SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




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, 2008




 ̈
            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: 001-33648




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
                  People’s Republic of China,
      121013(Address
      of principal executive office and zip code)(86)
      416-2661186(Registrant’s
      telephone number, including area code)(Former
      name, former address and former fiscal year, if changed since last
      report)





Securities
registered pursuant to Section 12(b) of the Act:





Title of Each Class
                
                Name of Each Exchange on Which
      RegisteredCommon
      Stock, Par Value $0.0001
                
                NASDAQ
      Global Market





Securities
registered pursuant to Section 12(g) of the Act: None





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


Yes  ̈No 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  ̈No 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  ̈




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.     ̈










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





Large
      Accelerated Filer    ̈
            Accelerated
      Filer   xNon-Accelerated
      Filer   (Do not check if a smaller reporting
      company)
            Smaller
      reporting company x




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




The
aggregate market value of shares of the Registrant’s common stock held by
non-affiliates of the Registrant’s common stock (based upon the closing sale
price of such shares as reported on the NASDAQ Global Market) was approximately
$103.2 million as of June 30, 2008. Shares of the Registrant’s common stock
held by each executive officer, director, and 10% stockholder have been excluded
from the calculation 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 27, 2009, there were
26,959,994 shares of the Registrant’s common stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE:




Portions
of the Registrant’s Definitive Proxy Statement for its 2009 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.











WONDER
AUTO TECHNOLOGY, INC.




FORM
10-K




For the
Fiscal Year Ended December 31, 2008




TABLE OF
CONTENTS




Number
                                      
                                      
                                      
                                      PagePART
      IItem
      1.
                                      
                                      Business
                                      
                                      1Item
      1A.
                                      
                                      Risk
      Factors
                                      
                                      12Item
      1B.
                                      
                                      Unresolved
      Staff Comments
                                      
                                      28Item
      2.
                                      
                                      Properties
                                      
                                      29Item
      3.
                                      
                                      Legal
      Proceedings
                                      
                                      29Item
      4.
                                      
                                      Submission
      of Matters to a Vote of Security Holders
                                      
                                      30PART
      IIItem
      5.
                                      
                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                      
                                      30Item
      6.
                                      
                                      Selected
      Financial Data
                                      
                                      31Item
      7.
                                      
                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      
                                      31Item
      7A.
                                      
                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                      
                                      43Item
      8.
                                      
                                      Financial
      Statements and Supplementary Data
                                      
                                      44Item
      9.
                                      
                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                      
                                      44Item
      9A.
                                      
                                      Controls
      and Procedures
                                      
                                      44Item
      9B.
                                      
                                      Other
      Information
                                      
                                      45PART IIIItem
      10.
                                      
                                      Directors,
      Executive Officers and Corporate Governance
                                      
                                      46Item
      11.
                                      
                                      Executive
      Compensation
                                      
                                      46Item
      12.
                                      
                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                      
                                      46Item
      13.
                                      
                                      Certain
      Relationships and Related Transactions
                                      
                                      46Item
      14.
                                      
                                      Principal
      Accountant Fees and Services
                                      
                                      46PART IVItem
      15.
                                      
                                      Exhibits,
      Financial Statement Schedules
                                      
                                      46










Use
of Terms




Except as
otherwise indicated by the context, references in this report to “Company,”
“WATG,” “we,” “us” and “our” are references to the combined business of Wonder
Auto Technology, Inc., a Nevada corporation, and its subsidiaries on a
consolidated basis.  Unless the context otherwise requires, all references
to:





·
            “Fuxin
      Huirui” are references to Fuxin Huirui Mechanical Co., Ltd., a corporation
      incorporated in the People’s Republic of China and an indirect, wholly
      owned subsidiary of the Company;


·
            “Jinan
      Worldwide” are references to Jinan Worldwide Auto Accessories Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;


·
            “Jinzhou
      Dongwoo” are references to Jinzhou Dongwoo Precision Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, 50% owned subsidiary of the
Company;


·
            “Jinzhou
      Equipment” are references to Jinzhou Wonder Auto Electrical Equipment Co.,
      Ltd., a corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;


·
            “Jinzhou
      Halla” are references to Jinzhou Halla Electrical Equipment Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;


·
            “Jinzhou
      Hanhua” are references to Jinzhou Hanhua Electrical System Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, 50% owned subsidiary of the
Company;


·
            “Jinzhou
      Karham” are references to Jinzhou Karham Electrical Equipment Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, 65% owned subsidiary of the
Company;


·
            “Jinzhou
      Motor” are references to Jinzhou Wonder Motor Co., Ltd., a corporation
      incorporated in the People’s Republic of China and an indirect, wholly
      owned subsidiary of the Company;


·
            “Jinzhou
      Wanyou” are references to Jinzhou Wanyou Mechanical Parts Co., Ltd., a
      corporation incorporated in the People’s Republic of China and an
      indirect, wholly owned subsidiary of the
  Company;


·
            “Wonder
      Auto” are references to Wonder Auto Limited, a British Virgin Islands
      company and a direct, wholly owned subsidiary of the
    Company;


·
            “China”
      and “PRC” are references to People’s Republic of
  China;


·
            “RMB”
      are to Renminbi, the legal currency of China;
  and


·
            “$”
      are to the legal currency of the United
States.




Forward-Looking
Statements




In
addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. We use words such as “believe,” “expect,” “anticipate,”
“project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar
expressions which are intended to identify forward-looking statements. Such
statements include, among others, those concerning market and industry segment
growth and demand and acceptance of new and existing products; any projections
of sales, earnings, revenue, margins or other financial items; any statements of
the plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; uncertainties
related to conducting business in China, as well as all assumptions,
expectations, predictions, intentions or beliefs about future events. You are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, as well as assumptions, that,
if they were to ever materialize or prove incorrect, could cause the results of
the Company to differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties, among others,
include:











·
            The
      effects of the global economic
crisis;


·
            The
      effects of contraction in automotive sales and
  production;


·
            Escalating
      pricing pressures from our
customers;


·
            Our
      ability to accurately project market demand for our
    products;


·
            Our
      ability to require additional
capital;


·
            Risks
      associated with future investments or
  acquisitions;


·
            Interruption
      in our production processes;


·
            Our
      ability to attract new
customers;


·
            Our
      ability to employ and retain qualified
  employees;


·
            Competition
      and competitive factors in the markets in which we
  compete;


·
            General
      economic and business conditions in China and in the local economies in
      which we regularly conduct business, which can affect demand for the
      Company’s products and services;


·
            Changes
      in laws, rules and regulations governing the business community in China
      in general and the automobile industry in particular;
  and


·
            The
      risks identified in Item 1A. “Risk Factors” included
    herein.





All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements.  The Company assumes no obligation and
does not intend to update these forward-looking statements, except as required
by law.











PART
I




Item
      1.
              Business




Overview




Wonder
Auto Technology, Inc. is a Nevada holding company and conducts its operations
through its China-based operating subsidiaries.  We are primarily
engaged in business of designing, developing, manufacturing and selling
automotive electrical parts, specifically alternators and starters, engine
valves, tappets, rods and shafts in China. We have been producing alternators
and starters in China since 1997 and our newly acquired subsidiary Jinan
Worldwide has been producing engine valves and tappets for over 50
years.  According to a report issued by the China Association of
Automobile Manufacturers (CAAM), we ranked second in sales revenue in China in
the market for automobile alternators and starters in both 2007 and 2006. Our
mission in 2009 is to further grow market share of all our product
lines.





Our
products are mainly used in passenger cars and commercial vehicles and sold to
original equipment manufacturers in China. We offer over 230 different models of
alternators and approximately 150 different models of starters. In addition, we
have begun to manufacture and sell rectifier and regulator products for use in
alternators as well as various rods and shafts for use in shock absorbers,
alternators and starters.  As a result of our acquisition of Jinan
Worldwide, we have become one of the largest engine valves and tappets
manufacturers in China.





We sell
our products to automakers, engine manufacturers and, increasingly, auto parts
suppliers, based primarily in China.  We are increasingly exporting
our products to the international market. Our customers include Shanghai General
Motor Wuling Co., Ltd., Beijing Hyundai Mobis Auto Parts Co., Ltd., Shenyang
Aerospace Mitsubishi Motors Engine Co., Ltd., Harbin Dongan Automotive Engine
Co., Ltd., Shanghai VW Co., Ltd., Tianjin Toyota Co., Ltd., Chery Automobile
Co., Ltd., Dongfeng Yueda Kia Motors Co., Ltd., Geely Automobile Co., Ltd.,
Tianjin FAW Xiali Automobile Co., Ltd., and other well-known international
automakers and auto parts suppliers.




We
actively pursue acquisition prospects and other strategic opportunities and have
completed the following acquisitions since the beginning of fiscal year
2008:





·
            On
      January 1, 2008, we acquired a 50% equity interest in Jinzhou Hanhua,
      which designs, manufactures and sells armatures for automotive starters
      and oil pumps. Jinzhou Hanhua is a supplier to another operating
      subsidiary of ours, Jinzhou Halla.





·
            On
      February 19, 2008, we acquired a 65% equity interest in Jinzhou Karham,
      which is engaged in the business of designing, manufacturing and selling
      carbon brush assemblies for automotive starters. Jinzhou Karham is a
      supplier to another operating subsidiary of ours, Jinzhou
      Halla.





·
            On
      May 15, 2008, we acquired a 100% equity interest in Fuxin Huirui, which
      manufactures and sells rotors for automotive alternators.  Fuxin
      Huirui is a supplier to another operating subsidiary of ours, Jinzhou
      Halla.





·
            On
      October 1, 2008 and January 4, 2009, in  two separately
      negotiated transactions, we acquired 65% and 35% equity interests in Jinan
      Worldwide, respectively.  Jinan Worldwide designs, manufactures
      and sells engine valves and tappets, and is one of the largest engine
      valves and tappets manufacturers in China. The majority of its customers
      are Chinese and international diesel engine
  manufacturers.





1





History
and Corporate Structure




We were
incorporated on June 8, 2000 in the State of Nevada as “MGCC Investment
Strategies Inc.”  Until our reverse acquisition of Wonder Auto on June
22, 2006, our business strategy and ownership changed several times. On June 22,
2006, we acquired all of the capital stock of Wonder Auto in exchange for shares
of our capital stock. This share exchange transaction resulted in a change of
the ownership control of the Company. On August 25, 2006, we amended our
Articles of Incorporation and changed our name into “Wonder Auto Technology,
Inc.” As a result of the Wonder Auto acquisition, our business became the
business of our indirect, wholly-owned Chinese subsidiaries: (1) Jinzhou Halla,
(2) Jinzhou Dongwoo, (3) Jinzhou Wanyou, (4) Jinzhou Hanhua, (5) Jinzhou Karham,
(6) Jinzhou Motor, (7) Jinzhou Equipment, (8) Fuxin Huirui, and (9) Jinan
Worldwide.




We
conduct our operations in China through our PRC subsidiaries. The following
chart reflects our organizational structure as of the date of this annual
report.











(1)
 Holding company with no active business operations.


(2)  Holding
company with active business operations.


(3)  We
acquired controlling equity interests in Jinzhou Hanhua, Jinzhou Karham, and
Jinan Worldwide on January 1, 2008, February 19, 2008, and October 1, 2008,
respectively, and we consider them to have been our indirectly-held subsidiaries
since those dates.




Segment
Information




Our
business operations can be categorized into four segments based on the type of
products which we manufacture and sell, specifically, (i) alternators, (ii)
starters, (iii) rods and shafts and (iv) engine valves and tappets.





Our
alternator product line offerings are available in seven series based on
different sizes and output rates and come in over 230 models. Our starter
product line offerings primarily consist of planetary type starters which are
small and lightweight and come in ten series with approximately 150 models based
on their size and power output. We manufacture and sell both alternators and
starters using largely the same facilities, personnel and other resources in
Jinzhou Halla.  Approximately 81.7% of our 2008 sales revenue was
derived from the sale of our starter and alternator products.





2





Our
subsidiary Jinzhou Wanyou manufacturers our rod and shaft product line, which is
targeted primarily to international market outside China and accounts for
approximately 12.8% of our sales revenue in 2008. Our product offerings were
expanded to include engine valves and tappets as a result of our acquisition of
Jinan Worldwide in 2008.  Sales of our engine valves and tappets
accounted for 5.5% of our sales revenue in 2008.





For
financial information relating to our business segments, see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 24 to the consolidated financial statements appearing
elsewhere in this annual report. For a discussion of the risks attendant to our
foreign operations and of any dependence on one or more of the Company’s
segments upon such foreign operations, please see “Item 1A – Risk
Factors.”





Our
Products and Markets




Our
current products include automotive electrical parts, specifically, alternators
and starters; rods and shafts; and engine valves and tappets.




The
following table set forth sales information about our product mix in each of the
last three years.




(All
amounts, other than percentage, in thousands of U.S. dollars)
 Year
      Ended December 31,2008
              
              2007
              
              2006Product
              
              Revenue
              
              Percent of
                Revenue
              
              Revenue
              
              Percent of
                Revenue
              
              Revenue
              
              Percent of
                RevenueAlternators
              
              $
              63,256
              
              
              
              44.8
              %
              
              $
              59,790
              
              
              
              58.6
              %
              
              $
              45,216
              
              
              
              62.7
              %Starters
              
              
              52,138
              
              
              
              36.9
              %
              
              
              35,014
              
              
              
              34.3
              %
              
              
              26,934
              
              
              
              37.3
              %Rods
      and Shafts
              
              
              18,106
              
              
              
              12.8
              %
              
              
              7,280
              
              
              
              7.1
              %
              
              
              -
              
              
              
              -
              %Engine
      Valves and Tappets
              
              
              7,690
              
              
              
              5.5
              %
              
              
              -
              
              
              
              -
              %
              
              
              -
              
              
              
              -
              %Total
              
              
              141,190
              
              
              
              100
              %
              
              
              102,084
              
              
              
              100
              %
              
              
              72,150
              
              
              
              100
              %


Alternators





Our
alternators are manufactured by Jinzhou Halla. An alternator is part of a car
engine’s electrical system which is connected to the engine belt of a vehicle
and converts mechanical energy into electricity to recharge the
battery.  The battery, in turn, provides power to all electrical
devices in the vehicle, such as the radio, power steering, headlights and
windshield wipers. We have developed, manufactured and sold seven series of
alternators, which are represented by different sizes and output rates, in over
230 models. Our alternators’ current electrical current flows range in size and
output from 35A to 120A. Larger alternators, as determined by their diameters,
have more electrical field coils and can produce stronger currents. Our
alternators have dual integrated fans and built-in integrated circuit
regulators. Our alternators are designed to produce high outputs while remaining
small and lightweight. The size and weight parameters result in the improved
cooling performance of integrated fans and higher output from the integrated
circuit regulators.





Starters





Our
starters are manufactured by Jinzhou Halla. A starter is part of a car engine’s
starting system, along with the starter solenoid. At ignition, the starter
solenoid is activated and provides power for the starter. The starter then spins
the engine a few revolutions to begin the internal combustion process. The
starters produced by our Company are known as planetary type starters. These
starters are small and lightweight due to their high speed motors combined with
speed reduction systems. We produce ten series of starters in terms of diameters
(ø) from ø67 to ø100, which produce between 0.85kW to 5.5kW of
power.





3





Rods and
Shafts





Our rods
and shafts are manufactured by Jinzhou Wanyou. Our rod and shaft products are
mainly used in shock absorber which is a key part in a vehicle’s suspension
system. A shock absorber rod is the stem in the shock absorber providing full
support of a vehicle’s suspension system. Jinzhou Wanyou currently produces 15
series of rods and shafts in terms of diameters from ø8 to ø28 with over 2,000
models.





Engine Valves and
Tappets





Our
engine valves and tappets are manufactured by Jinan Worldwide. Engine valves and
tappets are used in internal combustion engines to control and facilitate the
engine’s air intake and exhaust functions. Our engine valves and tappets are
critical to optimizing the engine’s power output and fuel
consumption.  At present, Jinan Worldwide produces 5 series of engine
valves and tappets in term of applications with over 200 models.





Our
products are suitable for use in various types of passenger vehicles and
commercial vehicles. Our alternators and starters are mainly use in cars with
displacement ranging from 1.0L-2.5L, which accounted for approximately 69.7% of
our total sales in 2008. In terms of the market for our products, the OEM market
accounts for approximately 85% of our total sales revenue, and our export
accounts for about 16.2% of total sales revenue in 2008.




We strive
to produce high quality products and have established a quality control system
to ensure that we achieve this goal. We have obtained the ISO9002, QS9000, and
TS 16949 certificates for our quality management system.




Our
Industry




Overview of Chinese
Automobile Industry




The
global automobile industry has been greatly impacted by the global economic
crisis.  Although less affected than many of its foreign counterparts,
the auto industry in China has experienced a significant slowdown growing in
2008 at a slower pace than in previous years.  In 2008, the China auto
makers reported a 6.7% growth in sales as compared to 21.84% in 2007. According
to the China Association of Automobile Manufacturers, China’s auto output and
auto sales were 9.34 million and 9.38 million units in 2008, representing a
5.21% and 6.7% growth rate over 2007, respectively. Sales of passenger car in
China, including sedans, multipurpose vehicles and sport-utility vehicles, were
6.76 million units in 2008, up 7.27% year-on-year, which was 14.41 percentage
points lower than 2007.





Despite
the general economic crisis, China’s auto industry is expected to continue its
growth in 2009 at a projected rate of 10% according to the China’s Passenger Car
Association. We anticipate the sustained growth of China’s auto industry will be
mainly driven by the following factors:





China’s
overall  economic growth.  According to the National
Bureau of Statistics of China, the gross domestic product (“GDP”) in China was
RMB 30.1 trillion in 2008, representing a 9% growth rate as compared to 2007.
According to a forecast by the United Nations released on January 15, 2009,
China’s GDP growth in 2009 is expected to reach approximately 8.4%
notwithstanding the global economic downturn, as compared to the global GDP
growth rate which is projected to be approximately 1.0%.  We believe
that the projected GDP growth rate in China, on a per capita basis, will create
greater purchasing power among Chinese consumers which, when paired with a
decrease in automobile prices, will result in higher private automobile
ownership.





Low per capita
rate of vehicle ownership. In 2007, the private auto ownership rate in
China was about 22 vehicles per 1000 inhabitants, as compared to more than 750
vehicles per 1000 inhabitants in the United States and the world average rate of
120 vehicles per 1000 inhabitants. Given the huge demand for automobiles in
China, we expect that sales of automobiles in China are poised for growth over
the next few years.





4





Increasing
urbanization. Overall population growth and a trend toward urbanization
have led to significant growth in China’s urban population since 1978. According
to the National Bureau of Statistics of China, the urbanization rate in China
grew from 26% in 1990 to 44.7% in 2007, an increase of 65%. China’s urban
population is expected to continue to grow, triggering the need for more
efficient and individualized means of transportation and we believe this trend
will contribute to rising car ownership.





Growth of highway
infrastructure.  According to statistics released by the PRC
Ministry of Communication, the total length of expressways and class I-IV
highways in China increased from 1.07 million km in 1998 to 1.9 million km in
2005, a growth of 77.6%.  The growth of highway infrastructure is
likely to make transportation by automobile easier and more efficient resulting
in a greater demand for automobiles in our estimation.





Favorable
government policies.  The PRC government has adopted a number
of measures and initiatives intended to spur the growth and development of
China’s automobile industry.  The following are some examples of
government initiatives that we believe are likely to have a favorable economic
impact on the automotive industry:





·
            The
      PRC Ministry of Financing recently approved and granted RMB 5 billion
      (approximately $0.74 billion) for the “Cars to the Countryside” program
      which is a government subsidy program that becomes effective on March 1,
      2009. Under this program, individuals in rural areas who trade up to or
      purchase minibuses with engine size of 1.3 L or less will be entitled to a
      10% subsidies of the full price of a vehicle. In addition, favorable tax
      incentives are being offered to farmers and individuals in rural areas who
      purchase smaller vehicles.





·
            In
      November 2008, China’s State Council announced a RMB 4 trillion
      (approximately $586 billion) economic stimulation package which increases
      PRC government investment and spending on  infrastructure
      projects, particularly roads, railways and
  airports.





·
            On
      September 1, 2008, a measure was adopted by the PRC tax authority to
      reduce the consumption tax rates assessed on low emission vehicles, which
      is a primary market for our
products.





·
            On
      January 1, 2009, the  PRC State Tax Bureau implemented a new
      fuel tax which replaces six other fees imposed on vehicle owners and
      provides favorable tax treatment to low emission
  vehicles.





·
            On
      January 20, 2009, the PRC State Tax Bureau reduced by 50% the sales tax
      imposed upon the sales of small engine vehicles with displacements of 1.6L
      and below.





·
            On
      January 14, 2009, PRC government announced a stimulus package to bolster
      China’s automobile industry, including a RMB10 billion investment in the
      development of alternative energy
vehicles.





We expect
these governmental actions and measures will accelerate the demand for
automobiles, especially small displacement automobiles in China.





Overview of Chinese
Automobile Parts Industry




While the
Chinese automobile parts industry experienced rapid growth over the past several
years, starting in 2008, the Chinese automotive parts industry grew at a
considerably slower pace than in past years as the global economic crisis took
effect.  The number of automobiles in China reached 93.1 million at
the end of 2008, up 13.5% from 2007. According to Sinomind Consulting, a China
based auto market research and management consulting company, China’s sales of
automobile parts reached $136.5 billion in 2008, up 23.9% from $110.2 billion in
2007.  In China, total sales of automobile parts is projected to reach
$175 billion by 2010, representing a compounded annual growth rate of 20.54%
between 2005 and 2010 according to China Association of Social Economic
System.  According to United States Commerce Department, China became
the second largest exporter of automobile parts in the United States in 2007,
overtaking Germany and following Japan.




5





We
believe that growth in China’s auto parts industry will continue due to several
important factors.  First, the continued growth of Chinese automobile
industry will lay a solid foundation for the growth in the OEM automobile parts
industry.  Second, increased levels of car ownership by Chinese
residents will lead to the growth of the replacement parts
market.  Finally, as Chinese and international automotive
manufacturers implement cost savings plans, we expect them to source components
directly from low cost manufacturing regions, such as China.




Our
Intellectual Property




Our goal
is to utilize our intellectual property to provide us with a competitive
advantage. We currently own 64 patents issued in China relating to our products.
Additionally, Jinzhou Halla has registered the trademark for the logo “ ” ,and Jinan Worldwide has registered the trademark for
the logo “”, “”, “”, “”, “”, “”, and “” with the Trademark office of the State Administration for
Industry and Commerce of China.





We cannot
give any assurance that the protection afforded our intellectual property will
be adequate. It may be possible for third parties to obtain and use, without our
consent, intellectual property that we own or are licensed to use. Unauthorized
use of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our business.
See “Risk Factors— Risks Related to our Business— Our failure to adequately
protect our intellectual property rights may undermine our competitive position,
and litigation to protect our intellectual property rights may be costly.” We
may also be subject to litigation involving claims of patent infringement or
violation of other intellectual property rights of third parties. See “Risk
Factors— Risks Related to our Business— We may be exposed to infringement or
misappropriation claims by third parties, which, if determined adversely against
us, could disrupt our business and subject us to significant liability to third
parties.”





Sales
and Marketing




We market
our products directly to our customers though our sales department which, as of
December 31, 2008, consisted of 141 employees. Each member of our sales
department receives one month of training in both the business and technical
aspects that they will need to perform their job functions. In addition, we
periodically provide continuing educational training for our sales personnel.
Members of our sales department generate sales leads by contacting auto
manufacturers directly and by attending industry trade shows and exhibitions.
Since we have established our status as one of the leading suppliers of
alternators, starters, rods and shafts, and engine valves and tappets, our
customers may also contact us for new projects. Although most of our business is
developed by direct personal contact and referrals from our customers, we also
advertise our products in industry trade journals and other industry
media.




In order
to attract international customers, we also attend international trade shows,
such as the automobile shows in Frankfurt and Las Vegas, to raise our brand
recognition and promote our products to the international market.  We
started selling our products directly to foreign customers in 2003. Our overseas
sales accounted for approximately 16.2% of our total sales revenue in
2008.




In
addition to our sales and marketing department which performs customer service
functions, we also employ outside representatives whose primary function is to
understand our customers’ needs and promote services that best meet their
requirements. These representatives also help our customers resolve installation
problems and provide general customer service. As of December 31, 2008, we had
twelve representatives stationed at different major customers, including one
Mexican representative.




6





Raw
Materials




The raw
materials we use to produce our starters and alternators fall into four general
categories: metal parts, semiconductors, chemicals, and packaging materials. The
main raw materials we use to produce our rods, shafts, engine valves and tappets
are iron and steel rods. The prices of these raw materials are determined based
upon prevailing market conditions, supply and demand. Supply and demand for
these raw materials is generally affected by the cyclical nature of the
automobile industry and the auto parts industry. Supply and demand is also
affected by macroeconomic conditions, including consumer disposable income and
spending patterns.




We
purchase the majority of our raw materials and components from suppliers located
in China, including our subsidiaries Jinzhou Dongwoo, Jinzhou Hanhua, Jinzhou
Karham and Fuxin Huirui, as well as Tianjin Jingda Rea Special Enamelled Wire
Co., Ltd., Yingkou Die-Casting Products Co., Ltd., Zhejiang Huanfang Auto
Electrical Appliance Co. Ltd. and foreign manufacturers based in South Korea,
such as SW-Tech Corporation.  In situations where we procure raw
materials from our subsidiaries, we purchase such materials at cost with no
additional mark-up and account for such transaction through intercompany cost
allocations.




A portion
of our raw materials and components are made to our technical specifications,
and the remainder of our raw materials and components are non-customized. We
consider the raw materials and components that are made to our technical
specifications to be proprietary to us, and we have entered into agreements with
some of our suppliers which prohibit them from supplying to other third parties
these raw materials and components. We believe that in most instances, raw
materials and components made to our technical specifications can be obtained
from multiple supply sources. We generally have not experienced any difficulties
in obtaining our requirements for raw materials.




Even
though multiple supply sources are available to us, our practice has been to
utilize limited vendors for certain types of raw materials and components needed
in our business based on our past relationship with particular vendors and their
abilities to deliver to us high quality raw materials and components on
favorable terms. Over the past years, we have been making efforts to diversity
our supply channels in order to increase our bargaining power with suppliers. In
2008, our top five suppliers accounted for approximately 59.0% of our total cost
of sales, decreased from approximately 62.6% in 2007.




We
utilize local suppliers in close proximity to us, typically within 300
kilometers of our manufacturing facilities, in order to closely supervise their
activities, monitor quality, provide technical training and collaborate on
technical improvements. If geographically proximate suppliers continue to be
able to provide high quality raw materials and components to us, we intend to
continue to source our raw materials and components from them to take advantage
of lower shipping costs and favorable quality control capabilities.




Our
suppliers must meet our quality standards and delivery requirements consistently
to remain on our approved supplier list. If a supplier furnishes suboptimal
materials and components to us or is repeatedly late in deliveries, we remove
them from our approved supplier list.




We
typically purchase the raw materials that we use to produce our products from
our suppliers on credit.  Credit terms usually permit payment up to 90
days following the delivery of the raw materials. When we purchase raw materials
from Chinese suppliers, we are able to pay in Renminbi. When we purchase raw
materials from foreign suppliers, we usually pay in U.S. dollars. Our account
payables above six months accounted for 0.06%, 1.75% and 1.85%of our
total account payables in 2006, 2007 and 2008, respectively.




7





In 2008,
our three biggest suppliers are Jinzhou Dongwoo, Tianjin Jingda Rea Special
Enameled Wire Co. Ltd. and Jinzhou Hanhua, which accounted for approximately
20%, 12% and 11% of our total cost of sales, respectively. No other suppliers
accounted for more than 10% of our total cost of sales in 2008.




Our
Major Customers




Large
automobile manufacturers and automotive engine suppliers are our primary and
most desirable customers.  Our major customers include, among others,
Beijing Hyundai Mobis Auto Parts, Harbin Dongan Automotive Engine Co., Ltd.,
Shenyang Xinguang Huachen Auto Engine Co., Ltd., SWT (Korea), and Shenyang
Aerospace Mitsubishi Motors Engine Co., Ltd. We have also entered into technical
cooperation agreements or letters of intent with new OEM customers; including
Shanghai GM Wuling Automotive Co., Ltd, Nanjing Fiat Automotive Co., Ltd,
Beijing Benz Daimler Chrysler Auto Co., Ltd, Hyundai Automotive Parts Global
Sourcing, and Korean Doosan Engineering Vehicles Co., Ltd. As we continue to
increase sales in the domestic market, we also intend to grow our overseas
sales. We focus on maintaining long-term relationships with our customers. We
have enjoyed recurring orders from most of our customers for periods of four to
ten years. Our typical sales contract has a one-year term and is usually
renewable.




We
continued our efforts in diversifying our client base without lowering our total
sales revenue. In 2008, our top three customers accounted for approximately
34.9% of our total sales revenue as compare to approximately 49.2% in
2007.  In 2008, our two biggest customers Beijing Hyundai Mobis Auto
Parts Co., Ltd. and Harbin Dongan Automotive Engine Co., Ltd. accounted for
approximately 15.2% and 13.5% of our total sales revenue, respectively. No other
customers accounted for more than 10% of our sales revenue in 2008. We plan to
further diversify our customer base in 2009 to enhance
profitability.




