Edgar Filing: WUHAN GENERAL GROUP (CHINA), INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission file number 001-34125

WUHAN GENERAL GROUP (CHINA), INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada		84-1092589
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

Canglongdao Science Park of Wuhan East Lake Hi-Tech Development Zone Wuhan, Hubei, People’s Republic of China		430200
(Address of Principal Executive Offices)		(Zip Code)

86-27-5970-0069

(Registrant’s Telephone Number, Including Area Code)

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 (the “Exchange Act”) 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 ý No ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company ý

(Do not check if a smaller reporting company)

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

As of November 12, 2008, the registrant had a total of 24,059,312 shares of common stock outstanding.

INDEX

	Page
PART I FINANCIAL INFORMATION	1

Item 1. Financial Statements.	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	39

Item 4T. Controls and Procedures.	39

PART II OTHER INFORMATION	43

Item 1. Legal Proceedings.	43

Item 1A. Risk Factors.	43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	59

Item 3. Defaults Upon Senior Securities.	59

Item 4. Submission of Matters to a Vote of Security Holders.	59

Item 5. Other Information.	60

Item 6. Exhibits.	60

Signatures	61

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Wuhan General Group (China), Inc.

Consolidated Balance Sheets

At September 30, 2008, and December 31, 2007

(Stated in US Dollars)

	Note		September 30,		December 31,
			2008		2007
			(unaudited)		(audited)
ASSETS

Cash		2(e)		10,059,533		992,965
Restricted Cash		3		11,576,749		9,108,866
Notes Receivable		4		-		1,865,491
Accounts Receivable		2(f),5		35,967,105		31,875,411
Other Receivable				5,436,765		1,977,646
Inventory		2(g),6		15,851,262		7,895,960
Advances to Suppliers				14,433,573		12,743,130
Advances to Employees		7		303,614		138,420
Prepaid Taxes				432,275		257,553
Real Property Available for Sale				1,100,232		993,861
Total Current Assets				95,161,107		67,849,304

Property, Plant & Equipment, net		2(h),8		20,328,248		20,401,546
Land Use Rights, net		2(j),9		1,921,279		1,830,476
Construction in Progress		10		18,352,763		9,897,484
Intangible Assets, net		2(i),11		375,546		381,281
Total Assets			$	136,138,942	$	100,360,092

LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities

Bank Loans & Notes		12		33,484,407		28,132,664
Accounts Payable				6,951,291		4,747,298
Taxes Payable				804,786		1,043,383
Other Payable				2,199,873		3,137,575
Dividend Payable				-		898,875
Accrued Liabilities		13		3,844,884		2,003,800
Customer Deposits				2,468,636		5,034,464
Total Current Liabilities				49,753,877		44,998,059

Total Liabilities				49,753,877		44,998,059

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China), Inc.

Consolidated Balance Sheets

At September 30, 2008, and December 31, 2007

(Stated in US Dollars)

	Note		September 30,		December 31,
Stockholders' Equity			2008		2007
			(unaudited)		(audited)
Preferred Stock - $0.0001 Par Value 50,000,000 Shares Authorized; 6,934,943 and 10,287,554 Shares of Series A Convertible Preferred Stock Issued & Outstanding at September 30, 2008, and December 31, 2007, respectively		14		693		1,029
Additional Paid in Capital - Preferred Stock				9,078,232		13,466,990
Additional Paid in Capital – Warrants		14		3,670,266		6,572,334
Additional Paid in Capital - Beneficial Conversion Feature				7,079,491		10,501,982
Preferred Stock - $0.0001 Par Value 50,000,000 Shares Authorized; 5,066,524 and 0 Shares of Series B Convertible Preferred Stock Issued & Outstanding at September 30, 2008, and December 31, 2007, respectively				507		-
Additional Paid in Capital - Preferred Stock				11,411,545		-
Additional Paid in Capital - Warrants				1,847,042		-
Additional Paid in Capital - Beneficial Conversion Feature				3,027,542		-
Common Stock - $0.0001 Par Value 100,000,000 Shares Authorized; 24,044,312 and 19,712,446 Shares Issued & Outstanding at September 30, 2008, and December 31, 2007, respectively		14		2,404		1,971
Additional Paid in Capital				22,412,016		12,349,602
Statutory Reserve		2(t),15		2,608,270		633,771
Retained Earnings				17,640,837		8,483,648
Accumulated Other Comprehensive Income		2(u)		7,606,221		3,350,706
Total Stockholders' Equity				86,385,065		55,362,033

Total Liabilities & Stockholders' Equity			$	136,138,942	$	100,360,092

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China), Inc.

Consolidated Statements of Income

For the three and nine months ended September 30, 2008 and 2007

(Stated in US Dollars)

		3 months			3 months			9 months			9 months
		ended			ended			ended			ended
		September 30,			September 30,			September 30,			September 30,
		2008			2007			2008			2007
Sales	2(l)	$	33,952,893		$	30,523,074		$	90,581,691		$	60,342,774
Cost of Sales	2(m)		23,934,676			20,039,259			62,932,130			40,511,207
Gross Profit			10,018,217			10,483,815			27,649,561			19,831,567

Operating Expenses
Selling Expenses	2(n)		834,590			938,534			2,129,971			1,633,144
General & Administrative Expenses	2(o)		2,112,731			1,480,755			6,602,031			3,299,901
Warranty Expense	2(v),13		89,958			91,059			647,175			514,520
Total Operating Expense			3,037,279			2,510,348			9,379,177			5,447,565

Operating Income			6,980,938			7,973,466			18,270,384			14,384,001

Other Income (Expenses)
Interest Income			288,177			94,798			636,626			108,923
Other Expenses			(1,375,291	)		(1,144,227	)		(1,492,718	)		(1,145,270	)
Interest Expense			(1,264,301	)		(369,187	)		(2,521,773	)		(756,695	)
Total Other Income (Loss) & Expense			(2,351,415	)		(1,418,616	)		(3,377,865	)		(1,793,042	)

Earnings before Tax			4,629,523			6,554,851			14,892,519			12,590,960

Income Tax	2(s), 16		-			-			-			-

Net Income		$	4,629,523		$	6,554,851		$	14,892,519		$	12,590,960

Preferred Dividends Declared			215,829			299,625			733,289			773,279
Series A Constructive Preferred Dividend			-			-			-			10,501,982
Series B Constructive Preferred Dividend			3,027,542			-			3,027,542			-
Income Available to Common Shareholders		$	1,386,152		$	6,255,226		$	11,131,688		$	1,315,699

Earnings Per Share	17
Basic		$	0.05		$	0.32		$	0.51		$	0.07
Diluted		$	0.03		$	0.14		$	0.33		$	0.03

Weighted Average Shares Outstanding
Basic			25,930,537			19,712,446			21,907,429			19,712,446
Diluted			47,457,524			46,200,613			45,365,361			39,122,641

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China), Inc.

Consolidated Statements of Income

For the three and nine months ended September 30, 2008 and 2007

(Stated in US Dollars)

	3 months		3 months		9 months		9 months
	ended		ended		ended		ended
	September 30,		September 30,		September 30,		September 30,
	2008		2007		2008		2007
Comprehensive Income
Net Income	$	4,629,523	$	6,554,851	$	14,892,519	$	12,590,960
Other Comprehensive Income
Foreign Currency Translation Adjustment		189,698		590,874		4,255,515		1,157,828
Total Comprehensive Income	$	4,819,221	$	7,145,725	$	19,148,034	$	13,748,788

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China), Inc.

Consolidated Statements of Stockholders’ Equity

For the nine months ended September 30, 2008 and the year ended December 31, 2007

(Stated in US Dollars)

Series A

Series

Beneficial

Series B

Series

Beneficial

Accum

Convertible

Preferred

A, J, B, C

Conversion

Convertible

Preferred

BB, JJ

Conversion

Common

-ulated

Preferred Stock

Stock

Warrants

Feature

Preferred Stock

Stock

Warrants

Feature

Common Stock

Stock

Other

Shares

Additional

Shares

Additional

Shares

Additional

Compren

Out-

Paid in

Out-

Paid in

Out-

Paid in

Statutory

Retained

--hensive

-standing

Amount

Capital

-standing

Amount

Capital

-standing

Amount

Capital

Reserve

Earnings

Income

Total

Balance, January 1, 2007

19,712,446

1,971

12,349,602

622,151

5,200,285

770,120

18,944,128

Issuance of Common Stock for Cash

Issuance of Preferred Stock for Cash

10,287,554

1,029

13,466,990

6,572,334

20,040,353

Net Income

14,869,869

Preferred Dividends Declared

(1,072,904

)

(1,072,904

)

Constructive Preferred Dividends

10,501,982

(10,501,982

)

Appropriations of Retained Earnings

11,620

Foreign Currency Translation Adjustment

2,580,586

Balance, December 31, 2007

10,287,554

1,029

13,466,990

6,572,334

10,501,982

19,712,446

1,971

12,349,602

633,771

8,483,648

3,350,706

55,362,033

	Series A						Series A			Series			Beneficial			Series B				Series B		Series		Beneficial													Accum
	Convertible						Preferred			A, J, B, C			Conversion			Convertible				Preferred		B, JJ		Conversion		Common											-ulated
	Preferred Stock						Stock			Warrants			Feature			Preferred Stock				Stock		Warrants		Feature		Stock											Other
	Shares						Additional			Additional			Additional			Shares				Additional		Additional		Additional		Shares				Additional							Compren
	Out-						Paid in			Paid in			Paid in			Out-				Paid in		Paid in		Paid in		Out-				Paid in		Statutory		Retained			--hensive
	-standing			Amount			Capital			Capital			Capital			-standing		Amount		Capital		Capital		Capital		-standing		Amount		Capital		Reserve		Earnings			Income		Total
Balance, January 1, 2008		10,287,554			1,029			13,466,990			6,572,334			10,501,982			-		-		-		-		-		19,712,446		1,971		12,349,602		633,771		8,483,648			3,350,706		55,362,033
Issuance of Preferred Stock for Cash											(2,634,592	)					5,066,524		507		11,411,545		1,847,042		3,027,542															13,652,043
Conversion of Series A Preferred Stock		(3,352,611	)		(335	)		(4,388,757	)					(3,422,491	)												3,352,611		335		7,811,248									-
Issuance of Common Stock from Exercise of Series C Warrants											(267,476	)															115,361		12		296,466									29,001
Stock Option Compensation																															296,109									296,109
Issuance of Common Stock for Listing Penalties																											863,894		86		1,658,590									1,658,676
Net Income																																			14,892,519					14,892,519
Preferred Dividends Declared																																			(733,289	)				(733,289	)
Constructive Preferred Dividends																																			(3,027,542	)				(3,027,542	)
Appropriations of Retained Earnings																																	1,974,499		(1,974,499	)				-
Foreign Currency Translation Adjustment																																						4,255,515		4,255,515
Balance, September 30, 2008		6,934,943			693			9,078,232			3,670,266			7,079,491			5,066,524		507		11,411,545		1,847,042		3,027,542		24,044,312		2,404		22,412,016		2,608,270		17,640,837			7,606,221		86,385,065

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China), Inc.

Consolidated Statements of Cash Flows

For the three and nine months ended September 30, 2008 and 2007

(Stated in US Dollars)

	3 months			3 months			9 months			9 months
	ended			ended			ended			ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Cash Flow from Operating Activities
Cash Received from Customers	$	28,544,654		$	29,180,726		$	80,439,415		$	51,098,507
Cash Paid to Suppliers & Employees		(26,129,464	)		(25,225,990	)		(76,160,420	)		(57,904,148	)
Interest Received		288,177			94,798			636,626			108,923
Interest Paid		(1,264,301	)		(369,187	)		(2,521,773	)		(756,695	)
Cash Sourced/(Used) in Operating Activities		1,439,066			3,680,348			2,393,848			(7,453,412	)

Cash Flows from Investing Activities
Cash Invested in Restricted Time Deposits		(7,154,810	)		794,351			(2,467,883	)		(8,425,983	)
Repayment of/(Investment in) Notes		-			(225,257	)		1,891,127			546,999
Payments for Construction of Plant & Equipment		-			(3,162,369	)		(11,078,425	)		(12,595,728	)
Purchases of Land Use Rights		-			(27,146	)		-			(74,072	)
Payments for Purchases of Intangible Assets		-			(33,850	)		-			(44,581	)
Cash Used/(Sourced) in Investing Activities		(7,154,810	)		(2,654,271	)		(11,655,182	)		(21,690,692	)

Cash Flows from Financing Activities
Proceeds from Issuance of Preferred Stock		10,624,501			(726,086	)		10,624,501			20,040,353
Proceeds from/(Repayment of) Bank Loans		4,976,284			1,596,793			5,351,743			11,283,397
Dividends Paid		(779,387	)		-			(1,632,164	)		(174,029	)
Cash Sourced/(Used) in Financing Activities		14,821,399			870,707			14,344,081			31,149,722

Net Increase/(Decrease) in Cash & Cash Equivalents for the Period		9,105,655			1,896,784			5,082,747			2,005,617

Effect of Currency Translation		205,006			590,878			3,983,821			1,157,831

Cash & Cash Equivalents at Beginning of Period		748,871			924,029			992,965			248,243

Cash & Cash Equivalents at End of Period	$	10,059,532		$	3,411,691		$	10,059,533		$	3,411,691
Non-Cash Investing Activity:
Constructive Preferred Dividend		3,027,542			-			3,027,542			10,501,982

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China), Inc.

