**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-K**




**(Mark
                One)**x
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934.****For
                the fiscal year ended December 31, 2007**oro
            **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 000-33123**




**CHINA
      AUTOMOTIVE SYSTEMS, INC.**


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




**Delaware**
            
            **33-0885775***(State
                or Other Jurisdiction*
              *of
                Incorporation or Organization)*
            
            *(I.R.S.
                Employer*
              *Identification
                No.)***No.
                1 Henglong Road, Yu Qiao Development Zone**
              **Shashi
                District, Jing Zhou City Hubei Province,
                China**
            
            **434000***(Address
                of Principal Executive Offices)*
            
            *(Zip
                Code)*





*****(Registrant’s
                Telephone Number, Including Area Code)***(86)
                716-8329196**




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





Common
      Stock, $0.0001 par value





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





None




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




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 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 (§ 229.405 of this chapter) 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, a non-accelerated filer or a smaller reporting company.
      See
      definition of “accelerated filer”, “large accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
                Accelerated Filer o
            Accelerated
                Filer o
            Non-Accelerated
                Filer o




Smaller
      Reporting Company x




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




Aggregate
      market value of voting and non-voting common equity held by non-affiliates
      of
      the registrant as of June 30 ,
      2007,
      based upon the closing price of the common stock as reported on the NASDAQ
      Stock
      Market under the symbol “CAAS” on such date, was approximately
      $28,822,340.




23,959,702
      shares of Common Stock outstanding as of February 27, 2008.











CHINA
      AUTOMOTIVE SYSTEMS, INC.




FORM
      10-K




INDEX




**Page**PART
                  I
              
              
              3Item
                  1. Description of Business
              
              
              3Item
                  1A. Risk Factors
              
              
              11Item
                  1B. Unresolved Staff Comments
              
              
              16Item
                  2. Description of Property
              
              
              17Item
                  3. Legal Proceedings
              
              
              17Item
                  4. Submission of Matters of a Vote of Security Holders
              
              
              17PART
                  II
              
              
              18Item
                  5. Market for Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              
              
              19Item
                  6. Selected Financial Data
              
              
              19Item
                  7. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              
              
              19Item
                  8. Financial Statements and Supplementary Data
              
              
              34Item
                  9. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              
              
              35Item
                  9A. Controls and Procedures
              
              
              35Item
                  9B. Other Information
              
              
              36PART
                  III
              
              
              36Item
                  10. Directors and Executive Officers, Corporate Governance and
                  Board
                  Independence
              
              
              36Item
                  11. Executive Compensation
              
              
              40Item
                  12. Security Ownership of Certain Beneficial Owners and Management
                  and
                  Related Stockholder Matters
              
              
              41Item
                  13. Certain Relationships and Related Transactions
              
              
              41Item
                  14. Principal Accountant Fees and Services
              
              
              42PART
                  IV
              
              
              42Item
                  15. Exhibits and Financial Statement Schedules
              
              
              42Signatures
              
              
              45Financial
                  Statements
              
              
              47-52


2




Cautionary
      Statement




This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
      Securities Exchange Act of 1934. These statements relate to future events or
      the
      Company’s future financial performance. The Company has attempted to identify
      forward-looking statements by terminology including “anticipates,” “believes,”
“expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predict,” “should” or “will” or the negative of these
      terms or other comparable terminology. Such statements are subject to certain
      risks and uncertainties, including the matters set forth in this report or
      other
      reports or documents the Company files with the Securities and Exchange
      Commission from time to time, which could cause actual results or outcomes
      to
      differ materially from those projected. Although the Company believes that
      the
      expectations reflected in the forward-looking statements are reasonable, the
      Company cannot guarantee future results, levels of activity, performance or
      achievements. Undue reliance should not be placed on these forward-looking
      statements which speak only as of the date hereof. The Company’s expectations
      are as of the date this Form 10-K is filed, and the Company does not intend
      to
      update any of the forward-looking statements after the date this Annual Report
      on Form 10-K is filed to confirm these statements to actual results, unless
      required by law.




PART
      I




ITEM
      1.
 DESCRIPTION OF BUSINESS.




COMPANY
      HISTORY




China
      Automotive Systems, Inc., “China Automotive” or the “Company”, was incorporated
      in the State of Delaware on June 29, 1999 under the name Visions-In-Glass,
      Inc..




On
      or
      around March 5, 2003, the Company acquired all of the issued and outstanding
      equity interests of Great Genesis Holding Limited, “Genesis”, a corporation
      organized under the laws of the Hong Kong Special Administrative Region, China,
      by issuance of 20,914,250 shares of common stock to certain sellers. After
      the acquisition, the Company continued the operations of
      Genesis. Presently, Genesis owns interests in eight Sino-joint ventures,
      which manufacture power steering systems and/or related products for different
      segments of the automobile industry in China.




On
      May
      19, 2003, the Company changed its name from Visions-In-Glass, Inc. to China
      Automotive Systems, Inc.




Effective
      September 5, 2007, Hanlin Chen, Qizhou Wu, Robert Tung, Haimian Cai, and William
      E. Thomson began serving their terms as members of the Company’s Board of
      Directors. The newly elected directors appointed Hanlin Chen as the chairman
      of
      the board, Qizhou Wu as the Chief Executive Officer of the Board of Directors,
      and Jie Li as Chief Financial Officer..




BUSINESS
      OVERVIEW




Unless
      the context indicates otherwise, the Company uses the terms “the Company”, “we”,
“our” and “us” to refer to Genesis and China Automotive collectively on a
      consolidated basis. The Company is a holding company and has no significant
      business operations or assets other than its interest in Genesis. Through
      Genesis, the Company manufactures power steering systems and other component
      parts for automobiles. All operations are conducted through eight Sino-foreign
      joint ventures in China and a wholly owned subsidiary in U.S. Set forth below
      is
      an organizational chart as at December 31, 2007.




3




**China
                Automotive Systems, Inc. [NASDAQ:CAAS]**↓100%
            
            
            
            ↓100%Great
                Genesis Holdings Limited
            
            
            
            Henglong
                USA Corporation↓↓44.5%
            
            ↓81%
            
            ↓70%
            
            ↓51%
            
            ↓75.9%
            
            ↓77.33%
            
            ↓85%
            
            ↓100.00%Jingzhou
                Henglong Automotive Parts Co., Ltd.
            
            Shashi
                Jiulong Power Steering Gears Co., Ltd.
            
            Shenyang
                Jinbei Henglong Automotive Steering System Co., Ltd.
            
            Zhejiang
                Henglong & Vie Pump-Manu Co., Ltd.
            
            Universal
                Sensor Application, Inc.
            
            Wuhu
                Henglong Automotive Steering System Co., Ltd.
            
            Wuhan
                Jielong Electric Power Steering Co., Ltd
            
            Jingzhou
                Hengsheng Automotive System Co., Ltd,(“Henglong”)
            
            (“Jiulong”)
            
            (“Shenyang”)
            
            ("Zhejiang")
            
            (“USAI”)
            
            (“Wuhu”)
            
            (“Jielong”)
            
            (“Hengsheng”)





Jiulong
      was established in 1993 and mainly engaged in the production of integral power
      steering gear for heavy-duty vehicles.





Henglong
      was established in 1997 and mainly engaged in the production of rack and pinion
      power steering gear for cars and light duty vehicles.





Shenyang
      was established in 2002 and focuses on power steering parts for light duty
      vehicles.





Zhejiang
      was established in 2002 to focus on power steering pumps.





On
      April
      12, 2005, Great Genesis entered into a Joint-venture agreement with Shanghai
      Hongxi Investment Inc., “Hongxi”, a company controlled by Mr. Hanlin Chen, the
      Company’s Chairman, and Sensor System Solution Inc., “Sensor”, to establish a
      joint venture, Universal Sensor Application Inc., “USAI”, in the Wuhan East Lake
      development zone to engage in production and sales of sensor modulars. The
      registered capital of the Joint-venture is $10 million. Great Genesis and Hongxi
      intended to invest $6 million and $1 million, respectively, including cash
      and
      land and building, which would account for 60% and 10% of the total registered
      capital, respectively. Sensor would invest $3 million in technology, accounting
      for 30% of the total registered capital. As of March 20, 2007, the three parties
      of USAI, Great Genesis, Hongxi, Sensor, entered into an agreement, which led
      to
      Sensor’s withdrawal from USAI and abandonment of all its rights and interests in
      USAI. The registered capital of the Joint-venture has changed to $1,800,000,
      with 75.9% owned by the Company, 24.1% owned by Hongxi. Since the withdrawal
      of
      intangible assets, another technology supplier is being sought.





On
      April
      14, 2006, Great Genesis entered into a Joint-venture agreement with Hong Kong
      Tongda, “Tongda”, to establish a joint venture, Wuhan Jielong Electric Power
      Steering Co., Ltd., “Jielong”, in the Wuhan East Lake development zone. Jielong
      is mainly engaged in the production and sales of electric power steering, “EPS”.
      The registered capital of the Joint-venture is $6 million. Great Genesis and
      Tongda will invest $5,100,000 and $900,000, respectively, amounting to 85%
      and
      15% of the total registered capital, respectively.





On
      March
      31, 2006, as amended on May 2, 2006, Great Genesis, entered into a Joint-venture
      agreement with Wuhu Chery Technology Co., Ltd., “Chery Technology”, to establish
      a Joint-venture, Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu”, in
      the Wuhu Technological Development Zone. Wuhu is mainly engaged in the
      production and sales of automobile steering systems. The registered capital
      of
      the Joint-venture is $3,750,387, the equivalent of RMB 30,000,000. Great Genesis
      and Chery Technology invested $2,900,300, the equivalent of RMB 23,200,000,
      and
      $848,938, the equivalent of RMB 6,800,000, respectively, which accounts for
      77.33% and 22.67% of the total registered capital, respectively.





On
      March
      7, 2007, Great Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng
      Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of
      automotive steering systems. The registered capital of Hengsheng is
      $10,000,000.




The
      Company has business relations with more than sixty vehicle manufacturers,
      including FAW Group and Dongfeng Auto Group, two of the five largest automobile
      manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., the largest van
      manufacturers in China; Cherry Automobile Co., Ltd, the largest state owned
      car
      manufacturer in China, and Zhejiang Geely Automobile Co., Ltd., the largest
      private owned car manufacturer. In 2006 and 2007, the Company has supplied
      power steering pumps and power steering gears for the Sino-Foreign joint
      ventures established by General Motors (GM) and Volkswagen.




The
      Company currently owns two trademarks covering automobile parts and twelve
      Chinese patents covering power steering technology. The Company is in the
      process of integrating new advanced technologies such as electronic chips in
      power steering systems into its current production line and is pursuing
      aggressive strategies in technology to maintain a competitive edge within the
      automobile industry. In 2001, the Company signed a Ten-Year Licensing Agreement
      with Bishop Steering Technology Limited, a leader in automotive steering gear
      technology innovation which is expected to offer advanced technology for
      steering valves within the contract period. In 2003, the Company signed a
      Technology Transfer Agreement with Nanyang Ind. Co. Ltd., a leading steering
      column maker, for the technology necessary for electronic power steering (EPS)
      systems. In addition, the Company established with Tsinghua University a
      steering systems research institute designed to develop Electronic Power
      Steering (EPS) and Electronic Hydraulic Steering Systems (EHPS).




4




STRATEGIC
      PLAN




The
      Company’s short to medium term strategic plan is to focus on both domestic and
      international market expansion. To achieve this goal and higher profitability,
      the Company focuses on brand recognition, quality control, decreasing costs,
      research and development and strategic acquisitions. Set forth below are the
      Company’s programs:


· Brand
            Recognition. Under the Henglong and Jiulong brands, the Company offers
            four
            separate series of power steering sets and 310 models of power steering
            sets,
            steering columns, steering oil pumps and steering
            hoses.


· Quality
          Control. The Henglong and Jiulong manufacturing facilities passed the ISO/TS
          16949 System Certification in January 2004, a well-recognized quality control
          system in the auto industry developed by TUVRheindland of
          Germany.


· Decrease
          Cost. By improving the Company’s production ability and enhancing equipment
          management, optimizing the process and products structure, perfecting the
          supplier system and cutting production cost, the Company’s goal is to achieve a
          more competitive profit margin.


· Research
          and Development. By partnering with Bishop Steering Technology Limited,
          Nanyang
          Ind. Co. Ltd. and Tsinghua University for the development of advanced steering
          systems, the Company’s objective is to gain increased market share in
          China.


· International
          Expansion. The Company has entered into agreements with several international
          vehicle manufacturers and auto parts modules suppliers and carried on
          preliminary negotiations regarding future development
          projects.


· Acquisitions.
          The Company is exploring opportunities to create long-term growth through
          new
          ventures or acquisitions of other auto component manufacturers. The Company
          will
          seek acquisition targets that fulfill the following criteria:·


·
            companies
                that can be easily integrated into product manufacturing and corporate
                management;




·
            companies
                that have strong joint venture partners that would become major customers;
                and




·
            companies
                involved with power steering systems, oil pump or engine-cooling
                systems.




5




CUSTOMERS




The
      Company’s ten largest customers represent 74.0% of the Company’s total sales for
      the year ended December 31, 2007. The following table sets forth information
      regarding the Company’s ten largest customers.




Name
                of Major Customers
            
            Percentage
                of Total
              Revenue
                in 2007Chery
                Automobile Co., Ltd
            
            
            16.4
            %Brilliance
                China Automotive Holdings Limited
            
            
            13.7
            %Beiqi
                Foton Motor Co., Ltd.
            
            
            11.5
            %Zhejiang
                Geely Holding Co., Ltd
            
            
            10.6
            %Xi’an
                BYD Electric Car Co., Ltd
            
            
            6.2
            %Dongfeng
                Auto Group Co., Ltd
            
            
            4.0
            %China
                FAW Group Corporation
            
            
            3.4
            %Great
                Wall Motor Company Limited
            
            
            3.0
            %Shanxi
                Heavy Auto Co., Ltd
            
            
            3.0
            %Shenyang
                Zhongshun Auto Co., Ltd
            
            
            2.2
            %Total
            
            
            74.0
            %




We
      primarily sell our products to the above-mentioned customers; we also have
      excellent relationships with them, including as their first-ranking supplier
      and
      developer for new product development for new models. While we intend to
      continue to focus on retaining and winning this business, we cannot ensure
      that
      we will succeed in doing so. It is difficult to keep these contracts as a result
      of severe price competition and customers’ diversification of their supply base.
      The Company’s business would be materially and adversely affected if it loses
      one or more of these major customers.




SALES
      AND
      MARKETING




The
      Company’s sales and marketing team has 104 sales persons, which are divided into
      an original equipment manufacturing, (OEM), team, a sales service team and
      a
      working group dedicated to international business. These sales and marketing
      teams provide a constant interface with the Company’s key customers. They are
      located in all major vehicle producing regions to more effectively represent
      the
      Company’s customers’ interests within the Company’s organization, to promote
      their programs and to coordinate their strategies with the goal of enhancing
      overall service and satisfaction. The Company’s ability to support its customers
      is further enhanced by its broad presence in terms of sales offices,
      manufacturing facilities, engineering technology centers and joint
      ventures.




The
      Company’s sales and marketing organization and activities are designed to create
      overall awareness and consideration of, and therefore to increase sales of,
      the
      Company’s modular systems and components. To achieve that objective, the Company
      organized delegations to visit the United States, Korea, India and Japan and
      met
      with potential customers. Through these activities, the Company has generated
      potential business interests as a strong base for future
      development.




DISTRIBUTION




The
      Company’s distribution system covers all of China. The Company has established
      sales and service offices with certain significant customers to deal with
      matters related to such customers in a timely fashion. The Company also
      established distribution warehouses close to major customers to ensure timely
      deliveries. The Company maintains strict control over inventories. Each of
      these
      sales and service offices sends back to the Company through e-mail or fax
      information related to the inventory and customers’ needs. The Company
      guarantees product delivery in 8 hours for those customers who are located
      within 200 km from the Company’s distribution warehouses, and 24 hours for
      customers who are located outside of 200 km from the Company’s distribution
      warehouses. Delivery time is a very important competitive factor in terms of
      customer decision making, together with quality, pricing and long-term
      relationships.




6




EMPLOYEES
      AND FACILITIES




As
      of
      December 31, 2007, the Company employed approximately 2,322 persons,
      including approximately 1,583 by Henglong and Jiulong, approximately 278 by
      Shengyan, approximately 288 by Zhejiang, approximately 39 by USAI, approximately
      128 by Wuhu, and approximately 6 for other companies.




As
      of
      December 31, 2007, each of Henglong and Jiulong, Shenyang, Zhejiang, Wuhu and
      Hengsheng has a manufacturing and administration area of 278,092 square meters,
      35,354 square meters, 100,000 square meters, 83,700 square meters and 170,520
      square meters, respectively.




Hubei
      Province, which is home to Dongfeng, one of the largest automakers in China,
      provides an ample supply of inexpensive but skilled labor to automotive-related
      industries. The annual production of the Company’s main product, power steering
      gears, was approximately 800,000 units and 1,070,000 units in 2006 and 2007
      respectively. Although the production process continues to rely heavily on
      manual labor, the Company has invested substantially in high-level production
      machinery to improve capacity and production quality. Approximately $32.4
      million was spent over the last three years on professional-grade equipment
      and
      workshops —
      approximately 80% of which has used in the production process as of December
      31,
      2007.




RAW
      MATERIALS




The
      Company purchases various manufactured components and raw materials for use
      in
      its manufacturing processes. The principal components and raw materials the
      Company purchases include castings, electronic parts, molded plastic parts,
      finished sub-components, fabricated metal, aluminum and steel. The most
      important raw material is steel. The Company enters into purchase
      agreements with local suppliers. The annual purchase plans are determined
      at the beginning of the calendar year but are subject to revision every three
      months as a result of customers’ orders. A purchase order is made according to
      monthly production plans. This protects the Company from building up
      inventory when the orders from customers change.




The
      Company’s purchases from its ten largest suppliers represent in the aggregate
      29.6% of all components and raw materials it purchased for the year ended
      December 31, 2007, with only one supplier, Somic Automotive Components Co.
      Ltd.,
      providing more than 10% of total purchases. It accounted for in the aggregate
      for 10.2% of all components and raw materials of the Company’s purchases.




The
      Company’s business would not be materially and adversely affected if it loses
      one or more of the suppliers such as Somic Automotive Components Co. Ltd. All
      components and raw materials are available from numerous sources. The
      Company has not, in recent years, experienced any significant shortages of
      manufactured components or raw materials and normally does not carry inventories
      of these items in excess of what is reasonably required to meet its production
      and shipping schedules.




RESEARCH
      AND DEVELOPMENT




The
      Company has a ten-year consulting and licensing agreement with Bishop Steering
      Technology Ltd, one of the leading design firms in power steering
      systems. Bishop’s technology in power steering systems is currently used by
      carmakers such as BMW and Mercedes Benz. Pursuant to the agreement, the
      Company has implemented the Bishop steering valve technology into the Henglong
      brand R&P power steering gear.




Henglong
      owns a Hubei Provincial-Level Technical Center, which is approved by the Hubei
      Economic Commission. The center has a staff of 134, including 13 senior
      engineers, 2 foreign experts and 100 engineers, primarily focused on steering
      system R&D, tests, production process improvement and new material and
      production methodology application.




In
      addition, the Company has partnered with Tsinghua University to establish a
      steering system research center, called Tsinghua Henglong Automobile Steering
      Research Institute, for the purposes of R&D and experimentation for
      Electronic Power Steering (EPS).




7




The
      Company believes that its engineering and technical expertise, together with
      its
      emphasis on continuing research and development, allow it to use the latest
      technologies, materials and processes to solve problems for its customers and
      to
      bring new, innovative products to market. The Company believes that continued
      research and development activities, including engineering, are critical to
      maintaining its pipeline of technologically advanced products. The Company
      has
      aggressively managed costs in other portions of its business in order to
      maintain its total expenditures for research and development activities,
      including engineering, at approximately $1,700,000, $1,100,000 and $1,000,000
      for the years ended December 31, 2007, 2006 and 2005, respectively. In
      2007, the sales of newly developed products accounted for about 7.8% of total
      sales.




COMPETITION




The
      automotive components industry is extremely competitive. Criteria for the
      Company’s customers include quality, price/cost competitiveness, system and
      product performance, reliability and timeliness of delivery, new product and
      technology development capability, excellence and flexibility in operations,
      degree of global and local presence, effectiveness of customer service and
      overall management capability. The power steering system market is fragmented
      in
      China, and the Company has seven major competitors. Of these competitors, two
      are Sino-foreign joint ventures while the other five are state-owned. Like
      many
      competitive industries, there is downward pressure on selling prices. For the
      year ended December 31, 2007, the selling price of the Company’s principal
      products was reduced by an average of 3.0% compared with 2006.




The
      Company’s major competitors, including Shanghai ZF and FKS, are component
      suppliers to specific automobile manufacturers. Shanghai ZF is the joint venture
      of SAIC and ZF Germany, which is an exclusive supplier to SAIC-Volkswagen and
      SAIC-GM. First Auto FKS is a joint venture between First Auto Group and Japan’s
      Koyo Company and its main customer is FAW-Volkswagen Company.




While
      the
      Chinese Government limits foreign ownership of auto assemblers to 50%, there
      is
      no analogous limitation in the automotive components industry. Thus
      opportunities exist for foreign component suppliers to set up factories in
      China. These overseas competitors employ technology that may be more advanced
      and may have existing relationships with global automobile assemblers, but
      they
      are generally not as competitive as the Company in China in terms of production
      cost and flexibility in meeting client requirements.




CHINESE
      AUTOMOBILE INDUSTRY




The
      Company is a supplier of automotive parts and all of its operations are located
      in China. An increase or decrease in output and sales of Chinese vehicles could
      result in an increase or decrease of the Company’s results of operations.
      According to the latest statistics from the China Association of Automobile
      Manufacturers, CAAM, in 2007, the output and sales volume of passenger vehicles
      has reached 6,381,000 and 6,298,000 units respectively, with an increase of
      21.9% and 21.7% compared with last year. The output and sales volume of
      commercial vehicles has reached 2,501,000 and 2,494,000 units respectively
      with
      an increase of 22.2% and 22.3% over last year. Accordingly, the Company’s
      sales of steering gears and steering pumps for passenger vehicles in 2007
      increased by 39.2% and 35.3% compared with the year 2006. The sales of steering
      gears for commercial vehicles in 2007 increased 42.3% compared with the year
      2006.




The
      Company expects that in 2008, China’s automobile market will develop
      steadily.




CAAM
      predicted that in 2008, there will be healthy development for the Chinese auto
      market, and the output and sales of vehicles will increase by approximately
      14.8%. Based on this prediction, management believes that the Company’s net
      sales in 2008 would increase by 20%-25% than 2007.




CHINESE
      ECONOMY




Management
      believes that the most important factor in understanding the Chinese automobile
      industry is the country’s rapid economic growth. Chinese economic growth
      maintained high levels in 2007. According to data from the State
      Statistical Bureau, Chinese economic growth reached 10.5% in 2007. Because
      of
      the growth of the Chinese economy and the increased income level of its
      residents, the investment by Chinese enterprises and consumption by Chinese
      residents will continue to increase rapidly in 2008.




8




Management
      believes that the continued investment and consumption growth will have a
      favorable effect on the sales of commercial vehicles and passenger vehicles.




HIGHWAY
      DEVELOPMENT




Management
      believes that the continuing development of the highway system will have a
      significant positive impact on the manufacture and sale of private automobiles.
      Statistics from the Ministry of Communications show that 116,000 kilometers
      of
      highway and 8,300 kilometers of expressway were developed in 2007. Total
      highways and expressways now amount to 3,573,000 kilometers and 53,600
      kilometers, respectively.




DOING
      BUSINESS IN CHINA




CHINESE
      LEGAL SYSTEM




The
      practical effect of the Chinese legal system on the Company’s business
      operations in China can be viewed from two separate but intertwined
      considerations. First, as a matter of substantive law, the Foreign Invested
      Enterprise Laws provide significant protection from government interference.
      In
      addition, these laws guarantee the full enjoyment of the benefits of corporate
      articles and contracts to Foreign Invested Enterprise participants. These laws,
      however, do impose standards concerning corporate formation and governance,
      which are not qualitatively different from the general corporation laws of
      other
      provinces. Similarly, the Chinese accounting laws mandate accounting practices,
      which are not consistent with US Generally Accepted Accounting Principles.
      The
      Chinese accounting laws require that an annual “statutory audit” be performed in
      accordance with Chinese accounting standards and that the books of account
      of
      Foreign Invested Enterprises be maintained in accordance with Chinese accounting
      laws. Article 14 of the People’s Republic of China Wholly Foreign-Owned
      Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain
      periodic fiscal reports and statements to designated financial and tax
      authorities. Otherwise, there is risk that its business license will be
      revoked.




Second,
      while the enforcement of substantive rights may appear less clear than those
      in
      the United States, the Foreign Invested Enterprises and Wholly Foreign-Owned
      Enterprises are Chinese registered companies which enjoy the same status as
      other Chinese registered companies in business dispute resolution. Because
      the
      terms of the Company’s various Articles of Association provide that all business
      disputes pertaining to Foreign Invested Enterprises will be resolved by the
      Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden
      applying Chinese substantive law, the Chinese minority partner in the Company’s
      joint venture companies will not assume any advantageous position regarding
      such
      disputes. Any award rendered by this arbitration tribunal is, by the express
      terms of the various Articles of Association, enforceable in accordance with
      the
“United Nations Convention on the Recognition and Enforcement of Foreign
      Arbitral Awards (1958).” Therefore, as a practical matter, although no
      assurances can be given, the Chinese legal infrastructure, while different
      from
      its United States counterpart, should not present any significant impediment
      to
      the operation of Foreign Invested Enterprises.




ECONOMIC
      REFORM ISSUES




Although
      the Chinese Government owns the majority of productive assets in China, in
      the
      past several years the Government has implemented economic reform measures
      that
      emphasize decentralization and encourage private economic activity. Because
      these economic reform measures may be inconsistent or ineffectual, there is
      no
      assurance that:




·
            The
                Company will be able to capitalize on economic
                reforms;




·
            The
                Chinese Government will continue its pursuit of economic reform
                policies;




·
            The
                economic policies, even if pursued, will be successful;




9




·
            Economic
                policies will not be significantly altered from time to time;
                and




·
            Business
                operations in China will not become subject to the risk of
                nationalization.




Negative
      impact resulting from economic reform policies or nationalization could result
      in a total investment loss in the Company’s common stock.




Since
      1979, the Chinese Government has reformed its economic system. Because many
      reforms are unprecedented or experimental, they are expected to be refined
      and
      readjusted. Other political, economic and social factors, such as political
      changes, changes in the rates of economic growth, unemployment or inflation,
      or
      disparities in per capita wealth between regions within China, could lead to
      further readjustment of the reform measures. This refining and readjustment
      process may negatively affect the Company’s operations.




Over
      the
      last few years, China’s economy has registered a high growth rate. Recently,
      there have been indications that the rate of inflation has increased. In
      response, the Chinese Government recently has taken measures to curb the
      excessively expansive economy. These measures included implementation of a
      unitary and well-managed floating exchange rate system based on market supply
      and demand for the exchange rates of Renminbi, restrictions on the availability
      of domestic credit, reduction of the purchasing capability of its citizens,
      and
      centralization of the approval process for purchases of certain limited foreign
      products. These austerity measures alone may not succeed in slowing down the
      economy’s excessive expansion or control inflation, and may result in severe
      dislocations in the Chinese economy. The Chinese Government may adopt additional
      measures to further combat inflation, including the establishment of freezes
      or
      restraints on certain projects or markets.




To
      date
      reforms to China’s economic system have not adversely affected the Company’s
      operations and are not expected to adversely affect the Company’s operations in
      the foreseeable future; however, there can be no assurance that reforms to
      China’s economic system will continue or that the Company will not be adversely
      affected by changes in China’s political, economic, and social conditions and by
      changes in policies of the Chinese Government, such as changes in laws and
      regulations, measures which may be introduced to control inflation, changes
      in
      the rate or method of taxation, imposition of additional restrictions on
      currency conversion and remittance abroad, reduction in tariff protection and
      other import restrictions.




