CHINA AUTOMOTIVE SYSTEMS INC - FORM 10-Q/A

Attached files

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EX-31.2 - CHINA AUTOMOTIVE SYSTEMS INC	v226706_ex31-2.htm
EX-32.2 - CHINA AUTOMOTIVE SYSTEMS INC	v226706_ex32-2.htm
EX-31.1 - CHINA AUTOMOTIVE SYSTEMS INC	v226706_ex31-1.htm
EX-32.1 - CHINA AUTOMOTIVE SYSTEMS INC	v226706_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 5.16

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark one)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number: 000-33123

China Automotive Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	33-0885775
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)

No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District,

Jing Zhou City, Hubei Province, People’s Republic of China

(Address of principal executive offices)

Issuer’s telephone number: (86) 716- 832- 9196

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨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.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company)	Smaller reporting company x

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

Yes ¨ No x

As of June 24, 2011, the Company had 28,083,534 shares of common stock issued and outstanding.

CHINA AUTOMOTIVE SYSTEMS, INC.

INDEX

		Page
Explanatory Note		3

Part I — Financial Information

Item 1. Financial Statements		5
Condensed Consolidated Statements of Income (Operations) (Unaudited) for the Three Months Ended March 31, 2010 and 2009		5
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2010 and 2009		6
Condensed Consolidated Balance Sheets at March 31, 2010 (Unaudited) and December 31, 2009		7
Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2010 (Unaudited) and December 31, 2009		8
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2010 and 2009		9
Notes to Condensed Consolidated Financial Statements (Unaudited) for the Three Months Ended March 31, 2010 and 2009		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		43

Part II — Other Information

Item 1. Legal Proceedings		44
Item 1A. Risk Factors		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3. Defaults Upon Senior Securities		48
Item 4. Submission of Matters to a Vote of Security Holders		48
Item 5. Other Information		48
Item 6. Exhibits		48
Signatures		50

EXPLANATORY NOTE

Restatement of Consolidated Financial Statements

On March 17, 2011, China Automotive Systems, Inc. (the “Company”) announced that it had identified historical accounting errors relating to the accounting treatment of the Company’s convertible notes issued on February 15, 2008 (the “Convertible Notes”). The accounting errors have resulted in the misstatement of certain charges arising from fair value adjustments and other changes to derivative liabilities since the first quarter of 2009. The Company has no evidence that the errors resulted from any fraud or intentional misconduct.

The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company’s review determined that the errors resulted from the Company’s failure to properly apply the requirements of Accounting Standard Codification (ASC) 815 (“ASC 815”), which changed the accounting treatment of convertible notes effective January 1, 2009. Additionally, management has also identified accounting errors in accumulated depreciation, deferred tax assets and accrued payroll and its related cost. These flaws represented material weaknesses in the Company’s internal controls over financial reporting as of March 31, 2010, such as accounting error on compound embedded derivative financial instruments, which were mentioned in this amended quarterly report on Form 10-Q/A. Management identified the accounting errors in connection with the 2010 annual audit procedures undertaken by the Company’s newly engaged independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian CPAs Limited Company.

The Company’s review was overseen by the audit committee of the board of directors of the Company (the “Audit Committee”) with the assistance of management and accounting consultants engaged by management. The Audit Committee concluded on March 12, 2011 that the Company’s previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009, and related auditors’ report, and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010, should no longer be relied upon because of these errors in the financial statements. The Company’s board of directors agreed with the Audit Committee’s conclusions. After analyzing the size and timing of the errors, the Company determined that, in the aggregate, the errors were material and would require the Company to restate certain of its previously issued financial statements.

As more fully described in Note 2 to the accompanying restated consolidated financial statements for the three-month period ended March 31, 2010 and 2009, the Company has restated its consolidated financial statements and the related disclosures for the three-month period ended March 31, 2010 and 2009. Specifically, the Company has restated its consolidated balance sheets and the related consolidated statements of income, statements of stockholders’ equity and statements of cash flows as of and for the three-month period ended March 31, 2010 and 2009. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2, has been updated to reflect the effects of the restatement.

The effect of the adjustments included: (a) a decrease of $14,441,620 in net income attributable to parent company for the three month period ended March 31, 2010, including a decrease of $14,301,410 resulting from the loss on change in fair value of derivative liabilities adjustment and a decrease of $140,210 from adjustments to financial expenses related to the Convertible Notes; and (b) a decrease of $1,740,950 in net income attributable to parent company for the three month period ended March 31, 2009, including an increase of $3,930,027 resulting from the gain on change in fair value of derivative liabilities adjustment and a decrease of $5,670,977 from adjustments to financial expenses related to the Convertible Notes.

Except as discussed above, the Company has not modified or updated disclosures presented in its quarterly report on Form 10-Q for the three-month period ended March 31, 2010 filed with the Securities and Exchange Commission on May 6, 2010 (the “Original Filing”), except as required to reflect the effects of the restatement. Accordingly, this amended quarterly report does not reflect events occurring after the Original Filing or modify or update those disclosures affected by subsequent events, except as specifically referenced herein. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Filing. References to this “quarterly report on Form 10-Q,” this “quarterly report on Form 10-Q/A” and this “amended quarterly report on Form 10-Q/A” herein shall refer to the Original Filing as amended by this amended quarterly report on Form 10-Q/A. The following items have been amended as a result of the restatement:

Part I	Item 1.	Financial Statements and Supplementary Data;
Part I	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part I	Item 4.	Controls and Procedures; and
Part II	Item 1A.	Risk Factors
Part II	Item 6.	Exhibits, Financial Statement Schedules.

Cautionary Statement

This Amendment no. 1 to the Quarterly Report on Form 10-Q/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q/A is filed, and the Company does not intend to update any of the forward-looking statements after the date this amended quarterly report on Form 10-Q/A is filed to confirm these statements to actual results, unless required by law.

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

China Automotive Systems, Inc.