Reconciliation of Net Income to Cash Flow Sourced/(Used) in Operating Activities

For the three months and nine months ended September 30, 2008 and 2007

(Stated in US Dollars)

	3 months			3 months			9 months			9 months
	ended			ended			ended			ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Net Income	$	4,629,523		$	6,554,851		$	14,892,519		$	12,590,960

Adjustments to Reconcile Net Income to
Net Cash Provided by Cash Activities:

Non Cash Compensation		1,673,841			-			1,983,787			-
Amortization		20,423			26,000			80,256			67,748
Depreciation		488,354			(430,594	)		1,628,214			336,611
Provision for Bad Debt on Note Receivable		-			537			(25,635	)		1,467
Decrease/(Increase) in Accounts Receivable		(5,809,839	)		(8,260,400	)		(9,902,582	)		(18,924,625	)
Decrease/(Increase) in Other Receivable		3,196,118			6,456,082			2,351,769			6,212,343
Decrease/(Increase) in Inventory		(4,007,822	)		(300,822	)		(7,955,302	)		(4,709,482	)
Decrease/(Increase) in Advances to Suppliers		3,190,928			(45,259	)		(1,690,443	)		(5,174,868	)
Decrease/(Increase) in Advances to Employees		3,696			(28,788	)		(165,193	)		(35,254	)
Decrease/(Increase) in Prepaid Taxes		(201,755	)		(15,379	)		(174,722	)		(43,299	)
Increase/(Decrease) in Accounts Payable		1,679,583			(3,279,865	)		2,203,993			(568,878	)
Increase/(Decrease) in Taxes Payable		(1,989	)		(356,450	)		(238,598	)		(817,959	)
Increase/(Decrease) in Other Payable		(574,417	)		1,258,971			130,530			(2,018,652	)
Increase/(Decrease) in Accrued Liabilities		(53,059	)		1,640,030			1,841,083			2,163,927
Increase/(Decrease) in Customer Deposits		(2,794,519	)		461,433			(2,565,828	)		3,466,548

Total of all adjustments		(3,190,457	)		(2,874,503	)		(12,498,671	)		(20,044,372	)


Net Cash Provided by Operating Activities	$	1,439,066		$	3,680,348		$	2,393,848		$	(7,453,412	)

See Accompanying Notes to the Financial Statements and Accountant’s Report.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

Wuhan General Group (China), Inc. (the “Company”) is a holding company whose primary business operations are conducted through its operating subsidiaries Wuhan Blower Co., Ltd. (“Wuhan Blower”) and Wuhan Generating Equipment Co., Ltd. (“Wuhan Generating Equipment”). Wuhan Blower is a China-based manufacturer of industrial blowers that principally are components of steam driven electrical power generation plants. Wuhan Generating Equipment is a China-based manufacturer of industrial steam and water turbines, also principally for use in electrical power generation plants.

The Company was formed under the laws of the State of Colorado on July 19, 1988 as Riverside Capital, Inc. On March 18, 1992, the Company changed its name to United National Film Corporation. In June 2001, the Company suspended all business activities and became a “shell company.”

In 2006, the Company effectively dissolved or abandoned all subsidiaries, which may or may not have been active in periods prior to June 2001. On October 20, 2006, the Company changed its state of incorporation from Colorado to Nevada by means of a merger with and into a Nevada corporation formed on September 12, 2006 solely for the purpose of effecting the reincorporation.

On February 7, 2007, the Company entered into a share exchange agreement with Fame Good International Limited (“Fame”) and Universe Faith Group Limited (“UFG”). Prior to the share exchange, Fame was the sole stockholder of UFG, which is the parent company of Wuhan Blower and Wuhan Generating Equipment. Pursuant to the share exchange, UFG became a wholly owned subsidiary of the Company and Fame became the Company’s controlling stockholder. On March 13, 2007, the Company changed its name from United National Film Corporation to Wuhan General Group (China), Inc.

The share exchange transaction has been accounted for as a recapitalization of UFG where the Company (the legal acquirer) is considered the accounting acquiree and UFG (the legal acquiree) is considered the accounting acquirer. As a result of this transaction, the Company is deemed to be a continuation of the business of UFG.

Accordingly, the financial data included in the accompanying consolidated financial statements for all periods prior to February 7, 2007 is that of the accounting acquirer (UFG). The historical stockholders’ equity of the accounting acquirer prior to the share exchange has been retroactively restated as if the share exchange transaction occurred as of the beginning of the first period presented.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Method of Accounting

The Company maintains its general ledger and journals with the accrual method of accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.

(b)

Consolidation

The interim consolidated financial statements include the accounts of the Company and its subsidiaries, UFG, Wuhan Blower, and Wuhan Generating Equipment. Inter-company transactions, such as sales, cost of sales, due to/due from balances, investment in subsidiaries, and subsidiaries’ capitalization have been eliminated.

(c)

Economic and Political Risks

The Company’s operations are conducted in the People’s Republic of China (the “PRC”). Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

(d)

Use of Estimates

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

(e)

Cash and Cash Equivalents

The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents. The company maintains bank accounts in the PRC.

(f)

Accounts Receivable-Trade

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount is no longer probable. Pursuant to the Company’s accounting policies, the allowance for doubtful accounts is determined by applying a rate of five percent on outstanding trade receivables. Bad debts are charged against the allowance when outstanding trade receivables have been determined to be uncollectible. See also Note 5 – Accounts Receivable.

(g)

Inventory

Inventory, consisting of raw materials, work in progress, and finished products, is stated at the lower of cost or market value. Finished products are comprised of direct materials, direct labor and an appropriate proportion of overhead.

(h)

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method with 5% salvage value. Estimated useful lives of the property, plant and equipment are as follows:

Buildings	30 years
Machinery and Equipment	10 years
Furniture and Fixtures	5 years
Motor Vehicles	5 years

(i)

Intangible Assets

Intangible assets are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives of intangibles are as follows:

Technical Licenses	10 years
Trademark	20 years

(j)

Land Use Rights

The Company carries land use rights at cost less accumulated amortization. Land use rights are amortized straight-line over the useful life of 50 years.

(k)

Accounting for Impairment of Long-Lived Assets

The Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of September 30, 2008 and December 31, 2007, there were no significant impairments of its long-lived assets.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

(l)

Revenue Recognition

Revenue from the sale of blower products and generating equipment is recognized at the time of the transfer of risks and rewards of ownership, which generally occurs when the goods are delivered to customers and the title passes. There are no customer acceptance clauses in the Company’s standard sales contracts. Typically, installation begins between one to two weeks following delivery of the product. The installation process typically takes four to eight weeks.

(m)

Cost of Sales

The Company’s cost of sales is comprised of raw materials, factory worker salaries and related benefits, machinery supplies, maintenance supplies, depreciation, utilities, inbound freight, purchasing and receiving costs, inspection and warehousing costs.

(n)

Selling Expenses

Selling expenses are comprised of outbound freight, salary for the sales force, client entertainment, commissions, depreciation, advertising, and travel and lodging expenses.

(o)

General & Administrative Expenses

General and administrative expenses include outside consulting services, research & development, executive compensation, quality control, and general overhead such as the finance department, administrative staff, and depreciation and amortization expense.

(p)

Advertising

The Company expenses all advertising costs as incurred.

(q)

Research and Development

The Company expenses all research and development costs as incurred.

(r)

Foreign Currency Translation

The Company maintains its financial statements in the functional currency, which is the Renminbi (RMB). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

For financial reporting purposes, the financial statements of the Company, which are prepared using the functional currency, have been translated into United States dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

*Exchange Rates*	*9/30/2008*		*12/31/2007*		*9/30/2007*
Period end RMB : US$ exchange rate		6.855100		7.314100		7.517600
Average period RMB : US$ exchange rate		6.998860		7.617200		7.675760

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(s)

Income Taxes

The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.

(t)

Statutory Reserve

In accordance with PRC laws, statutory reserve refers to the appropriation from net income, to the account “statutory reserve” to be used for future company development, recovery of losses, and increase of capital, as approved, to expand production or operations. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.

(u)

Other Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.

(v)

Warranty Policy

The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and reflects management’s best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available. Future events and circumstances could materially change our estimates and require adjustments to the warranty obligation. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. See also Note 13 – Warranty Liability.

(w)

Earnings Per Share

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method for warrants and the as-if method for convertible securities. Dilutive potential common shares include outstanding warrants, and convertible preferred stock. See also Note 17 – Earnings Per Share.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

(x)

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles."

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.

In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees”, an amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. The provisions of the FSP that amend Statement 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

The Company is currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on its consolidated results of operations and financial condition.

3.	RESTRICTED CASH

Restricted Cash represents cash placed with banks to secure banking facilities, which are comprised of loans and notes payables in addition to other collateral.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

4.	NOTES RECEIVABLE

	September 30,		December 31,
	2008		2007

Notes Receivable	$	-	$	1,891,126
Less: Allowance for Bad Debts		-		(25,635	)
	$	-	$	1,865,491

There were zero Notes Receivable at September 30, 2008. Notes Receivable are typically in the form of bank drafts from customers. Bank drafts are liquid instruments that can be either (a) endorsed to the Company vendors, or (b) discounted to the Company’s own bank. The Company chooses to carry these instruments as notes receivable instead of cash primarily because of the associated time element of these notes, as they are normally due at a later point in time; therefore, these bank drafts represent different risk and reward characteristics.

5.	ACCOUNTS RECEIVABLE

	September 30,			December 31,
	2008			2007

Total Accounts Receivable-Trade	$	39,564,757		$	33,121,294
Less: Allowance for Bad Debt		(3,597,652	)		(1,245,883	)
	$	35,967,105		$	31,875,411

Allowance for Bad Debts
Beginning Balance	$	(1,245,883	)	$	(319,741	)
Allowance Provided		(2,351,769	)		(1,485,634	)
Less: Bad Debt Written Off		-			559,492
Ending Balance	$	(3,597,652	)	$	(1,245,883	)

6.	INVENTORY

	September 30,		December 31,
	2008		2007

Raw Materials	$	3,100,079	$	1,523,444
Work in Progress		10,680,731		4,779,339
Finished Goods		2,070,452		1,593,177
	$	15,851,262	$	7,895,960

7.	ADVANCES TO EMPLOYEES

Advances to Employees of $303,614 and $138,420 as of September 30, 2008 and December 31, 2007, respectively, consisted of advances to salespeople for salary, travel, and expenses over extended periods as they work to procure new sales contracts or install and perform on existing contracts. These advances are deducted from future sales commissions earned by these salespeople. In the event that a salesperson leaves the Company prior to earning sales commissions sufficient to offset advances paid to the salesperson, the Company immediately expenses any outstanding balance to the income statement. None of the employees who have received these advances is a director or executive officer of the Company.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

8.	PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment, which are stated at cost less depreciation, were composed of the following:

	September 30,			December 31,
	2008			2007

Category of Asset
Buildings	$	11,010,212		$	10,318,689
Machinery & Equipment		11,958,734			11,278,647
Furniture & Fixtures		365,430			307,480
Auto		1,037,128			912,333
Other		8,945			8,384
		24,380,448			22,825,532

Less: Accumulated Depreciation
Buildings		(1,726,504	)		(1,168,101	)
Machinery & Equipment		(1,605,373	)		(742,062	)
Furniture & Fixtures		(207,697	)		(148,777	)
Auto		(507,258	)		(361,210	)
Other		(5,368	)		(3,836	)
		(4,052,200	)		(2,423,986	)

Property, Plant, & Equipment, Net	$	20,328,248		$	20,401,546

The Company’s real property consisted of approximately 440,000 square feet (44,233.40 square meters) of building floor space. The Company’s new turbine manufacturing workshop will be approximately 215,482 square feet (20,019 square meters) of floor space. The office building will house the business operations of Wuhan Generating Equipment and will provide an additional 134,656 square feet (12,510 square meters) of floor space.