ENVIRONMENTAL
      COMPLIANCE





We
      are
      subject to the requirements of U.S. federal, state, local and non-U.S.
      environmental and occupational safety and health laws and regulations. These
      include laws regulating air emissions, water discharge and waste management.
      We
      have an environmental management structure designed to facilitate and support
      our compliance with these requirements globally. Although it is our intent
      to
      comply with all such requirements and regulations, we cannot provide assurance
      that we are at all times in compliance. We have made and will continue to make
      capital and other expenditures to comply with environmental requirements,
      although such expenditures were not material during the past two years.
      Environmental requirements are complex, change frequently and have tended to
      become more stringent over time. Accordingly, we cannot assure that
      environmental requirements will not change or become more stringent over time
      or
      that our eventual environmental cleanup costs and liabilities will not be
      material





During
      2007, the Company did not make any material capital expenditures relating to
      environmental compliance.





**WEB
      SITE ACCESS TO SEC FILINGS**





We
      file
      electronically with the SEC our annual reports on Form 10-K, quarterly reports
      on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) of the
      Securities Exchange Act of 1934.  The SEC maintains an Internet site
      that contains reports, proxy information and information statements, and other
      information regarding issuers that file electronically with the
      SEC.  The address of that website is
      http://www.sec.gov.  The materials are also available at the SEC’s
      Public Reference Room, located at 100 F Street, Washington, D.C.
      20549.  The public may obtain information through the public reference
      room by calling the SEC at 1-800-SEC-0330.




10




ITEM
      1A.  RISK
      FACTORS





Any
      investment in our securities involves a high degree of risk. You should
      carefully consider the risks described below, together with the information
      contained elsewhere in this prospectus, before you make a decision to invest
      in
      our company. Our business, financial conditions and results of operations could
      be materially and adversely affected by many risk factors.  Because of
      these risk factors, actual results might differ significantly from those
      projected in any forward-looking statements.  Factors that might cause such
      differences include, among others, the following:





**Risks
      Related to our Business and Industry**




*Because
      we are a holding company with substantially all of our operations conducted
      through our subsidiaries, our performance will be affected by the performance
      of
      our subsidiaries.*




We
      have
      no operations independent of those of Genesis and its subsidiaries, and our
      principal assets are our investments in Genesis and its subsidiaries.  As a
      result, we are dependent upon the performance of Genesis and its subsidiaries
      and will be subject to the financial, business and other factors affecting
      Genesis as well as general economic and financial conditions.  As
      substantially all of our operations are and will be conducted through our
      subsidiaries, we will be dependent on the cash flow of our subsidiaries to
      meet
      our obligations.





Because
      virtually all of our assets are and will be held by operating subsidiaries,
      the
      claims of our stockholders will be structurally subordinate to all existing
      and
      future liabilities and obligations, and trade payables of such
      subsidiaries.  In the event of our bankruptcy, liquidation or
      reorganization, our assets and those of our subsidiaries will be available
      to
      satisfy the claims of our stockholders only after all of our and our
      subsidiaries’ liabilities and obligations have been paid in full.





The
      Senior Convertible Notes are unsecured obligations of us, but are not
      obligations of our subsidiaries. In addition, our secured commercial debt is
      senior to the Senior Convertible Notes.




*With
      the automobile parts markets being highly competitive and many of our
      competitors having greater resources than we do, we may not be able to compete
      successfully.*




The
                automobile parts industry is a highly competitive business.  Criteria
                for our customers include:·
            Quality;·
            Price/cost
                competitiveness;·
            System
                and product performance;·
            Reliability
                and timeliness of delivery;·
            New
                product and technology development capability;·
            Excellence
                and flexibility in operations;·
            Degree
                of global and local presence;·
            Effectiveness
                of customer service; and·
            Overall
                management capability.





Our
      competitors include independent suppliers of parts, as well as suppliers formed
      by spin-offs from our customers, who are becoming more aggressive in selling
      parts to other vehicle manufacturers.  Depending on the particular product,
      the number of our competitors varies significantly.  Many of our
      competitors have substantially greater revenues and financial resources than
      we
      do, as well as stronger brand names, consumer recognition, business
      relationships with vehicle manufacturers, and geographic presence than we
      have.  We may not be able to compete favorably and increased competition
      may substantially harm our business, business prospects and results of
      operations.





Internationally,
      we face different market dynamics and competition.  We may not be as
      successful as our competitors in generating revenues in international markets
      due to the lack of recognition of our products or other factors. 
Developing product recognition overseas is expensive and time-consuming and
      our
      international expansion efforts may be more costly and less profitable than
      we
      expect.  If we are not successful in our target markets, our sales could
      decline, our margins could be negatively impacted and we could lose market
      share, any of which could materially harm our business, results of operations
      and profitability.




11




*The
      cyclical nature of automotive production and sales could result in a reduction
      in automotive sales, which could adversely affect our business and results
      of
      operations.*




Our
      business relies on automotive vehicle production and sales by our customers,
      which are highly cyclical and depend on general economic conditions and other
      factors, including consumer spending and preferences and the price and
      availability of gasoline.  They also can be affected by labor relations
      issues, regulatory requirements, and other factors.  In addition, in the
      last two years, the price of automobiles in China has generally declined. 
As a result, the volume of automotive production in China has fluctuated from
      year to year, which gives rise to fluctuations in the demand for our
      products.  Any significant economic decline that results in a reduction in
      automotive production and sales by our customers would have a material adverse
      effect on our results of operations. Moreover, if the prices of automobiles
      do
      not remain low, then demand for automobile parts could fall and result in lower
      revenues and profitability.




*Increasing
      costs for manufactured components and raw materials may adversely affect our
      profitability.*




We
      use a
      broad range of manufactured components and raw materials in our products,
      including castings, electronic components, finished sub-components, molded
      plastic parts, fabricated metal, aluminum and steel, and resins.  Because
      it may be difficult to pass increased prices for these items on to our
      customers, a significant increase in the prices of our components and materials
      could materially increase our operating costs and adversely affect our profit
      margins and profitability.




*Pricing
      pressure by automobile manufacturers on their suppliers may adversely affect
      our
      business and results of operations.*




Recently,
      pricing pressure from automobile manufacturers has been prevalent in the
      automotive parts industry in China.  Virtually all vehicle manufacturers
      seek price reductions each year, including requiring suppliers to pay a “3-R
      Guarantees” service charge for repair, replacement and refund in an amount equal
      to one percent of the total amount of parts supplied.  Although we have
      tried to reduce costs and resist price reductions, these reductions have
      impacted our sales and profit margins.  If we cannot offset continued price
      reductions through improved operating efficiencies and reduced expenditures,
      price reductions will have a material adverse effect on our results of
      operations.




*Our
      business, revenues and profitability would be materially and adversely affected
      if we lose any of our large customers.*




For
      the
      year ended December 31, 2007, approximately 16.4% of our sales were to Chery
      Automobile Co., Ltd, approximately 13.7% were to Brilliance China Automotive
      Holdings Limited, approximately 11.5% were to Beiqi Foton Motor Co., Ltd, and
      approximately 10.6% were to Zhejiang Geely Holding Co., Ltd, our four largest
      customers. The loss of, or significant reduction in purchases by, one or more
      of
      these major customers could adversely affect our business.




*We
      may be subject to product liability and warranty and recall claims, which may
      increase the costs of doing business and adversely affect our financial
      condition and liquidity.*




We
      may be
      exposed to product liability and warranty claims if our products actually or
      allegedly fail to perform as expected or the use of our products results, or
      is
      alleged to result, in bodily injury and/or property damage.  We started to
      pay some of our customers’ increased after-sales service expenses due to
      consumer rights protection policies of “recall” issued by the Chinese Government
      in 2004, such as the recalling flawed vehicles policy.  Beginning in 2004,
      automobile manufacturers unilaterally required their suppliers to pay a “3-R
      Guarantees” service charge for repair, replacement and refund in an amount equal
      to one percent of the total amount of parts supplied.  Accordingly, we have
      experienced and will continue to experience higher after sales service
      expenses.  Product liability, warranty and recall costs may have a material
      adverse effect on our financial condition.




12




*We
      are subject to environmental and safety regulations, which may increase our
      compliance costs and may adversely affect our results of operation.*




We
      are
      subject to the requirements of environmental and occupational safety and health
      laws and regulations in China.  We cannot provide assurance that we have
      been or will be at all times in full compliance with all of these requirements,
      or that we will not incur material costs or liabilities in connection with
      these
      requirements.  Additionally, these regulations may change in a manner that
      could have a material adverse effect on our business, results of operations
      and
      financial condition.  The capital requirements and other expenditures that
      may be necessary to comply with environmental requirements could increase and
      become a material expense of doing business.




*Non-performance
      by our suppliers may adversely affect our operations by delaying delivery or
      causing delivery failures, which may negatively affect demand, sales and
      profitability.*




We
      purchase various types of equipment, raw materials and manufactured component
      parts from our suppliers.  We would be materially and adversely affected by
      the failure of our suppliers to perform as expected.  We could experience
      delivery delays or failures caused by production issues or delivery of
      non-conforming products if our suppliers failed to perform, and we also face
      these risks in the event any of our suppliers becomes insolvent or bankrupt.




*Our
      business and growth may suffer if we fail to attract and retain key personnel.*




Our
      ability to operate our business and implement our strategies effectively depends
      on the efforts of our executive officers and other key employees.  We
      depends on the continued contributions of our senior management and other key
      personnel.  Our future success also depends on our ability to identify,
      attract and retain highly skilled technical staff, particularly engineers and
      other employees with electronics expertise, and managerial, finance and
      marketing personnel.  We does not maintain a key person life insurance
      policy on Mr. Hanlin Chen or Mr. Qizhou Wu.  The loss of the services of
      any of our key employees or the failure to attract or retain other qualified
      personnel could substantially harm our business.




*Our
      management controls approximately 80.17% of our outstanding common stock and
      may
      have conflicts of interest with our minority stockholders.*




Members
      of our management beneficially own approximately 80.17% of the outstanding
      shares of our common stock.  As a result, these majority stockholders have
      control over decisions to enter into any corporate transaction and have the
      ability to prevent any transaction that requires the approval of stockholders,
      which could result in the approval of transactions that might not maximize
      stockholders’ value.  Additionally, these stockholders control the election
      of members of our board, have the ability to appoint new members to our
      management team and control the outcome of matters submitted to a vote of the
      holders of our common stock.  The interests of these majority stockholders
      may at times conflict with the interests of our other stockholders. The Henglong
      Transaction would be a transaction involving us and a counterparty controlled
      by
      Mr. Hanlin Chen, our Chairman and controlling stockholder. We regularly engage
      in transactions with entities controlled by one of more of our officers and
      directors.




**Covenants
      contained in the Securities Purchase Agreement and the Senior Convertible Notes
      restrict our operating flexibility.**




*There
      is a limited public float of our common stock, which can result in our stock
      price being volatile and prevent the realization of a profit on resale of our
      common stock or derivative securities.*




There
      is
      a limited public float of our common stock.  Of our outstanding common
      stock, approximately 19.83% is considered part of the public float.  The
      term “public float” refers to shares freely and actively tradable on the NASDAQ
      Capital Market and not owned by officers, directors or affiliates, as such
      term
      is defined under the Securities Act.  As a result of the limited public
      float and the limited trading volume on some days, the market price of our
      common stock can be volatile, and relatively small changes in the demand for
      or
      supply of our common stock can have a disproportionate effect on the market
      price for our common stock. This stock price volatility could prevent a
      securityholder seeking to sell our common stock or derivative securities from
      being able to sell them at or above the price at which the stock or derivative
      securities were bought, or at a price which a fully liquid market would
      report.




13




*Provisions
      in our certificate of incorporation and bylaws and the General Corporation
      Law
      of Delaware may discourage a takeover attempt.*




Provisions
      in our certificate of incorporation and bylaws and the General Corporation
      Law
      of Delaware, the state in which we are organized, could make it difficult for
      a
      third party to acquire us, even if doing so might be beneficial to our
      stockholders.  Provisions of our certificate of incorporation and bylaws
      impose various procedural and other requirements, which could make it difficult
      for stockholders to effect certain corporate actions and possibly prevent
      transactions that would maximize stockholders’ value.




*We
      do
      not pay cash dividends on our common stock.*




We
      have
      never paid common stock cash dividends and do not anticipate doing so in the
      foreseeable future. In addition, the Securities Purchase Agreement prohibits
      us
      from paying cash dividends on common stock without the approval of the holders
      of the Senior Convertible Notes.





**Risks
      Related to Doing Business in China and Other Countries Besides the United
      States**




*Because
      our operations are all located outside of the United States and are subject
      to
      Chinese laws, any change of Chinese laws may adversely affect our business.*




All
      of
      our operations are outside the United States and in China, which exposes us
      to
      risks, such as exchange controls and currency restrictions, currency
      fluctuations and devaluations, changes in local economic conditions, changes
      in
      Chinese laws and regulations, exposure to possible expropriation or other
      Chinese government actions, and unsettled political conditions.  These
      factors may have a material adverse effect on our operations or on our business,
      results of operations and financial condition.




*Our
      international expansion plans subject us to risks inherent in doing business
      internationally.*




Our
      long-term business strategy relies on the expansion of our international sales
      outside China by targeting markets, such as the United States.  Risks
      affecting our international expansion include challenges caused by distance,
      language and cultural differences, conflicting and changing laws and
      regulations, foreign laws, international import and export legislation, trading
      and investment policies, foreign currency fluctuations, the burdens of complying
      with a wide variety of laws and regulations, protectionist laws and business
      practices that favor local businesses in some countries, foreign tax
      consequences, higher costs associated with doing business internationally,
      restrictions on the export or import of technology, difficulties in staffing
      and
      managing international operations, trade and tariff restrictions, and variations
      in tariffs, quotas, taxes and other market barriers.  These risks could
      harm our international expansion efforts, which could in turn materially and
      adversely affect our business, operating results and financial condition.




*We
      face risks associated with currency exchange rate fluctuations; any adverse
      fluctuation may adversely affect our operating margins.*




Although
      we are incorporated in the United States (Delaware), the majority of our current
      revenues are in Chinese currency.  Conducting business in currencies other
      than US dollars subjects us to fluctuations in currency exchange rates that
      could have a negative impact on our reported operating results. 
Fluctuations in the value of the US dollar relative to other currencies impact
      our revenues, cost of revenues and operating margins and result in foreign
      currency translation gains and losses.  Historically, we have not engaged
      in exchange rate hedging activities. Although we may implement hedging
      strategies to mitigate this risk, these strategies may not eliminate our
      exposure to foreign exchange rate fluctuations and involve costs and risks
      of
      their own, such as ongoing management time and expertise requirements, external
      costs to implement the strategy and potential accounting implications.




14




*If
      relations between the United States and China worsen, our stock price may
      decrease and we may have difficulty accessing the U.S. capital markets.*




At
      various times during recent years, the United States and China have had
      disagreements over political and economic issues.  Controversies may arise
      in the future between these two countries.  Any political or trade
      controversies between the United States and China could adversely affect the
      market price of our common stock and our ability to access US capital markets.




*The
      Chinese Government could change its policies toward private enterprises, which
      could adversely affect our business.*




Our
      business is subject to political and economic uncertainties in China and may
      be
      adversely affected by China’s political, economic and social developments. 
Over the past several years, the Chinese Government has pursued economic reform
      policies including the encouragement of private economic activity and greater
      economic decentralization.  The Chinese Government may not continue to
      pursue these policies or may alter them to our detriment from time to
      time.  Changes in policies, laws and regulations, or in their
      interpretation or the imposition of confiscatory taxation, restrictions on
      currency conversion, restrictions or prohibitions on dividend payments to
      stockholders, devaluations of currency or the nationalization or other
      expropriation of private enterprises could have a material adverse effect on
      our
      business.  Nationalization or expropriation could result in the total loss
      of our investment in China.




*The
      economic, political and social conditions in China could affect our business.*




All
      of
      our business, assets and operations are located in China.  The economy of
      China differs from the economies of most developed countries in many respects,
      including government involvement, level of development, growth rate, control
      of
      foreign exchange, and allocation of resources.  The economy of China has
      been transitioning from a planned economy to a more market-oriented
      economy.  Although the Chinese Government has implemented measures recently
      emphasizing the utilization of market forces for economic reform, the reduction
      of state ownership of productive assets and the establishment of sound corporate
      governance in business enterprises, a substantial portion of productive assets
      in China is still owned by the Chinese Government.  In addition, the
      Chinese Government continues to play a significant role in regulating industry
      by imposing industrial policies.  It also exercises significant control
      over China’s economic growth through the allocation of resources, controlling
      payment of foreign currency-denominated obligations, setting monetary policy
      and
      providing preferential treatment to particular industries or companies. 
Therefore, the Chinese Government’s involvement in the economy could adversely
      affect our business operations, results of operations and/or financial
      condition.




*The
      Chinese Government’s macroeconomic policies could have a negative effect on our
      business and results of operations.* ** **




The
      Chinese Government has implemented various measures from time to time to control
      the rate of economic growth.  Some of these measures benefit the overall
      economy of China, but may have a negative effect on us.




*Government
      control of currency conversion and future movements in exchange rates may
      adversely affect our operations and financial results.*




We
      receive substantially all of our revenues in Renminbi, the currency of
      China.  A portion of such revenues will be converted into other currencies
      to meet our foreign currency obligations.  Foreign exchange transactions
      under our capital account, including principal payments in respect of foreign
      currency-denominated obligations, continue to be subject to significant foreign
      exchange controls and require the approval of the State Administration of
      Foreign Exchange in China.  These limitations could affect our ability to
      obtain foreign exchange through debt or equity financing, or to obtain foreign
      exchange for capital expenditures.




15




The
      Chinese Government controls its foreign currency reserves through restrictions
      on imports and conversion of Renminbi into foreign currency.  Although the
      exchange rate of the Renminbi to the US dollar has been stable since January
      1,
      1994, and the Chinese Government has stated its intention to maintain the
      stability of the value of Renminbi, there can be no assurance that exchange
      rates will remain stable.  The Renminbi could devalue against the US
      dollar.  Our financial condition and results of operations may also be
      affected by changes in the value of certain currencies other than the Renminbi
      in which our earnings and obligations are denominated.  In particular, a
      devaluation of the Renminbi is likely to increase the portion of our cash flow
      required to satisfy our foreign currency-denominated obligations.




*Because
      the Chinese legal system is not fully developed, our and securityholders’ legal
      protections may be limited.*




The
      Chinese legal system is based on written statutes and their interpretation
      by
      the Supreme People’s Court. Although the Chinese government introduced new laws
      and regulations to modernize its business, securities and tax systems on January
      1, 1994, China does not yet possess a comprehensive body of business law. 
Because Chinese laws and regulations are relatively new, interpretation,
      implementation and enforcement of these laws and regulations involve
      uncertainties and inconsistencies and it may be difficult to enforce
      contracts.  In addition, as the Chinese legal system develops, changes in
      such laws and regulations, their interpretation or their enforcement may have
      a
      material adverse effect on our business operations.  Moreover,
      interpretative case law does not have the sam e precedential
      value in China as in the United States, so legal compliance in China may be
      more
      difficult or expensive .




*It
      may be difficult to serve us with legal process or enforce judgments against
      our
      management or us.*




All
      of
      our assets are located in China and [three] of our directors and officers are
      non-residents of the United States, and all or substantial portions of the
      assets of such non-residents are located outside the United States.  As a
      result, it may not be possible to effect service of process within the United
      States upon such persons to originate an action in the United States. 
Moreover, there is uncertainty that the courts of China would enforce judgments
      of U.S. courts against us, our directors or officers based on the civil
      liability provisions of the securities laws of the United States or any state,
      or an original action brought in China based upon the securities laws of the
      United States or any state .




ITEM
      1B.
 UNRESOLVED STAFF COMMENTS.




Not
      Applicable.




16




ITEM
      2.
 DESCRIPTION OF PROPERTY.




The
      Company’s headquarters are located at No. 1 Henglong Road, Yu Qiao Development
      Zone Shashi District, Jing Zhou City Hubei Province, PRC. Set forth below are
      the manufacturing facilities operated by each joint venture. The Company has
      forty to fifty years long-term rights to use the buildings and machinery and
      equipment.




Name
                of Entity
            
            Product
            
            Total
                Area (M2)
            
            Building
                Area (M2)
            
            Original
                  Cost of Equipment
            
            SiteHenglong
            
            
            AutomotiveParts
            
            
            225,221
            
            
            20,226
            
            $
            24,195,680
            
            
            Jingzhou
                City, Hubei Province13,393
            
            
            13,707
            
            
            —
            
            
            Wuhan
                City, Hubei ProvinceJiulong
            
            
            Power
                Steering Gears
            
            
            39,478
            
            
            23,728
            
            
            13,314,368
            
            
            Jingzhou
                City, Hubei ProvinceShenyang
            
            
            Automotive
                Steering Gears
            
            
            35,354
            
            
            5,625
            
            
            3,445,590
            
            
            Shenyang
                City, Liaoning ProvinceZhejiang
            
            
            Steering
                Pumps
            
            
            100,000
            
            
            32,000
            
            
            5,457,287
            
            
            Zhuji
                City, Zhejiang ProvinceUSAI
            
            
            Sensor
                Modular
            
            
            —
            
            
            —
            
            
            610,342
            
            
            Wuhan
                City, Hubei ProvinceWuhu
            
            
            Automotive
                Steering Gears
            
            
            83,700
            
            
            12,600
            
            
            989,513
            
            
            Wuhu
                City, Anhue ProvinceJielong
            
            
            ElectricPowerSteering
            
            
            —
            
            
            —
            
            
            51,682
            
            
            Wuhan
                City, Hubei ProvinceHengsheng
            
            
            Automotive
                Steering Gears
            
            
            170,520
            
            
            26,000
            
            
            —
            
            
            Jingzhou
                City, Hubei ProvinceTotal
            
            
            
            
            
            667,666
            
            
            133,886
            
            $
            48,064,462




The
      Company is not involved in investments in (i) real estate or interests in real
      estate, (ii) real estate mortgages, and (iii) securities of or interests in
      persons primarily engaged in real estate activities, as all of its land rights
      are used for production purposes.




ITEM
      3.
 LEGAL PROCEEDINGS.




The
      Company is not a party to any pending or to the best of the Company’s knowledge,
      any threatened legal proceedings. No director, officer or affiliate of the
      Company, or owner of record of more than five percent (5%) of the securities
      of
      the Company, or any associate of any such director, officer or security holder
      is a party adverse to the Company or has a material interest adverse to the
      Company in reference to pending litigation.




ITEM
      4.
 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




On
      September 5 2007, we held a shareholder meeting at which the shareholders
      elected 5 directors and approved the engagement of Schwartz Levitsky Feldman
      LLP
      as independent auditor.




17




**PART
      II**




ITEM
      5.
 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
      OF EQUITY SECURITIES.




(a)
      MARKET PRICES OF COMMON STOCK




The
      Company’s common stock has been traded on the NASDAQ Small Cap market under the
      symbol “CAAS”. The high and low bid intra-day prices of the common stock in 2007
      and 2006 were reported on NASDAQ for the time periods indicated on the table
      below. Accordingly, the table below contains the high and low bid closing
      prices of the common stock as reported on the NASDAQ for the time periods
      indicated.




Price
                Range2007
            
            2006High
            
            Low
            
            High
            
            LowFirst
                Quarter
            
            $
            11.97
            
            $
            7.83
            
            $
            14.04
            
            $
            6.57Second
                Quarter
            
            
            8.90
            
            
            7.00
            
            
            11.19
            
            
            6.41Third
                Quarter
            
            
            8.76
            
            
            6.19
            
            
            8.14
            
            
            6.52Fourth
                Quarter
            
            $
            9.39
            
            $
            6.40
            
            $
            12.49
            
            $
            6.68




(b)
      STOCKHOLDERS




The
      Company’s common shares are issued in registered form. Securities Transfer
      Corporation in Frisco, Texas is the registrar and transfer agent for the
      Company’s common stock. As of February 27, 2008, there were 23,959,702 shares of
      the Company’s common stock outstanding and the Company had approximately 76
      stockholders of record.




(c)
      DIVIDENDS




The
      Company has never declared or paid any cash dividends on its common stock and
      it
      does not anticipate paying any cash dividends in the foreseeable future. The
      Company currently intends to retain future earnings, if any, to finance
      operations and the expansion of its business. Any future determination to pay
      cash dividends will be at the discretion of the Board of Directors and will
      be
      based upon the Company’s financial condition, operating results, capital
      requirements, plans for expansion, restrictions imposed by any financing
      arrangements and any other factors that the Board of Directors deems
      relevant.




(d)
      SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS




The
      securities authorized for issuance under equity compensation plans at December
      31, 2007 are as follows:




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding
                options
            
            Weighted
                average exercise price of outstanding options
            
            Number
                of securities remaining available for future issuanceEquity
                compensation plans approved by security holders
            
            
            2,200,000
            
            $
            6.57
            
            
            2,110,000




The
      stock
      option plan was approved in the 2004 Annual Meeting of Stockholders, and the
      maximum common shares for issuance under this plan are 2,200,000 with a term
      of
      10 years.




18




ITEM
      6.
      SELECTED FINANCIAL DATA




Not
      applicable.




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




The
      following is management’s discussion and analysis of certain significant factors
      which have affected the Company’s financial position and operating results
      during the periods included in the accompanying consolidated financial
      statements, as well as information relating to the plans of its current
      management. This report includes forward-looking statements. These statements
      relate to future events or the Company’s future financial performance. The
      Company has attempted to identify forward-looking statements by terminology
      including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,”
“should” or “will” or the negative of these terms or other comparable
      terminology. Such statements are subject to certain risks and uncertainties,
      including the matters set forth in this report or other reports or documents
      the
      Company files with the Securities and Exchange Commission from time to time,
      which could cause actual results or outcomes to differ materially from those
      projected. Although the Company believes that the expectations reflected in
      the
      forward-looking statements are reasonable, the Company cannot guarantee future
      results, levels of activity, performance or achievements. Undue reliance should
      not be placed on these forward-looking statements which speak only as of the
      date hereof. The Company undertakes no obligation to update these
      forward-looking statements. The Company’s expectations are as of the date this
      Form 10-K is filed, and the Company does not intend to update any of the
      forward-looking statements after the date this Annual Report on Form 10-K is
      filed to confirm these statements to actual results, unless required by
      law.




The
      following discussion and analysis should be read in conjunction with the
      Company’s consolidated financial statements and the related notes thereto and
      other financial information contained elsewhere in this Form 10-K.




GENERAL
      OVERVIEW:




China
      Automotive Systems, Inc., including, when the context so requires, its
      subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures
      described below, is referred to herein as the “Company”. The Company, through
      its Sino-foreign joint ventures, engages in the manufacture and sales of
      automotive systems and components in the People’s Republic of China, the “PRC”
or “China”, as described below.




19




Great
      Genesis Holding Limited, a company incorporated on January 3, 2003 under The
      Companies Ordinance in Hong Kong as a limited liability company, “Great
      Genesis”, is a wholly-owned subsidiary of the Company.




Henglong
      USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy,
      Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in
      marketing of automotive parts in North America, and provides after sales service
      and research and development support accordingly.




The
      Company owns the following aggregate net interests in eight Sino-foreign joint
      ventures organized in the PRC as of December 31, 2007 and 2006.