Condensed Consolidated Statements of Income (Operations) (Unaudited)

	Three Months Ended March 31,
	2010			2009
	As Restated– note 2			As Restated – note 2
Net product sales, including $1,660,393 and $559,011 to related parties for the three months ended March 31, 2010 and 2009	$	84,232,689		$	44,697,446
Cost of product sold, including $4,347,288 and $2,126,737 purchased from related parties for the three months ended March 31, 2010 and 2009		61,697,672			33,794,101
Gross profit		22,535,017			10,903,345
Add: Gain on other sales		451,610			66,879
Less: Operating expenses-
Selling expenses		1,867,803			1,064,680
General and administrative expenses		3,604,784			1,801,702
R&D expenses		1,301,758			439,922
Depreciation and amortization		321,793			571,413
Total Operating expenses		7,096,138			3,877,717
Income from operations		15,890,489			7,092,507
Add: Other income, net (note 23)		15,528			-
Financial income (expenses) net (note 24)		(508,221	)		(6,110,457	)
Gain (loss) on change in fair value of derivative (note 25)		(14,152,382	)		2,369,179
Income before income taxes		1,245,414			3,351,229
Less: Income taxes (note 26)		2,285,522			1,449,670
Net income (loss)	$	(1,040,108	)	$	1,901,559
Net income attributable to noncontrolling interest		3,066,343			1,383,697
Net income (loss) attributable to parent company	$	(4,106,451	)	$	517,862
Allocation to convertible notes holders		-			(80,164)
Net income (loss) attributable to parent company’s common shareholders		(4,106,451	)		437,698
Net income (loss) attributable to parent company’s common shareholders per share –
Basic (note 27)	$	(0.15	)	$	0.02
Diluted (note 27)	$	(0.15	)	$	0.02
Weighted average number of common shares outstanding –
Basic		27,046,244			26,983,244
Diluted		27,046,244			26,983,244

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

China Automotive Systems, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended March 31,
	2010			2009
	As Restated– note 2			As Restated– note 2
Net income (loss)	$	(1,040,108	)	$	1,901,559
Other comprehensive income:
Foreign currency translation gain (loss)		45,256			(14,586	)
Comprehensive income (loss)	$	(994,852	)	$	1,886,973
Comprehensive income attributable to non-controlling interest		3,073,897			1,379,272
Comprehensive income (loss) attributable to parent company	$	(4,068,749	)	$	507,701

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

China Automotive Systems, Inc.

Condensed Consolidated Balance Sheets

	March 31, 2010		December 31, 2009
	As Restated– note 2		As Restated– note 2
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	51,075,033	$	43,480,176
Pledged cash deposits (note 4)		13,976,353		12,742,187
Accounts and notes receivable, net, including $1,526,905 and $1,441,939 from related parties at March 31, 2010 and December 31, 2009 (note 5)		168,252,346		154,863,292
Advance payments and other, including $1,080,591 and $0 to related parties at March 31, 2010 and December 31, 2009		7,549,606		2,413,556
Inventories (note 7)		35,383,898		27,415,697
Current deferred tax assets (note 10)		4,235,610		3,866,353
Total current assets	$	280,472,846	$	244,781,261
Long-term Assets:
Property, plant and equipment, net (note 8)	$	58,644,920	$	58,529,447
Intangible assets, net (note 9)		516,052		561,389
Other receivables, net, including $332,955 and $65, 416 from related parties at March 31, 2010 and December 31, 2009 (note 6)		1,950,782		1,064,224
Advance payments for property, plant and equipment, including $1,962,472 and $2,579,319 to related parties at March 31, 2010 and December 31, 2009		8,323,825		6,369,043
Long-term investments		79,106		79,084
Non-current deferred tax assets (note 10)		3,077,970		2,998,124
Total assets	$	353,065,501	$	314,382,572
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans (note 11)	$	4,394,767	$	5,125,802
Accounts and notes payable, including $2,685,916 and $1,537,827 to related parties at March 31, 2010 and December 31, 2009 (note 12)		124,659,294		107,495,833
Convertible Notes payable (note 13)		30,000,000		30,000,000
Compound derivative liabilities (note 14)		59,595,888		45,443,506
Customer deposits		6,894,977		1,918,835
Accrued payroll and related costs		4,577,616		4,578,446
Accrued expenses and other payables(note 15)		27,391,581		22,472,452
Accrued pension costs (note 16)		3,859,241		3,778,187
Taxes payable (note 17)		13,016,930		11,482,177
Amounts due to shareholders/directors (note 18)		186,888		-
Total current liabilities	$	274,577,182	$	232,295,238
Long-term liabilities:
Advances payable (note 19)		234,007		233,941
Total liabilities	$	274,811,189	$	232,529,179
Significant concentrations (note 28)
Related party transactions (note 29 )
Commitments and contingencies (note 30 )
Stockholders' equity:
Preferred stock, $0.0001 par value - Authorized - 20,000,000 shares Issued and outstanding – None	$		$
Common stock, $0.0001 par value - Authorized - 80,000,000 shares Issued and Outstanding – 27,046,244 shares at March 31, 2010 and December 31, 2009 (note 20)		2,704		2,704
Additional paid-in capital (note 20)		27,515,064		27,515,064
Retained earnings-
Appropriated		8,324,533		8,324,533
Unappropriated		3,578,551		7,685,002
Accumulated other comprehensive income		11,225,435		11,187,733
Total parent company stockholders' equity		50,646,287		54,715,036
Non-controlling interests (note 21)		27,608,025		27,138,357
Total stockholders' equity	$	78,254,312	$	81,853,393
Total liabilities and stockholders' equity	$	353,065,501	$	314,382,572

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

China Automotive Systems, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Period Ended March 31, 2010 (unaudited) and December 31, 2009

										Accumulated		Total parent
			Additional							Other		company						Total
	Common		Paid-in		Retained Earnings					Comprehensive		stockholders '			Non-controlling			stockholders'
	Stock		Capital		Appropriated		Unappropriated			Income (Loss)		Equity			interests			Equity

