UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Amendment
No. 1 to


FORM
10-K





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




For the
fiscal year ended: December 31, 2007




 ̈
            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 Province


People’s
Republic of China, 121013


(Address
of principal executive office and zip code)




(86)
416-2661186


(Registrant’s
telephone number, including area code)







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





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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈
            Non-accelerated
      filer  ̈
            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  ̈No x




As of
June 30, 2007, there were 23,959,994 shares of the Registrant’s common stock
outstanding and the aggregate market value of such shares held by non-affiliates
of the Registrant’s common stock (based upon the average bid and asked price of
such shares as reported on the Over-the-Counter Bulletin Board) was
approximately $46 million. Shares of the Registrant’s common stock held by each
executive officer and director have been excluded in that such persons may be
deemed to be affiliates of the Registrant. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.





DOCUMENTS
INCORPORATED BY REFERENCE:




None.







EXPLANATORY
NOTE




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




The
Original Filing is being amended to: (1) record a compensation charge relating
to the performance of obligations of two shareholders of  the Company
under the make good escrow agreement with certain investors that was entered
into in connection with the Company’s private placement transaction occurred in
June 2006; (2)  re-classify restricted cash which was used as
collateral support for the Company’s bills payable as cash flows from financing
activities instead of cash flows from investing activities (see below for more
details); (3) revise Item 7 “Managements Discussion and Analysis of Financial
Condition and Results of Operations” to reflect the changes above; (4) use the
scaled disclosure rules applicable to a smaller reporting company, such as
revisions to Item 6, Item 7A and Item 11 because the Company was a smaller
reporting company as defined by Item 10 of Regulations S-K for the fiscal year
ended December 31, 2007; and (5) expand disclosures under “Summary of
significant accounting policies – Government Grant” of Note 4 to the Company’s
audited consolidated financial statements for the years ended December 31, 2007
and 2006 to clarify that certain government grant received by the Company was
unconditional, non-refundable and without any restrictions on usage at the time
of grant to and receipt by the Company.




On March
20, 2009, the Company’s management and audit committee concluded that its
consolidated financial statements as of and for the year ended December 31, 2007
could no longer be relied upon due to the reasons discussed herein.





Compensation
Charge





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





On
February 8, 2007 and February 2, 2008, stockholders of CIL and ECL transferred
their right to receive the 3,300,000 shares in escrow for no consideration to
Xiangdong Gao who ultimately received the escrowed shares. Upon consideration of
the SEC’s comments, after consultation with its independent auditor, the
Company’s management and audit committee have determined to recognize a non-cash
compensation expense for the shares released from the escrow in 2006 and 2007.
Accordingly, the aggregate fair value of the shares at the respective date when
performance goal was met, $7,507,500 and $18,265,500, has been accounted for as
stock-based compensation in 2006 and 2007, respectively.








Re-classification
of Restricted Cash





The
Company originally accounted for restricted cash, which was used as collateral
support for the Company’s bills payable undertaken by banks, as cash flows from
investing activities. In response to the SEC’s comments, the Company has
restated its consolidated financial statements for the years ended December 31,
2006 and 2007 to re-classify such increases and decreases in restricted cash as
cash flows from financing activities in its financial statements.




For
purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, each item of the Original Filing
that was affected by the restatement has been amended and restated in its
entirety.  Unless otherwise indicated, this report speaks only as of
the date of the Original Filing.  No attempt has been made in this
Form 10-K/A to update other disclosures presented in the Original
Filing.  This Form 10-K/A does not reflect events occurring after the
date of the Original Filing or modify or update those disclosures, including the
exhibits to Original Filing affected by subsequent events; however, this Form
10-K/A includes as exhibits 31.1, 31.2, 32.1 and 32.2 new certifications by the
Company’s Chief Executive Officer and Chief Financial Officer.


ii




WONDER
AUTO TECHNOLOGY, INC.




FORM
10-K




For the
Fiscal Year Ended December 31, 2007




TABLE OF
CONTENTS




Number
                    
                    PagePART
      IItem
      1.
                    Business
                    1Item
      1A.
                    Risk
      Factors
                    16Item
      2.
                    Properties
                    38Item
      3.
                    Legal
      Proceedings
                    39Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    39PART
      IIItem
      5.
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    40Item
      6.
                    Selected
      Financial Data
                    41Item
      7.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    41Item
      7A.
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    56Item
      8.
                    Financial
      Statements and Supplementary Data
                    56Item
      9
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    57Item
      9A
                    Controls
      and procedures
                    57Item
      9B
                    Other
      Information
                    58PART
      IIIItem
      10.
                    Directors
      and Executive Officers of the Registrant
                    59Item
      11.
                    Executive
      Compensation
                    63Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management
                    66Item
      13.
                    Certain
      Relationships and Related Transactions
                    67Item
      14.
                    Principal
      Accountant Fees and Services
                    67PART
      IVItem
      15.
                    Exhibits
      and Financial Statement Schedules
                    69







Use
of Term




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. and its consolidated subsidiaries.  References to
“Wonder Auto” are references to Wonder Auto Limited and its subsidiaries.
References to “Halla” are references to Jinzhou Halla Electrical Equipment Co.,
Ltd. References to “Hanhua” are references to “Jinzhou Hanhua Electrical System
Co., Ltd.” References to “China” and “PRC” are references to “People’s Republic
of China.” References to “BVI” are references to “British Virgin Islands.”
References to “RMB” are to Renminbi, the legal currency of China, and all
references to “$” are to the legal currency of the United States.




Forward-Looking
Statements




Certain
statements contained in this report under “Item 1—Business,” “Item 3—Legal
Proceedings,” “Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Item 10—Directors, Executive Officers and
Corporate Governance” and “Item 11—Executive Compensation” including, without
limitation, those concerning our liquidity and capital resources, contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning our operations; economic performance;
financial condition; management forecasts; efficiencies, cost savings and
opportunities to increase productivity and profitability; income and margins;
liquidity; anticipated growth; economies of scale; the economy; future economic
performance; our ability to maintain profitability during adverse economic
cycles and unfavorable external events; future acquisitions and dispositions;
litigation; potential and contingent liabilities; management’s plans; taxes; and
refinancing of existing debt. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. These statements may be preceded by,
followed by or include the words “believes,” “expects,” “anticipates,”
“intends,” “plans,” “estimates” or similar expressions.




Forward-looking
statements are not guarantees of performance and by their nature are subject to
inherent risks and uncertainties. We caution you therefore that you should not
rely on these forward-looking statements. You should understand the risks and
uncertainties discussed in “Item 1A—Risk Factors” and elsewhere in this report,
could affect our future results and could cause those results or other outcomes
to differ materially from those expressed or implied in our forward-looking
statements.




Any
forward-looking information contained in this report speaks only as of the date
of the report. Factors or events may emerge from time to time and it is not
possible for us to predict all of them. We undertake no obligation to update or
revise any forward-looking statements to reflect new information, changed
circumstances or unanticipated events.


ii


PART
I




ITEM
      1.
            BUSINESS.




Overview





We are a
leading manufacturer of automotive electrical parts in China, specifically,
alternators and starters. We have been producing alternators and starters in
China since 1997. In 2006, we ranked second in sales revenue in the PRC market
for automobile alternators and starters according to a report issued by the
Automotive Electrical Component Commission of the China Automotive
Society.




We
design, develop, manufacture and market our products for use in a variety of
automobiles. We offer over 150 different models of alternators and over 70
different models of starters. Most of our products are used in domestic original
equipment manufacturing, or OEM, market. 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.





We sell
our products to automakers, engine manufacturers and, increasingly, auto parts
suppliers. Our customers are based primarily in China and include Beijing
Daimler Chrysler, Beijing Hyundai Motor Company, Chery Automobile Co., Ltd.,
Dongfeng Yueda Kia Motors Co., Ltd., Zhejiang Geely Automobile Parts Purchasing
Co., Ltd., Harbin Dongan Automotive Engine Manufacturing Co., Ltd., Shenyang
Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd. and Tianjin FAW Xiali
Automobile Co., Ltd. We are increasing exports of our products to the
international market, which we believe will further enhance our brand and
reputation as a provider of high quality automotive electrical
parts.  Our manufacturing facilities are located in Jinzhou,
China.





Until our
acquisition of Wonder Auto in June 2006, our operations were limited and our
business strategy and ownership changed several times as a result of several
acquisitions of our stock that are discussed in the section below entitled “Our
Corporate History.”





The
following chart reflects our organizational structure as of the date of this
Annual Report.


1











(1)
Holding company with no active business operations.


(2) We
acquired a 50.0% ownership interest in Jinzhou Dongwoo in August 2006, which
until November 17, 2006 was accounted for under the equity method. On November
18, 2006, we acquired control of Jinzhou Dongwoo’s board of directors and it has
been our consolidated subsidiary since that date.


(3) In
connection with its organization in September 2006, we held a 20.4% ownership
interest in Jinzhou Wanyou, which until April 2007 was accounted for under the
equity method. Jinzhou Wanyou became our wholly-owned subsidiary after we
acquired, through our intermediate holding companies, the remaining 79.6% of
Jinzhou Wanyou from its other two shareholders under two separate agreements in
April 2007.





Our Corporate
History





We were
incorporated on June 8, 2000 in the State of Nevada as MGCC Investment
Strategies Inc. On August 25, 2006, we amended our Articles of Incorporation and
changed our name into Wonder Auto Technology, Inc. From inception until March
16, 2004, WATG’s primary business strategy was to provide corporate finance
consulting and management advisory services to emerging companies. During this
period, WATG had no sustained business operations.





On March
16, 2004, MyTop purchased 1,025,000 shares of the common stock of WATG existing
shareholders thereby becoming the owner of approximately 96% of the issued and
outstanding capital stock of WATG. After the stock acquisition, MyTop intended
for WATG to engage in business of developing hi-tech product manufacturing and
services including, digital precision machinery product, telecommunication
products, and other hi-tech products and services through the acquisition of
interests in one or more entities currently operating in these fields. MyTop
entered into informal discussions with potential acquisition targets in China,
but no agreements were reached.


On August
1, 2005, MyTop changed its name to Hisonic International, Inc. and continued to
own approximately 96% of the issued and outstanding capital stock of
WATG.


2





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




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





From the
date of HFI’s stock acquisition until the reverse acquisition of Wonder Auto on
June 22, 2006, discussed in the next section, WATG engaged in no active
operations.





Background and History of
Wonder Auto and its Operating Subsidiaries




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





Acquisition of Wonder Auto
and Related Financing





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




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


3




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




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




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




Our
Products and Market Presence




We mainly
engage in the design, development, manufacture and sale of automotive electrical
parts, specifically, alternators and starters in the PRC through our wholly
owned subsidiary, Halla. We primarily manufacture and sell two types of
automotive electrical components: alternators and starters.




·
            Alternators.
      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 five series of alternators, which are represented by
      different sizes and output rates, in over 150 models. Our alternators’
      current electrical current flows range in size and output from 65A to
      115A. 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.


4





·
            Starters.
      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 five series of starters in terms
      of diameters (ø), namely ø70, ø74, ø76, ø81, ø90 and ø100, which produce
      between 0.85kW to 5.5kW of
power.





The table
below shows our main product lines:





Alternator
            Diameter
      of
              Stator
              Power
            114mm
              65A
            118mm
              75A
            128mm
              85A
            135mm
              90A
            142mm
              115A5
      series with over 150
              modelsStarter
            Diameter
      of Shell
              Power
            Φ70
              0.85KW
            Φ74
            Φ76
            Φ81
            Φ90
            Φ1005
      series with over
              70
              models
            
            0.9KW
              1.2KW
              1.4KW
              3.2KW
              2.5KW
              5.0-5.5KW




Our
products are suitable for use in various types of automobiles. The sales of
alternators and starters for use in cars with displacement ranging from 1.6L to
2.5L, which accounted for approximately 72% of our total sales in 2007. In terms
of the market for our products, the OEM market accounts for about 85%, the
replacement market accounts for approximately 5% and export accounts for
approximately 10%.


5





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 Global Auto
Industry




According
to statistics published by the PRC China Automotive Newspaper, global sales of
automobiles in 2007 exceeded 40 million units. This 2007 sales figure represents
approximately 9% average growth over 2006. Different regions recorded different
growth rates in 2006 with the U.S. and Western European markets recording slight
gains and the Mercosur countries, Central and Eastern Europe and the Asian
markets showing strong growth. We believe that global competition from the
emerging markets has put pressure on the mature auto markets and will shift
automobile production to areas with lower production cost, such as China and
other developing countries.




Overview of Chinese Auto
Industry




In China,
the total output of autos in China reached 8.9 million units in 2007,
representing a 22.0 % increase over 2006 according to the according to China
Association of Automobile Manufacturers. Based on the unit sales volume in 2006,
China is the third largest automaker in the world, following the United States
which produced approximately 16 million units, and Japan which produced
approximately 11.5 million units during the same period. (Source: China
Association of Automobile Manufacturers). We believe that the global automotive
industry is focusing closely on China as nearly all global automobile
manufacturers are now represented there.




We
believe China’s auto industry will continue to grow. According to the research
report published by Nomura Research Institute on April 10, 2006, the auto sales
volume in China is expected to reach 10.08 million units in 2010. The sustained
growth of the auto industry in China is mainly driven by the following
factors:





·
            GDP Per Capita of China has
      risen to the critical point for auto ownership. The PRC’s GDP per
      capita in 2005 was $1700, a 9.9% increase as compared to that in 2004, and
      is approaching the critical vehicle ownership level of $2,000. The GDP per
      capital in some more developed areas, such as Shanghai and Beijing,
      reached over $5000 in 2005 according to the National Bureau of Statistics
      of China. The rising GDP per capita indicates the increase of purchasing
      power, which, combined with a fall in automobile prices, will lead to a
      higher private automobile
ownership.


6





·
            Huge population but low
      saturation level in China. Despite the fact that private vehicle
      ownership has continually increased over the past 10 years, the average
      auto ownership in China is only 19 per 1000 inhabitants which is very low
      as compared to the world average of 125 per 1000 inhabitants according to
      a Deutsche Bank research study issued on January 6, 2006 (780 in US, 500
      in EU, 568 in Japan, 588 in Germany, 313 in South Korea and 198 in Russian
      Federation in 2004). The PRC National Commerce Department predicted that
      the auto ownership in China will increase to 40 per 1000 inhabitants by
      2010.





·
            Dramatic increase of the
      urbanization rate. According to the National Bureau of Statistics
      of China, the urbanization rate in China grew from 26% in 1990 to 43% in
      2003, an increase of 65%. More people moving to the cities will lead to a
      rising demand for car ownership.





·
            Growth of highway
      infrastructure. The statistics of the PRC Ministry of Communication
      shows that 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 will benefit the
      Chinese auto industry.





·
            Favorable governmental
      policies. As explained in more details below, the Chinese
      government adopted a number of legislative measures to facilitate the
      development of the Chinese automotive
industry.




Overview of Chinese Auto
Parts Industry




Due to
the high growth of the auto industry, the Chinese auto parts industry has
experienced rapid growth over the past several years. According to CCID
Consulting, a professional market research and management consulting company,
the sales of auto parts industry reached $68.77 billion in 2005, up 26.13% from
$54.52 billion in 2004.




The auto
parts industry is generally divided into three segments: OEM market, replacement
market and export market, which accounted for approximately 67.94%, 18.55% and
13.51% of the market share in 2005, respectively, according to the statistics of
CCID Consulting.




In 2005,
the sales of auto parts in the OEM market and replacement market were about
$46.72 billion and $12.76 billion, up 21.63% and 23.29% from the previous year,
respectively. Since the number of China’s automobiles has reached 32 million by
the end of 2005 and is expected to increase in the future, we believe the
replacement market will become more and more important for auto parts
manufacturers. Export of auto parts is also a dynamic part of the auto parts
industry in China. The export sales of auto parts were about $9.29 billion in
2005, an increase of 61.28% over 2004. Currently, China is the fourth largest
exporter of auto parts in the world, following Mexico, Canada and Japan.
Although China’s auto parts export volume is still relatively small as compared
to some developed markets, it has been growing at an annual rate of more than
60% between 2002 and 2005. (Source: CCID Consulting)


7




According
to China Association of Social Economic System, the total sales of auto parts
industry will reach $175 billion by 2010, representing a compounded annual
growth rate of 20.54% between 2005 and 2010. We believe that China’s auto parts
industry will maintain its high growth momentum due to several important
factors. First, the growth of auto industry will lay a solid foundation for
growth in the OEM auto parts industry. Second, the increased levels of car
ownership by Chinese residents will also lead to the growth of the replacement
part market. In addition, in order to achieve cost reduction, it is the growing
tendency on the part of Chinese and international auto manufacturers to reduce
cost by sourcing components directly from low cost manufacturing regions, such
as China. Many view this development as prompting increased demand for the low
cost and high quality products provided by Chinese leading automotive parts
manufacturers. We believe that the regulatory measures recently adopted by the
Chinese government will also contribute to the growth in demand for Chinese auto
part products. The Measures for the Administration of Import of Automobile
Components and Parts Featuring Complete Vehicles issued by the National
Development and Reform Commission of the PRC Ministry of Finance and the
Ministry of Commerce encourages automakers to use parts manufactured by local
Chinese auto parts manufacturers. Pursuant to this regulation which becomes
effective on July 1, 2006, the Chinese government will charge automakers a
tariff up to 25% if more than 40% of the components and parts of an automobile
are imported.







Our
Intellectual Property




We
currently have the following issued patents.




Patent
                          
                          Patent
      Type
                          
                          Patent
      No.
                          
                          Expiration
                            Date
                          
                          CountryConfiguration
      of End Bearing Bracket of Starter
                          
                          Utility
      Model
                          
                          ZL03212000.1
                          
                          March
      16, 2013
                          
                          ChinaSpeed
      Reduction Gear to Start Electromotor
                          
                          Utility
      Model
                          
                          ZL032119992
                          
                          March
      16, 2013
                          
                          ChinaAuto
      AC Electricity Generator
                          
                          Utility
      Model
                          
                          ZL03211998.4
                          
                          March
      16, 2013
                          
                          ChinaRotor
      of Auto AC electricity generator
                          
                          Utility
      Model
                          
                          ZL03212001.X
                          
                          March
      16, 2013
                          
                          ChinaStarter
      Hull Connection and Location Configuration
                          
                          Utility
      Model
                          
                          ZL200320105993.6
                          
                          December
      9, 2013
                          
                          China




We have
filed 32 patent applications with the Patent Office of the State Intellectual
Property Office of China which are pending approval.





We have
registered the trademark for the logo  with the
Trademark office of the State Administration for Industry and Commerce of China.
We use our trademark for the sales and marketing of our products. Our trademark
expires in April 2010.


8




In 2004,
we signed a licensing agreement with a well-known Japanese automotive component
manufacturer pursuant to which the Japanese manufacturer granted us a license to
use its patented technologies to manufacture and sell certain alternators and
starters on a non-assignable and non-exclusive basis. The license agreement has
a three-year effective term which expired in September 2007. We are under a
contractual obligation to keep the identity of our Japanese licensor
confidential. Both parties agreed to renew the licensing agreement in the near
future.




Our
Internal and Strategic Research and Development Efforts




Overview




We
believe that the development of new products and production methodologies is
critical to our success. We currently operate two research and development
centers, each performing different research and development activities. Our
first research and development center is located at our headquarters in Jinzhou,
Liaoning Province of China. In June 2004, we set up a new center in Beijing,
China. As of December 2007, we have 71 research and development personnel, ten
of them are experts we hired from South Korea, 53 of them hold bachelor degrees
from Chinese universities.




Through
our research and development centers, we are able to accommodate joint
development programs with our OEM customers. As a result, we are often invited
by our customers to jointly develop new engines and manage the development
program tailored to our customers’ specific requirements. In 2007, we had 31
joint development programs (17 for alternators and 14 for starters) used in
popular models of sedans. These OEM customers include XiaLi, Chery, South Korea
Doosan and Beijing Benz DaimlerChrysler. Upon the successful completion of the
joint development project, we often become the supplier of the developed
products. In the past three years, we were engaged as the supplier in
approximately 78.0% of the successful joint development projects.




9





Although
the top five alternator and starter manufacturers in China all have
joint-development capacities, we believe that we have an advantage over our
competitors because our development period is about three months shorter than
our competitors due to our dedicated R&D resources.




Strategic Alliance with
Hivron




In
addition to our own research and development capabilities, we have entered into
a strategic alliance with Hivron, a South Korean company which has specialized
in the design and manufacturing of microchips since 2002. Through this strategic
alliance, we are able to access South Korean expertise and actively participate
in the research and development of technologies that are critical to our
products. During the past three years of this strategic alliance with Hivron, we
have jointly conducted research to develop microchips for use in our alternator
rectifiers and regulators. This strategic alliance is important to our business
because it provides us source of microchips that are suitable for our
alternators from PRC manufacturers.




Under the
terms of our June 7, 2004 long-term strategic cooperation agreement, Hivron will
design and manufacture microchips according to our specifications and then sell
these chips to our designated suppliers. Hivron is obligated to sell these chips
at competitive prices and cannot sell chips developed pursuant to this agreement
to our competitors. In return, we will provide specifications and information on
our new products to Hivron and instruct our rectifier and regulator suppliers to
purchase chips from Hivron.




Strategic Alliance with
Japanese automotive component manufacturer




In 2004,
we entered into a licensing agreement with a well-known Japanese automotive
component manufacturer which has three-year effective term. Under the terms of
the licensing agreement, we license the technology and products developed by our
Japanese licensor for a period of three years, ending in September 2007. Both
parties agreed to renew the licensing agreement in the near future. Through this
licensing agreement, we are able to integrate patented Japanese technologies
into our alternators and starters. We can also produce and sell products that
are more suitable for Japanese vehicles utilizing this technology. In return, we
pay a royalty of 0.55% of net sales revenue from the sales of the products that
incorporate the licensed technology. The licensor retains ownership of all
intellectual property licensed under the agreement. For the year ended December
31, 2007, sales of the licensed products amounted to approximately $27.7 million
and the amount of royalties paid was approximately $ 0.3 million. We are under a
contractual obligation to keep the identity of our Japanese licensor
confidential.


10





Research and Development
Expenses




For the
fiscal years ended December 31, 2005, 2006 and 2007, 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 $477,225, $500,347 and $534,503, respectively. The amount
incurred for acquisition of equipments for research and development use and for
routine and ongoing efforts to refine existing products were approximately $1.0
million, $1.1 million and $ 3.0 million, representing approximately 2.53%, 2.06%
and 3.0% of our sales for those years, respectively.




Our
Sales and Marketing Efforts




We market
our products directly to our customers though our sales department which, as of
December 2007, consisted of 27 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 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 and starters, our clients
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 Hanover, 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. In both 2003
and 2004, our overseas sales accounted for less than 1% of our total sales. In
2007, our overseas sales increased to approximately 9.6% of the total sales. We
have opened a sale office in Detroit USA to facilitate our efforts to enter the
North American markets in September 2007. Our sales and marketing department
also 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 2007, we had eight representatives stationed at different major
customers.




Raw
Materials for our Products and our Supplier Arrangements




Nature of the raw materials
used in our products.




The raw
materials we use to produce our starters and alternators fall into four general
categories: metal parts, semiconductors, chemical and packaging materials. 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 as well as
the auto parts industry itself and the characteristic over/under capacity of
these industries. Supply and demand is also affected by macroeconomic conditions
in China, including levels of consumer disposable income and spending
patterns.


11




Our
Suppliers and Supplier Arrangements .




