U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q







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





For the quarterly period ended December
31, 2010





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





For
the transition period from _____ to _____





Commission
file number: 000-31091





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  x No o





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 o   No
o




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 o   Accelerated
Filer o   Non
accelerated filer o 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 o 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 December 31, 2010.










ZHONGCHAI
MACHINERY, INC.





-
INDEX -





PageNo.PART
      I
              
              FINANCIAL
      INFORMATIONItem
      1
              
              Financial
      Statements
              
              4Unaudited
      Consolidated Balance Sheet as of December 31, 2010 and June
      30, 2010
              
              4Unaudited
      Consolidated Statements of Operations and Comprehensive Income for the
      three and six months ended December 31, 2010 and
      2009
              
              5Unaudited
      Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and
      2009
              
              6Notes
      to Consolidated Financial Statements
              
              7Item
      2
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              13Item
      3
              
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              16Item
      4
              
              Controls
      and Procedures
              
              16PART
      II
              
              OTHER
      INFORMATIONItem
      5
              
              Exhibits
              
              16Signatures
              
              
              
              17


2


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.


3





PART I – FINANCIAL
INFORMATION




Item
1.  Financial Statements.




ZHONGCHAI
MACHINERY, INC.





Consolidated
Balance Sheets


(Unaudited)


December 31,
                    
                    
                    June 30,2010
                    
                    
                    2010(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    3,929,108
                    
                    
                    $
                    1,495,597Restricted
      cash
                    
                    
                    1,364,086
                    
                    
                    
                    90,810Accounts
      receivable, net of allowance for doubtful accounts of $46,039 and $37,670
      at September 30, 2010 and June 30, 2010, respectively
                    
                    
                    2,751,677
                    
                    
                    
                    3,618,030Inventories
                    
                    
                    3,676,790
                    
                    
                    
                    2,680,666Notes
      receivable
                    
                    
                    3,772,549
                    
                    
                    
                    463,465Advance
      payments
                    
                    
                    563,863
                    
                    
                    
                    33,132Other
      current assets
                    
                    
                    346,540
                    
                    
                    
                    110,131Total
      current assets
                    
                    
                    16,404,613
                    
                    
                    
                    8,491,831Property
      and equipment, net
                    
                    
                    4,009,375
                    
                    
                    
                    3,017,569Goodwill
                    
                    
                    3,528,202
                    
                    
                    
                    3,425,868Advance
      payments – non current portion
                    
                    
                    4,103,810
                    
                    
                    
                    4,960,475Other
    assets
                    
                    
                    0
                    
                    
                    
                    451Total
      assets
                    
                    $
                    28,046,000
                    
                    
                    $
                    19,896,194LiabilitiesCurrent
      liabilities:Accounts
      payable and accrued expenses
                    
                    $
                    4,545,354
                    
                    
                    $
                    3,504,923Trade
      notes payable
                    
                    
                    3,331,067
                    
                    
                    
                    142,365Short-term
      bank loans
                    
                    
                    5,876,710
                    
                    
                    
                    1,428,810Taxes
      payable
                    
                    
                    248,842
                    
                    
                    
                    224,108Dividend
      payable
                    
                    
                    387,425
                    
                    
                    
                    381,201Other
      current liabilities
                    
                    
                    1,269,054
                    
                    
                    
                    3,322,277Total
      current liabilities
                    
                    
                    15,658,452
                    
                    
                    
                    9,003,684Total
      liabilities
                    
                    
                    15,658,452
                    
                    
                    
                    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
                    
                    
                    16,487,486
                    
                    
                    
                    16,484,097Statutory
      reserves
                    
                    
                    315,152
                    
                    
                    
                    315,152Accumulated
      deficit
                    
                    
                    (6,487,773
                    )
                    
                    
                    (7,558,542
                    )Accumulated
      other comprehensive income
                    
                    
                    1,782,301
                    
                    
                    
                    1,361,646Total
      stockholders’ equity
                    
                    
                    12,091,659
                    
                    
                    
                    10,596,846Noncontrolling
      interest
                    
                    
                    295,889
                    
                    
                    
                    295,664Total
      equity
                    
                    
                    12,387,548
                    
                    
                    
                    10,892,510Total
      liabilities and equity
                    
                    $
                    28,046,000
                    
                    
                    $
                    19,896,194





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


4


ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Operations and Comprehensive Income (Loss)