9.	LAND USE RIGHTS

	September 30,			December 31,
	2008			2007

Land Use Rights	$	2,117,431		$	1,984,550
Less: Accumulated Amortization		(196,152	)		(154,074	)
Land Use Rights, Net	$	1,921,279		$	1,830,476

The Company acquired through Wuhan Hi-Tech Blower Manufacturing Co. Ltd. (WBM) the Land Use Rights for three parcels of land totaling 1,170,000 square feet for a term of 50 years from March 1, 2004 to March 1, 2054 for $1,856,757 (RMB 14,515,200). The land has been used for the Company’s facilities including the blower manufacturing facilities, turbine manufacturing facility, warehouses, testing facilities, dormitories, and administrative buildings.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

10.

CONSTRUCTION IN PROGRESS

The Company is in the process of developing a new turbine manufacturing facility within its factory campus.

Construction in progress represents the direct costs of design, acquisition, building construction, building improvements, and land improvement. These costs are capitalized in the Construction-in-Progress account until substantially all activities necessary to prepare the assets for their intended use are completed. At such point, the Construction-in-Progress account is closed and the capitalized costs are transferred to their appropriate asset classification. No depreciation is provided until it is completed and ready for the intended use.

The following table details the assets that are accounted for in the Construction-in-Progress account at September 30, 2008 and December 31, 2007:

	September 30,		December 31,
	2008		2007
Category
Capitalized Interest	$	-	$	190,098
Construction - Design Fee		190		20,180
Construction - Inspection Fee		-		2,734
Construction - Labor Cost		-		558,690
Generating Office Equipment		2,343,209		9,297
Blower Workshop		9,010		-
Generating Workshop		8,878,435		4,101,667
Generating Workshop-Materials		2,293,183		1,777,389
Generating Office Building		3,334,637		-
Generating Test Center Construction		11,378		-
Parking Lot		4,376		-
Land Improvement		715,314		24,202
Landscaping		4,933		4,624
Miscellaneous		391,481		60,670
Office Building		-		3,093,750
Pavement		584		547
Showroom		-		46,622
Wall		314,007		7,013
Security System		292		-
Shipping Costs		10,211		-
Equipment Requiring Installation		8009		-
Warehouse Construction		33,514		-
Construction in Progress	$	18,352,763	$	9,897,484

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

11.

INTANGIBLE ASSETS

The following categories of assets are stated at cost less accumulated amortization.

	September 30,		December 31,
	2008		2007
Category of Asset
Trademarks	$	145,877	$	136,722
Mitsubishi License		335,936		314,855
Tianyu CAD License		4,449		4,170
Sunway CAD License		16,776		15,723
Microsoft License		13,932		13,057
	$	516,970	$	484,527

Less: Accumulated Amortization
Trademarks	$	30,999	$	23,926
Mitsubishi License		103,986		74,970
Tianyu CAD License		1,280		887
Sunway CAD License		979		524
Microsoft License		4,180		2,938
	$	141,424	$	103,246

Intangible Assets, Net	$	375,546	$	381,281

The weighted average amortization period for the Company’s intangible assets at September 30, 2008 and December 31, 2007 was 12.82 years and 12.82 years, respectively.

The weighted average amortization period for the Trademark is 20 years.

The weighted average amortization period for the Mitsubishi, CAD, and Microsoft technical licenses is 10 years.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

12.

BANK LOANS AND NOTES

The following table provides the name of the lender, due date, interest rate, and amounts outstanding at September 30, 2008 and December 31, 2007, for the Company’s bank loans and notes payable.

Name of Bank or Note Holder	Due Date		Interest Rate Per Annum			September 30, 2008		December 31, 2007
Shanghai Pudong Development Bank		8/27/2008		7.02	%	$	-	$	1,093,778
Shanghai Pudong Development Bank		8/22/2008		7.02	%		-		1,093,778
Shanghai Pudong Development Bank		6/3/2008		6.57	%		-		2,734,444
Shanghai Pudong Development Bank		6/24/2008		6.57	%		-		546,889
Shanghai Pudong Development Bank		5/21/2008		6.57	%		-		1,367,222
Shanghai Pudong Development Bank		10/23/2008		7.29	%		2,917,536		2,734,444
Shanghai Pudong Development Bank		12/9/2008		7.29	%		1,458,768		1,367,222
Shanghai Pudong Development Bank		1/7/2009		7.47	%		1,458,768		-
Shanghai Pudong Development Bank		5/20/2009		8.964	%		729,384		-
Shanghai Pudong Development Bank		5/22/2009		8.964	%		729,384		-
Shanghai Pudong Development Bank		5/25/2009		8.964	%		729,384		-
Shanghai Pudong Development Bank		5/27/2009		8.964	%		729,384		-
Shanghai Pudong Development Bank		5/29/2009		8.964	%		729,384		-
Shanghai Pudong Development Bank		6/4/2009		8.964	%		729,384		-
Shanghai Pudong Development Bank		6/23/2009		8.964	%		583,507		-
Shanghai Pudong Development Bank		8/26/2009		8.964	%		1,167,014		-
Shanghai Pudong Development Bank		8/24/2009		8.964	%		1,167,014		-
Citic Industrial Bank		9/19/2008		7.29	%		-		3,418,056
Citic Industrial Bank		3/28/2008		4.80	%		-		6,143
Citic Industrial Bank - Auto Loan		3/10/2008		5.76	%		-		2,428
Citic Industrial Bank		2/17/2008		6.73	%		-		2,734,444
Citic Industrial Bank		2/17/2008		6.73	%		-		2,734,444
Citic Industrial Bank		10/9/2008		-			25,492		-
Citic Industrial Bank		10/22/2008		-			42,364		-
Citic Industrial Bank		3/3/2009		8.217	%		2,917,536		-
Xin Ge Lin Co., Ltd.		1/15/2009		-			1,458,768		-
Xin Ge Lin Co., Ltd.		1/16/2009		-			4,376,304		-
Huaxia Credit Cooperative		On Demand		-			437,630
Chongqing Sailimeng Electrical Equipment Co. Ltd.		1/22/2009		-			199,851		-
E Zhou City Nanyang Material Co. Ltd.		1/22/2009		-			29,175		-
E Zhou City Nanyang Material Co. Ltd.		11/15/2008		-			7,294		-
E Zhou City Zhongtian Environmental Protection Equipment Co, Ltd		1/22/2009		-			72,938		-
Hanchuan City Maan Village Model Factory		11/15/2008		-			14,588		-
Hubei Jiutong Electrical Equipment Co. Ltd.		1/22/2009		-			87,526		-
Hubei Jiutong Electrical Equipment Co. Ltd.		11/15/2008		-			43,763		-
Hubei Gedian Development Zone Changfa Auto Parts		11/15/2008		-			43,763		-
Hubei Gedian Development Zone Changfa Auto Parts		1/22/2009		-			43,763		-
Hubei Gedian Development Zone Lianrui Machinery		1/22/2009		-			14,588		-

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

Name of Bank or Note Holder	Due Date		Interest Rate Per Annum		September 30, 2008		December 31, 2007
Tianjin Jinbo Meter Technology Co., Ltd.		1/22/2009		-		29,175		-
Tianjin Jinbo Meter Technology Co., Ltd.		11/15/2008		-		24,799		-
Wuhan City Jingda Meter Manufactory		1/22/2009		-		29,175		-
Wuhan Huaxiang Forging Co. Ltd.		1/22/2009		-		55,433		-
Wuhan Xingelin Environmental Protection Equipment Co., Ltd		3/27/2009		-		2,188,152		-
Wuhan Xingelin Environmental Protection Equipment Co., Ltd		2/28/2009		-		729,384		-
Wuhan Xingelin Environmental Protection Equipment Co., Ltd		2/28/2009		-		291,754		-
Wuhan Xingelin Environmental Protection Equipment Co., Ltd		2/28/2009		-		291,754		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		3/27/2009		-		1,458,768		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		3/2/2009		-		1,458,768		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		2/18/2009		-		743,972		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		2/18/2009		-		579,685		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		2/28/2009		-		729,384		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		2/28/2009		-		291,754		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		2/28/2009		-		145,877		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		2/28/2009		-		145,877		-
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.		3/2/2009		-		291,754		-
Wuhan Pengmai Auto Transport Co. Ltd.		11/15/2008		-		14,588		-
Wuhan City Caidian District Tongxin Metalurgical Parts		1/22/2009		-		80,232		-
Wuhan City Liufang Normteile Co. Ltd.		1/22/2009		-		49,598		-
Wuhan City Shengjie Chemical Plant Co. Ltd.		11/15/2008		-		29,175		-
Wuhan City Shengjie Chemical Plant Co. Ltd.		1/22/2009		-		58,351		-
Wuhan City Xinjian Forging Co. Ltd.		11/15/2008		-		18,964		-
Wuhan City Xinnong Forging Co. Ltd.		1/22/2009		-		18,964		-
Wuhan City Xinjian Forging Co. Ltd.		1/22/2009		-		14,588		-
Wuhan City Xinnong Forging Co. Ltd.		11/15/2008		-		14,588		-
Wuhan George Special Steel Co., Ltd		1/22/2009		-		189,640		-
Wuhan Weixiang Material Co. Ltd.		11/15/2008		-		29,175		-
Wuhan Weixiang Material Co. Ltd.		11/15/2008		-		29,175		-
Wuhan Weixiang Material Co. Ltd.		1/22/2009		-		43,763		-
Wuhan Shanghe Metalurgical Screen Manufactory		1/22/2009		-		17,505		-
Wuhan City Zhiwei Transportation Machinery Manufactory Co., Ltd		1/22/2009		-		29,175		-
Wuxi City Houde Automatic Meter Manufactory		1/22/2009		-		29,175		-

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

Name of Bank or Note Holder	Due Date		Interest Rate Per Annum		September 30, 2008		December 31, 2007
Xi’an Electrical Equipment Company Wuhan Branch		1/22/2009		-		47,045		-
Zhejiang Zhuji City Bushing Co.		1/22/2009		-		43,763		-
Zhejiang Zhongfa Power Equipment Co., Ltd.		1/22/2009		-		58,351		-
Various Other Notes						238,873		8,299,372
Total					$	33,484,407	$	28,132,664

Banking facilities extended by the CITIC Industrial Bank and Shanghai Pudong Development Bank were secured by the Company’s mortgage of real property.

Certain notes payable, as indicated above, do not have a stated rate of interest. These notes are payable on demand to the Company’s creditors. The creditors have given extended credit terms secured by pledge of the Company’s restricted cash.

13.

WARRANTY LIABILITY

Warranty liability is accrued and carried on the balance sheet under Accrued Liabilities. The Company makes its warranty accrual based on individual assessment of each contract because terms and conditions vary. The Company’s typical sales contracts provide for a warranty period of 12-18 months following product installation.

The following table summarizes the activity related to the Company’s product warranty liability for the nine months ended September 30, 2008 and the year ended December 31, 2007:

	September 30,			December 31,
	2008			2007

Balance at beginning of period	$	949,603		$	249,234
Accruals for current & pre-existing warranties issued during period		647,175			725,626
Less: Settlements made during period		(50,727	)		(25,257	)
Balance at end of period	$	1,546,051		$	949,603

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

14.

CAPITALIZATION

Series B Convertible Preferred Stock

On September 5, 2008, the Company entered into an Agreement to Amend Series J Warrants of the Company with holders of warrants exercisable for a majority of the shares of warrant stock issuable under the Company’s Series A, B and J warrants. This agreement amends the Series J Warrants so that such warrants are exercisable for shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share. Prior to this agreement, such warrants were exercisable for shares of the Company’s common stock.

