**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**




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




For
      the
      fiscal year ended: December 31, 2006




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




For
      the
      transition period from __________ to ____________




Commission
      File Number: 000-50883




**WONDER
      AUTO TECHNOLOGY, INC.**


**(Exact
      name of registrant as specified in its charter)**




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




No.
                56 Lingxi Street
              Taihe
                District
              JinZhou,
                Liaoning
              Peoples
                Republic of China,(Address
                of principal executive office and zip
                code)




(86)
                0416-5186632(Registrant’s
                telephone number, including area code)Securities
                registered pursuant to Section 12(b) of the Act:**None**
              
              Securities
                registered pursuant to Section 12(g) of the Act:**Common
                Stock, par value $0.0001**


Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes o 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 o 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 x No o




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




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




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




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




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




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




**DOCUMENTS
      INCORPORATED BY REFERENCE:**




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







**WONDER
      AUTO TECHNOLOGY, INC.**




**FORM
      10-K**




**For
      the Fiscal Year Ended December 31, 2006**


Number
              
              
              
              Page**PART
                  I**Item
                  1.
              
              Business
              
              1Item
                    1A.Risk
                    Factors
              
              11Item
                    1B.Unresolved
                    Staff Comments
              
              18Item
                  2.
              
              Properties
              
              18Item
                  3.
              
              Legal
                  Proceedings
              
              18Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              19**PART
                  II**Item
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              
              19Item
                  6.
              
              Selected
                  Financial Data
              
              20Item
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              20Item
                  7A. Quantitative and Qualitative Disclosures about Market
                  Risk
              
              33Item
                  8.
              
              Financial
                  Statements and Supplementary Financial Data
              
              33Item
                  9.
              
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              
              33Item
                  9A. Controls and Procedures
              
              34Item
                  9B. Other Information
              
              34**PART
                  III**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate Governance
              
              34Item
                  11.
              
              Executive
                  Compensation
              
              34Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              35Item
                  13.
              
              Certain
                  Relationships and Related Party Transactions and Direction
                  Independence
              
              35Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              35
  **WONDER
            AUTO TECHNOLOGY, INC.**
  **FORM
            10-K**
 **For
            the Fiscal Year Ended December 31, 2006**
 (continued)
  Number
                  
                  
                  
                  Page
 **PART
                  IV**Item 15.
              
              Exhibits,
                  Financial Statements Schedules
              
              35




ii


**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 subsidiaries, Wonder Auto Limited and JinZhou
      Halla Electrical Equipment Co., Ltd.  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
      “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.









**PART
      I**




**Item
                1.**
            ***Business***




***Overview***




Wonder
      Auto Technology, Inc. is a holding company whose primary business operations
      are
      conducted through our subsidiary, Wonder Auto Limited, and its subsidiary Halla.
      Wonder Auto is a China-based manufacturer of automotive electrical parts,
      specifically, starters and alternators. Wonder Auto’s business is focused on
      designing, developing, manufacturing and selling automotive electrical parts.
      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.”




*Our
      Corporate History*




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




On
      March
      16, 2004, MyTop International Inc., or “MyTop”, purchased 1,025,000 shares of
      common stock from 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
      products, telecommunication products, and other hi-tech products and services
      through the acquisition of interests in one or more entities operating in those
      fields. MyTop entered into informal discussions with potential acquisition
      targets in China, but no agreements were ever reached.




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




On
      December 19, 2005, Hisonic, as the principal stockholder of WATG, entered into
      a
      stock purchase agreement with Halter Financial Investments, L.P. or “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. WATG effected 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 Limited was incorporated in the BVI in March 2004. Its wholly owned
      subsidiary Man Do Auto Technology Co. Ltd., or “Man Do” was incorporated under
      the law of the BVI in 2003. Neither Wonder Auto Limited nor Man Do has any
      active business operations other than their ownership of Halla, which is the
      primary company that manufactures our products. Halla was incorporated in China
      in March 1996 with a registered capital of $12 million. Over the years, Halla
      went through several ownership changes and is now 61% owned by Wonder Auto
      Limited and 39% owned by Man Do.




1




*Acquisition
      of Wonder Auto and Related Financing*




On
      June
      22, 2006, Wonder Auto Limited completed a private placement pursuant to which
      Wonder Auto Limited issued to certain accredited investors 45.277236 shares
      of
      its common stock for $12,000,000, such shares were then 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 Limited’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. In accordance with the escrow
      agreement, 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, the escrow agent. If Wonder Auto Limited does not achieve
      the specified minimum net income thresholds for a given fiscal year, then the
      escrow agent must deliver, for each year that the threshold is not met,
      1,650,000 shares of the common stock held in escrow to the private placement
      investors on a pro rata basis (based upon the total number of shares purchased
      by the investors in connection with the private placement transaction) to the
      extent such investors remain our stockholders at the time the escrow shares
      become deliverable. Wonder Auto Limited’s net income as of December 31, 2006 was
      $8,220,000 as it exceeded the minimum threshold for the 2006 fiscal year. Choice
      Inspire Limited and Empower Century Limited have agreed to give their rights
      of
      the entitlement to the 1,650,000 shares held in escrow to Xiangdong Gao without
      consideration; pursuant to an agreement dated February 8, 2007 among Choice
      Inspire Limited, Empower Century and Mr. Gao.




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




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




*Subsequent
      Transactions*




On
      August
      23, 2006, Wonder Auto entered into a share purchase agreement with Winning
      International Development Limited, or “Winning”, a BVI corporation, to purchase
      Winning’s 50% interest in JinZhou “Dong Woo” Precision Co., Ltd. or Dong Woo, a
      PRC company and a primary supplier of raw materials to Wonder Auto for $4.85
      million to be paid in two installments, an initial payment of $2.43 million
      and
      a subsequent payment of $2.42 million if Dong Woo reaches a specified net income
      target for fiscal 2006. The second installment of the purchase price was
      contingent upon Dong Woo attaining a net income of at least $1.63 million for
      fiscal year ended December 31, 2006. If Dong Woo failed to achieve the target
      net income, Wonder Auto was entitled to deduct from the unpaid portion of the
      purchase price an amount proportionally equal to the unfulfilled net income.
      According to audited financial data, Dong Woo attained the target net income
      level for fiscal year ended 2006. We paid $400,000 to Dong Woo on February
      13,
      2007. We are in the process of arranging for the payment of the remaining
      balance.




2




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




***Our
      Products and Market Presence***




We
      mainly
      engage in the design, development, manufacture and sale of automotive electrical
      parts 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 that 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 develop, manufacture
                and
                sell five series of alternators, which are characterized by their
                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.




·
            *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 ø67, ø70, ø74, ø76, ø81, ø87 and ø100, which produce between 0.85kW
                to 5.5kW of power.




The
      table
      below shows our main product lines:







Our
      products are suitable for use in various types of automobiles. However, we
      currently have more market presence in the sedan cars, especially those with
      smaller engines, with displacement typically below 1.6L. We strive to produce
      high quality products and have established a quality control system to ensure
      that we achieve this goal. We have obtained ISO9002, QS9000, and TS 16949
      certificates for our quality management system.




3




***Our
      Industry***




*Overview
      of Global Auto Industry*




According
      to statistics published by the PRC State Information Center, global sales of
      automobiles in 2005 exceeded 68 million units. This 2005 sales figure represents
      a 23.41% growth over the 55.4 million units sold in 2001. Different regions
      recorded different growth rates in 2005 with the U.S. and Western European
      markets recording slight gains and South America, 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 and the manufacture of automobiles components to areas
      with lower production cost, such as China, and other developing
      countries.




*Overview
      of Chinese Auto Industry*




In
      China,
      the total output of automobiles in China reached 7.28 million units in 2006,
      representing a 27.32% increase over 2005 according to the China Auto Mobile
      Information Net. China is now the second largest auto market in the world,
      with
      sales volume for 2006 reaching 7.22 million units. Of the 5.23 million passenger
      cars manufactured in 2006, 5.17 million were sold, representing 32.76% and
      30.02% increase over 2005, respectively. (Source: China Auto Mobile Information
      Net). It is expected that the production of automobiles in China will exceed
      8.50 million units in 2007. (Source: Beijing Daily). Among the 7.22 million
      vehicles sold, 60% of them were purchased by private owners of which 2.08
      million were small cars with engine displacements between 1 to 1.6 liters.
      Market specialists estimate that the number of cars owned by private owners
      approached approximately 22 million by the end of 2006, making China the second
      largest new car ownership market in the world, especially for privately owned
      automobiles. We believe that the increasing number of automobile sales will
      also
      increase the size of the automotive aftermarket. As the automotive aftermarket
      increases and vehicle owners use older automobiles, the need for replacement
      parts and maintenance increases. We believe this trend will create an increasing
      demand for our products. We anticipate that the growth of the auto industry
      in
      China will mainly be 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,
                may
                lead to higher private automobile
                ownership.




·
            **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 automobile ownership in China
                is about
                30 per 1000 inhabitants, which is low compared to the world average
                of
                about 130 per 1000. (Source: Xinhua Net, Yunnan Channel). The PRC
                National
                Commerce Department has 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.




4




*Small
      Engine Car Market in China*




Our
      products are manufactured principally for use in cars with small engine
      capacities between 1 and 1.6 liters. In 2006, 2.08 million cars with engine
      capacities between 1 to 1.6 liters were sold in China, representing about 28%
      of
      the total vehicles sold in China during the same period. (Source: China Auto
      Mobile Information Net). We believe the sales for small engines cars will
      continue to grow rapidly because the rising oil prices will make energy
      efficient small engine cars more attractive to consumers. In addition, small
      engine cars have price advantages over large engine cars and are more
      environmentally friendly which makes them more suitable in China, which
      currently has a relatively low income per capita and faces significant
      environmental issues. The Chinese government promulgated a regulation in April
      2006 that further encourages the consumption of small engine vehicles. The
      regulation provides for an upward adjustment of the tax rate applicable to
      larger vehicles in order to encourage consumers to purchase smaller engine
      vehicles. Under the regulation, the top tax rate applicable to vehicles with
      engine displacements larger than 2 liters may be raised as high as 20% from
      8%,
      while the tax rates for vehicles with engine displacements less than 2 liters
      are 3-5%.




*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% respectively, from
      the
      previous year. Since the number of automobiles sold in China has reached 32
      million units by the end of 2005 with an expected increase in the future, we
      believe the replacement auto parts market in China will become 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).




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 is expected to 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 also will 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
      became 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.




5


***Our
      Strategy - How We Plan to Succeed***




Our
      strategic plan includes the following components:




*Increase
      production capacity* .
      We
      currently manufacture our products out of a single facility located in JinZhou,
      Liaoning Province of China. We used approximately $6 million of the net proceeds
      raised in the private placement in June 2006 to expand our production capacity.
      Upon the completion of the additional production lines, we expect that our
      production capacity for alternators and starters will reach approximately 1.68
      million and 1.78 million units, respectively. We expect these new production
      lines to be completed by July 2007. Thus far, we have increased our unit
      production of alternators and starters from approximately 1.42 million units
      in
      fiscal 2005 to approximately 2.26 million units as of December 31,
      2006.




*Strengthen
      our research and development capabilities* .
      We
      believe that as China’s market opens to more competition, the auto parts
      industry will be affected by a surge of new industry specific software and
      other
      technology and the subsequent development of more technologically advanced
      products. We plan to invest about $2.4 **** million
      to purchase testing equipment to further improve our R&D capability in the
      next twelve months. We expect that this investment will significantly contribute
      to the development of new high quality products with higher output power,
      smaller size and weight, longer duration and higher endurance to harsh
      environment.




*Expand
      sales to existing customers and actively market to new
      customers* .
      We plan
      to expand sales to the existing clients by providing high quality products
      and
      services to them and developing new products to meet their future demand for
      new
      models of automobiles and engines. We also intend to develop new OEM customers
      in China, increase our presence in the international trade shows to increase
      our
      brand recognition and promote our products, and increase our sales to the
      replacement markets in the future by investing more human resources and
      promotion efforts in this segment.




***Our
      Intellectual Property***




The
      following patents have been issued to us:




**Patent**
            
            **Patent
                Type**
            
            **Patent
                No.**
            
            **Expiration
                Date**
            
            **Country**Configuration
                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




Additionally,
      we filed 32 patent applications in 2006 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.




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 expires in September 2007. We are under
      a
      contractual obligation to keep the identity of our Japanese licensor
      confidential.




6




Our
      goal
      is to utilize our intellectual property to provide us with a competitive
      advantage but we cannot give any assurance that the protection afforded our
      intellectual property will be adequate.




***Our
      Internal and Strategic Research and Development Efforts - How We Create New
      Products and Enhance Existing Ones***




*Overview*




We
      believe that the development of new products and production methodologies is
      critical to our success. Wonder Auto currently operate two research and
      development centers, each performing different research and development
      activities. Our first research and development center is located at our
      principal business headquarters in JinZhou, Liaoning Province of China. In
      June
      2004, we set up a new center in Beijing, China. As of December 31, 2006, Wonder
      Auto’s research and development personnel consists of 34 employees, six of whom
      are foreign experts and 25 of whom 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 2006, we had 29
      joint development programs (16 for alternators and 13 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 jointly developed
      products. In the past three years, we were engaged as the supplier in
      approximately 76.5% of the successful joint development projects.




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 research and development
      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 four 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 to us a 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 that 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. 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, 2006, sales of the licensed products amounted to
      approximately $0.48 million and the amount of royalties paid was approximately
      $0.03 **** million.
      We are under a contractual obligation to keep the identity of our Japanese
      licensor confidential.




7




*Research
      and Development Expenses*




For
      the
      fiscal years ended December 31, 2004, 2005 and 2006, 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 $0.28 million, $0.48 million and $0.5 **** million,
      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 $1.07 million, $0.99 million and $1.06 million, representing
      approximately 2.53%, 2.06% and 1.47% **** of
      our
      sales for those years, respectively.




***Our
      Sales and Marketing Efforts - How We Sell Our
      Products***




We
      market
      our products directly to our customers though our sales department, which,
      as of
      December 31, 2006, consisted of 26 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 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.
      Our
      overseas sales increased to approximately 1.35% of our total sales in 2005
      and
      approximately 5% of our total sales in 2006.




In
      addition to our sales and marketing department, which perform customer service
      functions, we also employ outside representatives whose primary function is
      to
      help us understand our customers’ needs and promote services that best meets
      their requirements. These representatives also help our customers resolve
      installation problems and provide general customer service. As of December
      31,
      2006, we had 9 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.




*Our
      Suppliers and Supplier Arrangements* .




We
      purchase the majority of the raw materials from suppliers located in China
      including Dong Woo, a company in which we hold 50% equity interest, Yingkou
      Die-Casting Products Co., Ltd., JinZhou Huahua Electrical Systems Co., Ltd.,
      Tianjin Jingda Rea Special Enamelled Wire Co., Ltd., S.W.T. and Tianjin Showa
      Enamelled Wire Co., Ltd. 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 suggest technical improvements to
      them.




8




We
      mostly
      use a dual supplier system to source the raw materials that we use in our
      products and we maintain absolute exclusive supplier arrangements and
      non-exclusive supplier arrangements. About 70% of the raw materials that we
      use
      to manufacture our products is 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 raw materials to 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 11 vendors. These suppliers
                provided
                us with approximately 61.5% 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 2006, we
                had non-exclusive supplier arrangements with 35 vendors who supplied
                us
                with approximately 38.5% 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
      0.14 % **** of
      our
      total account payables in 2004, 2005 and 2006, respectively.




***Our
      Major Customers***




Large
      automobile manufacturers and automotive engine suppliers are our primary and
      most desirable customers. Our major customers include Beijing Hyundai Motor
      Co.,
      Dongfeng Yueda Kia Motors, SAIC GM WuLing, Chery, Geely, Tianjin XiaLi
      Automobile Co. and Shenyang Aerospace Mitsubishi Motors Engine Manufacturing
      Co., Ltd. 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 DaimlerChrysler, South Korea Hyundai and Korean Doosan. The number
      of our clients has increased about 195% 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.




For
      the
      fiscal years ended December 31, 2006 and 2005, our top ten largest customers
      accounted for approximately 75.03% and 77.28% of our total revenues,
      respectively .
      In
      2006, our two biggest customers Beijing Hyundai Motor Company and Shenyang
      Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd. accounted
      for approximately 18.97% and 14.41 % of our
      total revenues ,
      respectively. No other
      customers accounted for more than 10% of our revenues in 2006 .




9




***Our
      Competition***




The
      automobile parts market in China is very competitive. We compete based on 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.




***Our
      Employees***




As
      of
      December 31, 2006, we employed 318 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 approximately $0.49 million **,** $0.42
      million and $0.39 million for the fiscal years 2006, 2005 and 2004,
      respectively.




10




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**




**A
      large percentage of our revenues are 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 revenues historically have been derived from a
      limited number of customers. Four customers -- Beijing Hyundai, Shenyang
      AeroSpace Mitsubishi, Dongfeng YueDa Kia Motors Co., Ltd. and Harbin Dongan
      --
      accounted for approximately 52% of our sales in 2006. 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.




**Our
      revenues will decrease if there is less demand for vehicles in which our
      products are installed.**




We
      sell
      our products primarily to manufacturers of sedans and passenger vehicles. If
      sales of sedans and passenger vehicles decrease, demand for our products and
      our
      revenues will decrease accordingly.




**If
      the pricing and terms on which we purchase raw materials and component parts
      from our suppliers unfavorably change, we may become unable to produce and
      market our products on favorable terms.**




We
      purchase the raw materials and component parts which we use to manufacture
      our
      products from over 40 suppliers located primarily in Asia. The raw materials
      that we use are mainly divided into four categories: metal parts,
      semiconductors, chemicals and packaging materials. Our primary vendors and
      suppliers include YingKou Die-Casting Co., Ltd., Dong Woo, S.W.T., JinZhou
      ChangZe Machinery Plant, JinZhou HanHua Electrical Equipment Co., Ltd. and
      TianJin Showa Enamelled Wire Co. Ltd. If these or any other important suppliers
      are unable or unwilling to provide us with such raw materials and/or component
      parts on terms favorable to us, we may be unable to produce certain products,
      which could have a material adverse effect on our sales and revenue. If the
      prices of raw materials needed for our products increase, and we cannot pass
      these price increases on to our customers, our profit margins and operating
      results will suffer.