(Unaudited)





For the Three Months Ended
                
                
                For the Six Months EndedDecember 31,
                
                
                December 31,2010
                
                
                2009
                
                
                2010
                
                
                2009Sales
                
                $
                4,750,859
                
                
                $
                1,889,823
                
                
                $
                8,734,404
                
                
                $
                3,838,229Cost
      of sales
                
                
                3,497,710
                
                
                
                1,483,353
                
                
                
                6,470,261
                
                
                
                3,026,527Gross
      profit
                
                
                1,253,149
                
                
                
                406,470
                
                
                
                2,264,143
                
                
                
                811,702Operating
      expensesSelling,
      general and administrative
                
                
                604,411
                
                
                
                287,950
                
                
                
                948,855
                
                
                
                632,190Income
      from operations
                
                
                648,738
                
                
                
                118,520
                
                
                
                1,315,288
                
                
                
                179,512Other
      income (expenses):Interest
      income (expenses), net
                
                
                (186,783
                )
                
                
                (15,502
                )
                
                
                (202,738
                )
                
                
                (34,269
                )Other
      income, net
                
                
                108,247
                
                
                
                36,069
                
                
                
                143,099
                
                
                
                40,309Total
      other income
                
                
                (78,536
                )
                
                
                20,567
                
                
                
                (59,639
                )
                
                
                6,040Income
      (loss) before provision for income taxes
                
                
                570,202
                
                
                
                139,087
                
                
                
                1,255,649
                
                
                
                185,552Provision
      for income taxes
                
                
                10,595
                
                
                
                31,588
                
                
                
                184,655
                
                
                
                67,093Net
      income
                
                
                559,607
                
                
                
                107,499
                
                
                
                1,070,994
                
                
                
                118,459Less:
      Noncontrolling interest
                
                
                48
                
                
                
                61,167
                
                
                
                225
                
                
                
                100,482Net
      income attributable to Zhongchai Machinery, Inc.
                
                
                559,559
                
                
                
                46,332
                
                
                
                1,070,769
                
                
                
                17,977Other
      comprehensive incomeForeign
      currency translation adjustment
                
                
                190,851
                
                
                
                56
                
                
                
                420,655
                
                
                
                16,918Comprehensive
      income (loss)
                
                $
                750,410
                
                
                $
                46,388
                
                
                $
                1,491,424
                
                
                $
                34,895Loss
      per common share:Basic
                
                $
                0.02
                
                
                $
                0.00
                
                
                $
                0.04
                
                
                $
                0.00Diluted
                
                $
                0.02
                
                
                $
                0.00
                
                
                $
                0.04
                
                
                $
                0.00Weighted
      average number of common shares outstanding:Basic
                
                
                27,613,019
                
                
                
                27,613,019
                
                
                
                27,613,019
                
                
                
                27,613,019Diluted
                
                
                27,947,203
                
                
                
                27,613,019
                
                
                
                27,899,037
                
                
                
                27,613,019





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


5


ZHONGCHAI
MACHINERY, INC.




Consolidated
Statements of Cash Flows


(Unaudited)





For the Six Months EndedDecember 31,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                1,070,769
                
                
                $
                17,977Adjustments
      to reconcile net income to net cash Provided by (used in) operating
      activities:Noncontrolling
      interest
                
                
                225
                
                
                
                100,482Depreciation
      and amortization
                
                
                175,447
                
                
                
                148,156Loss
      on disposal of fixed assets
                
                
                
                
                
                
                4,846Provision
      for bad debts
                
                
                (21,317
                )
                
                
                1,604Share-based
      payments
                
                
                3,389
                
                
                
                54,395Changes
      in assets and liabilities:Restricted
      cash
                
                
                (1,259,843
                )
                
                
                172,118Accounts
      receivable
                
                
                987,522
                
                
                
                (86,738
                )Inventory
                
                
                (908,321
                )
                
                
                (597,283
                )Notes
      receivable-trade
                
                
                (3,290,413
                )
                
                
                13,573Advance
      payments
                
                
                (134,179
                )
                
                
                (8,804
                )Other
      assets
                
                
                (232,760
                )
                
                
                (474,263
                )Accounts
      payable and accrued expenses
                
                
                929,980
                
                
                