In connection with this agreement, the Company designated 9,358,370 shares of preferred stock as “Series B Convertible Preferred Stock, par value $0.0001 per share” with those rights and preferences as set forth in the Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock of the Company. The Series B Convertible Preferred Stock ranks senior to the Company’s common stock and junior to the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share. The shares of Series B Convertible Preferred Stock are convertible on a one-for-one basis into shares of the Company’s common stock. Except with respect to specified transactions that may affect the rights, preferences, privileges or voting power of the Series B Convertible Preferred Stock and except as otherwise required by Nevada law, the Series B Convertible Preferred Stock has no voting rights. The Series B Convertible Preferred Stock is non-redeemable and is not entitled to dividends. When accounting for the Series B Convertible Preferred Stock, the Company determined they qualified as equity because the aforementioned characteristics made them akin to common stock.

Two of the investors holding the amended warrant agreement for J Warrants exercised their right to purchase Series B Convertible Preferred Stock at $2.33 per share. The total number of shares issued was 5,066,524. The company received gross proceeds of $11,805,001 for the issuance of those shares. The total issuance cost paid to the placement agent, 1st Bridgehouse Securities, was 10% of the gross proceeds, or $1,180,500. Therefore, the net proceeds received from transaction was $10,624,501.

Simultaneously with the exercise of a portion of the Series J warrants, a corresponding portion of the Series B and Series JJ warrants became exercisable. Accordingly, the Company accounted for the net proceeds of this issuance by allocating to Par Value, Additional Paid in Capital attributable to Series B Convertible Preferred Stock, and Additional Paid in Capital attributable to Series B and JJ Warrants. The Company determined that the Series B Convertible Preferred Stock had a beneficial conversion feature (BCF). Accordingly, the Company accounted for this BCF as a constructive preferred dividend, which is a charge that reduces retained earnings and increases additional paid in capital attributable to the Series B Convertible Preferred Stock. The Company also transferred a prorated portion of proceeds previously recorded under Warrants A, J, B, and C to the Additional Paid in Capital of Series B Convertible Preferred Stock to reflect the exercise of the amended warrant agreement.

Penalty

Certain investors were awarded a penalty for the Company’s failure to achieve listing status by a predetermined date, which was a term stipulated in the securities purchase agreement dated February 7, 2007. During the three and nine months ended September 30, 2008, the investors were awarded 300,690 and 863,894 shares of common stock, respectively. The Company recorded an expense to statements of income for the issuance of these shares.

Exercise of Series C Warrants

During the three months ended September 30, 2008, one holder of Series C Warrants, which were issued to the placement agent in the Company’s financing transaction dated February 7, 2007, exercised the right to purchase 205,751 shares of common stock. The transaction was a cashless exercise. Accordingly, the Company issued to the holder 115,361 shares of common stock and recorded a charge to earnings for the additional cost to the Company of issuing the shares.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

The following table provides a summary of the total number of shares of fully diluted common stock at September 30, 2008:

	Number of Shares
Common Stock Outstanding		24,044,312
Common Stock Issuable upon:
- Conversion of Preferred Stock		12,001,467
- Exercise of Warrants		19,016,994
- Exercise of Stock Options		160,000
Total number of Shares of Fully Diluted Common Stock		55,222,773

Subsequent Events

Subsequent to September 30, 2008, three more J Warrant holders exercised their right to purchase Series B Convertible Preferred Stock at $2.33 per share. The total number of shares issued was 1,302,554. The Company received net proceeds of $2,731,456.

15.

COMMITMENTS OF STATUTORY RESERVE

In compliance with PRC laws, the Company is required to appropriate 10% of its net income to its statutory reserve up to a maximum of 50% of an enterprise’s registered Paid-in capital. The Company had future unfunded commitments, as provided below.

	September 30,			December 31,
	2008			2007

Unadjusted Registered Capital in PRC	$	35,982,303		$	35,982,303
50% maximum thereof		17,991,152			17,991,152

Less: Amounts Appropriated to Statutory Reserve		(2,608,270	)		(633,771	)
Unfunded Commitment	$	15,382,882		$	17,357,381

16.

INCOME TAXES

All of the Company’s operations are in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 25%; however, the Company was approved as a foreign investment enterprise in March 2007, and in accordance with the relevant regulations regarding the favorable tax treatment for a foreign investment enterprise, the Company is entitled to a two-year tax exemption followed by a three-year half exemption. For the periods ended September 30, 2008 and 2007 the Company was still within the two year tax exemption period, and accordingly, made no provision for income taxes.

Effective January 1, 2008, PRC government implemented a new 25% tax rate for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday, which is defined as a "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law, the previous tax holidays are terminated as of December 31, 2007. However, the PRC government has established a set of transition rules that permit enterprises that had received an income tax exemption prior to January 1, 2008 to continue to enjoy such exemption until the original expiration date.

On February 7, 2007, income from the Company’s foreign subsidiaries became subject to U.S. income tax law; however, this tax is deferred until foreign source income is repatriated to the Company, which has not yet occurred.

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

17.

EARNINGS PER SHARE

Components of basic and diluted earnings per share were as follows:

	3 months		3 months		9 months		9 months
	ended		ended		ended		ended
	September 30,		September 30,		September 30,		September 30,
	2008		2007		2008		2007
Net Income	$	4,629,523	$	6,554,851	$	14,892,519	$	12,590,960
Preferred Dividends		215,829		299,625		733,289		773,279
Series A Constructive Preferred Dividend		-		-		-		10,501,982
Series B Constructive Preferred Dividend		3,027,542		-		3,027,542		-
Income Available to Common Stockholders	$	1,386,152	$	6,255,226	$	11,131,688	$	1,315,699

Original Shares:		22,857,711		19,712,446		19,712,446		19,712,446
Additions from Actual Events
- Issuance of Common Stock		90,207		-		299,156		-
- Conversion of Preferred Stock into Common Stock		2,915,966		-		1,873,610		-
- Issuance of Common Stock resulting from the Exercise of Warrants		66,653				22,218
Basic Weighted Average Shares Outstanding		25,930,537		19,712,446		21,907,429		19,712,446

Dilutive Shares:
Additions from Potential Events
- Conversion of Series A Preferred Stock		8,413,944		10,287,554		7,371,588		8,877,778
- Conversion of Series B Preferred Stock		-		-		-		-
- Exercise of Investor Warrants & Placement Agent Warrants		13,113,043		16,200,613		16,083,880		10,532,417
- Exercise of Employee & Director Stock Options		-		-		2,464		-
- Exercise of Investor Relations Options		-		-		-		-
Diluted Weighted Average Shares Outstanding:		47,457,524		46,200,613		45,365,361		39,122,641

Earnings Per Share
- Basic	$	0.05	$	0.32	$	0.51	$	0.07
- Diluted	$	0.03	$	0.14	$	0.33	$	0.03

Weighted Average Shares Outstanding
- Basic		25,930,537		19,712,446		21,907,429		19,712,446
- Diluted		47,457,524		46,200,613		45,365,361		39,122,641

*Supplemental Data (EPS in the absence of Constructive Preferred Dividends):*
Earnings Per Share
- Basic	$	0.17	$	0.32	$	0.65	$	0.60
- Diluted	$	0.10	$	0.14	$	0.33	$	0.48

Weighted Average Shares Outstanding
- Basic		25,930,537		19,712,446		21,907,429		19,712,446
- Diluted		47,513,819		46,200,613		45,384,126		39,122,641

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

18.

OPERATING SEGMENTS

The Company individually tracks the performance of its two operating subsidiaries: Wuhan Blower and Wuhan Generating Equipment. Wuhan Blower is primarily engaged in the design, manufacture, installation, and service of blowers. Wuhan Generating Equipment is primarily engaged in the design, manufacture, installation, and service of power generating equipment. Below is a presentation of the Company’s financial position for its operating subsidiaries at September 30, 2008, and 2007, and results of operations for the nine month periods then ended. The Company has also provided reconciling adjustments with the Company and its intermediate holding company, UFG.

Results of Operations				Wuhan			Company,
nine months ended	Wuhan			Generating			UFG,
September 30, 2008	Blower			Equipment			Adjustments			Total
Sales	$	44,235,650		$	46,346,041		$	-		$	90,581,691
Cost of Sales		30,299,630			32,632,500			-			62,932,130
Gross Profit		13,936,020			13,713,541			-			27,649,561

Operating Expenses		4,905,937			2,720,031			1,753,210			9,379,177

Other Income (Expenses)		(1,325,421	)		(704,416	)		(1,348,028	)		(3,377,865	)

Earnings before Tax		7,704,662			10,289,094			(3,101,238	)		14,892,519

Tax		-			-			-			-

Net Income	$	7,704,662		$	10,289,094		$	(3,101,238	)	$	14,892,519

Financial Position			Wuhan		Company,
at	Wuhan		Generating		UFG,
September 30, 2008	Blower		Equipment		Adjustments			Total
Current Assets	$	74,944,250	$	34,808,865	$	(14,592,008	)	$	95,161,107
Non Current Assets		15,005,654		25,972,180		-			40,977,835
Total Assets		89,949,905		60,781,045		(14,592,008	)		136,138,942

Current Liabilities		28,918,446		34,537,866		(13,702,434	)		49,753,877
Total Liabilities		28,918,446		34,537,866		(13,702,434	)		49,753,877

Net Assets		61,031,459		26,243,180		(889,574	)		86,385,065

Total Liabilities & Net Assets	$	89,949,905	$	60,781,045	$	(14,592,008	)	$	136,138,942

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

Results of Operations				Wuhan			Company,
nine months ended	Wuhan			Generating			UFG,
September 30, 2007	Blower			Equipment			Adjustments			Total
Sales	$	30,217,094		$	30,125,680		$	-		$	60,342,774
Cost of Sales		18,678,246			21,832,961			-			40,511,207
Gross Profit		11,538,848			8,292,719			-			19,831,567

Operating Expense		3,631,391			857,872			959,728			5,448,991

Other Income (Expense)		(680,629	)		(1,221	)		(1,111,191	)		(1,793,042	)

Earnings before Tax		7,226,827			7,433,625			(2,069,493	)		12,590,960

Tax		-			-			-			-

Net Income	$	7,226,827		$	7,433,625		$	(2,069,493	)	$	12,590,960

Financial Position			Wuhan		Company,
at	Wuhan		Generating		UFG,
September 30, 2007	Blower		Equipment		Adjustments			Total
Current Assets	$	65,200,163	$	12,473,192	$	(11,843,746	)	$	65,829,609
Non Current Assets		21,411,087		9,163,497		-			30,574,584
Total Assets		86,611,250		21,636,689		(11,843,746	)		96,404,193

Current Liabilities		59,429,942		7,469,875		(23,599,459	)		44,444,202
Total Liabilities		59,429,942		7,469,875		(23,599,459	)		44,444,202

Net Assets		27,181,308		14,166,815		10,611,868			51,959,991

Liabilities & Net Assets	$	86,611,250	$	21,636,689	$	(11,843,748	)	$	96,404,193

Wuhan General Group (China) Inc.

Notes to Financial Statements

(Stated in US Dollars)

19.

STOCK COMPENSATION EXPENSE

On November 30, 2007, the Company’s Board of Directors adopted the Wuhan General Group (China), Inc. 2007 Stock Option Plan (the “Plan”). The Plan provides that the maximum number of shares of the Company’s common stock that may be issued under the Plan is 3,000,000 shares. The Company’s employees, directors, and service providers are eligible to participate in the Plan.

For the three and nine months ended September 30, 2008, the Company recorded $36,742 and $281,630 of stock compensation expense, respectively. The entire stock option compensation expense was recorded as a general and administrative expense given the nature of the work contribution of the grantees.

The range of the exercise prices of all the shares granted since inception of the plan are shown in the following table:

Price Range		Number of Shares
$0 - $9.99		160,000 shares
$10.00 - $19.99		0 shares
$20.00 - $29.99		0 shares

No tax benefit has yet to be accrued or realized. For the nine months ended September 30, 2008, the Company operated as an income tax-free entity in the PRC, and the Company has yet to repatriate its earnings, accordingly it has not recognized any deferred tax assets or liability in regards to benefits derived from the issuance of stock options.

The Company used the Black-Scholes Model to value the options granted. The following shows the weighted average fair value of the grants and the assumptions that were employed in the model:

Weighted-average fair value of grants:	$	0.9077
Risk-free interest rate:		3.97	%
Expected volatility:		20.00	%
Expected life in months:		96.88

Board of Directors and Stockholders

Wuhan General Group (China), Inc.