We
purchase the majority of the raw materials from suppliers located in China. If
we continue to see improvement in the quality of domestically produced parts, we
intend to increase our use of these local suppliers in order to take advantage
of the lower costs. We believe that utilizing local suppliers also provides us
with other benefits because we are able to supervise local suppliers, we can
easily provide technical training and our technical department can also provide
technical improvement suggestions to them.




We use a dual supplier system to source
the raw materials that we use in our products and we maintain absolute exclusive
supplier arrangements, relatively exclusive supplier arrangements and
non-exclusive supplier arrangements. About 70% of all of the raw materials that
we use to manufacture our products are purchased from a handful of select
suppliers. These select or primary suppliers consist of both local Chinese
manufacturers and foreign manufacturers based in South Korea and Japan,
including NMB, NSK, NTN, KBC, Pacific Metal and Suzhou Techno System, etc. Our
priority suppliers have long-term relationships with us, but we do not rely on
them exclusively. Instead, as part of our dual vendor system, we also purchase
about 30% of the total raw materials that we need to produce our products from
other vendors. As a result, if our priority suppliers cannot supply us for any
reasons, we are able to rely on these other suppliers to satisfy our raw
material requirements. All of our suppliers must meet our quality standards and
delivery requirements consistently in order to remain on our approved supplier
list. We require local suppliers within 300 km of our production facility to
deliver goods within six hours from the time when orders are placed. If a
supplier is repeatedly late in deliveries, it is removed from our approved
supplier list. We have entered into written agreements with our major suppliers
and these agreements generally have a one-year term. The terms and nature of our
arrangements with suppliers are as follows:





·
            Absolute
      Exclusive Supplier Arrangements. Under the exclusive supplier
      arrangements, our suppliers are obligated to provide all of their products
      to us and cannot sell any of their products to any third party in the
      Chinese automotive electrical equipment industry. In 2006, we had absolute
      exclusive supplier arrangements with three vendors, Jinzhou HanHua
      Electrical Equipment Co., Ltd., JinZhou ChangZe Precision Machinery Plant
      and JinZhou DongYou Precision Technology. These suppliers provided us with
      approximately 6.5% of the materials used in our
      products.





12


·
            Relatively
      Exclusive Supplier Arrangements. Under the relatively exclusive supplier
      arrangements, our suppliers cannot provide any of their products made
      based on the specifications provided by us to any other automotive
      electrical equipment manufactures in PRC. In 2005, we had relatively
      exclusive supplier arrangements with 31 vendors who supplied us with
      approximately 67.4% of the materials used in our
  products.





·
            Non-Exclusive
      Supplier Arrangement. Under this arrangement, there is no restriction on
      the vendors’ ability to sell their products to other parties. In 2005, we
      had non-exclusive supplier arrangements with 12 vendors who supplied us
      with approximately 26.1% of the materials used in our
      products.




These
flexible sourcing arrangements are designed to provide sourcing stability for us
and promote competition among our suppliers. We believe our supplier
arrangements incentivize suppliers to provide to us technologically advanced and
high quality products. We systematically assess our vendors to determine whether
they should remain as select vendors, be promoted to select vendors or be
demoted to the other vendor category.




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 Chinese Yuan Renminbi. When we purchase
raw materials from foreign suppliers, we usually pay in U.S. Dollars. Our
account payables above six months accounted for 0.22%, 0.06% and 1.75% of our
total account payables in 2005, 2006 and 2007, respectively.





Our top
ten suppliers in 2007 .




The
following table provides information regarding our top 10 suppliers of products
and services during 2007.




TOP
TEN SUPPLIERS IN 2007




Rank
                        
                        Supplier
                        
                        Location
                        
                        Material
                        
                        Percentage of total
                          materials
      cost1
                        
                        Jinzhou
      Dongwoo Precision Co., Ltd.
                        
                        Jinzhou,
      Liaoning
                        
                        Rectifier,
      adjustor
                        
                        23.57
                        %2
                        
                        Jinzhou
      Hanhua Electrical System Co.
                        
                        Jinzhou,
      Liaoning
                        
                        Armature
                        
                        11.91
                        %3
                        
                        Yingkou
      Die-Casting Products Co., Ltd.
                        
                        Yingkou,
      Liaoning
                        
                        Preoperculum,
      postoperculum
                        
                        11.07
                        %4
                        
                        Tianjin
      Jingda Rea Special Enameled Wire Co. Ltd.
                        
                        Tianjin
                        
                        Copper
      wire
                        
                        8.13
                        %5
                        
                        Tianjin
      Zhaohe Enameled Wire Co. Ltd.
                        
                        Tianjin
                        
                        Copper
      wire
                        
                        7.89
                        %Top
      5 Suppliers (total)
                        
                        
                        
                        
                        
                        62.56
                        %6
                        
                        Zhejiang
      Huanfang Auto Electrical Appliance Co. Ltd.
                        
                        Yuhuan,
      Zhejiang
                        
                        Solenoid
      switch
                        
                        6.79
                        %7
                        
                        Jinzhou
      Changze Precision Machinery Manufacturing Company
                        
                        Jinzhou,
      Liaoning
                        
                        Axis,
      Lundell motor, belt pulley
                        
                        6.52
                        %8
                        
                        Yuhuan
      Putian Isolator Co. Ltd.
                        
                        Yuhuan,
      Zhejiang
                        
                        Isolator,
      P axis, gear ring
                        
                        6.23
                        %9
                        
                        SWT
                        
                        Seoul,
      Korea
                        
                        Bearing,
      fine powder, alnico, standard element
                        
                        5.79
                        %10
                        
                        Jinzhou
      Motor Vehicle Parts Manufacturing Company
                        
                        Jinzhou,
      Liaoning
                        
                        Enclosure,
      belt pulley, denoise ring, bearing cap
                        
                        4.32
                        %




13





Our
Major Customers




Large
automobile manufacturers and automotive engine suppliers are our primary and
most desirable customers. Our customers include Beijing Hyundai, Dongfeng Yueda
Kia Motors, Daimler Chrysler, SAIC GM WuLing, Chery, Geely, Tianjin XiaLi
Automobile Co. and Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co.
We have also entered into technical cooperation agreements or letters of intent
with new OEM customers, including Shanghai GM, Fiat, Nan King MG, Beijing Benz,
South Korea Hyundai and Korean Doosan. The number of our clients has increased
about 194% in the past five years. As we continue to build sales in the domestic
market, we intend to grow by developing 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
contract has a one-year term and is usually renewable.




The
following table shows the revenues generated and percentage of total revenues
received from our ten largest customers during the years ended December 31, 2007
and 2006:




TOP TEN
CUSTOMERS IN 2007





Rank
                                
                                Clients
      Name
                                
                                Sales (US$)
                                
                                %1
                                
                                Harbin
      Dongan Automotive Engine Co., Ltd.
                                
                                16,657,632
                                
                                17.7
                                %2
                                
                                Shenyang
      Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd.
                                
                                15,691,636
                                
                                16.
      7
                                %3
                                
                                Beijing
      MOBIS Auto Parts and Components Co., Ltd.
                                
                                13,971,225
                                
                                14.8
                                %4
                                
                                Shenyang
      Xinguang Huachen Auto Engine Co., Ltd.
                                
                                5,216,132
                                
                                5.5
                                %5
                                
                                Tianjin
      Automotive Xia Li Co. Ltd Internal Combustion Engine Manufacturing Branch
      Co.
                                
                                5,086,864
                                
                                5.4
                                %6
                                
                                Dongfeng
      Yueda Kia Motors Co., Ltd.
                                
                                4,350,341
                                
                                4.6
                                %7
                                
                                Mianyang
      Xinchen Engine Co. Ltd
                                
                                3,774,014
                                
                                3.8
                                %8
                                
                                Jiangsu
      MOBIS Auto Parts and Components Co., Ltd.
                                
                                3,557,786
                                
                                3.8
                                %9
                                
                                SAIC
      CHERY AUTOMOBILE CO, LTD
                                
                                3,566,207
                                
                                3.8
                                %10
                                
                                SWT
                                
                                2,939,739
                                
                                3.1
                                %





TOP TEN
CUSTOMERS IN 2006





Rank
                              
                              Clients
      Name
                              
                              Sales
      (US$)
                              
                              %1
                              
                              Beijing
      Hyundai Motor Company
                              
                              13,686,791
                              
                              19.0
                              %2
                              
                              Shenyang
      Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd.
                              
                              12,837,338
                              
                              17.8
                              %3
                              
                              Harbin
      Dongan Mitsubishi
                              
                              5,770,801
                              
                              8.0
                              %4
                              
                              Tianjin
      Automotive Xia Li Co. Ltd
                              
                              4,359,671
                              
                              6.0
                              %5
                              
                              Shenyang
      Xinguang Huachen Auto Engine Co., Ltd.
                              
                              4,108,985
                              
                              5.7
                              %6
                              
                              Mianyang
      Xinchen Engine Co. Ltd
                              
                              3,540,831
                              
                              4.9
                              %7
                              
                              Chery
      Automobile Co., Ltd.
                              
                              3,445,774
                              
                              4.8
                              %8
                              
                              Harbin
      Dongan Automotive Engine Manufacturing Co., Ltd.
                              
                              3,279,274
                              
                              4.6
                              %9
                              
                              Dongfeng
      Yueda Kia Motors Co., Ltd.
                              
                              2,416,288
                              
                              3.4
                              %10
                              
                              SWT
                              
                              2,473,582
                              
                              3.4
                              %




14


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.




Regulation




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





There is
no private ownership of land in China and all land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights can be
obtained from the government for a period up to 70 years, and are typically
renewable. Land use rights can be transferred upon approval by the land
administrative authorities of the PRC (State Land Administration Bureau) upon
payment of the required land transfer fee. We have received the necessary land
use right certificate for the 42,169 square meters of land located at No. 16
Yulu Street, Jinzhou High Technology Industrial Park, Jinzhou, China. See “OUR
BUSINESS - Our Facilities” for more details.




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




We do not
face any significant government regulation of 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 of all corporations in
China.


15





Our
Employees




As of
December 31, 2007, we employed 513 full-time employees.




Our
Chinese subsidiary has trade unions which protect employees’ rights, aim to
assist in the fulfillment of our economic objectives, encourage employee
participation in management decisions and assist in mediating disputes between
us and union members. 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.




As
required by applicable Chinese law, we have entered into employment contracts
with all of our officers, managers and employees.




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 $681,944, $490,519 and $417,824 for the
fiscal year 2007, 2006 and 2005, 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.







ITEM
1A.   RISK FACTORS




RISKS
RELATED TO OUR BUSINESS




If
we fail to effectively expand our operations and capacity to satisfy demand for
our products, our results of operations and business prospects could be
impaired.





Our
future success depends on our ability to expand our business to address growth
in demand for our alternator and starter products. We are currently in the
process of constructing new production lines which began full production in
December 2007, resulting in total production capacity for alternators and
starters of approximately 2.2 million and 1.8 million units, respectively. Our
ability to add production capacity and increase output is subject to significant
risks and uncertainties, including:


·
            the
      availability of additional funding to build manufacturing facilities and
      purchase components, accessories and other raw materials on favorable
      terms or at all;


·
            our
      management and minimization of delays and cost overruns caused by problems
      with our equipment vendors, suppliers and third-party manufacturers;
      and


·
            our
      receipt of any necessary government approvals or permits that may be
      required to expand our operations in a timely manner or at
      all.


16





Our
rapid expansion could significantly strain our resources, management and
operational infrastructure which could impair our ability to meet increased
demand for our products and hurt our business results.




To
accommodate our anticipated growth, we will need to expend capital resources and
dedicate personnel to implement and upgrade our accounting, operational and
internal management systems and enhance our record keeping and contract tracking
system. Such measures will require us to dedicate additional financial resources
and personnel to optimize our operational infrastructure and to recruit more
personnel to train and manage our growing employee base. If we cannot
successfully implement these measures efficiently and cost-effectively, we will
be unable to satisfy the demand for our products, which will impair our revenue
growth and hurt our overall financial performance.




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.




Based
primarily on our projected increases in our sales volume and growth in the size
of the automotive market in China, we plan to increase our annual manufacturing
capacity to meet an expected increase in demand for our products. 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 and the proceeds
raised from the sale of our stock to the selling stockholders in December 2007
will be 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. 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.


17





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 $102.1
million in 2007. 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 two
years, we acquired controlling interests in two complementary businesses,
Jinzhou Dongwoo and Jinzhou Wanyou, 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.




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
Dongwoo and Jinzhou Wanyou. 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.


18





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, as described under “—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, 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.


19





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 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 alternators and
starters 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
1.4% ,4.8% and 9.6% of our total sales in 2005, 2006 and 2007, 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.




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.


20




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 PRC utility patents that relate to various
product configurations and product components and have 32 pending PRC patent
applications. 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.


21




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 “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 “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 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.


22




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


·
            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.




23




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. Five customers—Beijing Hyundai Motor Company,
Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd., Harbin
Dongan Automotive Engine Manufacturing Co. Ltd., Tianjin FAW Xiali Automotive
Co., Ltd. And Shenyang Xinguang Huachen Automotive Engine Co., Ltd.—accounted
for approximately 55.8% of our sales in 2006 and 60% in 2007.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 and component parts
that we use are mainly divided into four categories: metal parts,
semiconductors, chemicals and packaging materials. The majority of our raw
materials and components are purchased from suppliers in China, including
Jinzhou Dongwoo, a company in which we hold a 50% equity interest and control
the board of directors, Jinzhou Hanhua Electrical Systems Co., Ltd., 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 five largest raw materials and component parts
suppliers accounted for approximately 62.56% in 2007. 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.


24




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 small engine 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.


25





Our
business may adversely change due to the cyclical nature of the automotive
industry.





Our
financial performance depends, in large part, on the varying conditions in the
automotive markets that we serve. The volume of automobile production in Asia,
North America, Europe and the rest of the world has fluctuated, sometimes
significantly, from year to year, and such fluctuations give rise to
fluctuations in demand for our products. These fluctuations in demand in the
automotive industry often are in response to overall economic conditions but are
also a reaction to certain external factors, such as changes in interest rate
levels, vehicle manufacturer incentive programs, changes in fuel costs, consumer
spending and confidence and environmental issues. If the automotive market
experiences a downturn, our results of operations and business will
suffer.




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.




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 20.8% 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.


26





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 20.8% 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 11.0%
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.


27





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.


28





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




Foreign
invested enterprises, or FIEs, established in the PRC are generally subject to
an enterprise income tax, or EIT, rate of 33.0%, which includes a 30.0% state
income tax and a 3.0% local income tax. FIEs established in Coastal Open
Economic Zones, Special Economic Zones or Economic and Technical Development
Zones, such as our PRC subsidiaries, are subject to an EIT rate of 27.0%, which
is comprised of a 24.0% state income tax and a 3.0% local income tax. Under the
income tax law and the related implementing rules, FIEs engaging in
manufacturing businesses with a term of operation exceeding ten years may,
subject to approval from local taxation authorities, be entitled to a two-year
tax exemption from PRC EIT starting from the year they become profitable and a
50.0% tax reduction for the three years thereafter.




Our
subsidiaries Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou are subject to
PRC EIT at a rate of 27.0% of assessable profits, consisting of a 24.0% national
tax and a 3.0% local tax. As approved by the relevant PRC tax authority, Jinzhou
Halla and Jinzhou Dongwoo were entitled to a two-year exemption from EIT
followed by a 50.0% tax exemption for the next three years, commencing from the
first cumulative profit-making year in the fiscal financial year. The tax
holiday of Jinzhou Halla commenced in 2001, and Jinzhou Halla was subject to a
tax rate of 13.5% for 2003, 2004 and 2005. Furthermore, Jinzhou Halla, as an
FIE, is engaged in an advanced technology industry and has been approved to
enjoy a further 50.0% tax exemption for 2006, 2007 and 2008. The tax holiday of
Jinzhou Dongwoo commenced in 2004. Jinzhou Dongwoo was subject to a tax rate of
13.5% for 2006 and is expected to be subject to a tax rate of 13.5% for 2007 and
2008. Finally, Jinzhou Wanyou, is entitled to a two-year EIT exemption for 2007
and 2008 and will receive a 50.0% EIT reduction for 2009, 2010 and 2011,
assuming that Jinzhou Wanyou is profitable for each of these years.




In
addition, Jinzhou Halla and Jinzhou Dongwoo, being FIEs, were entitled to two
other special tax concessions. First, an amount equal to 40.0% of the qualifying
domestic capital expenditures (as defined and approved under the relevant PRC
income tax rule) can be used as an offset against the excess of the current
year’s EIT over the prior year’s EIT. Second, an amount equivalent to 50.0% of
the current year’s domestic development expenses can be used as an offset
against EIT. These two tax concessions, if unutilized, can be carried forward
for five years.




If this
preferential tax treatment is discontinued by the tax authorities or is
eliminated due to future changes in PRC tax laws, rules or regulations, our PRC
operating subsidiaries may cease to enjoy the aforementioned tax benefits. If
that were to occur, our PRC operating subsidiaries would thereafter be subject
to a 27.0% standard EIT rate under the current tax laws through 2007 and up to a
25.0% rate from January 1, 2008 under the new tax law described below,
which would significantly increase our effective tax rate and materially
adversely affect our operating results.


29





On
March 16, 2007, the National People’s Congress of China passed the new EIT
Law, which will take effect as of January 1, 2008. Under the new 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
EIT at the rate of 25.0% on its global income. The new EIT Law, however, does
not define the term “de facto management bodies.” If the PRC tax authorities
subsequently determine that we should be classified as a resident enterprise,
then our global income will be subject to PRC income tax at a tax rate of 25.0%.
In addition, under the new EIT Law, 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 subsidiaries. We are actively
monitoring the proposed withholding tax and are evaluating appropriate
organizational changes to minimize the corresponding tax impact. The new EIT Law
imposes a unified income tax rate of 25.0% on all domestic-invested enterprises
and FIEs, such as our PRC operating subsidiaries, unless they qualify under
certain limited exceptions, but the EIT Law permits companies to continue to
enjoy their existing preferential tax treatments until such treatments expire in
accordance with their current terms. We expect details of the transitional
arrangement for the five-year period from January 1, 2008 to
December 31, 2012 applicable to enterprises approved for establishment
prior to March 16, 2007 to be set out in more detailed implementing rules
to be adopted in the future. Any increase in our effective tax rate as a result
of the above may adversely affect our operating results. However, details
regarding implementation of this new law are expected to be provided in the form
of one or more implementing regulations to be promulgated by the PRC government,
and the timing of the issuance of such implementing regulations is currently
unclear.




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, or 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, including Form 10-K.  We are subject to this requirement
commencing with our fiscal year ending December 31, 2007 and a report of our
management is included under Item 9A of this Annual Report on Form 10-K. In
addition, SOX 404 requires the independent registered public accounting firm
auditing a company’s financial statements to also attest to and report on the
operating effectiveness of such company’s internal controls. However, this
annual report does not include an attestation report because under the current
law, we will not be subject to these requirements until our annual report for
the fiscal year ending December 31, 2009.   We can provide no assurance
that we will comply with all of the requirements imposed thereby.  There
can be no assurance that we will receive a positive attestation from our
independent auditors.  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.


30





We can
provide no assurance that we will be in compliance with all of the requirements
imposed by SOX 404 or that we will receive a positive attestation from our
independent auditors. 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.




In
addition, under the new EIT Law to be effective 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.


31





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.


32





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.


33





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.




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, or 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, or 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.


34


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.




The
recent PRC Regulation on Mergers and Acquisitions of Domestic Companies by
Foreign Investors also 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. 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.
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 business
combination transaction that is acceptable to our stockholders or sufficiently
protect their interests in a business combination transaction.


35





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 the financial
results are reported in U.S. dollar, 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. 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 1, 2006 and December 31, 2007, the closing
bid price of our common stock, as reported on the markets on which our
securities have traded, ranged between $1.02 and $11.21. Numerous factors, many
of which are beyond our control, may cause the market price of our common stock
to fluctuate significantly. These factors include:


36





·
            expiration
      of lock-up agreements;


·
            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;


·
            general
      economic conditions and
trends;


·
            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.





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.


37





Future
sales or perceived sales of our common stock could depress our stock
price.





All of
our executive officers and directors and certain of our stockholders are subject
to certain lock-up agreements. Shares of common stock subject to these lock-up
agreements will become eligible for sale in the public market upon expiration of
these lock-up agreements, subject to limitations imposed by Rule 144 under the
Securities Act (“Rule 144”), as amended. A substantial number of shares of our
common stock held by our current stockholders are freely tradable. If the
holders of these freely tradeable shares were to attempt to sell a substantial
amount of their holdings at once, the market price of our common stock could
decline. Moreover, the perceived risk of this potential dilution could cause
stockholders to attempt to sell their shares and investors to short the stock, a
practice in which an investor sells shares that he or she does not own at
prevailing market prices, hoping to purchase shares later at a lower price to
cover the sale. As each of these events would cause the number of shares of our
common stock being offered for sale to increase, our common stock’s market price
would likely further decline. All of these events could combine to make it very
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.





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




Other
than disclosed in our reports with the SEC, 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.




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 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 50 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.




38





We were
granted land use rights from the Chinese government for 42,169 square meters 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.




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
lease 169 square meters of office space at Wangjing Tower, No. 9 Zhong Huan Nan
Lu, Wangjing, Chaoyang District, Beijing where our Beijing Representative Office
is located. The lease has a 2-year term which runs from November 15, 2005 to
January 31, 2008. The monthly rent is RMB 17,000.




We
currently have established four alternator assembly lines and four starter
assembly lines. The total annual production capacity of these production lines
is approximately 2.2 million units of alternators and 1.8 million units of
starters, 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 each year from 2005 to 2007, the
utilization rates of our alternator production lines were approximately 85%,
109% and 108% , respectively, while those of the starter production lines were
approximately 140%, 74% and 86% respectively.





We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business. We plan to
utilize a portion of the $22.7 million that we raised in our private placement
that closed in December 2007 to construct additional production lines to expand
our production capacity for alternators and starters.




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.




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 2007.




39




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. The high and low quotations for the first quarter and the third
quarter of fiscal year 2006 have been adjusted for the above mentioned 20-for-1
reverse stock split and to give retroactive effect to the 2.448719-for-1 forward
stock split, respectively.




Closing Bid Prices(1)High
                  
                  
                  LowYear
      Ended December 31, 20071
      st
      Quarter
                  
                  $
                  6.70
                  
                  
                  $
                  5.122
      nd
      Quarter
                  
                  
                  7.43
                  
                  
                  
                  6.573
      rd
      Quarter
                  
                  
                  7.31
                  
                  
                  
                  5.654
      th
      Quarter
                  
                  
                  10.16
                  
                  
                  
                  7.61Year
      Ended December 31, 20061
      st
      Quarter
                  
                  $
                  1.40
                  
                  
                  $
                  1.202
      nd
      Quarter
                  
                  
                  2.65
                  
                  
                  
                  1.253
      rd
      Quarter
                  
                  
                  4.80
                  
                  
                  
                  3.004
      th
      Quarter
                  
                  
                  5.20
                  
                  
                  
                  3.44


(1) The
above tables set forth the range of high and low closing bid prices per share of
our common stock as reported by www.quotemedia .com
for the periods indicated.





Reports to
Stockholders




We plan
to furnish our stockholders with an annual report for each fiscal year ending
December 31 containing financial statements audited by our independent certified
public accountants. Additionally, we may, in our sole discretion, issue
unaudited quarterly or other interim reports to our stockholders when we deem
appropriate. We intend to maintain compliance with the periodic reporting
requirements of the Exchange Act.




Approximate Number of
Holders of Our Common Stock




On
December 31, 2007, there were approximately 296 stockholders of record of our
common stock.


40





Dividend
Policy




Other
than the dividends declared or paid by our subsidiary Wonder Auto before the
reverse acquisition transaction and the forward stock split as discussed above,
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.