Percentage
                InterestName
                of Entity
            
            2007
            
            2006Jingzhou
                Henglong Automotive Parts Co., Ltd.("Henglong")
            
            
            44.50
            %
            
            44.50
            %Shashi
                Jiulong Power Steering Gears Co., Ltd.("Jiulong")
            
            
            81.00
            %
            
            81.00
            %Shenyang
                Jinbei Henglong Automotive Steering System Co., Ltd.("Shenyang")
            
            
            70.00
            %
            
            70.00
            %Zhejiang
                Henglong & Vie Pump-Manu Co., Ltd.("Zhejiang")
            
            
            51.00
            %
            
            51.00
            %Universal
                Sensor Application Inc.(“USAI”)
            
            
            75.90
            %
            
            60.00
            %Wuhan
                Jielong Electric Power Steering Co., Ltd. (“Jielong”)
            
            
            85.00
            %
            
            85.00
            %Wuhu
                HengLong Auto Steering System Co., Ltd. (“Wuhu”)
            
            
            77.33
            %
            
            77.33
            %Jingzhou
                Hengsheng Automotive System Co., Ltd, “Hengsheng”
            
            
            100.00
            %
            
            —




Jiulong
      and Henglong were formed in 1993 and 1997 respectively, and they are mainly
      engaged in the production of integral power steering gear and rack and pinion
      power steering gear for light and heavy-duty vehicles and cars. Shenyang and
      Zhejiang were established in 2002 for the production of power steering parts
      and
      power steering pumps, respectively. USAI was established in 2005 and mainly
      engaged in the production and sales of sensors. Jielong and Wuhu were
      established in 2006, and they are mainly engaged in the production of rack
      and
      pinion power steering gear for cars and light vehicles and electric power
      steering, or “EPS”. During 2006, USAI has entered into small batch production,
      Jielong and Wuhu were in the technology and production preparation
      stage.




On
      March
      7, 2007, Great Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng
      Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of
      automotive steering systems. The registered capital of Hengsheng is $10,000,000.
      Presently, Hengsheng is in the start up stage, and is primarily engaged in
      preparation of technology and production.




RESULTS
      OF OPERATIONS




The
      following table sets forth for the periods indicated certain items from the
      Company's Consolidated Statements of Income expressed as a percentage of net
      sales and the percentage change in the dollar amount of each such item from
      that
      in the indicated previous year.




Percentage
                on net sales
            
            Change
                in percentageYear
                Ended December 31
            
            Year
                Ended December 312007
            
            2006
            
            2006
                to 2007Net
                sales
            
            
            100.00
            %
            
            100.00
            %
            
            39.5
            %Cost
                of sales
            
            
            66.1
            
            
            65.6
            
            
            40.4Gross
                profit
            
            
            33.9
            
            
            34.4
            
            
            37.7Gain
                on other sales
            
            
            0.4
            
            
            0.3
            
            
            98.5Less:
                operating expensesSelling
                expenses
            
            
            7.2
            
            
            8.1
            
            
            24.5General
                and administrative expenses
            
            
            6.8
            
            
            8.2
            
            
            15.6R
                & D expenses
            
            
            1.2
            
            
            1.1
            
            
            56.3Depreciation
                and amortization
            
            
            3.2
            
            
            3.9
            
            
            12.4Total
                operating expenses
            
            
            18.4
            
            
            21.3
            
            
            20.5Operating
                income
            
            
            15.9
            
            
            13.3
            
            
            66.6Other
                income
            
            
            0.0
            
            
            0.1
            
            
            (59.2
            )Financial
                expenses
            
            
            (0.4
            )
            
            (0.9
            )
            
            (31.9
            )Income
                before income tax
            
            
            15.5
            
            
            12.6
            
            
            72.4Income
                tax
            
            
            1.7
            
            
            1.7
            
            
            33.7Income
                before minority interests
            
            
            13.9
            
            
            10.8
            
            
            78.7Minority
                interests
            
            
            7.2
            
            
            5.8
            
            
            73.9Net
                income
            
            
            6.6
            %
            
            5.0
            %
            
            84.1
            %




20




RESULTS
      OF OPERATIONS: 2007 VERSUS 2006




NET
      SALES




The
      increase in net product
      sales of the Company is summarized as follows:




Years
                Ended December 312007
            
            2006
            
            Increase
                (Decrease)
            
            PercentageSteering
                gear for commercial vehicles
            
            $
            35,774,012
            
            $
            25,135,726
            
            $
            10,638,286
            
            
            42.30
            %Steering
                gear for passenger vehicles
            
            
            83,895,652
            
            
            60,248,178
            
            
            23,647,474
            
            
            39.3Steering
                pumps
            
            
            13,828,252
            
            
            10,221,478
            
            
            3,606,774
            
            
            35.3Sensor
                modular
            
            
            99,087
            
            
            161,057
            
            
            (61,970
            )
            
            (38.5
            )Total
            
            $
            133,597,003
            
            $
            95,766,439
            
            $
            37,830,564
            
            
            39.5
            %




For
      the
      year ended December 31, 2007, net product sales were $133,597,003, as compared
      to $95,766,439 for the year ended December 31, 2006, an increase of $37,830,564
      or 39.5%. The increase in net sales in 2007 as compared to 2006 was a result
      of
      several factors.




(1)
      Increases in the income of Chinese residents and the growth of consumption
      led
      to an increase in the sales of passenger vehicles and the increase in the
      Company’s sales of steering gear and pumps was due to these factors. During
      2007, the output and sales volume of passenger vehicles in China have reached
      6,381,000 and 6,298,000 units respectively, with an increase of 21.9% and 21.7%
      compared with last year. As
      a
      result, sales of steering gear and pumps for domestic passenger vehicles for
      the
      year ended December 31, 2007 increased 39.3% and 35.3% over the year of 2006,
      respectively.





(2)
      Increased national economic investments in China led to an increase in sales
      of
      commercial vehicles, and the increase in the Company’s sales of steering gear
      and pumps for commercial vehicles was due to this factor. The
      output and sales volume of commercial vehicles have reached 2,501,000 and
      2,494,000 units respectively with an increase of 22.2% and 22.3% over last
      year. For
      the
      year ended December 31, 2007, sales of steering gears and accessories for
      commercial vehicles increased by 42.3% as compared to the year of
      2006.




(3)
      Through technological improvement to the Company’s production lines, the
      technological contents in, and production efficiency, of the Company’s products
      were raised, thus satisfying market needs.




GAIN
      ON
      OTHER SALES




Gain
      on
      other sales consisted of net amount retained from sales of materials and other
      assets. For the year ended December 31, 2007, gain on other sales were $554,150,
      as compared to $279,216 for the year ended December 31, 2006, an increase of
      $274,934 or 98.5%, due to increased sales of materials.





GROSS
      PROFIT FROM PRODUCT SALES




For
      the
      year ended December 31, 2007, the gross profit was $45,323,048, as compared
      to
      $32,909,814 for the year ended December 31, 2006, an increase of $12,413,234
      or
      37.7%, as a result of following factors:




1.
       Increased product sales: In the domestic passenger vehicles and commercial
      vehicles markets, the output and sales in 2007 greatly increased as compared
      to
      2006 as a result of rapid and steady growth in consumption demand and government
      investment. Accordingly, the Company’s sales of steering parts of 2007 increased
      by 39.5% as compared with the corresponding period in 2006. Increased product
      sales contributed $13,070,206, or 39.7%, to the increase in gross profit.




2.
      Lower
      price. The year 2007 was still a “low price” year for the Chinese auto industry
      with an average price reduction of 5.7% during that period, and low prices
      have
      become the norm for many automobile manufacturers. To expand its market share,
      the Company also reduced the prices of its principal products by 3.0% on average
      in 2007. Lower prices led a decreased gross profit of $3,137,819 or 9.5% in
      2007.




3.
      Costs
      of goods sold: The advanced production equipment, which the Company acquired
      recently, has achieved the expected positive effects. In 2007, manufacturing
      efficiency was improved, and cost control over the production process was
      enhanced. The effect of cost reductions increased the Company’s gross profit by
      $2,480,848 or 7.5% for the year ended December 31, 2007.




In
      2007,
      the overall gross margin decreased to 33.9% from 34.4% in 2006 because the
      decline in selling price was higher than the cost reductions.




21




SELLING
      EXPENSES




For
      the
      years ended December 31, 2007 and 2006, selling expenses are summarized as
      follows:




Years
                Ended December 312007
            
            2006
            
            Increase
                  (Decrease)
            
            PercentageSalaries
                and wages
            
            $
            1,516,436
            
            $
            1,489,699
            
            $
            26,737
            
            
            1.8
            %Supplies
                expense
            
            
            76,448
            
            
            34,062
            
            
            42,386
            
            
            124.4Travel
                expense
            
            
            328,095
            
            
            302,052
            
            
            26,043
            
            
            8.6Transportation
                expense
            
            
            1,868,245
            
            
            1,495,765
            
            
            372,480
            
            
            24.9After
                sales service expense
            
            
            5,251,382
            
            
            3,770,432
            
            
            1,480,950
            
            
            39.3Rent
                expense
            
            
            265,908
            
            
            230,240
            
            
            35,668
            
            
            15.5Office
                expense
            
            
            114,105
            
            
            103,172
            
            
            10,933
            
            
            10.6Advertising
                expense
            
            
            14,168
            
            
            30,297
            
            
            (16,129
            )
            
            (53.2
            )Business
                entertainment expense
            
            
            222,200
            
            
            230,939
            
            
            (8,739
            )
            
            (3.8
            )Insurance
                expense
            
            
            15,431
            
            
            5,618
            
            
            9,813
            
            
            174.7Other
                expense
            
            
            2,058
            
            
            79,792
            
            
            (77,734
            )
            
            (97.4
            )Total
            
            $
            9,674,476
            
            $
            7,772,068
            
            $
            1,902,408
            
            
            24.5
            %




Selling
      expenses were $9,674,476 for the year ended December 31, 2007, as compared
      to $
      7,772,068 for 2006, an increase of $1,902,408, or 24.5%. Significant expense
      items that increased by more than $100,000 in 2007 as compared to 2006 were
      transportation expense and after sales service expense..




The
      increase in transportation expense was due to increased sales and a rise in
      the
      price of oil, which led to increases in domestic transportation
      prices.




After
      sales service expense for the year ended December 31, 2007 increased by
      $1,480,950, or 39.3%, as compared with last year, mainly due to the increased
      product sales.




GENERAL
      AND ADMINISTRATIVE EXPENSES




For
      the
      years ended December 31, 2007 and 2006, general and administrative expenses
      are
      summarized as follows:




Years
                Ended December 312007
            
            2006
            
            Increase
                  (Decrease)
            
            PercentageSalaries
                and wages
            
            $
            3,921,572
            
            $
            2,788,494
            
            $
            1,133,078
            
            
            40.6
            %Travel
                expenses
            
            
            491,422
            
            
            316,565
            
            
            174,857
            
            
            55.2Office
                expenses
            
            
            473,796
            
            
            379,345
            
            
            94,451
            
            
            24.9Supplies
                expenses
            
            
            609,895
            
            
            232,853
            
            
            377,042
            
            
            161.9Repairs
                expenses
            
            
            564,284
            
            
            226,779
            
            
            337,505
            
            
            148.8Business
                entertainment
                expenses
            
            
            206,677
            
            
            142,496
            
            
            64,181
            
            
            45.0Labor
                insurance expenses
            
            
            1,017,072
            
            
            761,971
            
            
            255,101
            
            
            33.5Labor
                union dues expenses
            
            
            65,200
            
            
            33,360
            
            
            31,840
            
            
            95.4Board
                of directors expense
            
            
            63,677
            
            
            100,476
            
            
            (36,799
            )
            
            (36.6
            )Taxes
            
            
            476,765
            
            
            453,337
            
            
            23,428
            
            
            5.2Provision
                for bad debts
            
            
            (649,512
            )
            
            995,440
            
            
            (1,644,952
            )
            
            (165.2
            )Impairment
                of inventories
            
            
            —
            
            
            (1,520
            )
            
            1,520
            
            
            (100.0
            )Training
                expenses
            
            
            128,032
            
            
            43,498
            
            
            84,534
            
            
            194.3Listing
                expenses
            
            
            1,203,104
            
            
            875,103
            
            
            328,001
            
            
            37.5Others
                expenses
            
            
            454,733
            
            
            461,990
            
            
            (7,257
            )
            
            (1.6
            )Total
            
            $
            9,026,717
            
            $
            7,810,187
            
            $
            1,216,530
            
            
            15.6
            %




22




General
      and administrative expenses were $ 9,026,717 for
      the
      year ended December 31, 2007, as compared to $7,810,187 for the year ended
      December 31, 2006, an increase of $ 1,216,530 or
      15.6%.




The
      expense items that increased more than $100,000 in 2007 as compared to 2006
      were
      salaries and wages, travel expenses, supplies expense, repair expenses, labor
      insurance expenses and listing expenses. Significant expense items that
      decreased more than $100,000 in 2007 were provision for bad debts. Listing
      expenses consisted of the costs associated with legal, accounting and auditing
      fees for operating a public company.




The
      increase in salaries and wages expense was due to bonuses paid to management
      for
      their exceeding the business target of 2007.




The
      increase in travel expenses was due to the trips between U.S. and China by
      management and technical personnel for the newly built U.S. subsidiary
      company.




The
      increase in supplies expenses was attributable to additional management
      organization and staff due to expanded business, and corresponding increases
      in
      supplies.




The
      increase in repairs expense was due to a significant repair in administration
      area and equipment in 2007 in anticipation of the ten years’ anniversary
      ceremony of Henglong, one of the Company’s Joint ventures.




The
      increase in labor insurance expenses was attributable to additional employees
      with the expansion of business.




The
      increase in listing expenses was due to increased costs associated with
      auditing, legal and consulting fees for operating a public company, as a result
      of expanded business.




There
      was
      a material decrease in the provision for doubtful accounts. The
      Company grants credit to its customers, generally on an open account basis.
      Credit terms, based on each customer’s historical credit standing, is three to
      four months. In normal circumstances, the Company does not record any provision
      for doubtful accounts for those accounts receivable amounts which were in
      credit. For those receivables in excess of credit terms, a provision has been
      recorded accordingly. In 2007, the Company further tightened its credit control,
      leading to a decreased over-due accounts receivables balance, thus recovered part of the
      provision for doubtful accounts recorded in prior years.




RESEARCH
      AND DEVELOPMENT EXPENSES




Research
      and development expenses were $1,666,274 for the year ended December 31, 2007,
      as compared to $1,066,050 for the year ended December 31, 2006, an increase
      of
      $600,224 or 56.3%, as a result of additional R&D expenses on development of
      steering gears and sensor modulars for domestic automotive
      manufacturers.




DEPRECIATION
      AND AMORTIZATION EXPENSE




For
      the
      year ended December 31, 2007, depreciation and amortization expenses excluded
      from that recorded under cost of sales were $4,243,930, as compared to
      $3,776,003 for the year ended December 31, 2006, an increase of $467,927, or
      12.4%, as a result of the Company’s increasing its fixed assets.




23




INCOME
      FROM OPERATIONS




Income
      from operations was $21,265,801 for the year ended December 31, 2007, as
      compared to $12,764,722 for the year ended December 31, 2006, an increase of
      $8,501,079or 66.6%, mainly consisting of an increase of $274,934 or 98.5% from
      net sales from materials and others; an increase of $12,413,234, or 37.7%,
      from
      gross profit, and a decrease of operating profit of $4,187,089 or 20.5%, as
      a
      result of increased running expenses.




OTHER
      INCOME




Other
      income was $38,462 for the year ended December 31, 2007, as compared to $94,257
      for the year ended December 31, 2006, a decrease of $55,795 or 59.2%, primarily
      as a result of decreased government subsidies.




Interest
      subsidies mean the refunds by the Chinese Government of interest charged by
      banks to companies which are entitled to such subsidies. This kind of subsidies
      applies only to loan interest related to production facilities expansion. During
      2004 and 2005, the Company had used this special loan to improve technologically
      its production line in order to enlarge capability and enhance quality. The
      expansion project was completed and new facilities were put into use at the
      end
      of 2005 and 2006 respectively.




During
      2006 and 2007, the experts sent by the Chinese Government reviewed and assessed
      the actual usage of technologically improved production facilities on site
      in
      order to confirm whether the improvement has achieved its expected goal of
      production expansion and quality enhancement. Whether or not a company can
      receive interest subsidies from the Chinese Government depends on the company’s
      achieving the two goals set forth above after the technological
      improvement.




FINANCIAL
      EXPENSES




Financial
      expenses were $566,986 for the year ended December 31, 2007, as compared to
      $832,844 for the year ended December 31, 2006, a decrease of $265,858, or 31.9%,
      primarily as a result of a decrease in note discounting expenses and interest
      on
      bank loan. During 2006 and 2007, the Company raised funds from stock issuances,
      which led to a reduction in cash funded from note discounting and bank
      loans.




INCOME
      BEFORE INCOME TAXES




Income
      before income taxes was $20,737,277 for the year ended December 31, 2007, as
      compared to $12,026,135 for the year ended December 31, 2006, an increase of
      $8,711,142 or 72.4%, consisting of increased income from operations of
      $8,501,079 or 66.6%, decreased other income of $55,795, or 59.2%, and decreased
      finance expenses of $265,858, or 31.9%.




INCOME
      TAXES




Income
      tax expense was $2,231,032 for the year ended December 31, 2007, as compared
      to
      $1,669,081 for the year ended December 31, 2006, an increase of $561,951, or
      33.7%, mainly because of:




1.
      Increased income before income taxes resulted in increased income tax of
      $2,178,603.




24




2.
      The
      Company has received an income tax refund of $2,085,180 for domestic equipment
      purchased during the year ended December 31, 2007, as compared to $928,108
      for
      the year of 2006, leading to a improvement of income tax of
      $1,157,072.




3.
      One of
      the Company’s Sino-foreign joint ventures, Jiulong, enjoyed its 50% state tax
      exemption up to December 31, 2006. During the year ended December 31, 2007,
      Jiulong was subject to an income tax rate of 30%, that was increased from 15%.
      This increase in income tax rate led to an increased income tax of
      $855,930.




4.
      An
      increase in deferred income taxes assets led to a decreased income tax of
      $1,315,510.




INCOME
      BEFORE MINORITY INTEREST




Income
      before minority interest was $18,506,245 for the year ended December 31, 2007,
      as compared to $10,357,054 for the year ended December 31, 2006, an increase
      of
      $8,149,191, or 78.7%, consisting of increased income before income taxes of
      $8,711,142, or 72.4%, and a decrease of $561,951, or 33.7% due to increased
      income tax expenses.




MINORITY
      INTEREST




The
      Company recorded minority interests’ share in the earnings of the Sino-foreign
      joint ventures aggregating $9,646,339 for the year ended December 31, 2007,
      and
      compared to $5,545,350 for the year ended December 31, 2006, an increase of
      $4,100,989 or 73.9%.




The
      Company owns different equity interests in eight Sino-foreign joint ventures,
      through which it conducts its operations. All the operating results of these
      eight Sino-foreign joint ventures were consolidated in the Company’s financial
      statements of December 31, 2007 and 2006. The Company records the minority
      interests' share in the earnings of the respective Sino-foreign joint ventures
      for each period.




In
      2007,
      minority interest increased greatly as compared to 2006, primarily as income
      from Henglong, one of the Company’s joint ventures, which was owned 55.5% by
      minority interest holders increased greatly.




NET
      INCOME




Net
      income was $8,859,906 for the year ended December 31, 2007, as compared to
      $4,811,704 for the year ended December 31, 2006, an increase of $4,048,202,
      or
      84.1%, consisting of increased income before minority interest of $8,149,191
      or
      78.7%, and an increased minority interest of $4,100,989 or 73.9%, which
      decreased net income.




LIQUIDITY
      AND CAPITAL RESOURCES:




Capital
      resources and use of cash




The
      Company has historically financed its liquidity requirements from a variety
      of
      sources, including short-term borrowings under bank credit agreements, bankers’
acceptance, issuances of capital stock and internally generated cash. As of
      December 31, 2007, the Company had cash and cash equivalents of $19,487,159,
      as
      compared to $27,418,500 as of December 31, 2006, a decrease of $7,931,341 or
      28.9%.




The
      Company had working capital of $35,022,355 as of December 31, 2007, as compared
      to $29,136,373 as of December 31, 2006, an increase of $5,885,982, or
      20.2%.




25




Financing
      activities:




For
      the
      Company’s bank loans and banker’s acceptance bill facilities, the Company’s
      banks require the Company to sign documents to repay such facilities within
      one
      year. On the condition that the Company can provide adequate mortgage security
      and has not violated the terms of the line of credit agreement, it can extend
      such one year facilities for another year.





The
      Company had bank loans maturing in less than one year of $13,972,603 and
      bankers’ acceptances of $15,018,571 as of December 31, 2007, including $683,995
      which was not a part of the line of credit and fully secured by notes
      receivable.





The
      Company currently expects to be able to obtain similar bank loans and bankers’
acceptance bills in the future if it can provide adequate mortgage security
      following the termination of the above mentioned agreements (See the table
      in
      (a) Bank loans). If the Company is not able to do so, it will have to refinance
      such debt as it becomes due or repay that debt to the extent it has cash
      available from operations or from the proceeds of additional issuances of
      capital stock. Owing to depreciation of the collateral, the value of the
      collaterals securing the above-mentioned bank loans and banker's acceptance
      bill
      will be devalued by approximately $2,859,090. If the Company wishes to obtain
      the same amount of bank loans and banker's acceptance bills on the expiry day
      of
      the above mentioned agreements (See the table in (a) Bank loans), we will have
      to provide $2,859,090 additional collateral. The Company will obtain a
      reduced line of credit, if it cannot provide additional collaterals. The Company
      expects that the reduction of bank loans will not have a material adverse effect
      on its liquidity. As of December 31, 2007, the Company has adequate working
      capital.





(a) Bank
          loans




As
      of
      December 31, 2007, the principal outstanding under the Company’s credit
      facilities and lines of credit was as follows:




Bank
            
            Due
                Date
            
            Amount
                available
            
            Amount
                borrowedComprehensive
                credit facilities
            
            
            Bank
                of China
            
            
            Nov-08
            
            $
            6,986,301
            
            $
            4,779,095Comprehensive
                credit facilities
            
            
            Bank
                of China
            
            
            Sep-08
            
            $
            1,095,890
            
            $
            284,931Comprehensive
                credit facilities
            
            
            China
                Construction Bank
            
            
            May-08
            
            
            6,849,315
            
            
            4,072,603Comprehensive
                credit facilities
            
            
            China
                Construction Bank
            
            
            Jun-08
            
            
            2,054,795
            
            
            2,054,795Comprehensive
                credit facilities
            
            
            CITIC
                Industrial Bank
            
            
            Apr-08
            
            
            3,835,616
            
            
            3,698,630Comprehensive
                credit facilities
            
            
            Shanghai
                Pudong Development Bank
            
            
            Sep-08
            
            
            6,164,384
            
            
            4,999,452Comprehensive
                credit facilities
            
            
            Jingzhou
                Commercial Bank
            
            
            Sep-08
            
            
            10,958,904
            
            
            5,736,164Comprehensive
                credit facilities
            
            
            Industrial
                and Commercial Bank of China
            
            
            Apr-08
            
            
            1,994,522
            
            
            901,234Comprehensive
                credit facilities
            
            
            Bank
                of Communications Co., Ltd
            
            
            Jul-08
            
            
            2,739,726
            
            
            1,095,890Comprehensive
                credit facilities
            
            
            China
                Merchants Bank Co. Ltd
            
            
            Dec-07
            
            
            2,054,795
            
            
            620,685Total
            
            
            
            
            
            
            
            $
            44,734,248
            
            $
            28,243,479




26




The
      Company may request the banks to issue notes payable or bank loans within its
      credit line using a 364-day revolving line.




The
      Company refinanced its short-term debt during early 2007 at annual interest
      rates of 6.12% to 7.72%, and for terms of six to twelve months. Pursuant to
      the
      refinancing arrangement, the Company pledged $12,500,521 of equipment,
      $3,837,836 of land use rights and $3,034,945 of buildings as security for its
      comprehensive credit facility with Bank of China; pledged $2,795,411 of land
      use
      rights and $3,981,113 of buildings as security for its comprehensive credit
      facility with CITIC Industrial Bank; pledged $1,639,342 of land use rights
      and
      $7,112,315 of buildings as security for its comprehensive credit facility with
      Shanghai Pudong Development Bank; pledged notes receivable at equivalent amount
      to credit line as security for its revolving comprehensive credit facility
      with
      Jingzhou Commercial Bank; pledged $1,475,250 of land use rights and $996,655
      of
      buildings as security for its comprehensive credit facility with Industrial
      and
      Commercial Bank of China; and pledged $9,752,970 of land use rights and
      $4,266,716 of buildings as security for its comprehensive credit facility with
      China Construction Bank. Wuhu and Zhejiang, two of the Company’s Joint-venture
      companies, entered into a comprehensive credit facility with Bank of
      Communication Co., Ltd and China Merchants Bank Co. Ltd, which was guaranteed
      by
      Jiulong and Henglong, the other Joint-venture company of the
      Company.




(b)  Financing
      from investors:




On
      March
      20, 2006, the Company entered into a Standby Equity Distribution Agreement
      with
      Yorkville Advisors, LLC, formerly known as Cornell Capital Partners, LP, for
      a
      total amount of $15 million. The Company has utilized $7,200,000 as of December
      31, 2007. Under the agreement, Cornell Capital Partners, LP has committed to
      provide funding to be drawn down over a stated period at the Company’s
      discretion.




If
      the
      Company fails to obtain the same or similar terms for any debt or equity
      refinancing to meet its debt obligations, or if the Company fails to obtain
      extensions of the maturity dates of these obligations as they become due, its
      overall liquidity and capital resources will be adversely affected.




Cash
      Requirements:




The
      following table summarizes the Company’s expected cash outflows resulting from
      financial contracts and commitments. The Company has not included information
      on
      its recurring purchases of materials for use in its manufacturing operations.
      These amounts are generally consistent from year to year, closely reflecting
      the
      Company’s levels of production, and are not long-term in nature, which are less
      than three months.





Payment
                Due DatesTotal
            
            Less
                than 1 year
            
            1-3
                years
            
            3-5
                years
            
            More
                than 5 yearsShort-term
                bank loan
            
            $
            13,972,603
            
            $
            13,972,603
            
            $
            —
            
            $
            —
            
            $
            —Notes
                payable
            
            
            15,018,571
            
            
            15,018,571
            
            
            —
            
            
            —
            
            
            —Other
                contractual purchase commitments, including information
                technology
            
            
            8,165,263
            
            
            7,276,496
            
            
            778,767
            
            
            110,000
            
            
            —Total
            
            $
            37,156,437
            
            $
            36,267,670
            
            $
            778,767
            
            $
            110,000
            
            $
            —




27




Short-term
      bank loans:




The
      following table summarizes the contract information of short-term borrowings
      between the banks and the Company as of December 31, 2007:




Bank
            
            Purpose
            
            Borrowing
                Date
            
            Borrowing
                Term (Year)
            
            Annual
                Percentage Rate
            
            Date
                of Interest Payment
            
            Date
                of payment
            
            Amount
                Payable on Due DateBank
                of China
            
            
            Working
                Capital
            
            
            7-Mar-07
            
            
            1
            
            
            6.12
            %
            
            Pay
                monthly
            
            
            7-Mar-08
            
            $
            684,932Bank
                of China
            
            
            Working
                Capital
            
            
            14-Jun-07
            
            
            1
            
            
            6.57
            %
            
            Pay
                monthly
            
            
            14-Jun-08
            
            
            1,369,863Bank
                of China
            
            
            Working
                Capital
            
            
            29-Dec-07
            
            
            1
            
            
            7.47
            %
            
            Pay
                monthly
            
            
            29-Dec-08
            
            
            684,932CITIC
                Industrial Bank
            
            
            Working
                Capital
            
            
            17-Apr-07
            
            
            1
            
            
            6.39
            %
            
            Pay
                monthly
            
            
            17-Apr-08
            
            
            958,904CITIC
                Industrial Bank
            
            
            Working
                Capital
            
            
            27-Jun-06
            
            
            1
            
            
            6.57
            %
            
            Pay
                monthly
            
            
            27-Jun-08
            
            
            2,739,726China
                Construction Bank
            
            
            Working
                Capital
            
            
            29-May-07
            
            
            1
            
            
            6.57
            %
            
            Pay
                monthly
            
            
            29-May-08
            
            
            1,369,863China
                Construction Bank
            
            
            Working
                Capital
            
            
            30-Jul-07
            
            
            1
            
            
            6.84
            %
            
            Pay
                monthly
            
            
            30-Jul-08
            
            
            1,369,863China
                Construction Bank
            
            
            Working
                Capital
            
            
            23-Aug-07
            
            
            0.9
            
            
            7.72
            %
            
            Pay
                monthly
            
            
            31-Jul-08
            
            
            2,054,794Shanghai
                Pudong Development Bank
            
            
            Working
                Capital
            
            
            18-Oct-07
            
            
            1
            
            
            7.47
            %
            
            Pay
                monthly
            
            
            18-Oct-08
            
            
            2,739,726Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            13,972,603




The
      Company must use the loans for the purpose described in the table. If the
      Company fails, it will be charged a penalty interest at 100% of the specified
      loan rate. The Company has to pay interest at the interest rate described in
      the
      table on the 20th of each month. If the Company fails, it will be charged a
      compounded interest at the specified rate. The Company has to repay the
      principal outstanding on the specified date in the table. If it fails, it will
      be charged a penalty interest at 50% of the specified loan rate. Management
      believes that the Company had complied with such financial covenants as of
      December 31, 2007, and will continue to comply with them.