                641,186Trade
      notes payable
                
                
                3,157,579
                
                
                
                (172,478
                )Taxes
      payable
                
                
                17,887
                
                
                
                (48,124
                )Other
      current liabilities
                
                
                (2,223,703
                )
                
                
                93,208Total
      adjustments
                
                
                (2,798,507
                )
                
                
                (158,122
                )Net
      cash used in operating activities
                
                
                (1,727,738
                )
                
                
                (140,145
                )Cash
      flows from investing activities:Advance
      payments for purchase of equipment
                
                
                (1,726,242
                )
                
                
                (49,858
                )Advance
      payments for purchase of land use rights and building
                
                
                2,331,510
                
                
                
                (2,199,600
                )Additions
      to property and equipment
                
                
                (1,069,057
                )
                
                
                (311,472
                )Proceeds
      from notes receivable
                
                
                22,500
                
                
                
                10,000Net
      cash used in investing activities
                
                
                (441,289
                )
                
                
                (2,550,930
                )Cash
      flows from financing activities:Proceeds
      from (repayment for) short-term bank loans
                
                
                4,541,176
                
                
                
                (777,192
                )Contribution
      from minority shareholders
                
                
                -
                
                
                
                293,280Net
      cash Provided by (used in) financing activities
                
                
                4,541,176
                
                
                
                (483,912
                )Effect
      of foreign currency translation on cash
                
                
                61,362
                
                
                
                4,219Net
      decrease in cash and cash equivalents and restricted cash
                
                
                2,433,511
                
                
                
                (3,170,768
                )Cash and cash equivalentsand restricted
      cash–beginning
                
                
                1,495,597
                
                
                
                3,990,767Cash and cash equivalentsand restricted
      cash–ending
                
                $
                3,929,108
                
                
                $
                819,999





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


6


ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements


(Unaudited)





ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements


December
31, 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 that 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.


7


ZHONGCHAI
MACHINERY, INC.


Notes
to Consolidated Financial Statements


(Unaudited)





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 December 31, 2010 through the date
the financial statements were issued, for material subsequent events
requiring
recognition or disclosure. No such events were identified for this
period.





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 December 31, 2010 were reclassified for
presentation purposes.


8




ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


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 $17,297 and $37,670 as of
December 31, 2010 and June 30, 2010, respectively.





Note
4 – Inventory





Inventory
as of December 31, 2010 and June 30, 2010 consists of the
following:


:




December 31, 2010
                        
                        
                        June 30, 2010By
      TypeGears
      products
                        
                        $
                        1,991,372
                        
                        
                        $
                        1,372,326Gearbox
      products
                        
                        
                        1,657,053
                        
                        
                        
                        1,307,940Transaxles
      products
                        
                        
                        28,365
                        
                        
                        
                        -Other
                        
                        
                        -
                        
                        
                        
                        400Total
                        
                        $
                        3,676,790
                        
                        
                        $
                        2,680,666December 31, 2010
                        
                        
                        June 30, 2010By
      Category:Raw
      materials
                        
                        $
                        1,524,723
                        
                        
                        $
                        896,273Work
      in process
                        
                        
                        518,908
                        
                        
                        
                        487,235Finished
      goods
                        
                        
                        1,633,159
                        
                        
                        
                        1,297,158Total
                        
                        $
                        3,676,790
                        
                        
                        $
                        2,680,666




Note
5 –Notes Receivable





Notes
receivable as of December 31, 2010 and June 30, 2010 consists of the
following:





December 31,2010
                    
                    
                    June 30, 2010Notes
      receivable-trade
                    
                    $
                    3,772,549
                    
                    
                    $
                    440,965Notes
      receivable-other
                    
                    
                    -
                    
                    
                    
                    22,500Total
                    
                    $
                    3,772,549
                    
                    
                    $
                    463,465





Note
6 – Advance Payments





Advance
payments as of December 31, 2010 and June 30, 2010 consists of the
following:





December 31,2010
                    
                    
                    June 30, 2010Inventory
                    
                    $
                    563,863
                    
                    
                    $
                    33,132Equipment
                    
                    
                    1,740,931
                    
                    
                    
                    -Land
      use rights and buildings
                    
                    
                    2,362,879
                    
                    
                    
