SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Amendment
No.1 to


FORM
10-K




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




For the
fiscal year ended: December 31, 2006




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: 000-50883




WONDER
AUTO TECHNOLOGY, INC.


(Exact
name of registrant as specified in its charter)




Nevada
              88-0495105(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer Identification
Number)




No.
      16 Yulu Street
                Taihe
      District, Jinzhou City, Liaoning Province
                People’s
      Republic of China, 121013(Address
      of principal executive office and zip
code)




(86)
      416-2661186(Registrant’s
      telephone number, including area code)Securities
      registered pursuant to Section 12(b) of the Act: None
                
                Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, par value
      $0.0001





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  oNo  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes 
oNo  x







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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x




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




Large
      accelerated filer o
              Accelerated
      filer o
              Non-accelerated
      filer x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes  oNo  x




As of
June 30, 2006, there were 23,959,994 shares of the Registrant’s common stock
outstanding and the aggregate market value of such shares held by non-affiliates
of the Registrant’s common stock (based upon the average bid and asked price of
such shares as reported on the Over-the-Counter Bulletin Board) was
approximately $49 million. Shares of the Registrant’s common stock held by each
executive officer and director have been excluded in that such persons may be
deemed to be affiliates of the Registrant. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.




As of
March 15, 2007, there were 23,959,994 shares of the Registrant’s common stock
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE:




Portions
of the Registrant’s Definitive Proxy Statement for its 2007 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the close of
the Registrant’s fiscal year are incorporated by reference into Part III of this
Annual Report on Form 10-K.









EXPLANATORY
NOTE




This
Amendment No. 1 to the Annual Report on Form 10-K for the year ended December
31, 2006 (the “Amendment”)
of Wonder Auto Technology, Inc. (the “Company”)
is being filed in response to comments by the Staff of the Securities and
Exchange Commission (the “SEC”) in
connection with its review of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 filed with the SEC on February 20,
2008.




The
Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the
“Original
Filing”) is being amended to: (1) record a compensation charge relating
to the obligations of two shareholders of the Company under the make good escrow
agreement with certain investors that was entered into in connection with the
Company’s private placement transaction occurred in June 2006;
(2)  re-classify changes in certain restricted cash which was used as
collateral support for the Company’s bills payable from cash flows from
investing activities to cash flows from financing activities (see below for more
details); (3) separated research and development costs from cost of sales and
reclassify it as operating expenses to confirm to the Company’s current year
presentation; and (4) revise Item 6 “Selected Financial Data” and Item 7
“Managements Discussion and Analysis of Financial Condition and Results of
Operations” to reflect the changes above.




On March
20, 2009, the Company’s management and audit committee concluded that its
consolidated financial statements as of and for the year ended December 31, 2006
could no longer be relied upon due to the reasons discussed herein.





Compensation
Charge





In
connection with the Company’s private placement which closed in June 2006, two
of the Company’s shareholders Choice Inspire Limited (“CIL”) and
Empower Century Limited (“ECL”)
pledged and deposited into escrow 3,300,000 shares of the Company’s common stock
pursuant to a “make good” escrow agreement with the private placement
investors.  Under the “make good” escrow agreement, the pledged shares
were deliverable to the investors, on a pro rata basis, if the Company did not
meet certain minimum net income thresholds during the fiscal years 2006 and
2007, but would be released back to CIL and ECL if the net income thresholds
were achieved.  The Company achieved its net income thresholds for
both 2006 and 2007.





On
February 8, 2007, stockholders of CIL and ECL transferred their right to receive
the 1,650,000 shares in escrow for no consideration to Xiangdong Gao who
ultimately received the escrowed shares. Upon consideration of the SEC’s
comment, after consultation with its independent auditor, the Company’s
management and audit committee have determined that it should have recognized a
non-cash compensation expense for the shares released from the escrow on
February 8, 2007. Accordingly, the aggregate fair value of the shares at the
time when the performance target was met, $7,507,500, has been accounted for as
stock-based compensation in 2006.





Re-classification
of Restricted Cash





The
Company originally accounted for the change of restricted cash, which was used
as collateral support for the Company’s bills payable undertaken by banks, as
cash flows from investing activities. In response to the SEC’s comments, the
Company has restated its consolidated financial statements for the year ended
December 31, 2006 to re-classify such increases and decreases in restricted cash
as cash flows from financing activities in its financial
statements.


3




For
purposes of the Amendment, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, each item of the Original Filing
that was affected by the restatement has been amended and restated in its
entirety.  Unless otherwise indicated, this report speaks only as of
the date of the Original Filing.  No attempt has been made in this
Amendment to update other disclosures presented in the Original
Filing.  This Amendment does not reflect events occurring after the
date of the Original Filing or modify or update those disclosures, including the
exhibits to Original Filing affected by subsequent events; however, this
Amendment includes as exhibits 31.1, 31.2, 32.1 and 32.2 new certifications by
the Company’s Chief Executive Officer and Chief Financial
Officer.


4





Item 6.
            Selected
      Financial Data





The
selected consolidated statement of income and comprehensive income data for the
years ended December 31, 2004, 2005 and 2006 and the selected balance sheet data
as of December 31, 2004, 2005 and 2006 are derived from our audited consolidated
financial statements included elsewhere in this Report. The selected
consolidated financial data for the year ended December 31, 2003 is derived from
our audited consolidated financial statements not included in this Report. The
selected consolidated financial data for the year ended December 31, 2002 is
derived from our unaudited consolidated financial statements that are not
included in this Report.




The
following selected historical financial information should be read in
conjunction with our consolidated financial statements and related notes and the
information contained in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”




Year
      Ended December 31,2002
                                        
                                        
                                        2003
                                        
                                        
                                        2004
                                        
                                        
                                        2005
                                        
                                        
                                        2006(in
      thousands)Statement
      of operations data:Sales
      Revenues:
                                        
                                        $
                                        22,781
                                        
                                        
                                        $
                                        39,791
                                        
                                        
                                        $
                                        42,266
                                        
                                        
                                        $
                                        48,063
                                        
                                        
                                        $
                                        72,150Cost
      of Sales
                                        
                                        
                                        (17,288
                                        )
                                        
                                        
                                        (31,193
                                        )
                                        
                                        
                                        (32,794
                                        )
                                        
                                        
                                        (35,963
                                        )
                                        
                                        
                                        (57,342
                                        )Gross
      profit
                                        
                                        
                                        5,493
                                        
                                        
                                        
                                        8,598
                                        
                                        
                                        
                                        9,470
                                        
                                        
                                        
                                        12,100
                                        
                                        
                                        
                                        14,808Operating
      expenses:Administrative
      expenses
                                        
                                        
                                        715
                                        
                                        
                                        
                                        755
                                        
                                        
                                        
                                        890
                                        
                                        
                                        
                                        1,155
                                        
                                        
                                        
                                        1,918Research
      and development expenses
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        279
                                        
                                        
                                        
                                        824
                                        
                                        
                                        
                                        948Selling
      expenses
                                        
                                        
                                        1,135
                                        
                                        
                                        
                                        1,523
                                        
                                        
                                        
                                        1,514
                                        
                                        
                                        
                                        2,148
                                        
                                        
                                        
                                        2,138Unusual
      charge-make good provision
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,5081,850
                                        
                                        
                                        
                                        2,278
                                        
                                        
                                        
                                        2,684
                                        
                                        
                                        
                                        4,128
                                        
                                        
                                        
                                        12,511Income
      from operationsInterest
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14
                                        
                                        
                                        
                                        29
                                        
                                        
                                        
                                        97Other
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        148
                                        
                                        
                                        
                                        137
                                        
                                        
                                        
                                        357Income
      before income taxes
                                        
                                        
                                        3,334
                                        
                                        
                                        
                                        5,883
                                        
                                        
                                        
                                        6,306
                                        
                                        
                                        
                                        7,298
                                        
                                        
                                        
                                        2,088Income
      taxes
                                        
                                        
                                        33
                                        
                                        
                                        
                                        (665
                                        )
                                        
                                        
                                        (718
                                        )
                                        
                                        
                                        (897
                                        )
                                        
                                        
                                        (1,270
                                        )Minority
      interests
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (102
                                        )Net
      income
                                        
                                        
                                        3,367
                                        
                                        
                                        
                                        5,218
                                        
                                        
                                        
                                        5,588
                                        
                                        
                                        
                                        6,401
                                        
                                        
                                        
                                        716Earnings
      per share - basic and diluted
                                        
                                        $
                                        0.2
                                        
                                        
                                        $
                                        0.3
                                        
                                        
                                        $
                                        0.32
                                        
                                        
                                        $
                                        0.37
                                        
                                        
                                        $
                                        0.03Weighted
      average number of sharesoutstanding
      - basic and diluted
                                        
                                        
                                        17,227
                                        
                                        
                                        
                                        17,227
                                        
                                        
                                        
                                        17,227
                                        
                                        
                                        
                                        17,227
                                        
                                        
                                        
                                        20,787Cash
      dividend declared per common share
                                        
                                        
                                        N/A
                                        
                                        
                                        
                                        N/A
                                        
                                        
                                        
                                        N/A
                                        
                                        
                                        
                                        0.33
                                        
                                        
                                        
                                        N/ACash
      flows data:Net
      cash flows provided by (used in) operating activities
                                        
                                        $
                                        908
                                        
                                        
                                        $
                                        (2,481
                                        )
                                        
                                        $
                                        7,239
                                        
                                        
                                        $
                                        11,439
                                        
                                        
                                        $
                                        1,389Net
      cash flows used in investing activities
                                        
                                        
                                        (631
                                        )
                                        
                                        
                                        (1,300
                                        )
                                        
                                        
                                        (2,849
                                        )
                                        
                                        
                                        (2,099
                                        )
                                        
                                        
                                        (6,219
                                        )Net
      cash flows provided by (used in) financing activities
                                        
                                        
                                        304
                                        
                                        
                                        
                                        4,947
                                        
                                        
                                        
                                        (4,784
                                        )
                                        
                                        
                                        (6,952
                                        )
                                        
                                        
                                        8,308




5





December
      31,2002
                        
                        
                        2003
                        
                        
                        2004
                        
                        
                        2005
                        
                        
                        2006Balance
      sheet data:Cash
      and cash equivalents
                        
                        $
                        1,056
                        
                        
                        $
                        2,223
                        
                        
                        $
                        1,830
                        
                        
                        $
                        4.369
                        
                        
                        $
                        8,204Working
      capital4,367
                        
                        
                        
                        6,297;
                        
                        
                        
                        5,344
                        
                        
                        
                        10,185
                        
                        
                        
                        18,933Total
      assets
                        
                        
                        28,591
                        
                        
                        
                        37,643
                        
                        
                        
                        36,975
                        
                        
                        
                        52,090
                        
                        
                        
                        78,000Total
      current liabilities
                        
                        
                        14,154
                        
                        
                        
                        20,824
                        
                        
                        
                        19,262
                        
                        
                        
                        28,282
                        
                        
                        
                        37,194Long
      term liability
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        4,955
                        
                        
                        
                        -Total
      liabilities
                        
                        
                        14,154
                        
                        
                        
                        20,824
                        
                        
                        
                        19,262
                        
                        
                        
                        33,236
                        
                        
                        
                        37,194Total
      stockholders' equity
                        
                        
                        14,437
                        
                        
                        
                        16,819
                        
                        
                        
                        17,713
                        
                        
                        
                        18,853
                        
                        
                        
                        38,227





Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.




Overview




Wonder
Auto Technology, Inc. is a holding company whose primary business operations are
conducted through our subsidiary, Wonder Auto Limited and its subsidiary Halla.
Through Halla, Wonder Auto is a China-based manufacturer of automotive
electrical parts, specifically, starters and alternators. Wonder Auto’s business
is focused on designing, developing, manufacturing and selling these automotive
electrical parts. Until our acquisition of Wonder Auto on June 22, 2006, our
business strategy and ownership changed over the years as a result of several
acquisitions of our stock that are discussed in the section below entitled “Our
Background and History.”




Our Background and
History




We were
incorporated on June 8, 2000 in the State of Nevada under the name “MGCC
Investment Strategies Inc.” On August 25, 2006, we amended our Articles of
Incorporation and changed our name into Wonder Auto Technology, Inc. From
inception until March 16, 2004, WATG’s primary business strategy was to provide
corporate finance consulting and management advisory services to emerging
companies. In particular, its plan was to focus its business in the areas of
corporate finance consulting services, business consulting services,
broker-client relation services and public relations services. WATG had no
business operations during this period.


6


On March
16, 2004, MyTop purchased 1,025,000 shares of the common stock of WATG and
became the owner of approximately 96% of the issued and outstanding capital
stock of WATG.




After the
stock acquisition, MyTop intended for WATG to engage in business of developing
hi-tech product manufacturing and services through the acquisition of other
companies. MyTop entered into informal discussions with potential acquisition
targets in China, but no agreements were reached.




On August
1, 2005, MyTop changed its name to Hisonic, and on December 19, 2005, Hisonic,
as the principal stockholder of WATG, entered into a stock purchase agreement
with HFI, pursuant to which Hisonic sold 1,000,000 shares of the common stock of
WATG to HFI for $300,000. As a result, HFI became the owner of approximately
86.4% of the issued and outstanding common stock of WATG.




In
connection with the sale of common stock to HFI, Timothy P. Halter was elected
as WATG’s Chairman of the Board, President, Chief Financial Officer and
Secretary and WATG effected a 20-for-1 reverse stock split in February
2006.




Until the
reverse acquisition of Wonder Auto on June 22, 2006, WATG engaged in no active
operations. In connection with the reverse acquisition transaction, Wonder Auto
became the wholly owned subsidiary of WATG and is the holding company for all
current commercial operations, which are conducted through a variety of
subsidiary companies whose business operations originally commenced business in
May 1996.




Background and History of
Wonder Auto and its Operating Subsidiaries




Wonder
Auto Limited was incorporated in British Virgin Islands in March 2004. Its
wholly owned subsidiary Man Do Auto Technology Co. Ltd. was incorporated under
the law of British Virgin Islands in 2003. Neither Wonder Auto Limited nor Man
Do Auto Technology Co. Ltd. has any active business operations other than their
ownership of Halla, which is the operating company that primarily manufactures
our products. Halla was incorporated in March 1996 with a registered capital of
$12 million. Over the years, Halla went through several ownership changes and is
now 61% owned by Wonder Auto Limited and 39% owned by Man Do Auto Technology Co.
Ltd.


7




Acquisition of Wonder Auto
and Related Financing





On June
22, 2006, Wonder Auto Limited completed a private placement pursuant to which
Wonder Auto Limited issued to certain accredited investors 45.277236 shares of
its common stock for $12,000,000, such shares were subsequently exchanged for
3,899,996 shares of the common stock of WATG in connection with the reverse
acquisition transaction as discussed below.




In
addition, on June 22, 2006, Empower Century Limited transferred 30.184824 shares
of the common stock of Wonder Auto Limited to certain accredited investors in
exchange for $8,000,000. Such shares were subsequently exchanged for 2,599,998
shares of the common stock of WATG in connection with the reverse acquisition
transaction as discussed below.





On June
22, 2006, we also completed a reverse acquisition transaction with Wonder Auto
Limited whereby we issued to the stockholders of Wonder Auto Limited 21,127,194
shares of our common stock in exchange for all of the issued and outstanding
capital stock of Wonder Auto Limited. Wonder Auto Limited thereby became our
wholly owned subsidiary and the former stockholders of Wonder Auto Limited
became our controlling stockholders.




Upon the
closing of the reverse acquisition, Timothy Halter submitted his resignation
letter pursuant to which he resigned from all offices of WATG that he held and
from his position as our director that became effective in July 2006. Qingjie
Zhao was appointed to the board of the directors at the effective time of the
resignation of Timothy Halter. In addition, our executive officers were replaced
by the Wonder Auto executive officers upon the closing of the reverse
acquisition as indicated in more detail below.




For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Wonder Auto as the acquirer and WATG as the acquired party.
When we refer in this Report to business and financial information for periods
prior to the consummation of the reverse acquisition, we are referring to the
business and financial information of Wonder Auto on a consolidated basis unless
the context suggests otherwise.




Subsequent
Transactions




On August
23, 2006, Wonder Auto entered into a share purchase agreement with Winning to
purchase Winning’s 50% interest in Dong Woo, one of our primary suppliers for
$4.85 million  to be paid in two installments subject to adjustment based
on Dong Woo’s financial performance. We paid $2.43 in 2006, $400,000 on February
13, 2007 and are in the process of arranging for the payment of the remaining
balance. Under this agreement, Wonder Auto may designate three out of five
members of the board of directors of Dong Woo.


8





On
September 21, 2006, Halla together with two independent parties established
Wonder Friends in the PRC. Halla contributed $0.5 million to Wonder Friends
registered capital representing a 20.41% equity interest. Wonder Friends is
principally engaged in the manufacture of piston rods, vibration-dampers and
rotary axes for motor vehicles.




Industry Wide Factors that
are Relevant to Our Business




Management
believes that the Chinese auto parts industry is expanding. According to the
China Council for the Promotion of International Trade, individual vehicle
ownership more than doubled to 13.65 million units in 2004 from 6.25 million
units in 2000. According to the China Automotive Industry Yearbook (1955-2005),
the Chinese automobile market maintained an average growth rate of 10% to 15%
over the past 15 years. In 2006, according to China Auto Mobile Information Net,
the total automobile production in China reached 7.28 million units,
representing a 27.32% increase over 2005. China is now the second largest auto
market in the world, with sales volume for 2006 reaching 7.22 million units. Of
the 5.23 million passenger cars manufactured in 2006, 5.17 million were sold,
representing 32.76% and 30.02% increase over 2005, respectively. It is expected
that production of autos in China will exceed 8.50 million units in 2007.
(Source: Beijing Daily). Among the 7.22 million vehicles sold, 60% of them were
purchased by private owners of which 2.08 million were small cars with engine
displacements between 1 to 1.6 liters. It is estimated by market specialists
that the number of cars owned by private owners will have reached 22 million by
the end of 2006, making China the second largest new car market in the world,
especially for privately owned autos. It is estimated that there are about 30
automobiles per 1000 people in China, which lags behind the global average of
approximately120 automobiles per 1000 people. Largely based on these statistics,
the consensus is that the Chinese automobile market may have considerable
potential for growth in the coming years. (Source: Xinhua Net, Yunnan Channel).
We believe that the increasing number of automobile sales will also increase the
size of the automotive aftermarket. As the automotive aftermarket increases and
vehicle owners use older automobiles, the need for replacement parts and
maintenance increases. We believe this trend will create an increasing demand
for our products.