Balance at January 1, 2009 restated	$	2,698	$	26,648,154	$	7,525,777	$	34,060,876		$	11,127,505	$	79,365,010		$	23,270,820		$	102,635,830
Accumulated effect of adopting ASC 8150-40		–		–		–		863,753			–		863,753			–			863,753
Balance at January 1,2009 - as further restated		2,698		26,648,154		7,525,777		34,924,629			11,127,505		80,228,763			23,270,820			103,499,583
Foreign currency translation gain		–		–		–		–			60,228		60,228			22,410			82,638
Exercise of stock options		6		420,234		–		–			–		420,240			–			420,240
Issuance of stock options to independent directors and management		-		446,676		–		–			–		446,676			–			446,676
Appropriation of retained earnings		-		-		798,756		(798,756	)		–		–			(3,944,619	)		(3,944,619	)
Net income (loss) for the year ended December 31, 2009		–		–		–		(26,440,871	)		–		(26,440,871	)		7,789,746			(18,651,125	)
Balance at December 31, 2009 restated	$	2,704	$	27,515,064	$	8,324,533	$	7,685,002		$	11,187,733	$	54,715,036		$	27,138,357		$	81,853,393
Foreign currency translation gain		–		–		–		–			37,702		37,702			7,554			45,256
Appropriation of retained earnings		–		–		–		–			–		–			(2,604,229	)		(2,604,229	)
Net income (loss) for the period ended March 31, 2010		–		–		–		(4,106,451	)		–		(4,106,451	)		3,066,343			(1,040,108	)
Balance at March 31, 2010 restated	$	2,704	$	27,515,064	$	8,324,533	$	3,578,551		$	11,225,435	$	50,646,287		$	27,608,025		$	78,254,312

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

China Automotive Systems, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2010			2009
	As Restated– note 2			As Restated– note 2
Cash flows from operating activities:
Net income	$	(1,040,108	)	$	1,901,559
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		2,358,266			2,026,816
Allowance for doubtful accounts (Recovered)		218,944			(650,590	)
Deferred income taxes assets		(447,191	)		112,451
Amortization for discount of Convertible Note payable		—			3,891,148
(Gain) loss on change in fair value of derivative		14,152,382			(2,369,179	)
Other operating adjustments		99			(1,234	)
Changes in operating assets and liabilities:
(Increase) decrease in:
Pledged deposits		(1,230,619	)		(1,102,026	)
Accounts and notes receivable		(13,455,446	)		(6,482,746	)
Advance payments and other		(5,135,625	)		(779,329	)
Inventories		(7,960,570	)		(1,379,040	)
Increase (decrease) in:
Accounts and notes payable		17,133,541			7,069,389
Customer deposits		4,976,051			280,763
Accrued payroll and related costs		(2,105	)		90,811
Accrued expenses and other payables		2,310,261			2,593,107
Accrued pension costs		80,002			(91,254	)
Taxes payable		1,531,557			3,779,564
Net cash provided by operating activities	$	13,489,439		$	8,890,210
Cash flows from investing activities:
(Increase) decrease in other receivables		(979,428	)		(111,395	)
Cash received from equipment sales		237,457			34,020
Cash paid to acquire property, plant and equipment		(4,616,312	)		(4,296,391	)
Cash paid to acquire intangible assets		(2,504	)		(292,573	)
Net cash (used in) investing activities	$	(5,360,787	)	$	(4,666,339	)
Cash flows from financing activities:
Proceeds from (repayment of) bank loans		(732,462	)		(2,194,298	)
Dividends paid to the non-controlling interest holders of Joint-venture companies		-			(1,550,637	)
Increase in amounts due to shareholders/directors		186,845			-
Net cash provided by (used in) financing activities	$	(545,617	)	$	(3,744,935	)
Cash and cash equivalents affected by foreign currency	$	11,822		$	(7,020	)
Net increase in cash and cash equivalents		7,594,857			471,916
Cash and cash equivalents at beginning of period		43,480,176			37,113,375
Cash and cash equivalents at end of period	$	51,075,033		$	37,585,291

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

China Automotive Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

	Three Months Ended March 31,
	2010		2009
Cash paid for interest	$	174,783	$	702,501
Cash paid for income taxes	$	1,559,519	$	294,494

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

China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2010 and 2009

1.	Organization and Business

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

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

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

The Company owns the following aggregate net interests in nine Sino-foreign joint ventures organized in the PRC as of March 31, 2010 and 2009.

	Percentage Interest
Name of Entity	March 31, 2010			March 31, 2009
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”		81.00	%		81.00	%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”		80.00	%		80.00	%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”		70.00	%		70.00	%
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang”		51.00	%		51.00	%
Universal Sensor Application Inc., “USAI”		83.34	%		83.34	%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”		85.00	%		85.00	%
Wuhu HengLong Automotive Steering System Co., Ltd., “Wuhu”		77.33	%		77.33	%
Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”		100.00	%		100.00	%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”		80.00	%		-	%

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

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

In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”, which is mainly engaged in research and development of new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent).

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

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

USAI was established in 2005 and mainly engages in production and sales of sensor modulars

Jielong was established in 2006 and mainly engages in production and sales of electric power steering, “EPS”.

Wuhu was established in 2006 and mainly engages in production and sales of automobile steering systems.

Hengsheng was established in 2007 and mainly engages in production and sales of automobile steering systems.

On February 24, 2010, the Board of Directors of the Company resolved to increase the registered capital of Hengsheng, one of the Company’s subsidiaries, to $16,000,000 from $10,000,000. The additional investment will be used for expansion of plant and purchase of machinery and equipment and will be funded by the Company’s working capital balances. As of the date of this report, the additional investment has been injected into Hengsheng.

On January 24, 2010, Genesis entered into a sino-foreign equity joint venture contract with Beijing Hainachuan Auto Parts Co., Ltd., to establish a sino-foreign joint venture company, Beijing Henglong Automotive System Co., Ltd., “Beijing Henglong”, to design, develop and manufacture both hydraulic and electric power steering systems and parts. Under PRC laws, the establishment of Beijing Henglong and the effectiveness of the equity joint venture contract are subject to approval by the local Ministry of Commerce and the registration of the same with the local Administration of Industries and Commerce in Beijing. As of the date of this report, the approval has not been obtained.