The
      following table summarizes the contract information of issuing notes payable
      between the banks and the Company as of December 31, 2007:







Purpose
            
            Term
                (Month)
            
            Due
                Date
            
            Amount
                Payable on Due DateWorking
                Capital
            
            
            3-6
            
            
            8-Jan
            
            $
            2,307,557Working
                Capital
            
            
            3-6
            
            
            8-Feb
            
            
            2,173,562Working
                Capital
            
            
            3-6
            
            
            8-Mar
            
            
            1,416,438Working
                Capital
            
            
            3-6
            
            
            8-Apr
            
            
            3,867,123Working
                Capital
            
            
            3-6
            
            
            8-May
            
            
            2,130,959Working
                Capital
            
            
            3-6
            
            
            8-Jun
            
            
            3,122,932Total
            
            
            
            
            
            
            
            $
            15,018,571





28




The
      Company must use the loan for the purpose described in the table. If it fails,
      the banks will no longer issue the notes payable, and it may have an adverse
      effect on the Company’s liquidity and capital resources. The Company has to
      deposit sufficient cash in the designated account of the bank on the due date
      of
      notes payable for payment to the suppliers. If the bank has advanced payment
      for
      the Company, it will be charged a penalty interest at 150% of the specified
      loan
      rate. Management believes that the Company had complied with such financial
      covenants as of December 31, 2007, and will continue to comply with them.




The
      Company had approximately $8,165,263 of capital commitment as of December 31,
      2007, arising from equipment purchases for expanding production capacity. The
      Company intends to pay $7,276,496 in 2008 using its working capital. Management
      believes that it will not have a material adverse effect on the Company’s
      liquidity.




Cash
      flows:





(a)
      Operating activities




Net
      cash
      generated from operations during the year ended December 31, 2007 was
      $11,324,473, compared with $7,969,150 for the year of 2006, an increase of
      $3,355,323, primarily due to increased net income.




During
      the year ended December 31, 2007, the most important factor of the increased
      cash outflow of operation activities is increased accounts receivables, notes
      receivables, and inventories, the same as the year ended December 31,
      2006.




First,
      cash outflow increased by about $5,200,000 owing to increased accounts
      receivables, mainly due to increased sales in 2007 than in 2006. The credit
      terms on sale of goods between customers and the Company generally range from
      3
      - 4 months, which resulted in increased accounts receivable as sales increased.
      This is a normal capital circulation and the Company believes that it will
      not
      have a material adverse effect on future cash flows. Second, cash outflow
      increased by about $14,500,000 owing to increased notes receivable, mainly
      due
      to the Company having sufficient working capital, thus having less notes
      receivable discounted during this period. Since the notes receivable were based
      on bank credit standing, they may turn into cash any time the Company elects.
      Therefore, the increase of notes receivable will not have a material adverse
      effect on the Company’s future operating activities. Third, increased
      inventories led to an increased cash outflow of about $3,500,000, mainly due
      to
      the Company’s intention to produce sufficient inventories to meet increasing
      demands in the first quarter of 2008.




(b)
      Investing activities




The
      Company expended net cash of $13,159,277 in investment activities during the
      year ended December 31, 2007, and $1,219,103 during the year of 2006.




Cash
      used
      in investment activities in 2007 significantly increased compared to the year
      of
      2006, primarily due to payment of about $13,982,490 for equipment purchases
      and
      workshop construction during the year ended December 31, 2007 and for production
      facilities expansion to satisfy the market demand. In the year of 2006, we
      paid
      for about $7,378,910 on this.




At
      December 31, 2006, the balance of other receivables decreased to $970,000,
      primarily due to the Company’s receipt of other receivable of $5,700,000 during
      2006, pursuant to prior agreement. In 2007, the Company received other
      receivable of approximately $480,000.




(c)
      Financing activities




During
      the year ended December 31, 2007, the Company expended net cash of $7,429,025
      in
      financing activities. During the year of 2006, the Company obtained net cash
      of
      $7,470,971 through financing activities. The significantly increased net cash
      was as a result of following factors:




During
      the year ended December 31, 2007, the Company expended a decreased cash of
      $2,200,000 on bank loan than that of the year of 2006, primarily due to
      decreased comprehensive credit lines from banks to Henglong, one of the
      Company’s Joint-venture companies, resulting from the decrease in the value of
      the collateral due to its depreciation over time. The Company expects that
      the
      reduction of bank credit lines to Henglong will not have a material adverse
      effect on its liquidity, for the Company has adequate working capital as of
      December 31, 2007.




29




During
      the year ended December 31, 2007, the Company raised $1,145,500 of cash by
      issuing 108,121 shares of common stock to the institutional investors. During
      the year of 2006, the Company raised $10,373,740 of cash by issuing 1,239,175
      shares of common stock, including 22,500 share option exercised by the
      independent directors .




The
      Company’s joint ventures paid more dividends to the minority shareholders of
      Sino-foreign joint ventures in the year ended December 31, 2007 than in the
      year
      of 2006. The amounts due to shareholders/directors were unsecured, interest-free
      and repayable on demand.




OFF-BALANCE
      SHEET ARRANGEMENTS





At
      December 31, 2006 and 2007, the Company did not have any transactions,
      obligations or relationships that could be considered off-balance sheet
      arrangements.





COMMITMENTS
      AND CONTINGENCIES




The
      following table summarizes the Company’s contractual payment obligations and
      commitments as of December 31, 2007:





Payment
                Obligations by Period2008
            
            2009
            
            2010
            
            2011
            
            Thereafter
            
            TotalObligations
                for service agreements
            
            $
            110,000
            
            $
            110,000
            
            $
            110,000
            
            $
            110,000
            
            $
            —
            
            $
            440,000Obligations
                for purchasing agreements
            
            
            7,166,496
            
            
            558,767
            
            
            —
            
            
            —
            
            
            —
            
            
            7,725,263Total
            
            $
            7,276,496
            
            $
            668,767
            
            $
            110,000
            
            $
            110,000
            
            $
            —
            
            $
            8,165,263







SUBSEQUENT
      EVENTS




On
      February 15, 2008, pursuant to a previously announced Securities Purchase
      Agreement dated February 1, 2008, we issued to two institutional investors,
      for
      $35,000,000, Senior Convertible Notes with an original principal amount of
      $35,000,000 and common stock Warrants to purchase 1,317,865 shares of common
      stock. We received $17,500,000 cash and the investors deposited another
      $17,500,000 cash in escrow to be delivered to us upon the satisfaction or waiver
      of certain conditions. Of the $35,000,000, Lehman Brothers provided $30,000,000
      and YA Global Investments, L.P., which is managed by Yorkville Advisors,
      LLC (formerly known as Cornell Capital Partners, LP), provided
      $5,000,000.




The
      Senior Convertible Notes are unsecured and are convertible into common stock
      at
      a conversion price of $8.8527 per share, subject to possible downward
      adjustments, including a semiannual reset (but the reset not to be
      below $7.0822 per share) based on our stock price. Subject to earlier
      redemption in circumstances that include default, failure to close the
      previously announced acquisition of a certain minority interest in our Jingzhou
      Henglong Automotive Parts Co. subsidiary, change of control, or extreme stock
      price levels, the Senior Convertible Notes will mature five years after the
      closing; the investors also have a direct redemption right on the second and
      third anniversaries of the closing. The Senior Convertible Notes are convertible
      at the holders' option; also, semiannually, we can force conversion of a portion
      of the Senior Convertible Notes if our stock price attains certain levels.
      The
      Senior Convertible Notes will bear interest at an annual rate increasing over
      time from 3% to 5%; if the Senior Convertible Notes are repaid or redeemed
      rather than being converted, we must make an additional make-whole payment
      which, together with interest already paid, will equate to gross interest of
      up
      to 13%.




30




The
      exercise price of the Warrants is $8.8527 per share, subject to possible
      downward adjustments based on a weighted-average antidilution formula. The
      Warrants will expire one year after the closing.




INFLATION
      AND CURRENCY MATTERS




In
      the
      most recent decade, the Chinese economy has experienced periods of rapid
      economic growth as well as relatively high rates of inflation, which in turn
      has
      resulted in the periodic adoption by the Chinese Government of various
      corrective measures designed to regulate growth and contain inflation.




Foreign
      operations are subject to certain risks inherent in conducting business abroad,
      including price and currency exchange controls, and fluctuations in the relative
      value of currencies. The Company conducts virtually all of its business in
      China
      and, accordingly, the sale of its products is settled primarily in RMB. As
      a
      result, devaluation or currency fluctuation of the RMB against the US$ would
      adversely affect the Company’s financial performance when measured in US
      dollars.




Until
      1994, the Renminbi experienced a significant devaluation against US dollars
      but
      since then the value of the Renminbi relative to the US dollar has remained
      stable. In addition, the Renminbi is not readily convertible into US dollars
      or
      other foreign currencies. All foreign exchange transactions continue to take
      place either through the Bank of China or other banks authorized to buy and
      sell
      foreign currencies at the exchange rate quoted by the People’s Bank of
      China.




RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
      Hybrid Financial Instruments” (“SFAS 155”). This Statement amends FASB
      Statements No. 133, Accounting for Derivative Instruments and Hedging
      Activities, and No. 140, Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities. This Statement resolves
      issues addressed in Statement 133 Implementation Issue No. D1, “Application
      of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS
      No. 155 permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation, clarifies which interest-only strips and principal-only strips
      are
      not subject to the requirements of Statement 133, and establishes a requirement
      to evaluate interests in securitized financial assets to identify interests
      that
      are freestanding derivatives or that are hybrid financial instruments that
      contain an embedded derivative requiring bifurcation. It also clarifies that
      concentrations of credit risk in the form of subordination are not embedded
      derivatives and amends Statement 140 to eliminate the prohibition on a
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This Statement is effective for all financial instruments acquired
      or issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006. The Company has adopted SFAS No. 155 on its financial
      statements from the first quarter of 2007.




In March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS 156”). This Statement amends FASB Statement No. 140, Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities, with respect to the accounting for separately recognized servicing
      assets and servicing liabilities. This Statement requires an entity to recognize
      a servicing asset or servicing liability each time it undertakes an obligation
      to service a financial asset by entering into a servicing contract in indicated
      situations; requires all separately recognized servicing assets and servicing
      liabilities to be initially measured at fair value, if practicable; permits
      an
      entity to choose relevant subsequent measurement methods for each class of
      separately recognized servicing assets and servicing liabilities; at its initial
      adoption, permits a one-time reclassification of available-for-sale securities
      to trading securities by entities with recognized servicing rights, without
      calling into question the treatment of other available-for-sale securities
      under
      Statement 115, provided that the available-for-sale securities are identified
      in
      some manner as offsetting the entity’s exposure to changes in fair value of
      servicing assets or servicing liabilities that a servicer elects to subsequently
      measure at fair value; and requires separate presentation of servicing assets
      and servicing liabilities subsequently measured at fair value in the statement
      of financial position and additional disclosures for all separately recognized
      servicing assets and servicing liabilities. The Company has adopted SFAS No.
      156
      on its Consolidated Financial Statements from the first quarter of
      2007.




31




In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS
      157”), to define fair value, establish a framework for measuring fair value in
      accordance with generally accepted accounting principles and expand disclosures
      about fair value measurements. SFAS 157 requires quantitative disclosures using
      a tabular format in all periods (interim and annual) and qualitative disclosures
      about the valuation techniques used to measure fair value in all annual periods.
      The provisions of this Statement shall be effective for financial statements
      issued for fiscal years beginning after November 15, 2007 and interim periods
      within those fiscal years. The Company will be required to adopt the provisions
      of this statement as of January 1, 2008. T




In
      September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
      Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This Statement enhances
      disclosure regarding the funded status of an employer’s defined benefit
      postretirement plan by (a) requiring companies to include the funding status
      in
      comprehensive income ,
      (b)
      recognize transactions and events that affect the funded status in the financial
      statements in the year in which they occur, and (c) at a measurement date of
      the
      employer’s fiscal year-end. Statement No. 158 effective for fiscal years ending
      after December 15, 2008, and is not expected to apply to the
      Company.





In
      February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities Including an Amendment of FASB Statement No.
      115 (“SFAS 159”). SFAS 159 permits entities to choose
      to
      measure many financial instruments and certain other items at fair values.
      SFAS
      159 is effective
      for fiscal years after November 15, 2007. The Company
      will be required to adopt the provisions of this statement as of January 1,
      2008.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
      Combinations. SFAS 141(R) retains the fundamental requirements of the original
      pronouncement requiring that the purchase method be used for all business
      combinations. SFAS 141(R) defines the acquirer as the entity that obtains
      control of one or more businesses in the business combination, establishes
      the
      acquisition date as the date that the acquirer achieves control and requires
      the
      acquirer to recognize the assets acquired, liabilities assumed and any
      noncontrolling interest at their fair values as of the acquisition date. In
      addition, SFAS 141(R) requires expensing of acquisition-related and
      restructure-related costs, remeasurement of earn out provisions at fair value,
      measurement of equity securities issued for purchase at the date of close of
      the
      transaction and non-expensing of in-process research and development related
      intangibles. 141R is effective for financial statements issued for fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years. The Company is required to and plans to adopt the provisions of SFAS
      141R
      beginning in the first quarter of 2009. We are currently evaluating the impact
      of the implementation of SFAS No. 141(R) on our consolidated financial position,
      results of operations and cash flows.





In
      December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51." The objective
      of
      SFAS No. 160 is to improve the relevance, comparability and transparency of
      the
      financial information that a reporting entity provides in its consolidated
      financial statements by establishing additional accounting and reporting
      standards. SFAS No. 160 is effective for fiscal years beginning on or after
      December 15, 2008. Early adoption of this statement is prohibited. By
      adopting SFAS No. 160, the noncontrolling interests will be reported as equity
      while the noncontrolling interests are reported in the mezzanine section between
      liabilities and equity currently.





In
      March
      2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
      No.
      161, *Disclosures
      about Derivative Instruments and Hedging Activities.* The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. It is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with early
      application encouraged. We
      are
      currently evaluating the impact of adopting SFAS No. 161 on our consolidated
      financial statements.





32




**SIGNIFICANT
      ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES**





The
      Company prepares its condensed consolidated financial statements in accordance
      with accounting principles generally accepted in the United States of America.
      The preparation of these financial statements requires the use of estimates
      and
      assumptions that affect the reported amounts of assets and liabilities and
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amount of revenues and expenses during the reporting
      period. Management periodically evaluates the estimates and judgments made.
      Management bases its estimates and judgments on historical experience and on
      various factors that are believed to be reasonable under the circumstances.
      Actual results may differ from these estimates as a result of different
      assumptions or conditions. The following critical accounting policies affect
      the
      more significant judgments and estimates used in the preparation of the
      Company’s condensed consolidated financial statements.




We
      consider an accounting estimate to be critical if:




·
            It
                requires us to make assumptions about matters that were uncertain
                at the
                time we were making the
                estimate, and




·
            Changes
                in the estimate or different estimates that we could have selected
                would
                have had a material impact on our financial condition or results
                of
                operations.




The
      table
      below presents information about the nature and rationale for the Company
      critical accounting estimates:





Balance
                Sheet Caption
            
            Critical
                Estimate Item
            
            Nature
                of Estimates Required
            
            Assumptions/Approaches
                Used
            
            Key
                FactorsAccrued
                liabilities and other long-term liabilities
            
            Warranty
                obligations
            
            Estimating
                warranty requires us to forecast the resolution of existing claims
                and
                expected future claims on products sold. VMs are increasingly seeking
                to
                hold suppliers responsible for product warranties, which may impact
                our
                exposure to these costs.
            
            We
                base our estimate on historical trends of units sold and payment
                amounts,
                combined with our current understanding of the status of existing
                claims
                and discussions with our customers.
            
            · VM
                  (Vehicle Manufacturer) sourcing
                
                ·VM
                    policy decisions regarding warranty claimsProperty,
                plant and equipment, intangible assets and other long-term
                assets
            
            Valuation
                of long- lived assets and investments
            
            We
                are required from time-to-time to review the recoverability of certain
                of
                our assets based on projections of anticipated future cash flows,
                including future profitability assessments of various product lines.
            
            We
                estimate cash flows using internal budgets based on recent sales
                data,
                independent automotive production volume estimates and customer
                commitments.
            
            ·Future
                  Production estimates
                
                ·Customer
                    preferences and
                    decisions




33




Accounts
                and notes receivables
            
            Provision
                for doubtful accounts and notes receivable
            
            Estimating
                the provision for doubtful accounts and notes receivable require
                the
                Company to analyze and monitor each customer’s credit standing and
                financial condition regularly. The Company grants credit to its customers,
                generally on an open account basis. It will have material adverse
                effect
                on the Company’s cost disclosure if such assessment were
                improper.
            
            The
                Company grants credit to its customers for three to four months based
                on
                each customer’s current credit standing and financial data. The Company
                assesses allowance on an individual customer basis, under normal
                circumstancesthe Company does not record any provision for doubtful accounts for
                those
                accounts receivable amounts which were in credit terms. For those
                receivables out of credit terms, certain proportional provision,
                namely
                25% to 100%, will be recorded based on respective overdue
                terms.
            
            ·Customers’
                  credit standing and financial conditionDeferred
                income taxes
            
            Recoverability
                of deferred tax assets
            
            We
                are required to estimate whether recoverability of our deferred tax
                assets
                is more likely than not based on forecasts of taxable earnings in
                the
                related tax jurisdiction.
            
            We
                use historical and projected future operating results, based upon
                approved
                business plans, including a review of the eligible carryforward period,
                tax planning opportunities and other relevant
                considerations.
            
            ·Tax
                  law changes
                
                ·Variances
                  in future projectedprofitability, includingbytaxing entity




In
      addition, there are other items within our financial statements that require
      estimation, but are not as critical as those discussed above. These include
      the
      allowance for reserves for excess and obsolete inventory. Although not
      significant in recent years, changes in estimates used in these and other items
      could have a significant effect on our consolidated financial statements.




ITEM
      8.
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




(a)
      FINANCIAL STATEMENTS




The
      following financial statements are set forth at the end hereof.




1.
       Report of Independent Auditors




2.
       Consolidated Balance Sheets as of December 31, 2007 and 2006




3.
       Consolidated Statements of  Earnings and Comprehensive Income
      for the years ended December 31, 2007 and 2006




4.
       Consolidated Statements of Comprehensive Income (Loss) for the years ended
      December 31, 2007 and 2006




5.
       Consolidated Statements of Changes in Stockholders’ Equity for the years
      ended December 31, 2007 and 2006




6.
       Consolidated Statements of Cash Flows for the years ended December 31,
      2007 and 2006




34




7.
       Notes to Consolidated Financial Statements.




(b)
      Selected quarterly financial data for the past two years appears in the
      following table:




Quarterly
                Results of OperationsFirst
            
            Second
            
            Third
            
            Fourth2007
            
            2006
            
            2007
            
            2006
            
            2007
            
            2006
            
            2007
            
            2006Net
                Sales
            
            $
            28,383,392
            
            $
            20,964,452
            
            $
            36,312,338
            
            $
            24,747,912
            
            $
            31,202,731
            
            $
            22,399,673
            
            $
            37,698,542
            
            $
            27,654,402Gross
                Profit
            
            
            9,191,906
            
            
            6,945,197
            
            
            12,093,806
            
            
            9,271,145
            
            
            11,362,751
            
            
            8,133,159
            
            
            12,674,585
            
            
            8,560,313Operating
                Income
            
            
            5,188,611
            
            
            2,619,649
            
            
            5,944,365
            
            
            3,144,980
            
            
            6,630,432
            
            
            3,398,569
            
            
            3,502,393
            
            
            3,601,524Net
                Income
            
            
            1,643,101
            
            
            1,094,398
            
            
            2,455,154
            
            
            751,636
            
            
            2,574,418
            
            
            1,532,123
            
            
            2,187,233
            
            
            1,433,547Earnings
                Per Share
            
            $
            0.07
            
            $
            0.05
            
            $
            0.10
            
            $
            0.03
            
            $
            0.11
            
            $
            0.07
            
            $
            0.09
            
            $
            0.06




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




Not
      applicable.




ITEM
      9A.
      CONTROLS AND PROCEDURES.




Disclosure
      Controls and Procedures





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in periodic reports filed with the
      SEC
      under the Securities Exchange Act of 1934 is recorded, processed, summarized,
      and reported within the time periods specified in the SEC’s rules and forms, and
      that such information is accumulated and communicated to the Company’s
      management, including its Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding required disclosure.




As
      of
      December 31, 2007, an evaluation was performed under the supervision and
      with the participation of the Company’s management, including its Chief
      Executive officer and Chief Financial Officer, of the effectiveness of the
      design and operation of disclosure controls and procedures. Based on that
      evaluation, the Chief Executive Officer and the Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures were
      effective as of December 31, 2007.





Internal
      Control over Financial Reporting





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




35





Changes
      in Internal Control over Financial Reporting




Management
      identified material weaknesses in the Company’s internal control over financial
      reporting for the twelve months ended December 31, 2006 in its 10K for 2006,
      including inadequate reclassification adjustments and inadequate presentation
      of
      other income and warranties.




Commencing
      October 1, 2006, the Company has taken remediation measures to improve its
      internal control and performed testing of those remediation measures to ensure
      improvement of its internal control. For example, the Company has provided
      its
      in-house accountants training of accounting policy to follow the provision
      of
      GAAP in order to ensure the financial reports are prepared under the provision
      of GAAP and has employed experienced accountants.




Management
      believes, based on testing performed, that the material weakness in the
      Company’s internal control over financial reporting had been remediated as of
      December 31, 2007.





ITEM
      9B.
      OTHER INFORMATION.




None.




PART
      III




ITEM
      10.
      DIRECTORS AND EXECUTIVE OFFICERS, CORPORATE GOVERNANCE AND BOARD INDEPENDENCE
      .




The
      following table and text set forth the names and ages of all directors and
      executive officers of the Company as of December 31, 2007. The Board of
      Directors is comprised of only one class. All of the directors will serve until
      the next annual meeting of stockholders and until their successors are elected
      and qualified, or until their earlier death, retirement, resignation or removal.
      Also provided herein are brief descriptions of the business experience of each
      director and executive officer during the past five years and an indication
      of
      directorships held by each director in other companies subject to the reporting
      requirements under the federal securities laws.




**Name**
            
            **Age**
            
            **Position(s)**Hanlin
                Chen
            
            50
            
            Chairman
                of the BoardQizhou
                Wu
            
            43
            
            Chief
                Executive Officer and DirectorJie
                Li
            
            38
            
            Chief
                Financial OfficerTse,
                Yiu Wong Andy
            
            37
            
            Sr.
                VPShengbin
                Yu
            
            54
            
            Sr.
                VPShaobo
                Wang
            
            45
            
            Sr.
                VPDaming
                Hu
            
            49
            
            Chief
                Accounting OfficerRobert
                Tung
            
            51
            
            DirectorDr.
                Haimian Cai
            
            44
            
            DirectorWilliam
                E. Thomson
            
            66
            
            Director




36




(a)  BIOGRAPHIES
      OF DIRECTORS AND EXECUTIVE OFFICERS:




Hanlin
      Chen has served as chairman of the board and CEO since March 2003. Mr. Chen
      is a
      standing board member of the Political Consulting Committee of Jingzhou city
      and
      vice president of Foreign Investors Association of Hubei Province. He was the
      general manager of Jiulong from 1993 to 1997. Since 1997, he has been the
      Chairman of the Board of Henglong.




Qizhou
      Wu
      has served as the Chief Executive Officer since September 2007, Prior to that
      position he served as the Chief Operating Officer since March 2003. He was
      the
      Executive Vice General Manager of Jiulong from 1993 to 1999 and GM of Henglong
      from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with
      a
      Masters degree in Automobile Engineering.




Jie
      Li
      has served as the Chief Financial Officer since September 2007, Prior to that
      position he served as the Corporate Secretary from December 2004. Prior to
      joining the Company in September 2003, Mr. Li was the Assistant President of
      Jingzhou Jiulong Industrial Inc from 1999 to 2003 and the general manger of
      Jingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has
      a
      Bachelor's degree from the University of Science and Technology of China. He
      also completed his graduate studies in economics and business management at
      the
      Hubei Administration Institute.




Tse,
      Yiu
      Wong Andy has served as Sr. VP of the Company since March 2003. He has also
      served as the general manager of the Henglong and Jiulong joint ventures and
      the
      chairman of the board of Shenyang since 2003. He was the vice GM of Jiulong
      from
      1993 to 1997 and the vice GM of Henglong. Mr. Tse has over 10 years of
      experience in automotive parts sales and strategic development. Mr. Tse has
      an
      MBA from the China People University.




Shengbin
      Yu has served as Sr. VP of the Company and had overall charge of the production
      since March 2003. Mr. Yu was the Vice-G.M. of Jiulong from 1993 to 1996 and
      Executive Vice-G.M. of Henglong from 1997 to 2003.




Shaobo
      Wang has served as Sr. VP of the Company and had overall charge of the
      technology since March 2003. He was the Vice-G.M. of Jiulong from 1993 to 2003.
      Mr. Wang graduated from Tsinghua University in Beijing with a bachelor degree
      in
      Automobile Engineering.




Daming
      Hu
      has served as the Chief Accounting Officer since September 2007 and had overall
      charge of the financial report. During March 2003 to August 2007, he served
      as
      Chief Financial Officer of the Company. Mr. Hu was the Finance Manager of
      Jiulong from 1996 to 1999 and Finance Manager of Heng Long from 1999 to
      2002.  Mr.
      Hu graduated from Zhongnan University of Economics and Law as an accountant
      bachelor.




Robert
      Tung has been a Director of the Company since September 2003 and a member of
      the
      Company’s Audit, Compensation and Nominating Committees. Mr. Tung is currently
      the President of Multi-Media Communications, Inc., and Vice President of Herbal
      Blends International, LLC. Mr. Tung holds a M.S. in Chemical Engineering from
      the University of Virginia and B.S. degrees in Computer Science and Chemical
      Engineering from the University of Maryland and National Taiwan University,
      respectively. Since 2003, Mr. Tung has been actively developing the business
      in
      China. Currently, Mr. Tung is the China Operation General Manager of Ulamatic
      Inc., a leading North American automated equipment design house and
      manufacturer. In addition, Mr. Tung holds grand China sales representative
      position of TRI Products, Inc., a well known North American iron ores and scrap
      metals supplier




37




Haimian
      Cai has been a Director since September 2003 and a member of the Company’s
      Audit, Compensation and Nominating Committees. Dr. Cai is a technical specialist
      in the automotive industry. Prior to that, Dr.Cai was a staff engineer in ITT
      Automotive Inc. Dr. Cai has written more than fifteen technical papers and
      co-authored a technical book regarding the Powder Metallurgy industry for
      automotive application. Dr. Cai has more than ten patents including pending
      patents. Dr. Cai holds a B.S. Degree in Automotive Engineering from Tsinghua
      University and a M.S. and Ph. D. in manufacturing engineering from Worcester
      Polytechnic Institute.




