dilutive effect of equity securities.. The
weighted average number of shares calculated for Diluted EPS excludes the
potential common stock that would be exercised under the options granted to
employees and warrants granted to agents because of their anti-dilutive
effect.





Three
      Months Ended September 30,2010
                                            
                                            
                                            2009Net income (loss)
      attributable to Zhongchai Machinery,
      Inc.
                                            
                                            $
                                            511,210
                                            
                                            
                                            $
                                            (28,355
                                            )Weighted average
      common shares (denominator
      for basic loss per share)
                                            
                                            
                                            27,613,019
                                            
                                            
                                            
                                            27,613,019Effect
      of dilutive securities:
                                            
                                            
                                            270,314
                                            
                                            
                                            
                                            -Weighted average
      common shares(denominator for diluted loss per
    share)
                                            
                                            
                                            27,883,333
                                            
                                            
                                            
                                            27,613,019Basic
      net income (loss) per share
                                            
                                            $
                                            0.02
                                            
                                            
                                            $
                                            (0.00
                                            )Diluted
      net income (loss) per share
                                            
                                            $
                                            0.02
                                            
                                            
                                            $
                                            (0.00
                                            )





Note
16 – Share-Based Payments





On July
7, 2010, the Company issued 1,300,000 options to its employees that shall vest
over three years with a life of five years. The grant date fair value was
$0.003729 based on the following assumptions: volatility of 10%, risk free
interest rate of 1.76%, dividend yield of 0%, and expected life of 5 years. No
estimate of forfeitures was made as the Company has a short history of granting
options. For the three months ended September 30, 2010, the Company
recorded approximately $2,353 of stock-based compensation
cost.





The fair
value of the options was determined based on the number of shares granted and
the quoted price of the Company’s common stock on the grant. The fair value of
stock-based compensation was determined using the Black-Scholes
model.





Note
17 – Stock Authorization and Issuance





On March
9, 2007, the Company completed the sale of an aggregate of 8,450,704 shares of
its common stock to a limited number of institutional investors in a private
placement transaction pursuant to offering exemptions under the Securities Act
of 1933.  The shares, which represented approximately 30% of the
outstanding common stock on an after-issued basis, were sold at a price of $1.42
per share, for net proceeds of approximately $10 million.





Note 18 –
Subsequent Events




On
October 1, 2010, the company entered into a consulting agreement with Mr. Larry
Chin. Pursuant to the agreement, in exchange for the consulting service provided
by Mr. Chin, upon the approval of the Board of Directors and the closing of
recent fund raising, the Company will grant incentive stock purchase options to
Mr. Chin to purchase 300,000 shares of the company’s common stock at an exercise
price of $0.50 per share. These options shall vest over thirty-six months with a
life of five years.





9





Item
2   Management’s Discussion and Analysis of Financial Condition
and Results of Operations or Plan of Operations.




Zhongchai
Machinery, Inc. (“Zhongchai”), a Nevada corporation, does business through its
subsidiary, Zhongchai Holding (Hong Kong) Limited, a Hong Kong company
(“Zhongchai Holding”), which in turn operates through Zhejiang ZhongChai
Machinery Co., Ltd. (the “Zhongchai China”), a wholly owned established under
the laws of the People’s Republic of China (the “PRC” or “China”), Zhejiang
Shengte Transmission Co., Ltd. (“Shengte”) a company established under the laws
of the PRC and wholly owned by Zhongchai China, and Xinchang Xian Lisheng
Machinery Co., Ltd. (“Lisheng”), a company established under the laws of the PRC
and 60% owned by Zhongchai China.  Through its operating subsidiaries,
Zhongchai is currently engaged in the manufacturing and sale of drivetrain
products, such as gears, transmission gearboxes, and drive axels in
China.




Results
of Operations




Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009




Sales




Sales
increased by $2,035,139 or 104% to $3,983,545 for the three months ended
September 30, 2010 compared to $1,948,406 for the three months ended
September 30, 2009. Sales for the three months ended September 30, 2010
consisted mainly the sales of gears and transmission gearboxes in China.
The increase in gear and transmission gearbox sales was attributable to the
continued increasing of the Company’s production capabilities, increase sales
and an increased share of the market due to the recognition of the Company and
its products.




Cost
of Sales and Gross Profit Margin




Cost of
sales was $2,972,551 for the three months ended September 30, 2010, increasing
by $1,429,377, or 93%, from $1,543,174 for the three months ended September
30, 2009. The gross profit margin was approximately 25% for the three months
ended September 30, 2010, compared to approximately 21% for the three months
ended September 30, 2009. The increase in gross profit margin in this
quarter as compared to the same period in the prior fiscal year was attributable
mainly to the decrease in transmission gearbox unit cost and therefore the
increase in transmission gearbox margin after the expansion in transmission
gearbox production capacity and sales.




Selling,
General and Administrative Expenses




Selling,
general and administrative (“SG&A”) expenses consisted primarily of labor
costs and overhead costs for sales, marketing, finance, legal, human resources
and general management. Such costs also include the expenses recognized for
stock-based compensation pursuant to SFAS 123R (ASC 718).




SG&A
expenses increased by $204 to $344,444 in the three months ended September
30, 2010, from $344,240 in three months ended September 30, 2009. The increase
of SG&A was minimal. Even though the sales have increased 104%, SG&A
expenses are almost remained the same compared to the amount at September 30,
2009. There were no significant cost increases in administration, sales, and
professional services.




Net
Income (Loss)




Net
income was $511,210 in three months ended September 30, 2010, compared to a net
loss of $28,355 in the three months ended September 30, 2009. The increase
of net income in the quarter is mainly attributable to increased sales and gross
profit.