**If
      our customers and/or the ultimate consumers of the vehicles, which 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 on sedans and 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 and/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 do not have product liability insurance. The publicity surrounding
      these sorts of claims is also likely 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 stockholder
      value.




11




**If
      our credit provider were to default on the credit facility agreement, our
      liquidity and business operation could be negatively
      affected.**




We
      rely
      partially on credit facilities provided by various banks to provide the
      necessary liquidity to maintain our business operations. If the banks were
      to
      default on any of the credit facility agreements, it could have a negative
      impact on our liquidity, which in turn may damage our business operations and
      financial results.




**We
      face strong competition from both Chinese and international competitors in
      the
      auto parts manufacturing industry.**




We
      compete worldwide with a number of other global and PRC-based manufacturers
      and
      distributors that produce and sell products similar to ours. Price, quality,
      and
      technological innovation are the primary elements of competition. Our main
      competitors are located in China, including Shanghai Valeo Automotive Electrical
      Systems Co. Ltd, and Hubei Shendian Auto Motor Co. Ltd. (a joint venture of
      Hubei Shendian and RAMY (U.S.). After China lifted its protections to infant
      industries, we have seen an increasing competition from multinational auto
      parts
      manufacturers and expect this trend to continue. Currently, our primary
      international competitors include VALEO (France), BOSCH (German), RAMY (U.S.),
      Mitsubishi Motor (Japan) and Denso (Japan). We are not as large as a number
      of
      our competitors and do not have the brand recognition or substantial financial
      or other resources of some of our competitors.




**Our
      business may adversely change due to the cyclical nature of the vehicular
      markets we serve.**




Our
      financial performance depends, in large part, on the varying conditions in
      the
      automotive markets that we serve. The volume of automotive 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
      also are 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 due to poor overall economic conditions or adverse
      changes in the external influences upon our business, our results of operations
      and business will suffer.




**Our
      products are subject to recall for performance related
      issues.**




Like
      many
      other participants in the automotive industry, we are at risk for product recall
      costs. As of December 31, 2006, our products have not been the subject of an
      open recall. Product recall costs 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 issue.
      Costs
      typically include the cost of the product, part or component being replaced,
      customer cost of the recall and labor to remove and replace the defective part
      or component. When a recall decision is made, we 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.




**Our
      results of operation could be adversely affected by high price of
      gasoline.**




The
      demand for our products depends, in large part, on the demand from the
      automobile markets we serve and on other economic metrics, such as gasoline
      prices, which influence industry demand. A prolonged increase in the market
      price of gasoline and other fuel products may result in less disposable income
      of consumers and lower spending by consumers on automobiles and automobile
      parts. This could result in a decreased demand for our products, which could
      negatively affect our results of operations. On the other hand, an increase
      in
      the price for gasoline could also lead to an increased demand for small engine
      automobiles, the main automobile sector we serve, and therefore, benefit us.
      During 2006 gasoline prices reached unprecedently high levels in the United
      States but have stabilized somewhat towards the end of 2006. It is difficult
      to
      predict the precise long term economic effects of high gasoline prices on the
      economy, the automobile industry generally or our results of
      operations.




12




**We
      might fail to adequately protect our intellectual property and third parties
      may
      claim that our products infringe upon their intellectual
      property.**




As
      part
      of our business strategy, we intend to accelerate our investment in new products
      and process technologies in an effort to strengthen and differentiate our
      product portfolio. As a result, we believe that the protection of our
      intellectual property will become increasingly important to our business.
      Currently, Wonder Auto holds 5 patents and has 32 pending 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 might
      be inadequate. For example, our pending or future patent applications might
      not
      be approved or, if allowed, they might not be of sufficient strength or scope.
      Conversely, third parties might assert that our technologies infringe their
      proprietary rights. In either case, litigation could result in substantial
      costs
      and diversion of our resources, and whether or not we are ultimately successful,
      the litigation could hurt our business and financial condition.




**Expansion
      of our business may strain our management and operational infrastructure and
      impede our ability to meet any increased demand for our automotive electrical
      component products.**




Our
      business plan is to significantly grow our operations by meeting the anticipated
      growth in demand for existing products, and by introducing new product
      offerings. Our planned growth includes the construction of new production lines
      to be put into operation over the next twelve months. Growth in our business
      may
      place a significant strain on our personnel, management, financial systems
      and
      other resources. Our business growth also presents numerous risks and
      challenges, including:




·
            our
                ability to successfully and rapidly expand sales to potential customers
                in
                response to potentially increasing
                demand;




·
            the
                costs associated with such growth, which are difficult to quantify,
                but
                could be significant; and




·
            rapid
                technological change.




To
      accommodate this growth and compete effectively, we may need to obtain
      additional funding to improve information systems, procedures and controls
      and
      expand, train, motivate and manage existing and additional employees. Funding
      may not be available in a sufficient amount or on favorable terms, if at all.
      If
      we are not able to manage these activities and implement these strategies
      successfully to expand to meet any increased demand, our operating results
      could
      suffer.




**We
      depend heavily on key personnel, and turnover 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 sole director, Chief Executive Officer, President
      and Secretary, Yuncong Ma, our Chief Operating Officer, Seuk Jun Kim, our Vice
      President of Research and Development, Meirong Yuan, our Chief Financial
      Officer, Yuguo Zhao, our Vice President of Sales 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. Significant turnover in our senior management could significantly
      deplete our institutional knowledge held by our existing senior management
      team.
      We depend on the skills and abilities of these key employees in managing the
      manufacturing, technical, marketing and sales aspects of our business, any
      part
      of which could be harmed by turnover in the future.




**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 CEO, President, Secretary, director and beneficial owner
      of
      61.05% of our common stock, serves as an executive director and is a 17% 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 Chinese pharmaceutical market),
      and an executive director and 10.96% owner of Jinheng Holdings (which is
      principally engaged in the manufacture and sale of automotive airbag safety
      systems in China). 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.
      Our officers and directors are accountable to us and our shareholders as
      fiduciaries, which requires that such officers and directors exercise good
      faith
      and integrity in handling our affairs. However, their existing responsibilities
      to other entities may limit the amount of time they can spend on our affairs.
      Mr. Zhao devotes approximately 85% of his business time to the affairs of Wonder
      Auto and approximately 15% 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. Mr. Zhao works about 75 hours per week
      altogether.




13




**We
      do not have any independent directors and there is no assurance that any
      independent directors will be appointed or what their qualifications may be
      if
      they are appointed.**




We
      currently have only one director, Qingjie Zhao, who is also our CEO, President,
      Secretary and the beneficial owner of 61.05% of our common stock. Therefore,
      we
      do not have any independent directors. We plan to appoint a number of
      independent directors, which will constitute a majority of our board of
      directors before our common stock, is listed on a national securities exchange
      or Nasdaq, but we may not be able to identify independent directors qualified
      to
      be on our board.




**We
      bear the risk of loss in shipment of our products and have no insurance to
      cover
      such loss.**




Under
      the
      shipping terms of our standard 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.




**We
      may be exposed to potential risks relating to our internal controls over
      financial reporting and our ability to have those controls attested to by our
      independent auditors.**




As
      directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the
      Securities and Exchange Commission 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. In addition, the
      independent registered public accounting firm auditing a company’s financial
      statements must also attest to and report on management’s assessment of the
      effectiveness of the company’s internal controls over financial reporting as
      well as the operating effectiveness of the company’s internal controls. We were
      not subject to these requirements for the fiscal year ended December 31, 2006;
      accordingly, we have not evaluated our internal control systems in order to
      allow our management to report on, and our independent auditors to attest to,
      our internal controls as required by these requirements of SOX 404. Under
      current law, we will be subject to these requirements beginning with our annual
      report for the fiscal year ending December 31, 2007. 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.




**Our
      holding company structure may limit the payment of
      dividends.**




Wonder
      Auto Technology, Inc. has no direct business operations, other than our
      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.




14




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




**RISKS
      RELATED TO DOING BUSINESS IN CHINA**




**Changes
      in China’s political or economic situation could harm us and our operating
      results.**




Economic
      reforms adopted by the Chinese government have had a positive effect on the
      economic development of the country, but the government could change these
      economic reforms or any of the legal systems at any time. This could either
      benefit or damage our operations and profitability. Some of the things that
      could have this effect are:




·
              Level
                  of government involvement in the
                  economy;


·
              Control
                  of foreign exchange;


·
              Methods
                  of allocating resources;


·
              Balance
                  of payments position;


·
              International
                  trade restrictions; and


·
            International
                conflict.




The
      Chinese economy differs from the economies of most countries belonging to the
      Organization for Economic Cooperation and Development, or OECD, in many ways.
      For example, state-owned enterprises still constitute a large portion of the
      Chinese economy, and weak corporate governance traditions and a lack of flexible
      currency exchange policy continue to persist. Because of these differences,
      we
      may not develop in the same way or at the same rate as might be expected if
      the
      Chinese economy were similar to those of the OECD member countries.




**Our
      business is largely subject to the uncertain legal environment in China and
      your
      legal protection could be limited.**




The
      Chinese legal system is a civil law system based on written statutes. Unlike
      common law systems, it is a system in which precedents set in earlier legal
      cases are not generally used. The overall effect of legislation enacted over
      the
      past 20 years has been to enhance the protections afforded to foreign invested
      enterprises in China. However, these laws, regulations and legal requirements
      are relatively recent and are evolving rapidly, and their interpretation and
      enforcement involve uncertainties. These uncertainties could limit the legal
      protections available to foreign investors, such as the right of foreign
      invested enterprises to hold licenses and permits such as requisite business
      licenses. In addition, all of our executive officers and our directors are
      residents of China and not of the U.S., and substantially all the assets of
      these persons are located outside the U.S. As a result, it could be difficult
      for investors to effect service of process in the U.S., or to enforce a judgment
      obtained in the U.S. against our Chinese operations and
      subsidiaries.




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




Only
      recently has China permitted provincial and local economic autonomy and private
      economic activities. The Chinese 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.




15




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.




**Future
      inflation in China may inhibit our ability to conduct business profitably in
      China.**




In
      recent
      years, the Chinese economy has experienced periods of rapid expansion and highly
      fluctuating rates of inflation. During the past ten years, the rate of inflation
      in China has been as high as 20.7% and as low as -2.2%. These factors have
      led
      to the adoption by the Chinese government, from time to time, of various
      corrective measures designed to restrict the availability of credit or regulate
      growth and contain inflation. High inflation may in the future cause the Chinese
      government to impose controls on credit and/or prices, or to take other action,
      which could inhibit economic activity in China, and thereby harm the market
      for
      our products.




**Restrictions
      on currency exchange may limit our ability to receive and use our revenues
      effectively.**




The
      majority of our revenues will be settled in Renminbi and U.S. Dollars, and
      any
      future restrictions on currency exchanges may limit our ability to use revenue
      generated in Renminbi to fund any future business activities outside China
      or to
      make dividend or other payments in U.S. dollars. Although the Chinese government
      introduced regulations in 1996 to allow greater convertibility of the Renminbi
      for current account transactions, significant restrictions remain, including
      primarily the restriction that foreign-invested enterprises may only buy, sell
      or remit foreign currencies after providing valid commercial documents at those
      banks in China authorized to conduct foreign exchange business. In addition,
      conversion of Renminbi for capital account items, including direct investment
      and loans, is subject to governmental approval in China, and companies are
      required to open and maintain separate foreign exchange accounts for capital
      account items. We cannot be certain that the Chinese regulatory authorities
      will
      not impose more stringent restrictions on the convertibility of the
      Renminbi.




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




On
      September 8, 2006, the PRC Ministry of Commerce, or “MOFCOM,” together with
      several other government agencies, promulgated a comprehensive set of
      regulations governing the approval process by which a Chinese company may
      participate in an acquisition of its assets or its equity interests and by
      which
      a Chinese company may obtain public trading of its securities on a securities
      exchange outside of the PRC. Depending on the structure of the transaction,
      these regulations will require the Chinese parties to make a series of
      applications and supplemental applications to the governmental 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. Governmental approvals will have expiration dates by
      which a transaction must be completed and reported to the governmental agencies.
      Compliance with the new regulations is likely to be more time consuming and
      expensive than in the past and the government now can exert more control over
      the combination of two businesses. Accordingly, due to these new regulations,
      our ability to engage in business combination transactions has become
      significantly more complicated, time consuming and expensive and we may not
      be
      able to negotiate a transaction that is acceptable to our stockholders or
      sufficiently protect their interests in a transaction.




The
      new
      regulations allow PRC government agencies to assess the economic terms of a
      business combination transaction. Parties to a business combination transaction
      may have to submit to MOFCOM and the other government agencies an appraisal
      report, an evaluation report and the acquisition agreement, all of which form
      part of the application for approval, depending on the structure of the
      transaction. The regulations also prohibit a transaction at an acquisition
      price
      obviously lower than the appraised value of the Chinese 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
      regulations also limit our ability to negotiate various terms of the
      acquisition, including aspects of the initial consideration, contingent
      consideration, holdback provisions, indemnification provisions and provisions
      relating to the assumption and allocation of assets and liabilities. Transaction
      structures involving trusts, nominees and similar entities are prohibited.
      Therefore,such
      regulations may impede our ability tonegotiate
      and complete a business combination transaction on financial terms, which
      satisfy our investors and protect our stockholders’ economic interests and we
      may not be able to negotiate a business combination transaction on terms
      favorable to our stockholders.




16




**The
      value of our securities will be affected by the foreign exchange rate between
      U.S. dollars and Renminbi.**




The
      value
      of our common stock will be affected by the foreign exchange rate between U.S.
      dollars and Renminbi, and between those currencies and other currencies in
      which
      our sales may be denominated. For example, to the extent that we need to convert
      U.S. dollars into Renminbi for our operational needs and should the Renminbi
      appreciate against the U.S. dollar at that time, our financial position, the
      business of the company, and the price of our common stock may be harmed.
      Conversely, if we decide to convert our Renminbi into U.S. dollars for the
      purpose of declaring dividends on our common stock or for other business
      purposes and the U.S. dollar appreciates against the Renminbi; the U.S. dollar
      equivalent of our earnings from our subsidiaries in China would be
      reduced.




Our
      strategy to procure steel supply is to diversify our suppliers both in the
      PRC
      and overseas. Currently, some of our raw materials 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 increase on to our
      customers, our profitability and operating results will suffer. In addition,
      since our sales to international customers grew rapidly, we are subject to
      the
      risk of foreign currency depreciation.




**RISKS
      RELATED TO THE MARKET FOR OUR STOCK**




***Our
      common stock is quoted on the OTC Bulletin Board, which may have an unfavorable
      impact on our stock price and liquidity.***




Our
      common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is
      a
      significantly more limited market than the New York Stock Exchange or Nasdaq
      system. The quotation of our shares on the OTC Bulletin Board may result in
      a
      less liquid market available for existing and potential stockholders to trade
      shares of our common stock, could depress the trading price of our common stock
      and could have a long-term adverse impact on our ability to raise capital in
      the
      future.




**Certain
      of our stockholders hold a significant percentage of our outstanding voting
      securities.**




Mr.
      Qingjie Zhao, our sole director, CEO, President and Secretary, is the beneficial
      owner of approximately 61.05% of our outstanding voting securities. As a result,
      he possesses significant influence, giving him the ability, among other things,
      to elect a majority of our Board of Directors and to authorize or prevent
      proposed significant corporate transactions. His ownership and control may
      also
      have the effect of delaying or preventing a future change in control, impeding
      a
      merger, consolidation, takeover or other business combination or discourage
      a
      potential acquirer from making a tender offer.




**Certain
      provisions of our Articles of Incorporation may make it more difficult for
      a
      third party to effect a change- in-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 voting rights including the right to vote as a series on particular
      matters, 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 the 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.




17




**Item
                1B.**
            ***Unresolved
                Staff Comments***




None.




**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.




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 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
      November 14, 2007. The monthly rent is approximately $2,125.




We
      currently have established three alternator assembly line facilities and three
      starter assembly line facilities. The total annual production capacity of these
      production lines is approximately 1.08 million units of alternators and 1.18
      million units of starters, assuming two work shifts per day with eight hours
      each.




Our
      207
      production workers currently work in two work shifts of eight hours, each to
      maximize the capabilities of our assembly lines. For each year from 2004 to
      2006, the utilization rates of our alternator production lines were
      approximately 74%, 81% and 106 % **,** respectively, while those of the starter production lines were approximately
      96.3%, 140% and **** 74 %, 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 have
      begun
      to use a portion of the $12 million that we raised in our private placement
      that
      closed in June 2006 to construct additional production lines to expand our
      production capacity for alternators and starters. After completion of the
      additional production lines, it is expected that our production capacity for
      alternators and starters will reach approximately 1.68 million and 1.78 million
      units, respectively. We expect that these new production lines will,
      approximately, be completed by July 2007.




**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.




18




**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 2006.




**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 became eligible for quotation on the OTC Bulletin Board on October
      4, 2005 and currently trades under the symbol “WATG.OB.” Our CUSIP number is
      978166106.




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**
            
            **Low*****Year
                Ended December 31, 2006***1st
                Quarter
            
            $
            1.40
            
            $
            1.202nd
                Quarter
            
            
            2.65
            
            
            1.253rd
                Quarter
            
            
            4.80
            
            
            3.004th
                Quarter
            
            
            5.20
            
            
            3.44***Year
                Ended December 31, 2005***1st
                Quarter
            
            
            N/A
            
            
            N/A2nd
                Quarter
            
            
            N/A
            
            
            N/A3rd
                Quarter
            
            
            N/A
            
            
            N/A4th
                Quarter
            
            
            0.15
            
            
            0.075





(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, 2006, there were approximately 76 **** stockholders
      of record of our common stock.