William
      E. Thomson, CA, has been a Director of the Company since September 2003 and
      is a
      member of the Company’s Audit, Compensation and Nominating Committees. Mr.
      Thomson has been the president of Thomson Associates, Inc., a leading merchant
      banking and crisis management company, since 1978. Mr. Thomson’s current
      additional directorships include: Nasdaq - Atlast Pain & Injury Solutions,
      Inc. (Healthcare),Maxus Technology Inc. (eWaste Management Solutions);
      TSX-Venture Exchange - Open EC Technologies (Software); TSX-Score Media Inc.
      (Media); Private-ReWorks Inc. (Environmental/Agriculture), Electrical Contacts
      Ltd. (Electrical Contacts), Redpearl funding Corporation (IT Financing), Wright
      Environmental Management Inc. (Waste Management Solutions). YTW Growth Capital
      Management Corporation (CPC facilitation), Han Wind Energy (BVI) (Sustainable
      Energy), Summit Energy Management (Oil and Gas, Paradox Financial Solutions
      Inc.
      (Supply Chain Financing), Debt Freedom Canada Inc. (Financing), Confederazione
      degli Imprenditory Italianinel Mondo Canada - Confederation of Italian
      Entrepreneurs Worldwide Canada, Pure Med Spa (Aesthetics)




COMPENSATION
      FOR DIRECTORS AND OTHER MATTERS




Based
      on
      the number of the board of directors’ service years, workload and performance,
      we decide on their pay. The management believes that the pay for the members
      of
      the board of directors was appropriate as of December 31, 2007.




The
      compensation that directors received for serving on the Board of Directors
      for
      fiscal year 2007 was as follows:




Name
            
            Fees
                earned or paid in cash
            
            Stock
                awards
            
            Option
                awards
            
            Non-equity
                incentive plan compensation
            
            Change
                in pension value and nonqualified deferred compensation
                earnings
            
            All
                other compensation
            
            Total($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)
            
            ($)Haimian
                Cai
            
            $
            34,000
            
            
            
            
            $
            51,225
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            85,225William
                E. Thomson
            
            $
            35,500
            
            
            -
            
            $
            51,225
            
            
            -
            
            
            -
            
            
            -
            
            $
            86,725Robert
                Tung
            
            $
            34,000
            
            
            -
            
            $
            51,225
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            85,225




In
      accordance with SFAS No. 123R, the cost of the above mentioned stock options
      and
      warrants issued to directors was measured on the grant date based on their
      fair
      value. The fair value is determined using the Black-Scholes option pricing
      model.




All
      other
      directors did not receive compensation for their service on the Board of
      Directors.




(c)
      AUDIT
      COMMITTEE AND INDEPENDENT DIRECTORS




The
      Company has a standing Audit Committee of the Board of Directors established
      in
      accordance with Section 3(a)(58)(A) of the Exchange Act, as amended. The Audit
      Committee consists of the following individuals, all of whom the Company
      considers to be independent, as defined under the SEC’s rules and regulations
      and the Nasdaq’s definition of independence: Robert Tung, Haimian Cai, and
      William Thomson. Mr. William Thomson is the Chairman of the Audit Committee.
      The
      Board has determined that Mr. William Thomson is the Audit Committee financial
      expert, as defined in Item 407(d)(5) of Regulation S-K, serving on the Company’s
      audit committee.




38




(d)
      COMPENSATION COMMITTEE




The
      Company has a standing Compensation Committee of the Board of Directors. The
      Compensation Committee is responsible for determining compensation for the
      Company’s executive officers. Three of the Company’s independent directors, as
      defined under the SEC’s rules and regulations and the Nasdaq’s definition of
      independence, Robert Tung, Haimian Cai and William Thomson, serve on the
      Compensation Committee. Dr. Haimian Cai is the Chairman of the Compensation
      Committee.




The
      Company’s Compensation Committee is empowered to review and approve the annual
      compensation and compensation procedures for the executive officers of the
      Company. The primary goals of the Compensation Committee of our board of
      directors with respect to executive compensation are to attract and retain
      the
      most talented and dedicated executives possible and to align executives’
incentives with stockholder value creation. The Compensation Committee evaluates
      individual executive performance with a goal of setting compensation at levels
      the committee believes are comparable with executives in other companies of
      similar size and stage of development operating in similar industry while taking
      into account our relative performance and our own strategic goals.




We
      have
      not retained a compensation consultant to review our policies and procedures
      with respect to executive compensation. We conduct an annual review of the
      aggregate level of our executive compensation, as well as the mix of elements
      used to compensate our executive officers. We compare compensation levels with
      amounts currently being paid to executives in our industry and most importantly
      with local practices in China. We are satisfied that our compensation levels
      are
      competitive with local conditions.




(e)
      NOMINATING COMMITTEE




The
      Company has a standing Nominating Committee of the Board of Directors. Director
      candidates are nominated by the Nominating Committee. The Nominating Committee
      will consider candidates based upon their business and financial experience,
      personal characteristics, and expertise that are complementary to the background
      and experience of other Board members, willingness to devote the required amount
      of time to carry out the duties and responsibilities of Board membership,
      willingness to objectively appraise management performance, and any such other
      qualifications the Nominating Committee deems necessary to ascertain the
      candidates’ ability to serve on the Board. The Nominating Committee will not
      consider nominee recommendations from security holders, other than the
      recommendations received from a security holder or group of security holders
      that beneficially owned more than five (5) percent of the Company’s outstanding
      common stock for at least one year as of the date the recommendation is made.
      Three of the Company’s independent directors, as defined under the SEC’s rules
      and regulations and the Nasdaq’s definition of independence, Robert Tung,
      William Thomson and Haimian Cai, serve on the Nominating Committee. Mr. Robert
      Tung is the Chairman of the Nominating Committee.




(f)
      STOCKHOLDER COMMUNICATIONS




Stockholders
      interested in communicating directly with the Board of Directors, or individual
      directors, may email the Company’s independent director William Thomson at
      Bill.Thomson@chl.com.cn. Mr. Thomson will review all such correspondence and
      will regularly forward to the Board copies of all such correspondence that
      deals
      with the functions of the Board or committees thereof or that he otherwise
      determines requires their attention. Directors may at any time review all of
      the
      correspondence received that is addressed to members of the Board of Directors
      and request copies of such correspondence. Concerns relating to accounting,
      internal controls or auditing matters will immediately be brought to the
      attention of the Audit Committee and handled in accordance with procedures
      established by the Audit Committee with respect to such matters.




(g)
      FAMILY RELATIONSHIPS




Mr.
      Hanlin Chen and Mr. Tse, Yiu Wong Andy are brothers-in-law.




39




(h)
      CODE
      OF ETHICS AND CONDUCT




The
      Board
      of Directors has adopted a Code of Ethics and Conduct which is applicable to
      all
      officers directors and employees. The Code of Ethics and Conduct is filed as
      an
      exhibit to this Form 10-K, which incorporates it by reference from the Form
      10-KSB for year ended December 31, 2003




(i)
      SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      executive officers and directors and persons who own more than 10% of a
      registered class of the Company’s equity securities to file with the Securities
      and Exchange Commission initial statements of beneficial ownership, reports
      of
      changes in ownership and annual reports concerning their ownership of common
      stock and other of the Company’s equity securities, on Forms 3, 4 and 5
      respectively. Executive officers, directors and greater than 10% stockholders
      are required by Commission regulations to furnish the Company with copies of
      all
      Section 16(a) reports they file. To the best of the Company’s knowledge, based
      solely upon a review of the Form 3, 4 and 5 filed, no officer, director or
      10%
      beneficial shareholder failed to file on a timely basis any reports required
      by
      Section 16(a) of the Securities Exchange Act of 1934, as amended.




ITEM
      11.
      EXECUTIVE COMPENSATION




Summary
      Compensation Table:


Name
                  and principal position
              
              Year
              
              Salary
              
              Bonus
              
              Stock
                  awards
              
              Option
                  awards
              
              Non-equity
                  incentive plan compensation
              
              Change
                  in pension value and non-qualified deferred compensation
                  earnings
              
              All
                  other compensation
              
              Total($)
              
              ($)
              
              ($)
              
              ($)
              
              ($)
              
              ($)
              
              ($)
              
              ($)Hanlin
                  Chen
              
              
              2007
              
              $
              116,667
              
              $
              —
              
              
              
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              116,667(Chairman)
              
              
              2006
              
              $
              100,000
              
              $
              —
              
              
              
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              100,000Qizhou
                  Wu
              
              
              2007
              
              $
              86,667
              
              $
              —
              
              
              
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              86,667(CEO)
              
              
              2006
              
              $
              80,000
              
              $
              —
              
              
              
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              80,000Jie
                  Li
              
              
              2007
              
              $
              35,000
              
              $
              —
              
              
              
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              35,000(CFO)
              
              
              2006
              
              $
              15,000
              
              $
              —
              
              
              
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              15,000




Outstanding
      Equity Awards at Fiscal Year-End:




Not
      Applicable.




40




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




As
      used
      in this section, the term beneficial ownership with respect to a security is
      defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
      as
      consisting of sole or shared voting power, including the power to vote or direct
      the vote, and/or sole or shared investment power, including the power to dispose
      of or direct the disposition of, with respect to the security through any
      contract, arrangement, understanding, relationship or otherwise, subject to
      community property laws where applicable. The percentage ownership is based
      on
      23,959, 702 shares of common stock outstanding at February 27, 2008.




Name/Title
            
            Total
                Number of Shares
            
            Percentage
                OwnershipHanlin
                Chen, Chairman (1)
            
            
            15,291,972
            
            
            63.82
            %Qizhou
                Wu, CEO and President, Director, CEO
            
            
            2,115,996
            
            
            8.83
            %Jie
                Li, CFO
            
            
            2,247
            
            
            0.01
            %Li
                Ping Xie(2)
            
            
            15,291,972
            
            
            63.82
            %Tse,
                Yiu Wong Andy, Sr. VP, Director
            
            
            899,426
            
            
            3.75
            %Shaobo
                Wang, Sr. VP
            
            
            416,104
            
            
            1.74
            %Shengbin
                Yu, Sr. VP
            
            
            467,429
            
            
            1.95
            %Daming
                HuCAO
            
            
            —
            
            
            —Robert
                Tung, Director
            
            
            7,500
            
            
            0.03
            %Dr.
                Haimian Cai, Director
            
            
            7,500
            
            
            0.03
            %William
                E. Thomson, Director
            
            
            —
            
            
            —All
                Directors and Executive Officers (10 persons)
            
            
            19,208,174
            
            
            80.17
            %




(1) Includes
      2,011,425 shares of common stock beneficially owned by Mr. Chen’s wife, Ms. Xie.




(2) Includes
      13,280,547 shares of common stock beneficially owned by Ms. Xie’s husband, Mr.
      Chen.




In
      July
      2004, the Company adopted a stock option plan subject to shareholders approval,
      which was approved at the Company’s annual general meeting on June 28, 2005. The
      stock option plan provides for the issuance to the Company’s officers,
      directors, management and employees of options to purchase shares of the
      Company’s common stock.




ITEM
      13.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.




For
      the
      information required by Item 13, please refer to Consolidated Financial
      Statements notes 3 and 23 “Certain Relationships And Related Transactions” and
“Related Party Transactions” in the Annual Report on Form 10-K for the year
      ended December 31, 2007.




41




ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES.




The
      following table sets forth the aggregate fees for professional audit services
      rendered by Schwartz Levitsky Feldman LLP for the audit of the Company’s annual
      financial statements for the fiscal years 2007 and 2006 and 2005, and fees
      billed for other services provided by Schwartz Levitsky Feldman LLP for fiscal
      years 2007 and 2006. The Audit Committee has approved all of the following
      fees.




Fiscal
                Year Ended2007
            
            2006Audit
                Fees
            
            $
            280,000
            
            $
            244,500Audit-Related
                Fees(1)
            
            
            -
            
            
            19,715Tax
                Fees (2)
            
            
            8,000
            
            
            7,000Total
                Fees Paid
            
            $
            288,000
            
            $
            271,215




(1)
      Includes accounting and reporting consultations related to financing
      and internal control procedures.




(2)
      Includes fees for service related to tax compliance services, preparation and
      filing of tax returns and tax consulting services.




Audit
      Committee’s Pre-Approval Policy




During
      fiscal years ended December 31, 2007 and 2006 , the Audit Committee of the
      Board
      of Directors adopted policies and procedures for the pre-approval of all audit
      and non-audit services to be provided by the Company’s independent auditor and
      for the prohibition of certain services from being provided by the independent
      auditor. The Company may not engage the Company’s independent auditor to render
      any audit or non-audit service unless the service is approved in advance by
      the
      Audit Committee or the engagement to render the service is entered into pursuant
      to the Audit Committee’s pre-approval policies and procedures. On an annual
      basis, the Audit Committee may pre-approve services that are expected to be
      provided to the Company by the independent auditor during the fiscal year.
      At
      the time such pre-approval is granted, the Audit Committee specifies the
      pre-approved services and establishes a monetary limit with respect to each
      particular pre-approved service, which limit may not be exceeded without
      obtaining further pre-approval under the policy. For any pre-approval, the
      Audit
      Committee considers whether such services are consistent with the rules of
      the
      Securities and Exchange Commission on auditor independence.




PART
      IV




ITEM
      15.
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.




(a) **List
      of Financial Statements/Schedules**




1.  Report
      of Independent Auditors




2.
       Consolidated Balance Sheets as of December 31, 2007 and 2006




3.
       Consolidated Statements of Earnings and Comprehensive Income for
      the years ended December 31, 2007 and 2006




4.
       Consolidated Statements of Comprehensive Income (Loss) for the years ended
      December 31, 2007 and 2006




5.
       Consolidated Statements of Changes in Stockholders’ Equity for the years
      ended December 31, 2007 and 2006




6.
       Consolidated Statements of Cash Flows for the years ended December 31,
      2007 and 2006




42




7.
       Notes to Consolidated Financial Statements.




(b)
      EXHIBITS




The
      following is a list of exhibits filed as part of this Annual Report on Form
      10-K. Where so indicated by footnote, exhibits that were previously filed are
      incorporated by reference.




**Exhibit**
              **Number**
            
            **Description**3.1(i)
            
            Certificate
                of Incorporation (incorporated by reference from the filing on Form
                10KSB
                File No. 000-33123.)3.1(ii)
            
            Bylaws
                (incorporated by reference from the Form 10KSB for the year ended
                December
                31, 2002.)10.1
            
            Registration
                Rights Agreement dated March 20, 2006 between us and Cornell Capital
                Partners, LP (Incorporated by reference to the exhibit of the same
                number
                to our Form S-3 Registration Statement (File No. 333 - 133331) filed
                on
                April 17, 2006)10.2
            
            Investor
                Registration Rights Agreement dated March 20, 2006 between us and
                Cornell
                Capital Partners, LP. (Incorporated by reference to the exhibit of
                the
                same number to our Form S-3 Registration Statement (File No. 333
                - 133331)
                filed on April 17, 2006)10.3
            
            Warrant
                to purchase 86,806 shares of common stock at $14.40 per share, issued
                to
                Cornell Capital Partners, LP. (Incorporated by reference to the exhibit
                of
                the same number to our Form S-3 Registration Statement (File No.
                333 -
                133331) filed on April 17, 2006 )10.4
            
            Warrant
                to purchase 69,444 shares of common stock at $18.00 per share, issued
                to
                Cornell Capital Partners, LP. (Incorporated by reference to the exhibit
                of
                the same number to our Form S-3 Registration Statement (File No.
                333 -
                133331) filed on April 17, 2006 )10.5
            
            Joint-venture
                Agreement, dated March 31, 2006, as amended on May 2, 2006, between
                Hongkong Great Genesis Group Co., Ltd. and Wuhu Chery Technology
                Co., Ltd.
                (Incorporated by reference to the exhibit 10.8 to the Company’s Form 10Q
                Quarterly Report on May 10, 2006 )10.6
            
            Securities
                Purchase Agreement dated February 1, 2008 among us, Lehman Brothers
                Commercial Corporation Asia Limited, and YA Global Investments,
                L.P.*10.7
            
            Escrow
                Agreement dated February 15, 2008 among us, U.S. Bank National
                Association, Lehman Brothers Commercial Corporation Asia Limited,
                and YA
                Global Investments, L.P.*10.8
            
            Registration
                Rights Agreement dated February 15, 2008 among us, Lehman Brothers
                Commercial Corporation Asia Limited, and YA Global Investments,
                L.P.*10.9
            
            Senior
                Convertible Note (“Closing Note”) dated February 15, 2008 in the
                original principal amount of $8,571,429 issued by us in favor of
                TFINN
                & CO. as nominee for Lehman Brothers Commercial Corporation Asia
                Limited*




43




10.10
            
            Senior
                Convertible Note (“Henglong Note”) dated February 15, 2008 in the
                original principal amount of $6,428,571 issued by us in favor of
                TFINN
                & CO. as nominee for Lehman Brothers Commercial Corporation Asia
                Limited*10.11
            
            Senior
                Convertible Note (“Escrow Note”) dated February 15, 2008 in the
                original principal amount of $15,000,000 issued by us in favor of
                TFINN
                & CO. as nominee for Lehman Brothers Commercial Corporation Asia
                Limited*10.12
            
            Closing
                Warrant to purchase 564,799 shares of common stock at $8.8527 per
                share,
                dated February 15, 2008, issued by us in favor of TFINN & CO. as
                nominee for Lehman Brothers Commercial Corporation Asia
                Limited*10.13
            
            Escrow
                Warrant to purchase 564,799 shares of common stock at $8.8527 per
                share,
                dated February 15, 2008, issued by us in favor of TFINN & CO. as
                nominee for Lehman Brothers Commercial Corporation Asia
                Limited*10.14
            
            Senior
                Convertible Note (“Closing Note”) dated February 15, 2008 in the
                original principal amount of $1,428,571 issued by us in favor of
                YA Global
                Investments, L.P.*10.15
            
            Senior
                Convertible Note (“Henglong Note”) dated February 15, 2008 in the
                original principal amount of $1,071,429 issued by us in favor of
                YA Global
                Investments, L.P.*10.16
            
            Senior
                Convertible Note (“Escrow Note”) dated February 15, 2008 in the
                original principal amount of $2,500,000 issued by us in favor of
                YA Global
                Investments, L.P.*10.17
            
            Closing
                Warrant to purchase 94,133 shares of common stock at $8.8527 per
                share,
                dated February 15, 2008, issued by us in favor of YA Global
                Investments, L.P.*10.18
            
            Escrow
                Warrant to purchase 94,133 shares of common stock at $8.8527 per
                share,
                dated February 15, 2008, issued by us in favor of YA Global
                Investments, L.P.*14
            
            Code
                of Ethics (incorporated by reference from the Form 10-KSB for the
                year
                ended December 31, 2003)21
            
            Schedule
                of Subsidiaries*23
            
            Consent
                of Schwartz Levitsky Feldman LLP., independent
                auditors*31.1
            
            Rule
                13a-14(a) Certification*31.2
            
            Rule
                13a-14(a) Certification*32.1
            
            Section
                1350 Certification*32.2
            
            Section
                1350 Certification*





*
      Filed
      herewith




44




SIGNATURES




In
      accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


CHINA
                AUTOMOTIVE SYSTEMS, INC.Dated:
                March 25, 2008
            
            
            /s/
                Qizhou WuName:
                Qizhou
                Wu
              Title:
                  CEO




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




Dated:
                March 25, 2008
            
            
            /s/
                Hanlin ChenName:Hanlin
                Chen
              Title:Chairman


Dated:
                  March 25, 2008
              
              
              /s/
                    Qizhou WuName:Qizhou
                    Wu
                    Title:CEO
                      and President, Director
 Dated:
                    March 25, 2008
                
                
                /s/
                      Jie LiName:Jie
                      Li
                      Title:CFO
 Dated:
                      March 25, 2008
                  
                  
                  /s/
                        Robert TungName:Robert
                        Tung
                        Title:Director
 Dated:
                        March 25, 2008
                    
                    
                    /s/
                          Dr. Haimian CaiName:
                        Dr. Haimian Cai
                      Title:Director
 Dated:
                          March 25, 2008
                      
                      
                      /s/
                            William E. ThomsonName:William
                            E. Thomson
                            Title:Director





45






REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Stockholders of China Automotive Systems,
      Inc.




We
      have
      audited the accompanying consolidated balance sheets of China Automotive
      Systems, Inc. as at December 31, 2007 and 2006 and the related consolidated
      statements of earnings and comprehensive income, cash flows and changes in
      stockholders’ equity for the years ended December 31, 2007 and 2006. These
      consolidated financial statements are the responsibility of the management
      of
      China Automotive Systems, Inc. Our responsibility is to express an opinion
      on
      these consolidated 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
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated 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, these consolidated financial statements referred to above present
      fairly, in all material respects, the financial position of China Automotive
      Systems, Inc. as of December 31, 2007 and 2006 and the results of its earnings
      and comprehensive income and its cash flows for the years ended December 31,
      2007 and 2006 in conformity with generally accepted accounting principles in
      the
      United States of America.




Toronto,
      Ontario, Canada




March
      24,
      2008




/s/
                Schwartz Levitsky Feldman LLPSchwartz
                Levitsky Feldman LLPChartered AccountantsLicensed Public
              Accountants




46




China
      Automotive Systems, Inc. and Subsidiaries


Consolidated
      Balance Sheets


December
      31, 2007 and 2006




December
                31,2007
            
            2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            19,487,159
            
            $
            27,418,500Pledged
                cash deposits (note 4)
            
            
            4,645,644
            
            
            3,484,335Accounts
                and notes receivable, net, including $1,869,480 and $1,770,933 from
                related parties at December 31, 2007 and 2006, net of an allowance
                for
                doubtful accounts of $3,827,838 and $4,086,218 at December 31, 2007
                and
                2006 (note 5)
            
            
            82,022,643
            
            
            57,234,383Advance
                payments and others, including $55,323 and $487,333 to related
                parties at December 31, 2007 and 2006
            
            
            922,578
            
            
            837,014Inventories
                (note 7)
            
            
            20,193,286
            
            
            15,464,571Total
                current assets
            
            $
            127,271,310
            
            $
            104,438,803Long-term
                Assets:Property,
                plant and equipment, net (note 8)
            
            $
            46,585,041
            
            $
            40,848,046Intangible
                assets, net (note 9)
            
            
            589,713
            
            
            3,140,548Other
                receivables, net, including $638,826 and $738,510 from related parties
                at
                December 31, 2007 and 2006, net of an allowance for doubtful accounts
                of
                $652,484 and $898,203 at December 31, 2007 and 2006 (note
                6)
            
            
            888,697
            
            
            966,715Advance
                payment for property, plant and equipment, including $1,560,378 and
                $488,873 to related parties at December 31, 2007 and 2006
            
            
            6,260,443
            
            
            2,640,708Long-term
                investments
            
            
            73,973
            
            
            73,718Deferred
                income taxes assets
            
            
            1,315,510
            
            
            —Total
                assets
            
            $
            182,984,687
            
            $
            152,108,538LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Bank
                loans (note 10)
            
            $
            13,972,603
            
            $
            15,384,615Accounts
                and notes payable, including $1,134,817 and $640,405 to related parties
                at
                December 31, 2007 and 2006 (note 11)
            
            
            47,530,383
            
            
            37,647,913Customer
                deposits
            
            
            135,627
            
            
            146,171Accrued
                payroll and related costs
            
            
            2,664,464
            
            
            1,506,251Accrued
                expenses and other payables (note 12)
            
            
            14,938,055
            
            
            11,078,186Accrued
                pension costs (note 13)
            
            
            3,622,729
            
            
            3,266,867Taxes
                payable (note 15)
            
            
            9,080,493
            
            
            5,914,362Amounts
                due to shareholders/directors (note 14)
            
            
            304,601
            
            
            358,065Total
                current liabilities
            
            $
            92,248,955
            
            $
            75,302,430Long-term
                liabilities:Advances
                payable (note 16)
            
            
            334,600
            
            
            313,151Total
                liabilities
            
            $
            92,583,555
            
            $
            75,615,581Minority
                interests (note 17)
            
            $
            23,166,270
            
            $
            23,112,667Related
                Party Transactions (note 24)Commitments
                and contingencies (note 25)Stockholders'
                equity:Preferred
                stock, $0.0001 par value - Authorized - 20,000,000shares
                Issued and outstanding - None
            
            $
            —
            
            $
            —Common
                stock, $0.0001 par value - Authorized - 80,000,000shares
                Issued and Outstanding - 23,959,702 shares and 23,851,581 shares
                at
                December 31, 2007 and 2006, respectively (note 18)
            
            
            2,396
            
            
            2,385Additional
                paid-in capital (note 19)
            
            
            30,125,951
            
            
            28,651,959Retained
                earnings-Appropriated
                (note 20)
            
            
            7,525,777
            
            
            6,209,909Unappropriated
            
            
            23,591,275
            
            
            16,047,237Accumulated
                other comprehensive income
            
            
            5,989,463
            
            
            2,468,800Total
                stockholders' equity
            
            $
            67,234,862
            
            $
            53,380,290Total
                liabilities and stockholders' equity
            
            $
            182,984,687
            
            $
            152,108,538




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




47




China
      Automotive Systems, Inc. and Subsidiaries


Consolidated
      Statements of Earnings


Years
      Ended December 31, 2007
      and
      2006


Years
                  Ended December 312007
              
              2006Net
                  product sales, including $5,472,509 and $3,278,444 to related parties
                  atYears
                  EndedDecember
                  31, 2007 and 2006
              
              $
              133,597,003
              
              $
              95,766,439Cost
                  of product sold, including $5,472,595 and $2,850,283 purchased
                  from
                  related parties atYears
                  EndedDecember 31, 2007 and 2006
              
              
              88,273,955
              
              
              62,856,625Gross
                  profit
              
              $
              45,323,048
              
              $
              32,909,814Add:
                  Gain on other sales
              
              
              554,150
              
              
              279,216Less:
                  Operating expensesSelling
                  expenses
              
              
              9,674,476
              
              
              7,772,068General
                  and administrative expenses
              
              
              9,026,717
              
              
              7,810,187R&D
                  expenses
              
              
              1,666,274
              
              
              1,066,050Depreciation
                  and amortization
              
              
              4,243,930
              
              
              3,776,003TotalOperating
                  expenses
              
              
              24,611,397
              
              
              20,424,308Income
                  from operations
              
              $
              21,265,801
              
              $
              12,764,722Add:
                  Other income, net (note 21)
              
              
              38,462
              
              
              94,257Financial
                  (expenses)
              
              
              (566,986
              )
              
              (832,844
              )Income
                  before income taxes
              
              
              20,737,277
              
              
              12,026,135Less:
                  Income taxes (note 22)
              
              
              2,231,032
              
              
              1,669,081Income
                  before minority interests
              
              
              18,506,245
              
              
              10,357,054Less:Minority
                  interests
              
              
              9,646,339
              
              
              5,545,350Net
                  income
              
              $
              8,859,906
              
              $
              4,811,704Net
                  income per common share-Basic
                  and diluted
              
              $
              0.37
              
              $
              0.21Weighted
                  average number of common shares outstanding -Basic
              
              
              23,954,370
              
              
              23,198,113Diluted
              
              
              23,958,705
              
              
              23,210,675
  The
        accompanying notes are an integral part of these consolidated financial
        statements.