Research
and Development




We
believe that the development of new products and production methods is important
to our success. We currently operate four research and development centers, each
performing different research and development activities. Three of our research
and development centers are located at our principal business headquarters in
Jinzhou, China, focusing on the enhancement of current products, and the
development and testing of new alternator, starter and electric motor products.
The other research and development center is located in Jinan, China, focusing
on the development and testing of new engine valve and tappet products. As of
December 31, 2008, our research and development personnel consisted of 163
employees.




We are
often invited by our customers to jointly develop new components tailored to our
customers’ specific requirements. In 2008, we had 32 joint development programs
used in various models of sedans. Our OEM customers that we conduct joint
development projects with include XiaLi, Chery Automobile, South Korea Doosan
and Beijing Benz-DaimlerChrysler Automotive Co., Ltd.  During the past
several years, upon the successful completion of most joint development
projects, we were engaged as the supplier for the jointly developed
products.




We
believe that our development period is shorter than many other industry
participants due to our dedicated research and development resources and our
close proximity to our customers. Many of our major competitors are foreign
joint ventures who generally conduct their primary research and development
activities in their home countries. We believe that our China-based research and
development operations provide us with an advantage over these competitors since
we are within geographic proximity to our customers and our research and
development personnel are able to communicate directly with our customers in
Chinese and quickly respond to their product requirements.





For the
fiscal years ended December 31, 2006, 2007 and 2008, our research and
development expenses for new products development, representing salaries of
personnel and other costs incurred for research and development of potential new
products, were $500,347, $534,503 and$1.2
million, representing approximately 0.7%, 0.5% and 0.9%of our
total sales revenue in 2006, 2007 and 2008, respectively.  The amount
incurred for purchase of equipments for research and development were
approximately $0.6 million, $2.4million
and $2.2 million, representing approximately 2.1%, 3.0% and 1.5%of our
total sales revenue in 2006, 2007 and 2008, respectively.




8





Backlog




Our
backlog of orders was approximately $12.3 million as of December 31, 2008
compared to approximately  $9.6 million at December 31, 2007. We
anticipate that substantially all of the backlog at the end of 2008 will be
delivered during 2009. In the opinion of management, the amount of backlog is
not indicative of trends in our business.





Regulation




Because
our operating subsidiaries are located in the PRC, we are regulated by the
national and local laws of the PRC.





There is
no private ownership of land in China. Upon payment of a land grant fee, land
use rights can be obtained from the government for a period up to 70 years in
the case of industrial land and are typically renewable. We have received the
necessary land use rights certificate for the 453,900 square feet of land
located at No. 16 Yulu Street, Jinzhou High Technology Industrial Park, Jinzhou,
China and the 179,500 square feet of land located at West Bo Hai Street, Open
Economic Zone, Jinzhou, China. We were granted land use rights from the Chinese
government for 1,842,000 square feet of land located at New Century Avenue,
Changqing District, Jinan High Technology Industrial Park, Shangdong, China. The
land use rights have a 50-year term and will expire on January 27, 2055. This
site houses our office building, a research and development center, as well as
our production facilities.





We are
also subject to China’s foreign currency regulations. The PRC government has
controlled Renminbi reserves primarily through direct regulation of the
conversion of Renminbi into other foreign currencies. Although foreign
currencies, which are required for “current account” transactions, can be bought
freely at authorized PRC banks, the proper procedural requirements prescribed by
PRC law must be met. At the same time, PRC companies are also required to sell
their foreign exchange earnings to authorized PRC banks, and the purchase of
foreign currencies for capital account transactions still requires prior
approval of the PRC government.





We do not
face any significant government regulations in connection with the production of
our products. We do not require any special government permits to produce our
products other than those permits that are required for all corporations in
China.





Our
Competition




The
automobile parts market in China is very competitive. We compete based upon the
price and quality of our products, product availability and customer service.
There are approximately 10 major competitors in this market trying to sell the
same products that we sell to the same group of target customers. Our primary
competitors are located in China and include Shanghai Valeo Automotive
Electrical Systems Co. Ltd., Hubei Shendian Auto Motor Co., Ltd. and Zhongqi
Changdian Co., Ltd.




With
China’s entry into the WTO and China’s agreement to lift its protections to
infant industries, we believe that competition will increase in the China auto
parts industry segment. Our primary international competitors include VALEO
(France), BOSCH (German), RAMY (U.S.), Mitsubishi Motor (Japan) and Denso
(Japan).  Some of our competitors have greater financial resources,
larger staff, and more established market recognition in both domestic Chinese
and international markets than we have.





9





Environmental
Compliance




Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise and air pollution and the disposal of waste and hazardous
materials. We are also subject to periodic inspections by local environmental
protection authorities. We believe we are in material compliance with the
relevant PRC environmental laws and regulations. We are not currently subject to
any pending actions alleging any violations of applicable PRC environmental
laws.




Our
Employees




As
ofDecember 31,
2008, we employed 2,698 full-time employees. The following table sets forth the
number of our full-time employees by function as of December 31,
2008.





Functions
                                      
                                      As
      of December 31, 2008Manufacturing
      and engineering
                                      
                                      
                                      2,254General
      and administration
                                      
                                      
                                      140Marketing
      and sales
                                      
                                      
                                      141Research
      and development
                                      
                                      
                                      163




As
required by applicable Chinese law, we have entered into employment contracts
with all of our officers, managers and employees. We believe that we maintain a
satisfactory working relationship with our employees, and we have not
experienced any significant labor disputes or any difficulty in recruiting staff
for our operations.




Our
employees in China participate in a state pension scheme organized by Chinese
municipal and provincial governments. We are required to contribute to the
scheme at the rates of 24% of the average monthly salary.  The
compensation expenses related to this scheme was approximately $1.2 million,
$681,944, and $490,519for the fiscal years
2008, 2007 and 2006, respectively.




In
addition, we are required by Chinese law to cover employees in China with
various types of social insurance.  We have purchased social insurance
for all of our employees.




Available
Information





Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, including exhibits, and amendments to those reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of
charge on our website at www.watg.cn as soon
as reasonably practicable after such reports are electronically filed with, or
furnished to, the SEC. Copies of these reports may also be obtained free of
charge by sending written requests to Investor Relation, Wonder Auto Technology,
Inc., No. 16 Yulu Street, Taihe District, Jinzhou City, Liaoning, People’s
Republic of China, 121013. The information posted on our web site is not
incorporated into this Annual Report.




Executive
Officers




Our
executive officers as of March 27, 2009 are as follows:





10




Name
                      
                      Age
                      
                      PositionsQingjie Zhao
                      
                      51
                      
                      Chairman, Chief Executive Officer and
      PresidentMeirong Yuan
                      
                      37
                      
                      Chief Financial Officer and
      TreasurerYuncong Ma
                      
                      62
                      
                      Chief Operating OfficerSeuk Jun Kim
                      
                      52
                      
                      Vice President of New Product DevelopmentYuguo Zhao
                      
                      52
                      
                      Vice
      President of Sales and MarketingYongdong Liu
                      
                      39
                      
                      Vice President of Production




Qingjie Zhao.  Mr.
Zhao has been our Chief Executive Officer and President since June 22, 2006 and
Chairman of our board since July 2006. Mr. Zhao joined our subsidiary, Jinzhou
Halla, as its Chairman in October 1997. Mr. Zhao is also currently an executive
director and 10.4% owner of China Wonder Limited, a company listed on the
Alternative Investment Market of the London Stock Exchange, which is principally
engaged in the manufacture and sale of specialty packaging machinery to the PRC
pharmaceutical market, and an executive director and 11.0% owner of Jinzhou
Jinheng Automotive Safety System Co., Ltd., which is principally engaged in the
manufacture and sale of automotive airbag safety systems in China. Our company,
China Wonder Limited and Jinzhou Jinheng Automotive Safety System Co., Ltd. do
not directly compete with each other, and there were no related party
transactions between our Company and the other two companies as of the date of
this report.  Mr. Zhao devotes most of his business time to our
affairs and the remainder of business time to the affairs of other companies.
Mr. Zhao’s decision making responsibilities for these three companies are
similar in the areas of public relations, management of human resources, risk
management and strategic planning. Mr. Zhao graduated from the Liaoning Industry
Academy in 1982. He thereafter became a faculty member at the Liaoning
University of Technology from 1982 to 1989. After leaving his post at the
Liaoning University of Technology, Mr. Zhao joined Jinzhou Shock Absorber Co.,
which is principally engaged in the manufacture and sale of suspension systems
for automobiles, in January 1989 as an engineer and the head of the research
department. He became its Chief Executive Officer in 1991 and remained in that
position until 1997.





Meirong Yuan.  Mr.
Yuan became our Chief Financial Officer and Treasurer on June 22, 2006 and our
director on March 2007. He has been the Vice President of Jinzhou Wonder
Industrial Co., Ltd. Since June 2005. Mr. Yuan also served as a director of
Jinzhou Halla since January 2002. From July 2003 to June 2005, Mr. Yuan served
as the Vice President of Shenzhen Luante Asphalt Advanced Technology Co. Ltd.
and was in charge of accounting and finance. Between October 2000 and October
2001, Mr. Yuan studied at ISMA Center in England. Mr. Yuan is a CPA in China and
has a Ph.D. in management from South California University for Professional
Study.





Yuncong Ma.  Mr. Ma
became our Chief Operating Officer on June 22, 2006. He has been the General
Manager of our subsidiary Jinzhou Halla since 1997 and is responsible for
Jinzhou Halla’s overall operations. He has over 30 years of production
experience and over 16 years of management experience in the automotive
industry. Mr. Ma graduated from the Harbin Institute of Technology in 1970
specializing in machine crafting. After graduation, Mr. Ma worked for Jinzhou
Huaguang Electron Tube Factory from 1970 to 1989. During that time, he worked in
various posts in its production, technology and corporate structuring
departments and was promoted to the post of Production Manager in 1984. Mr. Ma
joined Jinzhou Shock Absorber Co., Ltd. in 1989 as its Chief Engineer and Vice
Factory Manager.





Seuk Jun Kim.  Mr.
Kim became our Vice President of New Product Development in February 2007. From
June 2006 to February 2007, Mr. Kim served as our Vice President for Research
and Development. Mr. Kim joined Jinzhou Halla in October 1997 and has served as
its Vice President of Research and Development since January 2005. Mr. Kim is
responsible for Jinzhou Halla’s research and development and quality control
functions. In 1981, Mr. Kim graduated from Pohang University of Science and
Technology in Korea with a bachelor’s degree in automotive electrical
engineering. Prior to formally joining Jinzhou Halla in 1997, Mr. Kim worked at
the Korea Qingzhou Electrical Machinery Factory where he was in charge of
technical support.





11





Yuguo Zhao.  Mr.
Zhao became our Vice President of Sales and Marketing on June 22, 2006, and he
has been the head of sales and marketing since June 1996 when he joined Jinzhou
Halla. He became the Assistant General Manager in January 2005. Mr. Zhao is
responsible for our sales and after-sales operations. In 1979, Mr. Zhao
graduated from the Jinzhou Agriculture Academy, formerly known as Jinzhou
Agriculture Automotive School. Between 1980 and 1996, he worked for Jinzhou
Electrical as its Production Department Manager, Chief of Production and Chief
of Operations, among other posts.





Yongdong Liu.  Mr.
Liu became our Vice President of Production on June 22, 2006, and he has been
the Head of Production of Jinzhou Halla since May 2001 and an Assistant General
Manager of Jinzhou Halla since January 2005. Mr. Liu oversees our production,
purchasing, human resources and administration functions. Mr. Liu graduated from
the Suzhou Institute of Silk Textile Technology with a degree in weaving
mechanical design in 1992. Between 1992 and 1996, Mr. Liu worked in Jinzhou
Electrical and was responsible for its production technologies. He joined us in
June 1996 as a division head in the production department.





Item
      1A.
              RISK
      FACTORS




RISKS
RELATED TO OUR BUSINESS




The global
economic crisis could further impair the automotive
industry thereby limiting demand for our products and affecting the
overall availability and cost of external financing for our operations.The continuation or intensification of the global economic crisis and
turmoil in the global financial markets may adversely impact our business, the
businesses of our customers from whom we generate revenues and our
potential sources of capital financing.  Our automotive parts are primarily
sold to automakers, engine manufacturers and auto parts suppliers.  The
global economic crisis harmed most industries and has been particularly
detrimental to the automotive industry.  Since virtually all of our sales
are made to auto industry participants, our sales and business operations are
dependent on the financial health of the automotive industry and could
suffer if our customers experience, or continue to experience, a downturn
in their business.  In addition, the lack of availability of credit could
lead to a further weakening of the Chinese and global economies and make capital
financing of our operations more expensive for us or impossible altogether.
 Presently, it is unclear whether and to what extent the economic stimulus
measures and other actions taken or contemplated by the Chinese government and
other governments throughout the world will mitigate the effects of the crisis
on the automotive industry and other industries that affect our business. 
These conditions have not presently impaired our ability to access credit
markets and finance our operations.  However, the impact of the current
crisis on our ability to obtain capital financing in the future, and the cost
and terms of same, is unclear.  Furthermore, deteriorating economic
conditions including business layoffs, downsizing, industry slowdowns and other
similar factors that affect our customers could have further negative
consequences for the automotive industry and result in lower sales, price
reductions in our products and declining profit margins. The economic situation
also could harm our current or future lenders or customers, causing them to fail
to meet their obligations to us. No assurances can be given that the effects of
the current crisis will not damage on our business, financial condition and
results of operations.





A
contraction in automotive sales and production could have a material adverse
affect on our results of
operations and liquidity and on the viability of our supply base.





Automotive
sales and production are highly cyclical and depend, among other things, on
general economic conditions
and consumer spending and preferences (which can be affected by a number of
issues including fuel costs and the availability of consumer financing). As the
volume of automotive production fluctuates, the demand for our products also
fluctuates. The global automotive sales and production deteriorated
substantially in the second half of 2008 and are not expected to rebound
significantly in the near term. While the China automotive sales and production
maintained modest growth momentum in 2008 and is expected to continue to grow in
2009, the growth rate was down from previous years.  A contraction in
automotive sales and production could harm our results of operations and
liquidity. In addition, our suppliers would also be subject to many of the same
consequences which could pressure their results of operations and liquidity.
Depending on an individual supplier’s financial condition and access to capital,
its viability could be challenged which could impact its ability to perform as
we expect and consequently our ability to meet our own commitments.





12





Escalating
pricing pressures from our customers may adversely affect our
business.





Pricing
pressure in the automotive supply industry has been substantial and is likely to
continue. Many vehicle manufacturers seek price reductions in both the initial
bidding process and during the term of the contract.


Price
reductions have impacted our sales and profit margins and are expected to do so
in the future. If we are not able to offset continued price reductions through
improved operating efficiencies and reduced expenditures, those price reductions
may have a material adverse effect on our results of operations.




If
we fail to accurately project market demand for our products, our business
expansion plan could be jeopardized and our financial condition and results of
operations will suffer.




If actual
customer orders are less than our projected market demand, we will likely suffer
overcapacity problems and may have to leave capacity idle, which may reduce our
overall profitability and hurt our financial condition and results of
operations.  We derive most of our sales revenue from sales of our
products in China. The continued development of our business depends, in large
part, on continued growth in the automotive industry, especially in China.
Although China’s automotive industry has grown rapidly in the past, it may not
continue to grow at the same growth rate in the future or at all. However, the
developments in our industry are, to a large extent, outside of our control and
any reduced demand for automotive parts products and services, any other
downturn or other adverse changes in China’s automotive industry could severely
harm our business.




Our
business is capital intensive and our growth strategy may require additional
capital which may not be available on favorable terms or at all.




We
believe that our current cash and cash flow from operations are sufficient to
meet our present and reasonably anticipated cash needs. We may, however, require
additional cash resources due to changed business conditions, implementation of
our strategy to expand our manufacturing capacity or other investments or
acquisitions we may decide to pursue. If our own financial resources are
insufficient to satisfy our capital requirements, we may seek to sell additional
equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants that would
restrict our operations. Given the current global economic crisis, financing may
not be available in amounts or on terms acceptable to us, if at all. Any failure
by us to raise additional funds on terms favorable to us, or at all, could limit
our ability to expand our business operations and could harm our overall
business prospects.




Due
to our rapid growth in recent years, our past results may not be indicative of
our future performance so evaluating our business and prospects may be
difficult.




Our
business has grown and evolved rapidly in recent years as demonstrated by our
growth in sales revenue from approximately $48.1 million in 2005 to $141.2
million in 2008. We may not be able to achieve similar growth in future periods,
and our historical operating results may not provide a meaningful basis for
evaluating our business, financial performance and prospects. Moreover, our
ability to achieve satisfactory manufacturing results at higher volumes is
unproven. Therefore, you should not rely on our past results or our historical
rate of growth as an indication of our future performance.




We
face risks associated with future investments or acquisitions.




An
important element of our growth strategy is to invest in or acquire businesses
that will enable us, among other things, to expand the products we offer to our
existing target customer base, lower our costs for raw materials and components
and capitalize on opportunities to expand into new markets. Within the past
year, we acquired controlling interests in four complementary businesses,
Jinzhou Hanhua, Jinzhou Karham, Fuxin Huirui and Jinan Worldwide which we expect
to contribute to our future growth. In the future, we may be unable to identify
other suitable investment or acquisition candidates or may be unable to make
these investments or acquisitions on commercially reasonable terms, if at
all.





13




If we
complete an investment or acquisition, we may not realize the anticipated
benefits from the transaction. Integrating an acquired business is distracting
and time consuming, as well as a potentially expensive process. We are currently
in the process of integrating our operations with the operations of Jinzhou
Hanhua, Jinzhou Karham, Fuxin Huirui and Jinan Worldwide. The successful
integration of these companies and any other acquired businesses require us
to:




•
            
            integrate
      and retain key management, sales, research and development, production and
      other personnel;




•
            
            incorporate
      the acquired products or capabilities into our offerings from an
      engineering, sales and marketing
perspective;




•
            
            coordinate
      research and development efforts;




•
            
            integrate
      and support pre-existing supplier, distribution and customer
      relationships; and




•
            
            consolidate
      duplicate facilities and functions and combine back office accounting,
      order processing and support
functions.




Geographic
distance between business operations, the compatibility of the technologies and
operations being integrated and the disparate corporate cultures being combined
also present significant challenges.




Acquired
businesses are likely to have different standards, controls, contracts,
procedures and policies, making it more difficult to implement and harmonize
company-wide financial, accounting, billing, information and other systems. Our
focus on integrating operations may also distract attention from our day-to-day
business and may disrupt key research and development, marketing or sales
efforts. If we cannot overcome these challenges, we may not realize actual
benefits from past and future acquisitions, which will impair our overall
business results.




Our
acquisition strategy also depends on our ability to obtain necessary government
approvals. See “—Risks Related to Doing Business in China— We may be unable to
complete a business combination transaction efficiently or on favorable terms
due to complicated merger and acquisition regulations which became effective on
September 8, 2006.”




Any
interruption in our production processes could impair our financial performance
and negatively affect our brand.




We
manufacture or assemble our products at our facilities in Jinzhou and Jinan,
China. Our manufacturing operations are complicated and integrated, involving
the coordination of raw material and component sourcing from third parties,
internal production processes and external distribution processes. While these
operations are modified on a regular basis in an effort to improve manufacturing
and distribution efficiency and flexibility, we may experience difficulties in
coordinating the various aspects of our manufacturing processes, thereby causing
downtime and delays. We have also been steadily increasing our production
capacity and have limited experience operating at these higher production volume
levels.  In addition, we may encounter interruption in our
manufacturing processes due to a catastrophic loss or events beyond our control,
such as fires, explosions, labor disturbances or violent weather conditions. Any
interruptions in our production or capabilities at our facilities could result
in our inability to produce our products, which would reduce our sales revenue
and earnings for the affected period. If there is a stoppage in production at
any of our facilities, even if only temporary, or delays in delivery times to
our customers, our business and reputation could be severely affected. Any
significant delays in deliveries to our customers could lead to increased
returns or cancellations and cause us to lose future sales. We currently do not
have business interruption insurance to offset these potential losses, delays
and risks so a material interruption of our business operations could severely
damage our business.





14




Part
of our strategy involves the development of new products, and if we fail to
timely develop new products or we incorrectly gauge the potential market for new
products, our financial results will be adversely affected.




We plan
to utilize our in-house research and development capabilities to develop new
products that could become new sources of sales revenue for us in the future and
help us to diversify our revenue base.  Our future research and
development efforts will be focused on expanding our product offering beyond our
current products into other similar products and components for different
applications, such as hub motors for electric bicycles and electric vehicles. If
we fail to timely develop new products or if we miscalculate market demand for
new products that we develop, we may not be able to grow our sales revenue at
expected growth rates and may incur expenses relating to the development of new
products that are not offset by sufficient sales revenue generated by these new
products.




Exporting
our products outside of China is a core component of our overall growth
strategy, which could subject us to various economic, political, regulatory,
legal and foreign exchange risks.




We
currently sell most of our products in China. Our overseas sales accounted for
4.8%, 9.6% and 16.2% of our total sales revenue in 2006, 2007 and 2008,
respectively. We plan to selectively enter international markets in which an
opportunity to sell our products has been identified. The marketing,
distribution and sale of our products overseas expose us to a number of risks,
including:




•
            
            fluctuations
      in currency exchange rates;




•
            
            difficulty
      in designing products that are compatible with product standards in
      foreign countries;




•
            
            greater
      difficulty in accounts receivable
collection;




•
            
            increased
      marketing and sales costs;




•
            
            difficulty
      and costs of compliance with foreign regulatory requirements and different
      commercial and legal requirements;




•
            
            an
      inability to obtain, maintain or enforce intellectual property rights in
      foreign countries;




•
            
            changes
      to import and export regulations, including quotas, tariffs and other
      trade barriers, delays or difficulties in obtaining export and import
      licenses, repatriation controls on foreign earnings and currency
      conversion restrictions; and




•
            
            difficulty
      in engaging and retaining distributors and agents who are knowledgeable
      about, and can function effectively in, overseas
  markets.




If we
cannot effectively manage these risks, our ability to conduct or expand our
business abroad would be impaired, which may in turn hamper our business,
financial condition and prospects.





15




If
we cannot keep pace with market changes and produce automotive parts with new
technologies in a timely and cost-efficient manner to meet our customers’
requirements and preferences, the growth and success of our business will be
hindered.




The
automotive parts market in China is characterized by increasing demand for new
and advanced technologies, evolving industry standards, intense competition and
wide fluctuations in product supply and demand. If we cannot keep pace with
market changes and produce automotive parts incorporating new technologies in a
timely and cost-efficient manner to meet our customers’ requirements and
preferences, the growth and success of our business will suffer.




From time
to time, new products, product enhancements or technologies may replace or
shorten the life cycles of our products or cause our customers to defer
purchases of our existing products. Shorter product life cycles may require us
to invest more in developing and designing new products and to introduce new
products more rapidly, which may increase our costs of product development and
decrease our profitability. In addition, we may not be able to make such
additional investments and any additional investments we make in new product
development and introductions may not be successful.




Even if
we develop and introduce new products, their market acceptance is not assured
and depends on:




•
            
            the
      perceived advantages of our new products over existing competing
      products;




•
            
            our
      ability to attract vehicle manufacturers who are currently using our
      competitors’ products;




•
            
            product
      cost relative to performance; and




•
            
            the
      level of customer service available to support new
    products.




Therefore,
commercial acceptance by customers of our products may not occur at our expected
rate or level, and we may not be able to successfully adapt existing products to
effectively and economically meet customer demand, thus impairing the return
from our investments. We may also be required under applicable accounting
standards to recognize a charge for the impairment of assets to the extent our
existing products become uncompetitive or obsolete or if any new products fail
to achieve commercial acceptance. Any such charge may jeopardize our ability to
operate profitably.




Failure
to adequately protect our intellectual property rights may undermine our
competitive position, and litigation to protect our intellectual property rights
may be costly.




We strive
to strengthen and differentiate our product portfolio by developing new and
innovative products and product improvements. As a result, we believe that the
protection of our intellectual property will become increasingly important to
our business. Implementation and enforcement of intellectual property-related
laws in China has historically been lacking due primarily to ambiguities in PRC
intellectual property law. Accordingly, protection of intellectual property and
proprietary rights in China may not be as effective as in the United States or
other countries. Currently, we hold 64 PRC patents that relate to various
product configurations and product components. We will continue to rely on a
combination of patents, trade secrets, trademarks and copyrights to provide
protection in this regard, but this protection may be inadequate. For example,
our pending or future patent applications may not be approved or, if allowed,
they may not be of sufficient strength or scope. As a result, third parties may
use the technologies and proprietary processes that we have developed and
compete with us, which could negatively affect any competitive advantage we
enjoy, dilute our brand and harm our operating results.





16




In
addition, policing the unauthorized use of our proprietary technology can be
difficult and expensive. Litigation may be necessary to enforce our intellectual
property rights and given the relative unpredictability of China’s legal system
and potential difficulties enforcing a court judgment in China, there is no
guarantee litigation would result in an outcome favorable to us. Furthermore,
any such litigation may be costly and may divert management attention away from
our core business. An adverse determination in any lawsuit involving our
intellectual property is likely to jeopardize our business prospects and
reputation. We have no insurance coverage against litigation costs so we would
be forced to bear all litigation costs if we cannot recover them from other
parties. All of the foregoing factors could harm our business and financial
condition.




We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely against us, could disrupt our business and
subject us to significant liability to third parties.




Our
success largely depends on our ability to use and develop our technology,
know-how and product designs without infringing upon the intellectual property
rights of third parties. We may be subject to litigation involving claims of
patent infringement or violation of other intellectual property rights of third
parties. The holders of patents and other intellectual property rights
potentially relevant to our product offerings may be unknown to us or may
otherwise make it difficult for us to acquire a license on commercially
acceptable terms.




Wonder
Auto Group Limited, a Hong Kong company controlled by Mr. Qingjie Zhao, our
Chairman, Chief Executive Officer and President, has registered the “ ” trademark in Hong Kong. Jinzhou Wonder Auto Suspension
System Co., Ltd. has registered the trademarks “”
and “ ” in China. An independent third party entity
has registered the “Jinzhou Halla” trademark in China. We currently do not sell
any products or services using the marks similar to the trademarks registered by
Jinzhou Wonder Auto Suspension System Co., Ltd. or “Jinzhou Halla” trademarks.
We have entered into an agreement with Jinzhou Wonder Auto Suspension System
Co., Ltd. Under this agreement, Jinzhou Wonder Auto Suspension System Co., Ltd.
has agreed not to bring any legal action against us for using the mark “ ” in China. However, we cannot assure you that this
agreement will not be enforced or that no action will be brought against us
based on our use of “”.




There may
also be technologies licensed to and relied on by us that are subject to
infringement or other corresponding allegations or claims by others which could
damage our ability to rely on such technologies. In addition, although we
endeavor to ensure that companies that work with us possess appropriate
intellectual property rights or licenses, we cannot fully avoid the risks of
intellectual property rights infringement created by suppliers of components
used in our products or by companies with which we work in cooperative research
and development activities.




Our
current or potential competitors, many of which have substantial resources and
have made substantial investments in competing technologies, may have obtained
or may obtain patents that will prevent, limit or interfere with our ability to
make, use or sell our products in China or other countries. The defense of
intellectual property claims, including patent infringement suits, and related
legal and administrative proceedings can be both costly and time consuming, and
may significantly divert the efforts and resources of our technical and
management personnel. Furthermore, an adverse determination in any such
litigation or proceeding to which we may become a party could cause us
to:




•
            
            pay
      damage awards;




•
            
            seek
      licenses from third parties;




•
            
            pay
      additional ongoing royalties, which could decrease our profit
      margins;




•
            
            redesign
      our products; or




17





•
            
            be
      restricted by injunctions.




These
factors could effectively prevent us from pursuing some or all of our business
objectives and result in our customers or potential customers deferring,
canceling or limiting their purchase or use of our products, which could have a
material adverse effect on our financial condition and results of
operations.




We
rely on certain technologies licensed to us from third parties and the loss of
these licenses or failure to renew such licenses on a timely basis could
interrupt our production and have a material adverse impact on our
business.




We rely
on certain technologies licensed to us from third parties for manufacturing our
products. Through our licensing arrangements, we are able to integrate third
party technologies into our alternators and starters. We can also produce and
sell products that are more suitable for specific types of vehicles utilizing
these licensed technologies. If certain licenses are terminated, or not timely
renewed, the production of our products using the licensed technologies would be
disrupted and our business and financial condition could be
damaged.




If
we fail to maintain or improve our market position or respond successfully to
changes in the competitive landscape, our business and results of operations
will suffer.