Another
important trend that has an effect on our financial condition is the increasing
demand for automobiles that utilize small engines and automobiles that can be
sold at a lower cost. Management believes that a variety of factors contribute
to this increasing demand. The first factor is fuel prices. If fuel costs remain
at or above current levels, consumers may seek automobiles that utilize less
fuel to save money and our products are designed for use in these fuel efficient
vehicles. In addition, the Chinese government promulgated regulations in April
2006 that further encourage the consumption of small engine vehicles. These
regulations provide for an upward adjustment of the tax rate applicable to
larger vehicles in order to encourage consumers to purchase smaller engine
vehicles. The top tax rate applicable to vehicles with engine displacements
larger than 2 liters was raised to as high as 20% from 8%. Since we manufacture
auto parts for vehicles that do not fall within the category of vehicles subject
to the increased taxes, we anticipate that we will benefit from this regulation
because as more smaller engine vehicles are sold and the aftermarket in these
vehicles increases, we believe there will be an increased demand for parts and
maintenance for these vehicles.


9





We
believe that other regulatory measures by the Chinese government will also
contribute to the growth in demand for our products. The Measures for the
Administration of Import of Automobile Components and Parts Featuring Complete
Vehicles issued by the National Development and Reform Commission of the PRC
Ministry of Finance and the Ministry of Commerce is a regulation that encourages
automakers to use parts manufactured by local Chinese auto parts manufacturers.
Pursuant to this regulation, which became effective on July 1, 2006, the Chinese
government charges automakers a tariff of up to 25% if more than 40% of the
components and parts of an automobile are imported. We believe that this
regulation will have a positive impact on the sales of our
products.




We also
believe that sales to foreign markets may represent an opportunity for us and we
plan to enhance our sales efforts to foreign markets, which accounted for
approximately 5% of our total sales in 2006. In 2003, we began to sell a small
quantity of products directly to overseas customers. For the year ended December
31, 2006, we sold our products to consumers in South Korea, US and Turkey which
resulted in total sales of approximately $3.8 million.




Uncertainties that Affect
our Financial Condition




Our
primary challenge is our potential inability to produce enough of our products
to satisfy the increased demand for our products. In order to increase our
capacity, we will be required to make investments that improve the efficiency
and capacity of our properties, plant and equipment. The utilization rates of
our alternator and starter production lines as of December 31, 2005 and 2006,
were approximately 81% and 140%, respectively, assuming two work shifts per day
of eight hours and five days per week. In order to meet the projected demand for
our products in 2006, we need to build additional manufacturing lines. We have
raised a total of $12 million in the private placement that we closed in June
2006, approximately $6 million of which were used and will be used to build
additional production lines. We expect that two more production lines will be
operational by June 2007 and shall be able to satisfy the projected demands for
our products for the foreseeable future.




Results
of Operations




The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and key components of our revenue for the period
indicated in dollars.


10





All
amounts are in thousands of U.S. dollars.





Year
      ended December 31,2006
                    
                    
                    2005
                    
                    
                    2004RevenueSales
                    
                    $
                    72,150
                    
                    
                    $
                    48,063
                    
                    
                    $
                    42,266Cost of sales
                    
                    
                    (57,342
                    )
                    
                    
                    (35,963
                    )
                    
                    
                    (32,795
                    )Gross profit
                    
                    
                    14,808
                    
                    
                    
                    12,100
                    
                    
                    
                    9,471Operating
      expensesAdministrative
      expenses
                    
                    
                    1,918
                    
                    
                    
                    1,155
                    
                    
                    
                    890Research and development
      expenses
                    
                    
                    948
                    
                    
                    
                    824
                    
                    
                    
                    279Selling
expenses
                    
                    
                    2,138
                    
                    
                    
                    2,148
                    
                    
                    
                    1,514Unusual charge - Make good
      provision
                    
                    
                    7,508
                    
                    
                    
                    -
                    
                    
                    
                    -12,511
                    
                    
                    
                    4,128
                    
                    
                    
                    2,684Income
      from operations
                    
                    
                    2,297
                    
                    
                    
                    7,972
                    
                    
                    
                    6,787Interest income
                    
                    
                    97
                    
                    
                    
                    29
                    
                    
                    
                    14Other income
                    
                    
                    357
                    
                    
                    
                    137
                    
                    
                    
                    148Finance costs
                    
                    
                    (1,034
                    )
                    
                    
                    (839
                    )
                    
                    
                    (643
                    )Equity in net income of
      unconsolidatedaffiliates
                    
                    
                    371
                    
                    
                    
                    -
                    
                    
                    
                    -Income
      before income taxes
                    
                    
                    2,088
                    
                    
                    
                    7,298
                    
                    
                    
                    6,306Income
      taxes
                    
                    
                    (1,270
                    )
                    
                    
                    (897
                    )
                    
                    
                    (718
                    )Minority
      interests
                    
                    
                    (102
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    $
                    716
                    
                    
                    $
                    6,401
                    
                    
                    $
                    5,587





Year
      Ended December 31,Components
      of Revenue In thousands
                          2006
                          
                          2005
                          
                          2004Total
      Revenues
                          
                          $
                          72,150
                          
                          
                          $
                          48,063
                          
                          
                          $
                          42,266Revenues
      by Product or Product linealternator
                          
                          
                          45,216
                          
                          
                          
                          30,118
                          
                          
                          
                          28,119starter
                          
                          $
                          26,934
                          
                          
                          $
                          17,945
                          
                          
                          $
                          14,147




Year Ended December 31, 2006
Compared with Year Ended December 31, 2005




Sales
Revenue.  Sales revenue increased $24.09 million, or 50.12% to
$72.15 million for the year ended December 31, 2006 from $48.06 million for the
same period in 2005. This increase was mainly attributable to the increased
market demand for our products in the small and medium engine sedan market in
China spurred in part by governmental incentives, our expanded production
capacity and increased sales to our existing customers.


11





Cost of Goods
Sold.  Our cost of goods sold increased $21.38 million to
$57.34 million for the year ended December 31, 2006 from $35.96 million during
the same period in 2005. As a percentage of sales revenue, the cost of goods
sold increased to 79.48% during the year ended December 31, 2006 from 74.82% in
the same period of 2005. This increase is attributable to the rise in the cost
of raw materials we use in our products. The price of raw materials rose by
8.92% in 2006 which resulted in an increase of 8.24% in the overall cost of
goods sold despite our relatively stable labor and manufacturing
costs.




Gross Profit. Our gross
profit increased $2.71 million to $14.81 million for the year ended December 31,
2006 from $12.10 million for the same period in 2005. Gross profit as a
percentage of sales revenue was 20.52% for the year ended December 31, 2006, as
compared to 25.18% during the same period in 2005. The rise in the cost of raw
materials dampened gross profit by offsetting any benefits, which could have
otherwise accrued from a decrease in our labor and manufacturing costs and an
increase in product price.




Administrative
Expenses.  Our administrative expenses increased $0.76 million,
or 65.99%, to $1.92 million for the year ended December 31, 2006 from $1.16
million for the same period in 2005. As a percentage of sales revenue,
administrative expenses increased to 2.66% for the year ended December 31, 2006
from 2.40% for the same period in 2005. The increases in amount and percentage
were attributable to the increase in expenses incurred in the financing
activities in the U.S., as well as audit expenses.




Research and Development
Expenses. Our research and development expenses increased $0.12 million,
or 14.99%, to $0.95 million for the year ended December 31, 2006 from $0.82
million for the same period in 2005. As a percentage of net revenues, research
and development expenses decreased to 1.31% for the year ended December 31, 2006
from 1.71% for the same period in 2005. This percentage decrease is primarily a
function of our net revenues increasing faster than our research and development
expenses.




Selling
Expenses.  Our selling expenses decreased $10,573 to $2.14
million for the year ended December 31, 2006 from $2.15 million for the same
period in 2005. As a percentage of sales revenue, our selling expenses decreased
to 2.96% for the year ended December 31, 2006 from 4.47% for the same period in
2005. This percentage decrease was primarily attributable to our utilization of
more efficient controls that stabilized our selling expenses and improved the
quality of our products resulting in less expenses related to repairs and
replacements.


12





Unusual
Charge – Make Good Provision.





In
connection with the Company’s private placement which closed in June 2006, two
of the Company’s shareholders Choice Inspire Limited (“CIL”) and Empower Century
Limited (“ECL”) pledged and deposited into escrow 3,300,000 shares of the
Company’s common stock pursuant to a “make good” escrow agreement with the
private placement investors.  Under the “make good” escrow agreement,
the pledged shares were deliverable to the investors, on a pro rata basis, if
the Company did not meet certain minimum net income thresholds during the fiscal
years 2006 and 2007, but would be released back to CIL and ECL if the net income
thresholds were achieved.





On
February 8, 2007, stockholders’ of CIL and ECL transferred their right to
receive the 1,650,000 shares in escrow for no consideration to Xiangdong Gao who
ultimately received the escrowed shares. Compensation expense should be
recognized equal to the amount of the market value of the shares as of the date
when the performance goal was met. We achieved our net income threshold for
2006, accordingly, the Company recognized a non-cash expense of $7.5 million in
2006.





Total
expenses. Our total
expenses increased $8.38 million to $12.51 million for the year ended December
31, 2006 from $4.13 million for the same period in 2005. As a percentage of
sales revenue, our total expenses increased to 17.34% for the year ended
December 31, 2006 from 8.59% for the same period in 2005. The increases in
amount and percentage were primarily attributable to the non-cash expenses of
$7.51 million related to the make good arrangement recognized in 2006 as
discussed above.





Income Before Income
Taxes.  Income before income taxes decreased $5.21 million, or
71.39%, to $2.09 million during the year ended December 31, 2006 from $7.30
million during the same period in 2005. Income before income taxes as a
percentage of sales revenue decreased to 2.89% during the year ended December
31, 2006 from 15.18% during the same period in 2005. Such decrease in income
before income tax was mainly attributable to the non-cash expenses related to
the make good arrangement as discussed above.





Provision for income taxes.
We are subject to U.S. tax at the rate of 34%. No provision for income taxes in
the United States have been made as the taxable income for year ended December
31, 2006 was set-off by a net operating loss carry forward from previous years
and we had no taxable income for the years ended December 31, 2005 and
2004.





Wonder
Auto and Man Do Auto are incorporated in the BVI and, under current laws of the
BVI, not subject to income taxes.




Our
subsidiary Halla is subject to Chinese enterprises income tax (“EIT”) at a rate
of 27% of the assessable profits, consisting of a 24% national tax and a 3%
local tax. As approved by the local tax authority in the PRC, Halla was entitled
to a two-year exemption from EIT followed by 50% tax exemption for the next
three years, commencing from the first cumulative profit-making year in the
fiscal financial year of 2001. Accordingly, Halla was subject to a tax rate of
13.5% for 2004, 2005 and 2006. Furthermore, Halla, as a Foreign Investment
Enterprise (“FIE”), is engaged in advanced technology industry, Halla was
approved to enjoy a further 50% tax exemption for 2007 and
2008.


13


In
addition, as a FIE, Halla was entitled to another two special tax concessions.
First, equivalent to 40% of the purchase price of qualifying domestic capital
expenditure as defined and approved under the relevant PRC income tax rule can
be used to offset against EIT. Second, if there is a 10% increase of the
domestic development expenses in the current year over the prior year, amount
equivalent to 50% of the current year’s expenses can be used to offset against
EIT.




Provision
for income taxes increased approximately $0.37 million to $1.27 million during
the year ended December 31, 2006 from $0.90 million during the same period in
2005. Our effective tax rate for the year ended December 31, 2006, was
13.5%.




Net Income.  Net
income decreased $5.68 million, or 88.81%, to $0.72 million during the year
ended December 31, 2006 from $6.40 million during the same period in 2005. Such
decrease was attributable to the non-cash expenses related to the make good
arrangement as discussed above.




Year Ended December 31, 2005
Compared to Year Ended December 31, 2004




Sales
Revenue.  Sales revenue increased $5.79 million or 13.72% to
$48.06 million in 2005 from $42.27 million in 2004. This increase was mainly
attributable to the increased market demand for our products due to growth in
the small and medium engine sedan market.




Cost of Goods
Sold.  Our cost of goods sold increased $3.17 million or 9.66%
to $35.96 million in 2005 from $32.79 million in 2004. This increase was mainly
attributable to the increase of sales volumes. As a percentage of net revenues,
our cost of goods sold in 2005 decreased 2.77% from 74.82% in 2005 to 77.59% in
2004 mainly because the sale of products with higher profit margins constituted
a higher percentage of our sales revenue in 2005 as compared with
2004.




Gross Profit.  Our
gross profit increased $2.63 million or 27.76% to $12.10 million in 2005 from
$9.47 million in 2004. Gross profit as a percentage of sales revenue increased
2.77% in 2005 as compared with 2004 for the reason stated above.




Administrative
Expenses.  Our administrative expenses increased approximately
$0.26 million, or 29.75%, to $1.16 million in 2005 from approximately $0.89
million in 2004. As a percentage of sales revenue, administrative expenses
increased 0.29% to 2.40% in 2005 from 2.11% in 2004. This dollar increase was
primarily attributable to salary increases resulting from the establishment of
three new vice president positions and the increase cost for repairing our
facilities.


14


Research and Development
Expenses.  Our research and development expenses increased
$0.55 million, or 195.63%, to $0.82 million for the year ended December 31, 2005
from $0.28 million for the same period in 2004. As a percentage of sales
revenue, research and development expenses increased to 1.71% for the year ended
December 31, 2005 from 0.07% for the same period in 2004. This percentage
increase is primarily the result of the increased investment in research and
development.




Selling
Expenses.  Our selling expenses increased $0.63 million, or
42.25%, to $2.15 million in 2005 from $1.51 million in 2004. As a percentage of
sales revenue, our selling expenses in 2005 increased 0.90% as compared with
2004. This dollar increase was primarily attributable to our increased marketing
efforts and the increase of the sales volumes. We believe the increase of
selling expenses is generally in line with the increase of sales
revenue.




Total
Expenses.  Our total expenses increased $1.44 million, or
53.82%, to $4.13 million in 2005 from $2.68 million in 2004. As a percentage of
sales revenue, our total expenses increased to 8.59% in 2005 from 6.35% in 2004.
This dollar increase was primarily attributable to the factors described
above.




Income Before Income
Taxes.  Income before income taxes increased $0.99 million, or
15.73%, to $7.29 million in 2005 from $6.31 million in 2004. Income before
income taxes as a percentage of sales revenue increased 0.26% in 2005 as
compared to 2004. This increase was primarily a result of increase of the sales
revenue and gross margin.




Income Taxes.  We
incurred income taxes of $897,000 in 2005. This is an increase of 24.93% from
the taxes we incurred in 2004, which amounted to $718,000. We paid more taxes in
2005 mostly as a result of higher income in 2005 compared to 2004.




Net Income.  Net
income increased $813,000, or 14.55%, to $6.40 million in 2005 from $5.59
million in 2004, because of the factors described above.




Allowance
for doubtful debts




Our trade
receivables totaled $24.70 million as of December 31, 2006, an increase of $6.23
million or 33.73% from $18.47 million in the year ended December 31, 2005. Our
allowance of doubtful accounts totaled $32,150 for year ended December 31, 2006,
a 17.03% decrease from the $38,745 for the year ended December 31,
2005.


15


The
seemingly disproportionate increase of our trade receivable as compared to the
decrease of our allowance of doubtful accounts was mainly due to the increase in
our sales revenue and our policy to generally account a trade receivable as a
doubtful account only if it remains uncollected for more than one year. Our
allowance for doubtful debts accounts for only an insignificant portion of the
receivable balance in spite of the increasing trade receivable balance
throughout the reporting periods because almost all the outstanding debts were
aged less than one year. Many of our customers have long business relationship
with us and with good settlement history. In the absence of significant bad debt
experience, we consider the existing provisioning policy as
adequate.




Liquidity
and Capital Resources




As of
December 31, 2005 and December 31, 2006, we had cash and cash equivalents
(including restricted cash) of $7.97 million and $13.08 million, respectively.
The following table provides detailed information about our net cash flow for
all financial statements periods presented in this Report.




Cash
Flow




Years
      Ended December 31,2004
                    
                    
                    2005
                    
                    
                    2006Net
      cash provided by operating activities
                    
                    $
                    7,239,337
                    
                    
                    $
                    11,439,101
                    
                    
                    $
                    1,388,932Net
      cash used in investing activities
                    
                    
                    (2,848,514
                    )
                    
                    
                    (2,099,462
                    )
                    
                    
                    (6,219,108
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (4,784,483
                    )
                    
                    
                    (6,951,636
                    )
                    
                    
                    8,307,986Effect
      of foreign currency translation on cash and cash
    equivalents
                    
                    
                    74
                    
                    
                    
                    150,993
                    
                    
                    
                    357,132Net
      cash Flow
                    
                    $
                    (393,586
                    )
                    
                    $
                    2,538,996
                    
                    
                    $
                    3,834,942


16


Operating Activities:




Net cash
provided by operating activities was $1.39 million for the year ended December
31, 2006 which is a decrease of $10.05 million from the $11.44 million net cash
provided by operating activities for the same period in 2005. The decrease is a
function of our higher bills receivable and increased expenses related to
servicing our higher sales volume in fiscal 2006.




Net cash
provided by operating activities during 2005 totaled $11.44 million, which is an
increase of $4.20 million from net cash provided for operating activities of
$7.24 million during 2004. The increase was mainly due to the increased sales
revenue and the more efficient control of the accounts receivables and accounts
payables. Our negative cash flow from operating activities in 2004 was funded
from cash provided by financing activities during the year.




Investing Activities:




Our main
uses of cash for investing activities are payments to the acquisition of
property and purchase of stock option rights, plant and equipment.