Report of Registered Independent Public Accounting Firm

We have reviewed the accompanying interim consolidated Balance Sheets of Wuhan General Group (China), Inc. (the “Company”) as of September 30, 2008 and December 31, 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month and nine-month periods ended September 30, 2008 and 2007. These interim consolidated financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.

	/s/ Samuel H. Wong & Co., LLP

South San Francisco, California	Samuel H. Wong & Co., LLP
October 26, 2008	Certified Public Accountants

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

The information contained in this report includes some statements that are not purely historical fact and that are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements regarding our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, growth of our blower business and establishment of our turbine business. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “projects,” “should,” and similar expressions, or the negatives of such terms, identify forward-looking statements.

The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results to be materially different from those expressed or implied by these forward-looking statements, including the following:

vulnerability of our business to general economic downturn;

operating in the PRC generally and the potential for changes in the laws of the PRC that affect our operations;

our failure to meet or timely meet contractual performance standards and schedules;

our dependence on the steel and iron markets;

exposure to product liability and defect claims;

our ability to obtain all necessary government certifications and/or licenses to conduct our business;

the cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and

the other factors referenced in this report.

These risks and uncertainties, along with others, are also described in the Risk Factors section in Part II, Item 1A of this Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Overview

As a result of the share exchange or “reverse acquisition” transaction consummated on February 7, 2007, Wuhan General Group (China), Inc. became a holding company conducting operations through two indirect operating subsidiaries: Wuhan Blower Co., Ltd. (“Wuhan Blower”) and Wuhan Generating Equipment Co., Ltd. (“Wuhan Generating”), each a company operating in China. A wholly owned subsidiary of the Company, Universe Faith Group Limited (“UFG”), owns 100% of the capital stock of Wuhan Blower, which in turn owns 100% of the capital stock of Wuhan Generating. Our corporate structure is as follows:

For accounting purposes, the share exchange transaction is treated as a reverse acquisition with UFG as the acquirer and Wuhan General Group (China), Inc. as the acquired party. As a result, the Company is deemed to be a continuation of the business of UFG. Accordingly, the financial data included in the accompanying consolidated financial statements for all periods prior to February 7, 2007 is that of the accounting acquirer (UFG). The historical stockholders’ equity of the accounting acquirer prior to the share exchange has been retroactively restated as if the share exchange transaction occurred as of the beginning of the first period presented.

The information and data contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the operating results and financial condition for the three and nine month periods ended September 30, 2008 and 2007.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Sales. Sales increased $3.43 million, or 11.24%, to $33.95 million for the three months ended September 30, 2008 from $30.52 million for the same period in 2007. This increase was mainly attributable to the further penetration of the Company’s customer base in the iron and steel, power generation, petrochemical and other industries and the execution of more contracts in the period for both our industrial blower and turbine businesses.

Cost of Sales. Our cost of sales increased $3.90 million, or 19.44%, to $23.93 million for the three months ended September 30, 2008 from $20.04 million during the same period in 2007. Gross margin for the three months ended September 30, 2008 was 29.51%, which is 4.84% lower than the gross margin of 34.35% for the same period of 2007. The lower gross margin is primarily due to a significant increase in raw material costs as compared to the prior corresponding period.

Selling Expenses. Our selling expenses decreased $103,944, or 11.08%, to $834,590 for the three months ended September 30, 2008 from $938,534 for the same period in 2007. As a percentage of sales, selling expenses were 2.46% for the three months ended September 30, 2008 compared to 3.07% for the same period in 2007. This decrease as a percentage of sales was primarily attributable to better control on entertainment expenses relating to sales and marketing.

General and Administrative Expenses. Our general and administrative expenses increased $631,976, or 42.68%, to $2.11 million for the three months ended September 30, 2008 from $1.48 million for the same period in 2007. As a percentage of sales, general and administrative expenses were 6.22% for the three months ended September 30, 2008 compared to 4.85% for the same period in 2007. This increase as a percentage of sales was primarily attributable to expenses associated with being a U.S. public company.

Warranty Expense. Our warranty expense decreased to $89,958 for the three months ended September 30, 2008 from $91,059 for the same period in 2007. As a percentage of sales, warranty expense was 0.26% for the three months ended September 30, 2008 compared to 0.30% for the same period in 2007.

Operating Income. Our operating income decreased $0.99 million, or 12.45%, to $6.98 million for the three months ended September 30, 2008 from $7.97 million for the same period in 2007. As a percentage of sales, operating income was 20.56% for the three months ended September 30, 2008 compared to 26.12% for the same period in 2007. This decrease was due primarily to the significant increase in raw material costs and expenses associated with being a U.S. public company.

Interest Income. Our interest income increased to $288,177 for the three months ended September 30, 2008 from $94,798 for the same period in 2007. This increase was due to interest we received on deposits with Shanghai Pudong Development Bank.

Other Expenses. Our other expenses increased $231,064, or 20.19%, to $1.38 million for the three months ended September 30, 2008 from $1.14 million for the same period in 2007. As a percentage of sales, other expenses were 4.05% for the three months ended September 30, 2008 compared to 3.75% for the same period in 2007. This increase as a percentage of sales was primarily attributable to one-time, non-cash charges related to capital markets activities, including warrant exercises and stock issuances.

Interest Expense. Our interest expense increased $895,114, or 242.46%, to $1.26 million for the three months ended September 30, 2008 from $369,187 for the same period in 2007. This increase was due to increased interest rates on our bank loans and increased bank fees associated with the greater use of notes receivable as payment from customers. As a percentage of sales, interest expense was 3.72% for the three months ended September 30, 2008 and 1.21% for the same period in 2007.

Income Tax. Based on our understanding of the implementation of new Chinese tax rules, we do not believe Wuhan Blower and Wuhan Generating were subject to PRC income tax during the three months ended September 30, 2008. The Company did not incur any U.S. income tax liability during the three months ended September 30, 2008.

Net Income. Net income decreased $1.93 million, or 29.37%, to $4.63 million during the three months ended September 30, 2008 from $6.55 million during the same period in 2007, as a result of the factors described above.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Sales. Sales increased $30.24 million, or 50.11%, to $90.58 million for the nine months ended September 30, 2008 from $60.34 million for the same period in 2007. This increase was mainly attributable to the further penetration of the Company’s customer base in the iron and steel, power generation, petrochemical and other industries and the execution of more contracts in the period for both our industrial blower and turbine businesses.

Cost of Sales. Our cost of sales increased $22.42 million, or 55.34%, to $62.93 million for the nine months ended September 30, 2008 from $40.51 million during the same period in 2007. Gross margin for the nine months ended September 30, 2008 was 30.52%, which is less than the gross margin of 32.86% for the same period in 2007. The lower gross margin is primarily due to a significant increase in raw material costs as compared to the prior corresponding period.

Selling Expenses. Our selling expenses increased $496,827, or 30.42%, to $2.13 million for the nine months ended September 30, 2008 from $1.63 million for the same period in 2007. As a percentage of sales, selling expenses were 2.35% for the nine months ended September 30, 2008 compared to 2.71% for the same period in 2007. This decrease as a percentage of sales was primarily attributable to the economies of scale that we achieved due to the significant increase in sales.

General and Administrative Expenses. Our general and administrative expenses increased $3.30 million, or 100.07%, to $6.60 million for the nine months ended September 30, 2008 from $3.30 million for the same period in 2007. As a percentage of sales, general and administrative expenses were 7.29% for the nine months ended September 30, 2008 compared to 5.47% for the same period in 2007. This increase as a percentage of sales was primarily attributable to increased research and development expenses. In addition, expenses associated with being a U.S. public company also contributed to increased general and administrative expenses.

Warranty Expense. Our warranty expense increased to $647,175 for the nine months ended September 30, 2008 from $514,520 for the same period in 2007. As a percentage of sales, warranty expense was 0.71% for the nine months ended September 30, 2008 compared to 0.85% for the same period in 2007.

Operating Income. Our operating income increased $3.89 million, or 27.02%, to $18.27 million for the nine months ended September 30, 2008 from $14.38 million for the same period in 2007. As a percentage of sales, operating income was 20.17% for the nine months ended September 30, 2008 compared to 23.84% for the same period in 2007. This decrease was due primarily to the increase in our general and administrative expenses.

Interest Income. Our interest income increased to $636,626 for the nine months ended September 30, 2008 from $108,923 for the same period in 2007. This increase was due to interest we received on deposits with Shanghai Pudong Development Bank.

Other Expenses. Our other expenses increased $347,448, or 30.34%, to $1.49 million for the nine months ended September 30, 2008 from $1.15 million for the same period in 2007. The increase in other expenses was primarily attributable to one-time, non-cash charges related to capital markets activities, including warrant exercises and stock issuances. As a percentage of sales, other expenses were 1.65% for the nine months ended September 30, 2008 compared to 1.90% for the same period in 2007.

Interest Expense. Our interest expense increased $1.77 million, or 233.26%, to $2.52 million for the nine months ended September 30, 2008 from $756,695 for the same period in 2007. This increase was due to our significant increase in bank loans and notes. As a percentage of sales, interest expense was 2.78% for the nine months ended September 30, 2008 compared to 1.25% for the same period in 2007.

Income Tax. Based on our understanding of the implementation of new Chinese tax rules, we do not believe Wuhan Blower and Wuhan Generating were subject to PRC income tax during the nine months ended September 30, 2008. Wuhan General did not incur any U.S. income tax liability during the nine months ended September 30, 2008.

Net Income. Net income increased $2.30 million, or 18.28%, to $14.89 million during the nine months ended September 30, 2008 from $12.59 million during the same period in 2007, as a result of the factors described above.

Liquidity and Capital Resources

As of September 30, 2008, we had cash and cash equivalents of $10.06 million and restricted cash of $11.58 million.

As of September 30, 2008, we had banking facilities in the form of bank loans and loan facilities from other non-bank entities totaling approximately $33.48 million (based on an exchange rate of 6.8551 RMB per 1 U.S. dollar). Information regarding these loans is set forth below in US $.

Name of Bank or Note Holder	Due Date	Interest Rate Per Annum			September 30, 2008
Shanghai Pudong Development Bank	10/23/2008		7.29	%	$	2,917,536
Shanghai Pudong Development Bank	12/9/2008		7.29	%		1,458,768
Shanghai Pudong Development Bank	1/7/2009		7.47	%		1,458,768
Shanghai Pudong Development Bank	5/20/2009		8.964	%		729,384
Shanghai Pudong Development Bank	5/22/2009		8.964	%		729,384
Shanghai Pudong Development Bank	5/25/2009		8.964	%		729,384
Shanghai Pudong Development Bank	5/27/2009		8.964	%		729,384
Shanghai Pudong Development Bank	5/29/2009		8.964	%		729,384
Shanghai Pudong Development Bank	6/4/2009		8.964	%		729,384
Shanghai Pudong Development Bank	6/23/2009		8.964	%		583,507
Shanghai Pudong Development Bank	8/26/2009		8.964	%		1,167,014
Shanghai Pudong Development Bank	8/24/2009		8.964	%		1,167,014
Citic Industrial Bank	10/9/2008		-			25,492
Citic Industrial Bank	10/22/2008		-			42,364
Citic Industrial Bank	3/3/2009		8.217	%		2,917,536
Xin Ge Lin Co., Ltd.	1/15/2009		-			1,458,768
Xin Ge Lin Co., Ltd.	1/16/2009		-			4,376,304
Huaxia Credit Cooperative	On Demand		-			437,630
Chongqing Sailimeng Electrical Equipment Co. Ltd.	1/22/2009		-			199,851
E Zhou City Nanyang Material Co. Ltd.	1/22/2009		-			29,175
E Zhou City Nanyang Material Co. Ltd.	11/15/2008		-			7,294
E Zhou City Zhongtian Environmental Protection Equipment Co, Ltd	1/22/2009		-			72,938
Hanchuan City Maan Village Model Factory	11/15/2008		-			14,588
Hubei Jiutong Electrical Equipment Co. Ltd.	1/22/2009		-			87,526
Hubei Jiutong Electrical Equipment Co. Ltd.	11/15/2008		-			43,763
Hubei Gedian Development Zone Changfa Auto Parts	11/15/2008		-			43,763
Hubei Gedian Development Zone Changfa Auto Parts	1/22/2009		-			43,763
Hubei Gedian Development Zone Lianrui Machinery	1/22/2009		-			14,588
Tianjin Jinbo Meter Technology Co,, Ltd.	1/22/2009		-			29,175
Tianjin Jinbo Meter Technology Co,, Ltd.	11/15/2008		-			24,799
Wuhan City Jingda Meter Manufactory	1/22/2009		-			29,175
Wuhan Huaxiang Forging Co. Ltd.	1/22/2009		-			55,433
Wuhan Xingelin Environmental Protection Equipment Co, Ltd	3/27/2009		-			2,188,152
Wuhan Xingelin Environmental Protection Equipment Co, Ltd	2/28/2009		-			729,384
Wuhan Xingelin Environmental Protection Equipment Co, Ltd	2/28/2009		-			291,754
Wuhan Xingelin Environmental Protection Equipment Co, Ltd	2/28/2009		-			291,754