2. Restatement

The Company has restated its previously issued consolidated financial statements for the three months ended March 31, 2010 and 2009, for matters related to the following previously reported items: financial expenses and accrued interest; gain (loss) on change in fair value of derivative liabilities; and derivative liabilities. The financial data set forth below as of March 31, 2010 and 2009 have been restated to reflect those corrections. Also, retained earning and non-controlling interests as at January 1, 2009, reduced by $1,965,640 and $48,254 respectively, as a result of adjustments to accumulated depreciation and deferred tax assets previously reported and previously unrecorded liabilities in 2008.

Following is a summary of adjustments resulting from the restatement for the three months ended March 31, 2010 (unaudited):

Increase of previously reported financial expenses,	$	(140,210	)
Decrease of previously reported gain on change in fair value of derivative liabilities	$	(14,301,410	)
Subtotal		(14,441,620	)
Deferred tax assets related to accrued interest of Convertible Notes*		86,326
Valuation allowance*		(86,326	)
Total reduction in net earnings for the three months ended March 31, 2010	$	(14,441,620	)

*the Company accrued valuation allowance against its deferred tax assets while it accrued and restated loss related to deferred income tax income.

Following is a summary of adjustment on the restatement for the three months ended March 31, 2009:

Increase of previously reported financial expenses, increase of accrued interest	$	(5,670,977	)
Decrease of previously reported gain on change in fair value of derivative liabilities, increase of derivative liabilities	$	3,930,027
Subtotal		(1,740,950	)
Deferred tax assets related to accrued interest of Convertible Notes*		665,761
Valuation allowance*		(665,761	)
Total reduction in net earnings for the three months ended March 31, 2009	$	(1,740,950	)

*The Company accrued valuation allowance against its deferred tax assets while it accrued and restated loss related to deferred income tax income.

Due to the adjustments to restate the 2009 financial statements, the effect on the Company’s previously issued balance sheet as of March 31, 2010 (unaudited) is summarized as follows:

	Previously Reported		Increase (Decrease)			Restated
Current Assets:
Current deferred tax assets (a)	$	1,555,114	$	2,680,496		$	4,235,610
Total current assets		277,792,350		2,680,496			280,472,846
Long-term Assets:
Property, plant and equipment, net (b)		60,605,816		(1,960,896	)		58,644,920
Non-current deferred tax assets (c)		2,447,578		630,392			3,077,970
Total Assets		351,715,509		1,349,992			353,065,501

Current Liabilities:
Convertible notes payable (d)		28,747,192		1,252,808			30,000,000
Compound derivative liabilities (e)		730,981		58,864,907			59,595,888
Accrued payroll and related costs (f)		3,039,446		1,538,170			4,577,616
Accrued expenses and other payables (g)		22,381,164		5,010,417			27,391,581
Taxes payable (h)		12,899,736		117,194			13,016,930
Total current liabilities		207,793,686		66,783,496			274,577,182
Total Liabilities		208,027,693		66,783,496			274,811,189

Stockholders’ equity
Retained earnings-
Unappropriated- January 1, 2009		36,026,516		(1,965,640	)		34,060,876
Accumulated effect of adoption of ASC 815-40		—		863,753			863,753
Net income attributable to parent company-December 31, 2009		23,414,263		(49,855,134	)		(26,440,871	)
Unappropriated-December 31, 2009		58,642,023		(50,957,021	)		7,685,002
Net income attributable to parent company-March 31, 2010 (unaudited)		10,335,169		(14,441,620	)		(4,106,451	)
Unappropriated-March 31, 2010 (unaudited)		68,977,192		(65,398,641	)		3,578,551
Accumulated other comprehensive income-December 31, 2009		11,187,744		(11	)		11,187,733
Foreign currency translation gain –March 31, 2010 (unaudited)		37,777		(75	)		37,702
Accumulated other comprehensive income-March 31, 2010 (unaudited)		11,225,521		(86	)		11,225,435
Total parent company stockholders' equity		116,045,014		(65,398,727	)		50,646,287
Non-controlling interests- January 1, 2009		23,222,566		48,254			23,270,820
Net income attributable to noncontrolling interest- December 31, 2009		7,872,813		(83,067	)		7,789,746
Foreign currency translation gain (loss) - December 31, 2009		22,365		45			22,410
Non-controlling interests-December 31, 2009		27,173,125		(34,768	)		27,138,357
Foreign currency translation gain –March 31, 2010 (unaudited)		7,563		(9	)		7,554
Non-controlling interests- March 31, 2010 (unaudited)		27,642,802		(34,777	)		27,608,025
Total stockholders' equity		143,687,816		(65,433,504	)		78,254,312
Total liabilities and stockholders' equity	$	351,715,509	$	1,349,992		$	353,065,501

(a)

The adjustment represents the deferred tax assets arising from the provision for doubtful debt, prepaid income tax for unrealized profits for intra-group purchase and sale, accrued labour cost and accrued interest on the convertible notes payable, which were not previously accounted for.

(b)

The adjustment represents the accumulated depreciation by which the depreciation expenses were understated in prior years.

(c)

The adjustment represents the deferred tax assets arising from the timing difference associated with the depreciation expenses as noted in (b) above.

(d)

The adjustment is to accrete the convertible note payable to its full face value in fiscal 2009 upon the WAP default.

(e)

The adjustment represents the valuation of the embedded derivative at its fair value as of December 31, 2009.

(f)

The adjustment represents payroll and bonus expenses of certain of the Company’s joint venture subsidiaries which were previously recorded under cash basis.

(g)

The adjustment represents the make-whole redemption amount on the convertible note payable.

(h)

The adjustment represents the withholding tax levied on dividends distributed by domestic companies to their foreign investors when the dividends are remitted out of China.