Our
competition includes a number of global and PRC-based manufacturers and
distributors that produce and sell products similar to ours. We compete
primarily on the basis of quality, technological innovation and price. Our main
competitors include Shanghai Valeo Automotive Electrical Systems Co., Ltd., a
joint venture of Shanghai Auto Industrial Group and Valeo Group, Hubei Shendian
Auto Motor Co., Ltd., a joint venture of Hubei Shendian Auto Electrical
Equipment Co., Ltd. and Remy International, Inc., Bosch Group, Mitsubishi Motors
Corporation and Denso Corporation. Many of our competitors have longer operating
histories, greater name recognition, larger global market share, access to
larger customer bases and significantly greater economies of scale, as well as
greater financial, sales and marketing, manufacturing, distribution, technical
and other resources than we do. As a result of these competitive pressures and
expected increases in competition, we may price our products lower than our
competitors in order to maintain market share. Any lower pricing may negatively
affect our profit margins. If we fail to maintain or improve our market position
and respond successfully to changes in the competitive landscape, our business
and results of operations may suffer.




A
large percentage of our sales revenue is derived from sales to a limited number
of customers, and our business will suffer if sales to these customers
decline.




A
significant portion of our sales revenue historically has been derived from a
limited number of customers. Our top five customers accounted for approximately
60% of our sales in 2007 and 46.9% in 2008. Any significant reduction in demand
for vehicles manufactured by any of these major customers and any decrease in
their demand for our products could harm our sales and business operations. The
loss of one or more of these customers could damage our business, financial
condition and results of operations.




If
we cannot obtain sufficient raw materials and components at a reasonable cost,
our ability to produce and market our products, and thus our business, could
suffer.




We
purchase raw materials and component parts for our products from various
suppliers located primarily in Asia, most of which are located in China and a
few of which are located in South Korea. The raw materials we use to produce our
starters and alternators fall into four general categories: metal parts,
semiconductors, chemicals, and packaging materials. The main raw materials we
use to produce our rods, shafts, engine valves and tappets are iron and steel
rods. The majority of our raw materials and components are purchased from
suppliers in China, including our subsidiaries Jinzhou Dongwoo, Jinzhou Hanhua
and Jinzhou Karham as well as third parties such as Tianjin Jingda Rea Special
Enamelled Wire Co., Ltd., Yingkou Die-Casting Products Co., Ltd. and foreign
manufacturers based in South Korea, such as SW-Tech Corporation. Purchases from
our top five raw materials and component parts suppliers accounted for
approximately 59% of our total cost of sales in 2008. We may experience a
shortage in the supply of certain raw materials and components in the future,
and if any such shortage occurs, our manufacturing capabilities and operating
results of operations could be negatively affected. If any supplier is unwilling
or unable to provide us with high-quality raw materials and components in
required quantities and at acceptable costs, we may not be able to find
alternative sources on satisfactory terms in a timely manner, or at all. In
addition, some of our suppliers may fail to meet qualifications and standards
required by our customers now or in the future, which could impact our ability
to source raw materials and components. Our inability to find or develop
alternative supply sources could result in delays or reductions in manufacturing
and product shipments. Moreover, these suppliers may delay shipments or supply
us with inferior quality raw materials and components that may adversely impact
the performance of our products. The prices of raw materials and components
needed for our products could also increase, and we may not be able to pass
these price increases on to our customers. If any of these events occur, our
competitive position, reputation and business could suffer.





18




If
our customers and/or the ultimate consumers of the vehicles that use our
products successfully assert product liability claims against us due to defects
in our products, our operating results may suffer and our reputation may be
harmed.




Our
products are used primarily in low emission passenger vehicles. Significant
property damage, personal injuries and even death can result from malfunctioning
vehicles. If our products are not properly designed, built or installed or if
people are injured because of our products, we could be subject to claims for
damages based on theories of product liability and other legal theories. The
costs and resources to defend such claims could be substantial and, if such
claims are successful, we could be responsible for paying some or all of the
damages. We have maintained product liability insurance only for products
manufactured by Jinzhou Wanyou, which are sold in the United States and Canada.
Negative publicity from such claims may also damage our reputation, regardless
of whether such claims are successful. Any of these consequences resulting from
defects in our products would hurt our operating results and, in turn, the value
of our common stock.




Our
products may become subject to recall in the event of defects or other
performance related issues.




Like many
other participants in the automotive industry, we are at risk for product recall
costs which are costs incurred when, either voluntarily or involuntarily, a
product is recalled through a formal campaign to solicit the return of specific
products due to a known or suspected performance defect. Costs typically include
the cost of the product, part or component being replaced, the cost of the
recall borne by our customers and labor to remove and replace the defective part
or component. Our products have not been the subject of an open recall. If a
recall decision is made, we will need to estimate the cost of the recall and
record a charge to earnings in that period. In making this estimate, judgment is
required as to the quantity or volume to be recalled, the total cost of the
recall campaign, the ultimate negotiated sharing of the cost between us and the
customer and, in some cases, the extent to which the supplier of the part or
component will share in the recall cost. As a result, these estimates are
subject to change. Excessive recall costs or our failure to adequately estimate
these costs may negatively affect our operating results.




We
depend heavily on key personnel, and loss of key employees and senior management
could harm our business.




Our
future business and results of operations depend in significant part upon the
continued contributions of our key technical and senior management personnel,
including Qingjie Zhao, our Chairman, Chief Executive Officer and President,
Meirong Yuan, our Chief Financial Officer and Treasurer, Yuncong Ma, our Chief
Operating Officer, Seuk Jun Kim, our Vice President of New Product Development,
Yuguo Zhao, our Vice President of Sales and Marketing and Yongdong Liu, our Vice
President of Production.  They also depend in significant part upon
our ability to attract and retain additional qualified management, technical,
marketing and sales and support personnel for our operations. If we lose a key
employee, if a key employee fails to perform in his or her current position or
if we are not able to attract and retain skilled employees as needed, our
business could suffer. Turnover in our senior management could significantly
deplete institutional knowledge held by our existing senior management team and
impair our operations.





19




In
addition, if any of these key personnel joins a competitor or forms a competing
company, we may lose some of our customers. We have entered into confidentiality
and non-competition agreements with all of these key personnel. However, if any
disputes arise between these key personnel and us, it is not clear, in light of
uncertainties associated with the PRC legal system, what the court decisions
will be and the extent to which these court decisions could be enforced in
China, where all of these key personnel reside and hold some of their assets.
See “—Risks Related to Doing Business in China—Uncertainties with respect to the
PRC legal system could limit the legal protections available to you and
us.”




Certain
of our existing stockholders have substantial influence over our company, and
their interests may not be aligned with the interests of our other
stockholders.




Mr. Qingjie
Zhao, our Chairman, Chief Executive Officer and President, is the beneficial
owner of approximately 24.3% of our common stock. As a result, he has
significant influence over our business, including decisions regarding mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. This concentration of
ownership may also have the effect of discouraging, delaying or preventing a
future change of control, which could deprive our stockholders of an opportunity
to receive a premium for their shares as part of a sale of our company and might
reduce the price of our shares.




Mr. Qingjie
Zhao’s association with other businesses could impede his ability to devote
ample time to our business and could pose conflicts of interest.




Mr. Qingjie
Zhao, our Chairman, Chief Executive Officer and President, is the beneficial
owner of 24.3% of our common stock, serves as an executive director and is a
10.4% owner of China Wonder Limited, a company listed on the Alternative
Investment Market of the London Stock Exchange, which is principally engaged in
the manufacture and sale of specialty packaging machinery to the PRC
pharmaceutical market. He also serves as an executive director and is an 11%
owner of Jinzhou Jinheng Automotive Safety System Co., Ltd., a company listed on
the Hong Kong Growth Enterprise Market, which is principally engaged in the
manufacture and sale of automotive airbag safety systems in China. Mr. Zhao
devotes most of his business time to our affairs and the remainder of his
business time to the affairs of other companies. Mr. Zhao’s decision-making
responsibilities for these three companies are similar in the areas of public
relations, management of human resources, risk management and strategic
planning. As a result, conflicts of interest may arise from time to time. We
will attempt to resolve any such conflicts of interest in our favor.
Additionally, even though Mr. Zhao is accountable to us and our
stockholders as a fiduciary, which requires that he exercise good faith and due
care in handling our affairs, his existing responsibilities to other entities
may limit the amount of time he can spend on our affairs.




Problems
with product quality or product performance could result in a decrease in
customers and revenue, unexpected expenses and loss of market
share.




Our
operating results depend, in part, on our ability to deliver quality products on
a timely and cost-effective basis. As our products become more advanced, it may
become more difficult to maintain our quality standards. If we experience
deterioration in the performance or quality of any of our products, it could
result in delays in shipments, cancellations of orders or customer returns and
complaints, loss of goodwill and harm to our brand and reputation. Furthermore,
our products are used together with components and in motor vehicles that have
been developed and maintained by third parties, and when a problem occurs, it
may be difficult to identify the source of the problem. In addition, some
automobile parts and components may not be fully compatible with our products
and may not meet our or our customers’ quality, safety, security or other
standards. The use by customers of our products with incompatible or otherwise
substandard components is largely outside of our control and could result in
malfunctions or defects in our products and result in harm to our brand. These
problems may lead to a decrease in customers and revenue, harm to our brand,
unexpected expenses, loss of market share, the incurrence of significant
warranty and repair costs, diversion of the attention of our engineering
personnel from our product development efforts, customer relation problems or
loss of customers, any one of which could materially adversely affect our
business.





20




Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may harm our results of
operations.




We are
subject to environmental, health and safety laws and regulations that affect our
operations, facilities and products in each of the jurisdictions in which we
operate. We believe that we are in compliance with all material environmental,
health and safety laws and regulations related to our products, operations and
business activities. Although we have not suffered material environmental claims
in the past, the failure to comply with any present or future regulations could
result in the assessment of damages or imposition of fines against us,
suspension of production, cessation of our operations or even criminal
sanctions. New regulations could also require us to acquire costly equipment or
to incur other significant expenses. Our failure to control the use of, or
adequately restrict the discharge of, hazardous substances could subject us to
potentially significant monetary damages and fines or suspension of our business
operations, which could cause damage to our business.




We
have limited insurance coverage and do not carry any business interruption
insurance, third-party liability insurance for our manufacturing facilities or
insurance that covers the risk of loss of our products in shipment.




Operation
of our facilities involves many risks, including equipment failures, natural
disasters, industrial accidents, power outages, labor disturbances and other
business interruptions. Furthermore, if any of our products are faulty, then we
may become subject to product liability claims or we may have to engage in a
product recall. We do not carry any business interruption insurance, product
recall or third-party liability insurance for our manufacturing facilities or
with respect to our products to cover claims pertaining to personal injury or
property or environmental damage arising from defaults with our products,
product recalls, accidents on our property or damage relating to our operations.
We have obtained product liability insurance only for products manufactured by
Jinzhou Wanyou which are sold to customers in the United States and Canada.
Therefore, our existing insurance coverage may not be sufficient to cover all
risks associated with our business. As a result, we may be required to pay for
financial and other losses, damages and liabilities, including those caused by
natural disasters and other events beyond our control, out of our own funds,
which could have a material adverse effect on our business, financial condition
and results of operations.




Furthermore,
under the shipping terms of some of our customer contracts, we bear the risk of
loss in shipment of our products. We do not insure this risk. While we believe
that the shipping companies that we use carry adequate insurance or are
sufficiently solvent to cover any loss in shipment, there can be no assurance
that we will be adequately reimbursed upon the loss of a significant shipment of
our products.




The
discontinuation of the preferential tax treatment currently available to our PRC
subsidiaries could materially adversely affect our results of
operations.




Before
the implementation of the new enterprise income tax (“EIT”) law (as discussed
below), Foreign Invested Enterprises (“FIE”) established in the PRC, unless
granted by Chinese government to enjoy preferential tax treatments, such as
“two-year exemption and three-year half reduction”, were generally subject to an
EIT rate of 33.0%, which included a 30.0% state income tax and a 3.0% local
income tax. On March 16, 2007, the National People’s Congress of China passed
the new Enterprise Income Tax Law (“EIT Law”), and on November 28, 2007, the
State Council of China passed the Implementing Rules for the EIT Law
(“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and
Implementing Rules impose a unified EIT of 25.0% on all domestic-invested
enterprises and FIEs, unless they qualify under certain limited
exceptions.




Despite
these changes, the EIT Law gives the FIEs established before March 16, 2007
(“Old FIEs”) a five-year grandfather period during which they can continue to
enjoy their existing preferential tax treatments. During this five-year
grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under
the original EIT Law shall gradually increase their EIT rate within 5 years
until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for
the “two-year exemption and three-year half reduction” or “five-year exemption
and five-year half-reduction” under the original EIT Law, are allowed to remain
to enjoy their preference until these holidays expire. The discontinuation of
any such special or preferential tax treatment or other incentives would have an
adverse effect on the Company’s business, fiscal condition and current
operations in China.





21




In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.”




If the
PRC tax authorities determine that Wonder Auto Technology, Inc. is a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the EIT at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as
non-China source income would be subject to PRC enterprise income tax at a rate
of 25%. Second, although under the EIT Law and the Implementing Rules dividends
paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we
cannot guarantee that such dividends will not be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued guidance with respect to the processing of
outbound remittances to entities that are treated as resident enterprises for
PRC enterprise income tax purposes. Finally, it is possible that future guidance
issued with respect to the new “resident enterprise” classification could result
in a situation in which a 10% withholding tax is imposed on dividends we pay to
our non-PRC stockholders and with respect to gains derived by our non-PRC
stockholders from transferring our shares. We are actively monitoring the
possibility of “resident enterprise” treatment and are evaluating appropriate
organizational changes to avoid this treatment, to the extent
possible.




We may be exposed
to potential risks relating to our internal controls over financial reporting
and our ability to have the operating
effectiveness of our internal controls attested to by our independent
auditors.




As directed by Section 404 of
the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC adopted rules requiring
public companies to include a report of management on the Company’s internal
controls over financial reporting in their annual reports and the independent
registered public accounting firm auditing a company’s financial statements to
attest to and report on the operating effectiveness of such company’s internal
controls.   Although our independent auditor has provided a
positive attestation for the year ended December 31, 2008, we can provide no
assurance that we will comply with all of the requirements imposed thereby
and we will receive a positive attestation from our independent auditors in
the future.  In the event we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner
or we are unable to receive a positive attestation from our independent auditors
with respect to our internal controls, investors and others may lose confidence
in the reliability of our financial statements.




Our
holding company structure may hinder the payment of dividends.




Wonder
Auto Technology, Inc. has no direct business operations, other than its
ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us due to
restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions as discussed below. If future dividends are paid in Renminbi,
fluctuations in the exchange rate for the conversion of Renminbi into U.S.
dollars may reduce the amount received by U.S. stockholders upon conversion of
the dividend payment into U.S. dollars.




PRC
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with PRC accounting standards and
regulations. Our subsidiaries in China are also required to set aside a portion
of their after tax profits according to PRC accounting standards and regulations
to fund certain reserve funds. Currently, our subsidiaries in China are the only
sources of sales revenue or investment holdings for the payment of dividends. If
they do not accumulate sufficient profits under PRC accounting standards and
regulations to first fund certain reserve funds as required by PRC accounting
standards, we will be unable to pay any dividends.





22




In
addition, under the new EIT Law effected in January 2008, dividends from our PRC
subsidiaries to us will be subject to a withholding tax. The rate of the
withholding tax has not yet been finalized, pending promulgation of implementing
regulations. Furthermore, the ultimate tax rate will be determined by treaty
between China and the tax residence of the holder of the PRC subsidiary. We are
monitoring the proposed withholding tax and are evaluating appropriate
organizational changes to minimize the corresponding tax impact.




RISKS
RELATED TO DOING BUSINESS IN CHINA




Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of China, which could reduce the demand for our
products and damage our business.




We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:




•
            
            the
      higher level of government
involvement;




•
            
            the
      early stage of development of the market-oriented sector of the
      economy;




•
            
            the
      rapid growth rate;




•
            
            the
      higher level of control over foreign exchange;
  and




•
            
            the
      allocation of resources.




As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.




Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.




Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
automotive investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.





23




Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.




We
conduct substantially all of our business through our operating subsidiaries in
China. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference, but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all but two of our directors are residents of
China  and not of the United States, and substantially all the assets
of these persons are located outside the United States. As a result, it could be
difficult for investors to effect service of process in the United States or to
enforce a judgment obtained in the United States against our Chinese officers,
directors and subsidiaries.




The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.




The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.




Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.




Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.




Most of
our sales revenue and expenses are denominated in Renminbi. Under PRC law, the
Renminbi is currently convertible under the “current account,” which includes
dividends and trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to
us, without the approval of the State Administration of Foreign Exchange, or
SAFE, by complying with certain procedural requirements. However, the relevant
PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future. Since a significant amount of our future
revenue will be denominated in Renminbi, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in Renminbi
to fund our business activities outside China that are denominated in foreign
currencies.




Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or foreign lenders, these loans must be registered with SAFE, and
if we finance the subsidiaries by means of additional capital contributions,
these capital contributions must be approved by certain government authorities,
including the Ministry of Commerce, or their respective local counterparts.
These limitations could affect our PRC operating subsidiaries’ ability to obtain
foreign exchange through debt or equity financing.





24




Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.




In
October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the
Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China (the “SAFE Notice”), which requires
PRC residents to register with the competent local SAFE branch before using
onshore assets or equity interests held by them to establish offshore special
purpose companies (“SPVs”) for the purpose of overseas equity financing. Under
the SAFE Notice, such PRC residents must also file amendments to their
registration in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations.
Moreover, if the SPVs were established and owned the onshore assets or equity
interests before the implementation date of the SAFE Notice, a retroactive SAFE
registration is required to have been completed before March 31, 2006. If any
PRC resident stockholder of any SPV fails to make the required SAFE registration
and amended registration, the PRC subsidiaries of that SPV may be prohibited
from distributing their profits and the proceeds from any reduction in capital,
share transfer or liquidation to the SPV. Failure to comply with the SAFE
registration and amendment requirements described above could also result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions.




We
believe our stockholders who are PRC residents as defined in the SAFE Notice
have registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries.  However, we cannot provide any
assurances that their existing registrations have fully complied with, and they
have made all necessary amendments to their registration to fully comply with,
all applicable registrations or approvals required by the SAFE Notice. Moreover,
because of uncertainty over how the SAFE Notice will be interpreted and
implemented, and how or whether SAFE will apply it to us, we cannot predict how
it will affect our business operations or future strategies. For example, our
present and prospective PRC subsidiaries’ ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with the SAFE Notice by our PRC
resident beneficial holders. In addition, such PRC residents may not always be
able to complete the necessary registration procedures required by the SAFE
Notice. We also have little control over either our present or prospective
direct or indirect stockholders or the outcome of such registration procedures.
A failure by our PRC resident beneficial holders or future PRC resident
stockholders to comply with the SAFE Notice, if SAFE requires it, could subject
these PRC resident beneficial holders to fines or legal sanctions, restrict our
overseas or cross-border investment activities, limit our subsidiaries’ ability
to make distributions or pay dividends or affect our ownership structure, which
could adversely affect our business and prospects.




We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006.




On August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, which became effective on September 8, 2006 (the “M&A
Regulations”). This new regulation, among other things, governs the approval
process by which a PRC company may participate in an acquisition of assets or
equity interests. Depending on the structure of the transaction, the new
regulation will require the PRC parties to make a series of applications and
supplemental applications to the government agencies. In some instances, the
application process may require the presentation of economic data concerning a
transaction, including appraisals of the target business and evaluations of the
acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be
completed and reported to the government agencies. Compliance with the new
regulations is likely to be more time consuming and expensive than in the past
and the government can now exert more control over the combination of two
businesses. Accordingly, due to the new regulation, our ability to engage in
business combination transactions has become significantly more complicated,
time consuming and expensive, and we may not be able to negotiate a transaction
that is acceptable to our stockholders or sufficiently protect their interests
in a transaction.





25




The new
regulation allows PRC government agencies to assess the economic terms of a
business combination transaction. Parties to a business combination transaction
may have to submit to the Ministry of Commerce and other relevant government
agencies an appraisal report, an evaluation report and the acquisition
agreement, all of which form part of the application for approval, depending on
the structure of the transaction. The regulations also prohibit a transaction at
an acquisition price obviously lower than the appraised value of the PRC
business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulation may impede our ability to negotiate and complete a
business combination transaction on financial terms that satisfy our investors
and protect our stockholders’ economic interests.




In
addition to the above risks, in many instances, we will seek to structure
transactions in a manner that avoids the need to make applications or a series
of applications with Chinese regulatory authorities under these new M&A
regulations. If we fail to effectively structure an acquisition in a manner that
avoids the need for such applications or if the Chinese government interprets
the requirements of the new M&A regulations in a manner different from our
understanding of such regulations, then acquisitions that we have effected may
be unwound or subject to rescission. Also, if the Chinese government determines
that our structure of any of our acquisitions does not comply with these new
regulations, then we may also be subject to fines and penalties.




Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.




The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and the Renminbi and between those currencies and other
currencies in which our sales may be denominated. Because substantially all of
our earnings and cash assets are denominated in Renminbi and our financial
results are reported in U.S. dollars, fluctuations in the exchange rate between
the U.S. dollar and the Renminbi will affect our balance sheet and our earnings
per share in U.S. dollars. In addition, appreciation or depreciation in the
value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue that will be
exchanged into U.S. dollars and earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.




Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
the People’s Bank of China regularly intervenes in the foreign exchange market
to prevent significant short-term fluctuations in the exchange rate, the
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the medium to long term. Moreover, it is possible that in the future
the PRC authorities may lift restrictions on fluctuations in the Renminbi
exchange rate and lessen intervention in the foreign exchange
market.




Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.




Currently,
some of our raw materials, components and major equipment are imported. In the
event that the U.S. dollars appreciate against Renminbi, our costs will
increase. If we cannot pass the resulting cost increases on to our customers,
our profitability and operating results will suffer. In addition, since our
sales to international customers are growing rapidly, we are increasingly
subject to the risk of foreign currency depreciation.




RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY




The
market price of our common stock is volatile, leading to the possibility of its
value being depressed at a time when you want to sell your
holdings.




The
market price of our common stock is volatile, and this volatility may continue.
For instance, between January 2, 2008 and December 31, 2008, the closing
bid price of our common stock, as reported on the markets on which our
securities have traded, ranged between $2.58 and $12.63 per share. Numerous
factors, many of which are beyond our control, may cause the market price of our
common stock to fluctuate significantly. These factors include:





26




•
            
            general
      economic conditions and trends;





•
            
            our
      earnings releases, actual or anticipated changes in our earnings,
      fluctuations in our operating results or our failure to meet the
      expectations of financial market analysts and
  investors;




•
            
            changes
      in financial estimates by us or by any securities analysts who might cover
      our stock;




•
            
            speculation
      about our business in the press or the investment
    community;




•
            
            significant
      developments relating to our relationships with our customers or
      suppliers;




•
            
            stock
      market price and volume fluctuations of other publicly traded companies
      and, in particular, those that are in the automotive parts or automotive
      industry;




•
            
            customer
      demand for our products;




•
            
            investor
      perceptions of the automotive parts and automotive industries in general
      and our company in particular;




•
            
            the
      operating and stock performance of comparable
  companies;





•
            
            major
      catastrophic events;




•
            
            announcements
      by us or our competitors of new products, significant acquisitions,
      strategic partnerships or
divestitures;




•
            
            changes
      in accounting standards, policies, guidance, interpretation or
      principles;




•
            
            loss
      of external funding sources;




•
            
            sales
      of our common stock, including sales by our directors, officers or
      significant stockholders; and




•
            
            additions
      or departures of key personnel.




27




Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could result in
substantial costs to us and divert our management’s attention and
resources.




Moreover,
securities markets may from time to time experience significant price and volume
fluctuations for reasons unrelated to operating performance of particular
companies. These market fluctuations may adversely affect the price of our
common stock and other interests in our company at a time when you want to sell
your interest in us.




We
do not intend to pay dividends on shares of our common stock for the foreseeable
future.




We have
never declared or paid any cash dividends on shares of our common stock. We
intend to retain any future earnings to fund the operation and expansion of our
business and, therefore, we do not anticipate paying cash dividends on shares of
our common stock in the foreseeable future.




Although
publicly traded, the trading market in our common stock has been substantially
less liquid than the average trading market for a stock quoted on the Nasdaq
Global Market and this low trading volume may depress the price of our common
stock.




Our
common stock is traded on the Nasdaq Global Market. The trading market in our
common stock has been substantially less liquid than the average trading market
for companies quoted on the Nasdaq Global Market. Reported average daily trading
volume in our common stock for the three month period ended March 27, 2009, was
approximately 0.1 million shares. Limited trading volume will subject our shares
of common stock to greater price volatility and may make it difficult for you to
sell your shares of common stock at a price that is attractive to
you.




Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change-of-control.




Our
Articles of Incorporation authorizes the board of directors to issue up to
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by the stockholders. These terms
may include preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of the
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.




Item
      1B.
            Unresolved
      Staff Comments




The
Company has received comments from the SEC staff dated October 31, 2008 and
March 6, 2009 regarding our annual report on Form 10-K for the year ended
December 31, 2007 and the quarterly report on Form 10-Q for the period ended
September 30, 2008. The substance of these comments relates primarily to the
accounting treatment of the release of certain make good shares pledged by two
of the Company’s shareholders — Choice Inspire Limited and Empower Century
Limited — in connection with a private placement transaction that occurred in
June 2006 and the appropriate classification of restricted cash contained in the
Company’s statement of cash flows. Please see the Company’s current report on
Form 8-K filed on March 20, 2009 for more details. The Company believes it has
addressed the SEC staff’s comments in this Form 10-K.




28





Item
      2.
              Properties.




All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. In the case
of land used for industrial purposes, the land use rights are granted for a
period of up to 70 years. This period may be renewed at the expiration of the
initial and any subsequent terms. Granted land use rights are transferable and
may be used as security for borrowings and other obligations.




We were
granted land use rights from the Chinese government for following properties:
(1) 453,900 square feet of land located at No. 16 Yulu Street, Jinzhou High
Technology Industrial Park, Jinzhou, China. The land use rights have a 30-year
term and will expire on August 15, 2026. Our headquarters are located at this
site. This site houses our office building, a research and development center,
as well as our production facilities; (2) 179,500 square feet of land located at
West Bo Hai Street, Open Economic Zone, Jinzhou, China. This site houses our
production facilities and (3) 1,842,000 square feet of land located at New
Century Avenue, Changqing District, Jinan High Technology Industrial Park,
Shandong, China. The land use rights have a 50-year term and will expire on
January 27, 2055. This site houses our office building, a research and
development center, as well as our production facilities.




In
addition to the land use rights, we also have ownership of eleven other
properties.  Two properties are located at No. 16 Yulu Street, two
properties are located at Fuzhou Street, Taihe District of Jinzhou and the
remaining seven are residential properties located at Huianli Guta District of
Jinzhou. We have placed mortgages on the land and the four properties located at
No. 16 Yulu Street and Fuzhou Street to secure certain bank loan from China Bank
Jinzhou Branch for an amount up to RMB 50 million (approximately $6.25
million).




We also
own 2,100 square feet of office space at Focus Square, No. 6 Futong St.,
Wangjing, Chaoyang District, Beijing where our Beijing Representative Office is
located.




We
currently have four alternator assembly lines, four starter assembly lines,
three rods and shafts production lines, twenty engine valves production lines
and five tappets production lines. The total annual production capacity of these
production lines is approximately 2.6 million units of alternators, 2.4 million
units of starters, 20 million units of rods and shafts, and 27 million units of
engine valves and tappets, assuming two work shifts per day with eight hours
each.




We
currently work in two work shifts of eight hours, each to maximize the
capabilities of our assembly lines. For 2006, 2007 and 2008, the utilization
rates of our alternator production lines were approximately 109%, 108% and 78 %,
respectively, while those of the starter production lines were approximately
74%, 86% and 75% respectively. The utilization rates of our engine valve and
tappet production lines and our rod and shaft production lines were
approximately 75% and 110% in 2008, respectively. We plan to expand our
production capacity for rods and shafts in 2009 to meet the projected market
demand.




We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business.




Item
      3.
              Legal
      Proceedings.




From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business.  However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.  We
are currently not aware of any such legal proceedings or claims that we believe
will have a material adverse affect on our business, financial condition or
operating results.




29





Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.




No
matters were submitted to a vote of our security holders during the fourth
quarter of 2008.




PART
II




Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities.




Market
for our Common Stock




Our
common stock is quoted on the Nasdaq Global Market under the symbol
“WATG.”




The
following table sets forth, for the periods indicated, the high and low bid
prices of our common stock.  These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.




Closing Bid Prices (1)High
                        
                        
                        LowYear
      Ended December 31, 20081st
      Quarter
                        
                        $
                        12.63
                        
                        
                        $
                        6.472nd
      Quarter
                        
                        
                        9.27
                        
                        
                        
                        7.033rd
      Quarter
                        
                        
                        9.42
                        
                        
                        
                        6.414th
      Quarter
                        
                        
                        5.93
                        
                        
                        
                        2.58Year
      Ended December 31, 20071st
      Quarter
                        
                        $
                        6.70
                        
                        
                        $
                        5.122nd
      Quarter
                        
                        
                        7.43
                        
                        
                        
                        6.573rd
      Quarter
                        
                        
                        7.31
                        
                        
                        
                        5.654th
      Quarter
                        
                        
                        10.16
                        
                        
                        
                        7.61





Holders
of Record




On March
27, 2009 there were approximately 177 stockholders of record of our common
stock.  This number excludes the shares of our common stock owned by
stockholders holding stock under nominee security position
listings.