Net cash
used for investing activities in the year ended December 31, 2006 was $6.22
million, which is an increase of $4.12 million from net cash used for investing
activities of $2.10 million in the same period of 2005. The increase was due to
investments in fixed assets and the acquisition of Dong Woo for $5.82 million
and an investment of $0.5 million for a 20% in interest in Wonder Friends,a manufacturer of piston
rods, vibration dampers and rotary axes for motor vehicles.




Net cash
used for investing activities in the year 2005 was $2.10 million, which is a
decrease of $0.75 million from net cash used for investing activities of $2.85
million in 2004. Such decrease was primarily the result of decrease in payments
to acquire and for acquisition of property, plant and equipment.




Financing Activities:




Net cash
provided by financing activities in the year ended December 31, 2006 totaled
$8.31 million as compared to $6.95 million used in financing activities in the
same period of 2005. The increase in net cash is attributable to the receipt of
(i) $10.14 million (after payment of offering expenses) through the issuance of
stock in a private placement completed in June 2006 and (ii) $880,000 from bank
loans which more than offset the payment of $1.72 million by Halla as dividends
to its stockholders.


17





Net cash
used for financing activities was $6.95 million in 2005 as compared to $4.78
million used for financing activities in 2004. The $2.17 million decrease in the
payment of dividend and the $2.34 million increase in restricted cash in 2005
more than offset the $3.26 million increase of the proceeds from new bank loans
in 2005.




Our debt
to equity ratio was 37.48% as of December 31, 2006. We plan to maintain our debt
to equity ratio below 60%, increase our long-term loans, decrease our short-term
loans and increase the ratio of the borrowing in foreign currency to take
advantage of the expected increase of the value of RMB against the U.S. dollar.
We believe we currently maintain a good business relationship with many
banks.




As of
December 31, 2006, the maturities for these bank loans are as
follows.




All
amounts, other than percentages, in millions of U.S. dollars




Banks
                                
                                Amounts
                                
                                Beginning
                                
                                Ending
                                
                                DurationBank
      of China
                                
                                $3.84
      (RMB 30)
                                
                                Sept.
      20, 2006
                                
                                Sept.
      19, 2007
                                
                                1
      yearBank
      of China
                                
                                $2.56
      (RMB 20)
                                
                                Aug.
      21, 2006
                                
                                Aug.
      28, 2007
                                
                                1
      yearJinZhou
      Commercial Bank
                                
                                $
      0.25 (RMB2)
                                
                                Jan.
      5, 2006
                                
                                Jan.
      4, 2007
                                
                                1
      yearChina
      Construction Bank
                                
                                $5.12
      (RMB 40)
                                
                                July
      7, 2006
                                
                                July 6,
      2007
                                
                                1
      yearChina
      Construction Bank
                                
                                $2.56
      (RMB 20)
                                
                                Oct.
      18, 2006
                                
                                Oct.
      17, 2007
                                
                                1
      yearTotal
                                
                                $14.33





As shown
in the above table, we have $14.33 million in loans maturing in or before
November 2007. We plan to either repay this debt as it matures or refinance this
debt with other debt.




In June
2006, prior to the consummation of the share exchange with us, Wonder Auto
Limited completed a private placement of its common shares to certain accredited
investors. As a result of this private placement, Wonder Auto raised $12 million
in gross proceeds, which left Wonder Auto Limited with approximately $10 million
in net proceeds after the deduction of offering expenses in the amount of
approximately $2 million. We plan to use approximately $2 million of the net
proceeds on purchasing research and development equipment, approximately $6
million on building new production lines, $0.65 on infrastructure and $1.35
million as our working capital. This financing resulted in an increase of our
net cash flow and a decrease of our asset/liability ratio and financial
risks.


18


In 2006,
we repaid an aggregate of $7.47 million in bank loans with maturity dates of
July 7, 2006 and October 17, 2006, respectively. We obtained two new loans in
the aggregate amount of $7.47 million from China Construction Bank on July 7,
2006 and October 18, 2006 with a maturity dates of July 6, 2007 and October 18,
2007, respectively.




We also
obtained credit lines from Bank of China in aggregate principal amount of $10.02
million of which $6.26 million has been used by the Company by December 31,
2006. We used $5.01 million to repay loans owed to JinZhou Commercial
Bank.




Our
current material capital expenditure requirements are approximately $2 million
which will be used in updating and expanding our production lines, research and
development equipments and other equipments and facilities in the next 6 months
so as to satisfy our production demands in 2007. In addition we expect that we
may need approximately $5 million in additional working capital which we plan to
raise through a bank loan. We believe that we maintain good relationships with
the various banks we deal with and our current available working capital, after
receiving the aggregate proceeds of the capital raising activities and bank
loans referenced above, should be adequate to sustain our operations at our
current levels through at least the next twelve months.




Obligations
Under Material Contracts




Below is
a table setting forth our contractual obligations as of December 31,
2006:




All
      amounts in thousands of U.S. dollarsTotal
                  
                  Less
      than
                    1
      year
                  
                  1-3
      years
                  
                  3-5
      years
                  
                  More
                    than
      5
                    yearsLong
      term debt obligations
                  
                  
                  14,327
                  
                  
                  
                  14,327
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Capital
      commitment
                  
                  
                  1,536
                  
                  
                  
                  1,536
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      lease obligations
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Purchase
      obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  15,864
                  
                  
                  $
                  15,864
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -




19





Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:




·
              Use of estimates.In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management makes
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the
      dates of the financial statements, as well as the reported amounts of
      revenues and expenses during the reporting periods. These accounts and
      estimates include, but are not limited to, the valuation of accounts
      receivable, inventories, deferred income taxes, provision for warranty and
      the estimation on useful lives of property, plant and equipment. Actual
      results could differ from those
estimates.




·
            Allowance of doubtful
      accounts.The Company establishes an allowance for doubtful
      accounts based on management’s assessment of the collectibility of trade
      receivables. A considerable amount of judgment is required in assessing
      the amount of the allowance, the Company considers the historical level of
      credit losses and applies percentages to aged receivable categories. The
      Company makes judgments about the creditworthiness of each customer based
      on ongoing credit evaluations, and monitors current economic trends that
      might impact the level of credit losses in the future. If the financial
      condition of the customers were to deteriorate, resulting in their
      inability to make payments, a larger allowance may be
      required.





Based on
the above assessment, during the reporting years, the management establishes the
general provisioning policy to make allowance equivalent to 100% of gross amount
of trade receivables due over 1 year. Additional specific provision is made
against trade receivables aged less than 1 year to the extent which they are
considered to be doubtful.


20





Bad debts
are written off when identified. The Company extends unsecured credit to
customers ranging from three to six months in the normal course of business. The
Company does not accrue interest on trade accounts receivable.




Historically,
losses from uncollectible accounts have not significantly deviated from the
general allowance estimated by the management and no significant additional bad
debts have been written off directly to the profit and loss. This general
provisioning policy has not changed in the past since establishment and the
management considers that the aforementioned general provisioning policy is
adequate and not too excessive and does not expect to change this established
policy in the near future.




·
            Inventories.Inventories are stated at the lower of cost or market. Cost is
      determined on a weighted average basis and includes all expenditures
      incurred in bringing the goods to the point of sale and putting them in a
      saleable condition. In assessing the ultimate realization of inventories,
      the management makes judgments as to future demand requirements compared
      to current or committed inventory levels. Our reserve requirements
      generally increase as our projected demand requirements; decrease due to
      market conditions, product life cycle changes. The Company estimates the
      demand requirements based on market conditions, forecasts prepared by its
      customers, sales contracts and orders in
hand.




In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes down the
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and the estimated market value based
upon assumptions about future demand and market conditions.




Based on
the above assessment, the Company establishes a general provision to make a 50%
provision for inventories aged over 1 year.




Historically,
the actual net realizable value is close to the management
estimation.




·
            Property, plant and equipment.Property, plant and equipment are stated at cost less accumulated
      depreciation. Cost represents the purchase price of the asset and other
      costs incurred to bring the asset into its existing
  use.




Depreciation
is provided on straight-line basis over their estimated useful lives. The
principal depreciation rates are as follows:


Annual
      rate
                  
                  
                  Residual
      valueBuildings
                  
                  
                  3 -
      4.5
                  %
                  
                  
                  10
                  %Plant
      and machinery
                  
                  
                  9
                  %
                  
                  
                  10
                  %Motor
      vehicles
                  
                  
                  9-18
                  %
                  
                  
                  10
                  %Furniture,
      fixtures and equipment
                  
                  
                  15
                  %
                  
                  
                  10
                  %Tools
      and equipment
                  
                  
                  15-18
                  %
                  
                  0
      to 10%Leasehold
      improvements
                  
                  
                  20
                  %
                  
                  
                  0




21





Construction
in progress mainly represents expenditures in respect of the Company’s new
offices and factories under construction. All direct costs relating to the
acquisition or construction of the Company’s new office and factories are
capitalized as construction in progress. No depreciation is provided in respect
of construction in progress.




Maintenance
or repairs are charged to expense as incurred. Upon sale or disposition, the
applicable amounts of asset cost and accumulated depreciation are removed from
the accounts and the net amount less proceeds from disposal is charged or
credited to income.




·
            Revenue Recognition.Revenue from sales of the Company’s products is recognized when the
      significant risks and rewards of ownership have been transferred to the
      buyer at the time when the products are put into use by its customers, the
      sales price is fixed or determinable and collection is reasonably
      assured.




·
            Warranty. It is the
      policy of the Company to provide after sales support by way of a warranty
      program. The Company provided warranties to certain customers with
      warranty periods ranging from two years or 50,000 km to three years or
      60,000 km, whichever comes first.




Based on
the past experience, the Company sets up a policy of making a general provision
for warranty such that the closing balance of this provision is equal to certain
percentage of relevant sales during the reporting periods as follows
:


22





Year
      ended December 31,
                    
                    %2006
                    
                    
                    1.52005
                    
                    
                    22004
                    
                    
                    2





·
            Recently issued accounting
      pronouncements.In February 2006, the Financial Accounting
      Standards Board (“FASB”) issued SFAS No. 155 “Accounting for Certain
      Hybrid Financial Instruments: and amendment of FASB Statements
      No. 133 and 140”. SFAS No. 155 simplifies the accounting for certain
      derivatives embedded in other financial instruments by allowing them to be
      accounted for as a whole if the holder elects to account for the whole
      instrument on a fair value basis. SFAS No. 155 also clarifies and amends
      certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is
      effective for all financial instruments acquired, issued or subject to a
      remeasurement event occurring in fiscal years beginning after September
      15, 2006. Earlier adoption is permitted, provided the Company has not yet
      issued financial statements, including for interim periods, for that
      fiscal year.





In March
2006, the FASB released SFAS No. 156 “Accounting for Servicing of Financial
Assets: an amendment of FASB Statement No. 140” to simplify accounting for
separately recognized servicing assets and servicing liabilities. SFAS No. 156
permits an entity to choose either the amortization method or the fair value
measurement method for measuring each class of separately recognized servicing
assets and servicing liabilities after they have been initially measured at fair
value. SFAS No. 156 applies to all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity’s fiscal year
that begins after September 15, 2006.





In July
2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This
interpretation requires that the entity recognize in its financial statements
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 is effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings.


23


In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement.” SFAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This Statement shall be
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including any financial statements
for an interim period within that fiscal year. The provisions of this statement
should be applied prospectively as of the beginning of the fiscal year in which
this Statement is initially applied, except in some circumstances where the
statement shall be applied retrospectively.





In
September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize
the over funded or under funded status of defined benefit and other
postretirement plans as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through an adjustment to comprehensive income. This statement also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited
exceptions.





In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108, the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods, based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No. 108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.





The
company has adopted all the above accounting procurements and considers that
they have no material impact on these consolidated financial
statements.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.





Seasonality




Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.


24





Item 8.
            Financial
      Statements and Supplementary Financial
  Data




The full
text of our audited consolidated financial statements as of December 31, 2006,
2005 and 2004 begins on page F-1 of this Report.




PART
IV




Item 15.
            Exhibits,
      Financial Statements
Schedules.




(a)
              The
      following documents are filed as part of this
  report:




1)
              Financial
      Statement are set forth beginning on page F-1 of the
  Report




·
                            Report
      of Independent Registered Public Accounting Firm
                            F -
      3·
                            Consolidated
      Statement of Operations
                            F -
      4·
                            Consolidated
      Balance Sheets
                            F -
      5·
                            Consolidated
      Statement of Cash Flows
                            F -
      7·
                            Consolidated
      Statement of Stockholders’ Equity
                            F -
      9·
                            Notes
      to Consolidated Statements
                            F -
      10




25





2)
              Financial
      Statement Schedules:




Wonder
Auto Technology, Inc.


Financial
Statements Schedules:


Valuation
and Qualifying Accounts


Three
years ended December 31, 2006




Balance
                                at
                                beginning
                                $
                              
                              
                              Charge
                                (credit)
      to
                                other
                                comprehensive
                                income
      for
                                exchange
                                differences
                                on
      translation
                                $
                              
                              
                              Acquisition
                                $
                              
                              
                              Charge
                                (credit)
                                to
                                expenses
                                $
                              
                              
                              Balance
                                at
                                end
      of
                                year
                                $Allowance for Doubtful Accounts of Trade and Other
      ReceivablesYear
      ended December 31, 2006
                              
                              
                              38,745
                              
                              
                              
                              1,106
                              
                              
                              
                              -
                              
                              
                              
                              (7,701
                              )
                              
                              
                              32,150Year
      ended December 31, 2005
                              
                              
                              37,748
                              
                              
                              
                              997
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              38,745Year
      ended December 31, 2004
                              
                              
                              35,841
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,907
                              
                              
                              
                              37,748Provision for inventoriesYear
      ended December 31, 2006
                              
                              
                              194,153
                              
                              
                              
                              5,252
                              
                              
                              
                              -
                              
                              
                              
                              (52,470
                              )
                              
                              
                              146,935Year
      ended December 31, 2005
                              
                              
                              373,932
                              
                              
                              
                              6,867
                              
                              
                              
                              -
                              
                              
                              
                              (186,646
                              )
                              
                              
                              194,153Year
      ended December 31, 2004
                              
                              
                              247,392
                              
                              
                              
                              16
                              
                              
                              
                              -
                              
                              
                              
                              126,524
                              
                              
                              
                              373,932Provision for warrantyYear
      ended December 31, 2006
                              
                              
                              914,403
                              
                              
                              
                              32,096
                              
                              
                              
                              -
                              
                              
                              
                              102,845
                              
                              
                              
                              1,049,344Year
      ended December 31, 2005
                              
                              
                              815,498
                              
                              
                              
                              22,750
                              
                              
                              
                              -
                              
                              
                              
                              76,155
                              
                              
                              
                              914,403Year
      ended December 31, 2004
                              
                              
                              774,149
                              
                              
                              
                              23
                              
                              
                              
                              -
                              
                              
                              
                              41,326
                              
                              
                              
                              815,498




3)
              Exhibits




Exhibit
Index is hereby incorporated by reference.




26


Wonder
Auto Technology, Inc.





Consolidated
Financial Statements


(Stated
in US dollars)


F-1


Wonder
Auto Technology, Inc.


Consolidated
Financial Statements





Index to
Consolidated Financial Statements





PagesReport
      of Independent Registered Public Accounting Firm
                
                F-3Consolidated
      Statements of Operations
                
                F-4Consolidated
      Balance Sheets
                
                F-5Consolidated
      Statements of Cash Flows
                
                F-7Consolidated
      Statements of Stockholders’ Equity
                
                F-9Notes
      to Consolidated Financial Statements
                
                F-10


F-2


Report
of Independent Registered Public Accounting Firm





To the
Sole Director and Stockholders of


Wonder
Auto Technology, Inc.





We have
audited the accompanying consolidated balance sheets of Wonder Auto Technology,
Inc. (the “Company”) and its subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31,
2006.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2006 and 2005, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.





As
discussed in Note 3(iii) the Company has restated the accompanying consolidated
financial statements as of December 31, 2006, and for the year then
ended.





PKF


Certified
Public Accountants


Hong
Kong, China


February
12, 2007 except for note 3(ii), (iii) and (iv) as to which the date is March 30,
2009


F-3


Wonder
Auto Technology, Inc.


Consolidated
Statements of Operations


(Stated
in US Dollars)





Year ended December 31,2006
                
                
                2005
                
                
                2004RevenueSales
                
                $
                72,150,483
                
                
                $
                48,062,805
                
                
                $
                42,265,874Cost
      of sales
                
                
                (57,342,201
                )
                
                
                (35,962,931
                )
                
                
                (32,794,978
                )Gross
      profit
                
                
                14,808,282
                
                
                
                12,099,874
                
                
                
                9,470,896Operating
      expensesAdministrative
      expenses
                
                
                1,917,817
                
                
                
                1,155,378
                
                
                
                890,460Research
      and development expenses
                
                
                947,702
                
                
                
                824,184
                
                
                
                278,788Selling
      expenses
                
                
                2,137,853
                
                
                
                2,148,426
                
                
                
                1,514,417Unusual
      charge - make good provision - Note 3(ii)
                
                
                7,507,500
                
                
                
                -
                
                
                
                -12,510,872
                
                
                
                4,127,988
                
                
                
                2,683,665Income
      from operations
                
                
                2,297,410
                
                
                
                7,971,886
                
                
                
                6,787,231Interest
      income
                
                
                96,810
                
                
                
                28,539
                
                
                
                13,554Other
      income
                
                
                356,590
                
                
                
                136,711
                
                
                
                148,056Finance
      costs - Note 5
                
                
                (1,033,551
                )
                
                
                (838,954
                )
                
                
                (643,141
                )Equity
      in net income of unconsolidated affiliates - Note 4
                
                
                371,005
                
                
                
                -
                
                
                
                -Income
      before income taxes
                
                
                2,088,264
                
                
                
                7,298,182
                
                
                
                6,305,700Income
      taxes - Note 6
                
                
                (1,270,391
                )
                
                
                (897,256
                )
                
                
                (718,298
                )Minority
      interests - Note 7
                
                
                (101,827
                )
                
                
                -
                
                
                
                -Net
      income
                
                $
                716,046
                
                
                $
                6,400,926
                
                
                $
                5,587,402Earnings
      per share: basic and diluted - Note 8
                
                $
                0.03
                
                
                $
                0.37
                
                
                $
                0.32Weighted
      average number of shares outstanding:basic
      and diluted
                
                
                20,787,279
                
                
                
                17,227,198
                
                
                
                17,227,198





See Notes
to Consolidated Financial Statements


F-4


Wonder
Auto Technology, Inc.