Name of Bank or Note Holder	Due Date	Interest Rate Per Annum		September 30, 2008
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	3/27/2009		-		1,458,768
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	3/2/2009		-		1,458,768
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	2/18/2009		-		743,972
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	2/18/2009		-		579,685
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	2/28/2009		-		729,384
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	2/28/2009		-		291,754
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	2/28/2009		-		145,877
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	2/28/2009		-		145,877
Wuhan City Jinnuo Economy and Trade Development Co., Ltd.	3/2/2009		-		291,754
Wuhan Pengmai Auto Transport Co. Ltd.	11/15/2008		-		14,588
Wuhan City Caidian District Tongxin Metalurgical Parts	1/22/2009		-		80,232
Wuhan City Liufang Normteile Co. Ltd.	1/22/2009		-		49,598
Wuhan City Shengjie Chemical Plant Co. Ltd.	11/15/2008		-		29,175
Wuhan City Shengjie Chemical Plant Co. Ltd.	1/22/2009		-		58,351
Wuhan City Xinjian Forging Co. Ltd.	11/15/2008		-		18,964
Wuhan City Xinnong Forging Co. Ltd.	1/22/2009		-		18,964
Wuhan City Xinjian Forging Co. Ltd.	1/22/2009		-		14,588
Wuhan City Xinnong Forging Co. Ltd.	11/15/2008		-		14,588
Wuhan George Special Steel Co., Ltd	1/22/2009		-		189,640
Wuhan Weixiang Material Co. Ltd.	11/15/2008		-		29,175
Wuhan Weixiang Material Co. Ltd.	11/15/2008		-		29,175
Wuhan Weixiang Material Co. Ltd.	1/22/2009		-		43,763
Wuhan Shanghe Metalurgical Screen Manufactory	1/22/2009		-		17,505
Wuhan City Zhiwei Transportation Machinery Manufactory Co., Ltd	1/22/2009		-		29,175
Wuxi City Houde Automatic Meter Manufactory	1/22/2009		-		29,175
Xi’an Electrical Equipment Company Wuhan Branch	1/22/2009		-		47,045
Zhejiang Zhuji City Bushing Co	1/22/2009		-		43,763
Zhejiang Zhongfa Power Equipment Co., Ltd.	1/22/2009		-		58,351
Various Other Notes					238,873
Total				$	33,484,407

Certain notes payable, as indicated above, do not have a stated interest rate. These notes are payable on demand by the lenders. The lenders have given extended credit terms secured by pledge of the Company’s restricted cash.

We plan to either repay this debt as it matures or refinance this debt with other debt. For the quarter ended September 30, 2008, the amount of our outstanding debt from bank loans and notes increased $4.98 million. While the amount of our bank debt decreased, the amount of notes significantly increased.

On February 7, 2007, immediately following the consummation of the share exchange, we completed a private placement of Series A Convertible Preferred Stock (“Preferred Stock”) and warrants to accredited investors. As a result of this private placement, we received approximately $24.0 million in gross proceeds. After the deduction of sales commissions and offering expenses, we received approximately $20.0 million in net proceeds.

On September 29, 2008, the Company raised approximately $11.8 million in gross proceeds from the exercise of a portion of the Company’s Series J warrants. These warrant holders exercised the Series J warrants for 5,006,524 shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share (“Series B Preferred Stock”), which is convertible on a one-to-one basis for the Company’s common stock, par value $0.0001 per share. The Company paid approximately $1.18 million in commissions in connection with these warrant exercises.

In October and November 2008, the Company raised approximately $3.03 million in gross proceeds from additional exercises of Series J warrants. These warrants were exercised for 1,302,554 shares of the Company’s Series B Preferred Stock and the Company paid approximately $303,500 in commissions in connection with these warrant exercises.

The Company believes that its currently available working capital, combined with cash from operations, should be adequate to sustain operations at current levels through at least the next 12 months. In order to continue the pace of the Company’s recent growth, the Company may need additional capital.

At September 30, 2008, we had $35.97 million in accounts receivable, which is consistent with the amount at June 30, 2008. Our sales increased 9.49% for the quarter ended September 30, 2008 compared to the prior quarter. The stabilization of our accounts receivable in light of increased sales demonstrates our continued efforts to collect and our continued emphasis on the alignment of sales commissions with the collection on sales.

The majority of our customers pay us in installments at various stages of project completion. The percentage of the purchase price due at the various stages varies somewhat between contracts. In our standard sales contract, we receive 60% of the purchase price of a piece of equipment at the time of delivery. Alternatively, some sales contracts provide for 30% due upon signing and 30% due upon delivery. We generally receive an additional 30% of the purchase price when the equipment is installed and runs without problem for 72 hours. However, since our equipment is generally a component of a larger project, there are times that customers do not allow us to install the equipment immediately upon delivery. We generally receive the final 10% at 18 months following the installation. Although the payment terms in our standard sales contract result in a long payment cycle, we believe our payment terms are typical in our industry in China. Nonetheless, we are seeking more aggressive payment schedules on new sales contracts in order to improve our liquidity position.

At September 30, 2008, we had $5.44 million in other receivables, compared to $2.82 million at June 30, 2008. This increase was primarily due to a significant increase in deposits made in connection with new project bids by the Company. If the customer does not select the Company for the project, the deposit will be returned to the Company. If the Company is selected for the project, these funds remain on deposit with the customer until the project is completed.

At September 30, 2008, we had no notes receivable, which is consistent with the prior period. We had other payable of $2.20 million at September 30, 2008 related to accruals for materials that have been provided or services rendered, but for which no invoice has been received from the vendor.

Critical Accounting Policies

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

Method of Accounting: We maintain our general ledger and journals with the accrual method of accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies that we have adopted conform to generally accepted accounting principles in the United States and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.

Consolidation: The interim consolidated financial statements include the accounts of the Company and its subsidiaries, UFG, Wuhan Blower, and Wuhan Generating. Inter-company transactions, such as sales, cost of sales, due to/due from balances, investment in subsidiaries, and subsidiaries’ capitalization have been eliminated.

Economic and Political Risks: Our operations are conducted in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.

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

Cash and Cash Equivalents: We consider all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents. We maintain bank accounts in the PRC, and an escrow account in the United States.

Accounts Receivable-Trade: Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written-off as incurred.

Inventory: Inventory, consisting of raw materials, work in progress, and finished products, is stated at the lower of cost or market value. Finished products are comprised of direct materials, direct labor and an appropriate proportion of overhead.

Property, Plant and Equipment: Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method with 5% salvage value. Estimated useful lives of the property, plant and equipment are as follows:

Buildings			30 years
Machinery and Equipment			10 years
Furniture and Fixtures			5 years
Motor Vehicles			5 years

Intangible Assets: Intangible assets are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives of intangibles are as follows:

Technical Licenses			10 years
Trademark			20 years

Land Use Rights: We carry land use rights at cost less accumulated amortization. Land use rights are amortized straight-line over its useful life of 50 years.

Accounting for Impairment of Long-Lived Assets: We adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. We periodically evaluate the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, we believe that, as of September 30, 2008 and December 31, 2007, there were no significant impairments of long-lived assets.

Revenue Recognition: Revenue from the sale of blower products and generating equipment is recognized at the time of the transfer of risks and rewards of ownership, which generally occurs when the goods are delivered to customers and the title passes. There are no customer acceptance clauses in the Company’s standard sales contracts. Typically, installation begins between one to two weeks following delivery of the product. The installation process typically takes four to eight weeks.

Cost of Sales: Our cost of sales is comprised of raw materials, factory worker salaries and related benefits, machinery supplies, maintenance supplies, depreciation, utilities, inbound freight, purchasing and receiving costs, inspection and warehousing costs.

Selling Expenses: Selling expenses are comprised of outbound freight, salary for the sales force, client entertainment, commissions, depreciation, advertising, and travel and lodging expenses.

General & Administrative Expenses: General and administrative expenses include outside consulting services, research & development, executive compensation, quality control, and general overhead such as the finance department, administrative staff, and depreciation and amortization expense.

Advertising: We expense all advertising costs as incurred.

Research and Development: We expense all research and development costs as incurred.

Foreign Currency Translation: We maintain our financial statements in the functional currency, which is the Renminbi (RMB). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

For financial reporting purposes, the financial statements, which are prepared using the functional currency, have been translated into U.S. dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

Exchange Rates	September 30, 2008		September 30, 2007
Period end RMB: US$ exchange rate		6.8551		7.5176
Average RMB during period: US$ exchange rate		6.99886		7.67576

Income Taxes: We account for income tax using an asset and liability approach and allow for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to realize their benefits, or that future realization is uncertain.

Statutory Reserve: In accordance with PRC laws, statutory reserve refers to the appropriation from net income, to the account “statutory reserve” to be used for future company development, recovery of losses, and increase of capital, as approved, to expand production or operations. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.

Other Comprehensive Income: Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Our current component of other comprehensive income is the foreign currency translation adjustment.

Warranty Policy: The estimation of warranty obligations is determined in the same period that revenue from the sale of the related products is recognized. The warranty obligation is based on historical experience and reflects management’s best estimate of expected costs at the time products are sold. Warranty accruals are adjusted for known or anticipated warranty claims as new information becomes available. Future events and circumstances could materially change our estimates and require adjustments to the warranty obligation. New product launches require a greater use of judgment in developing estimates until historical experience becomes available.

Earnings Per Share: Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method for warrants and the as-if method for convertible securities. Dilutive potential common shares include outstanding warrants and convertible Preferred Stock.

Recent Accounting Pronouncements:

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”

In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.

In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees,” an amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. The provisions of the FSP that amend Statement 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

We are currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on our consolidated results of operations and financial condition.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

This item is not required for a smaller reporting company.

Item 4T. Controls and Procedures.

Disclosure Controls and Procedures

As required by Rule 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures contained significant deficiencies and material weaknesses. We believe that the deficiencies and weaknesses in our disclosure controls and procedures result from weaknesses in our internal control over financial reporting, which is described below.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)

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

(ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)

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

Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of preventing and detecting misstatements on a timely basis. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.

Management of the Company, including the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, which was the end of the Company’s most recent fiscal year. In making this evaluation, management used the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we concluded that we had material weaknesses in our internal control over financial reporting. The following is a description of deficiencies or weaknesses with respect to our internal control over financial reporting identified in connection with the management evaluation and the remediation initiatives that we have implemented or intend to implement in the near future.

The Company lacks formal, written risk assessment policies and procedures to ensure the identification of various risks and the timely implementation of plans to address such risks.

Remediation Initiative

We plan to establish comprehensive risk assessment policies and procedures. In addition, we plan to retain outside consultants to assist in designing and implementing internal control procedures both at the entity level and at the processing level in accordance with Section 404 of the Sarbanes-Oxley Act.

The current accounting staff lacks sufficient depth, skill and experience with U.S. GAAP reporting, and the Company does not have sufficient internal financial policies and procedures to monitor the capabilities of its personnel. Further, the Company’s internal audit department lacks sufficient resources to properly perform monitoring and risk assessment functions.

Remediation Initiative

We are seeking additional accountants experienced in several key areas of accounting, including persons with experience in U.S. GAAP and SEC financial reporting requirements. We also plan to retain outside consultants to assist in the training and development of our accounting staff and internal audit group and to assist with the development of internal financial policies and procedures.