48




China
      Automotive Systems, Inc. and Subsidiaries


Consolidated
      Statements of Comprehensive Income


Years
      Ended December 31, 2007
      and
      2006





Years
                Ended December 312007
            
            2006Net
                income
            
            $
            8,859,906
            
            $
            4,811,704Other
                comprehensive income:Foreign
                currency translation gain
            
            
            3,520,663
            
            
            1,136,116Comprehensive
                income
            
            $
            12,380,569
            
            $
            5,947,820




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




49




China
      Automotive Systems, Inc. and Subsidiaries


Consolidated
      Statements of Stockholders’ Equity


Years
      Ended December 31, 2007 and 2006




AccumulatedOtherCommonStock
              
              Additional
              
              
              
              ComprehensivePar
              
              Paid-in
              
              RetainedEarnings
              
              IncomeShares
              
              Value
              
              Capital
              
              Appropriated
              
              Unappropriated
              
              (Loss)
              
              TotalBalance
                  at January 1, 2006
              
              
              22,574,543
              
              $
              2,257
              
              $
              18,146,722
              
              $
              4,923,262
              
              $
              12,522,180
              
              $
              1,332,684
              
              $
              36,927,105Foreign
                  currency translation gain
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,136,116
              
              
              1,136,116Sale
                  of common stock
              
              
              1,216,675
              
              
              122
              
              
              10,899,872
              
              
              —
              
              
              —
              
              
              —
              
              
              10,899,994Exercise
                  of stock options by independent directors
              
              
              22,500
              
              
              2
              
              
              101,248
              
              
              —
              
              
              —
              
              
              —
              
              
              101,250Cash
                  paid for retaining fee, commissions and placement agent fee in
                  connection
                  with offering
              
              
              —
              
              
              —
              
              
              (627,504
              )
              
              —
              
              
              —
              
              
              —
              
              
              (627,504
              )Issuance
                  of common stock related to financing services
              
              
              37,863
              
              
              4
              
              
              449,996
              
              
              —
              
              
              —
              
              
              —
              
              
              450,000Payment
                  of financing services by issuance of common stock in accordance
                  with
                  Cornell Partners, LP
              
              
              —
              
              
              —
              
              
              (450,000
              )
              
              —
              
              
              —
              
              
              —
              
              
              (450,000
              )Issuance
                  of a warrant to purchase common stock
              
              
              —
              
              
              —
              
              
              832,639
              
              
              —
              
              
              —
              
              
              —
              
              
              832,639Payment
                  of commission and placement agent fee by issuance of common stock
                  warrants
                  in accordance with Cornell Partners, LP
              
              
              —
              
              
              —
              
              
              (832,639
              )
              
              —
              
              
              —
              
              
              —
              
              
              (832,639
              )Issuance
                  of stock options to independent directors
              
              
              —
              
              
              —
              
              
              131,625
              
              
              —
              
              
              —
              
              
              —
              
              
              131,625Net
                  income for the year ended December 31, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              4,811,704
              
              
              —
              
              
              4,811,704Appropriation
                  of retained earnings
              
              
              —
              
              
              —
              
              
              —
              
              
              1,286,647
              
              
              (1,286,647
              )
              
              —
              
              
              —Balance
                  at December 31, 2006
              
              
              23,851,581
              
              $
              2,385
              
              $
              28,651,959
              
              $
              6,209,909
              
              $
              16,047,237
              
              $
              2,468,800
              
              $
              53,380,290Foreign
                  currency translation gain
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3,520,663
              
              
              3,520,663Sale
                  of common stock
              
              
              108,121
              
              
              11
              
              
              1,199,989
              
              
              —
              
              
              —
              
              
              —
              
              
              1,200,000Cash
                  paid for retaining fee, commissions and placement agent fee in
                  connection
                  with offering
              
              
              —
              
              
              —
              
              
              (54,500
              )
              
              —
              
              
              —
              
              
              —
              
              
              (54,500
              )Increase
                  in connection with minority shareholders’ abandonment of all its
                  right and interest in Joint-venture
              
              
              —
              
              
              —
              
              
              174,828
              
              
              —
              
              
              —
              
              
              —
              
              
              174,828Issuance
                  of stock options to independent directors
              
              
              —
              
              
              —
              
              
              153,675
              
              
              —
              
              
              —
              
              
              —
              
              
              153,675Net
                  income for the year ended December 31, 2007
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              8,859,906
              
              
              —
              
              
              8,859,906Appropriation
                  of retained earnings
              
              
              —
              
              
              —
              
              
              —
              
              
              1,315,868
              
              
              (1,315,868
              )
              
              —
              
              
              —Balance
                  at December 31, 2007
              
              
              23,959,702
              
              $
              2,396
              
              $
              30,125,951
              
              $
              7,525,777
              
              $
              23,591,275
              
              $
              5,989,463
              
              $
              67,234,862




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




50




China
      Automotive Systems, Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows


Years
      Ended December 31, 2007
      and
      2006





Years
                Ended December 312007
            
            2006Cash
                flows from operating activities:Net
                income
            
            $
            8,859,906
            
            $
            4,811,704Adjustments
                to reconcile net income from continuing operations to net cash provided
                by
                operating activities:Minority
                interests
            
            
            9,646,339
            
            
            5,545,350Stock-based
                compensation
            
            
            153,675
            
            
            131,625Depreciation
                and amortization
            
            
            7,349,546
            
            
            6,476,214Deferred
                income taxes
            
            
            (1,315,510
            )
            
            —Allowance
                for doubtful accounts (Recovered)
            
            
            (881,423
            )
            
            995,440Other
                operating adjustments
            
            
            92,401
            
            
            3,121Changes
                in operating assets and liabilities:(Increase)
                decrease in:Pledged
                cash deposits
            
            
            (981,519
            )
            
            (2,194,003
            )Accounts
                and notes receivable
            
            
            (19,748,023
            )
            
            (14,785,434
            )Advance
                payments and other
            
            
            41,648
            
            
            219,491Inventories
            
            
            (3,454,479
            )
            
            (2,534,133
            )Increase
                (decrease) in:Accounts
                and notes payable
            
            
            7,120,821
            
            
            4,932,755Customer
                deposits
            
            
            (20,924
            )
            
            (17,355
            )Accrued
                payroll and related costs
            
            
            1,032,723
            
            
            32,735Accrued
                expenses and other payables
            
            
            627,192
            
            
            2,313,144Accrued
                pension costs
            
            
            128,136
            
            
            498,345Taxes
                payable
            
            
            2,673,964
            
            
            1,540,213Advances
                payable
            
            
            —
            
            
            (62
            )Net
                cash provided by operating activities
            
            $
            11,324,473
            
            $
            7,969,150Cash
                flows from investing activities:(Increase)
                decrease in other receivables
            
            $
            481,042
            
            $
            5,873,453Cash
                received from equipment sales
            
            
            629,918
            
            
            461,280Cash
                paid to acquire property, plant and equipment
            
            
            (13,982,490
            )
            
            (7,378,910
            )Cash
                paid to acquire intangible assets
            
            
            (287,747
            )
            
            (174,926
            )Net
                cash (used in) investing activities
            
            $
            (13,159,277
            )
            $
            (1,219,103
            )Cash
                flows from financing activities:Repayment
                of bank loans
            
            $
            (2,182,860
            )
            $
            -Dividends
                paid to the minority interest holders of Joint-venture
                companies
            
            
            (6,307,189
            )
            
            (3,894,634
            )Increase
                (decrease) in amounts due to shareholders/directors
            
            
            (84,476
            )
            
            (429,061
            )Proceeds
                from issuance of common stock
            
            
            1,145,500
            
            
            10,373,740Capital
                Contribution from the minority interest holders of Joint-venture
                companies
            
            
            —
            
            
            1,420,926Net
                cash provided by (used in) financing activities
            
            $
            (7,429,025
            )
            $
            7,470,971Cash
                and cash equivalents effected by foreign currency
            
            $
            1,332,488
            
            $
            822,538Net
                change in cash and cash equivalentsNet
                increase (decrease) in cash and cash equivalents
            
            $
            (7,931,341
            )
            $
            15,043,556Cash
                and cash equivalents, at the beginning of year
            
            
            27,418,500
            
            
            12,374,944Cash
                and cash equivalents, at the end of year
            
            $
            19,487,159
            
            $
            27,418,500




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




51




China
      Automotive Systems, Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows (continued)


Years
      Ended December 31, 2007 and 2006




SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:




Years
                Ended December 312007
            
            2006Cash
                paid for interest
            
            $
            895,491
            
            $
            834,406Cash
                paid for income taxes
            
            $
            1,970,544
            
            $
            1,738,773




SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:




Years
                Ended December 312007
            
            2006Issuance
                of common shares for financing sevices
            
            $
            —
            
            $
            4Financing
                services fee related to issuance of common shares
            
            
            —
            
            
            (4
            )Increase
                in capital by minority shareholders of Joint-venture companies on
                a
                non-cash basis
            
            
            —
            
            
            921,785Dividends
                payable to minority shareholders of Joint-venture companies being
                converted into capital
            
            
            —
            
            
            (921,785
            )Decrease
                in minority interests as a result of minority shareholder’s withdrawal
                from Joint-venture.
            
            
            (2,830,545
            )
            
            —Withdrawal
                of invested intangible assets by minority shareholder of
                Joint-venture
            
            
            2,600,204
            
            
            —Increase
                in equity in connection with minority shareholder’s withdrawal from
                Joint-venture
            
            $
            230,341
            
            $
            —




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




52




China
      Automotive Systems, Inc. and Subsidiaries


Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2007 and 2006




1.
      Organization and Business




China
      Automotive Systems, Inc., “ China Automotive”, was incorporated in the State of
      Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China
      Automotive, including, when the context so requires, its subsidiaries and the
      subsidiaries’ interests in the Sino-foreign joint ventures described below, is
      referred to herein as the “Company”. The Company is primarily engaged in the
      manufacture and sale of automotive systems and components, as described
      below.




Great
      Genesis Holding Limited, a company incorporated on January 3, 2003 under The
      Companies Ordinance in Hong Kong as a limited liability company, “Great
      Genesis”, is a wholly-owned subsidiary of the Company.




Henglong
      USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy,
      Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in
      marketing of automotive parts in North America, and provides after sales service
      and research and development support accordingly.




The
      Company owns the following aggregate net interests in eight Sino-foreign joint
      ventures organized in the PRC as of December 31, 2007 and 2006.




Percentage
                InterestName
                of Entity
            
            2007
            
            2006Jingzhou
                Henglong Automotive Parts Co., Ltd.("Henglong")
            
            
            44.50
            %
            
            44.50
            %Shashi
                Jiulong Power Steering Gears Co., Ltd.("Jiulong")
            
            
            81.00
            %
            
            81.00
            %Shenyang
                Jinbei Henglong Automotive Steering System Co., Ltd.("Shenyang")
            
            
            70.00
            %
            
            70.00
            %Zhejiang
                Henglong & Vie Pump-Manu Co., Ltd.("Zhejiang")
            
            
            51.00
            %
            
            51.00
            %Universal
                Sensor Application Inc.(“USAI”)
            
            
            75.90
            %
            
            60.00
            %Wuhan
                Jielong Electric Power Steering Co., Ltd. (“Jielong”)
            
            
            85.00
            %
            
            85.00
            %Wuhu
                HengLong Auto Steering System Co., Ltd. (“Wuhu”)
            
            
            77.33
            %
            
            77.33
            %Jingzhou
                Hengsheng Automotive System Co., Ltd, “Hengsheng”
            
            
            100.00
            %
            
            —




53




Jiulong
      was established in 1993 and mainly engaged in the production of integral power
      steering gears for heavy-duty vehicles.




Henglong
      was established in 1997 and mainly engaged in the production of rack and pinion
      power steering gears for cars and light duty vehicles.




Shenyang
      was established in 2002 and focuses on power steering parts for light duty
      vehicles.




Zhejiang
      was established in 2002 to focus on power steering pumps.




On
      April
      12, 2005, Great Genesis entered into a Joint-venture agreement with Shanghai
      Hongxi Investment Inc., “Hongxi”, a company controlled by Mr. Hanlin Chen, the
      Company’s Chairman, and Sensor System Solution Inc., “Sensor”, to establish a
      joint venture, Universal Sensor Application Inc., “USAI”, in the Wuhan East Lake
      development zone to engage in production and sales of sensor modulars. The
      registered capital of the Joint-venture is $10 million. Great Genesis and Hongxi
      will invest $6 million and $1 million, respectively, including cash and land
      and
      building, which will account for 60% and 10% of the total registered capital,
      respectively. Sensor will invest $3 million in technology, accounting for 30%
      of
      the total registered capital. As of March 20, 2007, Sensor has withdrawn from
      USAI. The registered capital of the Joint-venture has changed to $1,800,000,
      with 75.9% owned by the Company, 24.1% owned by Hongxi.




On
      April
      14, 2006, Great Genesis entered into a Joint-venture agreement with Hong Kong
      Tongda, “Tongda”, to establish a joint venture, Wuhan Jielong Electric Power
      Steering Co., Ltd., “Jielong”, in the Wuhan East Lake development zone. Jielong
      is mainly engaged in the production and sales of electric power steering, “EPS”.
      The registered capital of the Joint-venture is $6 million, the equivalent of
      RMB48,000,000. Great Genesis and Tongda will invest $5,100,000 and $900,000,
      respectively, amounting to 85% and 15% of the total registered capital,
      respectively. As of December 31, 2007, Great Genesis and Tongda have contributed
      $1,966,146 and $135,034 in cash, the equivalent of RMB15,225,270 and
      RMB1,081,620, respectively.




On
      March
      31, 2006, as amended on May 2, 2006, Great Genesis, entered into a Joint-venture
      agreement with Wuhu Chery Technology Co., Ltd., “Chery Technology”, to establish
      a Joint-venture, Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu”, in
      the Wuhu Technological Development Zone. Wuhu is mainly engaged in the
      production and sales of automobile steering system. The registered capital
      of
      the Joint-venture is $3,750,387, the equivalent of RMB30,000,000. Great Genesis
      and Chery Technology invested $2,900,300 and $848,938, respectively, which
      accounts for 77.33% and 22.67% of the total registered capital,
      respectively.




On
      March
      7, 2007, Great Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng
      Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of
      automotive steering systems. The registered capital of Hengsheng is $10,000,000.
      Presently, Hengsheng is in the start up stage, and is primarily engaged in
      preparation of technology and production.




54




2.
      Basis
      of Presentation and
      Significant Accounting Policies




Basis
      of
      Presentation - For the year ended December 31, 2007 and 2006 , the accompanying
      consolidated financial statements include the accounts of the Company and its
      two subsidiaries and eight joint ventures, which are mentioned in Note 1.
      Significant inter-company balances and transactions have been eliminated upon
      consolidation. The consolidated financial statements have been prepared in
      accordance with generally accepted accounting principles in the United States
      of
      America.




During
      early 2003, the Directors of the Company and the other joint venture partners
      in
      the Company’s Sino-foreign joint ventures executed “Act in Concert” agreements,
      resulting in the Company having voting control in such Sino-foreign joint
      ventures. Consequently, effective January 1, 2003, the Company changed from
      equity accounting to consolidation accounting for its investments in
      Sino-foreign joint ventures for the year ended December 31, 2003. Prior to
      January 1, 2003, the Company used the equity method pursuant to Emerging Issues
      Task Force Issue No. 96-16, as described as follows.




Henglong
      was formed in 1997, with 44.5% owned by the Company, 36.5% owned by Hubei
      Wanlong Investment Co., Ltd., “HBWL”, controlled by Mr. Hanlin Chen, the
      Company’s Chairman ,19% owned by Jingzhou Jiulong Machinery and Electronic
      Manufacturing Co., Ltd., “JLME”. The highest authority of the joint venture is
      the Board of Directors, which is comprised of five directors, two of which,
      40%,
      are appointed by the Company, two of which, 40%, are appointed by HBWL, and
      one
      of which, 20%, is appointed by JLME. Because of the Company’s control over the
      operation and assets of Henglong, the minority shareholders of Henglong have
      no
      right to select, terminate and set the compensation of management responsible
      for implementing the enterprise’s policies and procedures, nor do they have any
      right to establish operating and capital decisions of Henglong.




Jiulong
      was formed in 1993, with 81% owned by the Company, 10% owned by Jingzhou Jiulong
      Machinery and Electronic Manufacturing Co., Ltd., “JLME”, and 9% owned by
      Jingzhou Tianxin Investment Consulting Co., Ltd., “Tianxin”. The highest
      authority of the joint venture is the Board of Directors, which is comprised
      of
      five directors, four of which, 80%, are appointed by the Company, and one of
      whom, 20%, are appointed by JLME. As for day-to-day operating matters, approval
      by more than two-thirds of the members of the Board of Directors, 67%, is
      required. The Chairman of the Board of Directors is appointed by JLME. The
      general manager is appointed by the Company.




Shenyang
      was formed in 2002, with 70% owned by the Company, 30% owned by Shengyang
      Automotive Industry Investment Corporation, “JB Investment”. The highest
      authority of the joint venture is the Board of Directors, which is comprised
      of
      seven directors, four of whom, 57%, are appointed by the Company, and three
      of
      whom, 43%, are appointed by JB Investment. As for day-to-day operating matters,
      approval by more than two-thirds of the members of the Board of Directors,
      67%,
      is required. The Chairman of the Board of Directors is appointed by the Company.
      The general manager is appointed by the Company.




Zhejiang
      was formed in 2002, with 51% owned by the Company and 49% owned by Zhejiang
      Vie
      Group, “ZVG”. The highest authority of the joint venture is the Board of
      Directors, which is comprised of seven directors, four of whom, 57%, are
      appointed by the Company and three of whom, 43%, are appointed by ZVG. As for
      day-to-day operating matters, approval by more than two-thirds of the members
      of
      the Board of Directors, 67%, is required. The Chairman of the Board of Directors
      is appointed by ZVG. The general manager is appointed by the Company.




USAI
      was
      formed in 2005, with 60% owned by the Company, 30% owned by Sensor System
      Solutions Inc. in America, “Sensor”, and 10% owned by Shanghai Hongxi Investment
      Inc., “Hongxi”, controlled by Mr. Hanlin Chen, the Company’s Chairman. As of
      March 20, 2007, Sensor has withdrawn from USAI. The registered capital of the
      Joint-venture has changed to $1,800,000, with 75.9% owned by the Company, 24.1%
      owned by Hongxi. The highest authority of the joint venture is the Board of
      Directors, which is comprised of three directors, two of whom, 67%, are
      appointed by the Company, one of whom, 33%, is appointed by Hongxi. As for
      day-to-day operating matters, approval by more than two-thirds of the members
      of
      the Board of Directors, 67%, is required. The Chairman of the Board of Directors
      is appointed by the Company. The general manager is appointed by the
      Company.




55




Jielong
      was formed in April 2006, with 85% owned by the Company, 15% owned by Hong
      Kong
      Tongda, “Tongda”. The highest authority of the joint venture is the Board of
      Directors, which is comprised of three directors, two of whom, 67%, are
      appointed by the Company, one of whom, 33%, is appointed by Tongda. As for
      day-to-day operating matters, approval by more than two-thirds of the members
      of
      the Board of Directors, 67%, is required. The Chairman of the Board of Directors
      is appointed by the Company. The general manager is appointed by the Company.




Wuhu
      was
      formed in May 2006, with 77.33% owned by the Company, 22.67% owned by Wuhu
      Chery
      Technology Co., Ltd., “Chery Technology”. The highest authority of the joint
      venture is the Board of Directors, which is comprised of five directors, three
      of whom, 60%, are appointed by the Company, two of whom, 40%, is appointed
      by
      Chery Technology. As for day-to-day operating matters, approval by more than
      two-thirds of the members of the Board of Directors, 67%, is required. The
      directors of the Company and the other joint venture partner of Wuhu executed
      “Act in concert” agreement, resulting in the Company having voting control in
      the joint venture. The Chairman of the Board of Directors is appointed by the
      Company. The general manager is appointed by the Company.




The
      minority partners of each of the joint ventures are all private companies not
      controlled, directly or indirectly, by any PRC municipal government or other
      similar government entity.




Use
      of
      Estimates - The preparation of financial statements in conformity with
      accounting principles generally accepted in the United States requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, disclosure of contingent assets and liabilities at
      the
      date of the financial statements, and the reported amounts of revenues and
      expenses during the reporting periods. The Company is of an opinion that the
      significant items were warranty reserves, long term assets and investment,
      the
      realizable value of accounts receivable and inventories, useful lives of
      property, plant and equipment, accruals warranty liabilities and deferred tax
      assets. Actual results could differ from those estimates.




Cash
      and
      Cash Equivalents - Cash and cash equivalents include all highly-liquid
      investments with an original maturity of three months or less at the date of
      purchase.




Pledged
      Cash Deposits - The Company has pledged cash deposits to secure trade financing
      provided by banks.




Accounts
      Receivable - In order to determine the value of the Company’s accounts
      receivable, the Company records a provision for doubtful accounts to cover
      estimated credit losses. Management reviews and adjusts this allowance
      periodically based on historical experience and its evaluation of the
      collectibility of outstanding accounts receivable. The Company evaluates the
      credit risk of its customers utilizing historical data and estimates of future
      performance.




Inventories
      - Inventories are stated at the lower of cost and net realizable value. Cost
      is
      calculated on the moving-average basis and includes all costs to acquire and
      other costs incurred in bring the inventories to their present location and
      condition. The Company evaluates the net realizable value of its inventories
      on
      a regular basis and records a provision for loss to reduce the computed
      moving-average cost if it exceeds the net realizable value.




Advance
      Payments - These amounts represent advances or prepayments to acquire various
      assets to be utilized in the future in the Company’s normal business operations.
      Such amounts are paid according to their respective contract terms and are
      classified as a current asset in the consolidated balance sheet.




Property,
      Plant and Equipment - Property, plant and equipment are stated at cost. Major
      renewals and improvements are capitalized; minor replacements and maintenance
      and repairs are charged to operations. Depreciation is provided on the
      straight-line method over the estimated useful lives of the respective assets
      as
      follows:




Category
            
            Estimated
                Useful Life (Years)Land
                use rights and buildings:Land
                use rights
            
            45-50Buildings
            
            25Machinery
                and equipment
            
            6Electronic
                equipment
            
            4Motor
                vehicles
            
            6




56


Assets
      under construction- represent buildings under construction and plant and
      equipment pending installation — are stated
      at
      cost. Cost includes construction and acquisitions, and interest charges arising
      from borrowings used to finance assets during the period of construction or
      installation and testing. No provision for depreciation is made on assets under
      construction until such time as the relevant assets are completed and ready
      for
      their intended commercial use.




Gains
      or
      losses on disposal of property, plant and equipment are determined as the
      difference between the net disposal proceeds and the carrying amount of the
      relevant asset, and are recognized in the consolidated statements of operations
      on the date of disposal.




Interest
      Costs Capitalized - Interest costs incurred in connection with specific
      borrowings for the acquisition, construction or installation of property, plant
      and equipment are capitalized and depreciated as part of the asset’s total cost
      when the respective asset is placed into service.




Intangible
      Assets - Intangible assets, representing patents and technical know-how
      acquired, are stated at cost less accumulated amortization and impairment
      losses. Amortization is calculated on the straight-line method over the
      estimated useful life of 5 to 15 years.




Long-Lived
      Assets - The Company has adopted the provisions of Statement of Financial
      Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”. Property, plant and equipment and intangible assets are
      reviewed periodically for impairment losses whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be fully
      recoverable. If required, an impairment loss is recognized as the difference
      between the carrying value and the fair value of the assets.




In
      January 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible
      Assets”. The Company did not have any goodwill at December 31, 2007 and
      2006.




Impairment
      of long-lived assets is monitored on a continuing basis, and is assessed based
      on the undiscounted cash flows generated by the underlying assets. In the event
      that the carrying amount of long-lived assets exceeds the undiscounted future
      cash flows, then the carrying amount of such assets is adjusted to their fair
      value.




Long-Term
      Investments - Investments in which the Company owns less than 20% of the
      investee company and does not have the ability to exert significant influence
      are stated at cost, and are reviewed periodically for realizability.




57




Revenue
      from Product Sales Recognition - The Company recognizes revenue when the
      significant risks and rewards of ownership have been transferred to the customer
      pursuant to PRC law, including factors such as when persuasive evidence of
      an
      arrangement exists, delivery has occurred, the sales price is fixed or
      determinable, sales and value added tax laws have been complied with, and
      collectibility is probable. The Company recognizes product sales generally
      at
      the time the product is shipped. Concurrent with the recognition of revenue,
      the
      Company reduces revenue for estimated product returns. Shipping and handling
      costs are included in cost of goods sold. Revenue is presented net of any sales
      tax and value added tax.




Revenue
      from Materials and Other Assets Sales Recognition - Normally, the Company
      purchases materials only for its production. Occasionally, some materials will
      be sold to other suppliers in case of temporary inventory overage of such
      materials and to make a profit on any price difference. The Company is
      essentially the agent in these transactions because it does not have any risk
      of
      product return. When there is any quality or quantity loss, the suppliers are
      obligated to restitution. Income generated from selling materials is recorded
      as
      the net amount retained, that is, the amount billed to the customers less the
      amount paid to suppliers, in the consolidated statement of operations in
      accordance with EITF 99-19.





Revenue
      from other asset sales represents gains or losses from other assets, for
      example, used equipment. Income generated from selling other assets is recorded
      as the sales amount less cost of the assets. The Company has classified such
      revenue from materials and other asset sales into gain on other sales in its
      consolidated statement of operations.




Sales
      Taxes - The Company is subject to value added tax, “VAT”. The applicable VAT tax
      rate is 17% for products sold in the PRC. The amount of VAT liability is
      determined by applying the applicable tax rate to the invoiced amount of goods
      sold less VAT paid on purchases made with the relevant supporting invoices.
      VAT
      is collected from customers by the Company on behalf of the PRC tax authorities
      and is therefore not charged to the consolidated statements of operations.




Product
      Warranties - The Company provides for the estimated cost of product
      warranties when the products are sold. Such estimates of product warranties
      were
      based on, among other things, historical experience, product changes, material
      expenses, service and transportation expenses arising from the manufactured
      product. Estimates will be adjusted on the basis of actual claims and
      circumstances.




Pension
        -
        The Company’s operations are all located in China, all the employees are located
        in China. The Company records pension costs and various employment benefits
        in
        accordance with relevant Chinese social security laws, which is approximately
        at
        a total of 31% of salary as required by local government. Base salary levels
        are
        the average salary determined by local goverment.




Concentration
      of Credit Risk - Financial instruments that potentially subject the Company
      to
      significant concentrations of credit risk consist primarily of trade accounts
      receivable. The Company performs ongoing credit evaluations with respect to
      the
      financial condition of its debtors, but does not require collateral. In order
      to
      determine the value of the Company’s accounts receivable, the Company records a
      provision for doubtful accounts to cover probable credit losses. Management
      reviews and adjusts this allowance periodically based on historical experience
      and its evaluation of the collectibility of outstanding accounts receivable.




Interest
      Rate Risk- Bank loans are charged at fixed interest rates.




Income
      Taxes - The Company accounts for income taxes using the liability method whereby
      deferred income taxes are recognized for the tax consequences of temporary
      differences by applying statutory tax rates applicable to future years to
      differences between the financial statement carrying amounts and the tax bases
      of certain assets and liabilities ,
      changes
      in deferred tax assets and liabilities, if any, include the impact of any tax
      rate changes enacted during the year. Statement of Financial Accounting
      Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes,”
requires that deferred tax assets be reduced by a valuation allowance if, based
      on all available evidence, it is considered more likely than not that some
      portion or all of the recorded deferred tax assets will not be realized in
      future periods.




Research
      and Development Costs - Research and development costs are expensed as
      incurred.




Advertising,
                Shipping and Handling Costs - Advertising, shipping and handling
                costs are
                expensed as incurred.




Income
      Per Share - Basic income per share is calculated by dividing net income by
      the
      weighted average number of common shares outstanding during the period. Diluted
      income per share is calculated based on the treasury stock method, assuming
      the
      issuance of common shares, if dilutive, resulting from the exercise of
      warrants.