***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.




19




**Item
                6.**
            ***Selected
                Financial Data***




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




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




**Year
                Ended December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****(in
                thousands)****Statement
                of operations**data:Sales
                Revenues:
            
            $
            22,781
            
            $
            39,791
            
            $
            42,266
            
            $
            48,063
            
            $
            72,150Cost
                of Sales
            
            
            (17,288
            )
            
            (31,193
            )
            
            (33,074
            )
            
            (36,787
            )
            
            (58,290
            )Gross
                profit
            
            
            5,493
            
            
            8,598
            
            
            9,192
            
            
            11,276
            
            
            13,860Expenses:Administrative
                expenses
            
            
            527
            
            
            593
            
            
            732
            
            
            1,011
            
            
            1,449Amortization
                and depreciation
            
            
            113
            
            
            112
            
            
            111
            
            
            128
            
            
            176Other
                operating expenses
            
            
            71
            
            
            27
            
            
            49
            
            
            16
            
            
            142Provision
                for doubtful debt
            
            
            4
            
            
            23
            
            
            2
            
            
            
            
            
            (8
            )Selling
                expenses
            
            
            1,135
            
            
            1,523
            
            
            1,510
            
            
            2,148
            
            
            2,137Total
                expenses
            
            
            1,850
            
            
            2,278
            
            
            2,404
            
            
            3,303
            
            
            3,896Income
                from continuing operations before taxes
            
            
            3,334
            
            
            5,883
            
            
            6,306
            
            
            7,298
            
            
            9,596Income
                taxes
            
            
            33
            
            
            (665
            )
            
            (718
            )
            
            (897
            )
            
            (1,270
            )Minority
              interests
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (102
            )Net
                income
            
            
            3,367
            
            
            5,218
            
            
            5,588
            
            
            6,401
            
            
            8,224Earnings
                per share - basic and diluted*
            
            $
            0.2
            
            $
            0.3
            
            $
            0.32
            
            $
            0.37
            
            $
            0.40Weighted
                average number of shares
              outstanding
                - basic and diluted*
            
            
            17,227
            
            
            17,227
            
            
            17,227
            
            
            17,227
            
            
            20,787Cash
                dividend declared per common share
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            0.33
            
            
            N/A**Cash
                flows data:**Net
                cash flows provided by (used in) operating activities
            
            $
            908
            
            $
            (2,481
            )
            $
            7,240
            
            $
            11,439
            
            $
            1,339Net
                cash flows used in investing activities
            
            
            (631
            )
            
            (1,300
            )
            
            (3,472
            )
            
            (5,063
            )
            
            (7,139
            )Net
                cash flows provided by (used in) financing activities
            
            
            304
            
            
            4,947
            
            
            (4,161
            )
            
            (3,988
            )
            
            9,226








**December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Balance
                sheet data:**Cash
                and cash equivalents
            
            $
            1,056
            
            $
            2,223
            
            $
            1,830
            
            $
            4.369
            
            $
            8,204Working
                capital4,367
            
            
            6,297;
            
            
            5,344
            
            
            10,185
            
            
            18,933Total
                assets
            
            
            28,591
            
            
            37,643
            
            
            36,975
            
            
            52,090
            
            
            78,000Total
                current liabilities
            
            
            14,154
            
            
            20,824
            
            
            19,262
            
            
            28,282
            
            
            37,194Long
                term liability
            
            
            -
            
            
            
            
            
            -
            
            
            4,955
            
            
            -Total
                liabilities
            
            
            14,154
            
            
            20,824
            
            
            19,262
            
            
            33,237
            
            
            37,194Total
                stockholders' equity
            
            
            14,437
            
            
            16,819
            
            
            17,713
            
            
            18,853
            
            
            38,227





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




***Overview***




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




20




***Our
      Background and History***




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




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




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




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




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




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




***Background
      and History of Wonder Auto and its Operating
      Subsidiaries***




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




***Acquisition
      of Wonder Auto and Related Financing***




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




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




21




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




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




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




***Subsequent
      Transactions***




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




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




***Industry
      Wide Factors that are Relevant to Our Business***




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




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




22




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




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




***Uncertainties
      that Affect our Financial Condition***




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




**Results
      of Operations**




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




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




**Year
                ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**RevenueSales
            
            $
            72,150
            
            $
            48,063
            
            $
            42,266Cost
                of sales
            
            
            58,290
            
            
            36,787
            
            
            33,074Gross
                profit
            
            
            13,860
            
            
            11,276
            
            
            9,192ExpensesAdministrative
                expenses
            
            
            1,449
            
            
            1,011
            
            
            732Amortization
                and depreciation176
            
            
            128
            
            
            111Other
                operating expenses
            
            
            142
            
            
            16
            
            
            49(Recovery
                of) / provision for doubtful debts
            
            
            (8)
            
            
            -
            
            
            2Selling
                expenses
            
            
            2,137
            
            
            2,148
            
            
            1,5103,896
            
            
            3,303
            
            
            2,404Income
                before the following items and taxes
            
            
            9,964
            
            
            7,972
            
            
            6,788Interest
                income
            
            
            97
            
            
            29
            
            
            14Other
                income
            
            
            357
            
            
            137
            
            
            148Professional
                fee for reverse takeover
            
            
            159
            
            
            -
            
            
            -Finance
                costs
            
            
            1,034
            
            
            839
            
            
            643Equity
                in net income of unconsolidated affiliates
            
            
            371
            
            
            -
            
            
            -Income
                before income taxes
            
            
            9,596
            
            
            7,298
            
            
            6,306Income
                taxes
            
            
            1,270
            
            
            897
            
            
            718Minority
                interests
            
            
            102
            
            
            -
            
            
            -Net
                income
            
            $
            8,224
            
            $
            6,401
            
            $
            5,588





23





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




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




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




*Cost
      of Goods Sold* .
      Our
      cost of goods sold increased $21.50 million to $58.29 million for the year
      ended
      December 31, 2006 from $36.79 million during the same period in 2005. As a
      percentage of net revenues, the cost of goods sold increased to 80.79% during
      the year ended December 31, 2006 from 76.54% in the same period of 2005. This
      increase is attributable to the rise in the cost of raw materials we use in
      our
      products. The price of raw materials rose by 8.92% in 2006 which resulted in
      an
      increase of 8.24% in the overall cost of goods sold despite our relatively
      stable labor and manufacturing costs.




24




*Gross
      Profit* .
      Our
      gross profit increased $2.58 million to $13.86 million for the year ended
      December 31, 2006 from $11.28 million for the same period in 2005. Gross profit
      as a percentage of net revenues was 19.21% for the year ended December 31,
      2006,
      as compared to 23.46% during the same period in 2005. The rise in the cost
      of
      raw materials dampened gross profit by offsetting any benefits, which could
      have
      otherwise accrued from a decrease in our labor and manufacturing costs and
      an
      increase in product price.




*Administrative
      Expenses* .
      Our
      administrative expenses increased $0.44 million, or 43.31%, to $1.45 million
      for
      the year ended December 31, 2006 from $1.01 million for the same period in
      2005.
      The increase was attributable to the increase in expenses incurred in the
      financing activities in the U.S., as well as audit expenses. As a percentage
      of
      net revenues, administrative expenses decreased to 2.01% for the year ended
      December 31, 2006 from 2.10% for the same period in 2005. This percentage
      decrease is primarily a function of our net revenues increasing faster than
      our
      administrative expenses.




*Amortization
      and depreciation* .
      Our
      amortization and depreciation expenses increased $0.05 million, or 37.35%,
      to
      $0.18 million for the year ended December 31, 2006 from $0.13 million for the
      same period in 2005. As a percentage of net revenues, expenses associated with
      amortization and depreciation decreased to 0.24% for the year ended December
      31,
      2006 from 0.27% for the same period in 2005. This percentage decrease is
      primarily a function of our net revenues increasing faster than our amortization
      and depreciation expenses.




*Selling
      expenses* .
      Our
      selling expenses decreased $10,000 to $2.14 million for the year ended December
      31, 2006 from $2.15 million for the same period in 2005. As a percentage of
      net
      revenues, our selling expenses decreased to 2.96% for the year ended December
      31, 2006 from 4.47% for the same period in 2005. This percentage decrease was
      primarily attributable to our utilization of more efficient controls that
      stabilized our selling expenses and improved the quality of our products
      resulting in less expenses related to repairs and replacements.




*Total
      expenses* .
      Our
      total expenses increased $0.59 million to $3.89 million for the year ended
      December 31, 2006 from $3.30 million for the same period in 2005. As a
      percentage of net revenues, our total expenses decreased to 5.40% for the year
      ended December 31, 2006 from 6.87% for the same period in 2005. This percentage
      decrease was primarily attributable to our utilization of more efficient
      controls that stabilized our selling expenses and improved the quality of our
      products resulting in less expenses related to repairs and
      replacements.




*Income
      from operations before taxes* .
      Income
      from operations before taxes increased $2.30 million, or 31.48%, to $9.60
      million during the year ended December 31, 2006 from $7.30 million during the
      same period in 2005. Income from operations before taxes as a percentage of
      net
      revenues decreased to 13.30% during the year ended December 31, 2006 from 15.18%
      during the same period in 2005.




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




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




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




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




25




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




*Net
      income* .
      Net
      income increased $1.82 million, or 28.47%, to $8.22 million during the year
      ended December 31, 2006 from $6.40 million during the same period in 2005,
      because of the factors described above.




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




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




*Cost
      of Goods Sold* .
      Our
      cost of goods sold increased $3.71 million or 11.23% to $36.79 million in 2005
      from $33.08 million in 2004. This increase was mainly attributable to the
      increase of sales volumes. As a percentage of net revenues, our cost of goods
      sold in 2005 decreased 1.71% from 2004 mainly because the sale of products
      with
      higher profit margins constituted a higher percentage of our sales revenue
      in
      2005 as compared with 2004.




*Gross
      Profit* .
      Our
      gross profit increased $2.08 million or 22.67% to $11.27 million in 2005 from
      $9.19 million in 2004. Gross profit as a percentage of net revenues increased
      1.71% in 2005 as compared with 2004 for the reason stated above.




*Administrative
      Expenses* .
      Our
      administrative expenses increased approximately $0.28 million, or 38.11%, to
      $1.01 million in 2005 from approximately $0.73 million in 2004. As a percentage
      of net revenues, administrative expenses increased 0.37% in 2005 as compared
      with 2004. This dollar increase was primarily attributable to salary increases
      resulting from the establishment of three new vice president positions and
      the
      increase cost for repairing our facilities.




*Amortization
      and depreciation* .
      Our
      amortization and depreciation expenses increased $17,000, or 15.32%, to
      approximately $128,000 in 2005 from approximately $111,000 in 2004. As a
      percentage of net revenues, expenses associated with amortization and
      depreciation increased 0.01% in 2005 as compared with 2004.




*Other
      operating expenses* .
      Other
      operating expenses decreased from $49,000 in 2004 to $16,000 in 2005. This
      decrease was primarily attributable to more efficient cost controls and
      management.




*Provision
      for doubtful debts* .
      Our
      provision for doubtful debts decreased from $2,000 in 2004 to $0 in 2005. This
      decrease was primarily attributable to the improvements in our accounts
      receivable management.




*Selling
      expenses* .
      Our
      selling expenses increased $638,000, or 42.25%, to $2.15 million in 2005 from
      $1.51 million in 2004. As a percentage of net revenues, our selling expenses
      in
      2005 increased 0.90% as compared with 2004. This dollar increase was primarily
      attributable to our increased marketing efforts and the increase of the sales
      volumes. We believe the increase of selling expenses is generally in line with
      the increase of sales revenue.




*Total
      expenses* .
      Our
      total expenses increased $899,000, or 37.40%, to $3.30 million in 2005 from
      $2.40 million in 2004. As a percentage of net revenues, our total expenses
      increased 1.19% in 2005 as compared with 2004. This dollar increase was
      primarily attributable to the factors described above.




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




26




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




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




**Allowance
      for doubtful debts**




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




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




**Liquidity
      and Capital Resources**




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




**Cash
      Flow**




**Years
                Ended December 31,****2004**
            
            **2005**
            
            **2006**Net
                cash provided by operating activities
            
            $
            7,239,337
            
            $
            11,439,101
            
            $
            1,388,932Net
                cash used in investing activities
            
            
            (3,471,586
            )
            
            (5,062,632
            )
            
            (7,136,865
            )Net
                cash (used in) provided by financing activities
            
            
            (4,161,411
            )
            
            (3,988,466
            )
            
            9,225,743Effect
                of foreign currency translation on cash and cash
                equivalents
            
            
            74
            
            
            150,993
            
            
            357,132Net
                cash Flow
            
            $
            (393,586
            )
            $
            2,538,996
            
            $
            3,834,942




*Operating
      Activities* :




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




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




*Investing
      Activities* :




Our
      main
      uses of cash for investing activities are payments to the acquisition of
      property, purchase of stock option rights, plant and equipment and restricted
      cash pledged as deposit for bills payable issuance.




27




Net
      cash
      used for investing activities in the year ended December 31, 2006 was $7.14
      million, which is an increase of $2.08 million from net cash used for investing
      activities of $5.06 million in the same period of 2005. The increase was due
      to
      investments in fixed assets and the acquisition of Dong Woo for $5.82 million
      and an investment of $0.5 million for a 20% in interest in Wonder
      Friends **,** a
      manufacturer of piston rods, vibration dampers and rotary axes for motor
      vehicles.




Net
      cash
      used for investing activities in the year 2005 was $5.06 million, which is
      an
      increase of $1.59 million from net cash used for investing activities of $3.47
      million in 2004. The increase for 2005 was primarily the result of the increased
      amount used for bank deposits pledging the issuance of bills
      payable.




*Financing
      Activities* :




Net
      cash
      provided by financing activities in the year ended December 31, 2006 totaled
      $9.23 million as compared to $3.99 million used in financing activities in
      the
      same period of 2005. The increase in net cash is attributable to the receipt
      of
      (i) $10.14 million (after payment of offering expenses) through the issuance
      of
      stock in a private placement completed in June 2006 and (ii) $880,000 from
      bank
      loans which more than offset the payment of $1.72 million by Halla as dividends
      to its stockholders.




Net
      cash
      used for financing activities was $3.99 million in 2005 as compared to $4.16
      million used for financing activities in 2004. The $2.29 million decrease in
      the
      payment of dividend and the $0.79 decrease in the repayment of a bank loan
      in
      2005 was more than offset by the $3.26 million increase of the proceeds from
      new
      bank loans in 2005.




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




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




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




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





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




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




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




28




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




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




**Obligations** **Under Material Contracts**




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




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




***Critical
        Accounting Policies***
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires our management to make
        assumptions, estimates and judgments that affect the amounts reported in
        the
        financial statements, including the notes thereto, and related disclosures
        of
        commitments and contingencies, if any. We consider our critical accounting
        policies to be those that require the more significant judgments and estimates
        in the preparation of financial statements, including the
        following:
  *·*
              *Use
                  of estimates.*In
                  preparing financial statements in conformity with accounting principles
                  generally accepted in the United States of America, management
                  makes
                  estimates and assumptions that affect the reported amounts of assets
                  and
                  liabilities and disclosures of contingent assets and liabilities
                  at the
                  dates of the financial statements, as well as the reported amounts
                  of
                  revenues and expenses during the reporting periods. These accounts
                  and
                  estimates include, but are not limited to, the valuation of accounts
                  receivable, inventories, deferred income taxes, provision for warranty
                  and
                  the estimation on useful lives of property, plant and equipment.
                  Actual
                  results could differ from those
                  estimates.
  ·
              *Allowance
                  of doubtful accounts.*The
                  Company establishes an allowance for doubtful accounts based on
                  management’s assessment of the collectibility of trade receivables. A
                  considerable amount of judgment is required in assessing the amount
                  of the
                  allowance, the Company considers the historical level of credit
                  losses and
                  applies percentages to aged receivable categories. The Company
                  makes
                  judgments about the creditworthiness of each customer based on
                  ongoing
                  credit evaluations, and monitors current economic trends that might
                  impact
                  the level of credit losses in the future. If the financial condition
                  of
                  the customers were to deteriorate, resulting in their inability
                  to make
                  payments, a larger allowance may be
                  required.
   29
  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.
  Based
        on
        the above assessment, the Company establishes a general provision to make
        a 50%
        provision for inventories aged over 1 year.
  Historically,
        the actual net realizable value is close to the management
        estimation.
  ·
              *Property,
                  plant and equipment.*Property,
                  plant and equipment are stated at cost less accumulated depreciation.
                  Cost
                  represents the purchase price of the asset and other costs incurred
                  to
                  bring the asset into its existing
                  use.
  Depreciation
        is provided on straight-line basis over their estimated useful lives. The
        principal depreciation rates are as follows:
 Annual
                  rate
              
              Residual
                  valueBuildings
              3
                  -
                  4.5%
              
              10%Plant
                  and machinery
              9%
              
              10%Motor
                  vehicles
              9-18%
              
              10%Furniture,
                  fixtures and equipment
              15%
              
              10%Tools
                  and equipment
              15-18%
              
              0
                  to 10%Leasehold
                  improvements
              20%
              
              0
   30
  Construction
        in progress mainly represents expenditures in respect of the Company’s new
        offices and factories under construction. All direct costs relating to the
        acquisition or construction of the Company’s new office and factories are
        capitalized as construction in progress. No depreciation is provided in respect
        of construction in progress.
  Maintenance
        or repairs are charged to expense as incurred. Upon sale or disposition,
        the
        applicable amounts of asset cost and accumulated depreciation are removed
        from
        the accounts and the net amount less proceeds from disposal is charged or
        credited to income.
  ·
              *Revenue
                  Recognition.*Revenue
                  from sales of the Company’s products is recognized when the significant
                  risks and rewards of ownership have been transferred to the buyer
                  at the
                  time when the products are put into use by its customers, the sales
                  price
                  is fixed or determinable and collection is reasonably
                  assured.
  ·
              *Warranty*.
                  It is the policy of the Company to provide after sales support
                  by way of a
                  warranty program. The Company provided warranties to certain customers
                  with warranty periods ranging from two years or 50,000 km to three
                  years
                  or 60,000 km, whichever comes
                  first.
  Based
        on
        the past experience, the Company sets up a policy of making a general provision
        for warranty such that the closing balance of this provision is equal to
        certain
        percentage of relevant sales during the reporting periods as follows :
  Year
                  ended December 31,
              
              %2006
              
              1.52005
              
              22004
              
              2
 
 ·
              *Recently
                  issued accounting pronouncements.*In
                  February 2006, the Financial Accounting Standards Board (“FASB”) issued
                  SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments: and
                  amendment of FASB Statements No. 133 and 140”. SFAS No. 155
                  simplifies the accounting for certain derivatives embedded in other
                  financial instruments by allowing them to be accounted for as a
                  whole if
                  the holder elects to account for the whole instrument on a fair
                  value
                  basis. SFAS No. 155 also clarifies and amends certain other provisions
                  of
                  SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all
                  financial
                  instruments acquired, issued or subject to a remeasurement event
                  occurring
                  in fiscal years beginning after September 15, 2006. Earlier adoption
                  is
                  permitted, provided the Company has not yet issued financial statements,
                  including for interim periods, for that fiscal
                  year.
   31
  In
        March
        2006, the FASB released SFAS No. 156 “Accounting for Servicing of Financial
        Assets: an amendment of FASB Statement No. 140” to simplify accounting for
        separately recognized servicing assets and servicing liabilities. SFAS No.
        156
        permits an entity to choose either the amortization method or the fair value
        measurement method for measuring each class of separately recognized servicing
        assets and servicing liabilities after they have been initially measured
        at fair
        value. SFAS No. 156 applies to all separately recognized servicing assets
        and
        liabilities acquired or issued after the beginning of an entity’s fiscal year
        that begins after September 15, 2006.
 