Statement of operations data for the three months ended March 31, 2010 (unaudited)

	Previously Reported			Increase (Decrease)			Restated
Financial income (expenses)	$	(368,011	)	$	(140,210	)	$	(508,221	)
Gain (loss) on change in fair value of derivative		149,028			(14,301,410	)		(14,152,382	)
Income (loss) before income taxes		15,687,034			(14,441,620	)		1,245,414
Net income (loss)		13,401,512			(14,441,620	)		(1,040,108	)
Net income (loss) attributable to parent company	$	10,335,169		$	(14,441,620	)	$	(4,106,451	)

Statement of operations data for the three months ended March 31, 2009 (unaudited):

	Previously Reported			Increase (Decrease)			Restated
Financial income (expenses)	$	(439,480	)	$	(5,670,977	)	$	(6,110,457	)
Gain (loss) on change in fair value of derivative		(1,560,848	)		3,930,027			2,369,179
Income (loss) before income taxes		5,092,179			(1,740,950	)		3,351,229
Net income (loss)		3,642,509			(1,740,950	)		1,901,559
Net income (loss) attributable to parent company	$	2,258,812		$	(1,740,950	)	$	517,862

3. Basis of Presentation and Significant Accounting Policies

(a) Basis of Presentation

Basis of Presentation - For the three months ended March 31, 2010 and 2009, the accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The subsidiaries include nine Sino-foreign Joint-ventures mentioned in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

Comments - The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position, the results of operations and cash flows for the three months ended March 31, 2010 and 2009 respectively.

The consolidated balance sheet as of December 31, 2009 is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s 2009 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2010.

Estimation -The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(b) Recent Accounting Pronouncements

In June 2008, the FASB’s Emerging Issues Task Force reached a consensus regarding EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The adoption of EITF 07-5 has a material impact on the Company’s financial statement.

In June 2009, the Financial Accounting Standards Board (FASB) approved the “FASB Accounting Standards Codification” (“Codification”, “FASB ASC”) as the single source of authoritative generally accepted accounting principles (GAAP) and created a new Topic 105, Generally Accepted Accounting Principles , in the General Principles and Objective Section of the Codification. Topic 105 is effective for interim and annual periods ending after September 15, 2009, and its adoption did not have an impact on the Company’s financial condition or results of operations.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (VSOE) and verifiable objective evidence (VOE) (now referred to as TPE standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. This update is effective for fiscal years beginning on or after June 15, 2010. However, early adoption is allowed. The Company has adopted this guidance. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations and financial position.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures About Fair Value Measurements. The ASU requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Other than requiring additional disclosures, the adoption of this new guidance will not have a material impact on the Company’s consolidated results of operations and financial position.

In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for a SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and did not disclose the date through which subsequent events have been evaluated.

Foreign Currencies - The Company’s subsidiaries based in China maintain their books and records in Renminbi, “RMB”, the currency of the PRC, its functional currency. In accordance with guidance now incorporated in ASC Topic 830 (formerly FAS 52), foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing at the balance sheet date. Non-monetary items are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period. The Parent Company (CAAS) and Henglong USA Corporation (HLUSA) maintain their books and records in United States Dollars, “USD”, the currency of the United States, its functional currency.

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

Stock-Based Compensation - The Company may periodically issue shares of common stock for services rendered or for financing costs. Such shares will be valued based on the market price on the transaction date. The Company may periodically issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs.

In July 2004, the Company adopted a stock incentive plan. The maximum number of common shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees, of options to purchase shares of the Company’s common stock. Since the adoption of the stock incentive plan, the Company has issued 433,850 stock options under this plan, and there remain 1,766,150 stock options issuable in the future. As of March 31, 2010, the Company had 343,850 stock options outstanding.

The Company has adopted ASC Topic 718 (formerly SFAS 123R), “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.

Comprehensive Income - The Company has adopted ASC Topic 220 (formerly SFAS No. 130), “Reporting Comprehensive Income”. ASC Topic 220 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.

Derivatives – Effective January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities that revised the definition of “indexed to a company’s own stock” for purposes of continuing classification of the Company’s derivative financial instruments that are linked to the Company’s common stock. Derivative financial instruments, including those that are embedded in other financial instruments, may be classified in equity only when they both are indexed to the Company’s common stock and meet certain conditions for equity classification. Under the revised definition, an instrument (or embedded feature) is indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed monetary amount. On the effective date of the amendment, the embedded conversion option that is embedded in the Company’s Convertible Notes Payable (see Note 15) no longer met the definition because it embodied certain anti-dilution protections that did not achieve the fixed-for-fixed criteria described above. As a result, the embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value. The Company will be required to re-measure the bifurcated derivative at fair value, with changes reflected in the Company’s income, until the Convertible Notes are settled.

The Company has accounted for this change in accounting principle by reflecting the cumulative effect as an adjustment to the Company’s beginning retained earnings during for the Company’s year ended December 31, 2009. The cumulative effect adjustment that the Company made is the difference between the amounts that the Company recognized related to the Convertible Notes Payable before the initial application of the amended principle and the amounts that would have been recognized if the amended guidance had been applied from the issuance date of the Convertible Notes Payable, which was February 15, 2008. The following table illustrates the differences that comprise the cumulative effect:

	(Effective Date January 1, 2009)
Financial Instrument:	As Recorded		As Adjusted		Cumulative Effect
Convertible Notes Payable	$	34,339,807	$	31,108,852	$	3,230,955
Derivative liabilities		—		2,367,202		(2,367,202	)
	$	34,339,807	$	33,476,054	$	863,753

The cumulative effect gives effect to the reallocation of proceeds that arose from the February 15, 2008 financing transaction discussed in Note 14 on the financing date. The following table illustrates the reallocation as if the amended provisions of ASC 815 had been in effect on the financing date:

	(Financing Date February 15, 2008)
Financial Instrument:	Original Allocation		Amended Allocation		Difference
Convertible Notes Payable	$	34,201,374	$	28,379,704	$	5,821,670
Derivative liabilities		—		5,821,670		(5,821,670	)
Warrants		798,626		798,626		—
	$	35,000,000	$	35,000,000	$	—

The cumulative effect change in accounting principle on the effective date reflects (i) the difference in the financing date allocation of proceeds, (ii) the resulting change in the amortization of the debt discount that results from the revised allocation and (iii) the changes in the fair values in the derivative liabilities that would have been recorded had the amended standard been in effect since the financing date.