Consolidated
Balance Sheets


(Stated
in US Dollars)





As of December 31,2006
                
                
                2005ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                8,203,699
                
                
                $
                4,368,757Restricted
      cash - Note 9
                
                
                4,876,879
                
                
                
                3,597,609Marketable
      securities
                
                
                -
                
                
                
                37,159Trade
      receivables (net of allowance of doubtful accounts of $32,150 in 2006,
      $38,745 in 2005)
                
                
                24,696,982
                
                
                
                18,472,619Bills
      receivable
                
                
                3,098,314
                
                
                
                3,528,649Other
      receivables, prepayments and deposits - Note 10
                
                
                1,254,209
                
                
                
                392,906Inventories
      - Note 11
                
                
                13,689,374
                
                
                
                7,807,610Amount
      due from a related company - Note 18
                
                
                69,561
                
                
                
                -Deferred
      taxes - Note 6
                
                
                237,570
                
                
                
                261,548Total
      current assets
                
                
                56,126,588
                
                
                
                38,466,857Know-how
      - Note 12
                
                
                1,468,089
                
                
                
                1,421,556Trademarks
      and patents - Note 13
                
                
                11,418
                
                
                
                1,907Property,
      plant and equipment, net - Note 14
                
                
                13,945,846
                
                
                
                10,648,082Land
      use right - Note 15
                
                
                1,203,256
                
                
                
                580,020Deposit
      for acquisition of property, plant and equipment
                
                
                1,740,548
                
                
                
                819,183Investment
      in an unconsolidated affiliate - Note 4
                
                
                527,627
                
                
                
                -Goodwill
      - Note 4
                
                
                2,771,293
                
                
                
                -Deferred
      taxes - Note 6
                
                
                205,475
                
                
                
                152,316TOTAL
      ASSETS
                
                $
                78,000,140
                
                
                $
                52,089,921





See Notes
to Consolidated Financial Statements


F-5


Wonder
Auto Technology, Inc.


Consolidated
Balance Sheets (Cont’d)


(Stated
in US Dollars)





As of December 31,2006
                
                
                2005LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
      liabilitiesTrade
      payables - Note 9
                
                $
                9,631,537
                
                
                $
                10,299,879Bills
      payable - Note 9
                
                
                8,628,078
                
                
                
                7,060,222Other
      payables and accrued expenses - Note 16
                
                
                3,121,533
                
                
                
                709,822Provision
      for warranty - Notes 4 and 17
                
                
                1,049,344
                
                
                
                914,403Dividend
      payable
                
                
                -
                
                
                
                1,699,282Income
      tax payable
                
                
                398,768
                
                
                
                161,277Amount
      due to a stockholder - Note 18
                
                
                -
                
                
                
                5,149Amount
      due to an unconsolidated affiliate - Note 18
                
                
                37,492
                
                
                
                -Secured
      short-term bank loans - Note 19
                
                
                14,326,831
                
                
                
                7,431,813Total
      current liabilities
                
                
                37,193,583
                
                
                
                28,281,847Secured
      long-term bank loans - Note 19
                
                
                -
                
                
                
                4,954,542TOTAL
      LIABILITIES
                
                
                37,193,583
                
                
                
                33,236,389COMMITMENTS
      AND CONTINGENCIES-
      Note 20MINORITY INTERESTS -
      Note 4
                
                
                2,579,572
                
                
                
                -STOCKHOLDERS’
      EQUITYPreferred
      stock: par value $0.0001 per share; authorized 10,000,000 shares in 2006
      and 2005; none issued and outstanding
                
                
                -
                
                
                
                -Common
      stock: par value $0.0001 per share - Note 21Authorized
      90,000,000 shares in 2006 and 2005; issued and outstanding 23,959,994
      shares in 2006 and 17,227,198 shares in 2005
                
                
                2,396
                
                
                
                1,723Additional
      paid-in capital - Note 21
                
                
                29,647,643
                
                
                
                11,998,377Statutory
      and other reserves - Note 22
                
                
                3,148,265
                
                
                
                2,347,848Accumulated
      other comprehensive income - Note 23
                
                
                1,452,138
                
                
                
                444,670Retained
      earnings
                
                
                3,976,543
                
                
                
                4,060,914TOTAL
      STOCKHOLDERS’ EQUITY
                
                
                38,226,985
                
                
                
                18,853,532TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                78,000,140
                
                
                $
                52,089,921





See Notes
to Consolidated Financial Statements


F-6


Wonder
Auto Technology, Inc.


Consolidated
Statements of Cash Flows


(Stated
in US Dollars)





Year ended December 31,2006
                
                
                2005
                
                
                2004Cash
      flows from operating activitiesNet
      income
                
                $
                716,046
                
                
                $
                6,400,926
                
                
                $
                5,587,402Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                1,401,541
                
                
                
                1,158,561
                
                
                
                986,517Amortization
      of trademarks and patents
                
                
                769
                
                
                
                342
                
                
                
                338Amortization
      of land use right
                
                
                28,883
                
                
                
                26,245
                
                
                
                25,980Deferred
      taxes
                
                
                (16,369
                )
                
                
                857
                
                
                
                (144,817
                )Loss
      on disposal of property, plant and equipment
                
                
                79,527
                
                
                
                -
                
                
                
                19,489(Recovery
      of)/provision for doubtful debts
                
                
                (7,701
                )
                
                
                -
                
                
                
                1,906(Recovery
      of)/provision for obsolete inventories
                
                
                (52,470
                )
                
                
                (186,646
                )
                
                
                126,524Equity
      in net income of an unconsolidated affiliate
                
                
                (371,005
                )
                
                
                -
                
                
                
                -Increase
      in minority interests
                
                
                101,827
                
                
                
                -
                
                
                
                -Unusual
      charge - make good provision
                
                
                7,507,500
                
                
                
                -
                
                
                
                -Changes
      in operating assets and liabilities:Trade
      receivables
                
                
                (5,493,345
                )
                
                
                (7,073,894
                )
                
                
                840,070Bills
      receivable
                
                
                1,536,869
                
                
                
                (73,117
                )
                
                
                (736,499
                )Other
      receivables, prepayments and deposits
                
                
                (664,255
                )
                
                
                96,624
                
                
                
                (232,531
                )Inventories
                
                
                (4,481,151
                )
                
                
                (415,127
                )
                
                
                2,860,283Trade
      payables
                
                
                460,403
                
                
                
                5,288,135
                
                
                
                (3,267,345
                )Bills
      payable
                
                
                601,360
                
                
                
                5,729,402
                
                
                
                1,206,680Amount
      due to an unconsolidated affiliate
                
                
                36,719
                
                
                
                -
                
                
                
                -Other
      payables and accrued expenses
                
                
                (263,895
                )
                
                
                340,742
                
                
                
                (115,934
                )Provision
      for warranty
                
                
                102,845
                
                
                
                76,155
                
                
                
                41,326Income
      tax payable
                
                
                164,834
                
                
                
                69,896
                
                
                
                39,948Net
      cash flows provided by operating activities
                
                
                1,388,932
                
                
                
                11,439,101
                
                
                
                7,239,337Cash
      flows from investing activitiesPayments
      to acquire trademarks and patents
                
                
                (10,023
                )
                
                
                -
                
                
                
                (206
                )Payments
      to acquire and for deposit for acquisition of property, plant and
      equipment
                
                
                (3,627,589
                )
                
                
                (2,062,891
                )
                
                
                (2,879,320
                )Proceeds
      from sales of property, plant and equipment
                
                
                73,169
                
                
                
                -
                
                
                
                31,012Payment
      to acquire marketable securities
                
                
                -
                
                
                
                (36,571
                )
                
                
                -Proceeds
      from sales of marketable securities
                
                
                37,585
                
                
                
                -
                
                
                
                -Cash
      acquired from the RTO
                
                
                419
                
                
                
                -
                
                
                
                -Payment
      to acquire Wonder Friends - Notes 1 and 4
                
                
                (500,000
                )
                
                
                -
                
                
                
                -Payment
      to acquire Dong Woo - Notes 1 and 4
                
                
                (2,430,000
                )
                
                
                -
                
                
                
                -Cash
      inflow from Dong Woo - Note 4
                
                
                237,331
                
                
                
                -
                
                
                
                -Net
      cash flows used in investing activities
                
                $
                (6,219,108
                )
                
                $
                (2,099,462
                )
                
                $
                (2,848,514
                )


F-7


Wonder
Auto Technology, Inc.


Consolidated
Statements of Cash Flows (Cont’d)


(Stated
in US Dollars)





Year
      ended December 31,2006
                                  
                                  
                                  2005
                                  
                                  
                                  2004Cash
      flows from financing activities(Repayment
      to)/advance from a stockholder
                                  
                                  $
                                  (5,149
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  5,149Amount
      due from a related company
                                  
                                  
                                  (68,128
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Dividend
      paid to stockholders
                                  
                                  
                                  (1,719,985
                                  )
                                  
                                  
                                  (6,958,197
                                  )
                                  
                                  
                                  (4,666,033
                                  )Increase
      in restricted cash
                                  
                                  
                                  (917,757
                                  )
                                  
                                  
                                  (2,963,170
                                  )
                                  
                                  
                                  (623,072
                                  )Proceeds
      from bank loans
                                  
                                  
                                  17,573,649
                                  
                                  
                                  
                                  12,386,355
                                  
                                  
                                  
                                  9,127,907Repayment
      of bank loans
                                  
                                  
                                  (16,696,664
                                  )
                                  
                                  
                                  (9,416,624
                                  )
                                  
                                  
                                  (8,628,534
                                  )Proceeds
      from issuance of shares in connection with the reorganization before
      RTO
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100Net
      proceed from issue of shares
                                  
                                  
                                  10,142,020
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      cash flows provided by (used in) financing activities
                                  
                                  
                                  8,307,986
                                  
                                  
                                  
                                  (6,951,636
                                  )
                                  
                                  
                                  (4,784,483
                                  )Effect
      of foreign currency translation on cash and cash
    equivalents
                                  
                                  
                                  357,132
                                  
                                  
                                  
                                  150,993
                                  
                                  
                                  
                                  74Net
      increase (decrease) in cash and cash equivalents
                                  
                                  
                                  3,834,942
                                  
                                  
                                  
                                  2,538,996
                                  
                                  
                                  
                                  (393,586
                                  )Cash
      and cash equivalents - beginning of period
                                  
                                  
                                  4,368,757
                                  
                                  
                                  
                                  1,829,761
                                  
                                  
                                  
                                  2,223,347Cash
      and cash equivalents - end of period
                                  
                                  $
                                  8,203,699
                                  
                                  
                                  $
                                  4,368,757
                                  
                                  
                                  $
                                  1,829,761Supplemental
      disclosures for cash flow information:Non-cash
      financing activity:Issuance
      of 8,613,599 shares of WAL’s common stock for the acquisition of entire
      equity interests in Man Do Auto and Jinzhou Halla in conjunction with the
      reorganization
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  100Outstanding
      payable for acquisition of a subsidiary
                                  
                                  $
                                  2,420,000
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Cash
      paid for:Interest
                                  
                                  $
                                  807,693
                                  
                                  
                                  $
                                  611,326
                                  
                                  
                                  $
                                  537,958Income
      taxes
                                  
                                  $
                                  1,121,927
                                  
                                  
                                  $
                                  826,503
                                  
                                  
                                  $
                                  823,165





See Notes
to Consolidated Financial Statements


F-8


Wonder
Auto Technology, Inc.


Consolidated
Statements of Stockholders’ Equity


(Stated
in US Dollars)


AccumulatedAdditional
                    
                    
                    Statutory
                    
                    
                    otherCommon
      stock
                    
                    
                    paid-in
                    
                    
                    and
      other
                    
                    
                    comprehensive
                    
                    
                    RetainedNo.
      of shares
                    
                    
                    Amount
                    
                    
                    capital
                    
                    
                    reserves
                    
                    
                    income
                    
                    
                    earnings
                    
                    
                    TotalBalance,
      January 1, 2004
                    
                    
                    17,227,198
                    
                    
                    $
                    1,723
                    
                    
                    $
                    11,998,277
                    
                    
                    $
                    1,061,191
                    
                    
                    $
                    23,818
                    
                    
                    $
                    3,734,432
                    
                    
                    $
                    16,819,441Issuance
      of shares in connection with the reorganization
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    100
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    100Comprehensive
      incomeNet
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,587,402
                    
                    
                    
                    5,587,402Foreign
      currency translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    766
                    
                    
                    
                    -
                    
                    
                    
                    766Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,588,168Appropriation
      to reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    645,488
                    
                    
                    
                    -
                    
                    
                    
                    (645,488
                    )
                    
                    
                    -Dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,694,894
                    )
                    
                    
                    (4,694,894
                    )Balance,
      December 31, 2004
                    
                    
                    17,227,198
                    
                    
                    
                    1,723
                    
                    
                    
                    11,998,377
                    
                    
                    
                    1,706,679
                    
                    
                    
                    24,584
                    
                    
                    
                    3,981,452
                    
                    
                    
                    17,712,815Comprehensive
      incomeNet
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,400,926
                    
                    
                    
                    6,400,926Foreign
      currency translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    420,086
                    
                    
                    
                    -
                    
                    
                    
                    420,086Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,821,012Appropriation
      to reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    641,169
                    
                    
                    
                    -
                    
                    
                    
                    (641,169
                    )
                    
                    
                    -Dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (5,680,295
                    )
                    
                    
                    (5,680,295
                    )Balance,
      December 31, 2005
                    
                    
                    17,227,198
                    
                    
                    
                    1,723
                    
                    
                    
                    11,998,377
                    
                    
                    
                    2,347,848
                    
                    
                    
                    444,670
                    
                    
                    
                    4,060,914
                    
                    
                    
                    18,853,532Recapitalization
                    
                    
                    2,832,800
                    
                    
                    
                    283
                    
                    
                    
                    136
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    419Share
      issued for proceeds of $12 million
                    
                    
                    3,899,996
                    
                    
                    
                    390
                    
                    
                    
                    11,999,610
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,000,000Cost
      of raising capital
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,857,980
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,857,980
                    )Unusual
      charge - make good provision - Note 3 (iii)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,507,500
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,507,500Comprehensive
      incomeNet
      income, as restated
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    716,046
                    
                    
                    
                    716,046Foreign
      currency translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,007,468
                    
                    
                    
                    -
                    
                    
                    
                    1,007,468Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,723,514Appropriation
      to reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    800,417
                    
                    
                    
                    -
                    
                    
                    
                    (800,417
                    )
                    
                    
                    -Balance,
      December 31, 2006
                    
                    
                    23,959,994
                    
                    
                    $
                    2,396
                    
                    
                    $
                    29,647,643
                    
                    
                    $
                    3,148,265
                    
                    
                    $
                    1,452,138
                    
                    
                    $
                    3,976,543
                    
                    
                    $
                    38,226,985


See Notes
to Consolidated Financial Statements


F-9


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





1.
            Corporate
      information





Wonder
Auto Technology, Inc. (the “Company”) was incorporated in State of Nevada on
June 8, 2000.  The Company’s shares are quoted for trading on the
Over-The-Counter Bulletin Board in the United States of America.





Pursuant
to the Plan of Reorganization dated on June 22, 2006, the Company acquired 100%
ownership interest in Wonder Auto Limited (“WAL”), a limited company
incorporated in the British Virgin Islands, in consideration for the issuance of
the Company’s 17,227,198 common shares (as adjusted for a 2.449719-for-1 forward
stock split on July 26, 2006 (“Forward Stock Split”)) to the former stockholders
of WAL (“WAL Former Stockholders”) and 3,899,996 shares as adjusted for Forward
Stock Split to new investors.





The
aforesaid transaction was completed on June 22, 2006 and thereafter WAL became a
wholly owned subsidiary of the Company and WAL Former Stockholders became the
majority stockholders of the Company.  This transaction constituted a
reverse takeover transaction (“RTO”).





Following
the RTO, through WAL, the Company indirectly owned Man Do Auto Technology Co.,
Ltd. (“Man Do Auto”) and Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou
Halla”).  The entire issued and outstanding common stock of Man Do
Auto is directly held by the WAL.  In respect of Jinzhou Halla, 61% of
its common stock is directly held by the WAL whilst 39% is indirectly held by
the WAL through Man Do Auto.





On August
23, 2006, WAL entered into a Share Purchase Agreement (the “Share Purchase
Agreement”) with Winning International Development Limited (“Winning”), a
British Virgin Islands corporation, which held 50% equity interest in Jinzhou
Dong Woo Precision Co. Ltd. (“Dong Woo”).  The remaining 50% equity
interest is held by two independent third parties in equal proportion (that is
25% each).  Dong Woo was established in the People’s Republic of China
(the “PRC”) and is a supplier of raw materials to WAL.  More details
and accounting treatment on investment in Dong Woo are set out in note
4.





On
September 21, 2006, Jinzhou Halla together with two independent third parties
established Jinzhou Wonder Friends Mechanical Parts Co., Ltd. (“Wonder Friends”)
in the PRC.  Jinzhou Halla contributed $0.5 million to its registered
capital representing 20.41% equity interest thereon.  Wonder Friends
is principally engaged in manufacturing of piston rods, vibration-dampers and
rotary axes for motor vehicles.  More details and accounting treatment
on investment in Wonder Friends are set out in note 4.


F-10


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





2.
            Description
      of business





Following
the RTO as detailed in note 3(i), the Company commenced to be engaged in the
manufacture and distribution of automotive electrical components, namely
starters and alternators, in the PRC.





The
products of the Company are suitable for use in various types of
automobiles.  However, the Company currently has more market presence
in the sedan and passenger cars, pickup trucks and sport utility vehicles
segments.





The
customers include renowned automakers and automotive components suppliers in the
PRC.  As an integral part of developing customer relationship, the
Company will offer to its customers product design and development services for
their new car models or automotive components based on customers’ required
specifications.





The raw
materials used in production are mainly divided into four groups, namely metal
parts, semiconductors, chemical and packaging materials.