 In
        July
        2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This
        interpretation requires that the entity recognize in its financial statements
        the impact of a tax position, if that position is more likely than not of
        being
        sustained on audit, based on the technical merits of the position. The
        provisions of FIN 48 is effective for fiscal years beginning after December
        15,
        2006, with the cumulative effect of the change in accounting principle recorded
        as an adjustment to opening retained earnings.
 
 In
        September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement.” SFAS 157
        defines fair value, establishes a framework for measuring fair value, and
        expands disclosures about fair value measurements. This Statement shall be
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years. Earlier
        application is encouraged, provided that the reporting entity has not yet
        issued
        financial statements for that fiscal year, including any financial statements
        for an interim period within that fiscal year. The provisions of this statement
        should be applied prospectively as of the beginning of the fiscal year in
        which
        this Statement is initially applied, except in some circumstances where the
        statement shall be applied retrospectively.
 
 In
        September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB
        Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize
        the over funded or under funded status of defined benefit and other
        postretirement plans as an asset or liability in its statement of financial
        position and to recognize changes in that funded status in the year in which
        the
        changes occur through an adjustment to comprehensive income. This statement
        also
        requires an employer to measure the funded status of a plan as of the date
        of
        its year-end statement of financial position, with limited
        exceptions.
 
 In
        September 2006, the SEC issued SAB No. 108, which provides guidance on the
        process of quantifying financial statement misstatements. In SAB No. 108,
        the
        SEC staff establishes an approach that requires quantification of financial
        statement errors, under both the iron-curtain and the roll-over methods,
        based
        on the effects of the error on each of the Company’s financial statements and
        the related financial statement disclosures. SAB No. 108 is generally effective
        for annual financial statements in the first fiscal year ending after November
        15, 2006. The transition provisions of SAB No. 108 permits existing public
        companies to record the cumulative effect in the first year ending after
        November 15, 2006 by recording correcting adjustments to the carrying values
        of
        assets and liabilities as of the beginning of that year with the offsetting
        adjustment recorded to the opening balance of retained earnings.
 
 The
        company has adopted all the above accounting procurements and considers that
        they have no material impact on these consolidated financial
        statements.


***Off-Balance
      Sheet Arrangements***




We
      do not
      have any off-balance sheet arrangements.




32




***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.***




***Interest
      Rate Risk***




We
      are
      exposed to interest rate risk primarily with respect to our short-term bank
      loans. Although the interest rates are fixed for the terms of the loans, the
      terms are typically twelve months and interest rates are subject to change
      upon
      renewal. Since August 19, 2006, China People’s Bank has increased the interest
      rate of RMB bank loans with a term of 6 months or less by 0.18%, and loans
      with
      a term of 6 to 12 months by 0.27%. The new interest rates are 5.58% and 6.12%
      for RMB bank loans with a term 6 months or less and loans with a term of 6-12
      months, respectively. The change in interest rates has no impact on our bank
      loans secured before April 28, 2006. A hypothetical 1.0% increase in the annual
      interest rates for all of our credit facilities at December 31, 2006 would
      decrease net income before provision for income taxes by approximately $0.14
      million for the year ended December 31, 2006. Management monitors bank’s
      interest rates in conjunction with our cash requirements to determine the
      appropriate level of debt balances relative to other sources of funds. We have
      not entered into any hedging transactions in an effort to reduce our exposure
      to
      interest rate risk.




***Foreign
      Exchange Risk***




While
      our
      reporting currency is the U.S. Dollar, all of our consolidated revenues and
      consolidated costs and expenses are denominated in Renminbi. All of our assets
      are denominated in RMB except for cash. As a result, we are exposed to foreign
      exchange risk as our revenues and results of operations may be affected by
      fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB
      depreciates against the U.S. Dollar, the value of our RMB revenues, earnings
      and
      assets as expressed in our U.S. Dollar financial statements will decline. We
      have not entered into any hedging transactions in an effort to reduce our
      exposure to foreign exchange risk.




***Inflation***




Inflationary
      factors such as increases in the cost of our product and overhead costs may
      adversely affect our operating results. Although we do not believe that
      inflation has had a material impact on our financial position or results of
      operations to date, a high rate of inflation in the future may have an adverse
      effect on our ability to maintain current levels of gross margin and selling,
      general and administrative expenses as a percentage of net revenues if the
      selling prices of our products do not increase with these increased
      costs.




**Item
                8.**
            ***Financial
                Statements and Supplementary Financial
                Data***




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


**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
          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.
  33
  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, 2006 and
          2005.
  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.
  **Item
                    9A.**
                ***Controls
                    and Procedures.***
  Our
          management, with the participation of our chief executive officer and chief
          financial officer, Messrs. Qingjie Zhao and Meirong Yuan, respectively,
          evaluated the effectiveness of our disclosure controls and procedures.
          The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
          15d-15(e) under the Exchange Act, means controls and other procedures of
          a
          company that are designed to ensure that information required to be disclosed
          by
          a company in the reports, such as this report, that it files or submits
          under
          the Exchange Act is recorded, processed, summarized and reported, within
          the
          time periods specified in the SEC’s rules and forms. Disclosure controls and
          procedures include, without limitation, controls and procedures designed
          to
          ensure that information required to be disclosed by a company in the reports
          that it files or submits under the Exchange Act is accumulated and communicated
          to the company’s management, including its principal executive and principal
          financial officers, as appropriate to allow timely decisions regarding
          required
          disclosure. Management recognizes that any controls and procedures, no
          matter
          how well designed and operated, can provide only reasonable assurance of
          achieving their objectives and management necessarily applies its judgment
          in
          evaluating the cost-benefit relationship of possible controls and procedures.
          Based on that evaluation, Messrs. Zhao and Yuan concluded that as of December
          31, 2006, 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.
  There
          were no changes in our internal control over financial reporting identified
          in
          connection with the evaluation performed that occurred 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.
  **PART
          III**
  **Item
                    10.**
                ***Directors,
                    Executive Officers and Corporate
                    Governance.***
  Information
          required by Item10 of Part III is included in our Proxy Statement to be
          filed
          with the Commission in connection to our 2007 Annual Meeting of Stockholders,
          and is incorporated herein by reference. Information relating our Code
          of Ethics
          and compliance with Section 16(a) of the Exchange Act is set forth in our
          Proxy
          Statement to be filed in connection with our 2007 Annual Meeting of Stockholder
          and are incorporated by reference.
  **Item
                    11.**
                ***Executive
                    Compensation***
  Information
          required by Item 11 of Part III is included in our Proxy Statement to be
          filed
          with the Commission in connection to our 2007 Annual Meeting of Stockholders,
          and is incorporated herein by reference.
  34
  **Item
                    12.**
                ***Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters.***
  Information
          required by Item 12 of Part III is included in  our
          Proxy
          Statement to be filed with the Commission in connection to our 2007 Annual
          Meeting of Stockholders, and is incorporated herein by reference.
  **Item
                    13.**
                ***Certain
                    Relationships and Related Party Transactions and Direction
                    Independence.***
  Information  required
          by Item 13 of Part III is included in  our
          Proxy
          Statement to be filed with the Commission in connection to our 2007 Annual
          Meeting of Stockholders, and is incorporated herein by reference.
  **Item
                    14.**
                ***Principal
                    Accountant Fees and
                    Services.***
  Information
          required by Item 14 of Part III is included in  our
          Proxy
          Statement to be filed with the Commission in connection to our 2007 Annual
          Meeting of Stockholders, and is incorporated herein by reference.
 
 **PART
          IV**
  **Item
                  15.**
                ***Exhibits,
                    Financial Statements
                    Schedules.***
  (a)
                The
                    following documents are filed as part of this
                    report:
  1)
                Financial
                    Statement are set forth beginning on page F-1 of the
                    Report
  ·
                Report
                    of Independent Registered Public Accounting Firm
                F
                    -
                    3
  ·
                Consolidated
                    Statement of Operations
                F
                    -
                    4
  ·
                Consolidated
                    Balance Sheets
                F
                    -
                    5
  ·
                Consolidated
                    Statement of Cash Flows
                F
                    -
                    7
  ·
                Consolidated
                    Statement of Stockholders’ Equity
                F
                    -
                    9
  ·
                Notes
                    to Consolidated Statements
                F
                    -
                    10
  2)
                Financial
                    Statement Schedules:
  **Wonder
            Auto Technology, Inc.**
 **Financial
            Statements Schedules:**
 **Valuation
            and Qualifying Accounts**
 **Three
            years ended December 31, 2006**
  ***Balance
                      at***
                    ***beginning***
                    ***$***
                  
                  
                  ***Charge***
                    ***(credit)
                      to***
                    ***other***
                    ***comprehensive***
                    ***income
                      for***
                    ***exchange***
                    ***differences***
                    ***on
                      translation***
                    ***$***
                  
                  
                  ***Acquisition***
                    ***$***
                  
                  
                  ***Charge***
                    ***(credit)
                      to***
                    ***expenses***
                    ***$***
                  
                  
                  ***Balance
                      at***
                    ***end
                      of year***
                    ***$*****Allowance
                      for Doubtful Accounts**
                    ******of
                      Trade and Other Receivables**Year
                      ended December 31, 2006
                  
                  
                  38,745
                  
                  
                  1,106
                  
                  
                  -
                  
                  
                  (7,701
                  )
                  
                  32,150Year
                      ended December 31, 2005
                  
                  
                  37,748
                  
                  
                  997
                  
                  
                  -
                  
                  
                  -
                  
                  
                  38,745Year
                      ended December 31, 2004
                  
                  
                  35,841
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,907
                  
                  
                  37,748
  **Provision
                    for Obsolete Inventories**Year
                      ended December 31, 2006
                  
                  
                  194,153
                  
                  
                  5,252
                  
                  
                  -
                  
                  
                  (52,470
                  )
                  
                  146,935Year
                      ended December 31, 2005
                  
                  
                  373,932
                  
                  
                  6,867
                  
                  
                  -
                  
                  
                  (186,646
                  )
                  
                  194,153Year
                      ended December 31, 2004
                  
                  
                  247,392
                  
                  
                  16
                  
                  
                  -
                  
                  
                  126,524
                  
                  
                  373,932
 
 **Provision
                    for warranty**Year
                      ended December 31, 2006
                  
                  
                  914,403
                  
                  
                  32,096
                  
                  
                  -
                  
                  
                  102,845
                  
                  
                  1,049,344Year
                      ended December 31, 2005
                  
                  
                  815,498
                  
                  
                  22,750
                  
                  
                  -
                  
                  
                  76,155
                  
                  
                  914,403Year
                      ended December 31, 2004
                  
                  
                  774,149
                  
                  
                  23
                  
                  
                  -
                  
                  
                  41,326
                  
                  
                  815,498
  3)
                Exhibits
  **Exhibits
          (including those incorporated by reference).**
  **Exhibit
                    No.**
                
                **Description**2.1
                
                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].
  35
 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].
  36
 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 amongBeijing
                    International Technological Cooperation CenterWang 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
                    Contractbetween
                    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
                    Contractbetween
                    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
                    Contractbetween
                    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].**
  37
 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].14
                
                Code
                    of Ethics. [Incorporated by reference as Exhibit 14 to the Company’s
                    annual report on Form 10-KSB filed on March 30, 2005].21
                
                Revised
                    list of subsidiaries of the Company.*24
                
                Power
                    of Attorney.31.1
                
                Certification
                    of Chief Executive Officer, pursuant to Rule 13a - 14(a).*31.2
                
                Certification
                    of Chief Financial Officer, pursuant to Rule 13a - 14(a).*32.1
                
                Certification
                    of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
  38
 32.2
                
                Certification
                    of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*99.1
                
                Promissory
                    Note, dated June 27, 2005 [Incorporated by reference as Exhibit
                    99.1 to
                    the Company’s quarterly report on Form 10-QSB filed on August 15,
                    2005].
 
 *
          Filed
          herewith.
 ** Represents management contract or compensatory plan or arrangement.
 
 39
  **Report
          of Independent Registered Public Accounting Firm**
 
 To
          the
          Board of Directors and Stockholders of
 Wonder
          Auto Technology, Inc.
 
 We
          have
          audited in accordance with the standards of the Public Company Accounting
          Oversight Board (United States), the Consolidated Financial Statements
          of Wonder
          Auto Technology, Inc. and subsidiaries for 2006 and 2005 included in this
          Form
          10-K, and have issued our report thereon dated February 12, 2007. Our audits
          for
          the years ended December 31, 2006, 2005 and 2004, were made for the purpose
          of
          forming an opinion on the basic financial statements taken as a whole.
          The
          Financial Statement Schedules listed in Item 15 for Wonder Auto technology,
          Inc.
          and subsidiaries is the responsibility of the Company’s management and is
          presented for purposes of complying with the Securities and Exchange
          Commission’s rules and is not part of the basic financial statements. These
          schedules have been subjected to the auditing procedures applied in the
          audit of
          the basic financial statements and, in our opinion, fairly states in all
          material respects the financial data required to be set forth therein in
          relation to the basic financial statements taken as a whole.
 
  /s/
          PKF
 Certified
          Public Accountants
 Hong
          Kong
 February
          12, 2006
 
  Wonder
        Auto Technology, Inc.
 
 Consolidated
        Financial Statements
 (Stated
        in US dollars)
  F-1
  Wonder
        Auto Technology, Inc.
 Consolidated
        Financial Statements
  Index
        to
        Consolidated Financial Statements
  PagesReport
                  of Independent Registered Public Accounting Firm
              
              F-3Consolidated
                  Statements of Operations
              
              F-4Consolidated
                  Balance Sheets
              
              F-5Consolidated
                  Statements of Cash Flows
              
              F-7Consolidated
                  Statements of Stockholders’ Equity
              
              F-9Notes
                  to Consolidated Financial Statements
              
              F-10
 F-2
 
 Report
        of
        Independent Registered Public Accounting Firm
 
 To
        the
        Sole Director and Stockholders of
 Wonder
        Auto Technology, Inc.
  We
        have
        audited the accompanying consolidated balance sheets of Wonder Auto Technology,
        Inc. (the “Company”) and its subsidiaries as of December 31, 2006 and 2005, and
        the related consolidated statements of operations, stockholders’ equity and cash
        flows for each of the three years in the period ended December 31, 2006.
        These
        financial statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of the Company and
        its
        subsidiaries as of December 31, 2006 and 2005, and the consolidated results
        of
        their operations and their cash flows for each of the three years in the
        period
        ended December 31, 2006 in conformity with accounting principles generally
        accepted in the United States of America.
  /s/
        PKF
 Certified
        Public Accountants
 Hong
        Kong
 February
        12, 2007
  F-3
 
 Wonder
        Auto Technology, Inc.
 Consolidated
        Statements of Operations
 (Stated
        in US Dollars)
  Year
                  ended December 31,2006
              
              2005
              
              2004RevenueSales
              
              $
              72,150,483
              
              $
              48,062,805
              
              $
              42,265,874Cost
                  of sales
              
              
              (58,289,903
              )
              
              (36,787,115
              )
              
              (33,073,766
              )Gross
                  profit
              
              
              13,860,580
              
              
              11,275,690
              
              
              9,192,108ExpensesAdministrative
                  expenses
              
              
              1,449,031
              
              
              1,011,123
              
              
              732,370Amortization
                  and depreciation-
                  Notes 13, 14 and 15
              
              
              175,803
              
              
              127,998
              
              
              110,962Other
                  operating expenses
              
              
              142,442
              
              
              16,257
              
              
              49,169(Recovery
                  of) / provision for doubtful debts
              
              
              (7,701
              )
              
              -
              
              
              1,906Selling
                  expenses
              
              
              2,136,655
              
              
              2,148,426
              
              
              1,510,4703,896,230
              
              
              3,303,804
              
              
              2,404,877Income
                  before the following items and taxes
              
              
              9,964,350
              
              
              7,971,886
              
              
              6,787,231Interest
                  income
              
              
              96,810
              
              
              28,539
              
              
              13,554Other
                  income
              
              
              356,590
              
              
              136,711
              
              
              148,056Professional
                  fee for reverse takeover
              
              
              (159,440
              )
              
              -
              
              
              -Finance
                  costs - Note 5
              
              
              (1,033,551
              )
              
              (838,954
              )
              
              (643,141
              )Equity
                  in net income of unconsolidatedaffiliates
                  - Note 4
              
              
              371,005
              
              
              -
              
              
              -Income
                  before income taxes
              
              
              9,595,764
              
              
              7,298,182
              
              
              6,305,700Income
                  taxes - Note 6
              
              
              (1,270,391
              )
              
              (897,256
              )
              
              (718,298
              )Minority
                  interests - Note 7
              
              
              (101,827
              )
              
              -
              
              
              -Net
                  income
              
              $
              8,223,546
              
              $
              6,400,926
              
              $
              5,587,402Earnings
                  per share: basic and diluted - Note 8
              
              $
              0.40
              
              $
              0.37
              
              $
              0.32Weighted
                  average number of sharesoutstanding:basic
                  and diluted
              
              
              20,787,279
              
              
              17,227,198
              
              
              17,227,198
  See
        Notes
        to Consolidated Financial Statements
  F-4
 
 Wonder
        Auto Technology, Inc.
 Consolidated
        Balance Sheets
 (Stated
        in US Dollars)
 
 As
                  of December 31,2006
              
              2005ASSETSCurrent
                  assetsCash
                  and cash equivalents
              