Dividend
Policy




Other
than the dividends declared or paid by our subsidiary Wonder Auto before the
reverse acquisition transaction and the forward stock split in 2006, we have
never declared dividends or paid cash dividends. Our board of directors will
make any future decisions regarding dividends. We currently intend to retain and
use any future earnings for the development and expansion of our business and do
not anticipate paying any cash dividends in the near future.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
information under the heading “Equity Compensation Plan Information” in our
definitive proxy statement for the annual meeting of shareholders to be filed
with the SEC is incorporated herein by reference.





30





Recent
Sales of Unregistered Securities




Other
than as disclosed in our Quarterly Report on Form 10-Q and Current Report on
Form 8-K, no securities were sold by the Company during the fiscal year ended
December 31, 2008 that were not registered under the Securities
Act.




Item
      6.
              Selected
      Financial Data




Not
applicable.





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




Overview





The
following Management & Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the readers understand
our Company, our operations and our present business environment. MD&A is
provided as a supplement to—and should be read in conjunction with—our
consolidated financial statements and the accompanying notes thereto appearing
elsewhere in this annual report. This overview summarizes the MD&A includes
the following sections:





·
            Wonder Auto Technology,
      Inc.: a general description of our business, our strategic
      priorities, our core capabilities, and challenges and opportunities of our
      business.





·
            Critical Accounting Policies
      and Estimates: a discussion of accounting policies that require
      critical judgments and estimates.





·
            Results of Operation:an analysis of our Company’s consolidated results of operations for
      the years presented in our consolidated financial statements. Except to
      the extent that differences among our operating segments are material to
      an understanding of our business as a whole, we present the discussion in
      the MD&A on a consolidated
basis.





·
            Liquidity, Capital Resources
      and Financial Position: an analysis of cash flows; off-balance
      sheet arrangements and aggregate contractual
  obligations.





Wonder
Auto Technology, Inc.





General





We are a
Nevada holding company and, through our China-based operating subsidiaries,
we engage in the business of designing, developing, manufacturing and selling
automotive electrical parts, specifically alternators and starters, engine
valves and tappets, rods and shafts in China. We have been producing alternators
and starters in China since 1997 and our newly acquired subsidiary Jinan
Worldwide has been producing engine valves and tappets for over 50
years.  In 2006 and 2007, we ranked second in sales revenue in China
in the market of automotive alternators and starters.




Most of
our products are used in passenger cars, especially smaller engine vehicles with
engine displacement between 1.0L to 2.5L. We sell our products to automakers,
engine manufacturers and, increasingly, auto parts suppliers, based primarily in
China, and we are increasingly exporting our products. We have experienced
significant growth in sales revenue resulting primarily from increasing demand
for our products, larger orders from our key customers, and expansion of our
production capacity. We are also increasing exports to international
markets.





31




We
actively pursue acquisitions prospectus and other strategic opportunities. In
2008, we acquired Jinzhou Hanhua, Fuxin Huirui and Jinzhou Karham, all of which
are our major raw material suppliers, as well as Jinan Worldwide.





We
operate in the highly competitive automobile parts industry and face strong
competition from numerous PRC and international companies. Our business is
affected by a number of factors, including, but not limited to, cost to
manufacture products, financial stability of our customers and suppliers,
economic conditions, ability to develop new products, political climate, local
and national laws and regulations, foreign currency exchange fluctuations and
fuel prices.





Our
Strategic Priorities





We have
six strategic priorities designed to create long-term sustainable growth for our
company and value for our shareholders. These strategic priorities are: vertical
integration; sales expansion into select international markets; increasing
production capacity; strengthening of our research and development capabilities;
developing new products and focusing on supplying parts and components for
low-emission vehicles.





Core
capabilities





As we
operate and grow our business, we seek to enhance and capitalize on what we view
as our core capabilities described below:





·
            LeadingMarketPosition.We ranked the second
      in sales of automotive alternators and starters in China in 2006 and 2007.
      Our estimated market share in China for alternators and starters was
      approximately 14.4% in 2008. We believe our brand and our products are
      well recognized and accepted in the automotive industry in
      China.




·
            EstablishedSupplierNetwork. We purchase the
      majority of raw materials and components used in our products through a
      network of low-cost suppliers, primarily located within close proximity to
      our manufacturing facilities. We have established long-term relationships
      with many of our suppliers. Our established supplier network enables us to
      maintain a competitive low cost structure, shorten our product lead-times,
      closely monitor product quality and enjoy sourcing
    stability.




·
            ProprietaryManufacturingProcesses.We have
      invested substantial time and resources in developing customized assembly
      lines and equipment to optimize our manufacturing efficiency. Our
      proprietary manufacturing processes and customized equipment provide
      flexibility and efficiency, achieve shorter lead-times, improve quality
      assurance, reduce equipment downtime and material wastage and provide
      greater cost-competitiveness.




·
            StrongLong-TermCustomerBase. We are a
      qualified supplier of automotive components to many leading automobile
      industry players in China and worldwide. Given the high switching costs
      and rigorous qualification processes of our customers, we believe many of
      them have come to rely on us as a primary supplier of key components based
      on our proven ability to meet their growing demand and quality
      standards.




32




Challenges
and Opportunities





Our
management has identified the following key challenges and
opportunities:





·
            General economic
      conditions.Our financial results will be influenced by
      general economic conditions, the financial stability of our customers and
      suppliers, consumer confidence levels, instability and fluctuations in the
      capital markets and other unforeseen factors. Notwithstanding the global
      economic downturn, China’s GDP growth in 2009 is expected to reach
      approximately 8.4%, substantially higher than the global GDP growth rate
      which is projected to be approximately 1.0%. Since most of our sales
      revenue is generated from China market, we expect to benefit from the
      continued economic growth in China. Currently, it will also be challenging
      to maintain our historic growth rate due to the general economic condition
      which may reduce the demand for our products and overall ability and cost
      of external financing for our operations.  To meet this
      challenge, we plan to focus on further integrating our operations and
      generating greater synergies across our portfolio of technologies,
      products, and subsidiaries. We also plan to focus on increasing our
      manufacturing and administrative efficiencies through targeted cost
      savings initiatives.





·
            Government
      Policies.The PRC government has adopted a number of
      measures and initiatives to spur the growth and development of small
      engine and low-emission vehicles. These measures include reduction of
      consumption tax rates assessed on low emission vehicles, implementation of
      a new fuel tax which provides favorable tax treatment to low emission
      vehicles and a 50% sales tax deduction imposed upon the sales of small
      engine vehicles with displacements of 1.6L and below.  We
      anticipate these measures will have a positive impact on sales of our
      products. We also intend to capitalize on the favorable government
      policies on alternative energy vehicles by deepening our penetration into
      that market and by developing products for use in electric
      vehicles.





·
            Export.Recent market events, including
      an unfavorable global economic environment, challenging automotive
      industry conditions and the continued global credit crisis, are adversely
      impacting global automotive demand which may adversely impact our
      business, especially our exports. Export sales may also subject us to
      various economic, political, regulatory, legal and foreign exchange risks.
      However, we also see great opportunities for expanding our market share in
      the international market. As international automotive manufacturers
      implement cost saving plans, we expect them to source components directly
      from low cost manufacturing regions, such as China. We believe our high
      quality, low cost products will be attractive to international automakers
      and engine manufacturers. We anticipate our export sales will continue to
      increase in 2009 due to several new sales contracts for alternators and
      starters with international automakers in 2009. In addition, our
      subsidiary Jinzhou Wanyou is specialized in the manufacturing of rods and
      shafts. With more and more oversea automakers ceasing to manufacture rods
      and shafts themselves due to cost concerns, we anticipate more sales
      opportunities for our rods and shafts in the oversea market. We also plan
      to utilize our existing export sales network and resources to sell engine
      valves and tappets manufactured by our recently acquired subsidiary Jinan
      Worldwide. This strategy, if successfully implemented, will further
      increase our export sales.





Critical
Accounting Policies and Estimates





The
preparation of financial statements in conformity with GAAP requires estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities in the consolidated financial statements and accompanying notes. The
SEC has defined a company’s critical accounting policies as the ones that are
most important to the portrayal of the company’s financial condition and results
of operations, and which require the company to make its most difficult and
subjective judgments often as a result of the need to make estimates of matters
that are inherently uncertain. We believe that our most critical accounting
policies and estimates relate to the following:





33





·
            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.





·
            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.





·
            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.





For a
discussion of the Company’s significant accounting policies, please refer to
Note 3 of Notes to our Consolidated Financial Statements appears elsewhere in
this annual report.





Recently
issued accounting pronouncements





In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.”  Effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.  The Board does not expect that this Statement
will result in a change in current practice. However, transition provisions have
been provided in the unusual circumstance that the application of the provisions
of this Statement results in a change in practice.  The management is
in the process of evaluating the impact that SFAS 162 will have on the Company’s
financial statements upon adoption.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment to FASB Statement No. 133.” SFAS No. 161
is intended to improve financial standards for derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early adoption
encouraged.  The management is in the process of evaluating the impact
that SFAS 161 will have on the Company’s financial statements upon
adoption.





In
December 2007, the FASB issued SFAS No. 160 “Non-controlling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective for the fiscal year beginning after December 15, 2008. The
management is in the process of evaluating the impact that SFAS 160 will have on
the Company’s financial statements upon adoption.





34





In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The management is in the process of evaluating the impact that SFAS 141
(Revised) will have on the Company’s financial statements upon
adoption.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Entities that
elect the fair value option will report unrealized gains and losses in earnings
at each subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions.  SFAS 159 also
establishes presentation and disclosure requirements to facilitate comparisons
between companies that choose different measurement attributes for similar
assets and liabilities. The requirements of SFAS 159 are effective for our
fiscal year beginning January 1, 2008. The adoption of this statement has no
material effect on the Company's financial statements.





Recent
Developments





On
January 4, 2009, our indirect wholly owned subsidiary Jinzhou Halla entered into
an equity transfer agreement with Magic Era Group Limits, a British virgin
islands Corporation (“Magic Era”), under which Jinzhou Halla agreed to purchase
the remaining 35% equity interest in Jinan Worldwide (“Yearcity”) for a total
cash consideration of RMB 48 million (approximately $7.06 million), subject to
certain price adjustments. Yearcity does not have any asset except its 100%
equity ownership of Jinan Worldwide. Jinan Worldwide is a Chinese corporation
engaged in the manufacturing of engine valves and tappets. Prior to the equity
acquisition described above, Jinzhou Halla already acquired 65% equity interest
of Yearcity from Hony Capital II, L.P., a Cayman Islands corporation, in a
separately negotiated equity purchase transaction. As a result of the two
acquisitions, we now have 100% ownership of Yearcity and 100% indirect ownership
of Jinan Worldwide. Please see our current report on Form 8-K filed with SEC on
January 8, 2009 for more details.





ResultsofOperations




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


35




(all
amounts, other than percentages, in thousands of U.S. dollars)




Year Ended December 31,
                
                
                Percentage Change2008
                
                
                2007
                
                
                2006
                
                
                2008 vs. 2007
                
                
                2007 vs. 2006Sales
      revenue
                
                $
                141,190
                
                
                $
                102,084
                
                
                $
                72,150
                
                
                
                38.3
                %
                
                
                41.5
                %Cost
      of sales
                
                
                104,750
                
                
                
                76,460
                
                
                
                57,342
                
                
                
                (37.0
                )%
                
                
                (33.3
                )%Gross
      profit
                
                
                36,439
                
                
                
                25,624
                
                
                
                14,808
                
                
                
                42.2
                %
                
                
                73.0
                %Administrative
      expenses
                
                
                6,827
                
                
                
                3,565
                
                
                
                1,918
                
                
                
                91.5
                %
                
                
                85.9
                %Stock-based
      compensation
                
                
                706
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Research
      and development expenses
                
                
                1,648
                
                
                
                1,136
                
                
                
                948
                
                
                
                45.1
                %
                
                
                19.9
                %Selling
      expenses
                
                
                4,093
                
                
                
                3,291
                
                
                
                2,137
                
                
                
                24.4
                %
                
                
                53.9
                %Unusual
      charge-make good provision
                
                
                -
                
                
                
                18,266
                
                
                
                7,506
                
                
                
                -
                
                
                
                (143.3
                )%Total
      expenses
                
                
                13,275
                
                
                
                26,258
                
                
                
                12,511
                
                
                
                (49.4
                )%
                
                
                109.9
                %Other
      income
                
                
                1,360
                
                
                
                287
                
                
                
                357
                
                
                
                373.3
                %
                
                
                (19.4
                )%Government
      grant
                
                
                193
                
                
                
                1,497
                
                
                
                -
                
                
                
                (87.1
                )%
                
                
                -Net
      financial cost
                
                
                2,246
                
                
                
                2,409
                
                
                
                937
                
                
                
                (6.8
                )%
                
                
                157.2
                %Equity
      in unconsolidated affiliate
                
                
                1,073
                
                
                
                34
                
                
                
                371
                
                
                
                3,041.7
                %
                
                
                (90.8
                )%Income
      (loss) before income taxes and minority interests
                
                
                23,544
                
                
                
                (1,225
                )
                
                
                2,088
                
                
                
                (2,022.4
                )%
                
                
                (158.6
                )%Income
      taxes
                
                
                2,175
                
                
                
                1,389
                
                
                
                1,270
                
                
                
                56.6
                %
                
                
                9.3
                %Minority
      interests
                
                
                2,460
                
                
                
                1,137
                
                
                
                102
                
                
                
                116.4
                %
                
                
                1016.3
                %Net
      income (loss)
                
                
                18,909
                
                
                
                (3,750
                )
                
                
                716
                
                
                
                (604.2
                )%
                
                
                (623.8
                )%
  As
      a Percentage of Sales
                  Revenue
                
                2008
                
                
                2007
                
                
                2006Sales
      revenue
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %Cost
      of sales
                
                
                74.2
                %
                
                
                74.9
                %
                
                
                79.5
                %Gross
      profit
                
                
                25.8
                %
                
                
                25.1
                %
                
                
                20.5
                %ExpensesAdministrative
      expenses
                
                
                4.8
                %
                
                
                3.5
                %
                
                
                2.7
                %Stock-based
      compensation
                
                
                
                %
                
                
                
                
                
                
                0.5Research
      and development expenses
                
                
                1.2
                %
                
                
                1.1
                %
                
                
                1.3
                %Selling
      expenses
                
                
                2.9
                %
                
                
                3.2
                %
                
                
                3.0
                %Unusual
      charge-make good provision
                
                
                
                %
                
                
                17.9
                %
                
                
                10.4Total
      expenses
                
                
                9.4
                %
                
                
                25.7
                %
                
                
                17.3
                %Income
      (loss) before income taxes and minority interests
                
                
                16.7
                %
                
                
                (1.2
                )%
                
                
                2.9
                %Income
      taxes
                
                
                1.5
                %
                
                
                1.4
                %
                
                
                1.8
                %Minority
      interests
                
                
                1.7
                %
                
                
                1.1
                %
                
                
                0.1
                %Net
      income (loss)
                
                
                13.4
                %
                
                
                (3.7
                )%
                
                
                1.0
                %


Comparison
of 2008 and 2007





SalesRevenue. Sales
revenue increased $39.1 million, or 38.3%, to $141.2 million in 2008 from $102.1
million in 2007. In 2008, sales revenue from alternators and starters, rods and
shafts, engine valves and tappets increased $20.6 million, $10.8 million and
$7.7 million from 2007, respectively. The increase was mainly attributable to
the increased market demand for our mid to small displacement alternator and
starter products. We believe that our sales revenue increased in 2008 because of
our ability to sell high quality products at competitive prices. Our export
sales increased significantly to $22.9 million, accounting for 16.2% of the
total sales revenue in 2008, as compared to 9.6% in
2007.  Furthermore, our sales revenue increased partly because of our
acquisition of Jinan Worldwide which contributed $7.7 million to our sales
revenue in 2008.





36





The
following tables show the different segments and geographic areas comprising our
total sales revenues over each of the past three fiscal years:




Sales
Revenue by Product Segments




(all
amounts, other than percentages, in thousands of U.S. dollars)




Year Ended December 31,
                
                
                Percentage change2008
                
                
                2007
                
                
                2006
                
                
                2008 vs. 2007
                
                
                2007 vs. 2006Components
      of Sales RevenueAlternator
                
                $
                63,256
                
                
                $
                59,790
                
                
                $
                45,216
                
                
                
                5.8
                %
                
                
                32.2
                %Starter
                
                
                52,138
                
                
                
                35,014
                
                
                
                26,934
                
                
                
                48.9
                %
                
                
                30.0
                %Rod
      and shaft
                
                
                18,106
                
                
                
                7,280
                
                
                
                -
                
                
                
                148.7
                %
                
                
                -Engine
      valve and tappet
                
                
                7,690
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      sales revenue
                
                $
                141,190
                
                
                $
                102,084
                
                
                $
                72,150
                
                
                
                38.3
                %
                
                
                41.5
                %





Revenue
By Geographic Areas




(all
amounts in thousands of U.S. dollars)


Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006PRC
                    
                    $
                    118,251
                    
                    
                    $
                    92,329
                    
                    
                    $
                    69South
      Korea
                    
                    
                    9,066
                    
                    
                    
                    4,650
                    
                    
                    
                    3,013Brazil
                    
                    
                    5,903
                    
                    
                    
                    2,633
                    
                    
                    
                    -Mexico
                    
                    
                    1,769
                    
                    
                    
                    -
                    
                    
                    
                    -United
      States
                    
                    
                    3,469
                    
                    
                    
                    1,647
                    
                    
                    
                    451Germany
                    
                    
                    830
                    
                    
                    
                    -
                    
                    
                    
                    -Others
                    
                    
                    1,903
                    
                    
                    
                    825
                    
                    
                    
                    -Total
                    
                    $
                    141,190
                    
                    
                    $
                    102,084
                    
                    
                    $
                    72,150




CostofSales.  Our cost of sales
increased $28.3 million to $104.8 million in 2008 from $76.5 million in 2007.
Such amount increase was mainly a result of the substantial growth in sales
volume. As a percentage of sales revenue, the cost of sales decreased to 74.2%
in 2008 from 74.9% in 2007.  The percentage decrease was primarily
attributable to the decrease of per unit cost of products resulting from our
ability to realize the benefits of economies of scale. We also benefited from
more efficient cost control management and improved technology which allowed us
to reduce raw material and component consumption per unit of
production.




GrossProfit. Our
gross profit increased $10.8 million to $36.4million in 2008 from $25.6 million
in 2007. Gross profit as a percentage of sales revenue was 25.8% in 2008, as
compared to 25.1% in 2007. The increased gross margin was mainly attributable to
the factor as discussed above.




AdministrativeExpenses.Our
administrative expenses increased $3.3 million, or 91.5%, to $6.8 million in
2008 from $3.6 million in 2007. As a percentage of sales revenue, administrative
expenses increased to 4.8% in 2008 from 3.5% in 2007.  This dollar and
percentage increase of administrative expenses was mainly due to the
consolidation of the financial results of Jinzhou Hanhua, Jinzhou Karham, Fuxin
Huirui and Jinan Worldwide, and third party professional fees associated with
such acquisitions, as well as the audit and assessment costs in complying with
the rules and regulations related to our status as a public reporting company in
the United States.





37





Stock-based
compensation. We incurred a non-cash employee compensation of $706,295 as
a result of the stock option grants to senior management and other staff made
under our equity incentive plan adopted in April 2008.  Such stock
option grants were terminated in December 2008 and no non-cash compensation
expenses will be recognized in 2009 and 2010.





Research and
development expenses.  Our research and development costs
increased $511,891, or 45.1%, to $1.6 million in 2008 from $1.1 million in 2007.
As a percentage of sales revenue, research and development costs increased to
1.2% for the year ended December 31, 2008 from 1.1% in 2007. Such dollar and
percentage increases were primarily attributable to the increased expenses
associated with development of new products.




SellingExpenses. Our selling expenses
include sales commissions, advertising and promotional materials costs, salaries
and fringe benefits of sales personnel, after-sale support services and other
sales related costs. Our selling expenses increased to $ 4.1 million in 2008
from $3.3 million in 2007. The increased selling expenses were mainly
attributable to the increased sales commissions and salaries resulting from the
growth of our sales revenue, and the higher transportation costs during Beijing
Olympic Games. As a percentage of sales revenue, our selling expenses decreased
to 2.9% in 2008 from 3.2% in 2007. This percentage decrease was primarily
attributable to lower warranty costs resulting from the improved product
quality.




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 and February 2, 2008, stockholders’ of CIL and ECL transferred
their rights to receive the 3,300,000 shares in escrow for no consideration to
Xiangdong Gao who ultimately received the escrowed shares. Per SFAS No. 123R,
Accounting for Stock-Based Compensation, if the net income threshold is met, the
shares will be released back to CIL and ECL and treated as an expense equal to
the amount of the market value of the shares as of the date when the respective
performance goal was met.  We achieved the net income thresholds for
both 2006 and 2007, accordingly, we recognized a non-cash expense of $7.5
million and $18.3 million in 2006 and 2007, respectively. As the make good
arrangement only applies to 2006 an 2007, no such compensation expense was
recognized in 2008.





TotalExpenses.  Our total expenses
decreased $13.0 million to $13.3 million in 2008 from $26.3 million in 2007. As
a percentage of sales revenue, our total expenses decreased to 9.4% in 2008 from
25.7% in 2007. The decreases in amount and percentage were mainly due to the
non-cash expenses of $18.3 million related to the make good arrangement
recognized in 2007 as discussed above.





Other
Income. Our other income includes other payables waived, sales of scrap
materials, service income, and gain on disposal of property, plant and
equipment. Our other income increased $1.1 million to $1.4 million in 2008 from
$287,322 in 2007.





38





Net financial
costs. Our financial costs decreased $162,922 to $2.2 million in 2008
from $2.4 million in 2007. Such decrease was mainly because we have a loan in
the amount of 8.3 million Euro (approximately $11.8 million) outstanding. Since
this loan is denominated in Euro, with the appreciation of RMB against Euro, we
had a $1.2 million foreign exchange gain in 2008.





Equity in net
income of non-consolidated affiliates. We recognized a net income of $1.1
million from Money Victory Limited in 2008, as compared to $34,147 from Jinzhou
Wanyou in 2007. We used the equity method to recognize profit or loss for the
investment in which we exercised significant influence but did not
control.




Income
(Loss)BeforeIncomeTaxes and minority
interests.Our
income before income taxes and minority interests was $23.5 million in 2008, as
compared to a loss of $1.2 million in 2007.  Such increase in income
before income tax and minority interests was mainly attributable to the non-cash
expense of $18.3 million related to the make good arrangement recognized in
2007. No non-cash expense related to the make good arrangement  was
recognized in 2008.




IncomeTaxes.Income taxes increased
$785,940 to $2.2 million in 2008 from $1.4 million in 2007. As a percentage of
sales revenue, our income taxes increased to 1.5% in 2008 from 1.4% in
2007.





Minority
Interest. Our financial statements reflect an adjustment to our
consolidated group net income, and our minority interest increased $1.3 million
in 2008 to $2.5 million from $1.1 million in 2007, reflecting the minority
interests held by third parties in Jinzhou Dongwoo, Jinzhou Hanhua, Jinzhou
Karham and Jinan Worldwide.





Net
Income(Loss).  Our net income was $18.9 million in 2008 as
compared to a loss of $3.8 million in 2007. The significant increase in net
income was mainly attributable to the non-cash expense of $18.3 million related
to the make good arrangement recognized in 2007. Other than the $18.3 million
non-cash expense, our net income increased $4.4 million in 2008 mainly because
of the factors discussed above, including increased market demand and increased
export sales.





Comparison
of 2007 and 2006





Sales
Revenue. Sales revenue increased $29.9 million, or 41.5%, to $102.1
million in 2007 from $72.2 million in 2006. This increase was primarily
attributable to increased market demand for our products in the small and
medium-size engine passenger car market in China, spurred in part by government
incentives, our expanded production capacity and increased sales to our existing
customers. The robust growth in export sales also contributed to the sales
revenue increase. Export sales accounted for 9.6% of the total sales revenue in
2007, compared to 4.8% in 2006.





Cost of
Sales.Our cost
of sales increased $19.1 million to $76.5 million in 2007 from $57.3 million in
2006. As a percentage of sales revenue, the cost of sales decreased to 74.9% in
2007 from 79.5% in 2006. The increase in our cost of sales was a result of
substantial increase in sales volume. However, the cost of sales decreased as a
percentage of sales revenue because the Company adopted more efficient
technology to decrease raw material consumption per unit product and that the
large-scale production brought down production cost and cost of labor used per
unit product.




Gross
Profit. As a result of the factors discussed above, our gross profit
increased $10.8 million to $25.6 million in 2007 from $14.8 million in 2006.
Gross profit as a percentage of sales revenue was 25.1% in 2007, as compared to
20.5% in 2006. The increase in our gross profit as a percentage of revenue
increased.





Administrative
Expenses. Our administrative expenses increased $1.7 million, or 85.9%,
to $3.6 million in 2007 from $1.9 million in 2006. As a percentage of sales
revenue, administrative expenses increased to 3.5% in 2007 from 2.7% in 2006.
The increase was primarily attributable to expenses incurred in our financing
activities in the United States, increased audit expenses, increased independent
director expense, as well as increased expenses to improve internal control to
comply with Sarbanes-Oxley Act.





39





Research and
development expenses.Our research and development costs, listed as a new
line item under operating expenses starting from the first quarter of 2007,
consists of amounts spent on developing new products and enhancing our existing
products. Our research and development costs increased $188,295, or 19.9%, to
$1.1million in 2007 from $947,702 in 2006. Such increase primarily attributable
to the purchase of research and development equipment and hiring of new research
and development personnel.





Selling
Expenses. Our selling expenses increased to $3.3 million in 2007 from
$2.1 million in 2006. As a percentage of sales revenue, our selling expenses
increased to 3.2% in 2007 from 3.0% in 2006. This percentage increase was
primarily attributable to increased after-sale service expenses, greater number
of sales personnel and the resulting salary increase, as well as the rising
transportation costs.





Unusual
Charge – Make Good Provision.





As a
result of the make good arrangement discussed above, we recognized a non-cash
expense of $7.5 million and $18.3 million in 2006 and 2007,
respectively.





Total
Expenses. Our total expenses increased $13.7 million to $26.3 million in
2007 from $12.5 million in 2006. As a percentage of sales revenue, our total
expenses increased to 25.7% in 2007 from 17.3% in 2006. The  increases
in amount and percentage were  primarily attributable to increases in
our administrative expenses, selling expenses , research and development costs
and non-cash expenses related to the make good arrangements as discussed
above.





(Loss)IncomebeforeIncomeTaxes and Minority
Interests.  We incurred a $1.2 million loss before income taxes
and minority interests in 2007, as compared to $2.1 million income before income
taxes and minority interest in 2006.  Such decrease in income before
income taxes and minority interest was mainly attributable to the non-cash
expenses related to the make good arrangement as discussed above.





IncomeTaxes.Provision for income
taxes increased $118,617 to $1.4 million in 2007 from $1.3 million in
2006.




Net (Loss)
Income. We incurred
a net loss of $3.8 million in 2007 as compared to a net income of $716,046 in
2006.  Such decrease was mainly attributable to the non-cash expenses
related to the make good arrangement as discussed above.




Business
Segment Information




Our
business operations can be categorized into four segments based on the type of
products we manufacture and sell, specifically (i) alternators, (ii) starters,
(iii) rods and shafts, and (iv) engine valves and tappets.





In 2008,
our sales revenue from our alternator products was $63.3 million, our sales
revenue from our starter products was $52.1 million, our sales revenue from our
rod and shaft products was $18.1 million, and our sales revenue from our engine
valves and tappets was $7.7 million. Among the four principal products, rods and
shafts production enjoyed the fastest growth rate and the highest gross margin,
reaching approximately 25-30%.





We
manufacture and sell both our alternators and starters using largely the same
facilities, personnel and other resources in Jinzhou Halla. Rods and shafts are
mainly manufactured by our subsidiary Jinzhou Wanyou. Valves and tappets are
manufactured by our newly acquired subsidiary Jinan Worldwide.





40





Additional
information regarding our alternator and starter product lines can be
found  at Note 24 in our audited consolidated financial statements
contained elsewhere in this annual report.





Liquidity
and Capital Resources




As of
December 31, 2008, we had cash and cash equivalents of $8.2 million and
restricted cash of $24.2 million. The following table provides detailed
information about our net cash flow for all financial statements periods for
2006, 2007 and 2008.