Our information technology controls and our policies and procedures on the management of information technology require improvement. In addition, some of our accounting system servers are located in unsecured areas.

Remediation Initiative

We plan to establish a comprehensive information technology plan and a strategic plan designed to improve our information technology controls with assistance from outside consultants. We also plan to update our policies and procedures on the management of information technology and relocate our database servers to a secure and controlled location.

Because material weaknesses exist, management concluded that the Company’s internal control over financial reporting as of December 31, 2007 was not effective. In order to resolve these weaknesses, we plan to engage a consultant to provide us guidance on the improvement of our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

Other than the remediation measures described above, during the quarter ended September 30, 2008, there was no change in our internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.

Item 1A. Risk Factors.

An investment in our common stock or other securities involves a number of risks. You should carefully consider each of the risks described below before deciding to invest in our common stock. If any of the following risks develops into actual events, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.

The risk factors presented below are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risk Factors Related to Our Business

Our steam and water turbine business is a critical component of our growth and overall business strategy, yet our turbine facility is not fully operational and we have little experience manufacturing turbines.

In late 2005, Wuhan Blower reached an understanding with many of the former management members of Wuhan Turbine Works, a business owned by China Chang Jiang Energy Corporation, whereby it would establish a new business utilizing their management and technology to manufacture small to mid-size steam and water turbines. Since that time, we have begun production of turbines in our existing manufacturing facilities and in shared facilities. In March 2006, we broke ground on a new turbine manufacturing facility. The construction of the new turbine manufacturing facility has been completed; however, the installation of customized equipment for this facility will not be completed until the first quarter of 2009. We have begun production of turbines from this facility and will expand production once the installation is complete. The manufacture of turbines has become a critical component of our business. However, we have only two years experience manufacturing turbines.

Because we have had a limited operating history in the turbine manufacturing business, it is difficult to forecast accurately our future revenues and expenses related to this segment. Additionally, our turbine operations will continue to be subject to risks inherent in the establishment of a new business, including, among other things, efficiently deploying our capital, developing our product and service offerings, developing and implementing our marketing campaigns and strategies and developing awareness and acceptance of our products. Our ability to generate future revenues from these operations will be dependent on a number of factors, many of which are beyond our control. To be successful, we must, among other things, complete the installation of the customized equipment, integrate the former managers of Wuhan Turbine Works and establish market recognition in this business. This will require us to expend significant resources, including capital and management time and there can be no assurance that this aspect of our business will be successful.

Wuhan Blower was privatized in 2004, so it has a limited history of operations as a non-state-owned enterprise. We may not realize the benefits of privatization as quickly as we anticipate or at the level that we expect.

Wuhan Blower was originally founded in 1958 as the Wuhan Blower Company. In 2004, Mr. Xu Jie purchased the company and implemented steps to transform it from a traditional Chinese state-owned enterprise into a modern, efficient company. Thus, we only have a limited history of operations as a non-state-owned enterprise. We cannot assure you that we will be successful in achieving the benefits we expect from our privatization, such as increased management flexibility in implementing measures to improve our cost structure, the efficient operation of our business and the expansion into new businesses in a timely manner or at all. Factors that may cause the actual benefits we may derive from privatization to deviate from our expectations include:

inexperience of management in transforming and then operating a non-state-owned enterprise;

unanticipated adverse developments in our attempt to achieve efficient management of our workforce and operation of our business;

changes in regulations affecting us following our privatization; and

the speed with which we are able to implement more efficient management systems, and the resulting levels of cost savings.

Our management has identified material weaknesses in our internal control over financial reporting and disclosure controls and procedures that, if not properly remediated, could result in material misstatements in our financial statements in future periods.

In conjunction with the preparation of this Form 10-Q, our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based upon this evaluation, our CEO and CFO concluded that disclosure controls and procedures contained significant deficiencies and material weaknesses. For more detailed information regarding our disclosure controls and procedures, see Part I, Item 4T Controls and Procedures.

The deficiencies and weaknesses in our disclosure controls and procedures result from weaknesses in our internal control over financial reporting. In conjunction with the preparation of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, the Company’s management carried out an evaluation of the effectiveness of the design and operation of the Company’s internal control over financial reporting as of December 31, 2007. Based upon this evaluation, the Company’s CEO and CFO concluded that the Company’s internal control over financial reporting contained significant deficiencies and material weaknesses.

If we are unable to improve our financial and management controls and hire additional accounting and finance staff experienced in addressing complex accounting matters applicable to public companies, in each case in a timely and effective manner, our ability to comply with the accounting and financial reporting requirements and other rules that apply to public companies would be impaired.

If the remedial policies and procedures we implement are insufficient to address the identified material weaknesses, or if additional significant deficiencies or material weaknesses in our internal controls are discovered in the future, we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and our operating results may be adversely affected. Any such failure also could adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over financial reporting.

We must implement additional and expensive procedures and controls in order to grow our business and organization and to satisfy reporting requirements, which will increase our costs and require additional management resources.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act and the related rules and regulations of the SEC, including the requirements that we maintain disclosure controls and procedures and adequate internal control over financial reporting. We also are required to comply with marketplace rules to maintain our NASDAQ listing. Compliance with the Sarbanes-Oxley Act and other SEC and NASDAQ requirements will increase our costs and require additional management resources. We recently began upgrading our procedures and controls and will need to continue to implement additional procedures and controls as we grow our business and organization and to satisfy new reporting requirements. If we are unable to complete the required assessment as to the adequacy of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or if we fail to maintain internal control over financial reporting, our ability to produce timely, accurate and reliable periodic financial statements could be impaired.

Our substantial indebtedness could adversely affect our results of operations and financial condition and prevent us from fulfilling our financial obligations.

We have incurred substantial debt to finance our growth. As of September 30, 2008, we had approximately $33.48 million of outstanding bank loans and notes. This indebtedness could have important consequences to us, such as:

limiting our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service requirements or other cash requirements;

limiting our operational flexibility due to the covenants contained in our debt agreements;

limiting our ability to invest operating cash flow in our business due to debt service requirements;

limiting our ability to compete with companies that are not as highly leveraged and that may be better positioned to withstand economic downturns; and

increasing our vulnerability to fluctuations in market interest rates.

Our ability to meet our expenses and debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer preferences, the success of product and marketing innovation and pressure from competitors. If we do not have enough money to pay our debt service obligations, we may be required to raise additional equity capital, sell assets or borrow more money. We may not be able, at any given time, to raise additional equity capital, sell assets or borrow more money on terms acceptable to us or at all.

In addition, the majority of our debt matures in less than one year. In the past, we have refinanced our debt prior to maturity. However there can be no assurance that we will be able to refinance our debt on favorable terms.

Default in payment by one or more customers that have large account receivable balances could adversely impact our results of operations and financial condition.

A significant portion of our working capital consists of accounts receivable from customers. As of September 30, 2008, we had an aggregate amount of $35.97 million in accounts receivables. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable or unwilling to make timely payments, our business, results of operation, financial condition or liquidity could be adversely affected. A significant amount of customer defaults would be most likely to occur in an economic or industry downturn. Such an event could result in longer payment cycles, increased collection costs and defaults in excess of management’s expectations.

We rely on third-party relationships to augment our research and development capabilities. If we fail to establish new, or maintain existing, collaborative arrangements, or if our partners do not perform, we may be unable to research and develop new products and make technological advancements.

Although we maintain our own research and development facilities, we also rely on collaborative arrangements with third-parties to research and develop new products and make technological advancements. For example, we have relationships with the Science and Technology University of Central China, Jiaotong University and the Acoustic Institute of the China Science Academy that allow us to stay abreast of the latest developments in the fields of fluid dynamics, material sciences and acoustics. We would be harmed by the loss of such relationships. In addition, we license technological information, and receive related technical assistance, from Mitsubishi Heavy Industries, Ltd. in connection with the majority of axial flow fans that we produce. If we fail to retain our rights under the license agreement, we would not be able to produce axial flow fans using the technical information provided by Mitsubishi. Additional collaborations may be necessary in the future. If we fail to enter into additional collaborative arrangements or fail to maintain our existing collaborative arrangements, we may not be able to compete successfully with other companies that achieve technological advancements.

Our dependence on collaborative arrangements with third-parties subjects us to a number of risks, including, among others:

collaborative arrangements may not be on terms favorable to us;

disagreements with partners may result in delays in research and development, termination of our collaboration agreements or time consuming and expensive legal action;

we cannot control the amount and timing of resources that our partners devote to our research and development and our partners may not allocate sufficient funds or resources to our projects, or may not perform their obligations as expected;

partners may choose to research and develop, independently or with other companies, alternative products or technological advancements, including products or advancements that would compete with ours;

agreements with partners may expire or be terminated without renewal, or partners may breach collaboration agreements with us;

business combinations or significant changes in a partner’s business strategy might adversely affect that partner’s willingness or ability to complete its obligations to us; and

the terms and conditions of the relevant agreements may no longer be suitable.

The occurrence of any of these or similar events could adversely affect our research and development capabilities.

We have limited business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability insurance coverage for our operations. If we incur any losses, we will have to bear those losses without any assistance. As a result, we may not have sufficient capital to cover material damage to, or the loss of, our manufacturing facilities due to fire, severe weather, flood or other causes, and such damage or loss would have a material adverse effect on our financial condition, business and prospects.

Our results could be adversely impacted by product quality and performance.

We manufacture and install products based on specific requirements of each of our customers. We believe that future orders of our products or services will depend on our ability to maintain the performance, reliability and quality standards required by our customers. If our products or services have performance, reliability or quality problems, we may experience delays in the collection of accounts receivables, higher manufacturing or installation costs, additional warranty and service expense, and reduced, cancelled or discontinued orders. Additionally, performance, reliability or quality claims from our customers, with or without merit, could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages.

Continued price volatility and supply constraints in the steel and iron markets could prevent us from meeting delivery schedules to our customers or reduce our profit margins.

Our business is dependent on the prices and supply of steel and iron, which are the principal raw materials used in our products. The steel and iron industries are highly cyclical in nature, and steel and iron prices have been volatile in recent years and may remain volatile in the future. Steel and iron prices are influenced by numerous factors beyond our control, including general economic conditions, competition, labor costs, production costs, import duties and other trade restrictions. In the past, there have been unusually rapid and significant increases in steel and iron prices and severe shortages in the steel and iron industries due in part to increased demand from China’s expanding economy and high energy prices. We do not have any long-term contracts for the purchase of steel and iron and normally do not maintain inventories of steel and iron in excess of our current production requirements. We can give you no assurance that steel and iron will remain available to us at competitive prices or that prices will not continue to be volatile. If the available supply of steel and iron declines, we could experience price increases that we are not able to pass on to our customers, a deterioration of service from our suppliers or interruptions or delays that may cause us not to meet delivery schedules to our customers. Any of these problems could adversely affect our results of operations and financial condition.

Expansion of our business may strain our management and operational infrastructure and impede our ability to meet any increased demand for our products. In addition, we may need additional funding to support our growth, and this funding may not be available to us.

Our business plan is to grow significantly our operations by meeting the anticipated growth in demand for existing products, and by introducing new products. Our planned growth includes the development of a turbine manufacturing business. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. Our business growth also presents numerous risks and challenges, including:

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

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

rapid technological change.

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

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

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including in particular Xu Jie, our President, Chief Executive Officer and Chairman of the Board. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations. If we lose a key employee, if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the manufacturing, technical, marketing and sales aspects of our business, any part of which could be harmed by turnover in the future.

We are a holding company and rely on the receipt of dividends from our operating subsidiaries. We may encounter limitations on the ability of our subsidiaries to pay dividends to us.

As a holding company, we have no direct business operations other than the ownership of our operating subsidiaries. Our ability to pay dividends and meet other obligations depend upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions relating to doing business in China as discussed below. If future dividends are paid in Renminbi, fluctuations in the exchange rate for the conversion of Renminbi into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to their corporate structure.

All of our operations are conducted in China and substantially all of our revenues are generated in China. Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. This calculation may differ from the one performed under generally accepted accounting principles in the United States, or U.S. GAAP. As a result, we may not receive sufficient distributions from our Chinese subsidiaries to enable us to make dividend distributions to our stockholders in the future. The limitations on distributions of the profits of our Chinese operating subsidiaries could negatively affect our financial condition and assets, even if our U.S. GAAP financial statements indicate that our operations have been profitable.

Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations, we will be unable to pay any dividends.