It is the
Company’s policy to only purchase raw materials from selected suppliers, both
locally and overseas from South Korea because management believed that the South
Korean suppliers provide the Company with goods that domestic manufacturers
cannot produce consistently at a high quality.





3.
            Basis
      of presentation





(i)
              Reorganization





Pursuant
to the Plan of Reorganization dated on June 22, 2006, the Company issued
21,127,194 shares as adjusted for Forward Stock Split of common stock, par value
$0.0001 per share, to the stockholders of WAL (17,227,198 shares as adjusted for
Forward Stock Split to WAL Former Stockholders and 3,899,996 shares as adjusted
for Forward Stock Split to new investors), representing approximately 88.2% of
the Company post-exchange issued and outstanding common stock, in exchange for
100% of the outstanding capital stock of WAL.





The RTO
has been accounted for as a recapitalization of the Company whereby the
historical financial statements and operations of WAL become the historical
financial statements of the Company, with no adjustment to the carrying value of
the assets and liabilities.  The 2,832,800 shares as adjusted of the
Company outstanding prior to the RTO are accounted for at $419 of net book value
at the time of the RTO.  The accompanying consolidated financial
statements reflect the recapitalization of the stockholders equity as if the
transaction occurred as of the beginning of the first period
presented.


F-11


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Basis
      of presentation (Cont’d)





(ii)
              Make
      good arrangement





On June
22, 2006, WAL completed a private placement pursuant to which WAL issued to
certain accredited investors 45.277236 shares of its common stock for
$12,000,000, such shares were subsequently exchanged for 3,899,996 shares as
adjusted for Forward Stock Split on July 26, 2006 of the common stock of the
Company in connection with the RTO.





In
connection with the private placement, WAL's two stockholders, Choice Inspire
Limited (“CIL”) and Empower Century Limited (“ECL”) entered into an escrow
agreement with the private placement investors.  Pursuant to the
escrow agreement, CIL and ECL agreed to certain “make good”
provisions.  In the escrow agreement, WAL established minimum net
income thresholds of $8,140,000 for the fiscal year ended December 31, 2006 and
$12,713,760 for the fiscal year ending December 31, 2007.  CIL and ECL
deposited a total of 3,300,000 shares as adjusted for Forward Stock Split on
July 26, 2006 of the Company’s common stock into escrow with Securities Transfer
Corporation under the escrow agreement.  If the 2006 net income
threshold is not achieved, then the escrow agent must deliver 1,650,000 shares
to the investors on a pro rata basis (based upon the total number of shares
purchased by the investors in connection with the private placement transaction)
and if the 2007 net income threshold is not achieved, the escrow agent must
deliver the second 1,650,000 shares to the investors on a pro rata
basis.  However, only those private placement investors who remain our
stockholders at the time the escrow shares become deliverable are entitled to
their pro rata portion of such escrow shares.





On
February 8, 2007, stockholders of CIL and ECL resolved to surrender the right of
entitlement to the 1,650,000 shares in aggregate for the fiscal year ended
December 31, 2006 placed with the escrow agent to Xiangdong Gao under the escrow
agreement.  On the same date, an agreement was signed between CIL, ECL
and Xiangdong Gao whereby both CIL and ECL have agreed to give the right of the
entitlement to the aforementioned escrowed shares related to the fiscal year
ended December 31, 2006 to Xiangdong Gao as a gift (that is for nil
consideration).  Xiangdong Gao is a beneficial stockholder of the
Company.





For the
purpose of determining whether or not the net income threshold (“NIT”) has been
met, the return of any shares to CIL and ECL was not deemed an expense to the
Company.





Excluding
the make good provision of $7,507,500, the Company has achieved the 2006
NIT.





Following
the incorporation of the SEC comments as detailed in note 3(iii) below, the
shares released back to CIL and ECL is recognized as an expense by reference to
the market value of the shares as of the date when the performance goal was met,
i.e. December 31, 2006. The total expense recognized for the fiscal year 2006 is
$7,507,500. Such expense is treated as an unusual item since it is deemed to be
unusual in nature but may not be infrequent in occurrence.


F-12


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Basis
      of presentation (Cont’d)





(iii)
              Restatement





The
Company has restated the consolidated financial statements as of December 31,
2006 in response to the comments from the United States Securities and Exchange
Commission’s (the “SEC”) on (i) compensation charges arising from make good
provision in connection with the release of escrow shares and (ii)
classification of cash flows arising from movement in restricted
cash.





(a)
              Compensation
      charges arising from make good provision in connection with the release of
      escrow shares





On
February 8, 2007, stockholders of CIL and ECL surrendered their rights of
entitlement to the first tranche of 1,650,000 shares to Xiangdong Gao for no
consideration. Following the achievement of 2006 net income threshold as
detailed in note 3(ii). Xiangdong Gao maintained no relationship with the
Company other than as a shareholder. The Company, therefore, relied upon
guidance given in SEC Practice\08 SEC Staff Views - Current Issue Rulemaking
Projects 11/16/98 and did not recognize compensation expenses in connection with
the release of such escrow shares.





Upon
consideration of SEC’s comments, the Company decided to recognize compensation
expenses for the shares released from escrow, irrespective of whether CIL and
ECL surrendered their rights of entitlement to Xiangdong Gao.





(b)
              Classification
      of cash flow arising from movement in restricted
  cash





Because
the bank deposits placed with the bank as restricted cash carried interest, the
management had considered the movement in restricted cash as investing activity
even though they were pledged for bills payable.





The SEC
expressed a view that the movement of restricted cash, which was used as
collateral for the Company’s bills payable undertaken by bank, should be
accounted for as cash flows from financing activities, instead of cash flows
from investing activities.Upon
consideration of SEC’s comments, the Company decided to re-classify the movement
of restricted cash as cash flows from financing activities.





The
following table sets forth the financial impacts of the restatement on the
Company.


F-13


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Basis
      of presentation (Cont’d)





(iii)
              Restatement
      (Cont’d)





Consolidated
Statement of Operations for the year ended December 31, 2006


Impact
      on (a)Previously
                  
                  
                  IncreaseReported
                  
                  
                  (Decrease)
                  
                  
                  RestatedGross
      profit
                  
                  $
                  14,808,282
                  
                  
                  $
                  -
                  
                  
                  $
                  14,808,282Operating
      expenses
                  
                  
                  (5,003,372
                  )
                  
                  
                  (7,507,500
                  )
                  
                  
                  (12,510,872
                  )Income
      before the following items and taxes
                  
                  
                  9,804,910
                  
                  
                  
                  (7,507,500
                  )
                  
                  
                  2,297,410Other
      operating expenses
                  
                  
                  (209,146
                  )
                  
                  
                  -
                  
                  
                  
                  (209,146
                  )Income
      before income taxes
                  
                  
                  9,595,764
                  
                  
                  
                  (7,507,500
                  )
                  
                  
                  2,088,264Income
      taxes
                  
                  
                  (1,270,391
                  )
                  
                  
                  -
                  
                  
                  
                  (1,270,391
                  )Minority
      interests
                  
                  
                  (101,827
                  )
                  
                  
                  -
                  
                  
                  
                  (101,827
                  )Net
      income
                  
                  $
                  8,223,546
                  
                  
                  $
                  (7,507,500
                  )
                  
                  $
                  716,046Earnings
      per share:basic
      and diluted
                  
                  $
                  0.40
                  
                  
                  $
                  (0.37
                  )
                  
                  $
                  0.03Weighted
      average number of shares outstanding:basic
      and diluted
                  
                  
                  20,787,279
                  
                  
                  
                  -
                  
                  
                  
                  20,787,279





Consolidated
Balance Sheet as of December 31, 2006





Impact
      on (a)Previously
                  
                  
                  IncreaseReported
                  
                  
                  (Decrease)
                  
                  
                  RestatedStockholders’
      EquityCommon
      stock
                  
                  $
                  2,396
                  
                  
                  $
                  -
                  
                  
                  $
                  2,396Additional
      paid-in-capital
                  
                  
                  22,140,143
                  
                  
                  
                  7,507,500
                  
                  
                  
                  29,647,643Statutory
      and other reserves
                  
                  
                  3,148,265
                  
                  
                  
                  -
                  
                  
                  
                  3,148,265Accumulated
      other comprehensive income
                  
                  
                  1,452,138
                  
                  
                  
                  -
                  
                  
                  
                  1,452,138Retained
      earnings
                  
                  
                  11,484,043
                  
                  
                  
                  (7,507,500
                  )
                  
                  
                  3,976,543Total
      stockholders’ equity
                  
                  $
                  38,226,985
                  
                  
                  $
                  -
                  
                  
                  $
                  38,226,985


F-14


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





3.
            Basis
      of presentation (Cont’d)





(iii)
              Restatement
      (Cont’d)





Consolidated
Statement of Cash Flows for the year ended December 31, 2006





Impact
      on (b)Previously
                                  
                                  
                                  IncreaseReported
                                  
                                  
                                  (Decrease)
                                  
                                  
                                  RestatedNet
      income
                                  
                                  $
                                  8,223,546
                                  
                                  
                                  $
                                  (7,507,500
                                  )
                                  
                                  $
                                  716,046Adjustments
      to reconcile net income to net cash provide by operating
      activities
                                  
                                  
                                  (6,834,614
                                  )
                                  
                                  
                                  7,507,500
                                  
                                  
                                  
                                  672,886Net
      cash flows provided by operating activities
                                  
                                  
                                  1,388,932
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,388,932Net
      cash flows used in Investing activities
                                  
                                  
                                  (7,136,865
                                  )
                                  
                                  $
                                  917,757
                                  
                                  
                                  
                                  (6,219,108
                                  )Net
      cash flows provided by financing activities
                                  
                                  
                                  9,225,743
                                  
                                  
                                  
                                  (917,757
                                  )
                                  
                                  
                                  8,307,986Effect
      of foreign currency translation on cash and cash
      equivalents
                                  
                                  
                                  357,132
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  357,132Net
      increase in cash and cash equivalents
                                  
                                  
                                  3,834,942
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,834,942Cash
      and cash equivalents - beginning of period
                                  
                                  
                                  4,368,757
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,368,757Cash
      and cash equivalents - end of period
                                  
                                  $
                                  8,203,699
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  8,203,699





(iv)
              Reclassification





Certain
current and prior year balances in the Consolidated Statements of Operations
have been reclassified to conform to current year presentation. For the years
ended December 31, 2006, 2005 and 2004, the Company reclassified $947,702,
$824,184 and $278,788 from cost of sales to research and development expenses
under operating expenses respectively. These reclassifications have no effect on
net income as previously presented.


F-15


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies





Principles of
consolidation





The
consolidated financial statements include the accounts of the Company and its
subsidiaries.  All significant inter-company accounts and transactions
have been eliminated in consolidation.





The
Company acquired 50% equity interest in Dong Woo, one of the Company’s primary
raw material suppliers, on August 23, 2006.  The board of directors of
Dong Woo consists of 5 members, three out of which were nominated by WAL
whilst the remaining two board members by the other two shareholders of Dong
Woo.  The board is the highest authority of Dong Woo and has power to
make operating and financing decision.  Before November 18, 2006, any
valid resolution of the board should be made by over two-third of the board
members (i.e. four board members or more).  Based on the foregoing,
the management of the Company was of the view that the Company had significant
influence but not control over the operations of Dong
Woo.  Accordingly, the investment in Dong Woo was initially recognized
at cost and subsequently accounted for under the equity method of accounting,
under which the attributable share (that is 50%) of Dong Woo’s net income is
recognized in the period in which it is earned by Dong Woo from the date of
acquisition till November 17, 2006.  On November 18, 2006, Dong Woo
amended its Memorandum and Articles of Association such that any valid
resolution of the board shall only be made by more than a half of the board
members with immediate effect.  Without any change in the composition
of the board as before, the Company obtained control over Dong Woo and the
results of operations and the financial position of Dong Woo is consolidated
since then.





The
financial position of Dong Woo as of November 18, 2006 is as
follows:





Cash
      and cash equivalents
                    
                    $
                    237,331Restricted
      cash
                    
                    
                    361,512Receivable
                    
                    
                    2,931Bills
      receivable
                    
                    
                    1,019,550Other
      receivable, prepayment and deposits
                    
                    
                    168,463Inventories
                    
                    
                    985,558Property,
      plant and equipment
                    
                    
                    1,720,399Land
      use right
                    
                    
                    631,390Amount
      due from Jinzhou Halla
                    
                    
                    3,496,918Accounts
      payable
                    
                    
                    (2,033,220
                    )Bills
      payable
                    
                    
                    (720,057
                    )Other
      repayable and accrued expenses
                    
                    
                    (237,040
                    )Income
      tax payable
                    
                    
                    (63,675
                    )Secured
      short-term bank loans
                    
                    
                    (637,219
                    )Net
      assets
                    
                    $
                    4,932,841





The net
cash inflows from Dong Woo on November 18, 2006 (i.e. The date on which was
obtained control) is $237,331.


F-16


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Principles of
consolidation (cont’d)





The
Company acquired the 50% equity interest in Dong Woo at a cash purchase price of
$4.85 million, which is contingent on whether Dong Woo can attain a net income
of $1.63 million for the fiscal year ended December 31, 2006.  If Dong
Woo fails to attain $1.63 million, the Company is entitled to deduct the
purchase price proportionately with the amount of the unfulfilled net
income.  For the year ended December 31, 2006, Dong Woo has achieved
the above said income target.





According
to the payment terms of the share purchase agreement, $2.43 million of the
purchase price was paid within one month after signing of the share purchase
agreement and the remaining $2.42 million will be paid within 5 days after the
confirmation by WAL that Dong Woo attains the said income target.  As
Dong Woo has met the income target, the Company will write to confirm its
achievement in the near future.  Accordingly, purchase price of $2.42
million was still outstanding as of December 31, 2006.





As of
December 31, 2006, the consolidated balance sheet reflects a goodwill identified
on acquisition of Dong Woo amounted to $2.77 million which represents the excess
of the purchase price of $4.85 million over the attributable share (that is 50%)
of fair value of acquired identifiable net assets of Dong Woo amounted to $2.08
million.





Goodwill





Goodwill
represents the excess of the purchase price of an acquired business over the
fair value of the identifiable assets acquired and liabilities
assumed.  Pursuant to the provisions of SFAS No. 142 “Goodwill
and Other Intangible Assets”, goodwill is not amortized and is subjected to an
annual impairment test which occurs in the fourth quarter of each fiscal
year.





Goodwill
will be written down only when and if impairment is identified and measured,
based on future events and conditions.





Minority
interests





Minority
interests resulted from the consolidation of 50% owned subsidiary, Dong Woo,
where the Company has control over its operations.





Investment in an
unconsolidated affiliate





The
Company accounts for the 20.41% investment in Wonder Friends (an investment in
which the Company exercises significant influence but does not control) using
the equity method, under which the share of Wonder Friends’ net income is
recognized in the period in which it is earned by Wonder Friends.  As
of December 31, 2006, the investment in unconsolidated affiliate of
$0.53 million represents attributable share of the underlying net assets of
Wonder Friends.


F-17


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Use of
estimates





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods.  These accounts and estimates include, but are not
limited to, the valuation of accounts receivable, inventories, deferred income
taxes, provision for warranty and the estimation on useful lives of property,
plant and equipment.  Actual results could differ from those
estimates.





Concentrations of credit
risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade and
bills receivables.  As of December 31, 2006 and 2005, substantially
all of the Company’s cash and cash equivalents and restricted cash were held by
major financial institutions located in the PRC, which management believes are
of high credit quality.  With respect to trade and bills receivables,
the Company extends credit based on an evaluation of the customer’s financial
condition.  The Company generally does not require collateral for
trade receivables and maintains an allowance for doubtful accounts of trade
receivables.





Regarding
bills receivable, they are undertaken by the banks to honor the payments at
maturity and the customers are required to place deposits with the banks
equivalent to certain percentage of the bills amount as
collateral.  These bills receivable can be sold to any third party at
a discount before maturity.  The Company does not maintain allowance
for bills receivable in the absence of bad debt experience and the payments are
undertaken by the banks.





During
the reporting periods, customers representing 10% or more of the Company’s
consolidated sales are :-


Year
      ended December 31,2006
                    
                    
                    2005
                    
                    
                    2004Beijing
      Hyundai Motor Company
                    
                    $
                    13,686,791
                    
                    
                    $
                    6,926,159
                    
                    
                    $
                    70,757Dongfeng
      Yueda Kia Motors Company Limited
                    
                    
                    2,416,288
                    
                    
                    
                    5,346,827
                    
                    
                    
                    1,849,984Harbin
      Dongan Auto-Engine Company Limited
                    
                    
                    2,777,216
                    
                    
                    
                    4,511,073
                    
                    
                    
                    6,681,493Harbin
      Dongan Automotive Engine Manufacturing Company Limited
                    
                    
                    5,770,801
                    
                    
                    
                    1,403,102
                    
                    
                    
                    1,037,976Shanghai
      WuLong Auto Components Investment Company Limited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,621,017Shenyang
      Aerospace Mitsubishi Motors Engine Manufacturing Company
      Limited
                    
                    
                    12,837,338
                    
                    
                    
                    5,451,367
                    
                    
                    
                    3,715,043$
                    37,488,434
                    
                    
                    $
                    23,638,528
                    
                    
                    $
                    18,976,270


F-18


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Cash and cash
equivalents





Cash and
cash equivalents include all cash, deposits in banks and other highly liquid
investments with initial maturities of three months or less to be cash
equivalents.  As of December 31, 2006 and 2005, almost all the cash
and cash equivalents were denominated in Renminbi (“RMB”) and were placed with
banks in the PRC.  They are not freely convertible into foreign
currencies and the remittance of these funds out of the PRC is subject to
exchange control restrictions imposed by the PRC government.  The
remaining insignificant balance of cash and cash equivalents were denominated in
Hong Kong dollars.





Restricted
Cash





Deposits
in banks pledged as securities for bills payable and letter of credit (Note 9)
that are restricted in use are classified as restricted cash under current
assets.





Marketable
securities





Marketable
securities represent the available-for-sale securities and are carried at
current fair values by reference to their market prices.  The change
in fair values is taken to other comprehensive income.





During
the reporting periods, there was no significant fluctuation on market prices of
these securities and accordingly no change in fair value is taken to other
comprehensive income.