Statement
of Cash Flow




(All
amounts in thousands of U.S. dollars)


Years
      Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006Net
      cash provided by operating activities
                              
                              $
                              9,106
                              
                              
                              $
                              12,170
                              
                              
                              $
                              1,389Net
      cash used in investing activities
                              
                              
                              (37,336
                              )
                              
                              
                              (24,566
                              )
                              
                              
                              (6,219
                              )Net
      cash provided by (used in) financing activities
                              
                              
                              9,226
                              
                              
                              
                              29,232
                              
                              
                              
                              (8,308
                              )Effect
      of foreign currency translation on cash and cash
    equivalents
                              
                              
                              991
                              
                              
                              
                              1,063
                              
                              
                              
                              357Net
      cash (outflow) flow
                              
                              
                              (17,944)
                              
                              
                              
                              17,899
                              
                              
                              
                              3,835




OperatingActivities




We
believe our ability to generate cash from operating activities is one of our
fundamental financial strengths. Our company expects to meet all of our
financial commitments and operating needs for the foreseeable
future.





Net cash
provided by operating activities was $9.1 million in 2008, as compared to $12.2
million of net cash provided by operating activities in 2007. The decrease was
mainly attributable to the increase of finished product inventories as of
December 31, 2008. Due to the global economic crisis, in the fourth quarter of
2008, our sales of alternators and starters were lower than the anticipated
sales level which resulted in an increase of inventory for finished goods. In
addition, the acquisition of Jinan Worldwide in the fourth quarter of 2008 also
contributed to the increase of inventory.




Net cash
provided by operating activities in 2007 totaled $12.2 million, as compared to
$1.4 million in 2006. The increase was greatly due to higher net income, higher
accounts payable, more inventories although we had higher trade receivable and
bill receivable.





InvestingActivities





Our main
uses of cash for investing activities in 2008 were for (i) the acquisition of
property, plant and equipment, (ii) the acquisitions of Jinzhou Hanhua, Jinzhou
Karham, Fuxin Huirui and Jinan Worldwide, and (iii) the investment in Money
Victory Limited.





Net cash
used in investing activities in 2008 was $37.3 million, as compared to $24.6
million in 2007. Net cash used in investing activities in 2008 was mainly
attributable to a $5 million investment in Money Victory Limited, and payments
totaling $16.6 million for the acquisitions of Jinzhou Hanhua, Jinzhou Karham,
Fuxin Huirui and Jinan Worldwide. In addition, we spent approximately $17.3
million in connection with the acquisition of property, mainly for the purchase
of land use right for Jinzhou Motor and Jinzhou Equipment and the capacity
expansion of Jinzhou Wanyou.





41





Net cash
used in investing activities in 2007 was $24.6 million, as compared to $6.2
million in 2006. The increase of net cash used in investing activities was
mainly attributable to the purchase of property, plant and equipment for $8
million, the acquisition of Jinzhou Wanyou for $14 million.




FinancingActivities




Net cash
provided by financing activities in 2008 totaled $9.2 million as compared to
$29.2 million provided by financing activities in 2007. The decrease in net cash
was mainly attributable to the $22.7 million proceeds we received from private
placement transaction closed in December 2007, which more than offset the $9.2
million increase in net proceeds from bank loans in 2008.





Net cash
provided by financing activities in 2007 totaled $29.2 million as compared to
$8.3 million provided by financing activities in 2006. The increase in net cash
is attributable to the receipt of $22.7 million through the issuance of stock in
a private placement closed in December 2007, and the increase of $11.3 million
net proceeds from bank loans.




Our debt
to equity ratio was 58.9% as of December 31, 2008. We plan to maintain our debt
to equity ratio below 60%, increase long-term loans, decrease short-term loans
and increase the ratio of the borrowing in foreign currency to take advantage of
the expected appreciation of  RMB against the U.S.
dollar.




Loan
Facilities




As of
December 31, 2008, the amount, maturity date and duration of each of our bank
loans and obligation under finance leases were as follow:.




(All
amounts in millions of U.S. dollars)




Banks
                                    
                                    Amounts
                                    
                                    Maturity
      Date
                                    
                                    DurationBank
      of China*
                                    
                                    $
                                    0.7
                                    
                                    January
      26, 2009
                                    
                                    3
      monthsBank
      of China*
                                    
                                    
                                    0.7
                                    
                                    February
      23, 2009
                                    
                                    3
      monthsBank
      of China*
                                    
                                    
                                    1.8
                                    
                                    January
      25, 2009
                                    
                                    2
      monthsBank
      of China*
                                    
                                    
                                    2.2
                                    
                                    January
      27, 2009
                                    
                                    3
      monthsBank
      of China*
                                    
                                    
                                    2.0
                                    
                                    January
      27, 2009
                                    
                                    1
      monthsDEG
      - Deutsche Investitions und Entwicklungsgesellschaft MBH
**
                                    
                                    
                                    1.6
                                    
                                    October
      15, 2009
                                    
                                    10
      monthsBank
      of China*
                                    
                                    
                                    1.4
                                    
                                    February
      27, 2009
                                    
                                    2
      monthsBank
      of Jinzhou*
                                    
                                    
                                    0.4
                                    
                                    March
      27, 2009
                                    
                                    1
      yearBank
      of China*
                                    
                                    
                                    4.4
                                    
                                    April
      3,2009
                                    
                                    6
      monthsChina
      construction Bank*
                                    
                                    
                                    5.9
                                    
                                    April
      11, 2009
                                    
                                    2
      yearsBank
      of China*
                                    
                                    
                                    1.5
                                    
                                    May
      19, 2009
                                    
                                    1
      yearHuaxia
      Bank*
                                    
                                    
                                    5.6
                                    
                                    June
      22, 2009
                                    
                                    1
      yearHuaxia
      Bank*
                                    
                                    
                                    2.9
                                    
                                    June
      30, 2009
                                    
                                    1
      yearBank
      of Jinzhou*
                                    
                                    
                                    0.2
                                    
                                    August
      20, 2009
                                    
                                    1
      yearChina
      CITIC Bank*
                                    
                                    
                                    2.9
                                    
                                    September
      3, 2009
                                    
                                    1
      yearSZD
      Bank*
                                    
                                    
                                    2.9
                                    
                                    September
      15, 2009
                                    
                                    1
      yearBank
      of Jinzhou
                                    
                                    
                                    0.4
                                    
                                    September
      24, 2009
                                    
                                    1
      yearSPD
      Bank*
                                    
                                    
                                    2.9
                                    
                                    September
      26, 2009
                                    
                                    1
      yearChina
      construction Bank*
                                    
                                    
                                    2.9
                                    
                                    October
      28, 2009
                                    
                                    1
      yearBank
      of China*
                                    
                                    
                                    0.6
                                    
                                    December
      28, 2009
                                    
                                    1
      yearEvergrowing
      Bank*
                                    
                                    
                                    5.9
                                    
                                    January
      18, 2010
                                    
                                    1
      yearDEG
      - Deutsche Investitions und Entwicklungsgesellschaft MBH**
                                    
                                    
                                    10.2
                                    
                                    October
      15, 2013
                                    
                                    7
      yearsTotal
                                    
                                    $
                                    60.1




42





* The
loans are denominated in RMB, we used the exchange rate of $1 =
RMB6.8166


* The
loans are denominated in Euro, we used the exchange rate of 1 Euro =
RMB9.6590





As of the
date of this report, we believe that our currently available working capital,
including the aggregate proceeds of our capital raising activities and the
credit facilities referred to above, should be adequate to sustain our
operations at our current levels through at least the next twelve months. We
may, however, in the future, require additional cash resources due to the
changed business conditions, implementation of our strategy to expand our
production capacity or other investments or acquisitions we may decide to
pursue. If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.





Obligations
under Material Contracts





Below is
a table setting forth our contractual obligations as of December 31,
2008:




(All
amounts in thousands of U.S. dollars)





Total
                                      
                                      Less
      than 1 year
                                      
                                      1-3
      years
                                      
                                      More
      than 3 yearsLong
      term debt obligations
                                      
                                      $
                                      16,054
                                      
                                      -
                                      
                                      $
                                      15,314
                                      
                                      $
                                      740Capital
      commitment
                                      
                                      
                                      1,109
                                      
                                      
                                      1,109
                                      
                                      
                                      -
                                      
                                      
                                      -Operating
      lease obligations
                                      
                                      
                                      525
                                      
                                      
                                      525
                                      
                                      
                                      -
                                      
                                      
                                      -Purchase
      obligations
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -Total
                                      
                                      $
                                      17,293
                                      
                                      $
                                      1,239
                                      
                                      $
                                      15,314
                                      
                                      $
                                      740




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.





Inflation





We
believe our operations have not been materially adversely affected by inflation
or changing prices.





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.




Item
      7A.
            Quantitative
      And Qualitative Disclosure About Market
Risk




Not
applicable.




43





Item
      8.
            Financial
      Statements and Supplementary Financial
Data




The full
text of our audited consolidated financial statements as of December 31, 2008
and 2007 and for the years ended December 31, 2008 and 2007 and 2006 begins on
page F-1 of this Annual Report on Form 10-K.




Item 9.
            Changes in and Disagreements
      with Accountants on Accounting and Financial
      Disclosure.




None.




Item
      9A.
            Controls
      and Procedures.




(a)  
Evaluation of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.





As
required by Rule 13a-15 under the Exchange Act, our management,
including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2008.  Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2008, and as of the date that the
evaluation of the effectiveness of our disclosure controls and procedures was
completed, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.





(b)
Management’s annual report on internal control over financial
reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control
over financial reporting as a process designed by, or under the supervision of,
the Company’s principal executive and principal financial officers and effected
by the Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America and
includes those policies and procedures that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the Company;
      and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the framework
set forth in the report entitled Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment, (ii) risk
assessment, (iii) control activities, (iv) information and communication, and
(v) monitoring. Based on our assessment we determined that, as of December 31,
2008, the Company’s internal control over financial reporting is effective based
on those criteria.




In May
2008, the Company acquired 100% equity interest in Fuxin Huirui Mechanical Co.,
Ltd. In October 2008, the Company acquired 65% equity interest in Year City
Limited which owns 100% equity interest in Jinan Worldwide Auto Accessories Co.,
Ltd. Because of limitation of time, the Company has not completed the
implementation of the internal control on these three subsidiaries by December
31, 2008 and management excluded from its assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2008.
These three entities’ internal control over financial reporting associated with
total assets of 35% and total sales revenues of 13% included in the consolidated
financial statements of the Company as of and for the year ended December 31,
2008.





44




PKF Hong
Kong, Certified Public Accountants (“PKF”), our independent registered public
accounting firm, has performed an audit of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008, and, as part
of its audit, has issued its attestation report on the effectiveness of the
Company’s internal controls over financial reporting herein as of December 31,
2008. PKF’s attestation report is included in this Item 9A. This audit is
required to be performed in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our independent auditors were given
unrestricted access to all financial records and related data.




Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Stockholders of
 Wonder
Auto Technology, Inc.
 
 We have
audited the internal control over financial reporting of Wonder Auto Technology,
Inc. (the “Company”) and its subsidiaries as of December 31, 2008, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
 
 We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles; (3) that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (4) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008 based on the COSO
criteria.
 
 In May
2008, the Company acquired 100% equity interest in Fuxin Huirui Mechanical Co.,
Ltd. In October 2008, the Company acquired 65% equity interest in Year City
Limited which owns 100% equity interest in Jinan Worldwide Auto Accessories Co.,
Ltd. Because of limitation of time, the Company has not completed the
implementation of the internal control on these three subsidiaries by December
31, 2008 and management excluded from its assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2008.
These three entities’ internal control over financial reporting associated with
total assets of 35% and total sales revenues of 13% included in the consolidated
financial statements of the Company as of and for the year ended December 31,
2008. Our audit of internal control over financial reporting of the Company also
excluded an evaluation of the internal control over financial reporting of these
three entities.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2008 and 2007, and the related consolidated statements of
income and comprehensive income (loss), stockholders’equity, and cash flows for
each of the three years then ended December 31, 2008 and our report dated March
30, 2009 expressed an unqualified opinion thereon.
  
 PKF
 Certified
Public Accountants
 Hong
Kong, China
 March 30,
2009





(c)
Changes in internal control over financial reporting





During
the fiscal year ended December 31, 2008, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
performed during the fiscal year covered by this report that has materially
affected, or is reasonably likely to materially affect our internal control over
financial reporting.





Item
      9B.
            Other
      Information.




None.


45


PART
III




ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT




The
information required by Item 10 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference.




ITEM 11.  EXECUTIVE
COMPENSATION




The
information required by Item 11 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference.





ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDERS




The
information required by Item 12 of Part III is included in our Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is
incorporated herein by reference.




ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE




Information
required by Item 13 of Part III is included in our Proxy Statement relating
to the 2009 Annual Meeting of Stockholders and is incorporated herein by
reference.




ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES




Information
required by Item 14 of Part III is included in our Proxy Statement relating
to the 2009 Annual Meeting of Stockholders and is incorporated herein by
reference.




PART
IV




ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
SCHEDULES.





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





(1)    Financial
Statements





The
consolidated financial statements filed as part of this Form 10-K are located as
set forth in the index on page F-1 of this report.





(2)    Financial
Statement Schedules





Not
applicable.





(3)    Exhibits





The list
of exhibits included in the attached Exhibit Index is hereby incorporated herein
by reference.




46


Wonder
Auto Technology, Inc.
 
 Consolidated
Financial Statements
 (Stated
in US dollars)
  
  
 Wonder
Auto Technology, Inc.
 Consolidated
Financial Statements
 
 Index to
Consolidated Financial Statements
 
 PagesReport
      of Independent Registered Public Accounting Firm
                
                1Consolidated
      Statements of Income and Comprehensive Income (Loss)
                
                2Consolidated
      Balance Sheets
                
                3 -
      4Consolidated
      Statements of Cash Flows
                
                5 -
      7Consolidated
      Statements of Stockholders’ Equity
                
                8Notes
      to Consolidated Financial Statements
                
                9 -
      46
  
 
 Report
of Independent Registered Public Accounting Firm
 
 To the
Board of Directors 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, 2008 and 2007, and
the related consolidated statements of income and comprehensive income (loss),
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2008.  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, 2008 and 2007, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.
 
 We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
30, 2009 expressed an unqualified opinion thereon.
 
 PKF
 Certified
Public Accountants
 Hong
Kong, China
 March 30,
2009
  F-1
 
 Wonder
Auto Technology, Inc.
 Consolidated
Statements of Income and Comprehensive Income (Loss)
 (Stated
in US Dollars)
 
 Year ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Sales
      revenue
                  
                  $
                  141,189,559
                  
                  
                  $
                  102,083,722
                  
                  
                  $
                  72,150,483Cost
      of sales
                  
                  
                  104,750,150
                  
                  
                  
                  76,459,944
                  
                  
                  
                  57,342,201Gross
      profit
                  
                  
                  36,439,409
                  
                  
                  
                  25,623,778
                  
                  
                  
                  14,808,282Operating
      expensesAdministrative
      expenses
                  
                  
                  6,827,200
                  
                  
                  
                  3,565,332
                  
                  
                  
                  1,917,817Stock-based
      compensation
                  
                  
                  706,295
                  
                  
                  
                  -
                  
                  
                  
                  -Research
      and development expenses
                  
                  
                  1,647,888
                  
                  
                  
                  1,135,997
                  
                  
                  
                  947,702Selling
      expenses
                  
                  
                  4,093,413
                  
                  
                  
                  3,290,689
                  
                  
                  
                  2,137,853Unusual
      charge - make good provision
                  
                  
                  -
                  
                  
                  
                  18,265,500
                  
                  
                  
                  7,507,50013,274,796
                  
                  
                  
                  26,257,518
                  
                  
                  
                  12,510,872Income/(loss)
      from operations
                  
                  
                  23,164,613
                  
                  
                  
                  (633,740
                  )
                  
                  
                  2,297,410Other
      income - Note 4
                  
                  
                  1,359,883
                  
                  
                  
                  287,322
                  
                  
                  
                  356,590Government
      grants - Note 3
                  
                  
                  192,882
                  
                  
                  
                  1,496,547
                  
                  
                  
                  -Net
      finance costs - Note 5
                  
                  
                  (2,246,099
                  )
                  
                  
                  (2,409,021
                  )
                  
                  
                  (936,741
                  )Equity
      in net income of non-consolidated affiliates - Note 3
                  
                  
                  1,072,788
                  
                  
                  
                  34,147
                  
                  
                  
                  371,005Income/(loss)
      before income taxes and minority interests
                  
                  
                  23,544,067
                  
                  
                  
                  (1,224,745
                  )
                  
                  
                  2,088,264Income
      taxes - Note 6
                  
                  
                  (2,174,948
                  )
                  
                  
                  (1,389,008
                  )
                  
                  
                  (1,270,391
                  )Minority
      interests - Note 7
                  
                  
                  (2,460,352
                  )
                  
                  
                  (1,136,694
                  )
                  
                  
                  (101,827
                  )Net
      income/(loss)
                  
                  $
                  18,908,767
                  
                  
                  $
                  (3,750,447
                  )
                  
                  $
                  716,046Other
      comprehensive incomeForeign
      currency translation adjustments
                  
                  
                  4,002,238
                  
                  
                  
                  2,969,894
                  
                  
                  
                  1,007,468Total
      comprehensive income/(loss)
                  
                  $
                  22,911,005
                  
                  
                  $
                  (780,553
                  )
                  
                  $
                  1,723,514Earnings/(loss)
      per share: basic and diluted - Note 8
                  
                  $
                  0.70
                  
                  
                  $
                  (0.16
                  )
                  
                  $
                  0.03Weighted
      average number of shares outstanding:basic
      and diluted
                  
                  
                  26,959,994
                  
                  
                  
                  24,140,816
                  
                  
                  
                  20,787,279
 
 See Notes
to Consolidated Financial Statements
  F-2
 
 Wonder
Auto Technology, Inc.
 Consolidated
Balance Sheets
 (Stated
in US Dollars)
 
 As
      of December 31,2008
                      
                      
                      2007ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      8,159,156
                      
                      
                      $
                      26,102,993Restricted
      cash - Note 9
                      
                      
                      24,181,645
                      
                      
                      
                      8,613,262Trade
      receivables, net - Note 10
                      
                      
                      46,571,619
                      
                      
                      
                      38,124,411Bills
      receivable
                      
                      
                      8,388,926
                      
                      
                      
                      11,766,478Other
      receivables, prepayments and deposits - Note 11
                      
                      
                      16,408,304
                      
                      
                      
                      1,635,447Inventories
      - Note 12
                      
                      
                      44,016,192
                      
                      
                      
                      12,634,786Amount
      due from a related company - Note 18
                      
                      
                      -
                      
                      
                      
                      74,822Amount
      due from Hony Capital - Note 11(b)
                      
                      
                      7,637,216
                      
                      
                      
                      -Income
      tax recoverable
                      
                      
                      289,000
                      
                      
                      
                      -Deferred
      taxes - Note 6
                      
                      
                      1,075,766
                      
                      
                      
                      307,338Total
      current assets
                      
                      
                      156,727,824
                      
                      
                      
                      99,259,537Intangible
      assets - Note 13
                      
                      
                      22,062,560
                      
                      
                      
                      16,873,051Property,
      plant and equipment, net - Note 14
                      
                      
                      69,131,579
                      
                      
                      
                      22,516,900Land
      use rights - Note 15
                      
                      
                      10,391,527
                      
                      
                      
                      1,235,029Deposit
      for acquisition of property, plant and equipment
                      
                      
                      3,845,774
                      
                      
                      
                      2,072,458Deferred
      taxes - Note 6
                      
                      
                      870,500
                      
                      
                      
                      439,760TOTAL
      ASSETS
                      
                      $
                      263,029,764
                      
                      
                      $
                      142,396,735
 
 See Notes
to Consolidated Financial Statements
  F-3
 
 Wonder
Auto Technology, Inc.
 Consolidated
Balance Sheets (Cont’d)
 (Stated
in US Dollars)
 
 As
      of December 31,2008
                      
                      
                      2007LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
      liabilitiesTrade
      payables - Note 9
                      
                      $
                      21,616,932
                      
                      
                      $
                      12,726,989Bills
      payable - Note 9
                      
                      
                      31,247,100
                      
                      
                      
                      15,903,600Other
      payables and accrued expenses - Note 16
                      
                      
                      20,465,014
                      
                      
                      
                      2,413,140Provision
      for warranty - Notes 3 and 17
                      
                      
                      2,377,620
                      
                      
                      
                      1,124,655Income
      tax payable
                      
                      
                      -
                      
                      
                      
                      666,589Payable
      to Hony Capital - Note 16(f)
                      
                      
                      10,187,216
                      
                      
                      
                      -Secured
      borrowings - Note 19
                      
                      
                      44,055,803
                      
                      
                      
                      10,282,500Early
      retirement benefits cost - Note 3
                      
                      
                      419,301
                      
                      
                      
                      -Total
      current liabilities
                      
                      
                      130,368,986
                      
                      
                      
                      43,117,473Secured
      borrowings - Note 19
                      
                      
                      16,054,478
                      
                      
                      
                      17,622,186Deferred
      revenue - government grants - Note 3
                      
                      
                      2,806,777
                      
                      
                      
                      -Early
      retirement benefits cost - Note 3
                      
                      
                      798,115
                      
                      
                      
                      -TOTAL
      LIABILITIES
                      
                      
                      150,028,356
                      
                      
                      
                      60,739,659COMMITMENTS AND CONTINGENCIES- Note 21MINORITY INTERESTS -
      Note 3
                      
                      
                      10,941,715
                      
                      
                      
                      3,214,683STOCKHOLDERS’
      EQUITYPreferred
      stock: par value $0.0001 per share; authorized 10,000,000 shares in 2008
      and 2007; none issued and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock: par value $0.0001 per share Authorized 90,000,000 shares in 2008
      and 2007; issued and outstanding 26,959,994 shares in 2008 and
      2007
                      
                      
                      2,696
                      
                      
                      
                      2,696Additional
      paid-in capital
                      
                      
                      71,349,599
                      
                      
                      
                      70,643,304Statutory
      and other reserves - Note 22
                      
                      
                      7,628,541
                      
                      
                      
                      4,857,660Accumulated
      other comprehensive income
                      
                      
                      8,424,270
                      
                      
                      
                      4,422,032Retained
      earnings/accumulated (deficit)
                      
                      
                      14,654,587
                      
                      
                      
                      (1,483,299
                      )TOTAL
      STOCKHOLDERS’ EQUITY
                      
                      
                      102,059,693
                      
                      
                      
                      78,442,393TOTAL LIABILITIES AND
      STOCKHOLDERS’ EQUITY
                      
                      $
                      263,029,764
                      
                      
                      $
                      142,396,735
 
 See Notes
to Consolidated Financial Statements
  F-4
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows
 (Stated
in US Dollars)
 Year ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Cash
      flows from operating activitiesNet
      income/(loss)
                  
                  $
                  18,908,767
                  
                  
                  $
                  (3,750,447
                  )
                  
                  $
                  716,046Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                  
                  
                  3,734,534
                  
                  
                  
                  2,014,045
                  
                  
                  
                  1,401,541Amortization
      of intangible assets and land use right
                  
                  
                  169,641
                  
                  
                  
                  90,712
                  
                  
                  
                  29,652Deferred
      taxes
                  
                  
                  (112,140
                  )
                  
                  
                  (263,993
                  )
                  
                  
                  (16,369
                  )(Gain)/Loss
      on disposal of property, plant and equipment
                  
                  
                  (129,374
                  )
                  
                  
                  20,255
                  
                  
                  
                  79,527Gain
      on disposal of Man Do Auto Technology Co., Ltd. (“Man Do”)
                  
                  
                  -
                  
                  
                  
                  (500
                  )
                  
                  
                  -Loss
      on disposal of non-consolidated affiliate
                  
                  
                  122,788
                  
                  
                  
                  -
                  
                  
                  
                  -Provision/(Recovery
      of) for doubtful debts
                  
                  
                  8,577
                  
                  
                  
                  2,159
                  
                  
                  
                  (7,701
                  )Provision/(Recovery
      of) for obsolete inventories
                  
                  
                  46,917
                  
                  
                  
                  39,115
                  
                  
                  
                  (52,470
                  )Exchange
      (gain)/loss on translation of monetary assets and
    liabilities
                  
                  
                  (1,242,479
                  )
                  
                  
                  532,738
                  
                  
                  
                  -Equity
      in net income of non-consolidated affiliate
                  
                  
                  (1,072,788
                  )
                  
                  
                  (34,147
                  )
                  
                  
                  (371,005
                  )Share-based
      compensation - Note 20
                  
                  
                  706,295
                  
                  
                  
                  -
                  
                  
                  
                  -Increase
      in minority interests
                  
                  
                  2,460,352
                  
                  
                  
                  1,136,694
                  
                  
                  
                  101,827Deferred
      revenue amortized
                  
                  
                  28,241
                  
                  
                  
                  -
                  
                  
                  
                  -Unusual
      charge - make good provision
                  
                  
                  -
                  
                  
                  
                  18,265,500
                  
                  
                  
                  7,507,500Changes
      in operating assets and liabilities:Trade
      receivables
                  
                  
                  2,993,828
                  
                  
                  
                  (10,651,989
                  )
                  
                  
                  (5,493,345
                  )Bills
      receivable
                  
                  
                  6,251,024
                  
                  
                  
                  (6,504,351
                  )
                  
                  
                  1,536,869Other
      receivables, prepayments and deposits
                  
                  
                  (3,948,637
                  )
                  
                  
                  2,902
                  
                  
                  
                  (664,255
                  )Inventories
                  
                  
                  (14,861,979
                  )
                  
                  
                  2,265,298
                  
                  
                  
                  (4,481,151
                  )Trade
      payables
                  
                  
                  (53,217
                  )
                  
                  
                  2,554,508
                  
                  
                  
                  460,403Bills
      payable
                  
                  
                  (956,502
                  )
                  
                  
                  5,110,761
                  
                  
                  
                  601,360Amount
      due to an unconsolidated affiliate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36,719Amount
      due from a related company
                  
                  
                  78,516
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      payables and accrued expenses
                  
                  
                  (2,644,372
                  )
                  
                  
                  1,099,131
                  
                  
                  
                  (263,895
                  )Provision
      for warranty
                  
                  
                  262,316
                  
                  
                  
                  6,124
                  
                  
                  
                  102,845Income
      tax payable
                  
                  
                  (1,526,913
                  )
                  
                  
                  235,971
                  
                  
                  
                  164,834Early
      retirement benefits cost
                  
                  
                  (117,834
                  )
                  
                  
                  -
                  
                  
                  
                  -Net
      cash flows provided by operating activities
                  
                  $
                  9,105,561
                  
                  
                  $
                  12,170,486
                  
                  
                  $
                  1,388,932
 
 See Notes
to Consolidated Financial Statements
  F-5
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows (Cont’d)
 (Stated
in US Dollars)
 Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Cash
      flows from investing activitiesPayments
      to acquire intangible assets
                    
                    $
                    (1,472,868
                    )
                    
                    $
                    (1,982
                    )
                    
                    $
                    (10,023
                    )Payments
      to acquire land use right
                    
                    
                    (1,856,268
                    )
                    
                    
                    -
                    
                    
                    
                    -Payments
      to acquire and for deposit for acquisition of property, plant and
      equipment
                    
                    
                    (17,308,878
                    )
                    
                    
                    (8,023,761
                    )
                    
                    
                    (3,627,589
                    )Proceeds
      from sales of property, plant and equipment
                    
                    
                    242,044
                    
                    
                    
                    25,803
                    
                    
                    
                    73,169Proceeds
      from sales of marketable securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    37,585Cash
      acquired from the RTO
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    419Net
      cash paid to acquire Jinzhou Wanyou - Note 3
                    
                    
                    (293,400
                    )
                    
                    
                    (14,146,485
                    )
                    
                    
                    (500,000
                    )Net
      cash paid to acquire Jinzhou Dongwoo
                    
                    
                    -
                    
                    
                    
                    (2,420,000
                    )
                    
                    
                    (2,192,669
                    )Cash
      inflow from disposal of Man Do
                    
                    
                    -
                    
                    
                    
                    500
                    
                    
                    
                    -Net
      cash paid to acquire Jinzhou Hanhua - Note 2(a)
                    
                    
                    (4,040,472
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      cash paid to acquire Jinzhou Karham - Note 2(b)
                    
                    
                    (703,712
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      cash paid to acquire Money Victory - Note 2(c)
                    
                    
                    (5,000,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      cash paid to acquire Fuxin Huirui - Note 2(d)
                    
                    
                    (140,990
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      cash paid to acquire Yearcity - Note 2(e)
                    
                    
                    (6,691,434
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      cash flows used in investing activities
                    
                    
                    (37,335,978
                    )
                    
                    
                    (24,565,925
                    )
                    
                    
                    (6,219,108
                    )Cash
      flows from financing activitiesRepayment
      to a stockholder
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (5,149
                    )Amount
      due from a related company
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (68,128
                    )Decrease/(Increase)
      in restricted cash
                    
                    
                    2,293,532
                    
                    
                    
                    (3,736,383
                    )
                    
                    
                    (917,757
                    )Dividend
      paid to stockholders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,719,985
                    )Dividend
      paid to Winning - Note 3
                    
                    
                    (644,030
                    )
                    
                    
                    (343,934
                    )
                    
                    
                    -Dividend
      paid to minority stockholders
                    
                    
                    (1,653,271
                    )
                    
                    
                    (743,240
                    )
                    
                    
                    -Proceeds
      from bank loans
                    
                    
                    18,426,341
                    
                    
                    