58




Actual
      weighted average shares outstanding used in calculating basic and diluted income
      per share were:





Years
                Ended December 31,2007
            
            2006Weighted
                average shares outstanding
            
            
            23,954,370
            
            
            23,198,113Effect
                of dilutive securities
            
            
            4,335
            
            
            12,562Diluted
                shares outstanding
            
            
            23,958,705
            
            
            23,210,675





The
      156,250 shares underlying warrants issued to Cornell Capital Partners, LP on
      March 20, 2006 has not been included in the computation of diluted income per
      share because such inclusion would have had an anti-dilutive effect.




Comprehensive
      Income - The Company has adopted the provisions of Statement of Financial
      Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).
      SFAS No. 130 establishes standards for the reporting and display of
      comprehensive income, its components and accumulated balances in a full set
      of
      general purpose financial statements. SFAS No. 130 defines comprehensive income
      to include all changes in equity except those resulting from investments by
      owners and distributions to owners, including adjustments to minimum pension
      liabilities, accumulated foreign currency translation, and unrealized gains
      or
      losses on marketable securities.




Fair
      Value of Financial Instruments - The Company believes that the carrying value
      of
      the its cash and cash equivalents, accounts receivable, accounts payable and
      accrued liabilities as of December 31, 2007 approximates their respective fair
      values due to the short-term nature of those instruments. The fair values of
      long-term other receivables and advances payable, discounted at 5.90%, would
      be
      approximately $836,000 and $315,000 respectively as of December 31,
      2007.




Stock-Based
      Compensation - The Company may issue stock options to employees and stock
      options or warrants to non-employees in non-capital raising transactions for
      services and for financing costs.




In
      July
      2004, the Company adopted a stock incentive plan. The maximum number of common
      shares for issuance under this plan is 2,200,000 with a period of 10 years.
      The
      stock incentive plan provides for the issuance, to the Company’s officers,
      directors, management and employees, of options to purchase shares of the
      Company’s common stock. As of December 31, 2007, the Company has issued 90,000
      stock options under this plan, among that 22,500 shares was exercised and
      there remain 2,110,000 stock options issuable in future .




The
      Company has adopted Statement of Financial Accounting Standards (“SFAS”) No.
      123R, “Accounting for Stock-Based Compensation”, which establishes a fair value
      method of accounting for stock-based compensation plans. In accordance with
      SFAS
      No. 123R, the cost of stock options and warrants issued to employees and
      non-employees is measured at the grant date based on the fair value. The fair
      value is determined using the Black-Scholes option pricing model. The resulting
      amount is charged to expense on the straight-line basis over the period in
      which
      the Company expects to receive benefit, which is generally the vesting period.




Foreign
      Currencies - The Company maintains its books and records in Renminbi, RMB,
      the
      currency of the PRC, its functional currency. Foreign currency transactions
      in
      RMB are reflected using the temporal method. Under this method, all monetary
      items are translated into the functional currency at the rate of exchange
      prevailing at the balance sheet date. Non-monetary items are translated at
      historical rates. Income and expenses are translated at the rate in effect
      on
      the transaction dates. Transaction gains and losses, if any, are included in
      the
      determination of net income for the year.




59




In
      translating the financial statements of the Company from its functional currency
      into its reporting currency of United States dollars, balance sheet accounts
      are
      translated using the closing exchange rate in effect at the balance sheet date
      and income and expense accounts are translated using an average exchange rate
      prevailing during the reporting period. Adjustments resulting from the
      translation, if any, are included in cumulative other comprehensive income
      (loss) in stockholders’ equity.




Certain
      Relationships And Related Transactions-




The
      following related parties are related through common ownership with the major
      shareholders of the Company:




Jingzhou
      Henglong Fulida Textile Co., Ltd. (“Jingzhou”)




Xiamen
      Joylon Co., Ltd. (“Xiamen Joylon”)




Shanghai
      Tianxiang Automotive Parts Co., Ltd. (“Shanghai Tianxiang”)




Shanghai
      Fenglong Materials Co., Ltd. (“Shanghai Fenglong”)




Changchun
      Hualong Automotive Technology Co., Ltd. (“Changchun Hualong”)




Jiangling
      Tongchuang Machining Co., Ltd. (“Jiangling Tongchuang”)




Beijing
      Hualong Century Digital S&T Development Co., Ltd. (“Beijing
      Hualong”)




Jingzhou
      Jiulong Material Co., Ltd. (“Jiulong Material”)




Shanghai
      Hongxi Investment Inc. ( “Hongxi”)




Hubei
      Wiselink Equipment Manufacturing Co., Ltd. (“Hubei Wiselink”)




Jingzhou
      Tongyi Special Parts Co., Ltd. (“Jingzhou Tongyi”)




Jingzhou
      Derun Agricultural S&T Development Co., Ltd. (“Jingzhou Derun”)




Jingzhou
      Tongying Alloys Materials Co., Ltd. (“Jingzhou Tongying”)




WuHan
      Dida Information S&T Development Co., Ltd. (“WuHan Dida”)




Hubei
      Wanlong Investment Co., Ltd. (“Hubei Wanlong”).




Principal
      policies of the Company in connection with transaction with related party are
      as
      follows:




Products
      sold to related parties - The Company sold products to related parties at fair
      market prices, and also granted them credit of three to four months on an open
      account basis. These transactions were consummated under similar terms as the
      Company's other customers.




60




Materials
      purchases from related parities - The Company purchased materials from related
      parties at fair market prices, and also received them credit of three to four
      months on an open account basis. These transactions were consummated under
      similar terms as the Company's other suppliers.




Equipment
      and production technology purchased from related parties - The Company purchased
      equipment and production technology from related parties at fair market prices,
      and was required to pay in advance based on the purchase agreement between
      the
      two parties, because such equipment manufacturing and technology development
      was
      required for a long period. These transactions were consummated under similar
      terms as the Company's other suppliers.




3. Recent
      Accounting Pronouncements




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
      Hybrid Financial Instruments” (“SFAS 155”). This Statement amends FASB
      Statements No. 133, Accounting for Derivative Instruments and Hedging
      Activities, and No. 140, Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities. This Statement resolves
      issues addressed in Statement 133 Implementation Issue No. D1, “Application
      of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS
      No. 155 permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation, clarifies which interest-only strips and principal-only strips
      are
      not subject to the requirements of Statement 133, and establishes a requirement
      to evaluate interests in securitized financial assets to identify interests
      that
      are freestanding derivatives or that are hybrid financial instruments that
      contain an embedded derivative requiring bifurcation. It also clarifies that
      concentrations of credit risk in the form of subordination are not embedded
      derivatives and amends Statement 140 to eliminate the prohibition on a
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This Statement is effective for all financial instruments acquired
      or issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006. The Company has adopted of SFAS No. 155 on its
      financial statements from the first quarter of 2007.




In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets” (“SFAS 156”). This Statement amends FASB Statement No. 140, Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities, with respect to the accounting for separately recognized servicing
      assets and servicing liabilities. This Statement requires an entity to recognize
      a servicing asset or servicing liability each time it undertakes an obligation
      to service a financial asset by entering into a servicing contract in indicated
      situations; requires all separately recognized servicing assets and servicing
      liabilities to be initially measured at fair value, if practicable; permits
      an
      entity to choose relevant subsequent measurement methods for each class of
      separately recognized servicing assets and servicing liabilities; at its initial
      adoption, permits a one-time reclassification of available-for-sale securities
      to trading securities by entities with recognized servicing rights, without
      calling into question the treatment of other available-for-sale securities
      under
      Statement 115, provided that the available-for-sale securities are identified
      in
      some manner as offsetting the entity’s exposure to changes in fair value of
      servicing assets or servicing liabilities that a servicer elects to subsequently
      measure at fair value; and requires separate presentation of servicing assets
      and servicing liabilities subsequently measured at fair value in the statement
      of financial position and additional disclosures for all separately recognized
      servicing assets and servicing liabilities. The Company has adopted of SFAS
      No.
      156 on the Consolidated Financial Statements from the first quarter of
      2007.




In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS
      157”), to define fair value, establish a framework for measuring fair value in
      accordance with generally accepted accounting principles and expand disclosures
      about fair value measurements. SFAS 157 requires quantitative disclosures using
      a tabular format in all periods (interim and annual) and qualitative disclosures
      about the valuation techniques used to measure fair value in all annual periods.
      The provisions of this Statement shall be effective for financial statements
      issued for fiscal years beginning after November 15, 2007 and interim periods
      within those fiscal years. The Company will be required to adopt the provisions
      of this statement as of January 1, 2008.




61




In
      September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans - An amendment of FASB
      Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). This Statement enhances
      disclosure regarding the funded status of an employer’s defined benefit
      postretirement plan by (a) requiring companies to include the funding status
      in
      comprehensive income, (b) recognize transactions and events that affect the
      funded status in the financial statements in the year in which they occur,
      and
      (c) at a measurement date of the employer’s fiscal year-end. Statement No. 158
      is effective for fiscal years ending after December 15, 2008, and is not
      expected to apply to the Company.




In
      February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities Including an Amendment of FASB Statement No.
      115 (“SFAS 159”). SFAS 159 permits entities to choose
      to
      measure many financial instruments and certain other items at fair values.
      SFAS
      159 is effective
      for fiscal years after November 15, 2007. The Company is currently evaluating
      the impact of adopting SFAS 159 on its financial statements. The Company
      will be required to adopt the provisions of this statement as of January 1,
      2008.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
      Combinations. SFAS 141(R) retains the fundamental requirements of the original
      pronouncement requiring that the purchase method be used for all business
      combinations. SFAS 141(R) defines the acquirer as the entity that obtains
      control of one or more businesses in the business combination, establishes
      the
      acquisition date as the date that the acquirer achieves control and requires
      the
      acquirer to recognize the assets acquired, liabilities assumed and any
      noncontrolling interest at their fair values as of the acquisition date. In
      addition, SFAS 141(R) requires expensing of acquisition-related and
      restructure-related costs, remeasurement of earn out provisions at fair value,
      measurement of equity securities issued for purchase at the date of close of
      the
      transaction and non-expensing of in-process research and development related
      intangibles. 141R is effective for financial statements issued for fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years. The Company is required to and plans to adopt the provisions of SFAS
      141R
      beginning in the first quarter of 2009. We are currently evaluating the impact
      of the implementation of SFAS No. 141(R) on our consolidated financial position,
      results of operations and cash flows.





In
      December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51." The objective
      of
      SFAS No. 160 is to improve the relevance, comparability and transparency of
      the
      financial information that a reporting entity provides in its consolidated
      financial statements by establishing additional accounting and reporting
      standards. SFAS No. 160 is effective for fiscal years beginning on or after
      December 15, 2008. Early adoption of this statement is prohibited. By
      adopting SFAS No. 160, the noncontrolling interests will be reported as equity
      while the noncontrolling interests are reported in the mezzanine section between
      liabilities and equity currently.





In
      March
      2008, the Financial Accounting Standards Board (FASB) issued FASB Statement
      No.
      161, *Disclosures
      about Derivative Instruments and Hedging Activities.* The new
      standard is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity’s financial position, financial
      performance, and cash flows. It is effective for financial statements issued
      for
      fiscal years and interim periods beginning after November 15, 2008, with early
      application encouraged. We
      are
      currently evaluating the impact of adopting SFAS No.161 on our consolidated
      financial statements.





**4.**  Pledged
      cash deposits





Pledged
      as guarantee for the Company's notes payable,the Company regularly pays some
      of
      its suppliers by bank notes. The Company, the
      drawer, has
      to
      deposit a cash deposit, equivalent to 10%- 30% of the face value of the relevant
      bank note, in a bank of the
      drawee in
      order
      to obtain the bank note.





5 . Accounts
      Receivable and Notes Receivable




The
      Company’s accounts receivable at December 31, 2007 and 2006 are summarized as
      follows:




December
                31,2007
            
            2006Accounts
                receivable
            
            $
            49,605,411
            
            $
            41,174,404Notes
                receivable
            
            
            36,245,070
            
            
            20,146,197Less:
                allowance for doubtful accounts
            
            
            (3,827,838
            )
            
            (4,086,218
            )$
            82,022,643
            
            $
            57,234,383




62




Notes
      receivable represent accounts receivable in the form of bills of exchange whose
      acceptances and settlements are handled by banks.




The
      activity in the Company’s allowance for doubtful accounts during the years ended
      December 31, 2007 and 200 6 are
      summarized as follows:




December
                31,2007
            
            2006Balance
                at beginning of year
            
            $
            4,086,218
            
            $
            2,856,025Add:
                amounts (recovered) provided during the year
            
            
            (532,392
            )
            
            1,099,092Add:
                foreign currency translation
            
            
            274,012
            
            
            131,101Balance
                at end of year
            
            $
            3,827,838
            
            $
            4,086,218





6.
       Other Receivables




The
      Company’s other receivables at December 31, 2007 and 2006 are summarized as
      follows:




December
                31,2007
            
            2006Other
                receivables
            
            $
            1,541,181
            
            $
            1,864,918Less:
                allowance for doubtful accounts
            
            
            (652,484
            )
            
            (898,203
            )Balance
                at end of year
            
            $
            888,697
            
            $
            966,715




The
      activity in the Company’s allowance for doubtful accounts of other receivable
      during the years ended December 31, 2007 and 2006 are summarized as
      follows:





December
                31,2007
            
            2006Balance
                at beginning of the year
            
            $
            898,203
            
            $
            1,040,169Less:
                amounts recovered during the year
            
            
            (297,870
            )
            
            (210,861
            )Add:
                foreign currency translation
            
            
            52,151
            
            
            68,895Balance
                at end of the year
            
            $
            652,484
            
            $
            898,203





63




Other
      receivables consist of amounts advanced to both related and unrelated parties,
      primarily as unsecured demand loans, with no stated interest rate or due
      date.




7.
       Inventories




Inventories
      at December 31, 2007 and 2006 are summarized as follows:




December
                31,2007
            
            2006Raw
                materials
            
            $
            7,904,167
            
            $
            5,381,372Work
                in process
            
            
            4,181,248
            
            
            3,253,192Finished
                goods
            
            
            9,586,709
            
            
            7,548,21821,672,124
            
            
            16,182,782Less:
                provision for loss
            
            
            (1,478,838
            )
            
            (718,211
            )$
            20,193,286
            
            $
            15,464,571




8.
       Property, Plant and Equipment




Property,
      plant and equipment at December 31, 2007 and 2006 are summarized as
      follows:




December
                31,2007
            
            2006Land
                use rights and buildings
            
            $
            23,101,634
            
            $
            17,384,534Machinery
                and equipment
            
            
            42,512,900
            
            
            33,466,198Electronic
                equipment
            
            
            3,480,008
            
            
            2,945,454Motor
                vehicles
            
            
            2,427,375
            
            
            2,095,169Construction
                in progress
            
            
            1,542,865
            
            
            3,280,27973,064,782
            
            
            59,171,634Less:
                Accumulated depreciation
            
            
            (26,479,741
            )
            
            (18,323,588
            )$
            46,585,041
            
            $
            40,848,046




64




Depreciation
      charge for the years ended December 31, 2007 and 2006 are $7,079,313 and
      $5,816,922 respectively.




9.
       Intangible Assets




The
      activity in the Company’s intangible asset account during the years ended
      December 31, 2007 and 2006 are summarized as follows:




December
                31,2007
            
            2006Balance
                at beginning of year
            
            $
            3,140,548
            
            $
            3,503,217Add:
                Additions during the year-Patent
                technology
            
            
            144,390
            
            
            109,073Management
                software license
            
            
            143,356
            
            
            65,852Foreign
                currency translation
            
            
            31,856
            
            
            121,698Less:
                decrease during the year-Patent
                technology*
            
            
            (2,600,204
            )
            
            —859,946
            
            
            3,799,840Less:
                Amortization for the year
            
            
            (270,233
            )
            
            (659,292
            )Balance
                at end of year
            
            $
            589,713
            
            $
            3,140,548


*When
        USAI was established in 2005, Sensor contributed $3,000,000 as capital, being
        the fair market value of the intangible assets, including the sensor product
        and
        the technology for sensor production, as well as the Joint-venture’s technical
        personnel training. As of March 20, 2007 Sensor withdrew from USAI, abandoned
        all its right and interest in the Joint-venture, and repossessed the rights
        to
        the intangible assets at the carrying value of $2,600,204. Please see Note
        1 and
        Note 16.




The
        estimated aggregated amortization expense for each of the five succeeding
        years
        are $205,000, $153,000, $83,000, $54,000, and $51,000
        respectively.




10.
       Bank Loans




At
      December 31, 2007, the Company, through its Sino-foreign joint ventures, had
      outstanding fixed-rate short-term bank loans of $13,972,603, with weighted
      average interest rate at 6.40% per annum. These loans are secured with some
      of
      the property and equipment of the Company and are repayable within one year.




At
      December 31, 2006, the Company, through its Sino-foreign joint ventures, had
      outstanding fixed-rate short-term bank loans of $15,384,615, with weighted
      average interest rate at 5.90% per annum. These loans are secured with some
      of
      the property and equipment of the Company, and are repayable within one year.




11.
       Accounts and note s payable




Accounts
      and notes payable at December 31, 2007 and 2006 are summarized as
      follows:





December
                31,2007
            
            2006Accounts
                payable
            
            $
            32,511,812
            
            $
            22,517,260Notes
                payable
            
            
            15,018,571
            
            
            15,130,653Balance
                at end of year
            
            $
            47,530,383
            
            $
            37,647,913




65




Notes
      payable represent accounts payable in the form of bills of exchange whose
      acceptances and settlements are handled by banks.




The
      Company has pledged cash deposits, notes receivable and certain property plant
      and machinery to secure trade financing granted by banks.




12.
      Accrued expenses and other payables




The
      Company’s accrued expenses and other payables at December 31, 2007 and 2006 are
      summarized as follows:





December
                31,2007
            
            2006Accrued
                expenses
            
            $
            1,957,146
            
            $
            1,695,188Other
                payables
            
            
            1,340,442
            
            
            1,987,540Warranty
                reserves*
            
            
            4,919,491
            
            
            2,954,326Dividend
                payable to minority shareholders of Joint-ventures
            
            
            6,720,976
            
            
            4,441,132Balance
                at end of year
            
            $
            14,938,055
            
            $
            11,078,186




*The
      Company provides for the estimated cost of product warranties when the
      products are sold. Such estimates of product warranties were based on, among
      other things, historical experience, product changes, material expenses, service
      and transportation expenses arising from the manufactured products. Estimates
      will be adjusted on the basis of actual claims and circumstances.




For
      the
      years ended December 31, 2007 and 2006, the warranties activities were as
      follows:





December
                31,2007
            
            2006Balance
                at the beginning of year
            
            $
            2,954,326
            
            $
            1,787,869Additions
                during the year
            
            
            5,228,556
            
            
            3,956,521Settlement
                within the year
            
            
            (3,529,875
            )
            
            (2,858,829
            )Foreign
                currency translation
            
            
            266,484
            
            
            68,765Balance
                at end of year
            
            $
            4,919,491
            
            $
            2,954,326





66





13.
      Accrued pension costs




Since
      the
      Company’s operations are all located in China, all the employees are located in
      China. The Company records pension costs and various employment benefits in
      accordance with the relevant Chinese social security laws, which is
      approximately at a total of 31% of salary as required by local governments.
      Base
      salary levels are the average salary determined by the local
      governments.





The
      activities in the Company’s pension account during the years ended December 31,
      2007 and 2006 are summarized as follows:





December
                31,2007
            
            2006Balance
                at beginning of the year
            
            $
            3,266,867
            
            $
            2,653,064Amounts
                provided during the year
            
            
            1,286,566
            
            
            1,287,609Settlement
                during the year
            
            
            (1,154,462
            )
            
            (789,265
            )Foreign
                currency translation
            
            
            223,758
            
            
            115,459Balance
                at end of year
            
            $
            3,622,729
            
            $
            3,266,867




14.
       Amounts Due to Shareholders/Directors




The
      activity in the amounts due to shareholders/directors during the years ended
      December 31, 2007 and 2006 is summarized as follows:




December
                31,2007
            
            2006Balance
                at beginning of the year
            
            $
            358,065
            
            $
            766,642Add:
                foreign currency translation
            
            
            31,012
            
            
            20,484Repayments
                made to shareholders
            
            
            (84,476
            )
            
            (429,061
            )Balance
                at end of year
            
            $
            304,601
            
            $
            358,065




At
      December 31, 2007 and 2006, the amounts due to shareholders/directors were
      unsecured, interest free and repayable on demand.




15.
      Taxes
      payable




The
      Company’s taxes payable at December 31, 2007 and 2006 are summarized as
      follows:




December
                31,2007
            
            2006Value-added
                tax payable
            
            
            7,052,682
            
            $
            6,274,698Income
                tax payable (recoverable)*
            
            
            1,883,185
            
            
            (362,267
            )Other
                tax payable
            
            
            144,626
            
            
            1,931Balance
                at end of year
            
            $
            9,080,493
            
            $
            5,914,362


* At
        the
        end of the fiscal year of 2006, the Company paid income tax in advance, and
        the
        government settled with the Company during 2007.




67




16.
      Advances payable




The
      amounts mainly represent advances made by the Chinese government to the Company
      as subsidy on interest on loans related to production facilities
      expansion.




The
      balances are unsecured, interest-free and will be repayable to the Chinese
      government if the usage of such advance does not continue to qualify for the
      subsidy (see notes 21 and 25).




17.
       Minority Interests’ Equity




The
      activities in respect of the amounts of the minority interests’ equity during
      the years ended December 31, 2007 and 2006 are summarized as follows:




December
                31,2007
            
            2006Balance
                at beginning of the year
            
            $
            23,112,667
            
            $
            21,751,043Add:
                Additions during the yearcontribution
                by minority shareholders
            
            
            —
            
            
            2,332,470Minority
                interest’s income
            
            
            9,646,339
            
            
            5,545,350Increase
                in connection with minority shareholders’ abandonment of all its right and
                interest in Joint-venture.
            
            
            55,512
            
            
            —Foreign
                currency translation
            
            
            1,650,869
            
            
            1,468,787Less:
                decrease during the year-Dividends
                declared to the minority interest holders of Joint-venture
                companies
            
            
            (8,468,572
            )
            
            (7,984,983
            )Decrease
                in minority interests as a result of minority shareholders’ withdrawal
                from Joint-venture *
            
            
            (2,830,545
            )
            
            —Balance
                at end of year
            
            $
            23,166,270
            
            $
            23,112,667




* As
      of
      March 20, 2007, Great Genesis, Hongxi and Sensor entered into an agreement,
      which led to Sensor’s withdrawal from USAI, its withdrawal of intangible assets,
      and abandonment of all its right and interest in USAI. Please see Note 1.




68





The
      calculation of the withdrawal of Sensor is summarized as
      follows:




Sensor’s
            
            Additional
                paid-in capitalEquity
                of USAI (before Sensor’s withdrawal at March 20, 2007)
            
            Withdrawal
                of equity in USAI
            
            Carrying
                value of intangible assets withdrawn
            
            Abandoned
                interest
            
            The
                Company’s
            
            Hongxi’sa
            
            b
            
            c
            
            d=b-c
            
            e=d*75.9%
            
            f=d*24.1%Additional
                paid-in capital
            
            $
            4,337,291
            
            $
            3,000,000
            
            $
            2,600,204
            
            $
            399,796
            
            $
            303,445
            
            $
            96,351Foreign
                currency translation
            
            
            219,927
            
            
            183,923
            
            
            —
            
            
            183,923
            
            
            139,598
            
            
            44,325Stockholders'
                deficit
            
            
            (1,177,928
            )
            
            (353,378
            )
            
            —
            
            
            (353,378
            )
            
            (268,214
            )
            
            (85,164
            )Equity
            
            $
            3,379,290
            
            $
            2,830,545
            
            $
            2,600,204
            
            $
            230,341
            
            $
            174,829
            
            $
            55,512





Sensor’s
      withdrawal from USAI, its withdrawal of intangible assets, and abandonment
      of
      all its right and interest in USAI, was charged to minority interests of
      $2,830,545, and credited to intangible assets of $2,600,204. The abandoned
      interest of $230,341, recognized as additional paid-in capital of USAI, was
      credited into additional paid-in capital and minority interests of $174,829
      and
      $55,512, respectively.




18.
      Share
      Capital




The
      activities in the Company’s share capital account during the years ended
      December 31, 2007 and 2006 are summarized as follows:




December
                31,2007
            
            2006Common
                Stock
            
            Par
                Value
            
            Common
                Stock
            
            Par
                ValueBalance
                at beginning of the year
            
            
            23,851,581
            
            $
            2,385
            
            
            22,574,543
            
            $
            2,257Add:
                Additions during the yearIssuance
                of common stock for cash in accordance with the standby equity
                distribution agreement with Cornell Capital Partners, LP*
            
            
            108,121
            
            
            11
            
            
            1,216,675
            
            
            122Issuance
                of common stock as commissions and placement agent fee payable in
                accordance with the standby equity distribution agreement with Cornell
                Capital Partners, LP**
            
            
            —
            
            
            —
            
            
            37,863
            
            
            4Exercise
                of stock option by independent directors***
            
            
            —
            
            
            —
            
            
            22,500
            
            
            2Balance
                at end of year
            
            
            23,959,702
            
            $
            2,396
            
            
            23,851,581
            
            $
            2,385




*During
      2006, pursuant to Placement Agent Agreement, the Investor committed under
      certain conditions to purchase, within the next 24 months after an effective
      resale registration of the Company’s common stock, at the Company’s option, up
      to $15 million of the Company’ common stock, at an agreed discount from the fair
      market value. According to  this
      agreement, the Company raised gross amount of $10,900,000 in a number of private
      placements (PIPE) to Cornell Capital Partners, LP (“Investor”) by issuing
      1,216,675 shares of common stock in five installments from March to December
      in
      2006.




69




During
      2007, the Company raised gross amounts of $1,200,000 in a private placement
      (PIPE) to Cornell Capital Partners, LP (“Investor”) by issuing 108,121 shares of
      common stock.




**On
      March 20, 2006, the Company issued 37,863 shares of common stock to Cornell
      Capital Partners, LP and a placement agent in non-capital raising transactions,
      collectively at an exercise price of $11.885 per share as a commitment fee
      and a
      placement agent fee of $450,000 in connection with the establishment of a
      $15,000,000 equity line of credit under a Standby Equity Distribution Agreement
      with Cornell Capital Partners, LP. The exercise value of $450,000 by issuing
      37,863 shares of common stock was regarded as financing expense and has been
      debited to share capital with the excess of exercise value over par value,
      $449,996 being credited to additional paid-in capital.




The
      common stock to be issued under the Standby
      Equity Distribution Agreement (“SEDA”)
      will be issued at a 1.5% discount to the lowest daily Volume Weighted Average
      Price, (“VWAP”), of the Company’s common stock during the five consecutive
      trading day period immediately following the date the Company notifies Cornell
      Capital Partners, LP that it desires to access the SEDA; provided, that the
      price per share paid by Cornell Capital Partners, LP will in no event be less
      than a minimum of 90% of the closing bid price for the Company’s common stock on
      the trading day immediately preceding the date that it delivers an advance
      request. Further, Cornell Capital Partners, LP will retain 4.5% of each advance
      under the SEDA. Based on this discount, Cornell Capital Partners, LP will have
      an incentive to sell immediately to realize the gain on the 1.5% discount.
      These
      sales could cause the price of the Company’s common stock to decline, based on
      increased selling of its common stock. In the event Cornell Capital Partners,
      LP
      holds more than 9.9% of the Company’s then-outstanding common stock, the Company
      will be unable to obtain a cash advance under the SEDA. A possibility exists
      that Cornell Capital Partners, LP may own more than 9.9% of the Company’s
      outstanding common stock at a time when it would otherwise plan to request
      an
      advance under the SEDA. In that event, if the Company is unable to obtain
      additional external funding, it could fail to achieve the corporate objectives
      that it had hoped to use the cash to achieve.