              $
              8,203,699
              
              $
              4,368,757Restricted
                  cash - Note 9
              
              
              4,876,879
              
              
              3,597,609Marketable
                  securities
              
              
              -
              
              
              37,159Trade
                    receivables (net of allowance of doubtful accounts of $32,150
                    in 2006,
                    $38,745 in 2005)
              
              
              24,696,982
              
              
              18,472,619Bills
                  receivable
              
              
              3,098,314
              
              
              3,528,649Other
                  receivables, prepayments anddeposits
                  - Note 10
              
              
              1,254,209
              
              
              392,906Inventories
                  - Note 11
              
              
              13,689,374
              
              
              7,807,610Amount
                  due from a related company-
                  Note 18
              
              
              69,561
              
              
              -Deferred
                  taxes - Note 6
              
              
              237,570
              
              
              261,548Total
                  current assets
              
              
              56,126,588
              
              
              38,466,857Know-how
                  - Note 12
              
              
              1,468,089
              
              
              1,421,556Trademarks
                  and patents - Note 13
              
              
              11,418
              
              
              1,907Property,
                  plant and equipment, net - Note 14
              
              
              13,945,846
              
              
              10,648,082Land
                  use right - Note 15
              
              
              1,203,256
              
              
              580,020Deposit
                  for acquisition of property, plant andequipment
              
              
              1,740,548
              
              
              819,183Investment
                  in an unconsolidated affiliate-
                  Note 4
              
              
              527,627
              
              
              -Goodwill
                  - Note 4
              
              
              2,771,293
              
              
              -Deferred
                  taxes - Note 6
              
              
              205,475
              
              
              152,316TOTAL
                  ASSETS
              
              $
              78,000,140
              
              $
              52,089,921
  See
        Notes
        to Consolidated Financial Statements
  F-5
 
 Wonder
        Auto Technology, Inc.
 Consolidated
        Balance Sheets (Cont’d)
 (Stated
        in US Dollars)
 
 As
                  of December 31,2006
              
              2005LIABILITIES
                  AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent
                  liabilitiesTrade
                  payables - Note 9
              
              $
              9,631,537
              
              $
              10,299,879Bills
                  payable - Note 9
              
              
              8,628,078
              
              
              7,060,222Other
                  payables and accrued expenses-
                  Note 16
              
              
              3,121,533
              
              
              709,822Provision
                  for warranty - Notes 4 and 17
              
              
              1,049,344
              
              
              914,403Dividend
                  payable
              
              
              -
              
              
              1,699,282Income
                  tax payable
              
              
              398,768
              
              
              161,277Amount
                  due to a stockholder - Note 18
              
              
              -
              
              
              5,149Amount
                  due to an unconsolidated affiliate-
                  Note 18
              
              
              37,492
              
              
              -Secured
                  short-term bank loans - Note 19
              
              
              14,326,831
              
              
              7,431,813Total
                  current liabilities
              
              
              37,193,583
              
              
              28,281,847Secured
                  long-term bank loans - Note 19
              
              
              -
              
              
              4,954,542TOTAL
                  LIABILITIES
              
              
              37,193,583
              
              
              33,236,389COMMITMENTS
                  AND CONTINGENCIES-
                  Note 20MINORITY
                  INTERESTS - Note 4
              
              
              2,579,572
              
              
              -STOCKHOLDERS’
                  EQUITYPreferred
                    stock: par value $0.0001 per share; authorized 10,000,000 shares
                    in 2006
                    and 2005; none issued and outstanding
              
              
              -
              
              
              -Common
                  stock: par value $0.0001 per share-
                  Note 21Authorized
                    90,000,000 shares in 2006 and 2005; issued and outstanding 23,959,994
                    shares in 2006 and 17,227,198 shares in 2005
              
              
              2,396
              
              
              1,723Additional
                  paid-in capital - Note 21
              
              
              22,140,143
              
              
              11,998,377Statutory
                  and other reserves - Note 22
              
              
              3,148,265
              
              
              2,347,848Accumulated
                  other comprehensive income-
                  Note 23
              
              
              1,452,138
              
              
              444,670Retained
                  earnings
              
              
              11,484,043
              
              
              4,060,914TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              38,226,985
              
              
              18,853,532TOTAL
                  LIABILITIES AND STOCKHOLDERS’EQUITY
              
              $
              78,000,140
              
              $
              52,089,921
 
 See
        Notes
        to Consolidated Financial Statements
 F-6
 
 Wonder
        Auto Technology, Inc.
 Consolidated
        Statements of Cash Flows
 (Stated
        in US Dollars)
  Year
                  ended December 31,2006
              
              2005
              
              2004Cash
                  flows from operating activitiesNet
                  income
              
              $
              8,223,546
              
              $
              6,400,926
              
              $
              5,587,402Adjustments
                    to reconcile net income to netcash
                    provided by operating activities:Depreciation
              
              
              1,401,541
              
              
              1,158,561
              
              
              986,517Amortization
                  of trademarks and patents
              
              
              769
              
              
              342
              
              
              338Amortization
                  of land use right
              
              
              28,883
              
              
              26,245
              
              
              25,980Deferred
                  taxes
              
              
              (16,369
              )
              
              857
              
              
              (144,817
              )Loss
                  on disposal of property, plant andequipment
              
              
              79,527
              
              
              -
              
              
              19,489(Recovery
                  of)/provision for doubtful debts
              
              
              (7,701
              )
              
              -
              
              
              1,906(Recovery
                  of)/provision for obsoleteinventories
              
              
              (52,470
              )
              
              (186,646
              )
              
              126,524Equity
                  in net income of an unconsolidatedaffiliate
              
              
              (371,005
              )
              
              -
              
              
              -Increase
                  in minority interests
              
              
              101,827
              
              
              -
              
              
              -Changes
                  in operating assets and liabilities:Trade
                  receivables
              
              
              (5,493,345
              )
              
              (7,073,894
              )
              
              840,070Bills
                  receivable
              
              
              1,536,869
              
              
              (73,117
              )
              
              (736,499
              )Other
                    receivables, prepayments and deposits
              
              
              (664,255
              )
              
              96,624
              
              
              (232,531
              )Inventories
              
              
              (4,481,151
              )
              
              (415,127
              )
              
              2,860,283Trade
                  payables
              
              
              460,403
              
              
              5,288,135
              
              
              (3,267,345
              )Bills
                  payable
              
              
              601,360
              
              
              5,729,402
              
              
              1,206,680Amount
                  due to an unconsolidated affiliate
              
              
              36,719
              
              
              -
              
              
              -Other
                  payables and accrued expenses
              
              
              (263,895
              )
              
              340,742
              
              
              (115,934
              )Provision
                  for warranty
              
              
              102,845
              
              
              76,155
              
              
              41,326Income
                  tax payable
              
              
              164,834
              
              
              69,896
              
              
              39,948Net
                  cash flows provided by operating activities
              
              
              1,388,932
              
              
              11,439,101
              
              
              7,239,337Cash
                  flows from investing activitiesPayments
                  to acquire trademarks and patents
              
              
              (10,023
              )
              
              -
              
              
              (206
              )Payments
                    to acquire and for deposit for acquisition of property, plant
                    and
                    equipment
              
              
              (3,627,589
              )
              
              (2,062,891
              )
              
              (2,879,320
              )Proceeds
                    from sales of property, plant and equipment
              
              
              73,169
              
              
              -
              
              
              31,012Payment
                  to acquire marketable securities
              
              
              -
              
              
              (36,571
              )
              
              -Proceeds
                  from sales of marketable securities
              
              
              37,585
              
              
              -
              
              
              -Increase
                  in restricted cash
              
              
              (917,757
              )
              
              (2,963,170
              )
              
              (623,072
              )Cash
                  acquired from the RTO
              
              
              419
              
              
              -
              
              
              -Payment
                  to acquire Wonder Friends-
                  Notes 1 and 4
              
              
              (500,000
              )
              
              -
              
              
              -Payment
                  to acquire Dong Woo-
                  Notes 1 and 4
              
              
              (2,430,000
              )
              
              -
              
              
              -Cash
                  inflow from Dong Woo - Note 4
              
              
              237,331
              
              
              -
              
              
              -Net
                  cash flows used in investing activities
              
              $
              (7,136,865
              )
              $
              (5,062,632
              )
              $
              (3,471,586
              )
 F-7
 
 Wonder
        Auto Technology, Inc.
 Consolidated
        Statements of Cash Flows (Cont’d)
 (Stated
        in US Dollars)
  Year
                  ended December 31,2006
              
              2005
              
              2004Cash
                  flows from financing activities(Repayment
                  to)/advance from a stockholder
              
              $
              (5,149
              )
              $
              -
              
              $
              5,149Amount
                  due from a related company
              
              
              (68,128
              )
              
              -
              
              
              -Dividend
                  paid to stockholders
              
              
              (1,719,985
              )
              
              (6,958,197
              )
              
              (4,666,033
              )Proceeds
                  from bank loans
              
              
              17,573,649
              
              
              12,386,355
              
              
              9,127,907Repayment
                  of bank loans
              
              
              (16,696,664
              )
              
              (9,416,624
              )
              
              (8,628,534
              )Proceeds
                  from issuance of shares inconnection
                  with the reorganization beforeRTO
              
              
              -
              
              
              -
              
              
              100Net
                  proceed from issue of shares
              
              
              10,142,020
              
              
              -
              
              
              -Net
                    cash flows provided by (used in) financing
                    activities
              
              
              9,225,743
              
              
              (3,988,466
              )
              
              (4,161,411
              )Effect
                    of foreign currency translation on cash and cash
                    equivalents
              
              
              357,132
              
              
              150,993
              
              
              74Net
                    increase (decrease) in cash and cash equivalents
              
              
              3,834,942
              
              
              2,538,996
              
              
              (393,586
              )Cash
                  and cash equivalents - beginning of period
              
              
              4,368,757
              
              
              1,829,761
              
              
              2,223,347Cash
                  and cash equivalents - end of period
              
              $
              8,203,699
              
              $
              4,368,757
              
              $
              1,829,761Supplemental
                    disclosures for cash flow information:Non-cash
                  financing activity:Issuance
                    of 8,613,599 shares of WAL’s common stock for the acquisition of entire
                    equity interests in Man Do Auto and Jinzhou Halla in conjunction
                    with the
                    reorganization
              
              $
              -
              
              $
              -
              
              $
              100Outstanding
                    payable for acquisition of a subsidiary
              
              $
              2,420,000
              
              $
              -
              
              $
              -Cash
                  paid for:Interest
              
              $
              807,693
              
              $
              611,326
              
              $
              537,958Income
                  taxes
              
              $
              1,121,927
              
              $
              826,503
              
              $
              823,165
  See
        Notes
        to Consolidated Financial Statements
  F-8
  Wonder
        Auto Technology, Inc.
 Consolidated
        Statements of Stockholders’ Equity
 (Stated
        in US Dollars)
  Common
                  stock
              
              Additional
              
              Statutory
              
              Accumulated
                    otherNo.
                  of  shares
              
              Amount
              
              paid-in
                  capital
              
              and
                    other reserves
              
              comprehensive
                    income
              
              Retained
                    earnings
              
              TotalBalance,
                  January 1, 2004
              
              
              17,227,198
              
              $
              1,723
              
              $
              11,998,277
              
              $
              1,061,191
              
              $
              23,818
              
              $
              3,734,432
              
              $
              16,819,441Issuance
                    of shares in connection with the reorganization
              
              
              -
              
              
              -
              
              
              100
              
              
              -
              
              
              -
              
              
              -
              
              
              100Comprehensive
                  incomeNet
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,587,402
              
              
              5,587,402Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              766
              
              
              -
              
              
              766Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,588,168Appropriation
                  to reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              645,488
              
              
              -
              
              
              (645,488
              )
              
              -Dividend
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,694,894
              )
              
              (4,694,894
              )Balance,
                  December 31, 2004
              
              
              17,227,198
              
              
              1,723
              
              
              11,998,377
              
              
              1,706,679
              
              
              24,584
              
              
              3,981,452
              
              
              17,712,815Comprehensive
                  incomeNet
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,400,926
              
              
              6,400,926Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              420,086
              
              
              -
              
              
              420,086Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,821,012Appropriation
                  to reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              641,169
              
              
              -
              
              
              (641,169
              )
              
              -Dividend
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,680,295
              )
              
              (5,680,295
              )Balance,
                  December 31, 2005
              
              
              17,227,198
              
              
              1,723
              
              
              11,998,377
              
              
              2,347,848
              
              
              444,670
              
              
              4,060,914
              
              
              18,853,532Recapitalization
              
              
              2,832,800
              
              
              283
              
              
              136
              
              
              -
              
              
              -
              
              
              -
              
              
              419Share
                  issued for proceeds of $12 million
              
              
              3,899,996
              
              
              390
              
              
              11,999,610
              
              
              -
              
              
              -
              
              
              -
              
              
              12,000,000Cost
                  of raising capital
              
              
              -
              
              
              -
              
              
              (1,857,980
              )
              
              -
              
              
              -
              
              
              -
              
              
              (1,857,980
              )Comprehensive
                  incomeNet
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,223,546
              
              
              8,223,546Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,007,468
              
              
              -
              
              
              1,007,468Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,231,014Appropriation
                  to reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              800,417
              
              
              -
              
              
              (800,417
              )
              
              -Balance,
                  December 31, 2006
              
              
              23,959,994
              
              $
              2,396
              
              $
              22,140,143
              
              $
              3,148,265
              
              $
              1,452,138
              
              $
              11,484,043
              
              $
              38,226,985
 
 See
        Notes
        to Consolidated Financial Statements
  F-9
 
 **Wonder
        Auto Technology, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **(Stated
        in US Dollars)**
  1. Corporate
        information
 
 Wonder
        Auto Technology, Inc. (the “Company”) was incorporated in State of Nevada on
        June 8, 2000. The Company’s shares are quoted for trading on the
        Over-The-Counter Bulletin Board in the United States of America.
 
 Pursuant
        to the Plan of Reorganization dated on June 22, 2006, the Company acquired
        100%
        ownership interest in Wonder Auto Limited (“WAL”), a limited company
        incorporated in the British Virgin Islands, in consideration for the issuance
        of
        the Company’s 17,227,198 common shares (as adjusted for a 2.449719-for-1 forward
        stock split on July 26, 2006 (“Forward Stock Split”)) to the former stockholders
        of WAL (“WAL Former Stockholders”) and 3,899,996 shares as adjusted for Forward
        Stock Split to new investors.
 
 The
        aforesaid transaction was completed on June 22, 2006 and thereafter WAL became
        a
        wholly owned subsidiary of the Company and WAL Former Stockholders became
        the
        majority stockholders of the Company. This transaction constituted a reverse
        takeover transaction (“RTO”).
 
 Following
        the RTO, through WAL, the Company indirectly owned Man Do Auto Technology
        Co.,
        Ltd. (“Man Do Auto”) and Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou
        Halla”). The entire issued and outstanding common stock of Man Do Auto is
        directly held by the WAL. In respect of Jinzhou Halla, 61% of its common
        stock
        is directly held by the WAL whilst 39% is indirectly held by the WAL through
        Man
        Do Auto.
 
 On
        August
        23, 2006, WAL entered into a Share Purchase Agreement (the “Share Purchase
        Agreement”) with Winning International Development Limited (“Winning”), a
        British Virgin Islands corporation, which held 50% equity interest in Jinzhou
        Dong Woo Precision Co. Ltd. (“Dong Woo”). The remaining 50% equity interest is
        held by two independent third parties in equal proportion (that is 25% each).
        Dong Woo was established in the People’s Republic of China (the “PRC”) and is a
        supplier of raw materials to WAL. More details and accounting treatment on
        investment in Dong Woo are set out in note 4.
 
 On
        September 21, 2006, Jinzhou Halla together with two independent third parties
        established Jinzhou Wonder Friends Mechanical Parts Co., Ltd. (“Wonder Friends”)
        in the PRC. Jinzhou Halla contributed $0.5 million to its registered capital
        representing 20.41% equity interest thereon. Wonder Friends is principally
        engaged in manufacturing of piston rods, vibration-dampers and rotary axes
        for
        motor vehicles. More details and accounting treatment on investment in Wonder
        Friends are set out in note 4.
 
 F-10
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 2. Description
        of business
 
 Following
        the RTO as detailed in note 3(i), the Company commenced to be engaged in
        the
        manufacture and distribution of automotive electrical components, namely
        starters and alternators, in the PRC.
 
 The
        products of the Company are suitable for use in various types of automobiles.
        However, the Company currently has more market presence in the sedan and
        passenger cars, pickup trucks and sport utility vehicles segments.
 
 The
        customers include renowned automakers and automotive components suppliers
        in the
        PRC. As an integral part of developing customer relationship, the Company
        will
        offer to its customers product design and development services for their
        new car
        models or automotive components based on customers’ required
        specifications.
 
 The
        raw
        materials used in production are mainly divided into four groups, namely
        metal
        parts, semiconductors, chemical and packaging materials.
 
 It
        is the
        Company’s policy to only purchase raw materials from selected suppliers, both
        locally and overseas from South Korea because management believed that the
        South
        Korean suppliers provide the Company with goods that domestic manufacturers
        cannot produce consistently at a high quality.
  3. Basis
        of
        presentation
 
 (i)
                Pursuant
                    to the Plan of Reorganization dated on June 22, 2006, the Company
                    issued
                    21,127,194 shares as adjusted for Forward Stock Split of common
                    stock, par
                    value $0.0001 per share, to the stockholders of WAL (17,227,198
                    shares as
                    adjusted for Forward Stock Split to WAL Former Stockholders and
                    3,899,996
                    shares as adjusted for Forward Stock Split to new investors),
                    representing
                    approximately 88.2% of the Company post-exchange issued and outstanding
                    common stock, in exchange for 100% of the outstanding capital
                    stock of
                    WAL.
 