                    29,486,379
                    
                    
                    
                    17,573,649Repayment
      of bank loans
                    
                    
                    (9,196,570
                    )
                    
                    
                    (18,161,716
                    )
                    
                    
                    (16,696,664
                    )Net
      proceeds from issue of shares
                    
                    
                    -
                    
                    
                    
                    22,730,461
                    
                    
                    
                    10,142,020Net
      cash flows provided by financing activities
                    
                    
                    9,226,002
                    
                    
                    
                    29,231,567
                    
                    
                    
                    8,307,986Effect
      of foreign currency translation on cash and cash
    equivalents
                    
                    
                    990,578
                    
                    
                    
                    1,063,166
                    
                    
                    
                    357,132Net
      (decrease)/increase in cash and cash equivalents
                    
                    
                    (17,943,837
                    )
                    
                    
                    17,899,294
                    
                    
                    
                    3,834,942Cash
      and cash equivalents - beginning of year
                    
                    
                    26,102,993
                    
                    
                    
                    8,203,699
                    
                    
                    
                    4,368,757Cash
      and cash equivalents - end of year
                    
                    $
                    8,159,156
                    
                    
                    $
                    26,102,993
                    
                    
                    $
                    8,203,699
 
 See Notes
to Consolidated Financial Statements
  F-6
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows (Cont’d)
 (Stated
in US Dollars)
 Year
      ended December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Supplemental
      disclosures for cash flow information:Cash
      paid for:Interest
                                  
                                  $
                                  2,849,664
                                  
                                  
                                  $
                                  1,445,534
                                  
                                  
                                  $
                                  807,693Income
      taxes
                                  
                                  $
                                  2,464,548
                                  
                                  
                                  $
                                  1,316,837
                                  
                                  
                                  $
                                  1,121,927Cash
      investing activities:Acquisitions
      (Note 2)Fair
      value of assets acquired
                                  
                                  $
                                  101,208,984
                                  
                                  
                                  $
                                  3,149,361
                                  
                                  
                                  $
                                  8,624,052Fair
      value of liabilities assumed
                                  
                                  $
                                  86,049,295
                                  
                                  
                                  $
                                  309,044
                                  
                                  
                                  $
                                  3,691,211
 
 See Notes
to Consolidated Financial Statements
  F-7
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Stockholders’ Equity
 (Stated
in US Dollars)
 
 Accumulated
                  
                  
                  RetainedAdditional
                  
                  
                  Statutory
                  
                  
                  other
                  
                  
                  earnings/Common
      stock
                  
                  
                  paid-in
                  
                  
                  and
      other
                  
                  
                  comprehensive
                  
                  
                  accumulatedNo.
      of shares
                  
                  
                  Amount
                  
                  
                  capital
                  
                  
                  reserves
                  
                  
                  income
                  
                  
                  (deficit)
                  
                  
                  TotalBalance,
      January 1, 2006
                  
                  
                  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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,507,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,507,500Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  716,046
                  
                  
                  
                  716,046Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,007,468
                  
                  
                  
                  -
                  
                  
                  
                  1,007,468Appropriation
      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
                  
                  
                  
                  38,226,985Share
      issued for proceeds of $25.95 million
                  
                  
                  3,000,000
                  
                  
                  
                  300
                  
                  
                  
                  25,949,700
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  25,950,000Cost
      of raising capital
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,219,539
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,219,539
                  )Unusual
      charge - make good provision
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,265,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,265,500Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,750,447
                  )
                  
                  
                  (3,750,447
                  )Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,969,894
                  
                  
                  
                  -
                  
                  
                  
                  2,969,894Appropriation
      to reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,709,395
                  
                  
                  
                  -
                  
                  
                  
                  (1,709,395
                  )
                  
                  
                  -Balance,
      December 31, 2007
                  
                  
                  26,959,994
                  
                  
                  
                  2,696
                  
                  
                  
                  70,643,304
                  
                  
                  
                  4,857,660
                  
                  
                  
                  4,422,032
                  
                  
                  
                  (1,483,299
                  )
                  
                  
                  78,442,393Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,908,767
                  
                  
                  
                  18,908,767Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,002,238
                  
                  
                  
                  -
                  
                  
                  
                  4,002,238Appropriation
      to reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,770,881
                  
                  
                  
                  -
                  
                  
                  
                  (2,770,881
                  )
                  
                  
                  -Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  706,295
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  706,295Balance,
      December 31, 2008
                  
                  
                  26,959,994
                  
                  
                  $
                  2,696
                  
                  
                  $
                  71,349,599
                  
                  
                  $
                  7,628,541
                  
                  
                  $
                  8,424,270
                  
                  
                  $
                  14,654,587
                  
                  
                  $
                  102,059,693
 
 See Notes
to Consolidated Financial Statements
  F-8
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 1.
              Corporate
      information and description of
business
 
 Wonder
Auto Technology, Inc. (the “Company”) was incorporated in the State of Nevada on
June 8, 2000.  The Company’s shares are quoted for trading on the
Nasdaq Global Market in the United States.
 
 The
Company is principally engaged in the design, development, manufacture and
marketing of automotive electrical parts, specifically starters and alternators
and manufacturing of engine valves and tappets for motor vehicles mainly in the
PRC. The major target markets of the Company’s products are the PRC, South Korea
and Brazil.
 
 The
products of the Company are suitable for use in a variety of
automobiles.  However, most of the Company’s products are used in
passenger cars with smaller engines having displacement below 1.6
liters.  The Company has also begun to manufacture and sell rectifier
and regulator products for use in alternators as well as various rods and shafts
for use in shock absorbers, alternators and starters.
 
 The
Company’s customers include automakers, engine manufacturers and, increasingly,
auto parts suppliers.  The Company also offers to its customers’
product design and development services for their new car models or automotive
components based on customers’ specifications.
 
 The raw
materials used in the Company’s production are mainly divided into four
categories, metal parts, semiconductors, chemicals and packaging
materials.
 
 2.
              Acquisitions
 
 (a)
              On
      January 1, 2008, to secure the supply of raw materials and components for
      its starter products, Wonder entered into an agreement with Winning
      International Development Limited (“Winning”) pursuant to which Wonder
      agreed to acquire Winning’s 50% equity interest in Jinzhou Hanhua
      Electrical Systems Co., Ltd. (“Jinzhou Hanhua”) at a cash consideration of
      $4.10 million (RMB 29.75 million).  Upon the completion of the
      transaction on January 1, 2008, Jinzhou Hanhua was considered as a
      subsidiary of the Company as Wonder obtained control over Jinzhou Hanhua
      by appointing more than half of members in the board of directors in
      accordance with Jinzhou Hanhua’s amended Memorandum and Articles of
      Association of which a valid board action only requires the approval of
      more than half of board members.  Jinzhou Hanhua is engaged in
      design, manufacture and sales of armatures for various automotive
      starters and oil pumps.
  F-9
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      (Cont’d)
 
 The
consideration is scheduled to be paid by Wonder in two
installments.  The first installment of approximately $3.1 million
(RMB 22.55 million) was fully paid on January 28, 2008.  The second
installment of approximately $1 million (RMB 7.2 million) will be paid if
Jinzhou Hanhua achieves minimum net income of approximately $1.17 million (RMB
8.5 million) for the fiscal year ending December 31, 2008.  If Jinzhou
Hanhua fails to achieve the minimum net income threshold, the second installment
will be proportionately reduced.  No premium will be payable by Wonder
if Jinzhou Hanhua exceeds the minimum net income threshold.  The
second installment of $1 million was included in the cost of acquisition and
paid as the net income of Jinzhou Hanhua for the fiscal year ending December 31,
2008 achieved the minimum net income threshold.
 
 The
following table summarizes the allocation of the purchase price reflecting the
amounts assigned to Jinzhou Hanhua’s each major class of assets acquired and
liabilities assumed at the date of acquisition :
 
 January
      1,2008Current
      assets
                            
                            $
                            2,409,268Property,
      plant and equipment, net
                            
                            
                            2,010,948Land
      use right
                            
                            
                            1,020,098Goodwill
                            
                            
                            1,630,163Current
      liabilities
                            
                            
                            (2,972,681
                            )Net
      assets acquired
                            
                            $
                            4,097,796Satisfied
      by:-Cash
      payment
                            
                            $
                            4,097,796Net
      cash paid to acquire Jinzhou Hanhua
                            
                            $
                            4,040,472
 
 As of
December 31, 2008, the consolidated balance sheet includes a goodwill identified
upon the acquisition of 50% equity interest in Jinzhou Hanhua amounting to $1.63
million which represents the excess of the initial purchase price of $4.10
million over the attributable share of fair value of acquired identifiable net
assets of Jinzhou Hanhua of $2.47 million at the time of acquisition on January
1, 2008.
 
 Based on
an independent third-party appraisal, there were no other significant
identifiable intangible assets (such as trademark, patents and favorable or
unfavorable lease arrangements) noted.  The excess of purchase price
over the fair value of net tangible and intangible assets acquired, representing
consideration paid for intangible assets which do not meet either the
separability criterion or the contractual-legal criterion in accordance with
SFAS No. 141R para. 3k, was recorded as goodwill.
  F-10
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      (Cont’d)
 
 (b)
              On
      February 19, 2008, to secure the supply of raw materials and components
      for its automotive starter products, Wonder entered into an agreement with
      Koma Co., Ltd. (“Koma”), a corporation duly formed under the law of
      Republic of Korea and an independent third party, pursuant to which Wonder
      agreed to acquire Koma’s 65% equity interest in Jinzhou Karham Electrical
      Equipment Co., Ltd. (“Jinzhou Karham”) at a cash consideration of $0.82
      million. Upon the completion of the transaction on Febraury 19, 2008,
      Jinzhou Karham became a subsidiary of the Company.  Jinzhou
      Karham is engaged in design, manufacture and sales of carbon brush
      assembly of various automotive starters.   The negative
      goodwill of $0.19 million, representing the excess of the fair value of
      identifiable net assets of Jinzhou Karham amounting to $1.01 million over
      its purchase price amounting to $0.82 million, was allocated on a pro rata
      basis to long-lived assets at the date of
  acquisition.
 
 The
following table summarizes the allocation of the purchase price reflecting the
amounts assigned to (after the allocation of negative goodwill) Jinzhou Karham’s
each major class of assets acquired and liabilities assumed at the date of
acquisition:
 
 February
      19,2008Current
      assets
                          
                          $
                          696,365Property,
      plant and equipment, net
                          
                          
                          322,861Land
      use right
                          
                          
                          250,301Current
      liabilities
                          
                          
                          (449,527
                          )Net
      assets acquired
                          
                          $
                          820,000Satisfied
      by:-Cash
      payment
                          
                          $
                          820,000Net
      cash paid to acquire Jinzhou Karham
                          
                          $
                          703,712
 
 Jinzhou
Karham was incorporated on June 5, 2006 and commenced its business in the second
quarter of 2007. The Company, with advice from an independent appraiser, has
identified all assets acquired (including intangible assets which meets either
the separability criterion or the contractual-legal criterion in accordance with
SFAS No. 141R para. 3k) as of the date of acquisition and concluded that there
were no significant identifiable intangible assets (such as trademark, patents
and favorable or unfavorable lease arrangements) noted as the operating history
of Jinzhou Karham is limited.
  F-11
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      (Cont’d)
 
 The
following unaudited pro forma financial information presents the combined
results of operations of the Company with the operations of Jinzhou Karham for
year ended December 31, 2008, as if the acquisition had occurred as of the
beginning of fiscal year 2007:
 
 (Pro
      Forma)Year ended December 31,2008
                    
                    
                    2007Revenue
                    
                    $
                    141,189,559
                    
                    
                    $
                    102,083,722Net
      income/(loss)
                    
                    $
                    18,731,067
                    
                    
                    $
                    (3,750,447
                    )Earnings/(loss)
      per share: basic and diluted
                    
                    $
                    0.70
                    
                    
                    $
                    (0.16
                    )
 
 This
unaudited pro forma financial information is presented for informational
purposes only.  The unaudited pro forma financial information may not
necessarily reflect the future results of operations or the results of
operations had the Company owned and operated this business as of the beginning
of the period presented.
 
 (c)
              On
      April 9, 2008, Wonder entered into an agreement (the “Stock Purchase
      Agreement”) with Ms. Lin Tan (“Lin Tan”), an independent third party,
      pursuant to which Wonder agreed to acquire 22.49% equity interest in Money
      Victory Limited (“Money Victory”) at a cash consideration of $5
      million.  Upon the completion of the transaction on April 9,
      2008, Victory became a non-consolidated affiliate of the
      Company.  Money Victory is a holding company organized under the
      law of British Virgin Islands (“BVI”) with no active business
      operations.  Money Victory is the beneficial owner of 15,438,612
      shares of common stock (the “Common Stock”) of Golden Elephant Glass
      Technology, Inc. (“Golden Elephant”) formerly known as Nevstar
      Corporation, which represents 61.75% of Golden Elephant’s issued and
      outstanding shares of the Common Stock at March 31,
      2008.  Golden Elephant is a Nevada holding company for several
      direct and indirect subsidiaries in the British Virgin Islands and the
      People’s Republic of China (the “PRC”).  Golden Elephant’s
      principal business operations are conducted through Fuxin Hengrui
      Technology Co., Ltd., a China-based company which is primarily engaged in
      manufacturing and sales of glass and glass
  products.
 
 Under the
Stock Purchase Agreement, shares of Golden Elephant’s Common Stock continue to
be owned and held by Money Victory and cannot be transferred by Money Victory to
Wonder until such time that such transfer complies in all respects with the U.S.
Securities Laws.  Additionally, Wonder, upon 30 days written notice,
may require Lin Tan to repurchase shares of Money Victory owned by Wonder for
cash at a price that equates to an annualized return to Wonder of no less than
20% of the amount originally invested in Money Victory.  Wonder’s
investment in Money Victory is also subject to a so-called “make good”
provision, of which Lin Tan will be required to transfer 347,222 shares and
347,222 shares of common stock of Golden Elephant to Wonder at zero
consideration in the event that Golden Elephant fails to attain net income of
$10 million in 2008 and $14 million in 2009 respectively. This investment was
sold to a third party with all rights and obligations assigned. More details are
set out in Note 3.
  F-12
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      (Cont’d)
 
 (d)
              On
      May 15, 2008, to secure the supply of raw materials and components for its
      automotive alternator products, Wonder and Jinzhou Wanyou entered into two
      separate agreements with Advance Sun Group Limited (“Advance”), a limited
      company organized in the British Virgin Islands, and a third party Chu Hai
      Tao , pursuant to which Wonder and Jizhou Wanyou agreed to acquire
      Advance’s 32% and Chu Hai Tao’s 68% equity interest in Fuxin Huirui
      Mechanical Co. Ltd. (“Fuxin Huirui“) at par value of registered capital at
      cash considerations of $45,117 and $95,873 respectively.  Upon
      the completion of the transaction on May 15, 2008, Fuxin Huirui became a
      subsidiary of the Company.  Fuxin Huirui was a development stage
      company before acquisition.  After the acquisition, Fuxin Huirui
      is engaged in manufacturing of auto parts, mechanical parts and electrical
      parts.
 
 Fuxin
Huirui was incorporated on September 24, 2007 commenced its business in the
second quarter of 2008. The Company, with advice from an independent appraiser,
has identified all assets acquired (including intangible assets which meets
either the separability criterion or the contractual-legal criterion in
accordance with SFAS No. 141R para. 3k) as of the date of acquisition and
concluded that there were no significant identifiable intangible assets (such as
trademark, patents and favorable or unfavorable lease arrangements) noted as the
operating history of Fuxin Huirui is limited.
 
 (e)
              On
      October 1, 2008, Jinzhou Halla entered into an equity transfer agreement
      with Hony Capital II, L.P., a Cayman Islands corporation (“Hony Capital”),
      pursuant to which Jinzhou Halla agreed to purchase Hony Capital’s 65%
      equity interest in Yearcity Limited (“Yearcity”), a British Virgin Islands
      corporation, representing all the equity interest in Year City held by
      Hony Capital at a cash consideration of $11.70 million. The Company also
      incurred acquisition-related fees and expenses of approximately $0.17
      million.  Upon the completion of the transaction, Yearcity
      became a subsidiary of the Company. Year City owns 100% equity interest in
      Jinan Worldwide Auto Accessories Co., Ltd. (“Jinan
      Worldwide”).  Jinan Worldwide is a company established in PRC
      and engaged in the manufacturing of engine valves and
      tappets.  The negative goodwill of $2.05 million, representing
      the excess of the fair value of identifiable net assets of Yearcity
      amounting to $13.92 million over its purchase price amounting to $11.87
      million, was allocated on a pro rata basis to long-lived assets at the
      date of acquisition.  The Company is the second largest market
      player of alternators and starters with its customers mainly engaged in
      gasoline engine and vehicle market in the PRC.  Jinan Worldwide
      is the largest market player of engine valves and tappets in PRC with its
      customers mainly diesel engine and vehicle business.  The
      acquisition can provide the Company an opportunity to expand its market
      from gasoline engine parts market to diesel engine parts market in the
      PRC.
  F-13
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      (Cont’d)
 
 The
allocation of purchase price is based on the management’s estimates and
assumptions, and other information compiled by management utilizing established
valuation techniques. The following table summarizes the allocation of the
purchase price, including professional fees and other related acquisition costs,
reflecting the amounts assigned to Yearcity’s each major class of assets
acquired and liabilities assumed at the date of acquisition :
 
 October
      1,2008Current
      assets
                    
                    $
                    34,666,988Property,
      plant and equipment, net
                    
                    
                    20,155,011Deposit
      for acquisition of property, plant and equipment
                    
                    
                    158,051Land
      use rights
                    
                    
                    4,780,667Current
      liabilities
                    
                    
                    (47,888,661
                    )Net
      assets acquired
                    
                    $
                    11,872,056
 
 The
Company, with advice from an independent appraiser, has identified all assets
acquired (including intangible assets which meets either the separability
criterion or the contractual-legal criterion in accordance with SFAS No. 141R
para. 3k) as of the date of acquisition and concluded that, except for the
customer contracts of $73,000, there were no any other significant identifiable
intangible assets (such as trademark, patents and favorable or unfavorable lease
arrangements) noted. As the amount is immaterial and no recognition of the
identified customer contracts in connection with this acquisition.
 
 Satisfied
by:-
 
 Cash
      payment
                    
                    $
                    8,790,000Outstanding
      amount included in other payable and accrued expenses
                    
                    
                    3,082,056$
                    11,872,056Net
      cash paid to acquire Yearcity
                    
                    $
                    6,691,434
 
 The
following unaudited pro forma financial information presents the combined
results of operations of the Company with the operations of Yearcity for year
ended December 31, 2008, as if the acquisition had occurred as of the beginning
of fiscal year 2007:
 
 (Pro
      Forma)Year ended December 31,2008
                    
                    
                    2007Revenue
                    
                    $
                    174,612,974
                    
                    
                    $
                    136,168,274Net
      income (loss)
                    
                    $
                    23,158,839
                    
                    
                    $
                    (3,171,359
                    )Earnings
      (loss) per share: basic and diluted
                    
                    $
                    0.86
                    
                    
                    $
                    (0.13
                    )
 
  F-14
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 2.
              Acquisitions
      (Cont’d)
 
 This
unaudited pro forma financial information is presented for informational
purposes only.  The unaudited pro forma financial information may not
necessarily reflect the future results of operations or the results of
operations had the Company owned and operated this business as of the beginning
of the period presented.
 
 3.
              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.
 
 Investments in
non-consolidated affiliates
 
 Equity
method investments are recorded at original cost and adjusted periodically to
recognize (i) our proportionate share of the investees’ net income or losses
after the date of investment; (ii) additional contributions made and dividends
or distributions received; and (iii) impairment losses resulting from
adjustments to net realizable value. The Company assess the potential impairment
of our equity method investments.  The Company determine fair value
based on valuation methodologies, as appropriate, including the present value of
estimated future cash flows, estimates of sales proceeds, and external
appraisals. If an investment is determined to be impaired and the decline in
value is other than temporary, the Company record an appropriate
write-down.
 
 The
Company accounted for the 20.41% investment in Jinzhou Wanyou (an investment in
which the Company exercised significant influence but did not control until
April 2, 2007) using the equity method, under which the share of Jinzhou
Wanyou’s net income was recognized in the period in which it is earned by
Jinzhou Wanyou.
 
 The
Company accounted for the 22.49% investment in Money Victory using the equity
method, under which the share of Money Victory’ net income was recognized in the
period in which it is earned by Money Victory.  On November 19, 2008,
Wonder entered into an assignment agreement (the “Assignment Agreement”) with
Golden Stone Capital Limited (“Golden Stone”), a British Virgin Islands
corporation, Money Victory and Lin Tan.  Pursuant to the Assignment
Agreement, Golden Stone has assumed all of the Wonder’s rights, obligations and
duties under the Stock Purchase Agreement with a cash purchase price of $5.95
million. The consideration will be settled within 110 days from the date of
Assignment Agreement.  A loss of $122,788 resulted from the disposal
after the Company recorded equity in net income of $1,072,788 during the year
ended December 31, 2008.
  F-15
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Minority
interests
 
 Minority
interests resulted from the consolidation of 50% owned subsidiary, Jinzhou
Dongwoo, as a result of the Company’s determination that it had acquired control
over Jinzhou Dongwoo’s operations since November 2006.
 
 Minority
interests resulted from the consolidation of 50% owned subsidiary, Jinzhou
Hanhua, as a result of the Company’s determination that it had acquired control
over Jinzhou Hanhua’s operations since January 1, 2008.
 
 In
addition, minority interest resulted from the consolidation of 65% owned
subsidiaries, Jinzhou Karham and Yearcity, which was acquired on February 19,
2008 and October 1, 2008 respectively.
 
 Stock-based
compensation
 
 The
Company adopted the provisions of SFAS 123R, which requires the use of the fair
value method of accounting for share-based compensation. Under the fair value
based method, compensation cost related to employee stock options or similar
equity instruments which are equity-classified awards, is measured at the grant
date based on the value of the award and is recognized over the requisite
service period, which is usually the vesting period. SFAS 123R also requires
measurement of cost of a liability-classified award based on its current fair
value.
 
 Fair
value of share options granted is determined using the Black-Scholes model.
Under this model, certain assumptions, including the risk-free interest rate,
the expected life of the options and the estimated fair value of the Company’s
common stock and the expected volatility, are required to determine the fair
value of the options. If different assumptions had been used, the fair value of
the options would have been different from the amount the Company computed and
recorded, which would have resulted in either an increase or decrease in the
compensation expense.
 
 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, goodwill and the estimation on useful lives of
property, plant and equipment.  Actual results could differ from those
estimates.
  F-16
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 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, 2008 and 2007, 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 31,2008
                    
                    
                    2007
                    
                    
                    2006Beijing
      Hyundai Motor Company
                    
                    $
                    16,596,648
                    
                    
                    $
                    13,971,225
                    
                    
                    $
                    13,686,791Harbin
      Dongan Automotive Engine Manufacturing Company Limited
                    
                    
                    14,754,205
                    
                    
                    
                    16,657,632
                    
                    
                    
                    5,770,801Shenyang
      Aerospace Mitsubishi Motors Engine Manufacturing Company Limited
      (“Shenyang Aerospace”)
                    
                    
                    6,492,406
                    
                    
                    
                    15,691,636
                    
                    
                    
                    12,837,338$
                    37,843,259
                    
                    
                    $
                    46,320,493
                    
                    
                    $
                    32,294,930
 
 Details
of customers for 10% or more of the Company’s trade receivables are
:-
 
 As
      of December 31,2008
                        
                        
                        2007Beijing
      Hyundai Motor Company
                        
                        $
                        3,810,461
                        
                        
                        $
                        4,669,626Harbin
      Dongan Automotive EngineManufacturing
      Company Limited
                        
                        
                        545,454
                        
                        
                        
                        5,480,691Shenyang
      Aerospace
                        
                        
                        1,107,190
                        
                        
                        
                        4,395,696$
                        5,463,105
                        
                        
                        $
                        14,546,013
 
  F-17
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              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, 2008 and 2007, 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
US dollars.
 
 Allowance for 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.
 
 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.
  F-18
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Inventories
(Cont’d)
 
 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
                    
                    
                    2 -
      4.5
                    %
                    Nil
      to 10%Plant
      and machinery
                    
                    
                    7 -
      10
                    %
                    Nil
      to 10%Motor
      vehicles
                    
                    
                    8 -
      18
                    %
                    Nil
      to 10%Furniture,
      fixtures and equipment
                    
                    
                    15
                    %
                    Nil
      to 10%Tools
      and equipment
                    
                    
                    7 -
      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.
 
  F-19
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Know-how
 
 Know-how
with infinite useful life is determined to have an indefinite useful life
pursuant to the purchase contracts as detailed in note 13(b).  It is
not subject to amortization until its useful life is determined to be no longer
indefinite.
 
 Know-how
with infinite useful life is stated at cost of purchase less any identified
impairment losses in the annual impairment test.
 
 Know-how
with finite useful life pursuant to the purchase contracts as detailed in note
13(c) is stated at cost less accumulated amortization.  Amortization
is provided on a straight-line basis over their useful lives of 10
years.
 
 Land use
rights
 
 Land use
rights are stated at cost less accumulated amortization.  Amortization
is provided using the straight-line method over the terms of the lease of 50
years obtained from the relevant PRC land authority.
 
 Customer
Contracts
 
 Customer
contracts are stated at cost less accumulated amortization. Amortization is
provided on a straight-line basis over their estimated useful lives of 1 year
from the date of acquisition.
 
 Deferred revenue -
government grants
 
 Receipts
of government grants to encourage research and development activities, which are
non-refundable, are credited to deferred income upon
receipt.  Government grants are used for purchases of property, plant
and equipment, to subsidize the research and development expenses incurred, for
compensation expenses already incurred or for good performance of the
Company.
 
 Grants
applicable to purchase of property, plant and equipment are amortized over the
life of the depreciable assets.  For research and development
expenses, the Company matches and offsets the government grants with the
expenses of the research and development activities as specified in the grant
approval document in the corresponding period when such expenses are
incurred.  Government grants received as compensation for expenses
already incurred in the prior period or for good performance of the Company are
recognized as income in the period they become recognizable.
 
 During
the year ended December 31, 2008, the Company received government grants of
$114,851 for good performance of the Company which is unconditional,
non-refundable and without any restrictions on usage at the time of grant to and
receipt by the Company.  Such grant is recognized as income for the
year.
  F-20
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
  3.
                Summary
      of significant accounting policies
(Cont’d)
  Deferred revenue -
government grants (Cont’d)
 
 The
Company received certain government grants for the purchase of property, plant
and equipment since 2004.  Such subsidy was recorded as deferred
revenue and was amortized as income over the useful lives of the relevant
property, plant and equipment.  The Company received such government
grants of $691,039 during the year ended December 31, 2008. Amortization for the
year ended December 31, 2008 was $78,031.
 
 In
addition, the Company received certain government grants from the relevant
government authorities as an encouragement to the capitalization of the retained
profits by the Company’s subsidiaries.  Such government grant is
unconditional, non-refundable and without any restrictions on usage at the time
of grant to and receipt by the Company.  Government grant is
recognized as income at the time when the approval documents are obtained from
the relevant government authorities and when they are received. For the year
ended December 31, 2007, the Company received government grant of
$1,496,547.
 
 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.
 
 Capitalized
interest
 
 The
interest cost associated with the major development and construction projects is
capitalized and included in the cost of the project.  When no debt is
incurred specifically for a project, interest is capitalized on amounts expended
on the project using weighted-average cost of the Company’s outstanding
borrowings. Capitalization of interest ceases when the project is substantially
complete or development activity is suspended for more than a brief
period.
 
 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.
  F-21
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 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 the Statement of Income and
Comprehensive Income.
 
 “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
the Statement of Income and Comprehensive Income.
 
 Advertising
expenses amounting to $100,474, $8,926 and $16,137 for three years ended
December 31, 2008, 2007 and 2006 respectively are included in selling
expenses.
 
 Transportation
expenses amounting to $1,119,546, $630,254 and $464,838 for three years ended
December 31, 2008, 2007 and 2006 respectively are included in selling
expenses.
 
 Research
and development expenditure for each of three years in the period ended December
31, 2008 are as follow :-
  Year ended December 31,Nature
                
                Included in
                
                2008
                
                
                2007
                
                
                2006New
      productsdevelopmentexpenses
                
                Operating  expenses
                
                $
                1,249,894
                
                
                $
                534,503
                
                
                $
                500,347Investments
      in researchand developmentequipment
                
                Property,
      plant and equipment
                
                
                2,186,758
                
                
                
                2,388,867
                
                
                
                611,615Other
      research anddevelopmentexpenses
                
                Operating  expenses
                
                
                397,994
                
                
                
                601,494
                
                
                
                447,355$
                3,834,646
                
                
                $
                3,524,864
                
                
                $
                1,559,317
 F-22
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Warranty
 
 It is the
policy of the Company to provide after sales support to the product of
alternators and starters 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 in relation to the sales of alternators and starters such that the
closing balance of this provision is equal to 1.5% of relevant sales during the
reporting years.
 