There is
no significant market price risk as there was no significant fluctuation on
market prices and the marketable securities are not significant to the
Company.





Allowance of doubtful
accounts





The
Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectibility of trade receivables.  A considerable
amount of judgment is required in assessing the amount of the allowance, the
Company considers the historical level of credit losses and applies percentages
to aged receivable categories.  The Company makes judgments about the
creditworthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future.  If the financial condition of the customers were to
deteriorate, resulting in their inability to make payments, a larger allowance
may be required.





Based on
the above assessment, during the reporting years, the management establishes the
general provisioning policy to make allowance equivalent to 100% of gross amount
of trade receivables due over 1 year.  Additional specific provision
is made against trade receivables aged less than 1 year to the extent which they
are considered to be doubtful.


F-19


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Allowance of doubtful
accounts (cont’d)





Bad debts
are written off when identified.  The Company extends unsecured credit
to customers ranging from three to six months in the normal course of
business.  The Company does not accrue interest on trade accounts
receivable.





Historically,
losses from uncollectible accounts have not significantly deviated from the
general allowance estimated by the management and no significant additional bad
debts have been written off directly to the profit and loss.  This
general provisioning policy has not changed in the past since establishment and
the management considers that the aforementioned general provisioning policy is
adequate and not too excessive and does not expect to change this established
policy in the near future.





Inventories





Inventories
are stated at the lower of cost or market.  Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable
condition.  In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels.  Our reserve requirements generally
increase as our projected demand requirements; decrease due to market
conditions, product life cycle changes.  The Company estimates the
demand requirements based on market conditions, forecasts prepared by its
customers, sales contracts and orders in hand.





In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses.  The Company
writes down the inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and the estimated market
value based upon assumptions about future demand and market
conditions.





Based on
the above assessment, the Company establishes a general provision to make a 50%
provision for inventories aged over 1 year.





Historically,
the actual net realizable value is close to the management
estimation.


F-20


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Property, plant and
equipment





Property,
plant and equipment are stated at cost less accumulated
depreciation.  Cost represents the purchase price of the asset and
other costs incurred to bring the asset into its existing use.





Depreciation
is provided on straight-line basis over their estimated useful
lives.  The principal depreciation rates are as follows
:-


Annual rate
                  
                  
                  Residual valueBuildings
                  
                  
                  3 -
      4.5
                  %
                  
                  
                  10
                  %Plant
      and machinery
                  
                  
                  9
                  %
                  
                  
                  10
                  %Motor
      vehicles
                  
                  
                  9-18
                  %
                  
                  
                  10
                  %Furniture,
      fixtures and equipment
                  
                  
                  15
                  %
                  
                  
                  10
                  %Tools
      and equipment
                  
                  
                  15-18
                  %
                  
                  Nil
      to 10
                  %Leasehold
      improvements
                  
                  
                  20
                  %
                  
                  Nil





Construction
in progress mainly represents expenditures in respect of the Company’s new
offices and factories under construction.  All direct costs relating
to the acquisition or construction of the Company’s new office and factories are
capitalized as construction in progress. No depreciation is provided in respect
of construction in progress.





Maintenance
or repairs are charged to expense as incurred.  Upon sale or
disposition, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.





Trademarks and
patents





Trademarks
and patents are stated at cost less accumulated
amortization.  Amortization is provided on a straight-line basis over
their useful lives of 10 years granted from the relevant PRC
authorities.





Know-how





Know-how
is determined to have an indefinite useful life pursuant to the purchase
contracts as detailed in note 12.  It is not subject to amortization
until its useful life is determined to be no longer indefinite.





Know-how
is stated at cost of purchase less any identified impairment losses in the
annual impairment test.





Land use
right





Land use
right is stated at cost less accumulated amortization.  Amortization
is provided using the straight-line method over the terms of the lease of 30
years obtained from the relevant PRC land authority.


F-21


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Impairment of long-lived
assets





Long-lived
assets are tested for impairment in accordance with SFAS No. 144 and Accounting
Principles Board (“APB”) Opinion 18, Equity Method of Accounting for Investments
in Common Stock, respectively.  The Company periodically evaluates
potential impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable.  The Company
recognizes impairment of long-lived assets and investment in an affiliate in the
event that the net book values of such assets exceed the future undiscounted
cashflows attributable to such assets.  During the reporting periods,
the Company has not identified any indicators that would require testing for
impairment.





Revenue
recognition





Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time when the
products are put into use by its customers, the sales price is fixed or
determinable and collection is reasonably assured.





Advertising, transportation,
research and development expenses





Advertising,
transportation and other product-related costs are charged to expense as
incurred.





Research
and development costs include expenditure incurred for “new product development
expenses”, “investment in research and development equipment” and “other
research and development expenses”.





The “new
products development expenses” include salaries of personnel engaged and other
costs incurred for research and development of potential new
products.  They are expensed to Statement of Operations when
incurred.





“Investments
in research and development equipment” represent payments for acquisition of
equipment for research and development use.  This equipment has other
alterative future uses, such as usage in Testing Department.  The
equipment is capitalized as tangible asset when acquired and included under
Non-current assets “Property, plant and equipment” in the Financial
Statements.  Depreciation is provided according to the depreciation
rates of corresponding categories of Property, plant and equipment being
capitalized and included.





“Other
research and development expenses” represent payments for routine and ongoing
efforts to refine existing products.  These expenses are charged to
Statement of Operations when incurred.





Advertising
expenses amounting to $16,137, $15,992 and $12,061 for three years ended
December 31, 2006, 2005 and 2004 respectively are included in selling
expenses.





Transportation
expenses amounted to $464,838, $342,805 and $347,134 for three years ended
December 31, 2006, 2005 and 2004 respectively are included in selling
expenses.


F-22


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Advertising, transportation,
research and development expenses (cont’d)





Research
and development expenditure for each of three years in the year ended December
31, 2006 are as follow :-


Year
      ended December 31,Nature
                                  
                                  Included in
                                  
                                  2006
                                  
                                  
                                  2005
                                  
                                  
                                  2004New
      products
                                  
                                  Cost
      of salesdevelopmentexpenses
                                  
                                  
                                  
                                  $
                                  500,347
                                  
                                  
                                  $
                                  477,225
                                  
                                  
                                  $
                                  278,784Investments
      in research
                                  
                                  Property,
      plantand
      development
                                  
                                  and
      equipmentequipment
                                  
                                  
                                  
                                  
                                  611,615
                                  
                                  
                                  
                                  645,925
                                  
                                  
                                  
                                  695,610Other
      research and
                                  
                                  Cost
      of salesdevelopmentexpenses
                                  
                                  
                                  
                                  
                                  447,355
                                  
                                  
                                  
                                  346,959
                                  
                                  
                                  
                                  375,532$
                                  1,559,317
                                  
                                  
                                  $
                                  1,470,109
                                  
                                  
                                  $
                                  1,349,926





Warranty





It is the
policy of the Company to provide after sales support by way of a warranty
programme.  The Company provided warranties to certain customers with
warranty periods ranging from two years or 50,000 km to three years or 60,000
km, whichever comes first.





Based on
the past experience, the Company sets up a policy of making a general provision
for warranty such that the closing balance of this provision is equal to certain
percentage of relevant sales during the reporting periods as follows
:-





Year ended December 31,
                  
                  %2006
                  
                  
                  1.52005
                  
                  
                  22004
                  
                  
                  2





Stock-based
compensation





During
the reporting periods, the Company did not make any stock-based compensation
payments.


F-23


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Income
taxes





The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”.  Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statements carrying amounts of existing assets and
liabilities and loss carryforwards and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.





Dividends





Dividends
are recorded in Company’s financial statements in the period in which they are
declared.





Off-balance sheet
arrangements





The
Company does not have any off-balance sheet arrangements.





Comprehensive
income





The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances.  Components of comprehensive
income (loss) include net income and foreign currency translation
adjustments.





Foreign currency
translation





The
functional currency of the Company is RMB and RMB is not freely convertible into
foreign currencies.  The Company maintains its financial statements in
the functional currency.  Monetary assets and liabilities denominated
in currencies other than the functional currency are translated into the
functional currency at rates of exchange prevailing at the balance sheet
date.  Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchanges
rates prevailing at the dates of the transaction.  Exchange gains or
losses arising from foreign currency transactions are included in the
determination of net income for the respective periods.





For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars.  Assets and liabilities are translated at the exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates.  Any translation adjustments resulting are not
included in determining net income but are included in foreign exchange
adjustment to other comprehensive income, a component of stockholders’
equity.  The exchange rates in effect at December 31, 2006, 2005 and
2004 were RMB1 for $0.1279, $0.1239 and $0.1207 respectively.  There
is no significant fluctuation in exchange rate for the conversion of RMB to US
dollars after the balance sheet date.


F-24


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Basic and diluted earnings
per share





The
Company reports basic earnings per share in accordance with SFAS No. 128,
“Earnings Per Share”.  Basic earnings per share is computed using the
weighted average number of shares outstanding during the periods
presented.  The weighted average number of shares of the Company
represents the common stock outstanding during the reporting
periods.





Fair value of financial
instruments





The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, marketable securities, trade, bills and other
receivables, deposits, dividend payable, trade, bills and other payables
approximate their fair values due to the short-term maturity of such
instruments.  The carrying amounts of bank borrowings approximate
their fair values because the applicable interest rates approximate current
market rates.





It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.





In
respect of foreign currency risk, the Company is exposed to this risk arising
from import purchase transactions and recognized trade payables as they will
affect the future operating results of the Company.  The Company did
not have any hedging transactions during the reporting periods.  As
the functional currency of the Company is RMB, the exchange difference on
translation to US dollars for reporting purpose is taken to other comprehensive
income.





Recently issued accounting
pronouncements





In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155 “Accounting for Certain Hybrid Financial Instruments: and amendment of FASB
Statements No. 133 and 140”.  SFAS No. 155 simplifies the
accounting for certain derivatives embedded in other financial instruments by
allowing them to be accounted for as a whole if the holder elects to account for
the whole instrument on a fair value basis.  SFAS No. 155 also
clarifies and amends certain other provisions of SFAS No. 133 and SFAS No.
140.  SFAS No. 155 is effective for all financial instruments
acquired, issued or subject to a remeasurement event occurring in fiscal years
beginning after September 15, 2006.  Earlier adoption is permitted,
provided the Company has not yet issued financial statements, including for
interim periods, for that fiscal year.





In March
2006, the FASB released SFAS No. 156 “Accounting for Servicing of Financial
Assets: an amendment of FASB Statement No. 140” to simplify accounting for
separately recognized servicing assets and servicing
liabilities.  SFAS No. 156 permits an entity to choose either the
amortization method or the fair value measurement method for measuring each
class of separately recognized servicing assets and servicing liabilities after
they have been initially measured at fair value.  SFAS No. 156 applies
to all separately recognized servicing assets and liabilities acquired or issued
after the beginning of an entity’s fiscal year that begins after September 15,
2006.


F-25


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





4.
            Summary
      of significant accounting policies
(Cont’d)





Recently issued accounting
pronouncements (cont’d)





In July
2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income
Taxes”.  This interpretation requires that the entity recognize in its
financial statements the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position.  The provisions of FIN 48 is effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained
earnings.





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement”. SFAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  This Statement
shall be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years.  Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including
any financial statements for an interim period within that fiscal
year.  The provisions of this statement should be applied
prospectively as of the beginning of the fiscal year in which this Statement is
initially applied, except in some circumstances where the statement shall be
applied retrospectively.





In
September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize
the over funded or under funded status of defined benefit and other
postretirement plans as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through an adjustment to comprehensive income.  This
statement also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions.





In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements.  In SAB No.
108, the SEC staff establishes an approach that requires quantification of
financial statement errors, under both the iron-curtain and the roll-over
methods, based on the effects of the error on each of the Company’s financial
statements and the related financial statement disclosures.  SAB No.
108 is generally effective for annual financial statements in the first fiscal
year ending after November 15, 2006.  The transition provisions of SAB
No. 108 permits existing public companies to record the cumulative effect in the
first year ending after November 15, 2006 by recording correcting adjustments to
the carrying values of assets and liabilities as of the beginning of that year
with the offsetting adjustment recorded to the opening balance of retained
earnings.





The
company has adopted all the above accounting procurements and considers that
they have no material impact on these consolidated financial
statements.


F-26


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





5.
            Finance
      costs




Year
      ended December 31,2006
                  
                  
                  2005
                  
                  
                  2004Interest
      expenses
                  
                  $
                  807,693
                  
                  
                  $
                  611,326
                  
                  
                  $
                  537,958Bills
      discounting charges
                  
                  
                  170,851
                  
                  
                  
                  186,103
                  
                  
                  
                  68,524Bank
      charges and net exchange loss
                  
                  
                  55,007
                  
                  
                  
                  41,525
                  
                  
                  
                  36,659$
                  1,033,551
                  
                  
                  $
                  838,954
                  
                  
                  $
                  643,141





6.
            Income
      taxes





United
States





Wonder
Auto Technology, Inc. is subject to the United States of America Tax law at tax
rate of 34%.  No provision for income taxes in the United States has
been make as the taxable income for the year ended December 31, 2006 was set-off
by net operating loss carry forward from previous years and Wonder Auto
Technology, Inc. had no taxable income for the years ended December 31, 2005 and
2004.





BVI





WAL and
Man Do Auto were incorporated in the BVI and, under the current laws of the BVI,
are not subject to income taxes.





PRC





Enterprises
income tax (“EIT”) to Jinzhou Halla and Dong Woo in the PRC is charged at 27%,
in which 24% for national tax and 3% for local tax, of the assessable
profits.  As approved by the local tax authority in the PRC, Jinzhou
Halla and Dong Woo was entitled to two years’ exemption, from the first profit
making calendar year of operations after offset of accumulated taxable losses,
followed by 50% tax reduction for the immediate next three calendar years (“tax
holiday”).  The tax holiday of Jinzhou Halla commenced in the fiscal
financial year of 2001.  Accordingly, Jinzhou Halla was subject to tax
rate of 13.5% for 2003, 2004 and 2005.  Furthermore, Jinzhou Halla,
being a Foreign Investment Enterprise (“FIE”), is engaged in advanced technology
industry, Jinzhou Halla was approved to enjoy a further three years’ 50% tax
reduction for 2006, 2007 and 2008.  The tax holiday of Dong Woo
commenced in the fiscal year 2004.  Accordingly, Dong Woo was subject
to tax rate of 13.5% for 2006, 2007 and 2008.





Jinzhou
Halla and Dong Woo, being FIEs, were entitled to another special tax concession
that equivalent to 40% of the purchase price of qualifying domestic capital
expenditure as defined and approved under the relevant PRC income tax rule can
be used to offset against EIT.  Jinzhou Halla was additionally
entitled to a further tax concession, if there is a 10% increase in the current
year’s domestic development expenses over the prior year, amount equivalent to
50% of the current year’s expenses can be used to offset against
EIT.


F-27


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





6.
            Income
      taxes (Cont’d)





PRC
(cont’d)





The
components of the provision (benefit) for income taxes from continuing
operations are :-





Year
      ended December 31,2006
                  
                  
                  2005
                  
                  
                  2004Current
      taxes - PRC
                  
                  $
                  1,286,760
                  
                  
                  $
                  896,399
                  
                  
                  $
                  863,115Deferred
      taxes - PRC
                  
                  
                  (16,369
                  )
                  
                  
                  857
                  
                  
                  
                  (144,817
                  )$
                  1,270,391
                  
                  
                  $
                  897,256
                  
                  
                  $
                  718,298





The
effective income tax expenses differs from the PRC statutory income tax rate of
27% from continuing operations in the PRC as follows :-


Year
      ended December 31,2006
                    
                    
                    2005
                    
                    
                    2004Provision
      for income taxes at PRCstatutory
      income tax rate
                    
                    $
                    522,066
                    
                    
                    $
                    1,970,509
                    
                    
                    $
                    1,702,539Non-deductible
      items for tax
                    
                    
                    2,094,875
                    
                    
                    
                    31,817
                    
                    
                    
                    11,845Income
      not subject to tax
                    
                    
                    (108,558
                    )
                    
                    
                    (7,361
                    )
                    
                    
                    (4,407
                    )Others
                    
                    
                    16,200
                    
                    
                    
                    -
                    
                    
                    
                    -Tax
      concessions
                    
                    
                    (1,254,192
                    )
                    
                    
                    (1,097,709
                    )
                    
                    
                    (991,679
                    )$
                    1,270,391
                    
                    
                    $
                    897,256
                    
                    
                    $
                    718,298


F-28


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





6.
            Income
      taxes (Cont’d)





PRC
(cont’d)





Deferred
tax assets (liabilities) as of December 31, 2006 and 2005 are composed of the
following :-


As
      of December 31,2006
                                      
                                      
                                      2005PRCCurrent
      deferred tax assets:Allowance
      for doubtful debts
                                      
                                      $
                                      4,340
                                      
                                      
                                      $
                                      5,231Provision
      for obsolete inventories
                                      
                                      
                                      17,168
                                      
                                      
                                      
                                      26,211Provision
      for warranty
                                      
                                      
                                      141,661
                                      
                                      
                                      
                                      123,444Accrued
      liabilities
                                      
                                      
                                      23,053
                                      
                                      
                                      
                                      37,188Unrealized
      profit
                                      
                                      
                                      51,348
                                      
                                      
                                      
                                      -Others
                                      
                                      
                                      -
                                      
                                      
                                      
                                      69,474$
                                      237,570
                                      
                                      
                                      $
                                      261,548United
      StatesNon
      current deferred tax assets:Tax
      losses
                                      
                                      $
                                      48,000
                                      
                                      
                                      $
                                      52,000Valuation
      allowances
                                      
                                      
                                      (48,000
                                      )
                                      
                                      
                                      (52,000
                                      )$
                                      -
                                      
                                      
                                      $
                                      -PRCNon
      current deferred tax assets(liabilities):Depreciation
      of property, plantand
      equipment
                                      
                                      
                                      376,368
                                      
                                      
                                      
                                      298,021Amortization
      of land use right
                                      
                                      
                                      12,435
                                      
                                      
                                      
                                      12,621Amortization
      of know-how
                                      
                                      
                                      (183,328
                                      )
                                      
                                      
                                      (158,326
                                      )205,475
                                      
                                      
                                      
                                      152,316$
                                      205,475
                                      
                                      
                                      $
                                      152,316





As of
December 31, 2006, the Company had net operating loss carried forward amounted
to $140,612 in the United States which, if unutilized, will expire through to
2020.