                    4,960,475Total
                    
                    
                    4,667,673
                    
                    
                    
                    4,993,607Less:
      Current portion
                    
                    
                    563,863
                    
                    
                    
                    33,132Total
      non current portion
                    
                    $
                    4,103,810
                    
                    
                    $
                    4,960,475


9




ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


Note
7 – Property and Equipment





Property
and equipment as of December 31, 2010 and June 30, 2010 consists of
the following:





December 31,
                    
                    
                    June 30,2010
                    
                    
                    2010Manufacturing
      equipment
                    
                    $
                    3,792,439
                    
                    
                    $
                    3,272,563Office
      equipment and furniture
                    
                    
                    56,978
                    
                    
                    
                    51,306Vehicles
                    
                    
                    126,638
                    
                    
                    
                    122,965Subtotal
                    
                    
                    3,976,055
                    
                    
                    
                    3,446,834Less:
      Accumulated depreciation
                    
                    
                    900,337
                    
                    
                    
                    702,8713,075,718
                    
                    
                    
                    2,743,963Add:
      Construction in progress
                    
                    
                    933,657
                    
                    
                    
                    273,606Total
                    
                    $
                    4,009,375
                    
                    
                    $
                    3,017,569





Depreciation
expense for the three months ended December 31, 2010 and 2009 was $90,536 and $75,728,
and for the six months ended December 31,
2010 and
2009 was
$174,987 and
$147,618, 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
                    
                    
                    102,334Impairment
                    
                    
                    -Balance
      as of December
      31,
      2010
                    
                    $
                    3,528,202





Note
9 – Accounts Payable and Accrued Expenses





Accounts
payable and accrued expenses consist of the following:





December 31, 2010
                    
                    
                    June 30, 2010Accounts
      payable
                    
                    $
                    4,456,282
                    
                    
                    $
                    3,419,595Accrued
      expenses
                    
                    
                    89,072
                    
                    
                    
                    85,328Total
                    
                    $
                    4,545,354
                    
                    
                    $
                    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.


10




ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)
  Note
10 – Short-Term Bank Loans





Short-term
bank loans consist of the following:





December 31,
                  
                  
                  June 30,2010
                  
                  
                  2010On
      June 10, 2010, the Company obtained a loan from Agricultural
      Bank  of China, the principal of which was paid in pull by June
      10, 2011. The  interest  was calculated using an
      annual fixed interest rate of 5.31% and  paid monthly. The loan
      was secured by a third party.
                  
                  $
                  -
                  
                  
                  $
                  1,428,810On
      September 28, 2010, the Company obtained a loan from
      Agricultural  Bank 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 Xinchai Co., Ltd.
                  
                  
                  1,517,000
                  
                  
                  
                  -On
      November 9, 2010, the Company obtained a loan from Agricultural Bank of
      China, the principal of which is due on November 7, 2011.The interest is
      calculated using an annual fixed interest rate of 5.56% and paid monthly.
      The loan is secured by a third party, Zhejiang Xinchai Co.,
      Ltd..
                  
                  
                  303,400
                  
                  
                  
                  -On
      December 2, 2010, the Company obtained a loan from Agricultural Bank of
      China, the principal of which is due on November 28, 2011.The interest is
      calculated using an annual fixed interest rate of 5.56% and paid monthly.
      The loan is secured by a third party, Zhejiang Xinchai Co.,
      Ltd..
                  
                  
                  1,365,300
                  
                  
                  
                  -On
      December 29, 2010, the Company obtained a loan from
      Standard  Chartered Bank (Hong Kong) Limited, the interest is
      calculated using an  annual fixed interest rate of 1.98%. The
      principal and interest is due on December 20,2011.The interest is $
      53,701
                  
                  
                  2,691,010
                  
                  
                  
                  -Total
      short-term bank loans
                  
                  $
                  5,876,710
                  
                  
                  $
                  1,428,810





Note
11 – Other Current Liabilities





Other
current liabilities are $1,269,054 and $3,322,277 as of December 31, 2010 and
June 30, 2010, respectively, approximately $438,301 and $425,588 of which
represents the last payment due to Keyi for Shengte acquisition in July 2007 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 34% and 27%, respectively, of the Company’s sales for the three
months ended December 31, 2010. The same two customers accounted for 36% and
27%, respectively, of the Company’s sales for the six months ended December 31,
2010.