 In
addition, it is the policy of the Company to provide after sales support to the
product of engine valves and tappets by way of a warranty
programme.  The Company provided warranties to certain customers with
warranty periods ranging from 1 to 1.5 years or 3,000 hours, whichever comes
first.
 
 Based on
the past experience, the Company sets up a policy of making a general provision
for warranty in relation to the sales of engine valves and tappets such that the
closing balance of this provision is equal to 1.7% of relevant sales for the
year ended December 31, 2008.
 
 Early retirement benefits
cost
 
 The
Company adopted an early retirement scheme to provide eligible staff with
certain salaries and insurance benefits for their early retirement before
statutory retirement age, 55 for women and 65 for men.  The obligation
of early retirement benefits cost is recorded at the present value of the cost
expected to settle the obligation and is recognized when the application for
early retirement has been approved by the Company.  Since December 31,
2007, no further early retirement application is processed and approved by the
Company thereafter.
 
 As of
December 31, 2008, the discount rate of 6.3%, which was the average borrowing
rate of Renminbi loan in the PRC, was adopted to calculate the present value of
early retirement benefits cost.
 
 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.
  F-23
 Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 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 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, 2008, 2007 and
2006 were RMB1 for $0.1467, $0.1371 and $0.1279 respectively.  There
is no significant fluctuation in exchange rate for the conversion of RMB to US
dollars after the balance sheet date.
 
 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.
  F-24
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Fair value of financial
instruments
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 does not require any new
fair value measurements; however, the standard will impact how other fair value
based GAAP is applied. Subsequently, the FASB issued FSP FAS 157-2 which delayed
the effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008. The Company adopted SFAS 157 on January 1,
2008. The adoption of SFAS 157 did not materially impact the Company’s financial
position, results of operations or cash flows.
 
 Statement
of Financial Accounting Standards No. 107 “Disclosures About Fair Value of
Financial Instruments” (“SFAS 107”) requires the disclosure of the estimated
fair value of financial instruments including those financial instruments for
which the Financial Accounting Standards No. 159 fair value option was not
elected. Except for secured borrowings disclosed as below, the carrying amounts
of other financial assets and liabilities approximate to their fair value due to
short maturities:
 
 As of December 31, 2008
                        
                        
                        As
      of December 31, 2007Carrying
                          amount
                        
                        
                        Fair
      value
                        
                        
                        Carrying
                          amount
                        
                        
                        Fair
      valueSecured
      borrowings
                        
                        $
                        60,110,281
                        
                        
                        $
                        61,196,042
                        
                        
                        $
                        27,904,686
                        
                        
                        $
                        28,717,186
 
 The fair
values of secured borrowings are estimated using discounted cash flow analyses,
based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.
  F-25
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements
 
 In May
2008, FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”).  Effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.  The Board does not expect that this Statement
will result in a change in current practice. However, transition provisions have
been provided in the unusual circumstance that the application of the provisions
of this Statement results in a change in practice.  The management is
in the process of evaluating the impact that SFAS 162 will have on the Company’s
financial statements upon adoption.
 
 In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities - an amendment to FASB Statement No. 133" (“SFAS 161”).
SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early adoption
encouraged.  The management is in the process of evaluating the impact
that SFAS 161 will have on the Company’s financial statements upon
adoption.
 
 In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”). SFAS
160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The management is in the process of evaluating the impact that SFAS 160
will have on the Company’s financial statements upon adoption.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”
(“SFAS 141 (Revised)”). SFAS 141 (Revised) establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective for the fiscal year
beginning after December 15, 2008. The management is in the process of
evaluating the impact that SFAS 141 (Revised) will have on the Company’s
financial statements upon adoption.
  F-26
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements (cont’d)
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (“SFAS 159”).  SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date.  The fair value option may be elected on an
instrument-by-instrument basis, with few exceptions.  SFAS 159 also
establishes presentation and disclosure requirements to facilitate comparisons
between companies that choose different measurement attributes for similar
assets and liabilities.  The requirements of SFAS 159 are effective
for our fiscal year beginning January 1, 2008.  The adoption of
this statement has no material effect on the Company's financial
statements.
 
 4.
              Other
      income
 
 Year
      ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Other
      payables waived
                        
                        $
                        773,158
                        
                        
                        $
                        -
                        
                        
                        $
                        -Sales
      of scrap materials
                        
                        
                        198,432
                        
                        
                        
                        30,772
                        
                        
                        
                        3,268Services
      income
                        
                        
                        240,053
                        
                        
                        
                        -
                        
                        
                        
                        70,662Claims
      to suppliers
                        
                        
                        -
                        
                        
                        
                        179,696
                        
                        
                        
                        226,623Gain
      on disposal of property, plant and equipment
                        
                        
                        129,374
                        
                        
                        
                        -
                        
                        
                        
                        -Others
                        
                        
                        18,866
                        
                        
                        
                        76,854
                        
                        
                        
                        56,037$
                        1,359,883
                        
                        
                        $
                        287,322
                        
                        
                        $
                        356,590
 
 5.
              Net
      finance costs
 Year
      ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Interest
      income
                      
                      $
                      (314,290
                      )
                      
                      $
                      (111,784
                      )
                      
                      $
                      (96,810
                      )Interest
      expenses
                      
                      
                      2,809,856
                      
                      
                      
                      1,627,063
                      
                      
                      
                      807,693Less:
      Interest capitalized
                      
                      
                      -
                      
                      
                      
                      (131,287
                      )
                      
                      
                      -Bills
      discounting charges
                      
                      
                      449,530
                      
                      
                      
                      203,708
                      
                      
                      
                      55,007Bank
      charges
                      
                      
                      245,474
                      
                      
                      
                      120,360
                      
                      
                      
                      88,436Net
      exchange (gain)/loss
                      
                      
                      (975,305
                      )
                      
                      
                      700,961
                      
                      
                      
                      82,415Finance
      charges from early retirement benefits cost
                      
                      
                      30,834
                      
                      
                      
                      -
                      
                      
                      
                      -$
                      2,246,099
                      
                      
                      $
                      2,409,021
                      
                      
                      $
                      936,741
  F-27
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 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 the US federal income taxes has been
made as the Company had no taxable income in this jurisdiction for the reporting
period.
 
 BVI
 
 Wonder
and Yearcity were incorporated in the BVI and, under the current laws of the
BVI, are not subject to income taxes.
 
 PRC
 
 Corporate income tax
(“CIT”) to Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua,
Jinzhou Karham, Fuxin Huirui and Jinan Worldwide in the PRC was charged at 27%,
of which 24% is for national tax and 3% is for local tax, of the assessable
profits before 2008.  The PRC’s legislative body, the National
People’s Congress, adopted the unified CIT Law on March 16,
2007.  This new tax law replaces the existing separate income tax laws
for domestic enterprises and foreign-invested enterprises and became effective
on January 1, 2008.  Under the new tax law, a unified income tax
rates is set at 25% for both domestic enterprises and foreign-invested
enterprises.  However, there will be a transition period for
enterprises, whether foreign-invested or domestic, that are currently receiving
preferential tax treatments granted by relevant tax
authorities.  Enterprises that are subject to an enterprise income tax
rate lower than 25% may continue to enjoy the lower rate and will transit into
the new tax rate over a five year period beginning on the effective date of the
CIT Law.  Enterprises that are currently entitled to exemptions for a
fixed term will continue to enjoy such treatment until the exemption term
expires.  Preferential tax treatment will continue to be granted to
industries and projects that qualify for such preferential treatments under the
new tax law.  As approved by the relevant tax authority in the PRC,
Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua, Jinzhou Karham,
Fuxin Huirui and Jinan Worldwide were entitled to two years’ exemption from the
first profit making calendar year of operations after offset of accumulated
taxable losses, followed by a 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”), engaged in an advanced technology industry, was approved to
enjoy a further three years’ 50% tax reduction for 2006, 2007 and
2008.  The tax holiday of Jinzhou Dongwoo commenced in the fiscal year
2004.  Accordingly, Jinzhou Dongwoo was subject to tax rate of 13.5%
for 2006 and 2007, and the Company expects it will be subject to a tax rate of
12.5% for 2008.  Jinzhou Wanyou has elected to commence the tax
holiday in the fiscal year 2007.  Accordingly, Jinzhou Wanyou will be
exempted from EIT for 2007 and 2008 and thereafter entitled to a 50% reduction
on EIT tax rate 12.5% for 2009, 2010 and 2011.  The tax holiday of
Jinzhou Hanhua commenced in the fiscal year 2005.  Accordingly,
Jinzhou Hanhua was subject to tax rate of 13.5% for 2007, and we expect it will
be subject to a tax rate of 12.5% for 2008 and 2009.  Jinzhou Karham
has elected to commence the tax holiday in the fiscal year
2008.  Accordingly, Jinzhou Karham will be exempted from CIT for 2008
and 2009 and thereafter entitled to a 50% reduction on CIT tax rate 12.5% for
2010, 2011 and 2012.  The tax holiday of Fuxin Huirui
commenced in the fiscal year 2008.  Accordingly, Fuxin Huirui will be
exempted from CIT for 2008 and 2009 and thereafter entitled to a 50% reduction
on CIT tax rate 12.5% for 2010, 2011 and 2012.  The tax holiday of
Jinan Wolrdwide commenced in the fiscal year of 2006.  Accordingly,
Jinan Worldwide was subject to tax rate of 12.5% for 2008, 2009 and
2010.  Wonder Motor and Jinzhou Wonder is subject to a rate of
25%.
  F-28
  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 are :-
 
 Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Current
      taxes - PRC
                    
                    $
                    2,287,088
                    
                    
                    $
                    1,653,001
                    
                    
                    $
                    1,286,760Deferred
      taxes - PRC
                    
                    
                    (112,140
                    )
                    
                    
                    (263,993
                    )
                    
                    
                    (16,369
                    )$
                    2,174,948
                    
                    
                    $
                    1,389,008
                    
                    
                    $
                    1,270,391
 
 The
effective income tax expenses differs from the PRC statutory income tax rate of
25% for the year ended December 31, 2008 and 27% for the year ended December
2007 and 2006 in the PRC as follows :-
 
 Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Provision
      for income taxes at PRC statutory income tax rate
                    
                    $
                    5,886,017
                    
                    
                    $
                    (330,681
                    )
                    
                    $
                    522,066Non-deductible
      items for tax
                    
                    
                    378,773
                    
                    
                    
                    5,058,702
                    
                    
                    
                    2,094,875Income
      not subject to tax
                    
                    
                    (166,134
                    )
                    
                    
                    (183,342
                    )
                    
                    
                    (108,558
                    )Increase
      in deferred tax assets resulting resulting from a reduction of PRC
      enterprise income tax rate
                    
                    
                    -
                    
                    
                    
                    (194,321
                    )
                    
                    
                    -Over
      provision in respect of previous year
                    
                    
                    (103,190
                    )
                    
                    
                    -
                    
                    
                    
                    -Tax
      holiday
                    
                    
                    (3,820,518
                    )
                    
                    
                    (2,961,350
                    )
                    
                    
                    (1,254,192
                    )Others
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    16,200$
                    2,174,948
                    
                    
                    $
                    1,389,008
                    
                    
                    $
                    1,270,391
 
 During
the three years ended December 31, 2008, 2007 and 2006, the aggregate amounts of
benefit from tax holiday were $3,820,518, $2,961,350 and $1,254,192 and the
respective effective on earnings per share effect was $0.14, $0.12 and $0.06
respectively.
  F-29
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
                Income
      taxes (Cont’d)
 
 PRC
(cont’d)
 
 In July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”).  This interpretation requires recognition
and measurement of uncertain income tax positions using a “more-likely-than-not”
approach.  The Company adopted FIN 48 on January 1,
2007.  The management evaluated the Company’s tax positions and
considered that no additional provision for uncertainty in income taxes is
necessary as of December 31, 2008.
 
 Deferred
tax assets (liabilities) as of December 31, 2008 and 2007 are composed of the
following :-
 As
      of December 31,2008
                              
                              
                              2007PRCCurrent
      deferred tax assets:Allowance
      for doubtful debts
                              
                              $
                              72,950
                              
                              
                              $
                              5,004Provision
      for obsolete inventories
                              
                              
                              492,939
                              
                              
                              
                              21,107Provision
      for warranty
                              
                              
                              385,539
                              
                              
                              
                              151,829Accrued
      liabilities
                              
                              
                              -
                              
                              
                              
                              12,956Unrealized
      profit
                              
                              
                              112,196
                              
                              
                              
                              49,296Others
                              
                              
                              12,142
                              
                              
                              
                              67,146$
                              1,075,766
                              
                              
                              $
                              307,338United
      StatesNon
      current deferred tax assets:Tax
      losses
                              
                              $
                              48,000
                              
                              
                              $
                              48,000Valuation
      allowances
                              
                              
                              (48,000
                              )
                              
                              
                              (48,000
                              )-
                              
                              
                              
                              -PRCNon
      current deferred tax assets (liabilities):Depreciation
      of property, plant and equipment
                              
                              
                              1,107,137
                              
                              
                              
                              786,604Amortization
      of land use rights
                              
                              
                              11,477
                              
                              
                              
                              -Amortization
      of know-how
                              
                              
                              (400,291
                              )
                              
                              
                              (346,844
                              )Early
      retirement benefits cost
                              
                              
                              152,177
                              
                              
                              
                              -870,500
                              
                              
                              
                              439,760$
                              870,500
                              
                              
                              $
                              439,760
 
 As of
December 31, 2008, the Company had net operating loss carried forward amounting
to $140,612 in the United States which, if unutilized, will expire through to
2022.
 
  F-30
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 7.
              Minority
      Interests
 
 Minority
interests on the consolidated statement of income and comprehensive income of
$2,460,352 for the year ended December 31, 2008 represents the minority
shareholders’ proportionate share of the net income of Jinzhou Dongwoo, Jinzhou
Hanhua, Jinzhou Karkam and Yearcity.
 
 8.
              Earnings/(loss)
      per share
 
 During
the reporting periods, certain share-based awards were not included in the
computation of diluted earnings/(loss) per share because they were
anti-dilutive.  Accordingly, the basic and diluted earnings per share
are the same.
 
 The per
share data reflects the recapitalization of stockholders’ equity as if the
reserve takeover transaction (“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 31,2008
                      
                      
                      2007Bank
      deposit held as collateral for import duty
                      
                      $
                      586,800
                      
                      
                      $
                      548,400Bank
      deposits held as collateral for bills payable
                      
                      
                      20,240,795
                      
                      
                      
                      8,064,862Bank
      deposit held as collateral for bank loans
                      
                      
                      3,354,050
                      
                      
                      
                      -$
                      24,181,645
                      
                      
                      $
                      8,613,262
 
 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 30% to 100% 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% to
100% of the bills amount at the time of issuance and pay bank
charges.
 
 The
Company is entitled to exemption from import duty for importing fixed assets
from overseas.  As of December 31, 2008 and 2007, certain imported
fixed assets were pledged to DEG - Deutsche Investitions - und
Entwicklungsgesellschaft mbH (“DEG”), a Germany Bank, for a loan granted to
Jinzhou Halla.  Regarding the exemption from import duty, the Company
is required by the tax authority to deposit an equal amount of import duty
exempted in bank until the bank loan is fully settled.
 
 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-31
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 10.
                Trade
      receivables, net
 
 As
      of December 31,2008
                      
                      
                      2007Trade
      receivables
                      
                      $
                      46,621,756
                      
                      
                      
                      38,161,482Less
      : allowance for doubtful accounts
                      
                      
                      (50,137
                      )
                      
                      
                      (37,071
                      )$
                      46,571,619
                      
                      
                      $
                      38,124,411
 
 An
analysis of the allowance for doubtful accounts for the years ended December 31,
2008, 2007 and 2006 is as follows:
 
 Year
      ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Balance
      at beginning of year
                      
                      $
                      37,071
                      
                      
                      $
                      32,150
                      
                      
                      $
                      38,745Addition/(reversal)
      of bad debt expense, net
                      
                      
                      8,577
                      
                      
                      
                      2,159
                      
                      
                      
                      (7,701
                      )Translation
      adjustments
                      
                      
                      4,489
                      
                      
                      
                      2,762
                      
                      
                      
                      1,106Balance
      at end of year
                      
                      $
                      50,137
                      
                      
                      $
                      37,071
                      
                      
                      $
                      32,150
 
 
 11.
              Other
      receivables, prepayments and
deposits
 
 As
      of December 31,2008
                                  
                                  
                                  2007Value
      added tax and other tax recoverable
                                  
                                  $
                                  1,680,726
                                  
                                  
                                  $
                                  576,643Trade
      deposits paid to suppliers
                                  
                                  
                                  3,980,521
                                  
                                  
                                  
                                  -Advances
      to staff
                                  
                                  
                                  415,191
                                  
                                  
                                  
                                  314,964Other
      prepayments
                                  
                                  
                                  1,244,628
                                  
                                  
                                  
                                  343,362Other
      receivables
                                  
                                  
                                  456,295
                                  
                                  
                                  
                                  400,478Consideration
      receivable from Golden  Stone in respect of disposal of
      22.41%  investment in Money Victory - Note 3
                                  
                                  
                                  5,950,000
                                  
                                  
                                  
                                  -Amount
      due from a third party - Note 11a
                                  
                                  
                                  2,680,943
                                  
                                  
                                  
                                  -$
                                  16,408,304
                                  
                                  
                                  $
                                  1,635,447
 
 Notes
:-
 
 (a)
                The
      amount due from a third party represents an advance to Jinan Tian Chuang
      Auto Device Ltd which was the subsidiary of Jinan Worldwide until July 1,
      2006. The amount is interest free, unsecured and repayable within 6
      months.
 
 (b)
              The
      amount is interest-free, unsecured and repayable on
  demand.
  F-32
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 12.
              Inventories
 As
      of December 31,2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      9,783,335
                      
                      
                      $
                      4,101,852Work-in-progress
                      
                      
                      3,708,490
                      
                      
                      
                      665,959Finished
      goods
                      
                      
                      30,807,295
                      
                      
                      
                      8,085,32644,299,120
                      
                      
                      
                      12,853,137Provision
      for obsolete inventories
                      
                      
                      (282,928
                      )
                      
                      
                      (218,351
                      )$
                      44,016,192
                      
                      
                      $
                      12,634,786
 
 Provision/(Recovery
of) for obsolete inventories of $46,917, $39,115 and $(52,470) were charged
(credited) to operations during the years ended December 31, 2008, 2007 and 2006
respectively.
 
 13.
              Intangible
      assets
 As
      of December 31,2008
                            
                            
                            2007Costs:Goodwill
      - Note (a)
                            
                            $
                            18,904,782
                            
                            
                            $
                            15,274,619Customer
      contracts
                            
                            
                            49,053
                            
                            
                            
                            49,053Know-how
      with infinite useful life - Note (b)
                            
                            
                            1,683,645
                            
                            
                            
                            1,573,467Know-how
      with finite useful life - Note (c)
                            
                            
                            1,467,000
                            
                            
                            
                            -Trademarks
      and patents
                            
                            
                            26,144
                            
                            
                            
                            16,86622,130,624
                            
                            
                            
                            16,914,005Accumulated
      amortization
                            
                            
                            (68,064
                            )
                            
                            
                            (40,954
                            )Net
                            
                            $
                            22,062,560
                            
                            
                            $
                            16,873,051
 
 Note:-
 
 (a)       Goodwill
 
 As
      of December 31,2008
                                
                                
                                2007Goodwill
      identified upon acquisition of:-Jinzhou
      Dongwoo
                                
                                (i)
                                
                                $
                                3,115,227
                                
                                
                                $
                                3,115,227Jinzhou
      Wanyou
                                
                                (ii)
                                
                                
                                14,159,392
                                
                                
                                
                                12,159,392Jinzhou
      Hanhua
                                
                                (iii)
                                
                                
                                1,630,163
                                
                                
                                
                                -$
                                18,904,782
                                
                                
                                $
                                15,274,619
  F-33
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets (Cont’d)
 
 (a)
              Goodwill
      (Cont’d)
 
 (i)
                The
      amount represents a goodwill identified upon acquisition of Jinzhou
      Dongwoo amounting to $2.77 million which represents the excess of the
      purchase price of $4.85 million over the attributable share of fair value
      of acquired identifiable net assets of Jinzhou Dongwoo of $2.08 million at
      the time of acquisition on August 23,
2006.
 
 Pursuant
to Wonder’s August 23, 2006 Dongwoo Share Purchase Agreement with Winning for
the acquisition of a 50% equity interest of Jinzhou Dongwoo, all the 2005
distributable profit of Jinzhou Dongwoo shall be owned by the shareholders in
Jinzhou Dongwoo before the signing date of the Dongwoo Share Purchase Agreement
on condition that any distribution of such distributable profit to them will not
cause any shortage of Jinzhou Dongwoo’s working capital.
 
 On
February 6, 2007, after considering the sufficiency of Jinzhou Dongwoo’s working
capital, the board of the directors of Jinzhou Dongwoo declared a cash dividend
to the former shareholders amounting to $0.68 million in respect of the fiscal
year ended December 31, 2005.  Pursuant to the Dongwoo Share Purchase
Agreement, Winning was entitled to its portion of $0.34
million.  Since it represents the distribution of pre-acquisition
profits of Jinzhou Dongwoo, a corresponding upward adjustment to goodwill was
made as an additional contingent consideration in the first quarter of
2007.
 
 (ii)
                The
      amount represents a goodwill identified upon the acquisition of 79.59%
      equity interest in Jinzhou Wanyou amounting to $14.16 million which
      represents the excess of the initial purchase price of $16.42 million over
      the attributable share of fair value of acquired identifiable net assets
      of Jinzhou Wanyou of $2.26 million at the time of acquisition on April 2,
      2007.
 
 On April
2, 2007, Wonder and Jinzhou Halla acquired a 79.59% equity interest in Wanyou in
two separately negotiated equity purchase transactions between Wonder and
Jinzhou Halla and two former equity owners of Jinzhou Wanyou. In the first
transaction, Wonder acquired a 40.81% equity interest in Jinzhou Wanyou from
Hong Kong Friend Branches Limited, a Hong Kong corporation, for a total cash
consideration of up to $8.42 million pursuant to a Share Purchase Agreement
(“Wanyou Share Purchase Agreement I”) dated April 2, 2007.  The whole
amount was included in the purchase consideration at the date of
acquisition.
  F-34
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets (Cont’d)
 
 (a)
                Goodwill
      (Cont’d)
 
 In the
second transaction, Jinzhou Halla acquired a 38.78% equity ownership in Jinzhou
Wanyou from Jinzhou Wonder Auto Suspension System Co., Ltd. for a total cash
consideration of up to $8.0 million pursuant to another Share Purchase Agreement
(“Wanyou Share Purchase Agreement II”) dated April 2, 2007. Under the Wanyou
Share Purchase Agreement II, the total consideration will be paid in three
installments. The first installment of $3.0 million is due within three months
after the execution of the Wanyou Share Purchase Agreement II. The second
installment of $3.0 million cash installment will be paid if Jinzhou Wanyou
achieves minimum net income of $2.95 million (equivalent of RMB 23 million) for
the period from April 2, 2007 to April 1, 2008. The third installment of $2
million cash payment will be paid if Jinzhou Wanyou attains minimum net income
of $3.72 million (equivalent of RMB 29 million) for the period from April
2, 2008 to April 1, 2009. The first and second installments was included the
purchase consideration at the date of acquisition. As of December 31, 2008, the
management believes Jinzhou Wanyou will be able to attain the minimum net income
of $3.72 million (equivalent of RMB 29 million), and a corresponding upward
adjustment to goodwill of $2 million was made as an adjustment to the purchase
consideration. A part of the third installment, amounting to $293,400, was paid
during the year ended December 31, 2008.
 
 Jinzhou
Wanyou was incorporated on September 21, 2006 and commenced its business in the
first quarter of 2007. The Company, with advice from an independent appraiser,
has identified all assets acquired (including intangible assets which meets
either the separability criterion or the contractual-legal criterion in
accordance with SFAS No. 141R para. 3k) as of the date of acquisition and
concluded that, except for the customer contracts, there were no any other
significant identifiable intangible assets (such as trademark, patents and
favorable or unfavorable lease arrangements) noted as the operating history of
Jinzhou Wanyou is limited. The fair value of customer contracts acquired was
determined by using estimated discounted net cash inflows from unfulfilled
orders in accordance with the signed contracts with Jinzhou Wanyou’s
customers.
 
 (iii)
                The
      amount represents a goodwill identified upon the acquisition of 50% equity
      interest in Jinzhou Hanhua amounting to $1.63 million which represents the
      excess of the initial purchase price of $4.10 million over the
      attributable share of fair value of acquired identifiable net assets of
      Jinzhou Hanhua of $2.47 million at the time of acquisition on January 1,
      2008.
 
 On April
8, 2008, after considering the sufficiency of Jinzhou Hanhua’s working capital,
the board of the directors of Jinzhou Hanhua declared a cash dividend amounting
to $1.29 million in respect of the fiscal year ended December 31,
2007.  Pursuant to the Share Purchase Agreement, Winning was entitled
to the cash dividend declared for the fiscal year ended December 31, 2007
amounting to $644,030.  Since $644,030 represents the distribution of
pre-acquisition profits of Jinzhou Hanhua to the former stockholder, Winning, a
corresponding upward adjustment to goodwill was made as an adjustment to the
fair value of net assets acquired in the third quarter of 2008.
  F-35
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Intangible
      assets (Cont’d)
 
 (b)
              In
      March 1996, the Company entered into two contracts with the Korean Company
      (Note 3) 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.
 
 (c)
              In
      December, 2008, the Company entered into three contracts with Shenyang
      Aerospace to purchase three technical know-how in relation to product
      design, manufacturing and quality control of alternators and starters at a
      cash consideration of $1.47 million. This consideration was mutually
      agreed between the Company and Shenyang Aerospace.  Under the
      terms of the contracts, the Company is able to use such know-how for 10
      years.
 
 During
the three years ended December 31, 2008, 2007 and 2006 amortization charge was
$26,746, $38,318 and $769 respectively.
 
 The
estimated aggregate amortization expenses for know-how with finite useful life,
trademarks and patents for the five succeeding years is as follows
:-
 
 Year2009
                      
                      $
                      149,0192010
                      
                      
                      149,0192011
                      
                      
                      149,0192012
                      
                      
                      149,0192013
                      
                      
                      149,019$
                      745,095
  14.
              Property,
      plant and equipment, net
 As
      of December 31,2008
                        
                        
                        2007Costs:Buildings
                        
                        $
                        31,276,571
                        
                        
                        $
                        6,917,618Plant
      and machinery
                        
                        
                        40,140,804
                        
                        
                        
                        20,105,152Furniture,
      fixtures and equipment
                        
                        
                        1,207,159
                        
                        
                        
                        624,844Tools
      and equipment
                        
                        
                        4,879,920
                        
                        
                        
                        1,617,317Leasehold
      improvements
                        
                        
                        602,785
                        
                        
                        
                        299,868Motor
      vehicles
                        
                        
                        1,972,149
                        
                        
                        
                        891,37480,079,388
                        
                        
                        
                        30,456,173Accumulated
      depreciation
                        
                        
                        (14,835,046
                        )
                        
                        
                        (10,462,764
                        )Construction
      in progress - Note 3
                        
                        
                        3,887,237
                        
                        
                        
                        2,523,491Net
                        
                        $
                        69,131,579
                        
                        
                        $
                        22,516,900
  F-36
  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 31,2008
                        
                        
                        2007Costs:Buildings
                        
                        $
                        4,513,328
                        
                        
                        $
                        4,217,977Plant
      and machinery
                        
                        
                        14,357,430
                        
                        
                        
                        12,345,81018,870,758
                        
                        
                        
                        16,563,787Accumulated
      depreciation
                        
                        
                        (9,910,994
                        )
                        
                        
                        (8,350,795
                        )Net
                        
                        $
                        8,959,764
                        
                        
                        $
                        8,212,992
 
 (i)        During
the reporting periods, depreciation is included in :-
 
 Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Cost
      of sales and overheads of inventories
                    
                    $
                    3,095,204
                    
                    
                    $
                    1,491,634
                    
                    
                    $
                    1,255,390Other
                    
                    
                    639,330
                    
                    
                    
                    522,411
                    
                    
                    
                    146,151$
                    3,734,534
                    
                    
                    $
                    2,014,045
                    
                    
                    $
                    1,401,541
 
 During
the years ended December 31, 2008 and 2007, property, plant and equipment with
carrying amounts of $112,670 and $46,058 were disposed of at considerations of
$242,044 and $25,803 resulting in (gain)/loss of $(129,374) and $20,255
respectively.
 
 (ii)
              Construction
      in Progress
 
 Construction
in progress mainly comprises capital expenditure for construction of the
Company’s new offices and factories.
 
 15.
              Land
      use rights
 As
      of December 31,2008
                      
                      
                      2007Land
      use rights
                      
                      $
                      10,895,593
                      
                      
                      $
                      1,571,021Accumulated
      amortization
                      
                      
                      (504,066
                      )
                      
                      
                      (335,992
                      )$
                      10,391,527
                      
                      
                      $
                      1,235,029
 
 The
Company obtained the right from the relevant PRC land authority for a period of
fifty years to use the land on which the office premises, production facilities
and warehouse of the Company are situated.  The land use right of
carrying amount of $1,822,846 was pledged to a bank for the bank loans granted
to the Company (Note 19b).
  F-37
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 15.
              Land
      use rights (Cont’d)
 
 During
the three years ended December 31, 2008, 2007 and 2006, amortization amounted to
$142,895, $52,394 and $28,883 respectively.
 