 The
        RTO
        has been accounted for as a recapitalization of the Company whereby the
        historical financial statements and operations of WAL become the historical
        financial statements of the Company, with no adjustment to the carrying value
        of
        the assets and liabilities. The 2,832,800 shares as adjusted of the Company
        outstanding prior to the RTO are accounted for at $419 of net book value
        at the
        time of the RTO. The accompanying consolidated financial statements reflect
        the
        recapitalization of the stockholders equity as if the transaction occurred
        as of
        the beginning of the first period presented.
  F-11
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 3. Basis
        of
        presentation (Cont’d)
 
 (ii)
              On
                  June 22, 2006, WAL completed a private placement pursuant to which
                  WAL
                  issued to certain accredited investors 45.277236 shares of its
                  common
                  stock for $12,000,000, such shares were subsequently exchanged
                  for
                  3,899,996 shares as adjusted for Forward Stock Split on July 26,
                  2006 of
                  the common stock of the Company in connection with the
                  RTO.
 
 In
        connection with the private placement, WAL's two stockholders, Choice Inspire
        Limited (“CIL”) and Empower Century Limited (“ECL”) entered into an escrow
        agreement with the private placement investors. Pursuant to the escrow
        agreement, CIL and ECL agreed to certain “make good” provisions. In the escrow
        agreement, WAL established minimum net income thresholds of $8,140,000 for
        the
        fiscal year ended December 31, 2006 and $12,713,760 for the fiscal year ending
        December 31, 2007. CIL and ECL deposited a total of 3,300,000 shares as adjusted
        for Forward Stock Split on July 26, 2006 of the Company’s common stock into
        escrow with Securities Transfer Corporation under the escrow agreement. If
        the
        2006 net income threshold is not achieved, then the escrow agent must deliver
        1,650,000 shares to the investors on a pro rata basis (based upon the total
        number of shares purchased by the investors in connection with the private
        placement transaction) and if the 2007 net income threshold is not achieved,
        the
        escrow agent must deliver the second 1,650,000 shares to the investors on
        a pro
        rata basis. However, only those private placement investors who remain our
        stockholders at the time the escrow shares become deliverable are entitled
        to
        their pro rata portion of such escrow shares.
 
 On
        February 8, 2007, stockholders of CIL and ECL resolved to surrender the right
        of
        entitlement to the 1,650,000 shares in aggregate for the fiscal year ended
        December 31, 2006 placed with the escrow agent to Xiangdong Gao under the
        escrow
        agreement. On the same date, an agreement was signed between CIL, ECL and
        Xiangdong Gao whereby both CIL and ECL have agreed to give the right of the
        entitlement to the aforementioned escrowed shares related to the fiscal year
        ended December 31, 2006 to Xiangdong Gao as a gift (that is for nil
        consideration). Xiangdong Gao is a beneficial stockholder of the
        Company.
  F-12
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies
 
 Principles
        of consolidation
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries. All significant inter-company accounts and transactions have
        been
        eliminated in consolidation.
 
 The
        Company acquired 50% equity interest in Dong Woo, one of the Company’s primary
        raw material suppliers, on August 23, 2006. The board of directors of Dong
        Woo
        consists of 5 members, three out of which were nominated by WAL whilst the
        remaining two board members by the other two shareholders of Dong Woo. The
        board
        is the highest authority of Dong Woo and has power to make operating and
        financing decision. Before November 18, 2006, any valid resolution of the
        board
        should be made by over two-third of the board members (i.e. four board members
        or more). Based on the foregoing, the management of the Company was of the
        view
        that the Company had significant influence but not control over the operations
        of Dong Woo. Accordingly, the investment in Dong Woo was initially recognized
        at
        cost and subsequently accounted for under the equity method of accounting,
        under
        which the attributable share (that is 50%) of Dong Woo’s net income is
        recognized in the period in which it is earned by Dong Woo from the date
        of
        acquisition till November 17, 2006. On November 18, 2006, Dong Woo amended
        its
        Memorandum and Articles of Association such that any valid resolution of
        the
        board shall only be made by more than a half of the board members with immediate
        effect. Without any change in the composition of the board as before, the
        Company obtained control over Dong Woo and the results of operations and
        the
        financial position of Dong Woo is consolidated since then.
 
 The
        financial position of Dong Woo as of November 18, 2006 is as follows
        :-
 
 Cash
                  and cash equivalents
              
              $
              237,331Restricted
                  cash
              
              
              361,512Receivable
              
              
              2,931Bills
                  receivable
              
              
              1,019,550Other
                  receivable, prepayment and deposits
              
              
              168,463Inventories
              
              
              985,558Property,
                  plant and equipment
              
              
              1,720,399Land
                  use right
              
              
              631,390Amount
                  due from Jinzhou Halla
              
              
              3,496,918Accounts
                  payable
              
              
              (2,033,220
              )Bills
                  payable
              
              
              (720,057
              )Other
                  repayable and accrued expenses
              
              
              (237,040
              )Income
                  tax payable
              
              
              (63,675
              )Secured
                  short-term bank loans
              
              
              (637,219
              )Net
                  assets
              
              $
              4,932,841
 
 The
        net
        cash inflows from Dong Woo on November 18, 2006 (i.e. The date on which was
        obtained control) is $237,331.
  F-13
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Principles
        of consolidation (cont’d)
 
 The
        Company acquired the 50% equity interest in Dong Woo at a cash purchase price
        of
        $4.85 million, which is contingent on whether Dong Woo can attain a net income
        of $1.63 million for the fiscal year ended December 31, 2006. If Dong Woo
        fails
        to attain $1.63 million, the Company is entitled to deduct the purchase price
        proportionately with the amount of the unfulfilled net income. For the year
        ended December 31, 2006, Dong Woo has achieved the above said income
        target.
 
 According
        to the payment terms of the share purchase agreement, $2.43 million of the
        purchase price was paid within one month after signing of the share purchase
        agreement and the remaining $2.42 million will be paid within 5 days after
        the
        confirmation by WAL that Dong Woo attains the said income target. As Dong
        Woo
        has met the income target, the Company will write to confirm its achievement
        in
        the near future. Accordingly, purchase price of $2.42 million was still
        outstanding as of December 31, 2006.
 
 As
        of
        December 31, 2006, the consolidated balance sheet reflects a goodwill identified
        on acquisition of Dong Woo amounted to $2.77 million which represents the
        excess
        of the purchase price of $4.85 million over the attributable share (that
        is 50%)
        of fair value of acquired identifiable net assets of Dong Woo amounted to
        $2.08
        million.
 
 Goodwill
  Goodwill
        represents the excess of the purchase price of an acquired business over
        the
        fair value of the identifiable assets acquired and liabilities assumed. Pursuant
        to the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets”,
        goodwill is not amortized and is subjected to an annual impairment test which
        occurs in the fourth quarter of each fiscal year.
 
 Goodwill
        will be written down only when and if impairment is identified and measured,
        based on future events and conditions.
 
 Minority
        interests
 
 Minority
        interests resulted from the consolidation of 50% owned subsidiary, Dong Woo,
        where the Company has control over its operations.
 
 Investment
        in an unconsolidated affiliate
 
 The
        Company accounts for the 20.41% investment in Wonder Friends (an investment
        in
        which the Company exercises significant influence but does not control) using
        the equity method, under which the share of Wonder Friends’ net income is
        recognized in the period in which it is earned by Wonder Friends. As of December
        31, 2006, the investment in unconsolidated affiliate of $0.53 million
        represents attributable share of the underlying net assets of Wonder
        Friends.
  F-14
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Use
        of
        estimates
 
 In
        preparing financial statements in conformity with accounting principles
        generally accepted in the United States of America, management makes estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosures of contingent assets and liabilities at the dates of the financial
        statements, as well as the reported amounts of revenues and expenses during
        the
        reporting periods. These accounts and estimates include, but are not limited
        to,
        the valuation of accounts receivable, inventories, deferred income taxes,
        provision for warranty and the estimation on useful lives of property, plant
        and
        equipment. Actual results could differ from those estimates.
 
 Concentrations
        of credit risk
 
 Financial
        instruments that potentially subject the Company to significant concentrations
        of credit risk consist principally of cash and cash equivalents and trade
        and
        bills receivables. As of December 31, 2006 and 2005, substantially all of
        the
        Company’s cash and cash equivalents and restricted cash were held by major
        financial institutions located in the PRC, which management believes are
        of high
        credit quality. With respect to trade and bills receivables, the Company
        extends
        credit based on an evaluation of the customer’s financial condition. The Company
        generally does not require collateral for trade receivables and maintains
        an
        allowance for doubtful accounts of trade receivables.
 
 Regarding
        bills receivable, they are undertaken by the banks to honor the payments
        at
        maturity and the customers are required to place deposits with the banks
        equivalent to certain percentage of the bills amount as collateral. These
        bills
        receivable can be sold to any third party at a discount before maturity.
        The
        Company does not maintain allowance for bills receivable in the absence of
        bad
        debt experience and the payments are undertaken by the banks.
 
 During
        the reporting periods, customers representing 10% or more of the Company’s
        consolidated sales are :-
  Year
                  ended December 31,2006
              
              2005
              
              2004Beijing
                  Hyundai Motor Company
              
              $
              13,686,791
              
              $
              6,926,159
              
              $
              70,757Dongfeng
                    Yueda Kia Motors Company
                  Limited
              
              
              2,416,288
              
              
              5,346,827
              
              
              1,849,984Harbin
                    Dongan Auto-Engine Company
                  Limited
              
              
              2,777,216
              
              
              4,511,073
              
              
              6,681,493Harbin
                    Dongan Automotive Engine
                  Manufacturing
                    Company Limited
              
              
              5,770,801
              
              
              1,403,102
              
              
              1,037,976Shanghai
                    WuLong Auto Components
                  Investment
                    Company Limited
              
              
              -
              
              
              -
              
              
              5,621,017Shenyang
                    Aerospace Mitsubishi Motors
                  Engine
                    Manufacturing Company Limited
              
              
              12,837,338
              
              
              5,451,367
              
              
              3,715,043$
              37,488,434
              
              $
              23,638,528
              
              $
              18,976,270
 F-15
  **Wonder
        Auto Technology, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **(Stated
        in US Dollars)**
 
 4. Summary
        of significant accounting policies (Cont’d)
 
 Cash
        and cash equivalents
 
 Cash
        and
        cash equivalents include all cash, deposits in banks and other highly liquid
        investments with initial maturities of three months or less to be cash
        equivalents. As of December 31, 2006 and 2005, almost all the cash and cash
        equivalents were denominated in Renminbi (“RMB”) and were placed with banks in
        the PRC. They are not freely convertible into foreign currencies and the
        remittance of these funds out of the PRC is subject to exchange control
        restrictions imposed by the PRC government. The remaining insignificant balance
        of cash and cash equivalents were denominated in Hong Kong dollars.
 
 Restricted
        Cash
 
 Deposits
        in banks pledged as securities for bills payable and letter of credit (Note
        9)
        that are restricted in use are classified as restricted cash under current
        assets.
 
 Marketable
        securities
 
 Marketable
        securities represent the available-for-sale securities and are carried at
        current fair values by reference to their market prices. The change in fair
        values is taken to other comprehensive income.
 
 During
        the reporting periods, there was no significant fluctuation on market prices
        of
        these securities and accordingly no change in fair value is taken to other
        comprehensive income.
 
 There
        is
        no significant market price risk as there was no significant fluctuation
        on
        market prices and the marketable securities are not significant to the
        Company.
 
 Allowance
        of doubtful accounts
 
 The
        Company establishes an allowance for doubtful accounts based on management’s
        assessment of the collectibility of trade receivables. A considerable amount
        of
        judgment is required in assessing the amount of the allowance, the Company
        considers the historical level of credit losses and applies percentages to
        aged
        receivable categories. The Company makes judgments about the creditworthiness
        of
        each customer based on ongoing credit evaluations, and monitors current economic
        trends that might impact the level of credit losses in the future. If the
        financial condition of the customers were to deteriorate, resulting in their
        inability to make payments, a larger allowance may be required.
 
 Based
        on
        the above assessment, during the reporting years, the management establishes
        the
        general provisioning policy to make allowance equivalent to 100% of gross
        amount
        of trade receivables due over 1 year. Additional specific provision is made
        against trade receivables aged less than 1 year to the extent which they
        are
        considered to be doubtful.
  F-16
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Allowance
        of doubtful accounts (cont’d)
 
 Bad
        debts
        are written off when identified. The Company extends unsecured credit to
        customers ranging from three to six months in the normal course of business.
        The
        Company does not accrue interest on trade accounts receivable.
 
 Historically,
        losses from uncollectible accounts have not significantly deviated from the
        general allowance estimated by the management and no significant additional
        bad
        debts have been written off directly to the profit and loss. This general
        provisioning policy has not changed in the past since establishment and the
        management considers that the aforementioned general provisioning policy
        is
        adequate and not too excessive and does not expect to change this established
        policy in the near future.
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market. Cost is determined on a weighted
        average basis and includes all expenditures incurred in bringing the goods
        to
        the point of sale and putting them in a saleable condition. In assessing
        the
        ultimate realization of inventories, the management makes judgments as to
        future
        demand requirements compared to current or committed inventory levels. Our
        reserve requirements generally increase as our projected demand requirements;
        decrease due to market conditions, product life cycle changes. The Company
        estimates the demand requirements based on market conditions, forecasts prepared
        by its customers, sales contracts and orders in hand.
 
 In
        addition, the Company estimates net realizable value based on intended use,
        current market value and inventory ageing analyses. The Company writes down
        the
        inventories for estimated obsolescence or unmarketable inventory equal to
        the
        difference between the cost of inventories and the estimated market value
        based
        upon assumptions about future demand and market conditions.
 
 Based
        on
        the above assessment, the Company establishes a general provision to make
        a 50%
        provision for inventories aged over 1 year.
 
 Historically,
        the actual net realizable value is close to the management
        estimation.
  F-17
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Property,
        plant and equipment
 
 Property,
        plant and equipment are stated at cost less accumulated depreciation. Cost
        represents the purchase price of the asset and other costs incurred to bring
        the
        asset into its existing use.
 
 Depreciation
        is provided on straight-line basis over their estimated useful lives. The
        principal depreciation rates are as follows :-
  Annual
                  rate
              
              Residual
                  valueBuildings
              
              
              3
                  - 4.5
              %
              
              10
              %Plant
                  and machinery
              
              
              9
              %
              
              10
              %Motor
                  vehicles
              
              
              9-18
              %
              
              10
              %Furniture,
                  fixtures and equipment
              
              
              15
              %
              
              10
              %Tools
                  and equipment
              
              
              15-18
              %
              
              Nil
                  to 10
              %Leasehold
                  improvements
              
              
              20
              %
              
              Nil
 
 Construction
        in progress mainly represents expenditures in respect of the Company’s new
        offices and factories under construction. All direct costs relating to the
        acquisition or construction of the Company’s new office and factories are
        capitalized as construction in progress. No depreciation is provided in respect
        of construction in progress.
 
 Maintenance
        or repairs are charged to expense as incurred. Upon sale or disposition,
        the
        applicable amounts of asset cost and accumulated depreciation are removed
        from
        the accounts and the net amount less proceeds from disposal is charged or
        credited to income.
 
 Trademarks
        and patents
 
 Trademarks
        and patents are stated at cost less accumulated amortization. Amortization
        is
        provided on a straight-line basis over their useful lives of 10 years granted
        from the relevant PRC authorities.
 
 Know-how
 
 Know-how
        is determined to have an indefinite useful life pursuant to the purchase
        contracts as detailed in note 12. It is not subject to amortization until
        its
        useful life is determined to be no longer indefinite.
 
 Know-how
        is stated at cost of purchase less any identified impairment losses in the
        annual impairment test.
 
 Land
        use right
 
 Land
        use
        right is stated at cost less accumulated amortization. Amortization is provided
        using the straight-line method over the terms of the lease of 30 years obtained
        from the relevant PRC land authority.
  F-18
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Impairment
        of long-lived assets
 
 Long-lived
        assets are tested for impairment in accordance with SFAS No. 144 and Accounting
        Principles Board (“APB”) Opinion 18, Equity Method of Accounting for Investments
        in Common Stock, respectively. The Company periodically evaluates potential
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of the assets may not be recoverable. The Company recognizes
        impairment of long-lived assets and investment in an affiliate in the event
        that
        the net book values of such assets exceed the future undiscounted cashflows
        attributable to such assets. During the reporting periods, the Company has
        not
        identified any indicators that would require testing for
        impairment.
 
 Revenue
        recognition
 
 Revenue
        from sales of the Company’s products is recognized when the significant risks
        and rewards of ownership have been transferred to the buyer at the time when
        the
        products are put into use by its customers, the sales price is fixed or
        determinable and collection is reasonably assured.
 
 Advertising,
        transportation, research and development expenses
 
 Advertising,
        transportation and other product-related costs are charged to expense as
        incurred.
 
 Research
        and development costs include expenditure incurred for “new product development
        expenses”, “investment in research and development equipment” and “other
        research and development expenses”.
 
 The
“new
        products development expenses” include salaries of personnel engaged and other
        costs incurred for research and development of potential new products. They
        are
        expensed to Statement of Operations when incurred.
 
 “Investments
        in research and development equipment” represent payments for acquisition of
        equipment for research and development use. This equipment has other alterative
        future uses, such as usage in Testing Department. The equipment is capitalized
        as tangible asset when acquired and included under Non-current assets “Property,
        plant and equipment” in the Financial Statements. Depreciation is provided
        according to the depreciation rates of corresponding categories of Property,
        plant and equipment being capitalized and included.
 
 “Other
        research and development expenses” represent payments for routine and ongoing
        efforts to refine existing products. These expenses are charged to Statement
        of
        Operations when incurred.
 
 Advertising
        expenses amounting to $16,137, $15,992 and $12,061 for three years ended
        December 31, 2006, 2005 and 2004 respectively are included in selling
        expenses.
 