11




ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


One major
supplier, Zhejiang Yuyang Machinery Co. Ltd. accounted for approximately 15% and
17% of the Company’s total purchases for the three months ended December 31,
2010 and six months ended December 31,2010, respectively.





Note
14 – Supplemental Disclosure of Cash Flow Information





For the Six Months Ended December 31,2010
                  
                  
                  2009Cash
      paid for interest
                  
                  $
                  208,051
                  
                  
                  $
                  43,871Cash
      paid for income taxes
                  
                  $
                  119,818
                  
                  
                  $
                  78,163





Note
15 – Earnings Per Share





The
Company presents earnings per share on a basic and diluted basis. Basic earnings
per share have been computed by dividing net earnings by the weighted average
number of shares outstanding. Diluted earnings 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 December 31,2010
                  
                  
                  2009Net
      income (loss) attributable to Zhongchai Machinery, Inc.
                  
                  $
                  559,559
                  
                  
                  $
                  46,332Weighted
      average common shares (denominator for basic loss per
    share)
                  
                  
                  27,613,019
                  
                  
                  
                  27,613,019Effect
      of dilutive securities:
                  
                  
                  334,184
                  
                  
                  
                  -Weighted
      average common shares (denominator for diluted loss per
    share)
                  
                  
                  27,947,203
                  
                  
                  
                  27,613,019Basic
      net income (loss) per share
                  
                  $
                  0.02
                  
                  
                  $
                  (0.00
                  )Diluted
      net income (loss) per share
                  
                  $
                  0.02
                  
                  
                  $
                  (0.00
                  )





Six Months Ended December 31,2010
                  
                  
                  2009Net
      income (loss)
                  
                  $
                  1,070,769
                  
                  
                  $
                  17,977Weighted
      average common shares (denominator for basic loss per
    share)
                  
                  
                  27,613,019
                  
                  
                  
                  27,613,019Effect
      of dilutive securities:
                  
                  
                  286,018
                  
                  
                  
                  -Weighted
      average common shares (denominator for diluted loss per
    share)
                  
                  
                  27,899,037
                  
                  
                  
                  27,613,019Basic
      net income (loss) per share
                  
                  $
                  0.04
                  
                  
                  $
                  0.00Diluted
      net income (loss) per share
                  
                  $
                  0.04
                  
                  
                  $
                  0.00


12




ZHONGCHAI
MACHINERY, INC.
 Notes
to Consolidated Financial Statements
 (Unaudited)


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. On
November 1, 2010, the Company issued 8,333 options to its consultant, Mr. Larry
Chin with a life of five years and strike price of $0.50. The grant date fair
value was $0.070585 based on the following assumptions: volatility of 12.81%,
risk free interest rate of 1.17%, 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 six months ended December 31, 2010, the Company
recorded approximately $3,389 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.




13





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 subsidiary
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 wholly and partially owned 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 December 31, 2010 Compared to Three Months Ended December 31,
2009




Sales




Sales
increased by $2,861,036 or 151% to $4,750,859 for the three months ended
December 31, 2010 compared to $1,889,823 for the three months ended
December 31, 2009. Sales for the three months ended December 31, 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 $3,497,710 for the three months ended December 31, 2010, increasing by
$2,014,357, or 136%, from $1,483,353 for the three months ended December
31, 2009. The gross profit margin was approximately 26% for the three months
ended December 31, 2010, compared to approximately 22% for the three months
ended December 31, 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 $316,461 to $604,411 in the three months ended
December 31, 2010, from $287,950 in three months ended December 31, 2009. As the
sales increased significantly, the company spent more resources in
administration, sales, and professional services.


14




Net
Income (Loss)




Net
income was $559,559 in three months ended December 31, 2010, compared to a net
income of $46,332 in the three months ended December 31, 2009. The increase
of net income in the quarter is mainly attributable to increased sales and gross
profit.