PART
II




ITEM 6.
            SELECTED
      FINANCIAL DATA.




Not
applicable.




ITEM 7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Overview





Wonder
Auto Technology, Inc. is a Nevada holding company whose China-based operating
subsidiaries, Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou, are primarily
engaged in designing, developing, manufacturing and selling automotive
electrical parts in China, specifically alternators and starters. We have been
producing alternators and starters in China since 1997. In 2006, we ranked
second in sales revenue in China in the market for automobile alternators and
starters. Our market share increased to 14.6% in 2007 from 13.9% in 2006. We
believe our brand and our products are well recognized and respected in the
automotive industry in China.





Most of
our products are used in passenger cars, especially smaller engine vehicles with
engine displacement below 1.6 liters. We offer over 150 different models of
alternators and over 70 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.





We sell
our products to automakers, engine manufacturers and, increasingly, auto parts
suppliers, based primarily in China, and we are increasingly exporting our
products to the international market. Our primary focus during 2006 and 2007 has
been to increase sales of our alternator and starter 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.


41





To
capitalize on the increased demand for our products, we have undertaken
significant capital expansion and capital improvement efforts, utilizing most of
the net proceeds received from our equity financing in 2006 to expand and
enhance our manufacturing capabilities. In 2006 and early 2007, we also made two
strategic acquisitions of suppliers, Jinzhou Dongwoo and Jinzhou Wanyou, which
reduced our cost of raw materials and components. In addition, a large portion
of Jinzhou Wanyou’s products are sold to third parties which has helped expand
our customer base and product offerings.




As of
December 31, 2007, we had 513 employees working at our four alternator assembly
lines and four starter assembly lines. The total annual production capacity of
these production lines is approximately 2.2 million units of alternators and 1.8
million units of starters. Our assembly lines operate on two eight-hour shifts
per day over a five-day work week. Full utilization of our assembly lines is
defined on this basis, and overtime production may result in utilization rates
exceeding 100%. The utilization rates of our alternator production lines in
2005, 2006 and 2007 were approximately 85%, 109% and 108%,respectively, while
those of the starter production lines were approximately 140%, 74% and 86%,
respectively.





In April 2007, we expanded
our product mix by acquiring Jinzhou Wanyou, a manufacturer of shock absorber
rods, vibration dampers and rotary axles for automotive alternators and
starters. We expect our revenue to continue to grow in future periods as a
result of contributions by Jinzhou Wanyou, expected growth in China’s auto parts
industry, the increased demand for small engine automobiles, a friendly
regulatory environment and our plans to increase the level of our
exports.





On January 1, 2008, we
acquired 50% of Jinzhou Hanhua Electrical System Co., Ltd., a manufacturer of
armature for automotive starters. The acquisition of Hanhua will further boost
our competitive strength.





Principal
Factors Affecting Our Financial Performance





We believe that the following
factors will continue to affect our financial performance:





Growth of China’s
automobile industry.China is now the second
largest auto market in the world. According to the China Association of
Automobile Manufacturers, the output of automobiles in China in 2007 reached 8.9
million units, including 6.4 million passenger cars, representing a 22.0%
increase over 2006. We believe that the significant level of automobile
ownership in China and the increasing number of automobile sales will increase
the size of the automotive aftermarket, the need for replacement parts and the
overall demand for our products.


42


Fluctuations in
raw material and components costs.Our operations require
substantial amounts of a variety of raw materials and components. Some raw
materials and components, especially copper wire, have been susceptible to
fluctuations in price and availability. Significant increases in the prices of
our raw materials and components have a direct and negative impact on our gross
margin. We attempt to offset disadvantageous price fluctuations in raw materials
and components by sourcing large quantities to achieve economies of scale, by
reducing the consumption of raw material per unit and component per unit through
research and development and by focusing on suppliers within close proximity to
our facilities. We have also acquired a 50.0% ownership interest in Jinzhou
Dongwoo, one of our primary suppliers, to reduce our raw material and component
costs. Ultimately, we may be required to raise finished product prices in order
to recover higher raw material and component costs and maintain our profit
margin.





PRC regulations
promoting the use of domestically manufactured auto parts and
components. Effective on July 1, 2006,
the National Development and Reform Commission, the PRC Ministry of Finance and
the Ministry of Commerce adopted a regulation encouraging automakers to use
parts manufactured by local Chinese auto parts manufacturers. This regulation
imposes on automakers a tariff of up to 25% if more than 60% of the price of the
components and parts of an automobile manufactured in China are imported. We
believe that this regulation will continue to have a positive impact on the
sales of our products.





Increase in
exports.We plan
to expand sales of our products to foreign markets. In 2007, our sales to
foreign customers reached $9.7 million, or approximately 9.6% of our total
sales, with the majority of our foreign sales being made to customers in South
Korea, Turkey and the United States. Our acquisition of Jinzhou Wanyou
contributed to increased exports of our products. In 2007, Jinzhou Wanyou’s
total sales to foreign markets were approximately $4.8 million, accounting for
approximately 57.5% of its total sales.





Expansion of our
production capacity.Expansion of our production
capacity is needed to satisfy increased demand for our products. Our utilization
rate for our alternator and starter production lines in 2007 was approximately
108% and 86%, respectively. In order to increase our production capacity, we
must make capital investments that improve the efficiency and capacity of our
manufacturing facilities and equipment. We may need to build additional
production lines to satisfy the projected demand for our
products.





Taxation





United
States





Wonder Auto Technology, Inc.
is subject to United States tax at a tax rate of 34%. No provision for the US
federal income taxes has been made as the Company had no taxable income for the
reporting period.




43




BVI





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





PRC





FIEs established in the PRC
are generally subject to an EIT rate of 33.0%, which includes a 30.0% state
income tax and a 3.0% local income tax. FIEs established in Coastal Open
Economic Zones, Special Economic Zones or Economic and Technical Development
Zones, such as our PRC subsidiaries, are subject to an EIT rate of 27.0%, which
is comprised of a 24.0% state income tax and a 3.0% local income
tax.





Under the income tax law and
the related implementing rules, FIEs engaging in manufacturing businesses with a
term of operation exceeding ten years may, subject to approval from local
taxation authorities, be entitled to a two-year tax exemption from PRC EIT
starting from the year they become profitable and a 50% tax reduction for the
three years thereafter.





Our subsidiaries Jinzhou
Halla, Jinzhou Dongwoo and Jinzhou Wanyou are subject to PRC EIT at a rate of
27.0% of assessable profits, consisting of a 24.0% national tax and a 3.0% local
tax. As approved by the relevant PRC tax authority, Jinzhou Halla and Jinzhou
Dongwoo were entitled to a two-year exemption from EIT followed by a 50.0% tax
exemption for the next three years, commencing from the first cumulative
profit-making year in the fiscal financial year. The tax holiday of Jinzhou
Halla commenced in 2001, and Jinzhou Halla was subject to a tax rate of 13.5%
for 2003, 2004 and 2005. Furthermore, Jinzhou Halla, as an FIE, is engaged in an
advanced technology industry and has been approved to enjoy a further 50.0% tax
exemption for 2006, 2007 and 2008. The tax holiday of Jinzhou Dongwoo commenced
in 2004. Jinzhou Dongwoo was subject to a tax rate of 13.5% for 2006, 13.5% for
2007 and is expected to be subject to a tax rate of 13.5% for 2008. Finally,
Jinzhou Wanyou, is entitled to a two-year EIT exemption for 2007 and 2008 and
will receive a 50.0% EIT reduction for 2009, 2010 and 2011, assuming that
Jinzhou Wanyou is profitable for each of these years.




In addition, Jinzhou Halla,
Jinzhou Dongwoo and Jinzhou Wanyou, being FIEs, were entitled to a special tax
concession which allows an amount equal to 40.0% of the qualifying domestic
capital expenditures (as defined and approved under the relevant PRC income tax
rule) to be used as an offset against the excess of the current year’s EIT over
the prior year’s EIT. Jinzhou Hall and Jinzhou Dongwoo also were entitled to
another special tax concession, an amount equivalent to 50.0% of the current
year’s domestic development expenses can be used as an offset against EIT. These
two tax concessions, if unutilized in a particular year, can be carried forward
for five years.


44


On March 16, 2007, the
National People’s Congress of China passed the new EIT Law, which took effect on
January 1, 2008. Under the new 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 EIT at the rate of 25.0% on its
global income. The new EIT Law, however, does not define the term "de facto
management bodies." If the PRC tax authorities subsequently determine that we
should be classified as a resident enterprise, then our global income will be
subject to PRC income tax at a tax rate of 25.0%. In addition, under the new EIT
Law, 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 subsidiaries. We are actively monitoring the proposed withholding tax
and are evaluating appropriate organizational changes to minimize the
corresponding tax impact. The new EIT Law imposes a unified income tax rate of
25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating
subsidiaries, unless they qualify under certain limited exceptions, but the EIT
Law permits companies to continue to enjoy their existing preferential tax
treatments until such treatments expire in accordance with their current terms.
We expect details of the transitional arrangement for the five-year period from
January 1, 2008 to December 31, 2012 applicable to enterprises established prior
to March 16, 2007 to be set out in more detailed implementing rules in the
future. Any increase in our effective tax rate as a result of the above rules
may adversely affect our operating results. However, details regarding
implementation of this new law are expected to be provided in the form of one or
more implementing regulations to be promulgated by the PRC government, and the
timing of the issuance of such implementing regulations is currently
unclear.





Results
of Operations




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





YearEndedDecember31,2005
                            
                            
                            2006
                            
                            
                            2007(in
      thousands)Sales
      revenue
                            
                            $
                            48,063
                            
                            
                            $
                            72,150
                            
                            
                            $
                            102,084Cost
      of sales
                            
                            
                            35,963
                            
                            
                            
                            57,342
                            
                            
                            
                            76,460Gross
      profit
                            
                            
                            12,100
                            
                            
                            
                            14,808
                            
                            
                            
                            25,624Operating
      expensesAdministrative
      expenses
                            
                            
                            1,155
                            
                            
                            
                            1,918
                            
                            
                            
                            3,565Research
      and development expenses
                            
                            
                            824
                            
                            
                            
                            948
                            
                            
                            
                            1,136Selling
      expenses
                            
                            
                            2,148
                            
                            
                            
                            2,138
                            
                            
                            
                            3,291Unusual
      charge – Make good provision
                            
                            
                            -
                            
                            
                            
                            7,508
                            
                            
                            
                            18,266Total
      expenses
                            
                            
                            4,128
                            
                            
                            
                            12,511
                            
                            
                            
                            26,258Other
      income
                            
                            
                            137
                            
                            
                            
                            357
                            
                            
                            
                            287Government
      grants
                            
                            
                            1,497
                            
                            
                            
                            -
                            
                            
                            
                            -Financial
      cost
                            
                            
                            839
                            
                            
                            
                            1,034
                            
                            
                            
                            2,521Income
      (loss) before income taxes
                            
                            
                            7,298
                            
                            
                            
                            2,088
                            
                            
                            
                            (1,225
                            )Income
      taxes
                            
                            
                            897
                            
                            
                            
                            1,270
                            
                            
                            
                            1,389Minority
      interests
                            
                            
                            -
                            
                            
                            
                            102
                            
                            
                            
                            1,137Net income
      (loss)
                            
                            
                            6,401
                            
                            
                            
                            716
                            
                            
                            
                            (3,750
                            )As
      a Percentage of Sales RevenueSales
      revenue
                            
                            
                            100
                            %
                            
                            
                            100
                            %
                            
                            
                            100
                            %Cost
      of sales
                            
                            
                            74.8
                            %
                            
                            
                            79.5
                            %
                            
                            
                            74.9
                            %Gross
      profit
                            
                            
                            25.2
                            %
                            
                            
                            20.5
                            %
                            
                            
                            25.1
                            %Operating
      expensesAdministrative
      expenses
                            
                            
                            2.4
                            %
                            
                            
                            2.7
                            %
                            
                            
                            3.5
                            %Research
      and development expenses
                            
                            
                            1.7
                            %
                            
                            
                            1.3
                            %
                            
                            
                            1.1
                            %Selling
      expenses
                            
                            
                            4.5
                            %
                            
                            
                            3.0
                            %
                            
                            
                            3.2
                            %Unusual
      charge – Make good provision
                            
                            
                            -
                            %
                            
                            
                            10.4
                            %
                            
                            
                            17.9
                            %Total
      expenses
                            
                            
                            8.6
                            %
                            
                            
                            17.3
                            %
                            
                            
                            25.7
                            %Income
      (Loss) before income taxes
                            
                            
                            15.2
                            %
                            
                            
                            2.9
                            %
                            
                            
                            (1.2
                            ) %Income
      taxes
                            
                            
                            1.9
                            %
                            
                            
                            1.8
                            %
                            
                            
                            1.4
                            %Minority
      interests
                            
                            
                            -
                            
                            
                            
                            0.1
                            %
                            
                            
                            1.1
                            %Net
      income (loss)
                            
                            
                            13.3
                            %
                            
                            
                            1.0
                            %
                            
                            
                            (3.7
                            ) %




45





YearEndedDecember31,2005
                      
                      
                      2006
                      
                      
                      2007(inthousands)Components
      of Sales RevenueTotal
      sales revenue
                      
                      $
                      48,063
                      
                      
                      $
                      72,150
                      
                      
                      $
                      102,084Revenue
      by product or product lineAlternator
                      
                      
                      30,118
                      
                      
                      
                      45,216
                      
                      
                      
                      59,790Starter
                      
                      
                      17,945
                      
                      
                      
                      26,934
                      
                      
                      
                      35,014Rods
      and Shafts
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,280





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 revenue
increase. Export sales accounted for 9.6% of the total sale 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.


46





Gross
Profit. 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 sales revenue increased as a result of reduction of costs and
raw material consumption per unit of production as a result of our research
and development efforts. We have also increasingly focused our sales efforts on
customers that place larger orders, which results in increased economies of
scale in raw materials purchases.





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.





Research and
development costs.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.


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 performance
target was met.  We achieved our 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.


47





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 mainly due to the increase of non-cash expenses related to
the make good arrangement and other expenses as discussed above.





(Loss) Income
Before Income Taxes.  We incurred a $1.2 million loss before
income tax as compared to $2.1 million income from operations before income
taxes in 2006.  Such decrease in income before income tax was mainly
attributable to the non-cash expenses related to the make good arrangement as
discussed above.





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.





Comparison
of 2006 and 2005





Sales
Revenue.Sales
revenue increased $24.1 million, or 50.1%, to $72.2 million in 2006 from $48.1
million in 2005. This increase was mainly 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.





Cost of
Sales.Our cost
of sales increased $21.4 million to $57.3 million in 2006 from $36.0 million in
2005. This increase is attributable to the rise in our cost of raw materials and
components and the increase in total sales. As a percentage of sales revenue,
the cost of sales increased to 79.5% in 2006 from 74.8% in 2005, primarily as a
result of the increase in raw materials costs. The price of raw materials and
components rose by 8.9% in 2006, which contributed to an increase of 8.2% in the
overall cost of sales despite our relatively stable labor and manufacturing
costs.





Gross
Profit.As a
result of the factors above, our gross profit increased $2.7 million to $14.8
million in 2006 from $12.1 million in 2005. Gross profit as a percentage of
sales revenue was 20.5% in 2006, as compared to 25.2% in 2005.





Administrative
Expenses.Our
administrative expenses increased $762,439, or 66.0%, to $1.9 million in 2006
from $1.2 million in 2005. As a percentage of sales revenue, administrative
expenses increased to 2.7% in 2006 from 2.4% in 2005.  The increases
in amount and percentage were primarily attributable to expenses incurred in
connection with being a U.S. public reporting company.


48





Selling
Expenses.Our
selling expenses remained steady at $2.1 million in 2005 and 2006. As a
percentage of sales revenue, our selling expenses decreased to 3.0% in 2006 from
4.5% in 2005. This percentage decrease was primarily attributable to our
utilization of more efficient controls, which stabilized our selling expenses,
improved the quality of our products and resulted in less expenses related to
repairs and replacements.





Unusual Charge –
Make Good Provision.As
discussed above, in connection with the make good arrangement, we recognized a
non-cash expense of $7.5 million in 2006. We had no such expense in
2005.





Total
Expenses.Our
total expenses increased $8.4 million to $12.5 million in 2006 from $4.1 million
in 2005. As a percentage of sales revenue, our total expenses increased to 17.3%
in 2006 from 8.6% in 2005. The increases in amount and  percentage s
were primarily attributable to the non-cash expenses of  $7.5 million
related to make good arrangement recognized in 2006.





Income Before
Income Taxes.Income from operations before taxes decreased
$5.2 million, or 71.4%, to $2.1 million in 2006 from $7.3 million in 2005. Such
decrease in income before income tax was mainly attributable to the $7.5 million
non-cash expenses related to the make good arrangement as discussed
above.





Net
Income.Net income decreased $5.7 million, or 88.8%, to
$716,046 in 2006 from $6.4 million in 2005. Such decrease was mainly
attributable to the $7.5 million non-cash expenses related to the make good
arrangement as discussed above.




Allowance
for Doubtful Debts





Our trade
receivables were $38.1 million as of December 31, 2007, an increase of $13.4
million, or 54.4%, from $24.7 million as of December 31, 2006. Our allowance for
doubtful accounts totaled $37,071 as of December 31, 2007, a 15.3% increase
from $32,150 as of December 31, 2006.





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


49





Business
Segment Information




Our
business operations can be categorized into three segments based on the type of
products which we manufacture and sell, specifically alternators, starters, rods
and shafts. Our alternator product line offerings are available in five series
based on different sizes and output rates and come in over 150 models. Our
starter product line offerings primarily consist of planetary type starters
which are small and lightweight and come in over 70 models based on their size
and power output. We started manufacturing shock absorbers in 2007 and targeted
primarily to the international market outside China.





In 2007,
our sales revenue from our alternator product line was $59.8 million, our sales
revenue from our starter product line was $35.0 million and our sales from our
rods and shafts product line was $7.3 million. Our starter product line has
historically provided a higher profit margin than our alternator product line.
We manufacture and sell both our alternators and starters using largely the same
facilities, personnel and other resources. Among the three principal products,
shock absorber production enjoyed the fastest growth rate and the highest gross
profit rate, reaching approximately 25-28%.





Additional
information regarding our alternator, starter and rods and shafts product lines
can be found at Note 22 in our audited consolidated financial statements
contained elsewhere in this statement.





Liquidity
and Capital Resources




As of
December 31, 2007, we had cash and cash equivalents of $26.1 million and
restricted cash of $8.6 million. The following table provides detailed
information about our net cash flow for all financial statements periods for
2005, 2006 and 2007.




Statement
of Cash Flow


Years Ended December 31,2005
                
                
                2006
                
                
                2007(U.S. dollar in thousands)Net
      cash provided by operating activities
                
                $
                11,439
                
                
                $
                1,389
                
                
                $
                12,170Net
      cash used in investing activities
                
                
                (2,099
                )
                
                
                (6,219
                )
                
                
                (24,566
                )Net
      cash (used in) provided by financing activities
                
                
                (6,952
                )
                
                
                8,308
                
                
                
                29,232Effect
      of foreign currency translation on cash and cash
    equivalents
                
                
                151
                
                
                
                357
                
                
                
                1,063Net
      cash flow
                
                
                2,539
                
                
                
                3,835
                
                
                
                17,899




Operating
Activities




Net cash
provided by operating activities was $12.2 million in 2007, as compared to $1.4
million net cash provided by operating activities in 2006. The increase was
greatly due to increases in net income, accounts payable and inventories, but
was partially offset by higher trade receivables and bill
receivables.


50





Net cash
provided by operating activities during 2006 totaled $1.4 million, as compared
to $11.4 million during 2005. The decrease was mainly due to higher accounts
receivable and increased expenses related to servicing our higher sales volume
in the 2006 fiscal year.





Investing
Activities





Our main
uses of cash for investing activities are for the acquisition of property, plant
and equipment.





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 and the acquisition of Jinzhou Wanyou for $14 million.





Net cash
used in investing activities in 2006 was $6.2 million, as compared to $2.1
million in 2005. The increase was due to investments in fixed assets, the
acquisition of Jinzhou Dongwoo for $5.8 million and an investment of $500,000
for a 20.4% in interest in Jinzhou Wanyou in 2006.





Financing
Activities





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 completed in December 2007, and the increase of $11.3
million net proceeds from bank loans.





Our debt
to equity ratio was 35.6% as of December 31, 2007. We plan to maintain our debt
to equity ratio below 50%, increase long-term loans, decrease short-term loans
and increase the ratio of the borrowing in foreign currency to take advantage of
the expected increase of the value of the Renminbi against the U.S.
dollar.





Net cash
provided by financing activities in 2006 totaled $8.3 million as compared to
$7.0 million used in financing activities in 2005. The increase in net cash is
attributable to the receipt of $10.1 million through the issuance of stock in a
private placement completed in June 2006, net of offering expenses, and $876,985
from bank loans net of repayments which more than offset a $1.7 million dividend
payment by Jinzhou Halla to its stockholders, Man Do and Wonder Auto
Limited.





In
December 2007, Wonder Auto Limited completed a private placement of its common
shares to certain accredited investors for $25.9 million in gross proceeds,
resulting in $22.7 million in net proceeds after payment of $3.2 million in
offering expenses. We used approximately $6.5 million of the net proceeds to
purchase research and development equipment, approximately $15.0 million to
build new production lines, and the remaining as working
capital.


51





As of
 December
31, 2007, the maturities for our bank loans are as follows.




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




In
millions of U.S. dollars





Banks
                        
                        Amounts
                        
                        Beginning
                        
                        Ending
                        
                        DurationChina
      Construction Bank
                        
                        
                        2.7
                        
                        October
      29,2007
                        
                        October
      28,2008
                        
                        1
      yearChina
      Construction Bank
                        
                        
                        2.7
                        
                        August
      3, 2007
                        
                        August
      2, 2008
                        
                        1
      yearBank
      of China
                        
                        
                        4.1
                        
                        September
      9,2007
                        
                        March
      28,2008
                        
                        6
      monthsBank
      of China
                        
                        
                        0.7
                        
                        September
      23, 2007
                        
                        September
      24, 2008
                        
                        1
      yearChina
      construction Bank
                        
                        
                        5.5
                        
                        April
      12, 2007
                        
                        April
      11,2009
                        
                        2
      yearsDEG
                        
                        
                        12.2
                        
                        February
      12, 2007
                        
                        October
      15, 2013
                        
                        7
      yearsTotal
                        
                        
                        27.9




We
believe that we maintain good relationships with the banks we deal with and our
current available working capital, after receiving the aggregate proceeds of the
capital raising activities and bank loans referenced above, should be adequate
to sustain our operations at our current levels through at least the next twelve
months.




Obligations Under Material Contracts




Below is a table setting forth our contractual obligations as of December 31, 2007:




All
amounts in thousands of U.S. dollars





Total
                
                
                Less than 1
                  year
                
                
                1-3 years
                
                
                3-5 years
                
                
                More than 5
                  yearsLong
      term debt obligations
                
                
                27,905
                
                
                
                10,283
                
                
                
                9,530
                
                
                
                5,395
                
                
                
                2,697Capital
      commitment
                
                
                1,433
                
                
                
                1,433
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      lease obligations
                
                
                8
                
                
                
                8
                
                
                
                -
                
                
                
                -
                
                
                
                -Purchase
      obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                29,346
                
                
                $
                11,724
                
                
                
                9,530
                
                
                
                5,395
                
                
                
                2,697




52





Critical Accounting Policies




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




·
            Allowance for doubtful
      accounts. We establish an allowance for doubtful accounts based on
      our assessment of the collectibility of trade receivables. A considerable
      amount of judgment is required in assessing the amount of the allowance.
      Among other things, we consider the historical level of credit losses and
      apply percentages to aged receivable categories. We make judgments about
      the creditworthiness of each customer based on ongoing credit evaluations,
      and we monitor 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 periods, we have established a
general provisioning policy for an allowance equivalent to 100.0% of the gross
amount of trade receivables due over one year. Additional specific provision is
made against trade receivables aged less than one year to the extent which they
are considered to be doubtful.