F-29


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





7.
            Minority
      Interests





Minority
interests on the consolidated statement of operations of $101,827 for the year
ended December 31, 2006 represents the minority shareholders’ proportionate
share of the net income of Dong Woo.





8.
            Earnings
      per share





During
the reporting periods, the Company had no dilutive
instruments.  Accordingly, the basic and diluted earnings per share
are the same.





The per
share data reflects the recapitalization of stockholders’ equity as if the RTO
occurred as of the beginning of the first period presented and has been adjusted
for Forward Stock Split effected in July 2006.





9.
            Restricted
      cash, bills and trade payables





As
      of December 31,2006
                        
                        
                        2005Bank
      deposits held as collateral for bills payable
                        
                        $
                        4,876,879
                        
                        
                        $
                        3,597,609





When the
Company intends or is requested to settle its suppliers by issuance of bills, it
is required to place deposits with banks equal to 50% of the bills amount at the
time of issuance.  These deposits will be used to settle the bills at
maturity.





The
Company is requested by certain of its suppliers to settle by issuance of bills
for which the banks add their undertakings to guarantee their settlement at
maturity.  These bills are interest-free with maturity of three to six
months from date of issuance.  As security for the banks’
undertakings, the Company is required to deposit with such banks equal to 50% of
the bills amount at the time of issuance and pay bank charges.





Trade
payables represent trade creditors on open account.  They are
interest-free and unsecured.  The normal credit term given by these
suppliers to the Company ranges from one to three months.


F-30




Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





10.
            Other
      receivables, prepayments and
deposits





As
      of December 31,2006
                      
                      
                      2005Advances
      to staff
                      
                      $
                      238,310
                      
                      
                      $
                      110,178Value
      added tax and other tax recoverable
                      
                      
                      193,318
                      
                      
                      
                      145,669Other
      prepayments
                      
                      
                      227,883
                      
                      
                      
                      126,573Advance
      to a third party - Note 10a
                      
                      
                      358,171
                      
                      
                      
                      -Prepaid
      front-end-fee - Note 10b
                      
                      
                      162,146
                      
                      
                      
                      -Other
      receivables
                      
                      
                      74,381
                      
                      
                      
                      10,486$
                      1,254,209
                      
                      
                      $
                      392,906





Notes
:-





(a)
            The
      advance is interest-free, unsecured and repayable on
    demand.


(b)
              The
      front-end-fee was prepaid in conjunction with the loan facility to be
      obtained by the Company (Note
19).





11.
            Inventories




As
      of December 31,2006
                      
                      
                      2005Raw
      materials
                      
                      $
                      3,957,527
                      
                      
                      $
                      2,733,814Work-in-progress
                      
                      
                      450,545
                      
                      
                      
                      301,958Finished
      goods
                      
                      
                      9,428,237
                      
                      
                      
                      4,965,99113,836,309
                      
                      
                      
                      8,001,763Provision
      for obsolete inventories
                      
                      
                      (146,935
                      )
                      
                      
                      (194,153
                      )$
                      13,689,374
                      
                      
                      $
                      7,807,610





(Recovery
of)/provision for obsolete inventories of $(52,470), $(186,646) and $126,524
were (credited) charged to operations during the years ended December 31, 2006,
2005 and 2004 respectively.





12.
            Know-how





In March
1996, the Company entered into two contracts with the Korean Company (Note 4) to
purchase two technical know-how in relation to product design, manufacturing and
quality control of alternators and starters at a cash consideration of $1.36
million.  This consideration was mutually agreed between Jinzhou Halla
and the Korean Company.  Under the terms of the contracts, the Company
is able to use such know-how for unlimited period of time.





Since its
acquisition, no indicator of impairment was identified and accordingly it is
stated at cost.


F-31


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





13.
            Trademarks
      and patents




As
      of December 31,2006
                          
                          
                          2005Cost
                          
                          $
                          13,818
                          
                          
                          $
                          3,471Accumulated
      amortization
                          
                          
                          (2,400
                          )
                          
                          
                          (1,564
                          )$
                          11,418
                          
                          
                          $
                          1,907


During
the three years ended December 31, 2006, 2005 and 2004 amortization charge was
$769, $342 and $338 respectively.





The
estimated aggregate amortization expenses for trademarks and patents for the
five succeeding years is as follows :-





Year2007
                    
                    $
                    7692008
                    
                    
                    7692009
                    
                    
                    7692010
                    
                    
                    7692011
                    
                    
                    769$
                    3,845




14.
            Property,
      plant and equipment, net




As
      of December 31,2006
                        
                        
                        2005Costs:Buildings
                        
                        $
                        5,850,903
                        
                        
                        $
                        4,869,688Plant
      and machinery
                        
                        
                        13,457,393
                        
                        
                        
                        10,440,533Furniture,
      fixtures and equipment
                        
                        
                        381,810
                        
                        
                        
                        309,952Tools
      and equipment
                        
                        
                        1,196,095
                        
                        
                        
                        877,572Leasehold
      improvements
                        
                        
                        151,848
                        
                        
                        
                        24,773Motor
      vehicles
                        
                        
                        642,172
                        
                        
                        
                        341,33721,680,221
                        
                        
                        
                        16,863,855Accumulated
      depreciation
                        
                        
                        (7,851,156
                        )
                        
                        
                        (6,215,773
                        )Construction
      in progress - Note 4
                        
                        
                        116,781
                        
                        
                        
                        -Net
                        
                        $
                        13,945,846
                        
                        
                        $
                        10,648,082


F-32


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





14.
            Property,
      plant and equipment, net (Cont’d)





An
analysis of buildings, plant and machinery pledged to banks for banking loans
(Note 19a) is as follows :-




As
      of December 31,2006
                        
                        
                        2005Costs:Buildings
                        
                        $
                        4,576,803
                        
                        
                        $
                        3,810,749Plant
      and machinery
                        
                        
                        -
                        
                        
                        
                        2,663,9644,576,803
                        
                        
                        
                        6,474,713Accumulated
      depreciation
                        
                        
                        (929,213
                        )
                        
                        
                        (1,593,770
                        )Net
                        
                        $
                        3,647,590
                        
                        
                        $
                        4,880,943





Year
      ended December 31,2006
                  
                  
                  2005
                  
                  
                  2004Depreciation
                  
                  $
                  139,117
                  
                  
                  $
                  348,473
                  
                  
                  $
                  191,840





(i)
            During
      the reporting periods, depreciation is included in
  :-





Year
      ended December 31,2006
                      
                      
                      2005
                      
                      
                      2004Cost
      of sales and overheadsof
      inventories
                      
                      $
                      1,255,390
                      
                      
                      $
                      1,057,150
                      
                      
                      $
                      901,873Other
                      
                      
                      146,151
                      
                      
                      
                      101,411
                      
                      
                      
                      84,644$
                      1,401,541
                      
                      
                      $
                      1,158,561
                      
                      
                      $
                      986,517





During
the years ended December 31, 2006 and 2004, property, plant and equipment with
carrying amounts of $152,696 and $50,501 were disposed of at considerations of
$73,169 and $31,012 resulting in losses of $79,527 and $19,489
respectively.





(ii)
            Construction
      in Progress





Construction
in progress mainly comprises capital expenditure for construction of the
Company’s new offices and factories.


F-33


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





15.
            Land
      use right




As
      of December 31,2006
                      
                      
                      2005Land
      use right
                      
                      $
                      1,465,806
                      
                      
                      $
                      800,027Accumulated
      amortization
                      
                      
                      (262,550
                      )
                      
                      
                      (220,007
                      )$
                      1,203,256
                      
                      
                      $
                      580,020





The
Company obtained the right from the relevant PRC land authority for a period of
thirty years to use the land on which the office premises, production facilities
and warehouse of the Company are situated.  This right was pledged to
a bank for the bank loans granted to the Company (Note 19b).





During
the three years ended December 31, 2006, 2005 and 2004, amortization amounted to
$28,883, $26,245 and $25,980 respectively.





The
estimated aggregate amortization expenses for land use right for the five
succeeding years is as follows :-





Year2007
                  
                  $
                  28,8832008
                  
                  
                  28,8832009
                  
                  
                  28,8832010
                  
                  
                  28,8832011
                  
                  
                  28,883$
                  144,415




16.
            Other
      payables and accrued expenses




As
      of December 31,2006
                          
                          
                          2005Accrued
      audit fee
                          
                          $
                          90,678
                          
                          
                          $
                          110,114Other
      accrued expenses
                          
                          
                          137,839
                          
                          
                          
                          256,102Other
      tax payable
                          
                          
                          37,690
                          
                          
                          
                          12,479Payable
      for acquisition of property, plantand
      equipment
                          
                          
                          133,275
                          
                          
                          
                          166,789Staff
      welfare payable - Note
                          
                          
                          132,699
                          
                          
                          
                          82,325Payable
      for acquisition of Dong Woo-
      Note 4
                          
                          
                          2,420,000
                          
                          
                          
                          -Other
      payables
                          
                          
                          169,352
                          
                          
                          
                          82,013$
                          3,121,533
                          
                          
                          $
                          709,822





Note
:-





Staff
welfare payable represents accrued staff medical, industry injury claims, labor
and unemployment insurances.  All of which are third parties insurance
and the insurance premiums are based on certain percentage of
salaries.  The obligations of the Company are limited to those
premiums contributed by the Company.


F-34


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





17.
            Provision
      for warranty




As
      of December 31,2006
                      
                      
                      2005Balance,
      January 1
                      
                      $
                      914,403
                      
                      
                      $
                      815,498Claims
      paid for the year
                      
                      
                      (843,026
                      )
                      
                      
                      (991,008
                      )Addition
      provision for the year
                      
                      
                      945,871
                      
                      
                      
                      1,067,163Translation
      adjustments
                      
                      
                      32,096
                      
                      
                      
                      22,750Balance,
      December 31
                      
                      $
                      1,049,344
                      
                      
                      $
                      914,403




18.
            Amounts
      due from a related company / to a stockholder / to an unconsolidated
      affiliate





The
related company is controlled by certain of the Company’s stockholders which
include Qingjie Zhao.  These amounts are interest-free, unsecured and
repayable on demand.





19.
            Secured
      bank loans




As
      of December 31,2006
                      
                      
                      2005Bank
      loans repayable as follows:Within
      1 year
                      
                      $
                      14,326,831
                      
                      
                      $
                      7,431,813After
      1 year but within 2 years
                      
                      
                      -
                      
                      
                      
                      4,954,542$
                      14,326,831
                      
                      
                      $
                      12,386,355





As of
December 31, 2006, the Company’s banking facilities are composed of the
following:





AmountFacilities
      granted
                  
                  Granted
                  
                  
                  Utilized
                  
                  
                  UnusedSecured
      bank loans
                  
                  $
                  18,548,129
                  
                  
                  $
                  14,326,831
                  
                  
                  $
                  4,221,298





The above
banking loans were secured by the following:





(a)
            Property,
      plant and equipment with carrying value of $3,647,590 respectively (Note
      14);





(b)
            Land
      use right with carrying value of $1,203,256 (Note
  15);





(c)
            Certain
      trade receivables of approximately $4,260,000 were factored to a bank with
      recourse as collateral under invoice discount
  agreement;





(d)
            Guarantees
      executed by the Company’s sole director, Chief Executive Officer,
      President and Secretary, Qingjie Zhao, who is also a stockholder of the
      Company holding 61.05% common stock of the Company; and by a related
      company controlled by certain of the Company’s stockholders including
      Qingjie Zhao, Xiangdong Gao, Meina Zhang, Qing Lin, Yuquan Zhou, Chengyu
      Zhang and Chenye Zhang; and


F-35


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





19.
            Secured
      bank loans (Cont’d)





(e)
            All
      the bank loans are denominated in RMB and carry interest rates ranging
      from 6.12% to 6.732% per annum with maturity for one
  year.





During
the reporting periods, there was no covenant requirement under the banking
facilities granted to the Company.





On
November 24, 2006, the Company entered into a loan agreement (“Loan Agreement”)
with DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH for a bank
loan approximately up to $13 million (equivalent of Euro 10 million) for
expansion of its production facilities.  However, the availability of
this loan facility is subject to the terms and conditions laid down in the Loan
Agreement, including a first ranking pledge of the Company’s property, plant and
equipment with a minimum value of approximately $10.5 million (equivalent of
Euro 8 million).  As of December 31, 2006, such loan facility is
not yet available to the Company because the Company is still in the process of
arranging the aforementioned pledge and other necessary
documents.  Accordingly, this loan facility is not reflected in the
banking facilities as detailed above.  Details of such loan facility
are set out in the Company’s Form 8K dated November 30, 2006.





20.
            Commitments
      and contingencies





a.
            Capital
      commitment





As of
December 31, 2006, the Company had capital commitments amounting to $1,535,858
in respect of the acquisition of property, plant and equipment which were
contracted for but not provided in the financial statements.





b.
            Operating lease
      arrangement





As of
December 31, 2006, the Company had one non-cancelable operating lease for its
warehouses.  The leases will expire in 2007 and the expected payment
is $1,302.





The
rental expense relating to the operating leases was $1,302 and $3,764 for the
two years ended December 31, 2006 and 2005 respectively.


F-36


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





21.
            Common
      stock and additional paid-in
capital





Common
      stockNumber
      ofshares
      asadjusted
      for
                      
                      
                      
                      
                      
                      AdditionalForward
                      
                      
                      
                      
                      
                      paid-inStock
      Split
                      
                      
                      Amount
                      
                      
                      capitalBalance,
      January 1, 2005 andDecember 31,
    2005
                      
                      
                      17,227,198
                      
                      
                      $
                      1,723
                      
                      
                      $
                      11,998,377Recapitalization
                      
                      
                      2,832,800
                      
                      
                      
                      283
                      
                      
                      
                      136Shares
      issued for proceeds of $12 million
                      
                      
                      3,899,996
                      
                      
                      
                      390
                      
                      
                      
                      11,999,610Cost
      of raising capital
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,857,980
                      )Balance,
      December 31, 2006
                      
                      
                      23,959,994
                      
                      
                      $
                      2,396
                      
                      
                      $
                      22,140,143





(a)
            On
      June 22, 2006, the Company issued 21,127,194 shares of common stock, par
      value $0.0001 per share, to the stockholders of WAL, of which 17,227,198
      shares to WAL Former Stockholders and 3,899,996 shares to new investors in
      exchange for 100% of the outstanding capital stock of
  WAL.





(b)
            The
      Company’s issued and outstanding number of common stock immediately prior
      to the RTO is 2,832,800 shares are accounted for at $419 of net book value
      at the time of the RTO.





(c)
            On
      July 12, 2006, the board of the directors of the Company approved a
      2.448719-for-1 Forward Stock Split in the form of a stock
      dividend.  Immediately following the Forward Stock Split, the
      Company has 23,959,994 shares of common stock issued and
      outstanding.  The effect of Forward Stock Split has been
      retroactively reflected in these financial statements.  All
      references to weighted average shares outstanding and per share amounts
      included in the accompanying financial statements and notes reflect the
      Forward Stock Split and its retroactive
effects.





22.
            Statutory
      and other reserves





The
Company’s statutory and other reserves comprise statutory reserve and enterprise
expansion fund of Jinzhou Halla and Dong Woo in the PRC.




As
      of December 31,2006
                          
                          
                          2005Statutory
      reserve
                          
                          $
                          3,093,031
                          
                          
                          $
                          2,292,614Enterprise
      expansion fund
                          
                          
                          55,234
                          
                          
                          
                          55,234$
                          3,148,265
                          
                          
                          $
                          2,347,848


F-37


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





22.
            Statutory
      and other reserves (Cont’d)





Statutory
reserve





In
accordance with the relevant laws and regulations of the PRC and articles of
association of Jinzhou Halla and Dong Woo, it is required to appropriate 10% of
its net income, after offsetting any prior years’ losses, to the statutory
reserve.  When the balance of such reserve reaches 100% of the
registered capital, any further appropriation is optional.  Upon
approval from the board of directors of the respective company, the statutory
reserve can be used to offset accumulated losses or to increase registered
capital.





Enterprise expansion
fund





In
accordance with the relevant laws and regulations of the PRC and articles of
association of Jinzhou Halla and Dong Woo, the appropriation of income to this
fund is made in accordance with the recommendation of the board of directors of
the respective company.  Upon approval by the board, it can be used
for future expansion or to increase registered capital.





23.
            Accumulated
      other comprehensive income





The
accumulated other comprehensive income consists of foreign currency translation
adjustments as follows:


ForeigncurrencytranslationadjustmentsBalance,
      January 1, 2004
                  
                  $
                  23,818Foreign
      currency translation adjustments
                  
                  
                  766Balance,
      December 31, 2004
                  
                  
                  24,584Foreign
      currency translation adjustments
                  
                  
                  420,086Balance,
      December 31, 2005
                  
                  
                  444,670Foreign
      currency translation adjustments
                  
                  
                  1,007,468Balance,
      December 31, 2006
                  
                  $
                  1,452,138




24.
            Defined
      contribution plan





The
Company has a defined contribution plan for all qualified employees in the
PRC.  The employer and its employees are each required to make
contributions to the plan at the rates specified in the plan.  The
only obligation of the Company with respect to retirement scheme is to make the
required contributions under the plan.  No forfeited contribution is
available to reduce the contribution payable in the future years.  The
defined contribution plan contributions were charged to the consolidated
statements of operations.  The Company contributed $490,519, $417,824
and $388,461 for the years ended December 31, 2006, 2005 and 2004,
respectively.