***In
      July 2004, the Company adopted a stock incentive plan. The maximum number of
      common shares for issuance under this plan is 2,200,000 with a period of 10
      years. The stock incentive plan provides for the issuance, to the Company’s
      officers, directors, management and employees, of options to purchase shares
      of
      the Company’s common stock. As of December 31, 2007, the Company has issued
      90,000 stock options under this plan, among that 22,500 shares was exercised,
      and there remains 2,110,000 stock options issuable in future.




The
      securities authorized for issuance under equity compensation plans at December
      31, 2007 are as follows:




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding
                options
            
            Weighted
                average exercise price of outstanding options
            
            Number
                of securities remaining available for future issuanceEquity
                compensation plans approved by security holders
            
            
            2,200,000
            
            $
            6.57
            
            
            2,110,000




70




19.
       Additional paid-in capital




The
      activities in the Company’s additional paid-in capital account during the years
      ended December 31, 2007 and 2006 are summarized as follows:





December
                31,2007
            
            2006Balance
                at beginning of the year
            
            $
            28,651,959
            
            $
            18,146,722Add:
                Additions during the year-Issuance
                of common stock for cash in accordance with the standby equity
                distribution agreement with Cornell Capital Partners, LP. (Please
                see Note
                17).
            
            
            1,199,989
            
            
            10,899,872Exercise
                of stock option by independent directors
            
            
            —
            
            
            101,248Issuance
                of stock options to independent directors*
            
            
            153,675
            
            
            131,625Issuance
                of common stock in accordance with the standby equity distribution
                agreement with Cornell Capital Partners, LP (Please see Note
                17).
            
            
            —
            
            
            449,996Issuance
                of common stock warrants in accordance with the standby equity
                distribution agreement with Cornell Capital Partners, LP
            
            
            —
            
            
            832,639Increase
                in connection with minority shareholders’ abandonment of all its right and
                interest in Joint-venture. Please see Note 16.
            
            
            174,828
            
            
            —Less:
                decreases during the yearPayment
                of commissions and placement agent fee by issuance of common stock
                in
                accordance with the standby equity distribution agreement with Cornell
                Capital Partners, LP (Please see Note 17).
            
            
            —
            
            
            (450,000
            )Payment
                of commissions and placement agent fee by issuance of common stock
                warrants in accordance with the standby equity distribution agreement
                with
                Cornell Capital Partners, LP**
            
            
            —
            
            
            (832,639
            )Cash
                paid for retaining fee, commissions and placement agent fee in connection
                with offering.
            
            
            (54,500
            )
            
            (627,504
            )Balance
                at end of year
            
            $
            30,125,951
            
            $
            28,651,959





*In
      July
      2004, the Company adopted a stock incentive plan. The maximum number of common
      shares for issuance under this plan is 2,200,000 with a period of 10 years.
      The
      stock incentive plan provides for the issuance, to the Company’s officers,
      directors, management and employees, of options to purchase shares of the
      Company’s common stock. During 2004 to 2007, the Company has issued options to
      purchase up to 22,500 shares of common stock to its three independent directors
      every year, aggregately 90,000 shares. The exercise price represents the fair
      market value based on the grant date of the stock options




The
      fair
      value of the options at the grant date was $153,674, $131,625, $68,850 and
      $55,125, for the years 2007, 2006, 2005 and 2004, respectively, which was
      calculated based on Black-Scholes option pricing model. The fair value was
      recorded as compensation expenses for the years ended December 31, 2007, 2006,
      2005 and 2004. These amounts have been debited to operating expenses and
      credited to additional paid-in capital.




71




The
      weighted-average fair value of options granted during the periods 2007,
      2006, 2005 and 2004 was $6.83, $5.85, $3.06 and $2.45, respectively. The fair
      value of each option granted was estimated on the date of grant using the
      Black-Scholes option valuation model and assumptions noted in the table:




2007
            
            2006
            
            2005
            
            2004Expected
                volatility
            
            
            118.53
            %
            
            93.19
            %
            
            46.00
            %
            
            121.60
            %Risk-free
                rate
            
            
            3.00
            %
            
            4.75
            %
            
            3.60
            %
            
            4.00
            %Expected
                term (years)
            
            
            4
            
            
            5
            
            
            5
            
            
            2Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %
            
            0.00
            %
            
            0.00
            %




**On
      March 20, 2006, the Company raised a gross amount of $5,000,000 in a private
      placement (PIPE) to Cornell Capital Partners, LP, “Investor” by issuing 625,000
      shares of common stock. As part of the financing cost, the Company issued a
      warrant to purchase 86,806 shares of common stock, exercisable for three years
      at an exercise price of $14.40 per share, and a warrant to purchase 69,444
      shares of common stock, exercisable for three years at an exercise price of
      $18.00 per share, to Cornell Capital Partners, LP. The fair value of
      above-mentioned warrant at the grant date is $832,639, which was measured based
      on Black-Scholes option pricing model. This amount was recorded as financing
      expenses and debited to additional paid-in capital. Additionally, the same
      amount was credited to additional paid-in capital, resulting in zero effect
      on
      additional paid-in capital and the Consolidated Financial
      Statements.




The
      weighted average fair value of warrants issued during the 2006 year-end was
      $5.33. The fair value of the warrants granted was estimated on the date of
      grant
      using the option valuation model and assumptions noted in the
      table:





Expected
                volatility
            
            Risk-free
                rate
            
            Expected
                term (years)
            
            Dividend
                yield82.20%
            
            
            4.66
            %
            
            3
            
            
            0
            %




A
      summary
      of option activities under the plans for the years ended December 31,
      2007 and 2006 was as follows:





Shares
            
            Weighted-Average
                Exercise Price
            
            Weighted-Average
                Contractual Term (years)Outstanding
                - January 1, 2006
            
            
            45,000
            
            $
            5.67
            
            
            3.5Granted
            
            
            22,500
            
            
            7.94
            
            
            5Exercised
            
            
            (22,500
            )
            
            4.5
            
            
            —Cancelled
            
            
            —
            
            
            —
            
            
            —Outstanding
                - December 31, 2006
            
            
            45,000
            
            $
            7.39
            
            
            5Granted
            
            
            22,500
            
            
            7.01
            
            
            4Exercised
            
            
            —
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —
            
            
            —Outstanding
                - December 31, 2007
            
            
            67,500
            
            $
            7.26
            
            
            4.7




72




The
      following is a summary of warrants granted for the years ended December 31,
      2007
      and 2006:





Shares
            
            Weighted-Average
                Exercise Price
            
            Weighted-Average
                Contractual Term (years)Outstanding
                - January 1, 2006
            
            
            —
            
            $
            —
            
            
            —Granted
            
            
            156,250
            
            $
            16.00
            
            
            3Exercised
            
            
            —
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —
            
            
            —Outstanding
                - December 31, 2006
            
            
            156,250
            
            $
            16.00
            
            
            3Granted
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —
            
            
            —Outstanding
                - December 31, 2007
            
            
            156,250
            
            $
            16.00
            
            
            3




The
      following is a summary of the range of exercise prices for stock options that
      are outstanding and exercisable at December 31, 2007:





Range
                of
              Exercise
                Prices
            
            Outstanding
              Stock
                Options
            
            Weighted
                Average
              Remaining
                Life
            
            Weighted
                Average
              Exercise
                Price
            
            Number
                of Stock
              Options
                Exercisable$4.50
                - $10.00
            
            67,500
            
            3.25
            
            $
                7.26
            
            67,500





The
      following is a summary of the range of exercise prices for warrants that are
      outstanding and exercisable at December
      31, 2007:





Range
                of
              Exercise
                Prices
            
            Issued
              Warrants
            
            Weighted
                Average
              Remaining
                Life
            
            Weighted
                Average
              Exercise
                Price
            
            Number
                of
              Warrants
                Exercisable$10.01 - $20.00
            
            156,250
            
            1.22
            
            $16.00
            
            156,250




20.
       Retained earnings - Appropriated




The
      activities in the Company’s retained earnings - appropriated account during the
      years ended December 31, 2007 and 2006 are summarized as follows:




December
                31,2007
            
            2006Balance
                at beginning of the year
            
            $
            6,209,909
            
            $
            4,923,262Retained
                earnings - appropriated
            
            
            1,315,868
            
            
            1,286,647Balance
                at end of year
            
            $
            7,525,777
            
            $
            6,209,909




73





Pursuant
      to the relevant laws and regulations of Sino-foreign joint venture enterprises,
      the profits of the Company’s Sino-foreign subsidiaries, which are based on their
      PRC statutory financial statements, are available for distribution in the form
      of cash dividends after these subsidiaries have paid all relevant PRC tax
      liabilities, provided for losses in previous years, and made appropriations
      to
      statutory surplus at 10%.




When
      the
      statutory surplus reserve reaches 50% of the registered capital of a company,
      additional reserve is no longer required. However, the reserve cannot be
      distributed to joint venture partners. Based on the business licenses of the
      Sino-foreign joint ventures, the registered capital of Henglong, Jiulong,
      Shenyang, Zhejiang, USAI, Jielong, and Wuhu are $10,000,000, $4,283,170
      (RMB35,000,000), $8,132,530 (RMB67,500,000), $7,000,000, $1,800,000, $6,000,000
      and $3,750,387 (RMB30,000,000) respectively.




Net
      income as reported in the US GAAP financial statements differs from that
      reported in the PRC statutory financial statements. In accordance with relevant
      laws and regulations in the PRC, profits available for distribution are based
      on
      the statutory financial statements. If the Company has foreign currency
      available after meeting its operational needs, the Company may make its profit
      distributions in foreign currency to the extent foreign currency is available.
      Otherwise, it is necessary to obtain approval and convert such distributions
      at
      an authorized bank.




21.
      Other
      Income




During
      2007 and 2006, the Company recorded other income, government subsidies, of
      $38,462 and $94,257, respectively. ( see
      note
      25)




22
       Income Taxes




The
      Company’s subsidiaries registered in the PRC are subject to state and local
      income taxes within the PRC at the applicable tax rate on the taxable income
      as
      reported in their PRC statutory financial statements in accordance with the
      relevant income tax laws applicable to foreign invested enterprise. The
      Company’s PRC subsidiaries are generally subject to enterprise income tax at a
      statutory rate of 33%, which comprises 30% national income tax and 3% local
      income tax.




On
      January 1, 1996, one of the subsidiaries of the Company, Jiulong, was granted
      an
      enterprise income tax holiday of a 100% enterprise income tax exemption for
      two
      years commencing from 1996, and a 50% enterprise national income tax deduction
      and a 100% local income tax deduction for the next nine years thereafter, from
      1998 to 2006, for income tax purposes. In 2007, Jiulong continued to be granted
      a 100% local income tax exemption.





On
      January 1, 1999, one of the subsidiaries of the Company, Henglong, was granted
      an enterprise income tax holiday of a 100% enterprise income tax exemption
      for
      two years commencing from 1999, and a 50% enterprise national income tax
      deduction and a 100% local income tax deduction for the next nine years
      thereafter, from 2001 to 2009, for income tax purposes.





On
      January 1, 2003, one of the subsidiaries of the Company, Shenyang, was granted
      an enterprise income tax holiday of a 100% enterprise income tax exemption
      for
      two years commencing from 2003, and a 75% enterprise national income tax
      deduction and a 100% local income tax deduction for the next three years
      thereafter, from 2005 to 2007, for income tax purposes.





On
      January 1, 2004, one of the subsidiaries of the Company, Zhejiang, was granted
      an enterprise income tax holiday of a 100% enterprise income tax exemption
      for
      two years commencing from 2004, and a 50% enterprise national income tax
      deduction and a 50% local income tax deduction for the next three years
      thereafter, from 2006 to 2008, for income tax purposes.





74




USAI,
      Wuhu, Jielong and Hengsheng are at their start up stage and accordingly, there
      is no assessable profit for the period ended December 31, 2007 subject to PRC
      enterprise income tax.





No
      provision for Hong Kong tax is made as Great Genesis are both investment holding
      companies, and have no assessable income in Hong Kong for the years ended
      December 31, 2007 and 2006.





No
      provision for US tax is made as the Company has no assessable income in the
      US
      for the years ended December 31, 2007 and 2006.





The
      account of income tax as of the December 31, 2007 and 2006 is summarized as
      follows:





Years
                Ended December 312007
            
            2006Tax
                rate
            
            
            7.5%-30.0
            %
            
            7.5%-16.5
            %Current
                tax provision
            
            $
            5,631,722
            
            $
            2,597,189Income
                tax refund*
            
            
            (2,085,180
            )
            
            (928,108
            )Deferred
                tax (benefit) relating to the origination and reversal of temporary
                differences
            
            
            (1,315,510
            )
            
            —Income
                tax
            
            $
            2,231,032
            
            $
            1,669,081





*For
      the
      year ended December 31, 2007 and 2006, two of the Company’s Sino-foreign joint
      ventures received an income tax benefit of $ 2,085,180 and
      $928,108, respectively, for purchase of domestic equipment, which has been
      reflected as a reduction to income tax expense in the respective period of
      the
      Company’s consolidated statements of operations.





Deferred
      income taxes are provided for temporary differences between amounts of assets
      and liabilities for financial reporting purposes and the basis of such assets
      and liabilities as measured by tax laws and regulations, as well as net
      operating loss, tax credit and other carryforwards. Additionally, deferred
      taxes
      have been provided for the net effect of repatriating earnings from consolidated
      foreign subsidiaries. Statement of Financial Accounting Standards No. 109
      (“SFAS 109”), “Accounting for Income Taxes,” requires that deferred tax
      assets be reduced by a valuation allowance if, based on all available evidence,
      it is considered more likely than not that some portion or all of the recorded
      deferred tax assets will not be realized in future periods.





The
      components of deferred income tax assets at December 31 were as
      follows:





December
                312007
            
            2006Losses
              carryforward
            
            $
            1,921,953
            
            $
            1,520,160Product
                warranties and
                other reserves
            
            
            1,258,559
            
            
            534,553Property,
                plant and equipment
            
            
            1,573,787
            
            
            952,245Bonus
                  accrual
            
            
            347,089
            
            
            —All
                other
            
            
            161,121
            
            
            —5,262,509
            
            
            3,006,958Valuation
                allowance
            
            
            (3,946,999
            )
            
            (3,006,958
            )Total
                deferred tax assets
            
            $
            1,315,510
            
            $
            —




The
      estimated losses available to reduce taxable income in future years expire
      as
      follows:


Years
                  ending December 312027
              
              $
              779,3882026
              
              
              1,044,3632025
              
              
              471,6232024
              
              
              933,3082023
              
              
              2,259,7532012
              
              
              1,284,9382011
              
              
              918,439$
              7,691,812


75




23.
       Significant Concentrations




The
      Company grants credit to its customers, generally on an open account basis.
      The
      Company’s customers are all located in the PRC.




In
      2007,
      the Company’s ten largest customers accounted for 73.9% of the Company’s
      consolidated sales, with four customers accounting for in excess of 10% of
      consolidated sales, i.e. 16.4%, 13.7%, 11.5% and 10.6% of consolidated sales,
      or
      an aggregate of 52.2% of consolidated sales.




In
      2006,
      the Company’s ten largest customers accounted for 72.5% of the Company’s
      consolidated sales, with four customers accounting for in excess of 10% of
      consolidated sales, i.e. 16.4%, 13.3%, 11.1% and 10.3% of consolidated sales,
      or
      an aggregate of 51.1% of consolidated sales.




At
      December 31, 2007 and 2006, approximately 38.1% and 35.5% of accounts receivable
      were from trade transactions with the aforementioned
      customers.




24 .
       Related Party Transactions




The
      Company’s related party transactions include product sales, material purchases
      and purchases of equipment and technology. These transactions were consummated
      under similar terms as those with the Company's customers and suppliers. On
      some
      occasions, the Company’s related party transactions also include purchase/sale
      of capital stock of the joint ventures and sale of property, plant and
      equipment.




Related
      sales and purchases: During the years ended December 31, 2007 and 2006, the
      joint-ventures entered into related party transactions with companies with
      common directors as shown below:




Merchandise
      Sold to Related Parties





Years
                ended December 31,2007
            
            2006Xiamen
                Joylon
            
            $
            5,020,465
            
            $
            2,813,113Shanghai
                Fenglong
            
            
            452,044
            
            
            465,331Total
            
            $
            5,472,509
            
            $
            3,278,444





76




Materials
      Purchased from Related Parties





Years
                ended December 31,2007
            
            2006Xiamen
                Joylon
            
            $
            2,157
            
            $
            2,909Shanghai
                Fenglong
            
            
            144,333
            
            
            270,597Jiangling
                Tongchuang
            
            
            4,032,771
            
            
            2,333,399Jingzhou
                Tongyi
            
            
            225,451
            
            
            148,644Jingzhou
                Tongying
            
            
            953,796
            
            
            94,734Hubei
                Wiselink
            
            
            114,087
            
            
            —Total
            
            $
            5,472,595
            
            $
            2,850,283





Technology
      Purchased from Related Parties





Years
                ended December 31,2007
            
            2006Changchun
                Hualong
            
            $
            479,452
            
            $
            193,719





Equipment
      Purchased from Related Parties





Years
                ended December 31,2007
            
            2006Hubei
                Wiselink
            
            $
            1,015,493
            
            $
            858,115




Related
      receivables, advance payments and account payable: As at December 31, 2007
      and
      2006, accounts receivables, advance payments and account payable between the
      Company and related parties are as shown below:




Due
      from
      Related Parties




December
                31,2007
            
            2006Xiamen
                Joylon
            
            $
            1,704,571
            
            $
            1,521,413Shanghai
                Fenglong
            
            
            164,909
            
            
            249,520Total
            
            $
            1,869,480
            
            $
            1,770,933





77




Other
      Receivables from
      Related Parties





December
                31,2007
            
            2006Jiangling
                Tongchuang
            
            $
            3,288
            
            $
            3,077Jingzhou
                Derun
            
            
            22,472
            
            
            —WuHan
                Dida
            
            
            93,925
            
            
            83,959Jiulong
                Material
            
            
            519,141
            
            
            534,503Changchun
                Hualong
            
            
            —
            
            
            50,000Others
            
            
            —
            
            
            66,971Total
            
            $
            638,826
            
            $
            738,510




Other
      receivables from related parties are primarily unsecured demand loans, with
      no
      stated interest rate or due date.




O n
      December 31, 2007 and 2006, with the exception of the receivable from the
      investee of Jiulong Jiulong
      Material of
      $519,141 and $534,503, which were fully recorded in the allowance for doubtful
      accounts, the Company believes that all other receivables are collectible,
      as
      the related parties are in good financial condition and are paying their
      payables to Company pursuant to the terms of their respective contracts.





Due
      to
      Related Parties





December
                31,2007
            
            2006Xiamen
                Joylon
            
            $
            3,007
            
            $
            3,021Shanghai
                Tianxiang
            
            
            570,806
            
            
            534,216Shanghai
                Fenglong
            
            
            1,007
            
            
            79,417Jiangling
                Tongchuang
            
            
            287,292
            
            
            18,284Hubei
                Wiselink
            
            
            146,658
            
            
            3,111Jingzhou
                Tongyi
            
            
            33,859
            
            
            2,356Jingzhou
                Tongying
            
            
            92,188
            
            
            —Total
            
            $
            1,134,817
            
            $
            640,405




Advanced
      Equipment Payment to Related Parties





December
                31,2007
            
            2006Hubei
                Wiselink
            
            $
            1,560,378
            
            $
            488,873





78




Advanced
      Expenses and Others to Related Parties





December
                31,2007
            
            2006Changchun
                Hualong
            
            $
            —
            
            $
            128,205Jingzhou
                Tongyi
            
            
            54,799
            
            
            111,620Jingzhou
                Tongying
            
            
            524
            
            
            247,508Total
            
            $
            55,323
            
            $
            487,333





25.
      Commitments and Contingencies




Legal
      Proceedings - The Company is not currently a party to any threatened or pending
      legal proceedings, other than incidental litigation arising in the ordinary
      course of business. In the opinion of management, the ultimate disposition
      of
      these matters will not have a material adverse effect on the Company's
      consolidated financial position, results of operations or cash flows.




The
      following table summarizes the Company‘s major contractual payment obligations
      and commitments as of December 31, 2007:





Payment
                Obligations by year2008
            
            2009
            
            2010
            
            2011
            
            Thereafter
            
            TotalObligations
                for service agreements
            
            $
            110,000
            
            $
            110,000
            
            $
            110,000
            
            $
            110,000
            
            $
            —
            
            $
            440,000Obligations
                for purchasing agreements
            
            
            7,166,496
            
            
            558,767
            
            
            —
            
            
            —
            
            
            —
            
            
            7,725,263Total
            
            $
            7,276,496
            
            $
            668,767
            
            $
            110,000
            
            $
            110,000
            
            $
            —
            
            $
            8,165,263





Government
      subsidies represent refunds by the Chinese Government of interest paid to banks
      by companies entitled to such subsidies. This applies only to interest on loans
      related to production facilities expansion. Commencing in 2004 and 2005, the
      Company had used this type of special loan to improve its production lines
      by
      increasing capability and enhancing quality. The expansion was completed and
      began to operate at the end of 2005 and 2006. During 2007 and 2006, the Chinese
      Government sent experts to review and assess the Company’s usage of its improved
      production facilities on site to confirm that the Company’s improvements had
      achieved its goals and thereby qualify for the subsidy. The Company recorded
      the
      refunded interest which achieved its goals into Other income, and refunded
      interest which has not achieved its goals into advances payable.





26 . Off-Balance
      Sheet Arrangements




At
      December 31, 2007 and 2006, the Company did not have any transactions,
      obligations or relationships that could be considered off-balance sheet
      arrangements.




27.
      Subsequent Events




As
      of
      February 15, 2008, the Company has closed a senior convertible notes with
      warrants private placement transaction and received funding from Lehman Brothers
      ("Lehman") for $30 million and from YA Global Investments, L.P., which is
      managed by Yorkville Advisors, LLC, for $5 million. The proceeds are planned
      to
      support the Company's acquisitions, capital expenditures for expansion and
      working capital for future growth. As
      of
      February 21, 2008, a total of $17.5 million has been remitted and received
      in
      the company’s bank account.




79




28. Segment
      Reporting





The
      accounting policies of the product sectors are the same as those described
      in
      the summary of significant accounting policies except that the disaggregated
      financial results for the product sectors have been prepared using a management
      approach, which is consistent with the basis and manner in which management
      internally disaggregates financial information for the purposes of assisting
      them in making internal operating decisions. Generally, the Company evaluates
      performance based on stand-alone product sector operating income and accounts
      for inter segment sales and transfers as if the sales or transfers were to
      third
      parties, at current market prices.





During
      the year ended December 31, 2007, the Company had nine product sectors, five
      of
      them were principal profit makers, which were reported as separate sectors
      which
      engaged in the production and sales of power steering (Henglong), power steering
      (Jiulong), power steering (Shenyang), power pumps (Zhejiang), and power steering
      (Wuhu). The other four sectors which were established in 2005, 2006, 2007 and
      2007 respectively, engaged in the production and sales of sensor modular (USAI),
      electronic power steering (Jielong), power steering (Hengsheng), and provider
      of
      after sales and R&D services (HLUSA).Since the revenues, net income and net
      assets of these four sectors are less than 10% of its segment in the
      consolidated financial statements, the Company incorporated these four sectors
      into “other sectors”.




During
      the year ended December 31, 2006, the Company had seven product sectors, four
      of
      them were principal profit makers, which were reported as separate sectors
      which
      engaged in the production and sales of power steering for cars (Henglong),
      power
      steering for trucks (Jiulong), power steering for light duty vehicles
      (Shenyang), and power pumps (Zhejiang). To conform with the year 2007, power
      steering (Wuhu) was reported separately. The other two sectors which were
      established in 2005 and 2006 respectively, engaged in the production and sales
      of sensor modular (USAI), and electronic power steering (Jielong).Since the
      revenues, net income and net assets of these two sectors are less than 10%
      of
      its segment in the consolidated financial statements, the Company incorporated
      these two sectors into “other sectors”





The
      Company’s product sectors information is as follows:





For
      the
      year ended December 31, 2007





Henglong
            
            Jiulong
            
            Shenyang
            
            Zhejiang
            
            Wuhu
            
            Other
                Sectors
            
            Other
                (a)
            
            TotalRevenueNet
                product sales - external
            
            $
            45,612,058
            
            $
            35,774,010
            
            $
            19,787,916
            
            $
            13,828,252
            
            $
            18,495,678
            
            $
            99,089
            
            $
            —
            
            $
            133,597,003Net
                product sales - internal
            
            
            30,487,995
            
            
            3,151,173
            
            
            3,696,888
            
            
            142,185
            
            
            —
            
            
            —
            
            
            (37,478,241
            )
            
            —Gain
                on other sales and other income - external
            
            
            419,814
            
            
            115,472
            
            
            70,879
            
            
            5,973
            
            
            5,595
            
            
            (18,831
            )
            
            (6,290
            )
            
            592,612Total
                revenue
            
            $
            76,519,867
            
            $
            39,040,655
            
            $
            23,555,683
            
            $
            13,976,410
            
            $
            18,501,273
            
            $
            80,258
            
            
            ($37,484,531
            )
            $
            134,189,615Depreciation
                and amortization
            
            
            3,594,199
            
            
            1,897,886
            
            
            531,033
            
            
            848,534
            
            
            176,952
            
            
            197,311
            
            
            103,631
            
            
            7,349,546Net
                income
            
            
            6,154,185
            
            
            3,105,196
            
            
            2,121,008
            
            
            1,415,060
            
            
            (942,270
            )
            
            (755,821
            )
            
            (2,237,452
            )
            
            8,859,906Total
                assets
            
            
            82,336,597
            
            
            43,072,284
            
            
            22,360,047
            
            
            19,432,066
            
            
            10,469,583
            
            
            7,279,420
            
            
            (1,965,310
            )
            
            182,984,687Capital
                expenditures
            
            $
            3,845,364
            
            $
            2,283,801
            
            $
            1,288,001
            
            $
            2,127,630
            
            $
            1,702,612
            
            $
            3,022,829
            
            $
            —
            
            $
            14,270,237




80




For
      the
      year ended December 31, 2006




Henglong
            
            Jiulong
            
            Shenyang
            
            Zhejiang
            
            Other
                Sectors
            
            Other
                (a)
            
            TotalRevenueNet
                product sales - external
            
            $
            45,312,457
            
            $
            25,135,726
            
            $
            14,935,722
            
            $
            10,221,478
            
            $
            161,056
            
            $
            —
            
            $
            95,766,439Net
                product sales - internal
            
            
            8,191,505
            
            
            3,584,952
            
            
            884,979
            
            
            352,030
            
            
            —
            
            
            (13,013,466
            )
            
            —Gain
                on other salesand
                other income - external
            
            
            261,420
            
            
            83,941
            
            
            28,623
            
            
            3,273
            
            
            —
            
            
            (3,784
            )
            
            373,473Total
                revenue
            
            $
            53,765,382
            
            $
            28,804,619
            
            $
            15,849,324
            
            $
            10,576,781
            
            $
            161,056
            
            
            ($13,017,250
            )
            $
            96,139,912Depreciation
                and amortization
            
            $
            3,087,440
            
            $
            1,696,590
            
            $
            415,523
            
            $
            631,094
            
            $
            547,700
            
            $
            97,867
            
            $
            6,476,214Net
                income
            
            
            3,329,962
            
            
            1,304,902
            
            
            1,627,718
            
            
            789,239
            
            
            (827,957
            )
            
            (1,412,160
            )
            
            4,811,704Total
                assets
            
            
            74,295,465
            
            
            37,217,985
            
            
            15,279,830
            
            
            14,857,762
            
            
            8,216,363
            
            
            2,241,133
            
            
            152,108,538Capital
                expenditures
            
            $
            2,393,008
            
            $
            860,317
            
            $
            688,242
            
            $
            918,305
            
            $
            2,974,934
            
            
            ($280,970
            )
            $
            7,553,836





(a)
            Other
                includes activity at the corporate level, unrealized income between
                product companies (sectors), and elimination of inter-sector transactions.




81