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




Historically,
losses from uncollectible accounts have not significantly deviated from our
estimated allowance, 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 we consider the aforementioned
general provisioning policy to be adequate and not too excessive and do 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, we make
      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 and
      product life cycle changes. We estimate the demand requirements based on
      market conditions, forecasts prepared by our customers, sales contracts
      and orders in hand.


53





In
addition, we estimate net realizable value based on intended use, current market
value and inventory aging analyses. We write 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, we established a general 50.0% provision for inventories
aged over one year.




Historically,
the actual net realizable value has been close to our estimates.




·
            Property, plant and
      equipment. Our 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 a straight-line basis over the estimated useful life of an asset.
The principal depreciation rates are as follows:





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





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




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





·
            Revenue recognition.
      Revenue from sales of our 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.


54





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





Based on
past experience, we have established a policy of making a general provision for
warranty such that the closing balance of this provision equals 1.5% of the
relevant sales for the year.




Recently issued accounting pronouncements





In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). This interpretation requires that we recognize in our
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. The provisions of FIN 48 are effective as of the beginning of our
2007 fiscal year. The adoption of FIN 48 has no material effect on our financial
statements.





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





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 the 2008 fiscal
year. We are in the process of evaluating this guidance and therefore have not
yet determined the impact that SFAS 159 will have on our financial statements
upon adoption.


55





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. 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) 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.





Off-Balance Sheet Arrangements




We do not have any off-balance sheet arrangements.




Seasonality




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




ITEM 7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.




Not
applicable.




ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY FINANCIAL
DATA




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


56




ITEM 9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.




On June
22, 2006, concurrent with the change in control transaction discussed above, our
Board of Directors elected to continue the existing relationship of our new
subsidiary Wonder Auto with PKF Hong Kong, Certified Public Accountants and
appointed PKF Hong Kong, Certified Public Accountants as our independent
auditor. Additionally, concurrent with the decision to maintain our relationship
with PKF Hong Kong, Certified Public Accountants, our Board of Directors
approved the dismissal of Meyler & Company, LLC as our independent
auditor.




No
accountant’s report issued by Meyler & Company, LLC on the financial
statements for either of the past two (2) years contained an adverse opinion or
a disclaimer of opinion or was qualified or modified as to uncertainty, audit
scope or accounting principles, except for a going concern opinion expressing
substantial doubt about the ability of us to continue as a going
concern.




During
our two most recent fiscal years ended December 31, 2006 and 2005, there were no
disagreements with Meyler & Company, LLC on any matter of accounting
principles or practices, financial disclosure, or auditing scope or procedure.
There were no reportable events, as described in Item 304(a)(1)(v) of Regulation
S-K, during our two most recent fiscal years ended December 31, 2005 and
2004.




We
furnished a copy of this disclosure to Meyler & Company, LLC and requested
Meyler & Company, LLC to furnish us with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the statements
made by us herein in response to Item 304(a) of Regulation S-K and, if not,
stating the respect in which it does not agree. A copy of the letter was filed
by us as Exhibit 16.1 to our current report on Form 8-K, filed on June 23, 2006,
as amended.




ITEM 9A.
              CONTROLS
      AND PROCEDURES.




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.


57


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, 2007. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that as of December 31, 2007, 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.





Internal
Controls Over Financial Reporting




Section
404 of the Sarbanes-Oxley Act of 2002 requires that management document and test
the Company’s internal control over financial reporting and include in this
Annual Report on Form 10-K a report on management’s assessment of the
effectiveness of our internal control over financial reporting.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) of
the Exchange Act. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based upon the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, our management concluded that our
internal control over financial reporting is effective, as of December 31,
2007.




This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.




Changes
in Internal Controls over Financial Reporting.




During
the fiscal year ended December 31, 2007, 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.




58




PART
III




ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS OF AND CORPORATE
GOVERNANCE




Directors
and Executive Officers





Set forth
below are the names of our directors, officers and significant employees, their
ages, all positions and offices that they hold with us, the period during which
they have served as such, and their business experience During at least the last
five years. The directors will serve until the next annual meeting of the
stockholders or until their successors are elected or appointed and qualified.
Executive officers will serve at the board’s discretion.





Name
              
              Age
              
              PositionQingjie
      Zhao
              
              50
              
              Chairman,
      Chief Executive Officer and PresidentMeirong
      Yuan
              
              36
              
              Director,
      Chief Financial Officer and TreasurerLarry
      Goldman
              
              50
              
              DirectorDavid
      Murphy
              
              41
              
              DirectorXingye
      Zhang
              
              81
              
              DirectorYuncong
      Ma
              
              61
              
              Chief
      Operating OfficerSeuk
      Jun Kim
              
              51
              
              Vice
      President of New Product DevelopmentYuguo
      Zhao
              
              51
              
              Vice
      President of Sales and MarketingYongdong
      Liu
              
              38
              
              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.


59





Larry Goldman.Mr. Goldman has been our director since March 2007. Mr. Goldman is
a Certified Public Accountant, with over 20 years of auditing, consulting and
technical SEC reporting experience. Mr. Goldman currently works as a consultant,
helping both US and Chinese public companies listed in the US with various SEC
reporting and US GAAP reporting issues. Mr. Goldman was recently the Chief
Financial Officer and Treasurer of Thorium Power Ltd. (OTCBB: THPW.OB). Prior to
joining Thorium Power, Ltd., Mr. Goldman also worked as the Chief Financial
Officer, Treasurer and Vice President of Finance of WinWin Gaming, Inc. Prior to
joining WinWin in October 2004, Mr. Goldman was an audit partner at Livingston
Wachtell & Co., LLP and had been with that CPA firm for approximately 19
years. Mr. Goldman is also an independent director and audit committee chairman
of Winner Medical Group Inc. (OTCBB: WMDG.OB), a China based manufacturer of
medical disposable products and surgical dressings. Mr. Goldman has extensive
experience in both auditing and consulting with Chinese public companies,
working in the Asian marketplace since 2000 and he frequently travels to China.
He currently provides various CFO consulting and SEC reporting support to
approximately five other Chinese companies listed in the United
States.




David Murphy.Mr. Murphy has been our director since March 2007. Since June
2005, Mr. Murphy has served as the head of China Micro Economic Research at CLSA
Asia Pacific Markets, a special unit dedicated to grassroots economic research
in China and gathering local economic information from around China for rapid
delivery to overseas based funds and corporate clients. From December 2000 to
November 2004, Mr. Murphy worked as a correspondent for the Far Eastern Economic
Review and the Wall Street Journal where he covered China and Mongolia focusing
mainly on business and economic stories.




Xingye
Zhang.   Mr. Zhang become our director in July 2007. Mr. Zhang has
served as the honorary Chairman of the China Automotive Engineering Association
since September 2001. From January 1992 to September 2001, Mr. Zhang served as
the Chairman of the China Automotive Engineering Association. Prior to that, Mr.
Zhang was the Chairman of the board of directors of Hong Kong Huashengchang
Automobile Corporation, the Vice Chairman of the board of directors of Hong Kong
Huashengchang Machinery Co., Ltd. And Vice Chairman and Vice President of China
Automobile Industry Corporation. Mr. Zhang also worked in government as the
deputy chief of the Automobile Bureau of the Chinese No. 1 Ministry of
Machinery. Mr. Zhang graduated from the Department of Machinery at Tianjin
Beiyang University in 1951 and is a senior engineer with a rank of
professor.




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 Electrical Equipment Co., Ltd. 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.


60





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.





Yuguo
Zhao.   Mr. Zhao became our Vice President of Sales and Marketing on
June 22, 2006, and he has been the Head of our Sales and Marketing Group since
June 1996 when he joined us. He became an 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.




There are
no agreements or understandings for any of our executive officers or directors
to resign at the request of another person, and no officer or director is acting
on behalf of nor will any of them act at the direction of any other
person.


61





Board
Composition and Meetings of the Board of Directors





The Board
of Directors is currently composed of five members: Qingjie Zhao, Meirong Yuan,
Larry Goldman, Xingye Zhang and David Murphy. All actions of the Board of
Directors require the approval of a majority of the directors in attendance at a
meeting at which a quorum is present. Through December 31, 2007, our Board of
Directors met in person twice and acted by written consent 9 times.




Committees





Our board
of directors currently has three standing committees which perform various
duties on behalf of and report to the board of directors: (i) audit committee,
(ii) compensation committee and (iii) governance and nominating committee. Each
of the three standing committees is comprised entirely of independent directors.
From time to time, the board of directors may establish other
committees.




Audit
Committee and Audit Committee Financial Expert





Our audit
committee consists of three members: Larry Goldman, David Murphy and Xingye
Zhang, each of whom is "independent" as that term is defined under the Nasdaq
Marketplace Rules. Our audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company.
Mr. Goldman serves as our audit committee financial expert as that term is
defined by the applicable SEC rules.




Independent
Directors





Larry
Goldman, David Murphy and Xingye Zhang are "independent" as that term is defined
under the Nasdaq Marketplace Rules.




Policy
Regarding Board Attendance




Our
directors are expected to attend Board meetings as frequently as necessary to
properly discharge their responsibilities and to spend the time needed to
prepare for each such meeting. Our directors are expected to attend annual
meetings of stockholders, but we do not have a formal policy requiring them to
do so.


62




Director
Compensation





In 2007,
we entered into independent director’s Contracts and Indemnification Agreements
with each of the independent directors. Under the terms of the independent
director’s contracts, Mr. Goldman is entitled to $50,000, Mr. Murphy is entitled
to $40,000 and Mr. Zhang is entitled to $40,000 as annual compensation for the
services to be provided by them as independent directors, and as chairpersons of
various board committees, as applicable. Mr. Goldman’s compensation is greater
because he has greater responsibilities as the Audit Committee Chairman. Under
the terms of the Indemnification Agreements, we agreed to indemnify the
independent directors against expenses, judgments, fines, penalties or other
amounts actually and reasonably incurred by the independent directors in
connection with any proceeding if the independent director acted in good faith
and in our best interests. It is our practice to reimburse our directors for
reasonable travel expenses related to attendance at board of directors and
committee meetings.




The
compensation paid to Mr. Zhao and Mr. Yuan, our named executive officers who
also serve on our board of directors, is reported in the Summary Compensation
Table below. They do not receive any additional compensation for their service
as directors.




Family
Relationships




There are
no family relationships among our directors or officers.




Code
of Ethics





In June
2006, we amended our code of business conduct and ethics and expanded the scope
of the code of business conduct and ethics to cover the conduct of our business
by all employees, officers and directors. We intend to maintain the highest
standards of ethical business practices and compliance with all laws and
regulations applicable to our business, including those relating to doing
business outside the United States.




ITEM 11.
            EXECUTIVE
      COMPENSATION





Summary
Compensation Table





The
following table sets forth information concerning all compensation awarded to,
earned by or paid to our Chief Executive Officer for services during the last
two fiscal years in all capacities to us, our subsidiaries and predecessors. No
other executive officer received compensation of $100,000 or more for the year
ended December 31, 2007.


63





Annual CompensationName
                                                      And Principal
                                                      Position
                                                    
                                                    
                                                    Year
                                                    
                                                    Salary
                                                      ($)
                                                    
                                                    
                                                    Total
                                                      ($)Qingjie
      Zhao
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    90,000
                                                    
                                                    
                                                    
                                                    90,000Chairman,
      CEO and President
                                                    
                                                    
                                                    2006
                                                    
                                                    
                                                    52,500
                                                    
                                                    
                                                    
                                                    52,500





Employment
Contracts





On June
22, 2006, our subsidiary, Wonder Auto Limited, entered into an employment
agreement with Mr. Zhao, which was amended on July 2, 2007. Under the employment
agreement, as amended, Mr. Zhao is entitled to an annual salary of $90,000. The
employment agreement does not provide severance or change of control benefits.
Mr. Zhao is subject to customary confidentiality and non-competition covenants
as provided in the employment agreement.





Retirement
Benefits





Currently,
we do not provide any employees, including our named executive officers any
company sponsored retirement benefits other than a state pension scheme in which
all of our employees in China participate.





Payment
Upon Termination or Change-in Control




The
Company does not have change-in-control arrangements with any of its executive
officers, and the Company is not obligated to pay severance or other enhanced
benefits to executive officers upon termination of their
employment.





Director
Compensation - 2007





The
following table sets forth information concerning all compensation paid to our
non-employee directors for services rendered in all capacities for the year
ended December 31, 2007.





Name
                  
                  Fees
                    Earned or
                    Paid in
                    Cash
                    ($)
                  
                  
                  Total
                    Compensation
                    ($)Larry
      Goldman
                  
                  
                  50,000
                  
                  
                  
                  50,000David
      Murphy
                  
                  
                  40,000
                  
                  
                  
                  40,000Xingye
      Zhang
                  
                  
                  40,000
                  
                  
                  
                  40,000




64


In 2007,
we entered into agreements with each of the independent directors. Under the
terms of the agreements, Mr. Goldman is entitled to $50,000, Mr. Murphy is
entitled to $40,000 and Mr. Zhang is entitled to $40,000 as annual compensation
for their service as independent directors, and as chairpersons of various board
committees, as applicable. Mr. Goldman’s compensation is greater because he has
greater responsibilities as the Audit Committee Chairman. Under the terms of the
agreements, the independent directors are entitled to indemnification for
expenses, judgments, fines, penalties or other amounts actually and reasonably
incurred by the independent directors in connection with any proceeding if the
independent director acted in good faith and in our best interests. The Company
also reimburses our directors for reasonable travel expenses related to
attendance at board and committee meetings.





Limitation
of Liability and Indemnification of Officers and Directors




Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.




Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934, as amended, may be permitted to our directors, officers and
controlling persons pursuant to provisions of the Articles of Incorporation and
Bylaws, or otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.




At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such
indemnification.


65





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





The
following table sets forth certain information with respect to the beneficial
ownership of our common stock as of December 31, 2007 for (a) each of our
directors, (b) each of our executive officers, (c) each stockholder known to be
the beneficial owner of more than 5% of any class of the our voting securities,
and (d) all directors and executive officers as a group. Beneficial ownership is
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934 and does not necessarily bear on the economic incidents of ownership or the
rights to transfer the shares described below. Unless otherwise indicated, (a)
each stockholder has sole voting power and dispositive power with respect to the
indicated shares and (b) the address of each stockholder who is a director or
executive officer is c/o Wonder Auto Technology, Inc., No. 16, Yulu Street,
Taihe District, Jinzhou City, Liaoning, People’s Republic of China,
121013.





Name and Address of BeneficialOwner
                  
                  Amount of Beneficial
                    Ownership (1)
                  
                  
                  Percent of
                    ClassExecutive
      Officers and DirectorsQingjie
      Zhao (2)
                  
                  
                  7
      ,113,650
                  
                  
                  
                  26
      .4
                  %Over
      5% Beneficial OwnersChoice
      Inspire Limited (3)
                  
                  
                  9
      ,732,900
                  
                  
                  
                  28
      .4
                  %Empower
      Century Limited
                  
                  
                  1,542,112
                  
                  
                  
                  5.7
                  %Xiangdong
      Gao
                  
                  
                  1,650,000
                  
                  
                  
                  6.1
                  %Lili
      Niu
                  
                  
                  1,490,181
                  
                  
                  
                  5.5
                  %Selling
      StockholderAll
      officers and directors as a group (9 people)
                  
                  
                  7
      ,113,650
                  
                  
                  
                  26
      .4
                  %


(1)
              As
      of December 31, 2007, there were 26,959,994 shares of our common stock
      outstanding.


(2)
              Including
      7,113,650 shares owned by Choice Inspire Limited of which Mr. Zhao is a
      73.09% stockholder and chairman as of December 31,
  2007.


(3)
              Qingjie
      Zhao, our CEO, President and director, owns 73.09% of Choice Inspire
      Limited as of December 31,
2007.




66





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





During
2007, the Company purchased raw materials of $184,690 from a stockholder Jinzhou
Wonder Auto Suspension System Co., Ltd ("JWAS"). The Company also sold finished
goods of $169,928 and $82,251 to two stockholders, JWAS and Jinzhou Halla
Electrical Equipment Co., Ltd. Respectively. All the purchase and sale
transactions were conducted on an arm-length basis.




During
2007, the Company occupied part of factory and office premises and used
production line facilities owned by JWAS under operating lease
arrangement.




Director
Independence Standards





Larry
Goldman, David Murphy and Xingye Zhang are “independent” as that term is defined
under the Nasdaq Marketplace Rules.





ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.




PKF,
Certified Public Accountants, was the Company’s independent registered public
accounting firm engaged to examine the Company’s consolidated financial
statements for the fiscal year ended December 31, 2007 and 2006.




Fees
for the fiscal years ended December 31, 2007 and 2006





The
following is a summary of the fees billed to the Company by PKF, Certified
Public Accountants. PKF, was the Company’s independent registered public
accounting firm engaged to examine the Company’s consolidated financial
statements for the fiscal year ended December 31, 2007 and 2006.





2007
                    
                    
                    2006Audit
      fees (1)
                    
                    $
                    156,749
                    
                    
                    $
                    124,609Audit-related
      fees (2)
                    
                    
                    41,130
                    
                    
                    
                    —Tax
      fees
                    
                    
                    —
                    
                    
                    
                    —All
      other fees
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    197,879
                    
                    
                    
                    124,609





(1)
            Consists
      of fees billed for the audit of our annual financial statements, review of
      financial statements included in our Quarterly Reports on Form 10-Q and
      services that are normally provided by the accountant in connection with
      statutory and regulatory filings or
engagements.





(2)
            Consists
      of assurance and related services that are reasonably related to the
      performance of the audit and reviews of our financial statements and are
      not included in “audit fees” in this table. The services provided by our
      accountants within this category consisted of advice relating to SEC
      matters.


67





Board
of Directors Pre-Approval Policies and Procedures





Since the
establishment of Audit Committee in May 2007, our Board of Directors has adopted
the policy to pre-approve audit and permissible non-audit services provided by
our independent auditors.


68


PART
IV




ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENTS SCHEDULES




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


1)
                  Financial
      Statement are set forth beginning on page F-1 of the
  Report
  ·
                  Report
      of Independent Registered Public Accounting Firm
                  F –
      2·
                  Consolidated
      Statement of Operations
                  F –
      3·
                  Consolidated
      Balance Sheets
                  F –
      4·
                  Consolidated
      Statement of Cash Flows
                  F –
      6·
                  Consolidated
      Statement of Stockholders’ Equity
                  F –
      8·
                  Notes
      to Consolidated Statements
                  F –
      9


2)
                Financial
      Statement Schedules: All Schedules are omitted because the information
      called for is not applicable, is not required, or because the financial
      information is set forth in the financial statements or notes
      thereto.


3)
                Exhibits


Exhibit
Index is hereby incorporated by reference.


69




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
                
                2Consolidated
      Statements of Operations and Comprehensive (Loss) Income
                
                3Consolidated
      Balance Sheets
                
                4 -
      5Consolidated
      Statements of Cash Flows
                
                6 -
      7Consolidated
      Statements of Stockholders’ Equity
                
                8Notes
      to Consolidated Financial Statements
                
                9 -
      45
  F -
1
 
 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, 2007 and 2006, and
the related consolidated statements of operations and comprehensive (loss)
income, stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2007.  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, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
 
 As
discussed in Note 3(iv), the Company has restated the accompanying consolidated
financial statements as of December 31, 2007 and 2006.
 
 PKF
 Certified
Public Accountants
 Hong
Kong, China
 February
15, 2008 except for note 3(ii) and (iv), as to which the date is March 30,
2009
  F -
2
 
 Wonder
Auto Technology, Inc.
 Consolidated
Statements of Operations and Comprehensive (Loss) Income
 (Stated
in US Dollars)
 
 Years
      ended December 31,2007
                              
                              
                              2006
                              
                              
                              2005Sales
      revenue
                              
                              $
                              102,083,722
                              
                              
                              $
                              72,150,483
                              
                              
                              $
                              48,062,805Cost
      of sales
                              
                              
                              (76,459,944
                              )
                              
                              
                              (57,342,201
                              )
                              
                              
                              (35,962,931
                              )Gross
      profit
                              
                              
                              25,623,778
                              
                              
                              
                              14,808,282
                              
                              
                              
                              12,099,874Operating
      expensesAdministrative
      expenses
                              
                              
                              3,565,332
                              
                              
                              
                              1,917,817
                              
                              
                              
                              1,155,378Research
      and development expenses
                              
                              
                              1,135,997
                              
                              
                              
                              947,702
                              
                              
                              
                              824,184Selling
      expenses
                              
                              
                              3,290,689
                              
                              
                              
                              2,137,853
                              
                              
                              
                              2,148,426Unusual
      charge - make good provision - Note 3(ii)
                              
                              
                              18,265,500
                              
                              
                              
                              7,507,500
                              
                              
                              
                              -26,257,518
                              
                              
                              
                              12,510,872
                              
                              
                              
                              4,127,988(Loss)/income
      from operations
                              
                              
                              (633,740
                              )
                              
                              
                              2,297,410
                              
                              
                              
                              7,971,886Interest
      income
                              
                              
                              111,784
                              
                              
                              
                              96,810
                              
                              
                              
                              28,539Other
      income
                              
                              
                              287,322
                              
                              
                              
                              356,590
                              
                              
                              
                              136,711Government
      grants - Note 4
                              
                              
                              1,496,547
                              
                              
                              
                              -
                              
                              
                              
                              -Finance
      costs - Note 5
                              
                              
                              (2,520,805
                              )
                              
                              
                              (1,033,551
                              )
                              
                              
                              (838,954
                              )Equity
      in net income of unconsolidated affiliates - Note 4
                              
                              
                              34,147
                              
                              
                              
                              371,005
                              
                              
                              
                              -(Loss)/income
      before income taxes
                              
                              
                              (1,224,745
                              )
                              
                              
                              2,088,264
                              
                              
                              
                              7,298,182Income
      taxes - Note 6
                              
                              
                              (1,389,008
                              )
                              
                              
                              (1,270,391
                              )
                              
                              
                              (897,256
                              )Minority
      interests - Note 7
                              
                              
                              (1,136,694
                              )
                              
                              
                              (101,827
                              )
                              
                              
                              -Net
      (loss)/income
                              
                              $
                              (3,750,447
                              )
                              
                              $
                              716,046
                              
                              
                              $
                              6,400,926Other
      comprehensive incomeForeign
      currency translation adjustments
                              
                              
                              2,969,894
                              
                              
                              
                              1,007,468
                              
                              
                              
                              420,086Total
      comprehensive (loss)/income
                              
                              $
                              (780,553
                              )
                              
                              $
                              1,723,514
                              
                              
                              $
                              6,821,012(Loss)/earnings
      per share: basic and diluted - Note 8
                              
                              $
                              (0.16
                              )
                              
                              $
                              0.03
                              
                              
                              $
                              0.37Weighted
      average number of shares outstanding:basic
      and diluted
                              
                              
                              24,140,816
                              
                              
                              
                              20,787,279
                              
                              
                              
                              17,227,198
 
 See Notes
to Consolidated Financial Statements
  F -
3
 
 Wonder
Auto Technology, Inc.
 Consolidated
Balance Sheets
 (Stated
in US Dollars)
 