Accounts
Receivable




Accounts
receivable were $3,804,123 after reduction of $46,039 for doubtful accounts at
September 30, 2010, compared to accounts receivable of $3,618,030 after
reduction of $37,670 for doubtful accounts at June 30, 2010. The increase in the
amount of accounts receivable is mainly attributable to the increased sales of
the Company during the period reported upon. The payment term for sold products
usually is 60-90 days, and, to date, the Company’s experience is that the
accounts receivable are within the payment terms.




Note
Receivable




Notes
receivable were $460,956 at September 30, 2010, compared to $463,465 at June 30,
2010. The change in the amount was minimal. Of the total amount, $22,500 was an
unpaid balance on promissory notes due from two individuals, and $438,456 was
from product sales to customers using bank accepted forward drafts.




10




Foreign
Currency Translation




All
foreign currency assets and liabilities are translated at the period-end
exchange rate and all revenues and expenses are translated at the average
exchange rate for the period. The effects of translating the financial
statements of foreign subsidiaries into U.S. Dollars are reported as a
cumulative translation adjustment, a separate component of comprehensive income
in stockholder's equity. As the exchange rate between CNY to USD is
significantly increasing during the three months ended September 30, 2010, the
company recorded a comprehensive income $229,804.




Liquidity
and Capital Resources




As of
September 30, 2010, Zhongchai had current assets equal to $8,714,043, current
liabilities equal to $9,455,517 and working capital shortage is about $741,474.
Zhongchai believes that it shall have sufficient operating capital for its
current operations by increasing current bank loans. Zhongchai believes that it
shall have sufficient bank credit to increase current loan level.




Operating
Activities




Net cash
provided by operating activities was approximately $0.26 million for the three
months ended September 30, 2010, as compared to $0.03 million net cash used in
operating activities for the same period in the prior fiscal year. The change
was because the increase of $0.14 million in notes receivable-trade, and $0.23
million in other current liabilities during the three-month period.




Investing
Activities




Net cash
used in investing activities was $0.86 million for the three-month period ended
September 30, 2010, decreased from $2.32 million for the same period in fiscal
year 2009. The decrease was mainly due to $2.2 million advance payment made
during the last three-month period ended September 30, 2009. The advance payment
was made by the Zhongchai China to Xinchai Holdings, for the purchase of land
use rights and building for Zhongchai China’s future expansion of its production
capabilities.




Financing
Activities




Net cash
provided by financing activities was $44,370 for the three-month period ended
September 30, 2010, which was an additional loan from a bank which has a annual
fixed interest rate of 5.31%, and the loan is due on September 20, 2011. With
this additional loan, the total outstanding loan from the bank is
$1,497,000.




Other
Current Liabilities




On
September 30, 2010, the other current liabilities are $3,556,299, which consists
of $2,600,000 due to Keyi for the purchase of the residual 25% equity of
Zhejiang Zhongchai and $432,522 due to Keyi from the Shengte acquisition in July
2007, There are no any interest charges and penalties due related to these
liabilities. The payment of $2,600,000 is due on December 31, 2010. The other
current liabilities of $523,777 are as follows:




Professional
      Fees
                          
                          $
                          123,240Accrued
      Consulting Fees
                          
                          $
                          97,443Tax
      Payment
                          
                          $
                          82,690Pre-allocated
      Warranty Expenses
                          
                          $
                          74,850Pension
      Payment
                          
                          $
                          3,487Employee
      Rent Withhold
                          
                          $
                          2,974Rent
      Payment
                          
                          $
                          27,440Working
      Meal Payment
                          
                          $
                          825Working
      Cloth Deposit
                          
                          $
                          1,916Other
      Trade Related Payments
                          
                          $
                          108,912Total
                          
                          $
                          523,777




As
Zhongchai expands its operations and considers additional acquisitions of
private companies and divisions or product lines, it may require additional
capital for its business development and operations.  Zhongchai does
not have any specific sources of capital at this time; therefore, it would need
to find additional funding for its capitalization needs.  Such capital
may be in the form of either debt or equity or a combination.  To the
extent that financing is in the form of debt, it is anticipated that the terms
will include various restrictive covenants, affirmative covenants and credit
enhancements such as guarantees or security interests.  The terms of
any proposed financing may not be acceptable to Zhongchai.  There is
no assurance that funding will be identified or accepted by Zhongchai or, that
if offered, it will be concluded.


11





Off-Balance
Sheet Arrangements




The
Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
“special purpose entities” (SPEs).




Critical
Accounting Policies and Estimates




Please
refer to “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” in our Annual Report on Form 10-K for the year ended
June 30, 2010, for disclosures regarding Zhongchai Machinery, Inc.’s critical
accounting policies and estimates.  The interim financial statements
follow the same accounting policies and methods of computations as those for the
year ended June 30, 2009.  There were no new accounting policies and
estimates during the period ended September 30, 2010 which affects the
Company.




Item
3. Quantitative and Qualitative Disclosures about Market Risk




Not
applicable.




Item
4.  Controls and Procedures.




As of the
end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on
this evaluation, the Chief Executive Officer and Acting Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. There was no change in the Company’s internal
control over financial reporting during the Company’s most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.




PART II — OTHER
INFORMATION




Item
5.   Exhibits.




Exhibit
              
              Description*31.1
              
              Certificate
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Peter
      Wang*32.1
              
              Certificate
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Peter
      Wang




* Filed
herewith


12


SIGNATURES





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




ZHONGCHAI
      MACHINERY, INC.By:
                    /s/ Peter WangName:
      Peter WangTitle:   President
      & Acting Chief Financial
Officer




Date:
November 15,
2010


13