We enjoy certain preferential tax concessions, and the loss of these preferential tax concessions would cause our tax liabilities to increase and our profitability to decline.

On March 16, 2007, the National People’s Congress promulgated the Law of the People’s Republic of China on Enterprise Income Tax, or the new EIT Law, which became effective on January 1, 2008. In accordance with the new EIT Law, the corporate income tax rate is set at 25% for all enterprises. However, certain industries and projects, such as enterprises with foreign investors, may enjoy favorable tax treatment pursuant to the new EIT Law and its implementing rules.

The new EIT Law also provides for a transitional period for enterprises that were benefiting from an income tax exemption prior to January 1, 2008. The Company, which is an enterprise with foreign investors, expects to be an enterprise that will continue to benefit from an income tax exemption during this transitional period. There can be no assurance that we will continue to qualify for this preferential tax treatment or that Chinese tax regulations will remain the same. If we do not continue to receive our tax exemption or do not receive the reduced income tax rates thereafter, our tax liabilities will increase and our net income will decrease accordingly.

Under the new EIT Law, we may be classified a “resident enterprise” for PRC tax purposes, which may subject us to PRC enterprise income tax for any dividends we receive from our Chinese subsidiaries and to PRC income tax withholding for any dividends we pay to our non-PRC shareholders.

Under the new EIT Law, an enterprise established outside of China whose “de facto management bodies” are located in China is considered a “resident enterprise” and is subject to the 25% enterprise income tax rate on its worldwide income. The new EIT Law and its implementing rules are relatively new, and currently, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine the tax residency of enterprises established outside of China.

All of our management is currently based in China. If the PRC tax authorities determine that our U.S. holding company is a “resident enterprise” for PRC enterprise income tax purposes, we may be subject to an enterprise income tax rate of 25% on our worldwide taxable income. The “resident enterprise” classification also could subject us to a 10% withholding tax on any dividends we pay to our non-PRC shareholders if the relevant PRC authorities determine that such income is PRC-sourced income. In addition to the uncertainties regarding the interpretation and application of the new “resident enterprise” classification, the new EIT Law may change in the future, possibly with retroactive effect. If we are classified as a “resident enterprise” and we incur these tax liabilities, our net income will decrease accordingly.

Our quarterly and annual revenues and operating results are volatile and difficult to predict.

Our quarterly and annual revenues and operating results may vary depending on a number of factors, including, but not limited to: fluctuating customer demand, delay or timing of shipments, construction delays, changes in product mix or market acceptance of new products, manufacturing or operational difficulties that may arise due to quality control, capacity utilization of our production equipment or staffing requirements, and competition, including the introduction of new products by competitors, adoption of competitive technologies by our customers and competitive pressures on prices of our products and services. Our failure to meet quarterly or annual revenue and operating result expectations would likely adversely affect the market price of our common stock.

Risks Related to the Market for Our Stock and Our Capital Structure

Shares eligible for future sale may adversely affect the market price of our common stock.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of restricted common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 or a resale prospectus. Any substantial sale of our common stock may have a material adverse effect on the market price of our common stock.

The issuance of shares of common stock upon the exercise or conversion of outstanding securities may cause significant dilution to our stockholders and may have an adverse impact on the market price of our common stock.

As of November 12, 2008, there were 25,832,308 shares of our common stock issuable upon conversion of outstanding Preferred Stock and exercise of outstanding warrants and options. The issuance of our shares upon the exercise or conversion of these securities will increase the number of shares of our common stock outstanding , which could depress the market price of our common stock.

The perceived risk of dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

In the event that we issue common stock or securities convertible into common stock in the future for consideration that is less than the conversion price of our outstanding Series A Preferred Stock or the exercise prices of our outstanding warrants, the number of shares that we would be required to issue upon conversion of the Series A Preferred Stock would be increased and the exercise prices of the warrants would be decreased.

The terms of our outstanding convertible Series A Preferred Stock and warrants provide for a downward adjustment in the conversion price of our Series A Preferred Stock and exercise prices of the warrants in the event that we subsequently issue shares of our common stock, or securities convertible into or exercisable for our common stock, for consideration that is less than the conversion or exercise prices of these previously issued securities. Any reduction of the conversion price of our Series A Preferred Stock as a result of these adjustment provisions would require that we issue a greater number of shares upon conversion of Series A Preferred Stock than we would have issued in the absence of these provisions. Any additional shares that we issue as a result of these adjustment provisions would cause further dilution to our existing stockholders. In addition, any reduction of the exercise price of the warrants as a result of these adjustment provisions would reduce the amount of cash that we receive in connection with an exercise of such warrants.

We may not be able to achieve the benefits we expect to result from the share exchange.

We may not realize the benefits that we hoped to derive as a result of the February 2007 share exchange, which include:

access to the capital markets of the United States;

the increased market liquidity expected to result from exchanging stock in a private company for securities of a public company that are publicly traded;

the ability to use securities to make acquisition of assets or businesses;

increased visibility in the financial community;

enhanced access to the capital markets;

improved transparency of operations; and

perceived credibility and enhanced corporate image of being a publicly traded company.

In addition, the attention and effort devoted to achieving the benefits of the share exchange and attending to the obligations of being a public company, such as reporting requirements and securities regulations, could significantly divert management’s attention from operational issues, which could materially and adversely affect our operating results or stock price in the future.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team, which has limited experience operating a U.S. public company, will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Standards for compliance with Section 404 of the Sarbanes-Oxley Act are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an annual assessment of a public company’s internal control over financial reporting by management and an audit of the public company’s internal control over financial reporting by such company’s independent registered public accountants. We recently completed our first annual assessment of our internal controls in our annual report for the 2007 fiscal year, and the auditor’s attestation requirement will first apply to our annual report for the 2009 fiscal year. Since the auditor attestation process will be new for our company, we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation by our independent registered public accountants. Since we were not able to assess our internal control over financial reporting as effective, and if our independent registered public accountants are unable to provide an unqualified attestation, investor confidence and share value may be negatively impacted.

Our principal stockholder has the ability to control our operations, including the election of our directors.

Fame Good International Limited, a holding company controlled by our President and Chief Executive Officer, Xu Jie, is the owner of approximately 74.45% of our outstanding voting securities (excluding shares of our Preferred Stock which, until converted into common stock, only vote as a class on certain matters affecting such Preferred Stock). As a result, Mr. Xu possesses significant influence, giving him the ability, among other things, to elect each member of our Board of Directors and to authorize or prevent proposed significant corporate transactions. His ownership and control also may have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer. Additionally, Mr. Xu’s interests may differ from the interests of our other stockholders.

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

Our Articles of Incorporation authorize the Board of Directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent the stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

Risks Related to Doing Business in China

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

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Changes or events that could possibly occur, among others, include:

level of government involvement in the economy;

control of foreign exchange;

methods of allocating resources;

balance of payments position;

international trade restrictions;

international conflict; and

devaluation of the Renminbi, which is the Chinese currency.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

Our business is subject to the uncertain legal environment in China.

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally followed. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign investment enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign investment enterprises to hold licenses and permits such as requisite business licenses.

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

In the last 20 years, despite a process of devolution of regulatory control to provincial and local levels and resulting economic autonomy and private economic activities, the Chinese central government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision to adjust economic policies or even to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could harm our operations.

A renewed outbreak of SARS or another widespread public health problem such as new strains of avian influenza in China could have a negative effect on our operations.

Our operations may be impacted by a number of health-related factors, including the following:

quarantines or closures of some of our manufacturing facilities or offices which would severely disrupt our operations,

the sickness or death of our key officers and employees, and

a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public health problems could damage our operations.

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

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

The foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition and the value of our shares.

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

Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including the U.S. dollar, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. dollar has remained stable and has appreciated slightly against the U.S. dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. Since then, the Renminbi has appreciated by approximately 21.16% against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the U.S. dollar.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. During the past 15 years, the rate of inflation in China has been as high as approximately 20% and China has experienced deflation as low as approximately minus 2%. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability.

Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued a Notice on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies.

In accordance with the notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the notice, the PRC residents must each submit a registration form to the local provincial SAFE branch with respect to their establishment of an offshore company and also must file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transaction or use of assets in China to guarantee offshore obligations. The notice also provides that failure to comply with the registration procedures set forth therein may result in restrictions on our PRC resident stockholders and subsidiaries. Pending the promulgation of detailed implementation rules, the relevant government authorities are reluctant to commence processing any registration or application for approval required under the SAFE notices.

In addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the State-Owned Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission and SAFE, amended and released the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises, new foreign-investment rules which took effect September 8, 2006, superseding much, but not all, of the guidance in the prior SAFE circulars. These new rules significantly revised China’s regulatory framework governing onshore-offshore restructurings and how foreign investors can acquire domestic enterprises. These new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries.

These new rules may significantly affect the means by which onshore-offshore restructurings are undertaken in China in connection with offshore private equity and venture capital financings, mergers and acquisitions. It is expected that such transactional activity in China in the near future will require significant case-by-case guidance from MOFCOM and other government authorities as appropriate. It is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure that our PRC and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance.

It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of the SAFE notices and new rules.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Chinese companies and some other foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in the PRC, and our executive officers and employees have not been subject to the United States Foreign Corrupt Practices Act prior to the completion of the share exchange in February 2007. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

PRC companies historically have not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and computer, financial and other control systems. As a result, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet standards required of U.S. public companies. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act. Any such deficiencies, weaknesses or lack of compliance could have a material adverse effect on our business.

Our business may be adversely affected as a result of China’s entry into the World Trade Organization (“WTO”) because the preferential tax treatments available to us may be discontinued and foreign manufacturers may compete with us in the PRC.

The PRC became a member of the WTO on December 11, 2001. The current tax benefits that we enjoy may be discontinued as a result of the PRC’s membership in the WTO. If this happened, our profitability would be adversely affected. In addition, we may face additional competition from foreign manufacturers if they set up their production facilities in the PRC or form Sino-foreign joint ventures with our competitors in the PRC. In the event that we fail to maintain our competitiveness against these competitors, our profitability may be adversely affected.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original legal actions in China based upon U.S. laws, including the federal securities laws or other foreign laws, against us or our management.

Almost all of our current operations are conducted in China. Moreover, the majority of our officers and directors are currently nationals and residents of China. All or substantially all of the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process upon these persons within the United States or elsewhere outside China. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or our officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original legal actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On September 29, 2008, the Company raised approximately $11.8 million in gross proceeds from the exercise of a portion of the Company’s Series J warrants. These warrant holders exercised the Series J warrants for 5,006,524 shares of the Company’s Series B Preferred Stock, which is convertible on a one-to-one basis for the Company’s common stock, par value $0.0001 per share. The Company paid approximately $1.18 million in commissions in connection with these warrant exercises.

The Series J warrants had an exercise price of $2.33 and expired on November 7, 2008. The Series B Preferred Stock was issued in private placement transactions that were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

None.

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

On September 8, 2008, we filed with the SEC and provided to our stockholders an Information Statement on Schedule 14C. The purpose of the Information Statement was to inform the holders of record of shares of our common stock as of the close of business on August 28, 2008 that our Board of Directors had recommended, and that the holder of a majority of our common stock had approved by written consent in lieu of a meeting of stockholders dated September 4, 2008, an amendment to our Articles of Incorporation to allow for the designation of preferred stock with different rankings. Prior to this amendment, the Company could only designate different series of preferred stock that were of equal ranking.

The Information Statement was circulated to advise our stockholders of a corporate action that had already been approved by the written consent of our stockholder who holds a majority of our common stock. Therefore, the Information Statement was being sent to the stockholders for informational purposes only. Pursuant to Rule 14c-2 of the Exchange Act, the corporate action would not be effective until twenty days after the date that the Information Statement was mailed to our stockholders.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number		Description of Exhibit
31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a).
31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a).
32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

* Filed herewith

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 14, 2008

WUHAN GENERAL GROUP (CHINA), INC.

By:	/s/ Xu Jie
	Name: Xu Jie
	Title: President and Chief Executive Officer
	(principal executive officer and duly authorized officer)

By:	/s/ Haiming Liu
	Name: Haiming Liu
	Title: Chief Financial Officer and Treasurer
	(principal financial officer)

Exhibit Index

Exhibit Number		Description of Exhibit
31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a).
31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a).
32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

* Filed herewith