 As
      of December 31,2007
                              
                              
                              2006ASSETSCurrent
      assetsCash
      and cash equivalents
                              
                              $
                              26,102,993
                              
                              
                              $
                              8,203,699Restricted
      cash - Note 9
                              
                              
                              8,613,262
                              
                              
                              
                              4,876,879Trade
      receivables (net of allowance of doubtful accounts of $37,071 in 2007,
      $32,150 in 2006)
                              
                              
                              38,124,411
                              
                              
                              
                              24,696,982Bills
      receivable
                              
                              
                              11,766,478
                              
                              
                              
                              3,098,314Advances
      to staff
                              
                              
                              314,964
                              
                              
                              
                              238,310Other
      receivables, prepayments and deposits - Note
      10
                              
                              
                              1,320,483
                              
                              
                              
                              1,015,899Inventories
      - Note 11
                              
                              
                              12,634,786
                              
                              
                              
                              13,689,374Amount
      due from a related company - Note 17
                              
                              
                              74,822
                              
                              
                              
                              69,561Deferred
      taxes - Note 6
                              
                              
                              307,338
                              
                              
                              
                              237,570Total
      current assets
                              
                              
                              99,259,537
                              
                              
                              
                              56,126,588Intangible
      assets - Note 12
                              
                              
                              16,873,051
                              
                              
                              
                              4,250,800Property,
      plant and equipment, net - Note 13
                              
                              
                              22,516,900
                              
                              
                              
                              13,945,846Land
      use right - Note 14
                              
                              
                              1,235,029
                              
                              
                              
                              1,203,256Deposit
      for acquisition of property, plant and equipment
                              
                              
                              2,072,458
                              
                              
                              
                              1,740,548Investment
      in an unconsolidated affiliate - Note 4
                              
                              
                              -
                              
                              
                              
                              527,627Deferred
      taxes - Note 6
                              
                              
                              439,760
                              
                              
                              
                              205,475TOTAL
      ASSETS
                              
                              $
                              142,396,735
                              
                              
                              $
                              78,000,140
 
 See Notes
to Consolidated Financial Statements
  F -
4
 
 Wonder
Auto Technology, Inc.
 Consolidated
Balance Sheets (Cont’d)
 (Stated
in US Dollars)
 
 As
      of December 31,2007
                        
                        
                        2006LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
      liabilitiesTrade
      payables - Note 9
                        
                        $
                        12,726,989
                        
                        
                        $
                        9,631,537Bills
      payable - Note 9
                        
                        
                        15,903,600
                        
                        
                        
                        8,628,078Other
      payables and accrued expenses - Note 15
                        
                        
                        2,413,140
                        
                        
                        
                        3,121,533Provision
      for warranty - Notes 4 and 16
                        
                        
                        1,124,655
                        
                        
                        
                        1,049,344Income
      tax payable
                        
                        
                        666,589
                        
                        
                        
                        398,768Amount
      due to an unconsolidated affiliate - Note 17
                        
                        
                        -
                        
                        
                        
                        37,492Secured
      short-term bank loans - Note 18
                        
                        
                        10,282,500
                        
                        
                        
                        14,326,831Total
      current liabilities
                        
                        
                        43,117,473
                        
                        
                        
                        37,193,583Secured
      long-term bank loans - Note 18
                        
                        
                        17,622,186
                        
                        
                        
                        -TOTAL
      LIABILITIES
                        
                        
                        60,739,659
                        
                        
                        
                        37,193,583COMMITMENTS AND
      CONTINGENCIES -
      Note
      19MINORITY
      INTERESTS - Note 4
                        
                        
                        3,214,683
                        
                        
                        
                        2,579,572STOCKHOLDERS’
      EQUITYPreferred
      stock: par value $0.0001 per share; authorized 10,000,000 shares in 2007
      and 2006; none issued and outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock: par value $0.0001 per share - Note 20 Authorized 90,000,000 shares
      in 2007 and 2006; issued and outstanding 26,959,994 shares in 2007 and
      23,959,994 shares in 2006
                        
                        
                        2,696
                        
                        
                        
                        2,396Additional
      paid-in capital
                        
                        
                        70,643,304
                        
                        
                        
                        29,647,643Statutory
      and other reserves - Note 21
                        
                        
                        4,857,660
                        
                        
                        
                        3,148,265Accumulated
      other comprehensive income
                        
                        
                        4,422,032
                        
                        
                        
                        1,452,138Accumulated
      (deficit)/retained earnings
                        
                        
                        (1,483,299
                        )
                        
                        
                        3,976,543TOTAL
      STOCKHOLDERS’ EQUITY
                        
                        
                        78,442,393
                        
                        
                        
                        38,226,985TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
                        $
                        142,396,735
                        
                        
                        $
                        78,000,140
 
 See Notes
to Consolidated Financial Statements
  F -
5
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows
 (Stated
in US Dollars)
 
 Years ended December 31,2007
                      
                      
                      2006
                      
                      
                      2005Cash
      flows from operating activitiesNet
      (loss)/income
                      
                      $
                      (3,750,447
                      )
                      
                      $
                      716,046
                      
                      
                      $
                      6,400,926Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                      
                      
                      2,014,045
                      
                      
                      
                      1,401,541
                      
                      
                      
                      1,158,561Amortization
      of intangible assets and land  use right
                      
                      
                      90,712
                      
                      
                      
                      29,652
                      
                      
                      
                      26,587Deferred
      taxes
                      
                      
                      (263,993
                      )
                      
                      
                      (16,369
                      )
                      
                      
                      857Loss
      on disposal of property, plant
    and   equipment
                      
                      
                      20,255
                      
                      
                      
                      79,527
                      
                      
                      
                      -Gain
      on disposal of Man Do
                      
                      
                      (500
                      )
                      
                      
                      -
                      
                      
                      
                      -Provision/(Recovery
      of) for doubtful debts
                      
                      
                      2,159
                      
                      
                      
                      (7,701
                      )
                      
                      
                      -Provision/(Recovery
      of) for obsolete   inventories
                      
                      
                      39,115
                      
                      
                      
                      (52,470
                      )
                      
                      
                      (186,646
                      )Exchange
      loss on translation of monetary assets and
      liabilities
                      
                      
                      532,738
                      
                      
                      
                      -
                      
                      
                      
                      -Equity
      in net income of an
    unconsolidated   affiliate
                      
                      
                      (34,147
                      )
                      
                      
                      (371,005
                      )
                      
                      
                      -Increase
      in minority interests
                      
                      
                      1,136,694
                      
                      
                      
                      101,827
                      
                      
                      
                      -Unusual
      charge - make good provision
                      
                      
                      18,265,500
                      
                      
                      
                      7,507,500
                      
                      
                      
                      -Changes
      in operating assets and liabilities:Trade
      receivables
                      
                      
                      (10,651,989
                      )
                      
                      
                      (5,493,345
                      )
                      
                      
                      (7,073,894
                      )Advances
      to staff
                      
                      
                      (57,203
                      )
                      
                      
                      (121,961
                      )
                      
                      
                      (59,923
                      )Bills
      receivable
                      
                      
                      (6,504,351
                      )
                      
                      
                      1,536,869
                      
                      
                      
                      (73,117
                      )Other
      receivables, prepayments and deposits
                      
                      
                      60,105
                      
                      
                      
                      (542,294
                      )
                      
                      
                      156,547Inventories
                      
                      
                      2,265,298
                      
                      
                      
                      (4,481,151
                      )
                      
                      
                      (415,127
                      )Trade
      payables
                      
                      
                      2,554,508
                      
                      
                      
                      460,403
                      
                      
                      
                      5,288,135Bills
      payable
                      
                      
                      5,110,761
                      
                      
                      
                      601,360
                      
                      
                      
                      5,729,402Amount
      due to an unconsolidated affiliate
                      
                      
                      -
                      
                      
                      
                      36,719
                      
                      
                      
                      -Other
      payables and accrued expenses
                      
                      
                      1,099,131
                      
                      
                      
                      (263,895
                      )
                      
                      
                      340,742Provision
      for warranty
                      
                      
                      6,124
                      
                      
                      
                      102,845
                      
                      
                      
                      76,155Income
      tax payable
                      
                      
                      235,971
                      
                      
                      
                      164,834
                      
                      
                      
                      69,896Net
      cash flows provided by operating activities
                      
                      
                      12,170,486
                      
                      
                      
                      1,388,932
                      
                      
                      
                      11,439,101
 
 See Notes
to Consolidated Financial Statements
  F -
6
  Wonder
Auto Technology, Inc.
 Consolidated
Statements of Cash Flows (Cont’d)
 (Stated
in US Dollars)
 Years
      ended December 31,2007
                            
                            
                            2006
                            
                            
                            2005Cash
      flows from investing activitiesPayments
      to acquire intangible assets
                            
                            $
                            (1,982
                            )
                            
                            $
                            (10,023
                            )
                            
                            $
                            -Payments
      to acquire and for deposit for acquisition of property, plant
      and equipment
                            
                            
                            (8,023,761
                            )
                            
                            
                            (3,627,589
                            )
                            
                            
                            (2,062,891
                            )Proceeds
      from sales of property, plant and equipment
                            
                            
                            25,803
                            
                            
                            
                            73,169
                            
                            
                            
                            -Payment
      to acquire marketable securities
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            (36,571
                            )Proceeds
      from sales of marketable securities
                            
                            
                            -
                            
                            
                            
                            37,585
                            
                            
                            
                            -Cash
      acquired from the RTO
                            
                            
                            -
                            
                            
                            
                            419
                            
                            
                            
                            -Net
      cash paid to acquire Jinzhou Wanyou - Notes 1 and
      4
                            
                            
                            (14,146,485
                            )
                            
                            
                            (500,000
                            )
                            
                            
                            -Net
      cash paid to acquire Jinzhou Dongwoo - Notes 1 and
      4
                            
                            
                            (2,420,000
                            )
                            
                            
                            (2,192,669
                            )
                            
                            
                            -Cash
      inflow from disposal of Man Do - Note 1
                            
                            
                            500
                            
                            
                            
                            -
                            
                            
                            
                            -Net
      cash flows used in investing activities
                            
                            
                            (24,565,925
                            )
                            
                            
                            (6,219,108
                            )
                            
                            
                            (2,099,462
                            )Cash
      flows from financing activitiesRepayment
      to a stockholder
                            
                            
                            -
                            
                            
                            
                            (5,149
                            )
                            
                            
                            -Amount
      due from a related company
                            
                            
                            -
                            
                            
                            
                            (68,128
                            )
                            
                            
                            -Increase
      in restricted cash
                            
                            
                            (3,736,383
                            )
                            
                            
                            (917,757
                            )
                            
                            
                            (2,963,170
                            )Dividend
      paid to stockholders
                            
                            
                            -
                            
                            
                            
                            (1,719,985
                            )
                            
                            
                            (6,958,197
                            )Dividend
      paid to Winning - Note 4
                            
                            
                            (343,934
                            )
                            
                            
                            -
                            
                            
                            
                            -Dividend
      paid to minority stockholders
                            
                            
                            (743,240
                            )
                            
                            
                            -
                            
                            
                            
                            -Proceeds
      from bank loans
                            
                            
                            29,486,379
                            
                            
                            
                            17,573,649
                            
                            
                            
                            12,386,355Repayment
      of bank loans
                            
                            
                            (18,161,716
                            )
                            
                            
                            (16,696,664
                            )
                            
                            
                            (9,416,624
                            )Net
      proceed from issue of shares
                            
                            
                            22,730,461
                            
                            
                            
                            10,142,020
                            
                            
                            
                            -Net
      cash flows provided by / (used in) financing activities
                            
                            
                            29,231,567
                            
                            
                            
                            8,307,986
                            
                            
                            
                            (6,951,636
                            )Effect
      of foreign currency translation on cash and cash
    equivalents
                            
                            
                            1,063,166
                            
                            
                            
                            357,132
                            
                            
                            
                            150,993Net
      increase in cash and cash equivalents
                            
                            
                            17,899,294
                            
                            
                            
                            3,834,942
                            
                            
                            
                            2,538,996Cash
      and cash equivalents - beginning of year
                            
                            
                            8,203,699
                            
                            
                            
                            4,368,757
                            
                            
                            
                            1,829,761Cash
      and cash equivalents - end of year
                            
                            $
                            26,102,993
                            
                            
                            $
                            8,203,699
                            
                            
                            $
                            4,368,757Supplemental
      disclosures for cash flow information:Non-cash
      investing and financing activities:Acquisition
      of Jinzhou Wanyou and  Jinzhou Dongwoo - Note 4
                            
                            $
                            2,840,317
                            
                            
                            $
                            4,932,841
                            
                            
                            $
                            -Cash
      paid for:Interest
                            
                            $
                            1,445,534
                            
                            
                            $
                            807,693
                            
                            
                            $
                            611,326Income
      taxes
                            
                            $
                            1,316,837
                            
                            
                            $
                            1,121,927
                            
                            
                            $
                            826,503
 
 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, 2005
                            
                            
                            17,227,198
                            
                            
                            $
                            1,723
                            
                            
                            $
                            11,998,377
                            
                            
                            $
                            1,706,679
                            
                            
                            $
                            24,584
                            
                            
                            $
                            3,981,452
                            
                            
                            $
                            17,712,815Net
      income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,400,926
                            
                            
                            
                            6,400,926Foreign
      currency translation adjustments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            420,086
                            
                            
                            
                            -
                            
                            
                            
                            420,086Appropriation
      to reserves
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            641,169
                            
                            
                            
                            -
                            
                            
                            
                            (641,169
                            )
                            
                            
                            -Dividend
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5,680,295
                            )
                            
                            
                            (5,680,295
                            )Balance,
      December 31, 2005
                            
                            
                            17,227,198
                            
                            
                            
                            1,723
                            
                            
                            
                            11,998,377
                            
                            
                            
                            2,347,848
                            
                            
                            
                            444,670
                            
                            
                            
                            4,060,914
                            
                            
                            
                            18,853,532Recapitalization
                            
                            
                            2,832,800
                            
                            
                            
                            283
                            
                            
                            
                            136
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            419Share
      issued for proceeds of $12 million
                            
                            
                            3,899,996
                            
                            
                            
                            390
                            
                            
                            
                            11,999,610
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            12,000,000Cost
      of raising capital
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,857,980
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,857,980
                            )Unusual
      charge - make good provision - Note 3(ii)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,507,500
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,507,500Net
      income, as restated
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            716,046
                            
                            
                            
                            716,046Foreign
      currency translation adjustments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,007,468
                            
                            
                            
                            -
                            
                            
                            
                            1,007,468Appropriation
      to reserves
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            800,417
                            
                            
                            
                            -
                            
                            
                            
                            (800,417
                            )
                            
                            
                            -Balance,
      December 31, 2006, as restated
                            
                            
                            23,959,994
                            
                            
                            $
                            2,396
                            
                            
                            $
                            29,647,643
                            
                            
                            $
                            3,148,265
                            
                            
                            $
                            1,452,138
                            
                            
                            $
                            3,976,543
                            
                            
                            $
                            38,226,985Balance,
      December 31, 2006, as
      previously reported
                            
                            
                            23,959,994
                            
                            
                            $
                            2,396
                            
                            
                            $
                            22,140,143
                            
                            
                            $
                            3,148,265
                            
                            
                            $
                            1,452,138
                            
                            
                            $
                            11,484,043
                            
                            
                            $
                            38,226,985Prior
      period adjustment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,507,500
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (7,507,500
                            )
                            
                            
                            -Balance,
      January 1, 2007, as restated
                            
                            
                            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 - Note 3(ii)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            18,265,500
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            18,265,500Net
      income, as restated
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1
                            (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
                            )
                            
                            $
                            78,442,393
 
 See Notes
to Consolidated Financial Statements
  F -
8
 
 Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 1.
              Corporate
      information
 
 Wonder
Auto Technology, Inc. (the “Company”) was incorporated in 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.
 
 Pursuant
to that certain Share Exchange Agreement dated June 22, 2006, the Company
acquired a 100% ownership interest in Wonder Auto Limited (“Wonder”), a limited
company organized in the British Virgin Islands, in exchange for the issuance to
Empower Century Limited and Choice Inspire Limited (collectively, “Wonder’s
Former Stockholders”) of 14,627,200 shares (as adjusted for a 2.448719-for-1
forward stock split on July 26, 2006 (the “Forward Stock Split”)) of the
Company’s common stock and 6,499,994 shares (as adjusted for the Forward Stock
Split) to certain investors who invested $12 million into Wonder and purchased
$8 million Wonder’s stock from Empower Century Limited immediately prior to such
share exchange transaction.
 
 The
aforesaid share exchange transaction was completed on June 22, 2006 and
thereafter Wonder became a wholly owned subsidiary of the Company and Wonder’s
Former Stockholders became the majority stockholders of the
Company.  This transaction constituted a reverse takeover transaction
(“RTO”).
 
 Following
the RTO, through Wonder, the Company indirectly owned Man Do Auto Technology
Co., Ltd. (“Man Do”) and Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou
Halla”).  The entire issued and outstanding common stock of Man Do is
directly held by Wonder.  In respect of Jinzhou Halla, 61% of its
common stock is directly held by Wonder and the remaining 39% is indirectly held
by Wonder through Man Do.
 
 Man Do
declared a special interim dividend on September 30, 2007 by the way of
distribution in specie of all assets and liabilities held by Man Do on that
date.  In order to rationalise the structure of the group, on the same
date, Wonder entered into a Share Transfer Agreement with Xiangdong Gao, a
beneficial stockholder of the Company, to transfer all of its shares in Man Do
to Xiangdong Gao (the "Share Transfer") at a cash consideration of $500. 
Upon the completion of the Share Transfer on September 30, 2007.  Wonder
directly holds 100% of common stock of Jinzhou Halla.
  F -
9
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 1.
              Corporate
      information (Cont’d)
 
 On August
23, 2006, Wonder entered into a Share Purchase Agreement (the “Dongwoo Share
Purchase Agreement”) with Winning International Development Limited (“Winning”),
a British Virgin Islands limited company, which held 50% equity interest in
Jinzhou Dongwoo Precision Co., Ltd. (“Jinzhou Dongwoo”).  The
remaining equity interest in Jinzhou Dongwoo is held 25% each by two independent
third parties.  Jinzhou Dongwoo was established in the People’s
Republic of China (the “PRC”) and is a supplier of raw materials to Jinzhou
Halla.  The board of directors of Jinzhou Dongwoo consists of
5 members, three of which were nominated by Wonder while the other two
shareholders of Jinzhou Dongwoo each nominated one of the remaining two board
members.  The board is the highest authority of Jinzhou Dongwoo and
has power to make operating and financing decisions.  Before November
18, 2006, valid board action required the approval of more than two-thirds of
the board members (i.e. four board members or more).  Based on the
foregoing, the management of the Company was of the view that the Company had
significant influence but not control over the operations of Jinzhou
Dongwoo.  On November 18, 2006, Jinzhou Dongwoo amended its Memorandum
and Articles of Association to eliminate the supermajority requirement, such
that valid board action now requires the approval of only more than a half of
the board members.  Accordingly, without any change in the composition
of the board, the Company obtained control over Jinzhou Dongwoo as of November
18, 2006, and the results of operations and the financial position of Jinzhou
Dongwoo have been consolidated with the Company since then.
 
 On
September 21, 2006, Jinzhou Halla together with two independent third parties
established Jinzhou Wanyou Mechanical Parts Co., Ltd. (“Jinzhou Wanyou”) in the
PRC.  Jinzhou Halla contributed $0.5 million to its registered capital
representing 20.41% equity interest thereon.  Jinzhou Wanyou is
principally engaged in manufacturing of shock absorber rods, vibration-dampers
and rotary axles for automotive alternators and starters.
 
 On April
2, 2007, Wonder and Jinzhou Halla acquired the remaining 79.59% equity interest
in Jinzhou Wanyou in two separately negotiated equity purchase transactions
between Wonder and Jinzhou Halla and the aforesaid two former equity owners of
Jinzhou Wanyou. In the first transaction, Wonder entered into a Share Purchase
Agreement (“Jinzhou Wanyou Share Purchase Agreement I”) with Hong Kong Friend
Birch Limited, a Hong Kong corporation, which held 40.81% equity interest in
Jinzhou Wanyou. In the second transaction, Jinzhou Halla entered another Share
Purchase Agreement (“Jinzhou Wanyou Share Purchase Agreement II”) with Jinzhou
Wonder Auto Suspension System Co., Ltd., which held 38.78% equity ownership in
Jinzhou Wanyou. After the completion of these two equity purchase transactions,
Jinzhou Wanyou became a wholly-owned subsidiary of the Company.  More
details and accounting treatment on the further investment in Jinzhou Wanyou are
set forth in Note 4.
 
 On
September 24, 2007, Wonder and Jinzhou Halla established a subsidiary, Jinzhou
Wonder Motor Co., Ltd. (“Wonder Motor”), in the PRC. Wonder and Jinzhou Halla
contributed $1.1 million and $0.4 million to its registered capital representing
73.33% and 26.67% equity interest in Wonder Motor respectively. Wonder Motor is
a development stage company and planning to be engaged in manufacturing and
sales of motor and control systems for vehicles and other
applications.
  F -
10
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 1.
              Corporate
      information (Cont’d)
 
 On
September 24, 2007, Wonder established a wholly owned subsidiary, Jinzhou Wonder
Auto Electrical Equipment Co., Ltd. (“Jinzhou Wonder”), in the PRC. Wonder
contributed $0.5 million to its registered capital representing 100% equity
interest thereon.  Jinzhou Wonder is a development stage company and
planning to be engaged in manufacturing and sales of auto aluminum for
alternators, starters and other auto electrical components.
 
 2.
              Description
      of business
 
 Following
the RTO, the Company commenced to be engaged in the design, development,
manufacture and marketing of automotive electrical parts, specifically starters
and alternators, in the PRC.
 
 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.
 
 3.
              Basis
      of presentation
 
 (i)
                Reorganization
 
 Pursuant
to the Plan of Reorganization dated on June 22, 2006, the Company issued
21,127,194 shares as adjusted for Forward Stock Split of common stock, par value
$0.0001 per share, to the stockholders of Wonder (17,227,198 shares as adjusted
for Forward Stock Split to Wonder Former Stockholders and 3,899,996 shares as
adjusted for Forward Stock Split to new investors), representing approximately
88.2% of the Company post-exchange issued and outstanding common stock, in
exchange for 100% of the outstanding capital stock of Wonder.
 
 The RTO
has been accounted for as a recapitalization of the Company whereby the
historical financial statements and operations of Wonder become the historical
financial statements of the Company, with no adjustment to the carrying value of
the assets and liabilities.  The 2,832,800 shares as adjusted of the
Company outstanding prior to the RTO are accounted for at $419 of net book value
at the time of the RTO.  The accompanying consolidated financial
statements reflect the recapitalization of the stockholders equity as if the
transaction occurred as of the beginning of the first period
presented.
  F -
11
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Basis
      of presentation (Cont’d)
 
 (ii)
              Make
      good arrangement
 
 On June
22, 2006, Wonder completed a private placement pursuant to which Wonder issued
to certain accredited investors 45.277236 shares of its common stock for
$12,000,000, such shares were subsequently exchanged for 3,899,996 shares as
adjusted for Forward Stock Split on July 26, 2006 of the common stock of the
Company in connection with the RTO.
 