F-38


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





25.
            Segment
      information





The
Company is engaged in the manufacture and distribution of automotive electrical
components including alternators and starters in the PRC.  The Company
has two reportable segments, alternators and starters, based on the type of
products.  Information for the two segments is disclosed under FAS
131, “Disclosures about Segments of an Enterprise and Related Information” as
below:





Alternators
                                        
                                        
                                        Starters
                                        
                                        
                                        TotalYear
      ended December 31
                                        
                                        
                                        Year
      ended December 31
                                        
                                        
                                        Year
      ended December 312006
                                        
                                        
                                        2005
                                        
                                        
                                        2004
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004Revenue
      from externalcustomers
                                        
                                        $
                                        45,216,038
                                        
                                        
                                        $
                                        30,118,341
                                        
                                        
                                        $
                                        28,119,116
                                        
                                        
                                        $
                                        26,934,445
                                        
                                        
                                        $
                                        17,944,464
                                        
                                        
                                        $
                                        14,146,758
                                        
                                        
                                        $
                                        72,150,483
                                        
                                        
                                        $
                                        48,062,805
                                        
                                        
                                        $
                                        42,265,874Interest
      income
                                        
                                        
                                        41,954
                                        
                                        
                                        
                                        17,844
                                        
                                        
                                        
                                        9,017
                                        
                                        
                                        
                                        24,154
                                        
                                        
                                        
                                        10,632
                                        
                                        
                                        
                                        4,537
                                        
                                        
                                        
                                        66,108
                                        
                                        
                                        
                                        28,476
                                        
                                        
                                        
                                        13,554Interest
      expenses
                                        
                                        
                                        507,310
                                        
                                        
                                        
                                        383,085
                                        
                                        
                                        
                                        357,899
                                        
                                        
                                        
                                        300,383
                                        
                                        
                                        
                                        228,241
                                        
                                        
                                        
                                        180,059
                                        
                                        
                                        
                                        807,693
                                        
                                        
                                        
                                        611,326
                                        
                                        
                                        
                                        537,958Amortization
                                        
                                        
                                        19,295
                                        
                                        
                                        
                                        16,661
                                        
                                        
                                        
                                        17,509
                                        
                                        
                                        
                                        10,357
                                        
                                        
                                        
                                        9,926
                                        
                                        
                                        
                                        8,809
                                        
                                        
                                        
                                        29,652
                                        
                                        
                                        
                                        26,587
                                        
                                        
                                        
                                        26,318Depreciation
                                        
                                        
                                        883,250
                                        
                                        
                                        
                                        963,870
                                        
                                        
                                        
                                        805,037
                                        
                                        
                                        
                                        518,291
                                        
                                        
                                        
                                        194,691
                                        
                                        
                                        
                                        181,480
                                        
                                        
                                        
                                        1,401,541
                                        
                                        
                                        
                                        1,158,561
                                        
                                        
                                        
                                        986,517Segment
      profit
                                        
                                        
                                        4,835,128
                                        
                                        
                                        
                                        3,904,964
                                        
                                        
                                        
                                        3,413,013
                                        
                                        
                                        
                                        4,818,079
                                        
                                        
                                        
                                        3,384,753
                                        
                                        
                                        
                                        2,897,393
                                        
                                        
                                        
                                        9,653,207
                                        
                                        
                                        
                                        7,289,717
                                        
                                        
                                        
                                        6,310,406Segment
      assets
                                        
                                        
                                        54,860,505
                                        
                                        
                                        
                                        35,053,650
                                        
                                        
                                        
                                        27,265,236
                                        
                                        
                                        
                                        22,308,718
                                        
                                        
                                        
                                        16,990,104
                                        
                                        
                                        
                                        9,708,836
                                        
                                        
                                        
                                        77,169,223
                                        
                                        
                                        
                                        52,043,754
                                        
                                        
                                        
                                        36,974,072Expenditure
      for segmentassets
                                        
                                        $
                                        1,685,790
                                        
                                        
                                        $
                                        1,292,607
                                        
                                        
                                        $
                                        1,915,749
                                        
                                        
                                        $
                                        1,951,822
                                        
                                        
                                        $
                                        770,284
                                        
                                        
                                        $
                                        963,777
                                        
                                        
                                        $
                                        3,637,612
                                        
                                        
                                        $
                                        2,062,891
                                        
                                        
                                        $
                                        2,879,526




F-39


Wonder
Auto Technology, Inc.


Notes
to Consolidated Financial Statements


(Stated
in US Dollars)





25.
            Segment
      information (Cont’d)





A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.





Year
      ended December 31,2006
                        
                        
                        2005
                        
                        
                        2004Total
      consolidated revenue
                        
                        $
                        72,150,483
                        
                        
                        $
                        48,062,805
                        
                        
                        $
                        42,265,874Total
      profit for reportable segments
                        
                        $
                        9,653,207
                        
                        
                        $
                        7,289,717
                        
                        
                        $
                        6,310,406Unallocated
      amounts relating torelating
      to operations:Interest
      income
                        
                        
                        30,702
                        
                        
                        
                        63
                        
                        
                        
                        -Other
      income
                        
                        
                        18,418
                        
                        
                        
                        9,753
                        
                        
                        
                        -Other
      general expenses
                        
                        
                        (106,563
                        )
                        
                        
                        (1,351
                        )
                        
                        
                        (4,706
                        )Unusual
      charge - make good provision
                        
                        
                        (7,507,500
                        )
                        
                        
                        -
                        
                        
                        
                        -Income
      before income taxes
                        
                        $
                        2,088,264
                        
                        
                        $
                        7,298,182
                        
                        
                        $
                        6,305,700





As
      of December 31,2006
                    
                    
                    2005
                    
                    
                    2004AssetsTotal
      assets for reportable segments
                    
                    $
                    77,169,223
                    
                    
                    $
                    52,043,754
                    
                    
                    $
                    36,974,072Cash
      and cash equivalents
                    
                    
                    830,917
                    
                    
                    
                    9,008
                    
                    
                    
                    543Marketable
      securities
                    
                    
                    -
                    
                    
                    
                    37,159
                    
                    
                    
                    -$
                    78,000,140
                    
                    
                    $
                    52,089,921
                    
                    
                    $
                    36,974,615





All of
the Company’s long-lived assets are located in the PRC.  Geographic
information about the revenues, which are classified based on the customers, is
set out as follows:





Year
      ended December 31,2006
                    
                    
                    2005
                    
                    
                    2004PRC
                    
                    $
                    68,686,842
                    
                    
                    $
                    47,416,125
                    
                    
                    $
                    41,920,125Others
                    
                    
                    3,463,641
                    
                    
                    
                    646,680
                    
                    
                    
                    345,749Total
                    
                    $
                    72,150,483
                    
                    
                    $
                    48,062,805
                    
                    
                    $
                    42,265,874




26.
            Subsequent
      events





Subsequent
to December 31, 2006, CIL, ECL and Xiangdong Gao entered into an agreement on
February 8, 2007, pursuant to which both CIL and ECL have agreed to give the
right of the entitlement to the 1,650,000 escrowed shares related to the fiscal
year ended December 31, 2006 to Xiangdong Gao for nil
consideration.  Further details are set out in note 3
(ii).


F-40




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




WONDER AUTO TECHNOLOGY, INC.By:
                /s/ Qingjie ZhaoQingjie
      ZhaoChief
      Executive OfficerDate: March 30, 2009




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities
and on the dates indicated.




Each
person whose signature appears below hereby authorizes Qingjie Zhao and Meirong
Yuan, or any of them, as attorneys-in-fact to sign on his behalf, individually,
and in each capacity stated below, and to file all amendments and/or supplements
to this annual report on Form 10-K.




Signature
                                    
                                    Capacity
                                    
                                    Date/s/
      Qingjie Zhao
                                    
                                    President,
      Chief Executive Officer and Chairman
                                    
                                    March
      30, 2009Qingjie
      Zhao
                                    
                                    (Principal
      Executive Officer)/s/
      Meirong Yuan
                                    
                                    Chief
      Financial Officer and Director (Principal
                                    
                                    March
      30, 2009Meirong
      Yuan
                                    
                                    Financial
      Officer and Principal Accounting Officer)/s/
      Larry Goldman
                                    
                                    DirectorLarry
      Goldman
                                    
                                    
                                    
                                    March
      30, 2009/s/
      Xingye Zhang
                                    
                                    DirectorXingye
      Zhang
                                    
                                    
                                    
                                    March
      30, 2009/s/
      David Murphy
                                    
                                    DirectorDavid
      Murphy
                                    
                                    
                                    
                                    March
      30,
2009




27




EXHIBIT
INDEX





Exhibit
      No.
                
                Description2.1
                
                Share
      Exchange Agreement, dated June 22, 2006, among the Company, Wonder Auto
      Limited and its stockholders. [Incorporated by reference as Exhibit 2.1 to
      the Company’s current report on Form 8-K filed on June 22,
      2006].2.2
                
                Stock
      Purchase Agreement, dated December 19, 2005, by and among the Company,
      Halter Financial Investments, L.P., Hisonic International, Inc.
      [Incorporated by reference as Exhibit 10.1 to Schedule 13D filed on
      December 21, 2005].


3.1
                
                Articles
      of Incorporation of the Company as filed with the Secretary of State of
      Nevada, as amended to date. [Incorporated by reference as Exhibit 3.1 to
      the Company’s registration statement on Form SB-2 filed on December 11,
      2001 in commission file number 333-74914].3.2
                
                Amended
      and Restated Bylaws of the Company. [Incorporated by reference as Exhibit
      3.4 to the Company’s registration statement on Form SB-2 filed on December
      11, 2001 in commission file number 333-74914].10.1
                
                Form
      of the Stock Purchase and Subscription Agreement, dated June 22, 2006.
      [Incorporated by reference as Exhibit 10.1 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.2
                
                Escrow
      Agreement, dated June 22, 2006, among the Company, Sterne Agee &
      Leach, Inc., Empower Century Limited, Choice Inspire Limited and
      Securities Transfer Corporation. [Incorporated by reference as Exhibit
      10.2 to the Company’s current report on Form 8-K filed on June 22,
      2006].10.3
                
                Escrow
      Agreement, dated June 22, 2006, by and among Wonder Auto Limited, Empower
      Century Limited, Thelen Reid & Priest LLP and certain purchasers.
      [Incorporated by reference as Exhibit 10.3 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.4
                
                Stock
      Purchase Agreement, dated April 28, 2004, between JinZhou Wonder Industry
      (Group) Co., Ltd and Wonder Auto Limited. [Incorporated by reference as
      Exhibit 10.4 to the Company’s current report on Form 8-K filed on June 22,
      2006].10.5
                
                Technical
      Cooperation Agreement, dated July 25, 2003, between JinZhou Halla
      Electrical Equipment Co., Ltd and MEISTER (Korea) Company Limited.
      [Incorporated by reference as Exhibit 10.5 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.6
                
                Strategic
      Cooperation Agreement, dated June 7, 2004, between JinZhou Halla
      Electrical Equipment Co., Ltd. and HIVRON Inc. [Incorporated by reference
      as Exhibit 10.6 to the Company’s current report on Form 8-K filed on June
      22, 2006].10.7
                
                Form
      of Purchase Contract with Supplier. [Incorporated by reference as Exhibit
      10.7 to the Company’s current report on Form 8-K filed on June 22,
      2006].




28





10.8
              
              Equipment
      Purchase Agreement, dated January 1, 2006, between JinZhou Halla
      Electrical Equipment Co., Ltd. and Suzhou Tenuo Automation Co., Ltd.
      [Incorporated by reference as Exhibit 10.8 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.9
              
              Equipment
      Purchase Agreement, dated May 19, 2005, between JinZhou Halla Electrical
      Equipment Co., Ltd. and DMG meccanica. [Incorporated by reference as
      Exhibit 10.9 to the Company’s current report on Form 8-K filed on June 22,
      2006].10.10
              
              Equipment
      Purchase Agreement, dated December 17, 2004, between JinZhou Halla
      Electrical Equipment Co., Ltd. and OMT Co., Ltd. [Incorporated by
      reference as Exhibit 10.10 to the Company’s current report on Form 8-K
      filed on June 22, 2006].10.11
              
              Loan
      Agreement, dated October 18, 2005, between JinZhou Halla Electrical
      Equipment Co., Ltd. and China Construction Bank (JinZhou Linghe Branch).
      [Incorporated by reference as Exhibit 10.11 to the Company’s current
      report on Form 8-K filed on June 22,
2006].


10.12
                
                Loan
      Agreement, dated September 30, 2005, between JinZhou Halla Electrical
      Equipment Co., Ltd. and JinZhou Commercial Bank (Chengjian Branch).
      [Incorporated by reference as Exhibit 10.12 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.13
                
                Loan
      Agreement, dated July 8, 2005, between JinZhou Halla Electrical Equipment
      Co., Ltd and China Construction Bank (JinZhou Linghe Branch).
      [Incorporated by reference as Exhibit 10.13 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.14
                
                Mortgage
      Agreement, dated September 30, 2005, between JinZhou Halla Electronic
      Equipment Co., Ltd. and JinZhou Commercial Bank (Linghe Branch).
      [Incorporated by reference as Exhibit 10.14 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.15
                
                Lease
      Agreement, dated November 8, 2005, by and among Beijing International
      Technological Cooperation Center Wang Jing Tower Company, JinZhou Halla
      Electrical Equipment Co., Ltd. and Beijing Zhucheng Real Property
      Management Company. [Incorporated by reference as Exhibit 10.15 to the
      Company’s current report on Form 8-K filed on June 22, 2006]
    .10.16
                
                Employment
      Contract, dated June 21 , 2006, between Wonder Auto Limited and Qingjie
      Zhao. [Incorporated by reference as Exhibit 10.16 to the Company’s current
      report on Form 8-K filed on June 22, 2006].**10.17
                
                Employment
      Contract, dated June 21 , 2006, between Wonder Auto Limited and Yuncong
      Ma. [Incorporated by reference as Exhibit 10.17 to the Company’s current
      report on Form 8-K filed on June 22, 2006].**10.18
                
                Employment
      Contract, dated June 21 , 2006, between Wonder Auto Limited and Meirong
      Yuan. [Incorporated by reference as Exhibit 10.18 to the Company’s current
      report on Form 8-K filed on June 22,
2006].**




29





10.19
              
              Employment
      Contract between JinZhou Halla Electrical Equipment Co., Ltd. and Seuk Jun
      Kim. [Incorporated by reference as Exhibit 10.19 to the Company’s current
      report on Form 8-K filed on June 22, 2006].**10.20
              
              Employment
      Contract between JinZhou Halla Electrical Equipment Co., Ltd. and Yuguo
      Zhao. [Incorporated by reference as Exhibit 10.20 to the Company’s current
      report on Form 8-K filed on June 22, 2006].**10.21
              
              Employment
      Contract between JinZhou Halla Electrical Equipment Co., Ltd. and Yongdong
      Liu. [Incorporated by reference as Exhibit 10.21 to the Company’s current
      report on Form 8-K filed on June 22, 2006].**10.22
              
              Consulting
      Agreement, dated April 22, 2006, between Heritage Management Consultants,
      Inc. and Wonder Auto Limited. [Incorporated by reference as Exhibit 10.22
      to the Company’s current report on Form 8-K filed on June 22,
      2006].**10.23
              
              Amendment
      No. 1 to the Consulting Agreement, dated June 23, 2006, between Heritage
      Management Consultants, Inc. and Wonder Auto Limited.**10.24
              
              Financial
      Advisory Agreement, dated March 15, 2006, between Wonder Auto Group and
      HFG International, Limited. [Incorporated by reference as Exhibit 10.23 to
      the Company’s current report on Form 8-K filed on June 22,
      2006].**


10.25
                
                Assignment
      and Assumption Agreement, dated May 31, 2006, between Wonder Auto Group,
      HFG International Limited and Wonder Auto Limited. [Incorporated by
      reference as Exhibit 10.24 to the Company’s current report on Form 8-K
      filed on June 22, 2006].10.26
                
                Put
      Option Agreement, dated December 19, 2005, by and among the Registrant,
      Halter Financial Investments, L.P. and Rachel (Pin) Kang [Incorporated by
      reference as Exhibit 10.2 to Schedule 13D filed on December 21,
      2005].10.27
                
                Credit
      Facility Agreement, dated August 21, 2006, by and between JinZhou Halla
      Electrical Equipment Co., Ltd. and the Bank of China JinZhou Tiebei
      branch. [Incorporated by reference as Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on August 25, 2006]10.28
                
                Share
      Purchase Agreement, dated August 23, 2006, by and between Wonder Auto
      Limited and Winning International Development Limited. [Incorporated by
      reference as Exhibit 10.2 to the Company’s current report on Form 8-K
      filed on August 25, 2006].10.29
                
                Domestic
      Business Invoice Discount Agreement, dated August 21, 2006, by and between
      JinZhou Halla Electrical Equipment Co., Ltd. and the Bank of China JinZhou
      branch. [Incorporated by reference as Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on October 3, 2006].10.30
                
                RMB
      Short-term Loan Agreement, dated September 13, 2006, by and between
      JinZhou Halla Electrical Equipment Co., Ltd. and the Bank of China JinZhou
      Tiebei branch. [Incorporated by reference as Exhibit 10.2 to the Company’s
      current report on Form 8-K filed on October 3,
  2006].




30





10.31
              
              Mortgage
      Agreement, dated September 13, 2006, by and between JinZhou Halla
      Electrical Equipment Co., Ltd. and the Bank of China JinZhou Tiebei
      branch. [Incorporated by reference as Exhibit 10.3 to the Company’s
      current report on Form 8-K filed on October 3, 2006].10.32
              
              Loan
      Agreement, dated November 24, 2006, by and between JinZhou Halla
      Electrical Equipment Co., Ltd. and DEG - Deutsche Investitions - und
      Entwicklungsgesellschaft mbH [Incorporated by reference as Exhibit 10.1 of
      the Company’s current report on Form 8-K filed on November 30,
      2006].14
              
              Code
      of Ethics. [Incorporated by reference as Exhibit 14 to the Company’s
      annual report on Form 10-KSB filed on March 30, 2005].21
              
              Revised
      list of subsidiaries of the Company.24
              
              Power
      of Attorney .31.1
              
              Certification
      of Chief Executive Officer, pursuant to Rule 13a - 14(a).
  *31.2
              
              Certification
      of Chief Financial Officer, pursuant to Rule 13a - 14(a).
  *32.1
              
              Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *




32.2
              
              Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *99.1
              
              Promissory
      Note, dated June 27, 2005 [Incorporated by reference as Exhibit 99.1 to
      the Company’s quarterly report on Form 10-QSB filed on August 15,
      2005].





* Filed
herewith.


**
Represents management contract or compensatory plan or
arrangement.


31