 Transportation
        expenses amounted to $464,838, $342,805 and $347,134 for three years ended
        December 31, 2006, 2005 and 2004 respectively are included in selling
        expenses.
  F-19
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Advertising,
        transportation, research and development expenses (cont’d)
 
 Research
        and development expenditure for each of three years in the year ended December
        31, 2006 are as follow :-
  Year
                  ended December 31,Nature
              
              Included
                  in
              
              2006
              
              2005
              
              2004New
                  products
              
              
              Cost
                  of salesdevelopmentexpenses
              
              
              
              
              $
              500,347
              
              $
              477,225
              
              $
              278,784Investments
                  in research
              
              
              Property,
                  plantand
                  development
              
              
              and
                  equipmentequipment
              
              
              
              
              
              611,615
              
              
              645,925
              
              
              695,610Other
                  research and
              
              
              Cost
                  of salesdevelopmentexpenses
              
              
              
              
              
              447,355
              
              
              346,959
              
              
              375,532$
              1,559,317
              
              $
              1,470,109
              
              $
              1,349,926
 
 Warranty
  It
        is the
        policy of the Company to provide after sales support by way of a warranty
        program. The Company provided warranties to certain customers with warranty
        periods ranging from two years or 50,000 km to three years or 60,000 km,
        whichever comes first.
  Based
        on
        the past experience, the Company sets up a policy of making a general provision
        for warranty such that the closing balance of this provision is equal to
        certain
        percentage of relevant sales during the reporting periods as follows
        :-
  Year
                  ended December 31,
              
              %2006
              
              
              1.52005
              
              
              22004
              
              
              2
  Stock-based
        compensation
  During
        the reporting periods, the Company did not make any stock-based compensation
        payments.
  F-20
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
  Income
        taxes
 
 The
        Company uses the asset and liability method of accounting for income taxes
        pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and
        liability method of SFAS 109, deferred tax assets and liabilities are recognized
        for the future tax consequences attributable to temporary differences between
        the financial statements carrying amounts of existing assets and liabilities
        and
        loss carryforwards and their respective tax bases. Deferred tax assets and
        liabilities are measured using enacted tax rates expected to apply to taxable
        income in the years in which those temporary differences are expected to
        be
        recovered or settled.
 
 Dividends
 
 Dividends
        are recorded in Company’s financial statements in the period in which they are
        declared.
 
 Off-balance
        sheet arrangements
 
 The
        Company does not have any off-balance sheet arrangements.
 
 Comprehensive
        income
 
 The
        Company has adopted SFAS 130, “Reporting Comprehensive Income”, which
        establishes standards for reporting and display of comprehensive income,
        its
        components and accumulated balances. Components of comprehensive income (loss)
        include net income and foreign currency translation adjustments.
 
 Foreign
        currency translation
 
 The
        functional currency of the Company is RMB and RMB is not freely convertible
        into
        foreign currencies. The Company maintains its financial statements in the
        functional currency. Monetary assets and liabilities denominated in currencies
        other than the functional currency are translated into the functional currency
        at rates of exchange prevailing at the balance sheet date. Transactions
        denominated in currencies other than the functional currency are translated
        into
        the functional currency at the exchanges rates prevailing at the dates of
        the
        transaction. Exchange gains or losses arising from foreign currency transactions
        are included in the determination of net income for the respective
        periods.
 
 For
        financial reporting purposes, the financial statements of the Company which
        are
        prepared using the functional currency have been translated into United States
        dollars. Assets and liabilities are translated at the exchange rates at the
        balance sheet dates and revenue and expenses are translated at the average
        exchange rates and stockholders’ equity is translated at historical exchange
        rates. Any translation adjustments resulting are not included in determining
        net
        income but are included in foreign exchange adjustment to other comprehensive
        income, a component of stockholders’ equity. The exchange rates in effect at
        December 31, 2006, 2005 and 2004 were RMB1 for $0.1279, $0.1239 and $0.1207
        respectively. There is no significant fluctuation in exchange rate for the
        conversion of RMB to US dollars after the balance sheet date.
  F-21
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Basic
        and diluted earnings per share
 
 The
        Company reports basic earnings per share in accordance with SFAS No. 128,
        “Earnings Per Share”. Basic earnings per share is computed using the weighted
        average number of shares outstanding during the periods presented. The weighted
        average number of shares of the Company represents the common stock outstanding
        during the reporting periods.
 
 Fair
        value of financial instruments
 
 The
        carrying values of the Company’s financial instruments, including cash and cash
        equivalents, restricted cash, marketable securities, trade, bills and other
        receivables, deposits, dividend payable, trade, bills and other payables
        approximate their fair values due to the short-term maturity of such
        instruments. The carrying amounts of bank borrowings approximate their fair
        values because the applicable interest rates approximate current market
        rates.
 
 It
        is
        management’s opinion that the Company is not exposed to significant interest,
        price or credit risks arising from these financial instruments.
 
 In
        respect of foreign currency risk, the Company is exposed to this risk arising
        from import purchase transactions and recognized trade payables as they will
        affect the future operating results of the Company. The Company did not have
        any
        hedging transactions during the reporting periods. As the functional currency
        of
        the Company is RMB, the exchange difference on translation to US dollars
        for
        reporting purpose is taken to other comprehensive income.
 
 Recently
        issued accounting pronouncements
 
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        155 “Accounting for Certain Hybrid Financial Instruments: and amendment of FASB
        Statements No. 133 and 140”. SFAS No. 155 simplifies the accounting for
        certain derivatives embedded in other financial instruments by allowing them
        to
        be accounted for as a whole if the holder elects to account for the whole
        instrument on a fair value basis. SFAS No. 155 also clarifies and amends
        certain
        other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective
        for
        all financial instruments acquired, issued or subject to a remeasurement
        event
        occurring in fiscal years beginning after September 15, 2006. Earlier adoption
        is permitted, provided the Company has not yet issued financial statements,
        including for interim periods, for that fiscal year.
 
 In
        March
        2006, the FASB released SFAS No. 156 “Accounting for Servicing of Financial
        Assets: an amendment of FASB Statement No. 140” to simplify accounting for
        separately recognized servicing assets and servicing liabilities. SFAS No.
        156
        permits an entity to choose either the amortization method or the fair value
        measurement method for measuring each class of separately recognized servicing
        assets and servicing liabilities after they have been initially measured
        at fair
        value. SFAS No. 156 applies to all separately recognized servicing assets
        and
        liabilities acquired or issued after the beginning of an entity’s fiscal year
        that begins after September 15, 2006.
  F-22
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 4. Summary
        of significant accounting policies (Cont’d)
 
 Recently
        issued accounting pronouncements (cont’d)
 
 In
        July
        2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes”. This
        interpretation requires that the entity recognize in its financial statements
        the impact of a tax position, if that position is more likely than not of
        being
        sustained on audit, based on the technical merits of the position. The
        provisions of FIN 48 is effective for fiscal years beginning after December
        15,
        2006, with the cumulative effect of the change in accounting principle recorded
        as an adjustment to opening retained earnings.
 
 In
        September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement”. SFAS 157
        defines fair value, establishes a framework for measuring fair value, and
        expands disclosures about fair value measurements. This Statement shall be
        effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years. Earlier
        application is encouraged, provided that the reporting entity has not yet
        issued
        financial statements for that fiscal year, including any financial statements
        for an interim period within that fiscal year. The provisions of this statement
        should be applied prospectively as of the beginning of the fiscal year in
        which
        this Statement is initially applied, except in some circumstances where the
        statement shall be applied retrospectively.
 
 In
        September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB
        Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize
        the over funded or under funded status of defined benefit and other
        postretirement plans as an asset or liability in its statement of financial
        position and to recognize changes in that funded status in the year in which
        the
        changes occur through an adjustment to comprehensive income. This statement
        also
        requires an employer to measure the funded status of a plan as of the date
        of
        its year-end statement of financial position, with limited
        exceptions.
 
 In
        September 2006, the SEC issued SAB No. 108, which provides guidance on the
        process of quantifying financial statement misstatements. In SAB No. 108,
        the
        SEC staff establishes an approach that requires quantification of financial
        statement errors, under both the iron-curtain and the roll-over methods,
        based
        on the effects of the error on each of the Company’s financial statements and
        the related financial statement disclosures. SAB No. 108 is generally effective
        for annual financial statements in the first fiscal year ending after November
        15, 2006. The transition provisions of SAB No. 108 permits existing public
        companies to record the cumulative effect in the first year ending after
        November 15, 2006 by recording correcting adjustments to the carrying values
        of
        assets and liabilities as of the beginning of that year with the offsetting
        adjustment recorded to the opening balance of retained earnings.
 
 The
        company has adopted all the above accounting procurements and considers that
        they have no material impact on these consolidated financial
        statements.
  F-23
  **Wonder
        Auto Technology, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **(Stated
        in US Dollars)**
 
 5. Finance
        costs
  Year
                  ended December 31,2006
              
              2005
              
              2004Interest
                  expenses
              
              $
              807,693
              
              $
              611,326
              
              $
              537,958Bills
                  discounting charges
              
              
              170,851
              
              
              186,103
              
              
              68,524Bank
                  charges and net exchange loss
              
              
              55,007
              
              
              41,525
              
              
              36,659$
              1,033,551
              
              $
              838,954
              
              $
              643,141
  6. Income
        taxes
 
 United
        States
 
 Wonder
        Auto Technology, Inc. is subject to the United States of America Tax law
        at tax
        rate of 34%. No provision for income taxes in the United States has been
        make as
        the taxable income for the year ended December 31, 2006 was set-off by net
        operating loss carry forward from previous years and Wonder Auto Technology,
        Inc. had no taxable income for the years ended December 31, 2005 and
        2004.
 
 BVI
 
 WAL
        and
        Man Do Auto were incorporated in the BVI and, under the current laws of the
        BVI,
        are not subject to income taxes.
 
 PRC
 
 Enterprises
        income tax (“EIT”) to Jinzhou Halla and Dong Woo in the PRC is charged at 27%,
        in which 24% for national tax and 3% for local tax, of the assessable profits.
        As approved by the local tax authority in the PRC, Jinzhou Halla and Dong
        Woo
        was entitled to two years’ exemption, from the first profit making calendar year
        of operations after offset of accumulated taxable losses, followed by 50%
        tax
        reduction for the immediate next three calendar years (“tax holiday”). The tax
        holiday of Jinzhou Halla commenced in the fiscal financial year of 2001.
        Accordingly, Jinzhou Halla was subject to tax rate of 13.5% for 2003, 2004
        and
        2005. Furthermore, Jinzhou Halla, being a Foreign Investment Enterprise (“FIE”),
        is engaged in advanced technology industry, Jinzhou Halla was approved to
        enjoy
        a further three years’ 50% tax reduction for 2006, 2007 and 2008. The tax
        holiday of Dong Woo commenced in the fiscal year 2004. Accordingly, Dong
        Woo was
        subject to tax rate of 13.5% for 2006, 2007 and 2008.
 
 Jinzhou
        Halla and Dong Woo, being FIEs, were entitled to another special tax concession
        that equivalent to 40% of the purchase price of qualifying domestic capital
        expenditure as defined and approved under the relevant PRC income tax rule
        can
        be used to offset against EIT. Jinzhou Halla was additionally entitled to
        a
        further tax concession, if there is a 10% increase in the current year’s
        domestic development expenses over the prior year, amount equivalent to 50%
        of
        the current year’s expenses can be used to offset against EIT.
  F-24
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 6. Income
        taxes (Cont’d)
 
 PRC (cont’d)
 
 The
        components of the provision (benefit) for income taxes from continuing
        operations are :-
 
 Year
                  ended December 31,2006
              
              2005
              
              2004Current
                  taxes - PRC
              
              $
              1,286,760
              
              $
              896,399
              
              $
              863,115Deferred
                  taxes - PRC
              
              
              (16,369
              )
              
              857
              
              
              (144,817
              )$
              1,270,391
              
              $
              897,256
              
              $
              718,298
 
 The
        effective income tax expenses differs from the PRC statutory income tax rate
        of
        27% from continuing operations in the PRC as follows :-
  Year
                  ended December 31,2006
              
              2005
              
              2004Provision
                  for income taxes at PRCstatutory
                  income tax rate
              
              $
              2,590,857
              
              $
              1,970,509
              
              $
              1,702,539Non-deductible
                  items for tax
              
              
              26,084
              
              
              31,817
              
              
              11,845Income
                  not subject to tax
              
              
              (108,558
              )
              
              (7,361
              )
              
              (4,407
              )Others
              
              
              16,200
              
              
              -
              
              
              -Tax
                  concessions
              
              
              (1,254,192
              )
              
              (1,097,709
              )
              
              (991,679
              )$
              1,270,391
              
              $
              897,256
              
              $
              718,298
  F-25
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 6. Income
        taxes (Cont’d)
 
 PRC (cont’d)
 
 Deferred
        tax assets (liabilities) as of December 31, 2006 and 2005 are composed of
        the
        following :-
  As
                  of December 31,2006
              
              2005PRCCurrent
                  deferred tax assets:Allowance
                  for doubtful debts
              
              $
              4,340
              
              $
              5,231Provision
                  for obsolete inventories
              
              
              17,168
              
              
              26,211Provision
                  for warranty
              
              
              141,661
              
              
              123,444Accrued
                  liabilities
              
              
              23,053
              
              
              37,188Unrealized
                  profit
              
              
              51,348
              
              
              -Others
              
              
              -
              
              
              69,474$
              237,570
              
              $
              261,548United
                  StatesNon
                  current deferred tax assets:Tax
                  losses
              
              $
              48,000
              
              $
              52,000Valuation
                  allowances
              
              
              (48,000
              )
              
              (52,000
              )$
              -
              
              $
              -PRCNon
                  current deferred tax assets(liabilities):Depreciation
                  of property, plantand
                  equipment
              
              
              376,368
              
              
              298,021Amortization
                  of land use right
              
              
              12,435
              
              
              12,621Amortization
                  of know-how
              
              
              (183,328
              )
              
              (158,326
              )205,475
              
              
              152,316$
              205,475
              
              $
              152,316
 
 As
        of
        December 31, 2006, the Company had net operating loss carried forward amounted
        to $140,612 in the United States which, if unutilized, will expire through
        to
        2020.
  F-26
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 7. Minority
        Interests
 
 Minority
        interests on the consolidated statement of operations of $101,827 for the
        year
        ended December 31, 2006 represents the minority shareholders’ proportionate
        share of the net income of Dong Woo.
 
 8. Earnings
        per share
 
 During
        the reporting periods, the Company had no dilutive instruments. Accordingly,
        the
        basic and diluted earnings per share are the same.
 
 The
        per
        share data reflects the recapitalization of stockholders’ equity as if the RTO
        occurred as of the beginning of the first period presented and has been adjusted
        for Forward Stock Split effected in July 2006.
 
 
 9. Restricted
        cash, bills and trade payables
 
 As
                  of December 31,2006
              
              2005Bank
                  deposits held as collateral for billspayable
              
              $
              4,876,879
              
              $
              3,597,609
 
 When
        the
        Company intends or is requested to settle its suppliers by issuance of bills,
        it
        is required to place deposits with banks equal to 50% of the bills amount
        at the
        time of issuance. These deposits will be used to settle the bills at
        maturity.
 
 The
        Company is requested by certain of its suppliers to settle by issuance of
        bills
        for which the banks add their undertakings to guarantee their settlement
        at
        maturity. These bills are interest-free with maturity of three to six months
        from date of issuance. As security for the banks’ undertakings, the Company is
        required to deposit with such banks equal to 50% of the bills amount at the
        time
        of issuance and pay bank charges.
 
 Trade
        payables represent trade creditors on open account. They are interest-free
        and
        unsecured. The normal credit term given by these suppliers to the Company
        ranges
        from one to three months.
  F-27
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 10. Other
        receivables, prepayments and deposits
 
 As
                  of December 31,2006
              
              2005Advances
                  to staff
              
              $
              238,310
              
              $
              110,178Value
                  added tax and other tax recoverable
              
              
              193,318
              
              
              145,669Other
                  prepayments
              
              
              227,883
              
              
              126,573Advance
                  to a third party - Note 10a
              
              
              358,171
              
              
              -Prepaid
                  front-end-fee - Note 10b
              
              
              162,146
              
              
              -Other
                  receivables
              
              
              74,381
              
              
              10,486$
              1,254,209
              
              $
              392,906
 
 Notes
        :-
 
 (a)  The
        advance is interest-free, unsecured and repayable on demand.
  (b)  The
        front-end-fee was prepaid in conjunction with the loan facility to be obtained
        by the Company (Note 19).
 
 11. Inventories
  As
                  of December 31,2006
              
              2005Raw
                  materials
              
              $
              3,957,527
              
              $
              2,733,814Work-in-progress
              
              
              450,545
              
              
              301,958Finished
                  goods
              
              
              9,428,237
              
              
              4,965,99113,836,309
              
              
              8,001,763Provision
                  for obsolete inventories
              
              
              (146,935
              )
              
              (194,153
              )$
              13,689,374
              
              $
              7,807,610
 
 (Recovery
        of)/provision for obsolete inventories of $(52,470), $(186,646) and $126,524
        were (credited) charged to operations during the years ended December 31,
        2006,
        2005 and 2004 respectively.
 
 12. Know-how
 
 In
        March
        1996, the Company entered into two contracts with the Korean Company (Note
        4) to
        purchase two technical know-how in relation to product design, manufacturing
        and
        quality control of alternators and starters at a cash consideration of $1.36
        million. This consideration was mutually agreed between Jinzhou Halla and
        the
        Korean Company. Under the terms of the contracts, the Company is able to
        use
        such know-how for unlimited period of time.
 
 Since
        its
        acquisition, no indicator of impairment was identified and accordingly it
        is
        stated at cost.
  F-28
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 13. Trademarks
        and patents
  As
                  of December 31,2006
              
              2005Cost
              
              $
              13,818
              
              $
              3,471Accumulated
                  amortization
              
              
              (2,400
              )
              
              (1,564
              )$
              11,418
              
              $
              1,907
 
 During
        the three years ended December 31, 2006, 2005 and 2004 amortization charge
        was
        $769, $342 and $338 respectively.
 