 In
connection with the private placement, Wonder's two stockholders, Choice Inspire
Limited (“CIL”) and Empower Century Limited (“ECL”) entered into an escrow
agreement with the private placement investors.  Pursuant to the
escrow agreement, CIL and ECL agreed to certain “make good”
provisions.  In the escrow agreement, Wonder established minimum net
income thresholds of $8,140,000 for the fiscal year ended December 31, 2006 and
$12,713,760 for the fiscal year ended December 31, 2007.  CIL and ECL
deposited a total of 3,300,000 shares as adjusted for Forward Stock Split on
July 26, 2006 of the Company’s common stock into escrow with Securities Transfer
Corporation under the escrow agreement.  If the 2006 net income
threshold is not achieved, then the escrow agent must deliver the first tranche
of 1,650,000 shares to the investors on a pro rata basis (based upon the total
number of shares purchased by the investors in connection with the private
placement transaction) and if the 2007 net income threshold is not achieved, the
escrow agent must deliver the second tranche of 1,650,000 shares to the
investors on a pro rata basis.  However, only those private placement
investors who remain our stockholders at the time the escrow shares become
deliverable are entitled to their pro rata portion of such escrow
shares.
 
 On
February 8, 2007 and February 2, 2008, stockholders of CIL and ECL resolved to
surrender the right of entitlement to the first tranche and second tranche of
1,650,000 shares, respectively, totaling 3,300,000 shares, to Xiangdong
Gao.  On those two respective dates, two separate agreements were
signed between CIL, ECL and Xiangdong Gao whereby both CIL and ECL agreed to
give the right of the entitlement to the aforementioned escrowed shares to
Xiangdong Gao as a gift (that is for no consideration).  Xiangdong Gao
is a beneficial stockholder of the Company.
 
 For the
purpose of determining whether or not the net income threshold (“NIT”) has been
met, the return of any shares to CIL and ECL was not deemed an expense to the
Company.
 
 Excluding
the make good provision of $18,265,500 and $7,507,500 for the years ended
December 31, 2007 and 2006 respectively, the Company has achieved the 2007 and
2006 NIT.
 
 Following
the incorporation of the SEC comments as detailed in note 3(iv) below, the
shares released back to CIL and ECL is recognized as an expense by reference to
the market values of the shares as of the dates of the performance goals are
met, i.e. December 31, 2007 and 2006. The total expenses recognized for the
fiscal year 2007 and 2006 are $18,265,500 and $7,507,500 respectively. Such
expenses are treated as an unusual item since it is deemed to be unusual in
nature but may not be infrequent in occurrence.
  F -
12
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Basis
      of presentation (Cont’d)
 
 (iii)
              Reclassification
 
 Certain
prior year balances in the Consolidated Statements of Income and Comprehensive
Income have been reclassified to conform to current year presentation. For the
years ended December 31, 2005 and 2006, the Company reclassified $824,184 and
$947,702 from cost of sales to research and development costs under operating
expenses respectively. These reclassifications have no effect on net income as
previously presented.
 
 (iv)
              Restatement
 
 The
Company has restated the consolidated financial statements as of December 31,
2007 and 2006 in response to the comments from the United States Securities and
Exchange Commission (the “SEC”) on (i) compensation charges arising from make
good provision in connection with the release of escrow shares and (ii)
classification of cash flows arising from movement in restricted
cash.
 
 (a)
                Compensation
      charges arising from make good provision in connection with the release of
      escrow shares
 
 On
February 2, 2008 and February 8, 2007, stockholders of CIL and ECL surrendered
their rights of entitlement to the first tranche and second tranche of 1,650,000
shares, respectively, totaling 3,300,000 shares to Xiangdong Gao for no
consideration. Following the achievement of 2006 net income threshold as
detailed in note 3(ii). Xiangdong Gao maintained no relationship with the
Company other than as a shareholder. The Company, therefore, relied upon
guidance given in SEC Practice\08 SEC Staff Views - Current Issue Rulemaking
Projects 11/16/98 and did not recognize compensation expenses in connection with
the release of such escrow shares.
 
 Upon
consideration of SEC’s comments, the Company decided to recognize compensation
expenses for the shares released from escrow, irrespective of whether CIL and
ECL surrendered their rights of entitlement to Xiangdong Gao.
 
 (b)
                Classification
      of cash flow arising from movement in restricted
  cash
 
 Because
the bank deposits placed with the bank as restricted cash carried interest, the
management had considered the movement in restricted cash as investing activity
even though they are pledged for bills payable.
 
 The SEC
expressed a view that the movement of restricted cash, which was used as
collateral for the Company’s bills payable undertaken by bank, should been
accounted for as cash flows from financing activities, instead of cash flows
from investing activities. Upon consideration of SEC’s comments, the Company
decided to re-classify the movement of restricted cash as cash flows from
financing activities.
  F -
13
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Basis
      of presentation (Cont’d)
 
 (iv)
              Restatement
      (Cont’d)
 
 The
following table sets forth the financial impacts of the restatement on the
Company.
 
 Consolidated
Statements of Operations and Comprehensive loss
 
 For the
fiscal year ended December 31, 2007
 Impact
      on (a)Previously
                        
                        
                        IncreaseReported
                        
                        
                        (Decrease)
                        
                        
                        RestatedGross
      profit
                        
                        $
                        25,623,778
                        
                        
                        $
                        -
                        
                        
                        $
                        25,623,778Operating
      expenses
                        
                        
                        (7,992,018
                        )
                        
                        
                        (18,265,500
                        )
                        
                        
                        (26,257,518
                        )Income
      (loss) from operations
                        
                        
                        17,631,760
                        
                        
                        
                        (18,265,500
                        )
                        
                        
                        (633,740
                        )Other
      operating expenses
                        
                        
                        (591,005
                        )
                        
                        
                        -
                        
                        
                        
                        (591,005
                        )Income
      (loss) before income taxes
                        
                        
                        17,040,755
                        
                        
                        
                        (18,265,500
                        )
                        
                        
                        (1,224,745
                        )Income
      taxes
                        
                        
                        (1,389,008
                        )
                        
                        
                        -
                        
                        
                        
                        (1,389,008
                        )Minority
      interests
                        
                        
                        (1,136,694
                        )
                        
                        
                        -
                        
                        
                        
                        (1,136,694
                        )Net
      income (loss)
                        
                        $
                        14,515,053
                        
                        
                        $
                        (18,265,500
                        )
                        
                        $
                        (3,750,447
                        )Other
      comprehensive incomeForeign
      currency translation adjustments
                        
                        
                        2,969,894
                        
                        
                        
                        -
                        
                        
                        
                        2,969,894Total
      comprehensive income (loss)
                        
                        $
                        17,484,947
                        
                        
                        $
                        (18,265,500
                        )
                        
                        $
                        (780,553
                        )Earnings
      (loss) per share:basic
      and diluted
                        
                        $
                        0.60
                        
                        
                        $
                        (0.76
                        )
                        
                        $
                        (0.16
                        )Weighted
      average number of shares outstanding:basic
      and diluted
                        
                        
                        24,140,816
                        
                        
                        
                        -
                        
                        
                        
                        24,140,816
  F -
14
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Basis
      of presentation (Cont’d)
 
 (iv)
              Restatement
      (Cont’d)
 
 For the
fiscal year ended December 31, 2006
 Impact
      on (a)Previously
                    
                    
                    IncreaseReported
                    
                    
                    (Decrease)
                    
                    
                    RestatedGross
      profit
                    
                    $
                    14,808,282
                    
                    
                    $
                    -
                    
                    
                    $
                    14,808,282Operating
      expenses
                    
                    
                    (5,003,372
                    )
                    
                    
                    (7,507,500
                    )
                    
                    
                    (12,510,872
                    )Income
      from operations
                    
                    
                    9,804,910
                    
                    
                    
                    (7,507,500
                    )
                    
                    
                    2,297,410Other
      operating expenses
                    
                    
                    (209,146
                    )
                    
                    
                    -
                    
                    
                    
                    (209,146
                    )Income
      before income taxes
                    
                    
                    9,595,764
                    
                    
                    
                    (7,507,500
                    )
                    
                    
                    2,088,264Income
      taxes
                    
                    
                    (1,270,391
                    )
                    
                    
                    -
                    
                    
                    
                    (1,270,391
                    )Minority
      interests
                    
                    
                    (101,827
                    )
                    
                    
                    -
                    
                    
                    
                    (101,827
                    )Net
      income
                    
                    $
                    8,223,546
                    
                    
                    $
                    (7,507,500
                    )
                    
                    $
                    716,046Other
      comprehensive incomeForeign
      currency translation adjustments
                    
                    
                    1,007,468
                    
                    
                    
                    -
                    
                    
                    
                    1,007,468Total
      comprehensive income
                    
                    $
                    9,231,014
                    
                    
                    $
                    (7,507,500
                    )
                    
                    $
                    1,723,514Earnings
      per share:basic
      and diluted
                    
                    $
                    0.40
                    
                    
                    $
                    (0.37
                    )
                    
                    $
                    0.03Weighted
      average number of shares outstanding:basic
      and diluted
                    
                    
                    20,787,279
                    
                    
                    
                    -
                    
                    
                    
                    20,787,279
 
 Consolidated
Balance Sheets
 
 As of
December 31, 2007
 Impact
      on (a)Previously
                            
                            
                            IncreaseReported
                            
                            
                            (Decrease)
                            
                            
                            RestatedStockholders’
      EquityCommon
      stock
                            
                            $
                            2,696
                            
                            
                            $
                            -
                            
                            
                            $
                            2,696Additional
      paid-in-capital
                            
                            
                            44,870,304
                            
                            
                            
                            25,773,000
                            
                            
                            
                            70,643,304Statutory
      and other reserves
                            
                            
                            4,857,660
                            
                            
                            
                            -
                            
                            
                            
                            4,857,660Accumulated
      other comprehensive income
                            
                            
                            4,422,032
                            
                            
                            
                            -
                            
                            
                            
                            4,422,032Retained
      earningsAccumulated
      (deficit)
                            
                            
                            24,289,701
                            
                            
                            
                            (25,773,000
                            )
                            
                            
                            (1,483,299
                            )Total
      stockholders’ equity
                            
                            $
                            78,442,393
                            
                            
                            $
                            -
                            
                            
                            $
                            78,442,393
  F -
15
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
                Basis
      of presentation (Cont’d)
 
 (iv)
                Restatement
      (Cont’d)
 
 As of
December 31, 2006
 Impact
      on (a)Previously
                          
                          
                          IncreaseReported
                          
                          
                          (Decrease)
                          
                          
                          RestatedStockholders’
      EquityCommon
      stock
                          
                          $
                          2,396
                          
                          
                          $
                          -
                          
                          
                          $
                          2,396Additional
      paid-in-capital
                          
                          
                          22,140,143
                          
                          
                          
                          7,507,500
                          
                          
                          
                          29,647,643Statutory
      and other reserves
                          
                          
                          3,148,265
                          
                          
                          
                          -
                          
                          
                          
                          3,148,265Accumulated
      other comprehensive income
                          
                          
                          1,452,138
                          
                          
                          
                          -
                          
                          
                          
                          1,452,138Retained
      earnings
                          
                          
                          11,484,043
                          
                          
                          
                          (7,507,500
                          )
                          
                          
                          3,976,543Total
      stockholders’ equity
                          
                          $
                          38,226,985
                          
                          
                          $
                          -
                          
                          
                          $
                          38,226,985
 
 Consolidated
Statements of Cash Flows
 
 For the
year ended December 31, 2007
 Impact
      on (b)Previously
                          
                          
                          IncreaseReported
                          
                          
                          (Decrease)
                          
                          
                          RestatedNet
      income (loss)
                          
                          $
                          14,515,053
                          
                          
                          $
                          (18,265,500
                          )
                          
                          $
                          (3,750,447
                          )Adjustments
      to reconcile net income to net cash provide by operating
      activities
                          
                          
                          (2,344,567
                          )
                          
                          
                          18,265,500
                          
                          
                          
                          15,920,933Net
      cash flows provided by operating activities
                          
                          
                          12,170,486
                          
                          
                          
                          -
                          
                          
                          
                          12,170,486Net
      cash flows used in investing
                          
                          
                          (28,302,308
                          )
                          
                          $
                          3,736,383
                          
                          
                          
                          (24,565,925
                          )Net
      cash flows provided by financing activities
                          
                          
                          32,967,950
                          
                          
                          
                          (3,736,383
                          )
                          
                          
                          29,231,567Effect
      of foreign currency translation on cash and cash
    equivalents
                          
                          
                          1,063,166
                          
                          
                          
                          -
                          
                          
                          
                          1,063,166Net
      cash increase in cash and cash equivalents
                          
                          
                          17,899,294
                          
                          
                          
                          -
                          
                          
                          
                          17,899,294Cash
      and cash equivalents - beginning of period
                          
                          
                          8,203,699
                          
                          
                          
                          -
                          
                          
                          
                          8,203,699Cash
      and cash equivalents - end of period
                          
                          $
                          26,102,993
                          
                          
                          $
                          -
                          
                          
                          $
                          26,102,993
  F -
16
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 3.
              Basis
      of presentation (Cont’d)
 
 (iv)
                Restatement
      (Cont’d)
 
 For the
year ended December 31, 2006
 
 Impact
      on (b)Previously
                          
                          
                          IncreaseReported
                          
                          
                          (Decrease)
                          
                          
                          RestatedNet
      income
                          
                          $
                          8,223,546
                          
                          
                          $
                          (7,507,500
                          )
                          
                          $
                          716,046Adjustments
      to reconcile net income to net cash provided by operating
      activities
                          
                          
                          (6,834,614
                          )
                          
                          
                          7,507,500
                          
                          
                          
                          672,886Net
      cash flows provided by operating activities
                          
                          
                          1,388,932
                          
                          
                          
                          -
                          
                          
                          
                          1,388,932Net
      cash flows used in Investing activities
                          
                          
                          (7,136,865
                          )
                          
                          $
                          917,757
                          
                          
                          
                          (6,219,108
                          )Net
      cash flows provided by financing activities
                          
                          
                          9,225,743
                          
                          
                          
                          (917,757
                          )
                          
                          
                          8,307,986Effect
      of foreign currency translation on cash and cash
    equivalents
                          
                          
                          357,132
                          
                          
                          
                          -
                          
                          
                          
                          357,132Net
      increase in cash and cash equivalents
                          
                          
                          3,834,942
                          
                          
                          
                          -
                          
                          
                          
                          3,834,942Cash
      and cash equivalents - beginning of period
                          
                          
                          4,368,757
                          
                          
                          
                          -
                          
                          
                          
                          4,368,757Cash
      and cash equivalents - end of period
                          
                          $
                          8,203,699
                          
                          
                          $
                          -
                          
                          
                          $
                          8,203,699
  F -
17
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
 
 Principles of
consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries.  All significant inter-company accounts and transactions
have been eliminated in consolidation.
 
 On April
2, 2007, Wonder and Jinzhou Halla acquired the remaining 79.59% equity interest
in Jinzhou Wanyou in two separately negotiated equity purchase transactions
between Wonder and Jinzhou Halla and two former equity owners of Jinzhou
Wanyou.  After the completion of these two equity purchase
transactions, Jinzhou Wanyou became a wholly-owned subsidiary of the
Company.
 
 In the
first transaction, Wonder acquired a 40.81% equity interest in Jinzhou Wanyou
from Hong Kong Friend Birch Limited, a Hong Kong corporation, for a total cash
consideration of up to $8.42 million pursuant to the Jinzhou Wanyou Share
Purchase Agreement I dated April 2, 2007.  Under the Jinzhou Wanyou
Share Purchase Agreement I, the total cash consideration is scheduled to be paid
by Wonder in three installments as follows.  The first installment
payment of $2.8 million and second installment of $1.41 million were made in
June 2007 and December 2007 respectively.  The final cash installment
payment of $4.21 million will be paid if Jinzhou Wanyou achieves minimum net
income of approximately $2.95 million (RMB 23 million) for the period from April
2, 2007 to April 1, 2008.  If Jinzhou Wanyou fails to achieve the
minimum net income threshold, the remaining $4.21 million payment will be
proportionately reduced.  Under the Jinzhou Wanyou Share Purchase
Agreement I, no premium is payable by Wonder if Jinzhou Wanyou exceeds the net
income target threshold.  As of December 31, 2007, the final cash
installment was included in the cost of acquisition as the management believed
that, based on the net income of Jinzhou Wanyou for the period from April 2,
2007 to December 31, 2007, Jinzhou Wanyou will achieve the minimum net income
threshold.
 
 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 the Jinzhou Wanyou Share
Purchase Agreement II dated April 2, 2007.  Under the Jinzhou Wanyou
Share Purchase Agreement II, the total consideration will be paid in three
installments.  The first payment of $3.0 million was made in June
2007.  The second $3.0 million cash installment will be paid if
Jinzhou Wanyou achieves minimum net income of approximately $2.95 million (RMB
23 million) for the period from April 2, 2007 to April 1, 2008.  As of
December 31, 2007, the final cash installment was included in the cost of
acquisition as the management believed that, based on the net income of Jinzhou
Wanyou for the period from April 2, 2007 to December 31, 2007, Jinzhou Wanyou
will achieve the minimum net income threshold. The remaining $2 million cash
payment will be paid if Jinzhou Wanyou attains minimum net income of
approximately $3.72 million (RMB 29million) for
the period from April 2, 2008 to April 1, 2009.  In the case that
Jinzhou Wanyou fails to achieve these net income thresholds, the corresponding
payments will be proportionately reduced.  Under the Jinzhou Wanyou
Share Purchase Agreement II, no premium is payable by the Jinzhou Halla if
Jinzhou Wanyou exceeds the net income target threshold.
  F -
18
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Principles of
consolidation (cont’d)
 
 The
financial position of Jinzhou Wanyou as of April 2, 2007 is as
follows:
 
 Fair
      valueadjustmentpursuant
      to
                        
                        
                        Fair
      marketCarrying amount
                        
                        
                        SFAS 141
                        
                        
                        valueCash
      and cash equivalents
                        
                        $
                        273,515
                        
                        
                        
                        
                        
                        $
                        273,515Trade
      receivable, net
                        
                        
                        562,107
                        
                        
                        
                        
                        
                        
                        562,107Bills
      receivable
                        
                        
                        64,592
                        
                        
                        
                        
                        
                        
                        64,592Other
      receivable, prepayment and deposits
                        
                        
                        192,696
                        
                        
                        
                        
                        
                        
                        192,696Inventories
                        
                        
                        224,421
                        
                        
                        
                        
                        
                        
                        224,421Amount
      due from Jinzhou Halla
                        
                        
                        694,267
                        
                        
                        
                        
                        
                        
                        694,267Property,
      plant and equipment, net
                        
                        
                        1,069,720
                        
                        
                        
                        
                        
                        
                        1,069,720Deposit
      for acquisition of  property, plant and
equipment
                        
                        
                        18,990
                        
                        
                        
                        
                        
                        
                        18,990Intangible
      assets - customer contracts
                        
                        
                        -
                        
                        
                        $
                        49,053
                        
                        
                        
                        49,053Trade
      payables
                        
                        
                        (293,537
                        )
                        
                        
                        
                        
                        
                        
                        (293,537
                        )Other
      repayable and accrued expenses
                        
                        
                        (15,507
                        )
                        
                        
                        
                        
                        
                        
                        (15,507
                        )Net
      assets
                        
                        $
                        2,791,264
                        
                        
                        
                        
                        
                        
                        $
                        2,840,31779.59%
      equity interest acquired
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,260,608Goodwill
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        12,159,392Initial
      purchase price of acquisition
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        14,420,000Satisfied
      by:-Cash
      payment
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        14,420,000Net
      cash paid to acquire Jinzhou Wanyou
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        14,146,485
 
 As of
December 31, 2007, the consolidated balance sheet includes a goodwill identified
upon the acquisition of 79.59% equity interest in Jinzhou Wanyou amounting to
$12.16 million which represents the excess of the initial purchase price of
$14.42 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.
 
 The above
initial purchase price for Jinzhou Wanyou does not include the $2 million of
contingent consideration pursuant to the Share Purchase Agreement
II.  The remaining consideration shall be payable upon Jinzhou
Wanyou’s fulfillment of targeted net profits.  The recognition and
allocation of contingent consideration will be treated as additional purchase
price and allocated to goodwill subsequently.
  F -
19
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Principles of
consolidation (cont’d)
 
 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 with a
conclusion 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.
 
 The
following unaudited pro forma financial information presents the combined
results of operating of the Company with the operations of Jinzhou Wanyou for
year ended December 31, 2007, as if the acquisition had occurred as of the
beginning of fiscal year 2007:
 
 (Unaudited)Revenue
                    
                    $
                    102,876,541Net
      loss
                    
                    $
                    (3,617,290
                    )Loss
      per share: basic and diluted
                    
                    $
                    (0.15
                    )
 
 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 would have been had the Company owned and operated this business as
of the beginning of the period presented.
 
 Goodwill
 As
      of December 31,2007
                    
                    
                    2006Goodwill
      identified upon acquisition of:-Jinzhou
      Dongwoo  (i)
                    
                    $
                    3,115,227
                    
                    
                    $
                    2,771,293Jinzhou
      Wanyou  (ii)
                    
                    
                    12,159,392
                    
                    
                    
                    -$
                    15,274,619
                    
                    
                    $
                    2,771,293
 
 (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.
  F -
20
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Goodwill
(cont’d)
 
 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 $12.16 million which
      represents the excess of the initial purchase price of $14.42 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.
 
 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.
 
 Investment in an
unconsolidated affiliate
 
 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’
net income was recognized in the period in which it is earned by Jinzhou
Wanyou.  As of December 31, 2006, the investment in unconsolidated
affiliate of $0.53 million represented attributable share of the underlying
net assets of Jinzhou Wanyou.
 
 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.
  F -
21
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              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, 2007 and 2006, 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:-
 Years
      ended December 31,2007
                          
                          
                          2006
                          
                          
                          2005Beijing
      Hyundai Motor Company
                          
                          $
                          13,971,225
                          
                          
                          $
                          13,686,791
                          
                          
                          $
                          6,926,159Dongfeng
      Yueda Kia Motors CompanyLimited
                          
                          
                          4,350,341
                          
                          
                          
                          2,416,288
                          
                          
                          
                          5,346,827Harbin
      Dongan Automotive EngineManufacturing
      Company Limited
                          
                          
                          16,657,632
                          
                          
                          
                          5,770,801
                          
                          
                          
                          1,403,102Shenyang
      Aerospace Mitsubishi MotorsEngine
      Manufacturing Company Limited
                          
                          
                          15,691,636
                          
                          
                          
                          12,837,338
                          
                          
                          
                          5,451,367$
                          50,670,834
                          
                          
                          $
                          34,711,218
                          
                          
                          $
                          19,127,455
 
 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, 2007 and 2006, almost all the cash
and cash equivalents were denominated in Renminbi (“RMB”) and were placed with
banks in the PRC.  They are not freely convertible into foreign
currencies and the remittance of these funds out of the PRC is subject to
exchange control restrictions imposed by the PRC government.  The
remaining insignificant balance of cash and cash equivalents were denominated in
Hong Kong dollars.
  F -
22
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Allowance of doubtful
accounts
 
 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.
 
 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.
  F -
23
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Inventories
(cont’d)
 
 Based on
the above assessment, the Company establishes a general provision to make a 50%
provision for inventories aged over 1 year.
 
 Historically,
the actual net realizable value is close to the management
estimation.
 
 Property, plant and
equipment
 
 Property,
plant and equipment are stated at cost less accumulated
depreciation.  Cost represents the purchase price of the asset and
other costs incurred to bring the asset into its existing use.
 