Six  Months
Ended December 31, 2010 Compared to Six  Months Ended December 31,
2009




Sales




Sales
increased by $4,896,175 or 128% to $8,734,404 for the six months ended
December 31, 2010 compared to $3,838,229 for the six months ended
December 31, 2009. Sales for the six months ended December 31, 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 $6,470,261 for the six months ended December 31, 2010, increasing by
$3,443,734, or 114%, from $3,026,527 for the six months ended December 31,
2009. The gross profit margin was approximately 26% for the six months ended
December 31, 2010, compared to approximately 21% for the six months ended
December 31, 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 $316,665 to $948,855 in the six months ended December
31, 2010, from $632,190 in six months ended December 31, 2009. As the sales
increased significantly, the company spent more resources in administration,
sales, and professional services.




Net
Income (Loss)




Net
income was $1,070,769 in six months ended December 31, 2010, compared to a net
income of $17,977 in the six months ended December 31, 2009. The increase
of net income for the period is mainly attributable to increased sales and gross
profit.




Accounts
Receivable




Accounts
receivable were $2,751,677 after a reduction of $17,297 for doubtful accounts at
December 31, 2010, compared to accounts receivable of $3,618,030 after a
reduction of $37,670 for doubtful accounts at June 30, 2010. The decrease in the
amount of accounts receivable is mainly attributable to the Company enforcing a
strict payment policy on its customers. 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 $3,772,549 at December 31, 2010, compared to $463,465 at June
30, 2010. All the current note receivables are from the trade accounts. Many of
the principal customers of the Company use bank accepted forward drafts to pay
for their purchases. As the sales increased during the reported period, the
amount of bank accepted forward drafts also increased somewhat in line with the
sales increase.




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 increased during the six months ended December 31, 2010,
the Company recorded a comprehensive income $420,655.


15




Liquidity
and Capital Resources




As of
December 31, 2010, Zhongchai had current assets equal to $16,404,613, current
liabilities equal to $15,658,452 and working capital of $746,161. Zhongchai
believes that if there is no sufficient operating capital for its current
operations, it will seek an increase in its credit available under current bank
loans.




Operating
Activities




Net cash
used in operating activities was approximately $1.7 million for the six months
ended December 31, 2010, as compared to $0.31 million net cash used in operating
activities for the same period in the prior fiscal year. The change was due to
the increase of $3.3 million in trade related notes receivables, and $2.3
million in other current liabilities during the six-month period.




Investing
Activities




Net cash
used in investing activities was $0.44 million for the six-month period ended
December 31, 2010, a decrease from $2.11 million for the same period in fiscal
year 2009. The decrease was mainly due to the $2.3 million advance payment
being returned to the Company in December 2010. The advance payment was
originally made by the Zhongchai China to Xinchai Holdings in 2009, for the
purchase of land use rights and building for Zhongchai China’s future expansion
of its production capabilities. Because there were several legal issues
regarding the transferring of title of ownership, the deposit was returned;
however, the Company believes that the issues shall be solved in the future and
the Company will pursue title ownership.




Financing
Activities




Net cash
provided by financing activities was $4.5 million for the six-month period ended
December 31, 2010, which consisted of the following:  a loan from a
bank with an annual fixed interest rate of 5.31% which is due on September 20,
2011; a loan from a bank with an annual fixed interest rate of 5.56% which is
due on November 7, 2011; a loan from a bank with an annual fixed interest rate
of 5.56% which is due on November 28, 2011; and a loan from a bank with an
annual fixed interest rate of 1.98% which is due on December 20, 2011. These
loans aggregated a total outstanding loan from a bank in principal amount of
$5,876,710.




Other
Current Liabilities




On
December 31, 2010, the other current liabilities of the Company were $1,269,054,
which included $438,301 due to Keyi from the Shengte acquisition in July 2007,
there is no any interest charge or penalty due in respect of this
liability. The remaining other current liabilities of $830,753 are as
follows:




Professional
      Fees
                  
                  $
                  124,820Accrued
      Consulting Fees
                  
                  $
                  171,950Tax
      Payment
                  
                  $
                  83,794Pre-allocated
      Warranty Expenses
                  
                  $
                  151,700Pension
      Payment
                  
                  $
                  3,533Employee
      Rent Withhold
                  
                  $
                  4,334Working
      Meal Payment
                  
                  $
                  713Working
      Cloth Deposit
                  
                  $
                  2,048Other
      Trade Related Payments
                  
                  $
                  287,861Total
                  
                  $
                  830,753




As
Zhongchai expands its operations and considers additional acquisitions of
private companies, 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.


16





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 December 31, 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


17


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:
February 11, 2011


18