Financial Instruments – Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Inputs to the valuation methodology for Level I are quoted prices (unadjusted) for identical assets or liabilities in active markets. Inputs to the valuation methodology Level 2 include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. Inputs to the valuation methodology for Level 3 are unobservable and significant to the fair value. Consideration is also given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Fair Value Measurements - The Company has adopted the provisions of ASC Topic 820 (formerly SFAS 157), “Fair Value Measurements”, except as it applies to those nonfinancial assets and nonfinancial liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, FASB Staff delayed the effective date of ASC Topic 820 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

Noncontrolling Interests in Consolidated Financial Statements - In December 2007, the FASB issued guidance now incorporated in ASC Topic 810 “Consolidation” (formerly Statement of Financial Accounting Standards (“SFAS”) 160). The guidance clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of stockholders’ equity. This guidance was effective for the Company’s fiscal year beginning January 1, 2009. The Company has adopted this guidance in its consolidated financial statements for the period ended March 31, 2010.

4. Pledged cash deposits

Pledged as guarantee for its notes payable, the Company regularly pays some of its suppliers by bank notes. The Company has to deposit a cash deposit, equivalent to 30%- 40% of the face value of the relevant bank note, at a bank in order to obtain the bank note.

5. Accounts and notes receivable

The Company’s accounts receivable at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010			December 31, 2009
Accounts receivable	$	122,018,900		$	104,120,926
Notes receivable		51,664,801			56,062,744
		173,683,701			160,183,670
Less: allowance for doubtful accounts		(5,431,355	)		(5,320,378	)
Balance at the end of the period	$	168,252,346		$	154,863,292

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

The activity in the Company’s allowance for doubtful accounts during the three months ended March 31, 2010 (unaudited) and the year ended December 31, 2009 are summarized as follows:

	March 31, 2010		December 31, 2009
Balance at beginning of period	$	5,320,378	$	4,910,478
Amounts provided during the period		109,496		406,228
Foreign currency translation gain		1,481		3,672
Balance at the end of the period	$	5,431,355	$	5,320,378

6. Other receivables

The Company’s other receivables at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010			December 31, 2009
Other receivables	$	2,784,256		$	1,804,334
Less: allowance for doubtful accounts		(833,474	)		(740,110	)
Balance at the end of the period	$	1,950,782		$	1,064,224

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

The activity in the Company’s allowance for doubtful accounts of other receivable during the three months ended March 31, 2010 (unaudited) and the year ended December 31, 2009 are summarized as follows:

	March 31, 2010		December 31, 2009
Balance at beginning of the period	$	740,110	$	659,837
Amounts provided during the period		93,158		79,618
Foreign currency translation gain		206		655
Balance at the end of the period	$	833,474	$	740,110

7. Inventories

The Company’s inventories at March 31, 2010 (Unaudited) and December 31, 2009 consisted of the following:

	March 31, 2010			December 31, 2009
Raw materials	$	13,387,709		$	10,683,448
Work in process		8,339,074			6,824,137
Finished goods		15,742,057			12,017,195
		37,468,840			29,524,780
Less: provision for loss		(2,084,942	)		(2,109,083	)
Balance at the end of the period	$	35,383,898		$	27,415,697

8. Property, plant and equipment

The Company’s property, plant and equipment at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010			December 31, 2009
	As Restated– note 2			As Restated – note 2
Land use rights and buildings	$	33,485,052		$	33,100,702
Machinery and equipment		64,626,551			62,982,885
Electronic equipment		5,192,997			5,054,502
Motor vehicles		2,655,218			2,634,696
Construction in progress		2,175,749			1,939,256
		108,135,567			105,712,041
Less: Accumulated depreciation		(49,490,647	)		(47,182,594	)
Balance at the end of the period	$	58,644,920		$	58,529,447

Depreciation charge for the three months ended March 31, 2010 and the year ended December 31, 2009 are $2,310,265 and $8,429,863 respectively.

9. Intangible assets

The activities in the Company’s intangible asset account at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010			December 31, 2009
Costs:
Patent technology	$	1,384,422		$	1,384,037
Management software license		440,985			438,359
		1,825,407			1,822,396
Less: Amortization		(1,309,355	)		(1,261,007	)
Balance at the end of the period	$	516,052		$	561,389

10. Deferred Income Tax Assets

In accordance with the provisions of ASC Topic 740 “Income Taxes” (formerly SFAS 109), the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessment of recent years’ profitability and losses; the Company’s expectation of profits based on margins and volumes expected to be realized (which are based on current pricing and volume trends); the long period - ten years or more in all significant operating jurisdictions — before the expiry of net operating losses, noting further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.

The components of estimated deferred income tax assets at March 31, 2010 (unaudited) and December 31, 2009 were as follows:

	March 31, 2010			December 31, 2009
	As Restated– note 2			As Restated – note 2
Losses carryforward (U.S.)	$	2,183,674		$	2,089,985
Losses carryforward (PRC)		756,881			659,774
Product warranties and other reserves		3,446,183			3,164,674
Property, plant and equipment		3,192,427			3,112,550
Accrued make-whole interest expense for convertible notes		1,753,646			1,667,320
Share-based compensation		311,582			289,705
Bonus accrual		345,329			306,030
Other		444,098			395,649
		12,433,820			11,685,687
Valuation allowance （1）		(5,120,240	)		(4,821,210	)
Total deferred tax assets（2）	$	7,313,580		$	6,864,477

（1）As of March 31, 2010, valuation allowance was $5,120,240, including $4,248,901 allowance for the Company’s deferred tax assets in the U.S. and $871,339 allowance for the Company’s non-U.S. deferred tax assets. Based on the Company’s current operations in the U.S., the management believes that the deferred tax assets in the U.S. are not likely to be realized in the future. For the non-U.S. deferred tax assets, pursuant to certain tax laws and regulations in China, the management believes such amount will not be used to offset future taxable income.

（2） Approximately $3,077,970 and $ 2,998,124 of deferred income tax asset as of March 31, 2010 and December 31, 2009, respectively, is included in non-current deferred tax assets in the accompanying consolidated balance sheets. The remaining $4,235,610 and $ 3,866,353 of deferred income tax asset as of March 31, 2010 and December 31, 2009, respectively, is included in the current deferred tax assets.

11. Bank loans

At March 31, 2010, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $4,394,767, with weighted average interest rate at 5.31% per annum. These loans are secured with some of the property and equipment of the Company, and are repayable within one year.