 Depreciation
is provided on straight-line basis over their estimated useful
lives.  The principal depreciation rates are as follows:-
 Annual
      rate
                        
                        
                        Residual
      valueBuildings
                        
                        
                        3 -
      4.5
                        %
                        
                        
                        10
                        %Plant
      and machinery
                        
                        
                        9
                        %
                        
                        
                        10
                        %Motor
      vehicles
                        
                        
                        9-18
                        %
                        
                        
                        10
                        %Furniture,
      fixtures and equipment
                        
                        
                        15
                        %
                        
                        
                        10
                        %Tools
      and equipment
                        
                        
                        15-18
                        %
                        
                        Nil
      to 10
                        %Leasehold
      improvements
                        
                        
                        20
                        %
                        
                        Nil
 
 Construction
in progress mainly represents expenditures in respect of the Company’s new
offices and factories under construction.  All direct costs relating
to the acquisition or construction of the Company’s new office and factories are
capitalized as construction in progress. No depreciation is provided in respect
of construction in progress.
 
 Maintenance
or repairs are charged to expense as incurred.  Upon sale or
disposition, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.
 
 Trademarks and
patents
 
 Trademarks
and patents are stated at cost less accumulated
amortization.  Amortization is provided on a straight-line basis over
their useful lives of 10 years granted from the relevant PRC
authorities.
 
 Know-how
 
 Know-how
is determined to have an indefinite useful life pursuant to the purchase
contracts as detailed in note 12(a).  It is not subject to
amortization until its useful life is determined to be no longer
indefinite.
 
 Know-how
is stated at cost of purchase less any identified impairment losses in the
annual impairment test.
  F -
24
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Land use
right
 
 Land use
right is stated at cost less accumulated amortization.  Amortization
is provided using the straight-line method over the terms of the lease of 30
years obtained from the relevant PRC land authority.
 
 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.
 
 Government
grant
 
 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.
 
 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 -
25
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Advertising, transportation,
research and development expenses
 
 Advertising,
transportation and other product-related costs are charged to expense as
incurred.
 
 Research
and development costs include expenditure incurred for “new product development
expenses”, “investment in research and development equipment” and “other
research and development expenses”.
 
 The “new
products development expenses” include salaries of personnel engaged and other
costs incurred for research and development of potential new
products.  They are expensed to Statement of Operations when
incurred.
 
 “Investments
in research and development equipment” represent payments for acquisition of
equipment for research and development use.  This equipment has other
alterative future uses, such as usage in Testing Department.  The
equipment is capitalized as tangible asset when acquired and included under
Non-current assets “Property, plant and equipment” in the Financial
Statements.  Depreciation is provided according to the depreciation
rates of corresponding categories of Property, plant and equipment being
capitalized and included.
 
 “Other
research and development expenses” represent payments for routine and ongoing
efforts to refine existing products.  These expenses are charged to
Statement of Operations when incurred.
 
 Advertising
expenses amounting to $8,926, $16,137 and $15,992 for three years ended December
31, 2007, 2006 and 2005 respectively are included in selling
expenses.
 
 Transportation
expenses amounted to $630,254, $464,838 and $342,805 for three years ended
December 31, 2007, 2006 and 2005 respectively are included in selling
expenses.
 
 Research
and development expenditure for each of three years in the year ended December
31, 2007 are as follow:-
 Years
      ended December 31,Nature
                                      
                                      Included in
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005New
      productsdevelopmentexpenses
                                      
                                      Operating  expenses
                                      
                                      $
                                      534,503
                                      
                                      
                                      $
                                      500,347
                                      
                                      
                                      $
                                      477,225Investments
      in researchand developmentequipment
                                      
                                      Property,
      plant and equipment
                                      
                                      
                                      2,388,867
                                      
                                      
                                      
                                      611,615
                                      
                                      
                                      
                                      645,925Other
      research anddevelopmentexpenses
                                      
                                      Operating  expenses
                                      
                                      
                                      601,494
                                      
                                      
                                      
                                      447,355
                                      
                                      
                                      
                                      346,959$
                                      3,524,864
                                      
                                      
                                      $
                                      1,559,317
                                      
                                      
                                      $
                                      1,470,109
 
  F -
26
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Warranty
 
 It is the
policy of the Company to provide after sales support by way of a warranty
programme.  The Company provided warranties to certain customers with
warranty periods ranging from two years or 50,000 km to three years or 60,000
km, whichever comes first.
 
 Based on
the past experience, the Company sets up a policy of making a general provision
for warranty such that the closing balance of this provision is equal to certain
percentage of relevant sales during the reporting periods as follows
:-
 
 Year ended December 31,
                    
                    %2007
                    
                    
                    1.52006
                    
                    
                    1.52005
                    
                    
                    2
 
 Stock-based
compensation
 
 During
the reporting periods, the Company did not make any stock-based compensation
payments.
 
 Income
taxes
 
 The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”.  Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statements carrying amounts of existing assets and
liabilities and loss carryforwards and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
 
 Dividends
 
 Dividends
are recorded in Company’s financial statements in the period in which they are
declared.
 
 Off-balance sheet
arrangements
 
 The
Company does not have any off-balance sheet arrangements.
 
 Comprehensive
income
 
 The
Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances.  Components of comprehensive
income (loss) include net income and foreign currency translation
adjustments.
  F -
27
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 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, 2007, 2006 and
2005 were RMB1 for $0.1371, $0.1279 and $0.1239 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.
 
 Fair value of financial
instruments
 
 The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, marketable securities, trade, bills and other
receivables, deposits, dividend payable, trade, bills and other payables
approximate their fair values due to the short-term maturity of such
instruments.  The carrying amounts of bank borrowings approximate
their fair values because the applicable interest rates approximate current
market rates.
 
 It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.
 
 In
respect of foreign currency risk, the Company is exposed to this risk arising
from import purchase transactions and recognized trade payables as they will
affect the future operating results of the Company.  The Company did
not have any hedging transactions during the reporting periods.  As
the functional currency of the Company is RMB, the exchange difference on
translation to US dollars for reporting purpose is taken to other comprehensive
income.
  F -
28
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements
 
 In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”).  This interpretation requires that we recognize in our financial
statements, the impact of a tax position, if that position is more likely than
not of being sustained on audit, based on the technical merits of the
position.  The provisions of FIN 48 are effective as of the beginning
of our 2007 fiscal year.  The adoption of FIN 48 has no material
effect on our financial statements.
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157 “Fair Value Measurement” (“SFAS 157”).  SFAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  This Statement
shall be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years.  Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including
any financial statements for an interim period within that fiscal
year.  The provisions of this statement should be applied
prospectively as of the beginning of the fiscal year in which this Statement is
initially applied, except in some circumstances where the statement shall be
applied retrospectively.  The adoption of SFAS 157 has no material
effect on our financial statements.
 
 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.  We are in the
process of evaluating this guidance and therefore have not yet determined the
impact that SFAS 159 will have on our 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
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.
  F -
29
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 4.
              Summary
      of significant accounting policies
(Cont’d)
 
 Recently issued accounting
pronouncements (cont’d)
 
 In
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 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.
 
 5.
              Finance
      costs
  Years ended December 31,2007
                      
                      
                      2006
                      
                      
                      2005Interest
      expenses
                      
                      $
                      1,627,063
                      
                      
                      $
                      807,693
                      
                      
                      $
                      611,326Less:
      Interest capitalized
                      
                      
                      (131,287
                      )
                      
                      
                      -
                      
                      
                      
                      -Bills
      discounting charges
                      
                      
                      821,321
                      
                      
                      
                      170,851
                      
                      
                      
                      186,103Bank
      charges and net exchange loss
                      
                      
                      203,708
                      
                      
                      
                      55,007
                      
                      
                      
                      41,525$
                      2,520,805
                      
                      
                      $
                      1,033,551
                      
                      
                      $
                      838,954
 
 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 for the reporting period.
 
 BVI
 
 Wonder
was incorporated in the BVI and, under the current laws of the BVI, are not
subject to income taxes.
  F -
30
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
              Income
      taxes (Cont’d)
 
 PRC
 
 Enterprise
income tax (“EIT”) to Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou in the
PRC is charged at 27%, of which 24% is for national tax and 3% is for local tax,
of the assessable profits.  As approved by the relevant tax authority
in the PRC, Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou 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 we expect will be subject to a tax rate of 13.5% for 2007 and
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
13.5% for 2009, 2010 and 2011.  Wonder Motor and Jinzhou Wonder is
subject to a rate of 25%.
 
 Jinzhou
Halla, Jinzhou Dongwoo and Jinzhou Wanyou, as FIEs, were entitled to another
special tax concession which allows an amount equivalent to 40% qualifying
domestic capital expenditure as defined and approved under the relevant PRC
income tax rule to be used as an offset against the excess of the current year’s
EIT over the prior year’s EIT.  Jinzhou Halla and Jinzhou Dongwoo were
entitled to another special tax concession.  An amount equivalent to
50% of the current year’s domestic development expenses can be used as an offset
against EIT.  These two tax concessions, if unutilized in a particular
year, can be carried forward for five years.
  F -
31
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
              Income
      taxes (Cont’d)
 
 PRC
(cont’d)
 
 The
components of the provision (benefit) for income taxes from continuing
operations are :-
 
 Year ended December 31,2007
                      
                      
                      2006
                      
                      
                      2005Current
      taxes - PRC
                      
                      $
                      1,653,001
                      
                      
                      $
                      1,286,760
                      
                      
                      $
                      896,399Deferred
      taxes - PRC
                      
                      
                      (263,993
                      )
                      
                      
                      (16,369
                      )
                      
                      
                      857$
                      1,389,008
                      
                      
                      $
                      1,270,391
                      
                      
                      $
                      897,256
 
 The
effective income tax expenses differs from the PRC statutory income tax rate of
27% from continuing operations in the PRC as follows :-
 Years ended December 31,2007
                      
                      
                      2006
                      
                      
                      2005Provision
      for (loss) income taxes at PRC statutory income tax rate
                      
                      $
                      (330,681
                      )
                      
                      $
                      522,066
                      
                      
                      $
                      1,970,509Non-deductible
      items for tax
                      
                      
                      5,058,702
                      
                      
                      
                      2,094,875
                      
                      
                      
                      31,817Income
      not subject to tax
                      
                      
                      (183,342
                      )
                      
                      
                      (108,558
                      )
                      
                      
                      (7,361
                      )Increase
      in deferred tax assets resulting resulting from a reduction of PRC
      enterprise income tax rate
                      
                      
                      (194,321
                      )
                      
                      
                      -
                      
                      
                      
                      -Tax
      holiday
                      
                      
                      (2,961,350
                      )
                      
                      
                      (1,254,192
                      )
                      
                      
                      (1,097,709
                      )Others
                      
                      
                      -
                      
                      
                      
                      16,200
                      
                      
                      
                      -$
                      1,389,008
                      
                      
                      $
                      1,270,391
                      
                      
                      $
                      897,256
 
 During
the three years ended December 31, 2007, 2006 and 2005, the aggregate amounts of
benefit from tax holiday were $2,961,350, $1,254,192 and $1,097,709 and the
respective effective on earnings per share effect was $0.12, $0.06 and $0.06
respectively.
  F -
32
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 6.
              Income
      taxes (Cont’d)
 
 PRC
(cont’d)
 
 Deferred
tax assets (liabilities) as of December 31, 2007 and 2006 are composed of the
following :-
 As
      of December 31,2007
                                      
                                      
                                      2006PRCCurrent
      deferred tax assets:Allowance
      for doubtful debts
                                      
                                      $
                                      5,004
                                      
                                      
                                      $
                                      4,340Provision
      for obsolete inventories
                                      
                                      
                                      21,107
                                      
                                      
                                      
                                      17,168Provision
      for warranty
                                      
                                      
                                      151,829
                                      
                                      
                                      
                                      141,661Accrued
      liabilities
                                      
                                      
                                      12,956
                                      
                                      
                                      
                                      23,053Unrealized
      profit
                                      
                                      
                                      49,296
                                      
                                      
                                      
                                      51,348Others
                                      
                                      
                                      67,146
                                      
                                      
                                      
                                      -$
                                      307,338
                                      
                                      
                                      $
                                      237,570United
      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
                                      
                                      
                                      786,604
                                      
                                      
                                      
                                      376,368Amortization
      of land use right
                                      
                                      
                                      -
                                      
                                      
                                      
                                      12,435Amortization
      of know-how
                                      
                                      
                                      (346,844
                                      )
                                      
                                      
                                      (183,328
                                      )439,760
                                      
                                      
                                      
                                      205,475$
                                      439,760
                                      
                                      
                                      $
                                      205,475
 
 On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”).  The new CIT
Law reduces the corporate income tax rate from 33% to 25% with effect from
January 1, 2008.  The tax rate reduction will also impact the carrying
value of deferred tax assets as a result of new tax rate.
 
 As of
December 31, 2007, the Company had net operating loss carried forward amounted
to $140,612 in the United States which, if unutilized, will expire through to
2021.
 
 7.
              Minority
      Interests
 
 Minority
interests on the consolidated statement of income and comprehensive income of
$1,136,694 for the year ended December 31, 2007 represents the minority
shareholders’ proportionate share of the net income of Jinzhou
Dongwoo.
  F -
33
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 8.
              (Loss)
      earnings per share
 
 During
the reporting periods, the Company had no dilutive
instruments.  Accordingly, the basic and diluted (loss)/earnings per
share are the same.
 
 The per
share data reflects the recapitalization of stockholders’ equity as if the RTO
occurred as of the beginning of the first period presented and has been adjusted
for Forward Stock Split effected in July 2006.
 
 9.
              Restricted
      cash, bills and trade payables
 
 As of December 31,2007
                    
                    
                    2006Bank
      deposit held as collateral for import duty
                    
                    $
                    548,400
                    
                    
                    $
                    501,133Bank
      deposits held as collateral for bills payable
                    
                    
                    8,064,862
                    
                    
                    
                    4,375,746$
                    8,613,262
                    
                    
                    $
                    4,876,879
 
 When the
Company intends or is requested to settle its suppliers by issuance of bills, it
is required to place deposits with banks equal to 50% of the bills amount at the
time of issuance.  These deposits will be used to settle the bills at
maturity.
 
 The
Company is requested by certain of its suppliers to settle by issuance of bills
for which the banks add their undertakings to guarantee their settlement at
maturity.  These bills are interest-free with maturity of three to six
months from date of issuance.  As security for the banks’
undertakings, the Company is required to deposit with such banks equal to 50% of
the bills amount at the time of issuance and pay bank charges.
 
 Trade
payables represent trade creditors on open account.  They are
interest-free and unsecured.  The normal credit term given by these
suppliers to the Company ranges from one to three months.
 
 The
Company is entitled to exemption from import duty for importing fixed assets
from overseas.  As of December 31, 2006 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.
  F -
34
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 10.
              Other
      receivables, prepayments and
deposits
 
 As
      of December 31,2007
                    
                    
                    2006Value
      added tax and other tax recoverable
                    
                    $
                    576,643
                    
                    
                    $
                    193,318Other
      prepayments
                    
                    
                    343,362
                    
                    
                    
                    227,883Advance
      to a third party - Note 10a
                    
                    
                    -
                    
                    
                    
                    358,171Other
      receivables
                    
                    
                    400,478
                    
                    
                    
                    236,527$
                    1,320,483
                    
                    
                    $
                    1,015,899
 
 Notes
:-
 
 (a)
              The
      advance is interest-free, unsecured and repayable on
    demand.
  11.
              Inventories
  As
      of December 31,2007
                        
                        
                        2006Raw
      materials
                        
                        $
                        4,101,852
                        
                        
                        $
                        3,957,527Work-in-progress
                        
                        
                        665,959
                        
                        
                        
                        450,545Finished
      goods
                        
                        
                        8,085,326
                        
                        
                        
                        9,428,23712,853,137
                        
                        
                        
                        13,836,309Provision
      for obsolete inventories
                        
                        
                        (218,351
                        )
                        
                        
                        (146,935
                        )$
                        12,634,786
                        
                        
                        $
                        13,689,374
 
 Provision/(Recovery
of) for obsolete inventories of $39,115, $(52,470) and $(186,646) were charged
(credited) to operations during the years ended December 31, 2007, 2006 and 2005
respectively.
 
  F -
35
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
  12.
              Intangible
      assets
  As
      of December 31,2007
                          
                          
                          2006Costs:Goodwill
      - Note 4
                          
                          $
                          15,274,619
                          
                          
                          $
                          2,771,293Customer
      contracts
                          
                          
                          49,053
                          
                          
                          
                          -Know-how
      - Note (a)
                          
                          
                          1,573,467
                          
                          
                          
                          1,468,089Trademarks
      and patents
                          
                          
                          16,866
                          
                          
                          
                          13,81816,914,005
                          
                          
                          
                          4,253,200Accumulated
      amortization
                          
                          
                          (40,954
                          )
                          
                          
                          (2,400
                          )Net
                          
                          $
                          16,873,051
                          
                          
                          $
                          4,250,800
 
 Note:-
 (a)
              In
      March 1996, the Company entered into two contracts with the Korean Company
      (Note 4) to purchase two technical know-how in relation to product design,
      manufacturing and quality control of alternators and starters at a cash
      consideration of $1.36 million.  This consideration was mutually
      agreed between Jinzhou Halla and the Korean Company.  Under the
      terms of the contracts, the Company is able to use such know-how for
      unlimited period of time.
 
 Since its acquisition, no indicator of
impairment was identified and accordingly it is stated at cost.
 
 During
the three years ended December 31, 2007, 2006 and 2005 amortization charge was
$38,318, $769 and $342 respectively.
 
 The
estimated aggregate amortization expenses for customer contracts and trademarks
and patents for the five succeeding years is as follows :-
 
 Year2008
                    
                    $
                    13,6332009
                    
                    
                    1,3702010
                    
                    
                    1,3702011
                    
                    
                    1,3702012
                    
                    
                    1,370$
                    19,113
  F -
36
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 13.
              Property,
      plant and equipment, net
  As
      of December 31,2007
                        
                        
                        2006Costs:Buildings
                        
                        $
                        6,917,618
                        
                        
                        $
                        5,850,903Plant
      and machinery
                        
                        
                        20,105,152
                        
                        
                        
                        13,457,393Furniture,
      fixtures and equipment
                        
                        
                        624,844
                        
                        
                        
                        381,810Tools
      and equipment
                        
                        
                        1,617,317
                        
                        
                        
                        1,196,095Leasehold
      improvements
                        
                        
                        299,868
                        
                        
                        
                        151,848Motor
      vehicles
                        
                        
                        891,374
                        
                        
                        
                        642,17230,456,173
                        
                        
                        
                        21,680,221Accumulated
      depreciation
                        
                        
                        (10,462,764
                        )
                        
                        
                        (7,851,156
                        )Construction
      in progress - Note 4
                        
                        
                        2,523,491
                        
                        
                        
                        116,781Net
                        
                        $
                        22,516,900
                        
                        
                        $
                        13,945,846
 
 An
analysis of buildings, plant and machinery pledged to banks for banking loans
(Note 18a) is as follows :-
 As
      of December 31,2007
                          
                          
                          2006Costs:Buildings
                          
                          $
                          4,217,977
                          
                          
                          $
                          4,576,803Plant
      and machinery
                          
                          
                          12,345,810
                          
                          
                          
                          -16,563,787
                          
                          
                          
                          4,576,803Accumulated
      depreciation
                          
                          
                          (8,350,795
                          )
                          
                          
                          (929,213
                          )Net
                          
                          $
                          8,212,992
                          
                          
                          $
                          3,647,590
 
 Years ended December 31,2007
                        
                        
                        2006
                        
                        
                        2005Depreciation
                        
                        $
                        1,188,589
                        
                        
                        $
                        139,117
                        
                        
                        $
                        348,473
 
 (i)
              During
      the reporting periods, depreciation is included in
  :-
 
 Years ended December 31,2007
                        
                        
                        2006
                        
                        
                        2005Cost
      of sales and overheads of inventories
                        
                        $
                        1,491,634
                        
                        
                        $
                        1,255,390
                        
                        
                        $
                        1,057,150Other
                        
                        
                        522,411
                        
                        
                        
                        146,151
                        
                        
                        
                        101,411$
                        2,014,045
                        
                        
                        $
                        1,401,541
                        
                        
                        $
                        1,158,561
 
 During
the years ended December 31, 2007 and 2006, property, plant and equipment with
carrying amounts of $46,058 and $152,696 were disposed of at considerations of
$25,803 and $73,169 resulting in losses of $20,255 and $79,527
respectively.
 
 (ii)
              Construction
      in Progress
 
 Construction
in progress mainly comprises capital expenditure for construction of the
Company’s new offices and factories.
  F -
37
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 14.
              Land
      use right
  As
      of December 31,2007
                        
                        
                        2006Land
      use right
                        
                        $
                        1,571,021
                        
                        
                        $
                        1,465,806Accumulated
      amortization
                        
                        
                        (335,992
                        )
                        
                        
                        (262,550
                        )$
                        1,235,029
                        
                        
                        $
                        1,203,256
 
 The
Company obtained the right from the relevant PRC land authority for a period of
thirty years to use the land on which the office premises, production facilities
and warehouse of the Company are situated.  The land use right of
carrying amount of $582,967 was pledged to a bank for the bank loans granted to
the Company (Note 18b).
 
 During
the three years ended December 31, 2007, 2006 and 2005, amortization amounted to
$52,394, $28,883 and $26,245 respectively.
 
 The
estimated aggregate amortization expenses for land use right for the five
succeeding years is as follows :-
 
 Year2008
                    
                    $
                    52,3942009
                    
                    
                    52,3942010
                    
                    
                    52,3942011
                    
                    
                    52,3942012
                    
                    
                    52,394$
                    261,970
  15.
              Other
      payables and accrued expenses
  As
      of December 31,2007
                        
                        
                        2006Accrued
      audit fee
                        
                        $
                        95,970
                        
                        
                        $
                        90,678Interest
      payable
                        
                        
                        184,763
                        
                        
                        
                        -Other
      accrued expenses
                        
                        
                        159,552
                        
                        
                        
                        137,839Other
      tax payable
                        
                        
                        437,785
                        
                        
                        
                        37,690Payable
      for acquisition of property, plant and equipment
                        
                        
                        827,172
                        
                        
                        
                        133,275Staff
      welfare payable - Note
                        
                        
                        146,524
                        
                        
                        
                        132,699Payable
      for acquisition of Jinzhou Dongwoo - Note 4
                        
                        
                        -
                        
                        
                        
                        2,420,000Other
      payables
                        
                        
                        561,374
                        
                        
                        
                        169,352$
                        2,413,140
                        
                        
                        $
                        3,121,533
  F -
38
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 15.
              Other
      payables and accrued expenses
(Cont’d)
 
 Note
:-
 
 Staff
                welfare
      payable represents accrued staff medical, industry injury claims, labor
      and unemployment insurances.  All of which are third parties
      insurance and the insurance premiums are based on certain percentage of
      salaries.  The obligations of the Company are limited to those
      premiums contributed by the
Company.
 
 16.
              Provision
      for warranty
  As
      of December 31,2007
                        
                        
                        2006Balance,
      January 1
                        
                        $
                        1,049,344
                        
                        
                        $
                        914,403Claims
      paid for the year
                        
                        
                        (1,362,636
                        )
                        
                        
                        (843,026
                        )Additional
      provision for the year
                        
                        
                        1,368,760
                        
                        
                        
                        945,871Translation
      adjustments
                        
                        
                        69,187
                        
                        
                        
                        32,096Balance,
      December 31
                        
                        $
                        1,124,655
                        
                        
                        $
                        1,049,344
 
 17.
              Amount
      due from a related company / to an unconsolidated
  affiliate
 
 The
related company is controlled by certain of the Company’s stockholders which
include Qingjie Zhao.  These amounts are interest-free, unsecured and
repayable on demand.
 