 The
estimated aggregate amortization expenses for land use right for the five
succeeding years is as follows :-
 
 Year2009
                    
                    $
                    253,2332010
                    
                    
                    253,2332011
                    
                    
                    253,2332012
                    
                    
                    253,2332013
                    
                    
                    253,233$
                    1,266,165
 
 16.           Other
payables and accrued expenses
 As
      of December 31,2008
                      
                      
                      2007Accrued
      audit fee
                      
                      $
                      209,339
                      
                      
                      $
                      95,970Interest
      payable
                      
                      
                      179,010
                      
                      
                      
                      184,763Installment
      payment for acquisition of subsidiaries
                      
                      
                      4,740,356
                      
                      
                      
                      -Other
      accrued expenses
                      
                      
                      1,183,740
                      
                      
                      
                      159,552Other
      tax payable
                      
                      
                      216,237
                      
                      
                      
                      437,785Payable
      for acquisition of property, plant and equipment
                      
                      
                      1,507,234
                      
                      
                      
                      827,172Sales
      receipt in advance from customers
                      
                      
                      1,258,141
                      
                      
                      
                      -Staff
      welfare payable - Note (a)
                      
                      
                      218,608
                      
                      
                      
                      146,524VAT
      and penalty payable - Note (b)
                      
                      
                      2,586,135
                      
                      
                      
                      -Compensation
      funds - Note (c)
                      
                      
                      1,572,891
                      
                      
                      
                      -Accrued
      staff welfare and social insurance- Note (d)
                      
                      
                      4,798,861
                      
                      
                      
                      -Amount
      due to a third party - Note (e)
                      
                      
                      190,710
                      
                      
                      
                      -Other
      payables
                      
                      
                      1,803,752
                      
                      
                      
                      561,374$
                      20,465,014
                      
                      
                      $
                      2,413,140
 
 Note
:-
 
 a)
              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.
 
 b)
              VAT
      and penalty payable was imposed by the relevant PRC tax authority during
      2000 for incorrect VAT returns filed by the Jinan Worldwide during the
      period from 1997 to 1999.
  F-38
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 16.
              Other
      payables and accrued expenses
(Cont’d)
 
 c)
              Compensation
      funds represent unutilized funds received from State-Owned Assets
      Supervision and Administration Commission of the State Council which are
      restricted for the compensation of affected employees after the
      transformation from a stated-owned enterprise to domestic company
      completed on May 30, 2005.  An amount of $137,143 was utilized
      for the year ended December 31,
2008.
 
 d)
              Staff
      welfare and social insurance payable mainly represents accrued social
      insurance payable to the PRC municipal and provincial governments which
      covers pensions, unemployment and medical insurances and staff housing
      fund.
 
 e)
              The
      amount due to a third party represents an advance from Jinzhou Hivron Auto
      Electronics Co., Ltd.  The amount was interest free, unsecured
      and fully repaid in January, 2009.
 
 f)
              The
      amount is interest-free, unsecured and repayable on
  demand.
 
 17.
              Provision
      for warranty
 2008
                    
                    
                    2007Balance,
      January 1
                    
                    $
                    1,124,655
                    
                    
                    $
                    1,049,344Acquisition
      of Yearcity
                    
                    
                    900,608
                    
                    
                    
                    -Claims
      paid for the year
                    
                    
                    (1,102,398
                    )
                    
                    
                    (1,362,636
                    )Provision
      for the year
                    
                    
                    1,365,206
                    
                    
                    
                    1,368,760Translation
      adjustments
                    
                    
                    89,549
                    
                    
                    
                    69,187Balance,
      December 31
                    
                    $
                    2,377,620
                    
                    
                    $
                    1,124,655
 
 18.
              Amount
      due from a related company
 
 The
related company is controlled by certain of the Company’s stockholders which
include Qingjie Zhao.  These amount is interest-free, unsecured and
repayable on demand.
  F-39
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 19.
              Secured
      borrowings
 As
      of December 31,2008
                        
                        
                        2007Short-term
      borrowingsShort-term
      loans (Note a)
                        
                        $
                        42,481,386
                        
                        
                        $
                        10,282,500Long-term
      loans - current portion (Note b)
                        
                        
                        1,574,417
                        
                        
                        
                        -44,055,803
                        
                        
                        
                        10,282,500Long-term
      borrowings-
      due 2010, (Note c)
                        
                        
                        5,868,000
                        
                        
                        
                        5,484,000-
      due 2013, (Note b)
                        
                        
                        11,760,895
                        
                        
                        
                        12,138,18617,628,895
                        
                        
                        
                        17,622,186Less:
      current maturities
                        
                        
                        (1,574,417
                        )
                        
                        
                        -16,054,478
                        
                        
                        
                        17,622,186$
                        60,110,281
                        
                        
                        $
                        27,904,686
 
 Notes:-
 
 a)
              The
      weighted-average interest rate for short-term loans as of December 31,
      2008 and 2007, were 6.75% and 6.8%,
  respectively.
 
 b)
              Interest
      bearing at a fixed rate of 6.95% per
annum.
 
 c)
              Interest
      bearing at a fixed rate of 7.56% per
annum.
 
 As of
December 31, 2008, the Company’s banking facilities are composed of the
following :-
 
 AmountFacilities granted
                        
                        Granted
                        
                        
                        Utilized
                        
                        
                        UnusedSecured
      borrowings
                        
                        $
                        60,990,481
                        
                        
                        $
                        60,110,281
                        
                        
                        $
                        880,200
 
 The above
secured borrowings were secured by the following :-
 
 (a)
              Property,
      plant and equipment with carrying value of $8,959,764 respectively (Note
      14);
 
 (b)
              Land
      use right with carrying value of $1,822,846 (Note
  15);
 
 (c)
              Bank
      deposit amount of $3,354,050 (Note
9);
 
 (d)
              Buildings
      and land use right owned by Hony Capital;
and
 
 (e)
              Guarantees
      executed by third parties.
 
 During
the reporting periods, there was no covenant requirement under the banking
facilities granted to the Company.
  F-40
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 20.
                Share-based
      compensation
 
 The
Company granted share options to employees, directors and consultants to reward
for services.
 
 Stock
option plan
 
 In April
30, 2008, the Board of Directors adopted the Wonder Auto Technology, Inc. 2008
Equity Incentive Plan (the “Plan”). The Plan was approved by the Annual General
Meeting on June 20, 2008. The Plan authorizes the issuance of options up to
3,500,000 shares of the Company’s common stock. The exercise price of the
options granted, pursuant to the Plan, must be at least equal to the fair market
value of the Company’s common stock at the date of grant. The plan will
terminate on May 1, 2018.
 
 Pursuant
to the Plan, the Company issued 270,000 options with an exercise price of $9 per
share on May 6, 2008.  One third of the options will vest and become
exercisable on each of the filing dates of the Company’s Annual Reports on Form
10-K for fiscal years 2008, 2009 and 2010, respectively, upon the achievement of
certain income thresholds which set to be $22 million for fiscal year 2008,
$30.8 million for fiscal year 2009 and $43.15 million for fiscal year
2010.
 
 A summary
of share option plan activity for the year ended December 31, 2008 is presented
below:
 
 Number
      of
                    
                    
                    Exercise
      priceshares
                    
                    
                    per
      shareOutstanding
      as of January 1, 2008
                    
                    
                    -
                    
                    
                    $
                    -Granted
                    
                    
                    270,000
                    
                    
                    
                    9Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    (270,000
                    )
                    
                    
                    -Outstanding
      as of December 31, 2008
                    
                    
                    -
                    
                    
                    $
                    -Exercisable
      as of September 30, 2008
                    
                    
                    -
                    
                    
                    $
                    -
 
 The
grant-date fair values of options granted for 2008, 2009 and 2010 are $2.32,
$2.75 and $3.01 per share respectively. Compensation expense of $208,782 arising
from abovementioned share options granted was recognized for the year ended
December 31, 2008.
 
 On
December 31, 2008, the Compensation Committee of Board of Directors passed a
resolution to terminate the stock option agreements with each of the certain key
employees and directors of the Company (the “Holders”), thereby rescinding to
reward them for their past services and to promote future performance, by
entering into a termination and release agreements with each
Holder.  The unrecognized compensation costs of $497,513 related to
the above non-vested share options were recognized for the year ended December
31, 2008.
 
  F-41
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 20.
              Share-based
      compensation (Cont’d)
 
 The fair
values of the above option awards were estimated on the date of grant using the
Black-Scholes Option Valuation Model and graded vesting method together with the
following assumptions.
 2008
                    
                    
                    2009
                    
                    
                    2010Expected
      volatility
                    
                    
                    53.74
                    %
                    
                    
                    53.74
                    %
                    
                    
                    53.74
                    %Expected
      dividends
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    NilExpected
      life
                    
                    1.4
      years
                    
                    
                    2.4
      years
                    
                    
                    3.4
      yearsRisk-free
      interest rate
                    
                    
                    2.49
                    %
                    
                    
                    2.88
                    %
                    
                    
                    3.17
                    %
 
 21.
              Commitments
      and contingencies
 
 a.
              Capital
      commitment
 
 As of
December 31, 2008, the Company had capital commitments amounting to $1,108,915
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, 2008, the Company had non-cancelable operating leases for its
warehouses and shuttle bus.  The leases will expire in 2009 and the
expected payment is $524,570.
 
 The
rental expense relating to the operating leases was $130,178 and $2,840 for the
two years ended December 31, 2008 and 2007 respectively.
 
 22.
              Statutory
      and other reserves
 
 The
Company’s statutory and other reserves comprise statutory reserve and enterprise
expansion fund of Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinahou
Hanhua, Jinzhou Karham, Fuxin Huiri and Jinan Worldwide in the PRC.
 
 As
      of December 31,2008
                      
                      
                      2007Statutory
      reserve
                      
                      $
                      7,567,171
                      
                      
                      $
                      4,802,426Enterprise
      expansion fund
                      
                      
                      61,370
                      
                      
                      
                      55,234$
                      7,628,541
                      
                      
                      $
                      4,857,660
  F-42
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 22.
              Statutory
      and other reserves (Cont’d)
 
 Statutory
reserve
 
 Under PRC
regulations, Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Wonder,
Wonder Motor, Jinzhou Hanhua, Jinzhou Karham, Fuxin Huiri and Jinan Worldwide
may pay dividends only out of their accumulated profits, if any, determined in
accordance with PRC GAAP.  In addition, these companies are required
to set aside at least 10% of their after-tax net profits each year, if any, to
fund the statutory reserves until the balance of the reserves reaches 50% of
their registered capital.  The statutory reserves are not
distributable in the form of cash dividends to the Company and can be used to
make up cumulative prior year losses.
 
 Enterprise expansion
fund
 
 In
accordance with the relevant laws and regulations of the PRC and articles of
association of Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Wonder,
Wonder Motor and Jinzhou Hanhua, 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.
              Defined
      contribution plan
 
 Pursuant
to the relevant PRC regulations, the Company is required to make contributions
at a rate of 30.6% to 53% of employees’ salaries and wages to a defined
contribution retirement scheme organized by a state-sponsored social insurance
plan in respect of the retirement benefits for the Company’s employees in the
PRC.  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 profit.  The Company
contributed $1,178,078, $681,944 and $490,519 for the year ended December 31,
2008, 2007 and 2006, respectively.
  F-43
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              Segment
      information
 
 The
Company uses the “management approach” in determining reportable operating
segments.  The management approach considers the internal organization
and reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Company’s reportable segments.  Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue of
alternators, starters and rods and shafts and operating results of the Company
and, as such, the Company has determined that the Company has four operating
segments as defined by SFAS 131, “Disclosures about Segments of an Enterprise
and Related Information”: Alternators, starters, rods and shafts and valves and
tappets.
 
 Alternators
                            
                            
                            Starters
                            
                            
                            Rods
      and shafts
                            
                            
                            Valves
      and tappets
                            
                            
                            TotalYear
      ended December 31
                            
                            
                            Year
      ended December 31
                            
                            
                            Year
      ended December 31
                            
                            
                            Year
      ended December 31
                            
                            
                            Year
      ended December 312008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006Revenue
      from external  customers
                            
                            $
                            63,255,682
                            
                            
                            $
                            59,790,042
                            
                            
                            $
                            45,216,038
                            
                            
                            $
                            52,137,737
                            
                            
                            $
                            35,014,035
                            
                            
                            $
                            26,934,445
                            
                            
                            $
                            18,106,221
                            
                            
                            $
                            7,279,645
                            
                            
                            $
                            -
                            
                            
                            $
                            7,689,919
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            141,189,559
                            
                            
                            $
                            102,083,722
                            
                            
                            $
                            72,150,483Interest
      income
                            
                            
                            103,776
                            
                            
                            
                            57,177
                            
                            
                            
                            41,954
                            
                            
                            
                            76,208
                            
                            
                            
                            31,463
                            
                            
                            
                            24,154
                            
                            
                            
                            45,717
                            
                            
                            
                            16,631
                            
                            
                            
                            -
                            
                            
                            
                            3,519
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            229,220
                            
                            
                            
                            105,271
                            
                            
                            
                            66,108Interest
      expenses
                            
                            
                            1,303,730
                            
                            
                            
                            1,039,895
                            
                            
                            
                            507,310
                            
                            
                            
                            1,007,696
                            
                            
                            
                            368,790
                            
                            
                            
                            300,383
                            
                            
                            
                            68,424
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            430,006
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,809,856
                            
                            
                            
                            1,408,685
                            
                            
                            
                            807,693Amortization
                            
                            
                            57,262
                            
                            
                            
                            42,945
                            
                            
                            
                            19,295
                            
                            
                            
                            56,679
                            
                            
                            
                            10,977
                            
                            
                            
                            10,357
                            
                            
                            
                            12,263
                            
                            
                            
                            36,790
                            
                            
                            
                            -
                            
                            
                            
                            31,131
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            157,335
                            
                            
                            
                            90,712
                            
                            
                            
                            29,652Depreciation
                            
                            
                            1,740,795
                            
                            
                            
                            1,619,077
                            
                            
                            
                            1,174,059
                            
                            
                            
                            1,004,002
                            
                            
                            
                            294,740
                            
                            
                            
                            227,482
                            
                            
                            
                            272,764
                            
                            
                            
                            100,228
                            
                            
                            
                            -
                            
                            
                            
                            708,314
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,725,875
                            
                            
                            
                            2,014,045
                            
                            
                            
                            1,401,541Segment
      profit
                            
                            
                            12,563,260
                            
                            
                            
                            11,103,589
                            
                            
                            
                            4,835,128
                            
                            
                            
                            6,967,496
                            
                            
                            
                            4,560,488
                            
                            
                            
                            4,818,079
                            
                            
                            
                            4,355,937
                            
                            
                            
                            1,822,949
                            
                            
                            
                            -
                            
                            
                            
                            445,508
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            24,332,201
                            
                            
                            
                            17,487,026
                            
                            
                            
                            9,653,207Segment
      assets
                            
                            
                            72,097,609
                            
                            
                            
                            79,027,844
                            
                            
                            
                            54,860,505
                            
                            
                            
                            58,300,925
                            
                            
                            
                            37,624,611
                            
                            
                            
                            22,308,718
                            
                            
                            
                            30,146,314
                            
                            
                            
                            23,278,939
                            
                            
                            
                            -
                            
                            
                            
                            92,832,061
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            253,376,909
                            
                            
                            
                            139,931,394
                            
                            
                            
                            77,169,223Expenditure
      for segment assets
                            
                            $
                            6,313,644
                            
                            
                            $
                            5,732,146
                            
                            
                            $
                            1,685,790
                            
                            
                            $
                            5,519,154
                            
                            
                            $
                            1,533,523
                            
                            
                            $
                            1,951,822
                            
                            
                            $
                            4,386,179
                            
                            
                            $
                            754,133
                            
                            
                            $
                            -
                            
                            
                            $
                            1,052,162
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            17,271,139
                            
                            
                            $
                            8,019,802
                            
                            
                            $
                            3,637,612
  F-44
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              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 31,2008
                        
                        
                        2007
                        
                        
                        2006Total
      consolidated revenue
                        
                        $
                        141,189,559
                        
                        
                        $
                        102,083,722
                        
                        
                        $
                        72,150,483Total
      profit for reportable segments
                        
                        $
                        24,332,201
                        
                        
                        $
                        17,487,026
                        
                        
                        $
                        9,653,207Unallocated
      amounts relating to relating to operations:Interest
      income
                        
                        
                        85,070
                        
                        
                        
                        6,513
                        
                        
                        
                        30,702Equity
      in net income of an non-consolidated
      affiliate
                        
                        
                        1,072,788
                        
                        
                        
                        -
                        
                        
                        
                        -Loss
      on disposal of investment in an unconsolidated affiliate
                        
                        
                        (122,788
                        )
                        
                        
                        -
                        
                        
                        
                        -Other
      income
                        
                        
                        -
                        
                        
                        
                        16,203
                        
                        
                        
                        18,418Exchange
      loss
                        
                        
                        (48,132
                        )
                        
                        
                        (8,061
                        )
                        
                        
                        -Finance
      costs
                        
                        
                        (199,853
                        )
                        
                        
                        (4,631
                        )
                        
                        
                        (973
                        )Other
      general expenses
                        
                        
                        (1,575,219
                        )
                        
                        
                        (456,295
                        )
                        
                        
                        (105,590
                        )Unusual
      charge - make good provision
                        
                        
                        -
                        
                        
                        
                        (18,265,500
                        )
                        
                        
                        (7,507,500
                        )Income/(loss)
      before income taxes and minority interests
                        
                        $
                        23,544,067
                        
                        
                        $
                        (1,224,745
                        )
                        
                        $
                        2,088,264
 
 As of December 31,2008
                        
                        
                        2007
                        
                        
                        2006AssetsTotal
      assets for reportable segments
                        
                        $
                        253,376,909
                        
                        
                        $
                        139,931,394
                        
                        
                        $
                        77,169,223Cash
      and cash equivalents
                        
                        
                        259,630
                        
                        
                        
                        2,421,363
                        
                        
                        
                        830,917Other
      receivables
                        
                        
                        69,463
                        
                        
                        
                        39,948
                        
                        
                        
                        -Receivable
      from disposal of an non-consolidated affiliate
                        
                        
                        5,950,000
                        
                        
                        
                        -
                        
                        
                        
                        -Deposit
      for acquisition of property, plant and equipment
                        
                        
                        448,161
                        
                        
                        
                        -
                        
                        
                        
                        -Intangible
      assets
                        
                        
                        1,096
                        
                        
                        
                        -
                        
                        
                        
                        -Land
      use right
                        
                        
                        1,030,377
                        
                        
                        
                        -
                        
                        
                        
                        -Property,
      plant and equipment
                        
                        
                        1,894,128
                        
                        
                        
                        4,030
                        
                        
                        
                        -$
                        263,029,764
                        
                        
                        $
                        142,396,735
                        
                        
                        $
                        78,000,140
 
  F-45
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              Segment
      information (Cont’d)
 
 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 31,2008
                    
                    
                    2007
                    
                    
                    2006PRC
                    
                    $
                    118,250,788
                    
                    
                    $
                    92,328,725
                    
                    
                    $
                    68,686,842South
      Korea
                    
                    
                    9,065,522
                    
                    
                    
                    4,650,040
                    
                    
                    
                    3,013,127Brazil
                    
                    
                    5,903,194
                    
                    
                    
                    2,633,065
                    
                    
                    
                    -Mexico
                    
                    
                    1,768,600
                    
                    
                    
                    -
                    
                    
                    
                    -United
      States
                    
                    
                    3,469,054
                    
                    
                    
                    1,646,823
                    
                    
                    
                    450,514Germany
                    
                    
                    829,543
                    
                    
                    
                    -
                    
                    
                    
                    -Others
                    
                    
                    1,902,858
                    
                    
                    
                    825,069
                    
                    
                    
                    -Total
                    
                    $
                    141,189,559
                    
                    
                    $
                    102,083,722
                    
                    
                    $
                    72,150,483
  25.
              Subsequent
      events
 
 On
January 4, 2009, Jinzhou Halla entered into an equity transfer agreement (the
“Equity Transfer Agreement”) with Magic Era Group Limited (“Magic Era”), a
British Virgin Islands corporation, under which Jinzhou Halla acquired the
remaining equity interest in Yearcity. Yearcity does not have any assets except
its 100% equity ownership of Jinan Worldwide. Upon the completion of
acquisition, Yearcity became the wholly owned subsidiary of the
Company.
 
 According
to the equity transfer agreement, the consideration of this acquisition is
approximately $7.06 million (RMB48 million), which is subject to certain price
adjustments (the “Consideration”) based on Jinan Worldwide’s audited net income
(including income tax refund, if any) for the year ending December 31, 2008 (the
“2008 Audited Net Income”).  If the 2008 Audited Net Income is less
than approximately $2.86 million (RMB19.48 million), the Consideration will be
reduced to an amount equal to the product of (i) approximately $7.06 million
(RMB48 million) and (ii) the quotient of the 2008 Audited Net Income divided by
approximately $2.86 million (RMB19.48 million).  If the 2008 Audited
Net Income is more than approximately $3.36 million (RMB22.88 million), then the
Consideration will be increased to an amount equal to the product of (i)
approximately $7.06 million (RMB48 million) and (ii) the quotient of the 2008
Audited Net Income divided by approximately $3.36 million (RMB22.88
million).  The Consideration will be settled by May 31,
2009.
  F-46




SIGNATURES





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





Date:
March 30, 2009





Wonder
      Auto Technology, Inc./s/
      Qingjie ZhaoQingjie
      Zhao
                      Chairman
      and Chief Executive Officer/s/
      Meirong YuanMeirong
      Yuan
                      Chief
      Financial
Officer





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 and 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
              
              Chairman,
      Chief Executive Officer and
                Director
              
              March
      30, 2009Qingjie
      Zhao
              
              (Principal
      Executive Officer)/s/
      Meirong Yuan
              
              Chief
      Financial Officer and Director
              
              March
      30, 2009Meirong
      Yuan
              
              (Principal
      Financial Officer and Principal
                Accounting
      Officer)/s/
      Larry Goldman
              
              Director
              
              March
      30, 2009Larry
      Goldman/s/
      David Murphy
              
              Director
              
              March
      30, 2009David
      Murphy/s/
      Xingye Zhang
              
              Director
              
              March
      30, 2009Xingye
      Zhang




47





Exhibit
Index




Exhibit
      No.
                            
                            Description3.1
                            
                            Articles
      of Incorporation of the Company as filed with the Secretary of State of
      Nevada, as amended to date. [Incorporated by reference to 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
                            
                            Certificate
      of Amendment to Articles of Incorporation. [Incorporated by reference to
      Exhibit 3.1 to the Company’s current report on 8-K filed on February 13,
      2006]3.3
                            
                            Certificate
      of Amendment to Articles of Incorporation. [Incorporated by reference to
      appendix A to the Company’s definitive information statement on Schedule
      14C filed on July 31, 2006]3.4
                            
                            Amended
      and Restated Bylaws of the Company. [Incorporated by reference to Exhibit
      3.2 to the Company’s current report on 8-K filed on July 9,
      2007]10.1
                            
                            Employment
      Contract between Jinzhou Halla Electrical Equipment Co., Ltd. And Seuk Jun
      Kim. [Incorporated by reference to Exhibit 10.19 to the Company’s current
      report on Form 8-K filed on June 22, 2006]10.2
                            
                            Employment
      Contract between Jinzhou Halla Electrical Equipment Co., Ltd. And Yuguo
      Zhao. [Incorporated by reference to Exhibit 10.20 to the Company’s current
      report on Form 8-K filed on June 22, 2006]10.3
                            
                            Employment
      Contract between Jinzhou Halla Electrical Equipment Co., Ltd. And Yongdong
      Liu. [Incorporated by reference to Exhibit 10.21 to the Company’s current
      report on Form 8-K filed on June 22, 2006]10.4
                            
                            Wonder
      Auto Technology, Inc. Independent Director’s Contract, dated as of March
      23, 2007, by and between Wonder Auto Technology, Inc. and Larry Goldman,
      CPA. [Incorporated by reference to Exhibit 10.1 to the Company’s current
      report on Form 8-K filed on March 29, 2007]10.5
                            
                            Wonder
      Auto Technology, Inc. Independent Director’s Contract, dated as of March
      23, 2007, by and between Wonder Auto Technology, Inc. and David Murphy.
      [Incorporated by reference to Exhibit 10.2 to the Company’s current report
      on Form 8-K filed on March 29, 2007]10.6
                            
                            Wonder
      Auto Technology, Inc. Independent Director’s Contract, dated as of March
      23, 2007, by and between Wonder Auto Technology, Inc. and Lei Jiang.
      [Incorporated by reference to Exhibit 10.3 to the Company’s current report
      on Form 8-K filed on March 29, 2007]10.7
                            
                            Form
      of the Indemnification Agreement, dated as of March 23, 2007, by and
      between Wonder Auto Technology, Inc. and the Independent Directors.
      [Incorporated by reference to Exhibit 10.4 to the Company’s current report
      on Form 8-K filed on March 29, 2007]10.8
                            
                            English summary of Credit
      Facility Agreement, Dated September 27, 2007, by and between Jinzhou Halla
      Electrical Equipment Co., Ltd and Bank of China, Jinzhou Tiebei
      Branch. [Incorporated by reference to
      Exhibit 10.1 to the Company’s quarterly report on Form 10-Q filed on
      November 1, 2007]10.9
                            
                            English
      summary of Short-Term Loan Agreement, Dated September 27, 2007, by and
      between Jinzhou Halla Electrical Equipment Co., Ltd and Bank of China,
      Jinzhou Tiebei Branch. [Incorporated by reference to Exhibit 10.2 to the
      Company’s quarterly report on Form 10-Q filed on November 1,
      2007]10.10
                            
                            English
      summary of Maximum Amount Mortgage Agreement, Dated September 27, 2007, by
      and between Jinzhou Halla Electrical Equipment Co., Ltd and Bank of China,
      Jinzhou Tiebei Branch. [Incorporated by reference to Exhibit 10.3 to the
      Company’s quarterly report on Form 10-Q filed on November 1,
      2007]








10.11
                                  
                                  Share
      Purchase Agreement, dated as of April 2, 2007, by and between Wonder auto
      Limited and Hong Kong Friend Branches Limited. [Incorporated by reference
      to Exhibit 10.1 to the Company’s current report on Form 8-K filed on April
      4, 2007]10.12
                                  
                                  Share
      Purchase Agreement, dated as of April 2, 2007, by and between Jinzhou
      Halla Electrical Equipment Co., Ltd. and Jinzhou Wonder Auto Suspension
      System Co., Ltd. [Incorporated by reference to Exhibit 10.2 to the
      Company’s current report on Form 8-K filed on April 4,
    2007]10.13
                                  
                                  Form
      of the Registration Rights Agreement, dated December 10, 2007.
      [Incorporated by reference to Exhibit 10.1 to the Company’s current report
      on Form 8-K filed on December 12, 2007]10.14
                                  
                                  Share
      Purchase Agreement, dated as of February 19, 2008, by and between Wonder
      Auto Limited and Koma Co., Ltd. [Incorporated by reference to Exhibit 10.1
      to the Company’s current report on Form 8-K filed on February 21,
      2008]10.15
                                  
                                  English Summary of Stock Purchase
      Agreement, dated as of April 9, 2008, by and between Wonder Auto Limited
      and Lin Tan. [Incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K filed on April
      14, 2008]10.16
                                  
                                  Wonder Auto Technology, Inc.,
      2008 Equity Incentive Plan. [Incorporated by reference to
      Exhibit 10.1 to the Company’s current report on Form 8-K filed on May 5,
      2008]10.17
                                  
                                  English translation of the Equity
      Transfer Agreement, dated as of October 1, 2008, by and between Jinzhou
      Halla Electrical Equipment Co., Ltd. and Hony Capital II, L.P.
      [Incorporated by reference
      to Exhibit 10.1 to the Company’s current report on Form 8-K filed on
      October 6, 2008]10.18
                                  
                                  English
      translation of Assignment Agreement, by and among Wonder Auto Limited,
      Golden Stone Capital Limited, Money Victory Limited and Lin Tan, dated
      November 19, 2008. [Incorporated by reference to Exhibit 10.1 to the
      Company’s current report on Form 8-K filed on November 20,
      2008]10.19
                                  
                                  English
      translation of the Equity Transfer Agreement, dated as of January 4, 2009,
      by and between Jinzhou Halla Electrical Equipment Co., Ltd. and Magic Era
      Group Limited. [Incorporated by reference to Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on January 8, 2009]14
                                  
                                  Code
      of Ethics. [Incorporated by reference to Exhibit 14 to the Company’s
      current report on Form 8-K filed on March 29, 2007]21
                                  
                                  Subsidiaries
      of the Company.*23
                                  
                                  Consent
      of PKF*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.
    *