At December 31, 2009, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $5,125,802, with weighted average interest rate at 5.68% per annum. These loans are secured with some of the property and equipment of the Company and are repayable within one year.

12. Accounts and notes payable

The Company’s accounts and notes payable at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010		December 31, 2009
Accounts payable	$	84,639,902	$	69,454,231
Notes payable		40,019,392		38,041,602
Balance at the end of the period	$	124,659,294	$	107,495,833

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

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

13. Convertible Notes payable

In February 2008, the Company sold to two accredited institutional investors $35 million of Convertible Notes with a scheduled maturity date of February 15, 2013. The Convertible Notes, including any accrued but unpaid interest, are convertible into common shares of the Company at a conversion price of $8.8527 per share, subject to adjustment upon the occurrence of certain events.

The Convertible Notes bear annual interest rates of 3%, 3.5%, 4%, 4.5% and 5% for each year of 2008, 2009, 2010, 2011 and 2012. The interest on the Convertible Notes shall be computed commencing from the issuance date and will be payable in cash in arrears semi-annually on January 15, and July 15 of each year with the first interest payable date being July 15, 2008. From and after the occurrence and during the continuance of an Event of Default defined in the relevant Convertible Note agreements, the interest rate then in effect shall be increased by two percent (2%) until the event of default is remedied.

The holders of the Convertible Notes will be entitled to convert any portion of the conversion amount into shares of common stock at the conversion price at any time or times on or after the thirtieth (30th) day after the issuance date and prior to the thirtieth (30th) Business Day prior to the expiry date of the Convertible Notes. A damage penalty will be paid if share certificates are not delivered timely after any conversion.

The Company will have the right to require the Convertible Note holders to convert a portion of the conversion amount then remaining under the Convertible Note obligation into shares of common stock, “ Mandatory Conversion”, if at any time during a six-month period, the beginning day of each such six-month period, a “Mandatory Conversion Period Start Date”, the arithmetic average of the weighted average price of the common stock for a period of at least thirty (30) consecutive trading days following the Mandatory Conversion Period Start Date equals or exceeds the percentage of $8.8527 set forth in the chart below as applicable to the indicated six month period:

0-6 months:	125	%
6-12 months:	125	%
12-18 months:	135	%
18-24 months:	135	%
24-30 months:	145	%
30-36 months:	145	%
36-42 months:	155	%
42-48 months:	155	%

The Company will not effect a Mandatory Conversion of more than twelve percent (12%) of the original principal amount of the Convertible Notes, with the applicable accrued but unpaid interest, in any six month period or twenty-four percent (24%) of the original principal amount of the Convertible Notes, with the applicable accrued but unpaid interest, in any twelve (12) month period.

On each six month anniversary of the issuance date beginning August 15, 2008, the conversion price will be adjusted downward to the Reset Reference Price, as defined below, if the weighted average price for the twenty (20) consecutive trading days immediately prior to the applicable six month anniversary, the “Reset Reference Price”, is less than 95% of the conversion price in effect as of such applicable six month anniversary date. The foregoing notwithstanding, the conversion price will not be reduced via such reset provision to less than $7.0822. The conversion price is also subject to weighted-average antidilution adjustments, but in no event will the conversion price be reduced to less than $6.7417. If and whenever on or after the issuance date, the Company issues or sells its shares of Common Stock or other convertible securities, except for certain defined exempt issuances, for a consideration per share less than a price equal to the conversion price in effect on the issuance date immediately prior to such issue or sale, the original conversion price then in effect shall be adjusted by a weighted-average antidilution formula, but in no event to a new conversion price less than $6.4717.

The Company will not effect any conversion of the Convertible Notes, and each holder of the Convertible Notes will not have the right to convert any portion of the Convertible Notes to the extent that after giving effect to such conversion, such holders would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.

As indicated above, according to the terms of the Convertible Notes, the conversion price was reset to $7.0822 as of August 15, 2008 based on the weighted average price of the stock on that date. In accordance with ASC Topic 470 (formerly EITF 00-27), a contingency feature that cannot be measured at inception of the instrument should be recorded when the contingent event occurs. Therefore, on the date of the reset, the difference in the number of indexed shares prior to the reset was compared to the indexed shares subsequent to the reset and this incremental number of shares was multiplied by the commitment date stock price to determine the incremental intrinsic value that resulted from the adjustment to the conversion price. At the commitment date, as the effective conversion price was higher than the market value of the stock, no beneficial conversion feature was present and therefore, no beneficial conversion charge was recorded.

As of August 15, 2008, the number of indexed shares was 3,953,596 and 4,941,967 at the inception conversion price and reset conversion price, respectively. At the commitment date, the stock price was $6.09, and the “effective” conversion price was $6.93. Accordingly, since the effective conversion price was higher than the market value of the stock, the debt instruments are not considered "in the money" and no beneficial conversion feature is present.

Upon the occurrence of an event of default with respect to the Convertible Notes, the Convertible Note holders may require the Company to redeem all or any portion of the Convertible Notes. Each portion of the Convertible Notes subject to redemption by the Company will be redeemed by the Company at a price equal to the sum of (i) the conversion amount to be redeemed and (ii) the Other Make Whole Amount. The “Other Make Whole Amount” will mean a premium to the conversion amount such that the total amount received by the Convertible Note holder upon redemption represents a gross yield to the Convertible Note holders on the original principal amount as of the redemption date equal to thirteen percent (13%), with interest computed on the basis of actual number of days elapsed over a 360-day year. The events of default includes the Company’s failure to cure a conversion failure by delivery of the required number of shares of Common Stock, the Company’s failure to pay to the Convertible Note holder any amount of principal, interest, late charges or other amounts when and as due under the Convertible Notes and other events as defined in the Convertible Note agreements. Any amount of principal, interest or other amount due under the Convertible Notes that is not paid when due shall result in a late charge of 18% being incurred and payable by the Company until such amount has been paid.