 18.
              Secured
      bank loans
 
 As
      of December 31,2007
                                    
                                    
                                    2006Short-term
      loan, interest rates rangingfrom 5.67% to 6.84 % per
    annum
                                    
                                    $
                                    10,282,500
                                    
                                    
                                    $
                                    14,326,831Long-term
      loan-
      due 2009, interest charge at 6.57% per annum
                                    
                                    
                                    5,484,000
                                    
                                    
                                    
                                    --
      due 2009 to 2013, interest charge atEURIBOR rate plus 2.85% per
      annum
                                    
                                    
                                    12,138,186
                                    
                                    
                                    
                                    -17,622,186
                                    
                                    
                                    
                                    -$
                                    27,904,686
                                    
                                    
                                    $
                                    14,326,831
 
 As of
December 31, 2007, the Company’s banking facilities are composed of the
following :-
 
 AmountFacilities
      granted
                      
                      Granted
                      
                      
                      Utilized
                      
                      
                      UnusedSecured
      bank loans
                      
                      $
                      30,390,820
                      
                      
                      $
                      27,904,686
                      
                      
                      $
                      2,486,134
 
  F -
39
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 18.
              Secured
      bank loans (Cont’d)
 
 The above
banking loans were secured by the following :-
 
 (a)
              Property,
      plant and equipment with carrying value of $8,212,992 respectively (Note
      13);
 
 (b)
              Land
      use right with carrying value of $582,967 (Note
  14);
 
 (c)
              Certain
      trade receivables of approximately $980,265 were factored to a bank with
      recourse as collateral under invoice discount
  agreement;
 
 (d)
              Guarantees
      executed by a related company controlled by certain of the Company’s
      stockholders including Qingjie Zhao, Xiangdong Gao, Meina Zhang, Qing Lin,
      Yuquan Zhou, Chengyu Zhang and Chenye Zhang;
and
 
 (e)
              Guarantees
      executed by a related company controlled by the Company’s CEO and director
      Qingjie Zhao.
 
 During
the reporting periods, there was no covenant requirement under the banking
facilities granted to the Company.
 
 19.
              Commitments
      and contingencies
 
 a.
              Capital
      commitment
 
 As of
December 31, 2007, the Company had capital commitments amounting to $1,433,479
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, 2007, the Company had one non-cancelable operating lease for its
warehouses.  The leases will expire in 2010 and the expected payment
is $7,728.
 
 The
rental expense relating to the operating leases was $2,840 and $1,302 for the
two years ended December 31, 2007 and 2006 respectively.
  F -
40
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 20.
              Common
      stock
 
 On
December 10, 2007, the Company entered into certain securities purchase
agreements (collectively, the “Securities Purchase Agreement”) with certain
accredited investors (collectively, the “Investors”).  Under the
Securities Purchase Agreement, the Company agreed to issue and sell to the
Investors a total of 3,000,000 shares of the Company’s common stock at a price
per share of $8.65, which represents approximately 11.1% of the issued and
outstanding capital stock of the Company as of and immediately after
consummation of the transactions contemplated by the Securities Purchase
Agreement, for an aggregate purchase price of $25,950,000.  The
proceeds will be used for working capital and general corporate
purposes.  The transactions were completed on December 13,
2007.
 
 In
connection with Securities Purchase Agreement, the Company also entered into
certain registration rights agreements (“collectively, the “Registration Rights
Agreement”) with the Investors, pursuant to which, among other things, the
Company agreed to register the Shares within a pre-defined
period.  Under the terms of the Registration Rights Agreement, the
Company isobligated to
file a registration statement (the “Registration Statement”) under the
Securities Act of 1933 on Form S-3 covering the resale of the Shares issued to
the Investors under the Securities Purchase Agreement.  The Company is
subject to registration delay penalty payments in the amounts prescribed by the
Registration Rights Agreement if it is unable to file the Registration Statement
or cause it to become effective or maintain its effectiveness as required by the
Registration Rights Agreement.  The Form S-3 has been filed by the
Company as required by the Registration Rights Agreement.
 
 21.
              Statutory
      and other reserves
 
 The
Company’s statutory and other reserves comprise statutory reserve and enterprise
expansion fund of Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou in the
PRC.
 
 As
      of December 31,2007
                          
                          
                          2006Statutory
      reserve
                          
                          $
                          4,802,426
                          
                          
                          $
                          3,093,031Enterprise
      expansion fund
                          
                          
                          55,234
                          
                          
                          
                          55,234$
                          4,857,660
                          
                          
                          $
                          3,148,265
 
 Statutory
reserve
 
 Under PRC
regulations, Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Wonder and
Wonder Motor 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.
  F -
41
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 21.
              Statutory
      and other reserves (Cont’d)
 
 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
and Wonder Motor, 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.
 
 22.
              Defined
      contribution plan
 
 The
Company and its qualified employees are each required to make contributions to
the plan at the rates specified in the plan organized by the PRC municipal and
provincial governments which covers pensions, unemployment and medical
insurances, and staff housing fund.  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 $681,944, $490,519 and $417,824 for
the year ended December 31, 2007, 2006 and 2005, respectively.
  F -
42
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 23.
              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
alternator, starter and rods and shafts and operating results of the Company
and, as such, the Company has determined that the Company has three operating
segments as defined by SFAS 131, “Disclosures about Segments of an Enterprise
and Related Information”: Alternator, starter and rods and shafts.
 
 Alternators
                        
                        
                        Starters
                        
                        
                        Rods
      and shafts
                        
                        
                        TotalYears
      ended December 31
                        
                        
                        Years
      ended December 31
                        
                        
                        Years
      ended December 31
                        
                        
                        Years
      ended December 312007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005Revenue
      from external   customers
                        
                        $
                        59,790,042
                        
                        
                        $
                        45,216,038
                        
                        
                        $
                        30,118,341
                        
                        
                        $
                        35,014,035
                        
                        
                        $
                        26,934,445
                        
                        
                        $
                        17,944,464
                        
                        
                        $
                        7,279,645
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        102,083,722
                        
                        
                        $
                        72,150,483
                        
                        
                        $
                        48,062,805Interest
      income
                        
                        
                        57,177
                        
                        
                        
                        41,954
                        
                        
                        
                        17,844
                        
                        
                        
                        31,463
                        
                        
                        
                        24,154
                        
                        
                        
                        10,632
                        
                        
                        
                        16,631
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        105,271
                        
                        
                        
                        66,108
                        
                        
                        
                        28,476Interest
      expenses
                        
                        
                        1,039,895
                        
                        
                        
                        507,310
                        
                        
                        
                        383,085
                        
                        
                        
                        368,790
                        
                        
                        
                        300,383
                        
                        
                        
                        228,241
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,408,685
                        
                        
                        
                        807,693
                        
                        
                        
                        611,326Amortization
                        
                        
                        42,945
                        
                        
                        
                        19,295
                        
                        
                        
                        16,661
                        
                        
                        
                        10,977
                        
                        
                        
                        10,357
                        
                        
                        
                        9,926
                        
                        
                        
                        36,790
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        90,712
                        
                        
                        
                        29,652
                        
                        
                        
                        26,587Depreciation
                        
                        
                        1,619,077
                        
                        
                        
                        1,174,059
                        
                        
                        
                        963,870
                        
                        
                        
                        294,740
                        
                        
                        
                        227,482
                        
                        
                        
                        194,691
                        
                        
                        
                        100,228
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,014,045
                        
                        
                        
                        1,401,541
                        
                        
                        
                        1,158,561Segment
      profit
                        
                        
                        11,103,589
                        
                        
                        
                        4,835,128
                        
                        
                        
                        3,904,964
                        
                        
                        
                        4,560,488
                        
                        
                        
                        4,818,079
                        
                        
                        
                        3,384,753
                        
                        
                        
                        1,822,949
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,487,026
                        
                        
                        
                        9,653,207
                        
                        
                        
                        7,289,717Segment
      assets
                        
                        
                        79,027,844
                        
                        
                        
                        54,860,505
                        
                        
                        
                        35,053,650
                        
                        
                        
                        37,624,611
                        
                        
                        
                        22,308,718
                        
                        
                        
                        16,990,104
                        
                        
                        
                        23,278,939
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        139,931,394
                        
                        
                        
                        77,169,223
                        
                        
                        
                        52,043,754Expenditure
      for segment assets
                        
                        $
                        5,732,146
                        
                        
                        $
                        1,685,790
                        
                        
                        $
                        1,292,607
                        
                        
                        $
                        1,533,523
                        
                        
                        $
                        1,951,822
                        
                        
                        $
                        770,284
                        
                        
                        $
                        754,133
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        8,019,802
                        
                        
                        $
                        3,637,612
                        
                        
                        $
                        2,062,891
  F -
43
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 23.
              Segment
      information (Cont’d)
 
 A
reconciliation is provided for unallocated amounts relating to corporate
operations which is not included in the segment information.
 Years
      ended December 31,2007
                        
                        
                        2006
                        
                        
                        2005Total
      consolidated revenue
                        
                        $
                        102,083,722
                        
                        
                        $
                        72,150,483
                        
                        
                        $
                        48,062,805Total
      profit for reportable segments
                        
                        $
                        17,487,026
                        
                        
                        $
                        9,653,207
                        
                        
                        $
                        7,289,717Unallocated
      amounts relating to  relating to operations:Interest
      income
                        
                        
                        6,513
                        
                        
                        
                        30,702
                        
                        
                        
                        63Other
      income
                        
                        
                        16,203
                        
                        
                        
                        18,418
                        
                        
                        
                        9,753Other
      general expenses
                        
                        
                        (468,987
                        )
                        
                        
                        (106,563
                        )
                        
                        
                        (1,351
                        )Unusual
      charge - make good provision
                        
                        
                        (18,265,500
                        )
                        
                        
                        (7,507,500
                        )
                        
                        
                        -(Loss)/income
      before income taxes
                        
                        $
                        (1,224,745
                        )
                        
                        $
                        2,088,264
                        
                        
                        $
                        7,298,182
 
 As of December 31,2007
                        
                        
                        2006
                        
                        
                        2005AssetsTotal
      assets for reportable segments
                        
                        $
                        139,931,394
                        
                        
                        $
                        77,169,223
                        
                        
                        $
                        52,043,754Cash
      and cash equivalents
                        
                        
                        2,421,363
                        
                        
                        
                        830,917
                        
                        
                        
                        9,008Marketable
      securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        37,159Other
      receivables
                        
                        
                        39,948
                        
                        
                        
                        -
                        
                        
                        
                        -Property,
      plant and equipment
                        
                        
                        4,030
                        
                        
                        
                        -
                        
                        
                        
                        -$
                        142,396,735
                        
                        
                        $
                        78,000,140
                        
                        
                        $
                        52,089,921
 
 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 :-
 
 Years ended December 31,2007
                      
                      
                      2006
                      
                      
                      2005PRC
                      
                      $
                      92,328,725
                      
                      
                      $
                      68,686,842
                      
                      
                      $
                      47,416,125Others
                      
                      
                      9,754,997
                      
                      
                      
                      3,463,641
                      
                      
                      
                      646,680Total
                      
                      $
                      102,083,722
                      
                      
                      $
                      72,150,483
                      
                      
                      $
                      48,062,805
 
 24.
              Subsequent
      events
 
 (i)
              On
      January 1, 2008, Wonder entered into an agreement with 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 $4.08 million (RMB 29.75 million).  Upon
      completion of the transaction, Jinzhou Hanhua is considered as a
      subsidiary of the Company as Wonder obtained control over Jinzhou Hanhua
      in January, 2008 by appointing more than half of members in the board of
      directors in accordance with Jinzhou Hanhua’s Memorandum and Articles of
      Association.
  F -
44
  Wonder
Auto Technology, Inc.
 Notes
to Consolidated Financial Statements
 (Stated
in US Dollars)
 
 24.
              Subsequent
      events (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 by January 28, 2008.  The second
installment of approximately $0.98 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 31 December 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.
 
 (ii)
              February
      2, 2008, stockholders of CIL and ECL resolved to surrender the right of
      entitlement to the second tranche of 1,650,000 shares placed with the
      escrow agent to Xiangdong Gao under the escrow agreement for the fiscal
      year ended December 31, 2007 respectively.  On the same date,
      separate agreement was signed between CIL, ECL and Xiangdong Gao whereby
      both CIL and ECL have agreed to give the right of the entitlement to the
      aforementioned escrowed shares related to the fiscal year ended December
      31, 2007 to Xiangdong Gao as a gift (that is for nil
      consideration).  Xiangdong Gao is a beneficial stockholder of
      the Company.
  F -
45




SIGNATURES




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




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




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




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




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





EXHIBIT
INDEX




Exhibit
      No.
                
                Description2.1
                
                Share
      Exchange Agreement, dated June 22, 2006, among the Company, Wonder Auto
      Limited and its stockholders. [Incorporated by reference as Exhibit 2.1 to
      the Company’s current report on Form 8-K filed on June 22,
      2006].2.2
                
                Stock
      Purchase Agreement, dated December 19, 2005, by and among the Company,
      Halter Financial Investments, L.P., Hisonic International, Inc.
      [Incorporated by reference as Exhibit 10.1 to Schedule 13D filed on
      December 21, 2005].3.1
                
                Articles
      of Incorporation of the Company as filed with the Secretary of State of
      Nevada, as amended to date. [Incorporated by reference as Exhibit 3.1 to
      the Company’s registration statement on Form SB-2 filed on December 11,
      2001 in commission file number 333-74914].3.2
                
                Amended
      and Restated Bylaws of the Company. [Incorporated by reference as Exhibit
      3.4 to the Company’s registration statement on Form SB-2 filed on December
      11, 2001 in commission file number 333-74914].10.1
                
                Form
      of the Stock Purchase and Subscription Agreement, dated June 22, 2006.
      [Incorporated by reference as Exhibit 10.1 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.2
                
                Escrow
      Agreement, dated June 22, 2006, among the Company, Sterne Agee &
      Leach, Inc., Empower Century Limited, Choice Inspire Limited and
      Securities Transfer Corporation. [Incorporated by reference as Exhibit
      10.2 to the Company’s current report on Form 8-K filed on June 22,
      2006].10.3
                
                Escrow
      Agreement, dated June 22, 2006, by and among Wonder Auto Limited, Empower
      Century Limited, Thelen Reid & Priest LLP and certain purchasers.
      [Incorporated by reference as Exhibit 10.3 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.4
                
                Stock
      Purchase Agreement, dated April 28, 2004, between JinZhou Wonder Industry
      (Group) Co., Ltd and Wonder Auto Limited. [Incorporated by reference as
      Exhibit 10.4 to the Company’s current report on Form 8-K filed on June 22,
      2006].10.5
                
                Technical
      Cooperation Agreement, dated July 25, 2003, between JinZhou Halla
      Electrical Equipment Co., Ltd and MEISTER (Korea) Company Limited.
      [Incorporated by reference as Exhibit 10.5 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.6
                
                Strategic
      Cooperation Agreement, dated June 7, 2004, between JinZhou Halla
      Electrical Equipment Co., Ltd. And HIVRON Inc. [Incorporated by reference
      as Exhibit 10.6 to the Company’s current report on Form 8-K filed on June
      22, 2006].10.7
                
                Form
      of Purchase Contract with Supplier. [Incorporated by reference as Exhibit
      10.7 to the Company’s current report on Form 8-K filed on June 22,
      2006].10.8
                
                Equipment
      Purchase Agreement, dated January 1, 2006, between JinZhou Halla
      Electrical Equipment Co., Ltd. And Suzhou Tenuo Automation Co., Ltd.
      [Incorporated by reference as Exhibit 10.8 to the Company’s current report
      on Form 8-K filed on June 22, 2006].10.9
                
                Equipment
      Purchase Agreement, dated May 19, 2005, between JinZhou Halla Electrical
      Equipment Co., Ltd. And DMG meccanica. [Incorporated by reference as
      Exhibit 10.9 to the Company’s current report on Form 8-K filed on June 22,
      2006].










10.10
              
              Equipment
      Purchase Agreement, dated December 17, 2004, between JinZhou Halla
      Electrical Equipment Co., Ltd. And OMT Co., Ltd. [Incorporated by
      reference as Exhibit 10.10 to the Company’s current report on Form 8-K
      filed on June 22, 2006].10.11
              
              Loan
      Agreement, dated October 18, 2005, between JinZhou Halla Electrical
      Equipment Co., Ltd. And China Construction Bank (JinZhou Linghe Branch).
      [Incorporated by reference as Exhibit 10.11 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.12
              
              Loan
      Agreement, dated September 30, 2005, between JinZhou Halla Electrical
      Equipment Co., Ltd. And JinZhou Commercial Bank (Chengjian Branch).
      [Incorporated by reference as Exhibit 10.12 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.13
              
              Loan
      Agreement, dated July 8, 2005, between JinZhou Halla Electrical Equipment
      Co., Ltd and China Construction Bank (JinZhou Linghe Branch).
      [Incorporated by reference as Exhibit 10.13 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.14
              
              Mortgage
      Agreement, dated September 30, 2005, between JinZhou Halla Electronic
      Equipment Co., Ltd. And JinZhou Commercial Bank (Linghe Branch).
      [Incorporated by reference as Exhibit 10.14 to the Company’s current
      report on Form 8-K filed on June 22, 2006].10.15
              
              Lease
      Agreement, dated November 8, 2005, by and among Beijing International
      Technological Cooperation Center Wang Jing Tower Company, JinZhou Halla
      Electrical Equipment Co., Ltd. And Beijing Zhucheng Real Property
      Management Company. [Incorporated by reference as Exhibit 10.15 to the
      Company’s current report on Form 8-K filed on June 22, 2006]
    .10.16
              
              Employment
      Contract, dated June 21 , 2006, between Wonder Auto Limited and Qingjie
      Zhao. [Incorporated by reference as Exhibit 10.16 to the Company’s current
      report on Form 8-K filed on June 22, 2006].***10.17
              
              Employment
      Contract, dated June 21 , 2006, between Wonder Auto Limited and Yuncong
      Ma. [Incorporated by reference as Exhibit 10.17 to the Company’s current
      report on Form 8-K filed on June 22, 2006].***10.18
              
              Employment
      Contract, dated June 21 , 2006, between Wonder Auto Limited and Meirong
      Yuan. [Incorporated by reference as Exhibit 10.18 to the Company’s current
      report on Form 8-K filed on June 22, 2006].***10.19
              
              Employment
      Contract between JinZhou Halla Electrical Equipment Co., Ltd. And Seuk Jun
      Kim. [Incorporated by reference as Exhibit 10.19 to the Company’s current
      report on Form 8-K filed on June 22, 2006].***10.20
              
              Employment
      Contract between JinZhou Halla Electrical Equipment Co., Ltd. And Yuguo
      Zhao. [Incorporated by reference as Exhibit 10.20 to the Company’s current
      report on Form 8-K filed on June 22, 2006].***10.21
              
              Employment
      Contract between JinZhou Halla Electrical Equipment Co., Ltd. And Yongdong
      Liu. [Incorporated by reference as Exhibit 10.21 to the Company’s current
      report on Form 8-K filed on June 22,
2006].***










10.22
              
              Consulting
      Agreement, dated April 22, 2006, between Heritage Management Consultants,
      Inc. and Wonder Auto Limited. [Incorporated by reference as Exhibit 10.22
      to the Company’s current report on Form 8-K filed on June 22,
      2006].***10.23
              
              Amendment
      No. 1 to the Consulting Agreement, dated June 23, 2006, between Heritage
      Management Consultants, Inc. and Wonder Auto
Limited.***10.24
              
              Financial
      Advisory Agreement, dated March 15, 2006, between Wonder Auto Group and
      HFG International, Limited. [Incorporated by reference as Exhibit 10.23 to
      the Company’s current report on Form 8-K filed on June 22,
      2006].***10.25
              
              Assignment
      and Assumption Agreement, dated May 31, 2006, between Wonder Auto Group,
      HFG International Limited and Wonder Auto Limited. [Incorporated by
      reference as Exhibit 10.24 to the Company’s current report on Form 8-K
      filed on June 22, 2006].10.26
              
              Put
      Option Agreement, dated December 19, 2005, by and among the Registrant,
      Halter Financial Investments, L.P. and Rachel (Pin) Kang [Incorporated by
      reference as Exhibit 10.2 to Schedule 13D filed on December 21,
      2005].10.27
              
              Credit
      Facility Agreement, dated August 21, 2006, by and between JinZhou Halla
      Electrical Equipment Co., Ltd. And the Bank of China JinZhou Tiebei
      branch. [Incorporated by reference as Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on August 25, 2006]10.28
              
              Share
      Purchase Agreement, dated August 23, 2006, by and between Wonder Auto
      Limited and Winning International Development Limited. [Incorporated by
      reference as Exhibit 10.2 to the Company’s current report on Form 8-K
      filed on August 25, 2006].10.29
              
              Domestic
      Business Invoice Discount Agreement, dated August 21, 2006, by and between
      JinZhou Halla Electrical Equipment Co., Ltd. And the Bank of China JinZhou
      branch. [Incorporated by reference as Exhibit 10.1 to the Company’s
      current report on Form 8-K filed on October 3, 2006].10.30
              
              RMB
      Short-term Loan Agreement, dated September 13, 2006, by and between
      JinZhou Halla Electrical Equipment Co., Ltd. And the Bank of China JinZhou
      Tiebei branch. [Incorporated by reference as Exhibit 10.2 to the Company’s
      current report on Form 8-K filed on October 3, 2006].10.31
              
              Mortgage
      Agreement, dated September 13, 2006, by and between JinZhou Halla
      Electrical Equipment Co., Ltd. And the Bank of China JinZhou Tiebei
      branch. [Incorporated by reference as Exhibit 10.3 to the Company’s
      current report on Form 8-K filed on October 3, 2006].10.32
              
              Loan
      Agreement, dated November 24, 2006, by and between JinZhou Halla
      Electrical Equipment Co., Ltd. And DEG - Deutsche Investitions - und
      Entwicklungsgesellschaft mbH [Incorporated by reference as Exhibit 10.1 of
      the Company’s current report on Form 8-K filed on November 30,
      2006].10.33
              
              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 as Exhibit 10.1 of the
      Company’s quarterly report on Form 10-Q filed on November 1,
      2007].10.34
              
              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 as Exhibit 10.2 of the
      Company’s quarterly report on Form 10-Q filed on November 1,
      2007].










10.35
              
              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 as Exhibit 10.3 of the
      Company’s quarterly report on Form 10-Q filed on November 1,
      2007].10.36
              
              Form
      of the Stock Purchase Agreement, dated December 10, 2007. [Incorporated by
      reference as Exhibit 10.1 to the Company’s current report on Form 8-K
      filed on December 12, 2007].10.37
              
              Form
      of the Registration Rights Agreement, dated December 10, 2007.
      [Incorporated by reference as Exhibit 10.1 to the Company’s current report
      on Form 8-K filed on December 12, 2007].14
              
              Code
      of Ethics. [Incorporated by reference as Exhibit 14 to the Company’s
      annual report on Form 10-KSB filed on March 30, 2005].21
              
              Revised
      list of subsidiaries of the Company.**23
              
              Consent
      of PKF*24
              
              Power
      of Attorney (included on the signature page of this annual
      report).31.1
              
              Certification
      of Chief Executive Officer, pursuant to Rule 13a - 14(a).
  *31.2
              
              Certification
      of Chief Financial Officer, pursuant to Rule 13a - 14(a).
  *32.1
              
              Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *32.2
              
              Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *99.1
              
              Promissory
      Note, dated June 27, 2005 [Incorporated by reference as Exhibit 99.1 to
      the Company’s quarterly report on Form 10-QSB filed on August 15,
      2005].




* Filed
herein.


** Filed
with the Original Filing


***
Represents management contract or compensation plan or
arrangement.