 The
        estimated aggregate amortization expenses for trademarks and patents for
        the
        five succeeding years is as follows :-
 
 Year2007
              
              $
              7692008
              
              
              7692009
              
              
              7692010
              
              
              7692011
              
              
              769$
              3,845
  14. Property,
        plant and equipment, net
  As
                  of December 31,2006
              
              2005Costs:Buildings
              
              $
              5,850,903
              
              $
              4,869,688Plant
                  and machinery
              
              
              13,457,393
              
              
              10,440,533Furniture,
                  fixtures and equipment
              
              
              381,810
              
              
              309,952Tools
                  and equipment
              
              
              1,196,095
              
              
              877,572Leasehold
                  improvements
              
              
              151,848
              
              
              24,773Motor
                  vehicles
              
              
              642,172
              
              
              341,33721,680,221
              
              
              16,863,855Accumulated
                  depreciation
              
              
              (7,851,156
              )
              
              (6,215,773
              )Construction
                  in progress - Note 4
              
              
              116,781
              
              
              -Net
              
              $
              13,945,846
              
              $
              10,648,082
  F-29
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
  14. Property,
        plant and equipment, net (Cont’d)
 
 An
        analysis of buildings, plant and machinery pledged to banks for banking loans
        (Note 19a) is as follows :-
  As
                  of December 31,2006
              
              2005Costs:Buildings
              
              $
              4,576,803
              
              $
              3,810,749Plant
                  and machinery
              
              
              -
              
              
              2,663,9644,576,803
              
              
              6,474,713Accumulated
                  depreciation
              
              
              (929,213
              )
              
              (1,593,770
              )Net
              
              $
              3,647,590
              
              $
              4,880,943
 
 Year
                  ended December 31,2006
              
              
              2005
              
              
              2004Depreciation
              
              $
              139,117
              
              $
              348,473
              
              $
              191,840
 
 (i)  During
        the reporting periods, depreciation is included in :-
 
 Year
                  ended December 31,2006
              
              2005
              
              2004Cost
                  of sales and overheadsof
                  inventories
              
              $
              1,255,390
              
              $
              1,057,150
              
              $
              901,873Other
              
              
              146,151
              
              
              101,411
              
              
              84,644$
              1,401,541
              
              $
              1,158,561
              
              $
              986,517
 
 During
        the years ended December 31, 2006 and 2004, property, plant and equipment
        with
        carrying amounts of $152,696 and $50,501 were disposed of at considerations
        of
        $73,169 and $31,012 resulting in losses of $79,527 and $19,489
        respectively.
 
 (ii)  Construction
        in Progress
 
 Construction
        in progress mainly comprises capital expenditure for construction of the
        Company’s new offices and factories.
  F-30
  **Wonder
        Auto Technology, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **(Stated
        in US Dollars)**
  15. Land
        use
        right
  As
                  of December 31,2006
              
              2005Land
                  use right
              
              $
              1,465,806
              
              $
              800,027Accumulated
                  amortization
              
              
              (262,550
              )
              
              (220,007
              )$
              1,203,256
              
              $
              580,020
 
 The
        Company obtained the right from the relevant PRC land authority for a period
        of
        thirty years to use the land on which the office premises, production facilities
        and warehouse of the Company are situated. This right was pledged to a bank
        for
        the bank loans granted to the Company (Note 19b).
 
 During
        the three years ended December 31, 2006, 2005 and 2004, amortization amounted
        to
        $28,883, $26,245 and $25,980 respectively.
 
 The
        estimated aggregate amortization expenses for land use right for the five
        succeeding years is as follows :-
 
 Year2007
              
              $
              28,8832008
              
              
              28,8832009
              
              
              28,8832010
              
              
              28,8832011
              
              
              28,883$
              144,415
  16. Other
        payables and accrued expenses
  As
                  of December 31,2006
              
              2005Accrued
                  audit fee
              
              $
              90,678
              
              $
              110,114Other
                  accrued expenses
              
              
              137,839
              
              
              256,102Other
                  tax payable
              
              
              37,690
              
              
              12,479Payable
                  for acquisition of property, plantand
                  equipment
              
              
              133,275
              
              
              166,789Staff
                  welfare payable - Note
              
              
              132,699
              
              
              82,325Payable
                  for acquisition of Dong Woo-
                  Note 4
              
              
              2,420,000
              
              
              -Other
                  payables
              
              
              169,352
              
              
              82,013$
              3,121,533
              
              $
              709,822
 
 Note
        :-
 
 Staff
        welfare payable represents accrued staff medical, industry injury claims,
        labor
        and unemployment insurances. All of which are third parties insurance and
        the
        insurance premiums are based on certain percentage of salaries. The obligations
        of the Company are limited to those premiums contributed by the
        Company.
  F-31
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
  17. Provision
        for warranty
  As
                  of December 31,2006
              
              2005Balance,
                  January 1
              
              $
              914,403
              
              $
              815,498Claims
                  paid for the year
              
              
              (843,026
              )
              
              (991,008
              )Addition
                  provision for the year
              
              
              945,871
              
              
              1,067,163Translation
                  adjustments
              
              
              32,096
              
              
              22,750Balance,
                  December 31
              
              $
              1,049,344
              
              $
              914,403
 
 
 18. Amounts
        due from a related company / to a stockholder / to an unconsolidated
        affiliate
 
 The
        related company is controlled by certain of the Company’s stockholders which
        include Qingjie Zhao. These amounts are interest-free, unsecured and repayable
        on demand.
  19. Secured
        bank loans
  As
                  of December 31,2006
              
              2005Bank
                  loans repayable as follows:Within
                  1 year
              
              $
              14,326,831
              
              $
              7,431,813After
                  1 year but within 2 years
              
              
              -
              
              
              4,954,542$
              14,326,831
              
              $
              12,386,355
 
 As
        of
        December 31, 2006, the Company’s banking facilities are composed of the
        following :-
 
 AmountFacilities
                  granted
              
              Granted
              
              Utilized
              
              UnusedSecured
                  bank loans
              
              $
              18,548,129
              
              $
              14,326,831
              
              $
              4,221,298
 
 The
        above
        banking loans were secured by the following :-
 
 (a)  Property,
        plant and equipment with carrying value of $3,647,590 respectively (Note
        14);
 
 (b)  Land
        use
        right with carrying value of $1,203,256 (Note 15);
 
 (c)  Certain
        trade receivables of approximately $4,260,000 were factored to a bank with
        recourse as collateral under invoice discount agreement;
 
 (d)  Guarantees
        executed by the Company’s sole director, Chief Executive Officer, President and
        Secretary, Qingjie Zhao, who is also a stockholder of the Company holding
        61.05%
        common stock of the Company; and by a related company controlled by certain
        of
        the Company’s stockholders including Qingjie Zhao, Xiangdong Gao, Meina Zhang,
        Qing Lin, Yuquan Zhou, Chengyu Zhang and Chenye Zhang; and
 
 F-32
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
  19. Secured
        bank loans (Cont’d)
 
 (e)
              All
                  the bank loans are denominated in RMB and carry interest rates
                  ranging
                  from 6.12% to 6.732% per annum with maturity for one
                  year.
 
 During
        the reporting periods, there was no covenant requirement under the banking
        facilities granted to the Company.
 
 On
        November 24, 2006, the Company entered into a loan agreement (“Loan Agreement”)
        with DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH for a
        bank
        loan approximately up to $13 million (equivalent of Euro 10 million) for
        expansion of its production facilities. However, the availability of this
        loan
        facility is subject to the terms and conditions laid down in the Loan Agreement,
        including a first ranking pledge of the Company’s property, plant and equipment
        with a minimum value of approximately $10.5 million (equivalent of Euro
        8 million). As of December 31, 2006, such loan facility is not yet
        available to the Company because the Company is still in the process of
        arranging the aforementioned pledge and other necessary documents. Accordingly,
        this loan facility is not reflected in the banking facilities as detailed
        above.
        Details of such loan facility are set out in the Company’s Form 8K dated
        November 30, 2006.
  20. Commitments
        and contingencies
 
 a. Capital
        commitment
 
 As
        of
        December 31, 2006, the Company had capital commitments amounting to $1,535,858
        in respect of the acquisition of property, plant and equipment which were
        contracted for but not provided in the financial statements.
 
 b.  Operating
        lease arrangement
 
 As
        of
        December 31, 2006, the Company had one non-cancelable operating leases for
        its
        warehouses. The leases will expire in 2007 and the expected payment is
        $1,302.
 
 The
        rental expense relating to the operating leases was $1,302 and $3,764 for
        the
        two years ended December 31, 2006 and 2005 respectively.
  F-33
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 21. Common
        stock and additional paid-in capital
 
 Common
                  stockNumber
                  ofshares
                  asadjusted
                  for
              
              
              
              AdditionalForward
              
              
              
              paid-inStock
                  Split
              
              Amount
              
              capitalBalance,
                  January 1, 2005 andDecember
                  31, 2005
              
              
              17,227,198
              
              $
              1,723
              
              $
              11,998,377Recapitalization
              
              
              2,832,800
              
              
              283
              
              
              136Shares
                  issued for proceeds of $12 million
              
              
              3,899,996
              
              
              390
              
              
              11,999,610Cost
                  of raising capital
              
              
              -
              
              
              -
              
              
              (1,857,980
              )Balance,
                  December 31, 2006
              
              
              23,959,994
              
              $
              2,396
              
              $
              22,140,143
 
 (a)  On
        June
        22, 2006, the Company issued 21,127,194 shares of common stock, par value
        $0.0001 per share, to the stockholders of WAL, of which 17,227,198 shares
        to WAL
        Former Stockholders and 3,899,996 shares to new investors in exchange for
        100%
        of the outstanding capital stock of WAL.
 
 (b)  The
        Company’s issued and outstanding number of common stock immediately prior to the
        RTO is 2,832,800 shares are accounted for at $419 of net book value at the
        time
        of the RTO.
 
 (c)  On
        July
        12, 2006, the board of the directors of the Company approved a 2.448719-for-1
        Forward Stock Split in the form of a stock dividend. Immediately following
        the
        Forward Stock Split, the Company has 23,959,994 shares of common stock issued
        and outstanding. The effect of Forward Stock Split has been retroactively
        reflected in these financial statements. All references to weighted average
        shares outstanding and per share amounts included in the accompanying financial
        statements and notes reflect the Forward Stock Split and its retroactive
        effects.
  22. Statutory
        and other reserves
 
 The
        Company’s statutory and other reserves comprise statutory reserve and enterprise
        expansion fund of Jinzhou Halla and Dong Woo in the PRC.
 
 As
                  of December 31,2006
              
              2005Statutory
                  reserve
              
              $
              3,093,031
              
              $
              2,292,614Enterprise
                  expansion fund
              
              
              55,234
              
              
              55,234$
              3,148,265
              
              $
              2,347,848
  F-34
  **Wonder
        Auto Technology, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **(Stated
        in US Dollars)**
  
 22. Statutory
        and other reserves (Cont’d)
 
 Statutory
        reserve
 
 In
        accordance with the relevant laws and regulations of the PRC and articles
        of
        association of Jinzhou Halla and Dong Woo, it is required to appropriate
        10% of
        its net income, after offsetting any prior years’ losses, to the statutory
        reserve. When the balance of such reserve reaches 100% of the registered
        capital, any further appropriation is optional. Upon approval from the board
        of
        directors of the respective company, the statutory reserve can be used to
        offset
        accumulated losses or to increase registered capital.
 
 Enterprise
        expansion fund
 
 In
        accordance with the relevant laws and regulations of the PRC and articles
        of
        association of Jinzhou Halla and Dong Woo, the appropriation of income to
        this
        fund is made in accordance with the recommendation of the board of directors
        of
        the respective company. Upon approval by the board, it can be used for future
        expansion or to increase registered capital.
 
 23. Accumulated
        other comprehensive income
 
 The
        accumulated other comprehensive income consists of foreign currency translation
        adjustments as follows :-
  ForeigncurrencytranslationadjustmentsBalance,
                  January 1, 2004
              
              $
              23,818Foreign
                  currency translation adjustments
              
              
              766Balance,
                  December 31, 2004
              
              
              24,584Foreign
                  currency translation adjustments
              
              
              420,086Balance,
                  December 31, 2005
              
              
              444,670Foreign
                  currency translation adjustments
              
              
              1,007,468Balance,
                  December 31, 2006
              
              $
              1,452,138
  24. Defined
        contribution plan
 
 The
        Company has a defined contribution plan for all qualified employees in the
        PRC.
        The employer and its employees are each required to make contributions to
        the
        plan at the rates specified in the plan. The only obligation of the Company
        with
        respect to retirement scheme is to make the required contributions under
        the
        plan. No forfeited contribution is available to reduce the contribution payable
        in the future years. The defined contribution plan contributions were charged
        to
        the consolidated statements of operations. The Company contributed $490,519,
        $417,824 and $388,461 for the years ended December 31, 2006, 2005 and 2004
        respectively.
 
 F-35
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 25. Segment
        information
 
 The
        Company is engaged in the manufacture and distribution of automotive electrical
        components including alternators and starters in the PRC. The Company has
        two
        reportable segments, alternators and starters, based on the type of products.
        Information for the two segments is disclosed under FAS 131, “Disclosures about
        Segments of an Enterprise and Related Information” as below :-
 
 Alternators
              
              Starters
              
              TotalYear
                  ended December 31
              
              Year
                  ended December 31
              
              Year
                  ended December 312006
              
              2005
              
              2004
              
              2006
              
              2005
              
              2004
              
              2006
              
              2005
              
              2004Revenue
                  from externalcustomers
              
              $
              45,216,038
              
              $
              30,118,341
              
              $
              28,119,116
              
              $
              26,934,445
              
              $
              17,944,464
              
              $
              14,146,758
              
              $
              72,150,483
              
              $
              48,062,805
              
              $
              42,265,874Interest
                  income
              
              
              41,954
              
              
              17,844
              
              
              9,017
              
              
              24,154
              
              
              10,632
              
              
              4,537
              
              
              66,108
              
              
              28,476
              
              
              13,554Interest
                  expenses
              
              
              507,310
              
              
              383,085
              
              
              357,899
              
              
              300,383
              
              
              228,241
              
              
              180,059
              
              
              807,693
              
              
              611,326
              
              
              537,958Amortization
              
              
              19,295
              
              
              16,661
              
              
              17,509
              
              
              10,357
              
              
              9,926
              
              
              8,809
              
              
              29,652
              
              
              26,587
              
              
              26,318Depreciation
              
              
              883,250
              
              
              963,870
              
              
              805,037
              
              
              518,291
              
              
              194,691
              
              
              181,480
              
              
              1,401,541
              
              
              1,158,561
              
              
              986,517Segment
                  profit
              
              
              4,835,128
              
              
              3,904,964
              
              
              3,413,013
              
              
              4,818,079
              
              
              3,384,753
              
              
              2,897,393
              
              
              9,653,207
              
              
              7,289,717
              
              
              6,310,406Segment
                  assets
              
              
              54,860,505
              
              
              35,053,650
              
              
              27,265,236
              
              
              22,308,718
              
              
              16,990,104
              
              
              9,708,836
              
              
              77,169,223
              
              
              52,043,754
              
              
              36,974,072Expenditure
                  for segmentassets
              
              $
              1,685,790
              
              $
              1,292,607
              
              $
              1,915,749
              
              $
              1,951,822
              
              $
              770,284
              
              $
              963,777
              
              $
              3,637,612
              
              $
              2,062,891
              
              $
              2,879,526
  F-36
 **Wonder
          Auto Technology, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **(Stated
          in US Dollars)**
 25. Segment
        information (Cont’d)
 
 A
        reconciliation is provided for unallocated amounts relating to corporate
        operations which is not included in the segment information.
 
 Year
                  ended December 31,2006
              
              2005
              
              2004Total
                  consolidated revenue
              
              $
              72,150,483
              
              $
              48,062,805
              
              $
              42,265,874Total
                  profit for reportable segments
              
              $
              9,653,207
              
              $
              7,289,717
              
              $
              6,310,406Unallocated
                  amounts relating torelating
                  to operations:Interest
                  income
              
              
              30,702
              
              
              63
              
              
              -Other
                  income
              
              
              18,418
              
              
              9,753
              
              
              -Other
                  general expenses
              
              
              (106,563
              )
              
              (1,351
              )
              
              (4,706
              )Income
                  before income taxes
              
              $
              9,595,764
              
              $
              7,298,182
              
              $
              6,305,700
 
 As
                  of December 31,2006
              
              2005
              
              2004AssetsTotal
                  assets for reportable segments
              
              $
              77,169,223
              
              $
              52,043,754
              
              $
              36,974,072Cash
                  and cash equivalents
              
              
              830,917
              
              
              9,008
              
              
              543Marketable
                  securities
              
              
              -
              
              
              37,159
              
              
              -$
              78,000,140
              
              $
              52,089,921
              
              $
              36,974,615
 
 All
        of
        the Company’s long-lived assets are located in the PRC. Geographic information
        about the revenues, which are classified based on the customers, is set out
        as
        follows :-
 
 Year
                  ended December 31,2006
              
              2005
              
              2004PRC
              
              $
              68,686,842
              
              $
              47,416,125
              
              $
              41,920,125Others
              
              
              3,463,641
              
              
              646,680
              
              
              345,749Total
              
              $
              72,150,483
              
              $
              48,062,805
              
              $
              42,265,874
  26. Subsequent
        events
 
 Subsequent
        to December 31, 2006, CIL, ECL and Xiangdong Gao entered into an agreement
        on
        February 8, 2007, pursuant to which both CIL and ECL have agreed to give
        the
        right of the entitlement to the 1,650,000 escrowed shares related to the
        fiscal
        year ended December 31, 2006 to Xiangdong Gao for nil consideration. Further
        details are set out in note 3 (ii).
 
 F-37
  **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 19, 2007
  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
                
                Qingjie
                  Zhao
              
              President
                  , Sole Director and Chief Executive Officer (Principal Executive
                  Officer)
              
              March 19,
                  2007/s/
                    Meirong Yuan
                
                Meirong
                  Yuan
              
              Chief
                  Financial Officer (Principal Financial Officer and Principal Accounting
                  Officer)
              
              March
                  19,
                  2007
   
  **EXHIBITS**
  **Exhibit
                  No.**
              
              **Description**2.1
              
              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 amongBeijing
                  International Technological Cooperation CenterWang 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
                  Contractbetween
                  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
                  Contractbetween
                  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
                  Contractbetween
                  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].14
              
              Code
                  of Ethics. [Incorporated by reference as Exhibit 14 to the Company’s
                  annual report on Form 10-KSB filed on March 30, 2005].21
              
              Revised
                  list of subsidiaries of the Company.*
  
 24
              
              Power
                  of Attorney.31.1
              
              Certification
                  of Chief Executive Officer, pursuant to Rule 13a - 14(a).*31.2
              
              Certification
                  of Chief Financial Officer, pursuant to Rule 13a - 14(a).*32.1
              
              Certification
                  of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
              
              Certification
                  of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*99.1
              
              Promissory
                  Note, dated June 27, 2005 [Incorporated by reference as Exhibit
                  99.1 to
                  the Company’s quarterly report on Form 10-QSB filed on August 15,
                  2005].