Upon the consummation of a change of control as defined in the Convertible Note agreements, the Convertible Note holder may require the Company to redeem all or any portion of the Convertible Notes. The portion of the Convertible Notes subject to redemption shall be redeemed by the Company in cash at a price equal to the sum of the conversion amount of being redeemed and the Other Make Whole Amount as defined above.

On each of February 15, 2010 and February 15, 2011, the Convertible Note holders will have the right, in their sole discretion, to require that the Company redeem the Convertible Notes in whole but not in part, by delivering written notice thereof to the Company. The portion of this Convertible Note subject to redemption pursuant to this annual redemption right will be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Annual Redemption Make Whole Amount. The “Annual Redemption Make Whole Amount” will mean a premium to the conversion amount such that the total amount received by the Convertible Note holder upon any annual redemption represents a gross yield on the original principal amount of eleven percent (11%), with interest computed on the basis of actual number of days elapsed over a 360-day year.

In the event that the Company has not completed the necessary filings to list the conversion shares on its principal market by the date that is ninety (90) days after the issuance date or has not so listed the conversion shares by the date that is ninety (90) days after the issuance date or the shares of the Company’s common stock are terminated from registration under the Securities Act of 1933, the Convertible Note holders will have the right, in its sole discretion, to require that the Company redeem all or any portion of the Convertible Notes. The portion of the Convertible Notes subject to redemption in connection with this listing default will be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.

At any time following February 15, 2009, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days is less than 45% of the Conversion Price in effect on the Issuance Date, as adjusted, namely $3.187, the Convertible Note holder shall have the right, in its sole discretion, to require that the Company redeem all or any portion of the Convertible Notes. The portion of this Convertible Note subject to redemption in connection with the share price change of the underlying common stock will be redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.

Since the Company’s stock Weighted Average Price for twenty (20) consecutive trading days ended on March 16, 2009 was below $3.187, which is less than 45% of the Conversion Price in effect as of the Issuance Date, as adjusted, the “ WAP Default” , each Convertible Note holder had the right, at its sole discretion, to require that the Company redeem all or any portion of the Convertible Notes by delivering written redemption notice to the Company within five (5) business days after the receipt of the Company’s notice of the WAP Default.

On March 17, 2009, the Company delivered two WAP Default notices to the Convertible Note holders. On March 27, 2009, the Company received a letter from YA Global, one of the Convertible Note holders, electing to require the Company to redeem all the three Convertible Notes it held in the total principal amount of $5,000,000, together with interest, late charges, and the Other Make Whole Amount as defined in Section 5(d) of the Convertible Notes. After negotiation, the Company and YA Global reached a settlement agreement on April 8, 2009 and under the terms of the settlement agreement, the Company paid on April 15, 2009 a redemption amount of $5,041,667 to YA Global and YA Global waived its entitlement to the Other Make Whole Amount.

Following the WAP Default notices, the Company received a letter from the provisional liquidator acting on behalf of Lehman Brothers Commercial Corporation Asia Limited, the “LBCCA Liquidator”, the other Convertible Note holder, requesting an extension until April 24, 2009 to consider its rights under the Convertible Notes. The Company granted an extension to April 15, 2009. The LBCCA Liquidator further requested another extension to April 24, 2009. On April 24, 2009, LBCCA’s lawyers sent three Holder Redemption Notices via fax electing to redeem the entire outstanding principal of $30,000,000, together with interest, late charges, if any, and the Other Make Whole Amount, to be paid on July 23, 2009. The Company discussed settlement with the LBCCA Liquidator, and on or about July 22, 2009, the Company and the LBCCA Liquidator agreed to extend the applicable holder mandatory redemption date for two months to September 23, 2009 to give more time to pursue settlement discussion. The Company received a letter dated September 22, 2009 from the LBCCA Liquidator stating that upon the Company’s acceptance of the revocation, all holder redemption notices dated April 24, 2009 shall be immediately revoked as if they were never issued, and the letter and the revocation did not purport to amend, restate or supplement any other terms and conditions under the three Notes and the Securities Purchase Agreement dated 1 February 2008 between the Company and LBCCA Liquidator. The Company accepted such revocation on September 23, 2009.

In connection with the Convertible Notes, the Company issued 1,317,864 detachable warrants, the “Warrants,” to purchase from the Company shares of common stock of the Company at the exercise price of $8.8527 per share. The Warrants are exercisable immediately and expired on February 15, 2009. The Warrants require net cash settlement in the event that there is a fundamental transaction, contractually defined as a merger, sale of substantially all assets, tender offer or share exchange. Due to this contingent redemption provision, in accordance with guidance now incorporated in ASC Topic 480 (formerly SFAS 150), the warrants require liability classification and must be recorded at fair value each reporting period. As of the issuance date, i.e., February 15, 2008, the fair value of warrants was $798,626, which was determined using the Black-Scholes option pricing model.

On the issuance date, February 15, 2008, the Company has evaluated the Convertible Notes for terms and conditions that are not clearly and closely associated with the risks of the debt-type host instrument. Generally, such features require separation from the host contract and treatment as derivative financial instruments. Certain features, such as the conversion option, were found to be exempt, as they satisfied the conditions in ASC Topic 815 (formerly the paragraph 11(a) of SFAS 133) for instruments (1) indexed with the Company’s own stock, and (2) classified as equity in financial position statement. Other features, such as puts features were also found to be exempt based on the provision of ASC Topic 815 (formerly the paragraph 61(d) of SFAS 133), when they are clearly and closely associated with the risk of the debt-type host instrument, except (1) debt involving a substantial discount, and (2) put which is only contingently exercisable. Put feature that was embedded in the Company’s hybrid debt instrument satisfied the exemption conditions as (1) it is clearly and closely related to the host debt instrument, and (2) the debt does not involve a substantial discount, as the debt discount that the Company calculated was only 2% which is not considered a substantial discount.

When a financial instrument contains embedded derivatives that require bifurcation, such as the conversion option, redemption put, and freestanding instruments that are recorded at fair value each period, such as the warrants, the accounting is to record the embedded derivative and the freestanding instruments at fair value on inception and the residual proceeds are allocated to the debt instrument. Therefore, upon inception of the debt instruments, the Company recorded the warrants at fair value of $798,626. The remaining proceeds were then allocated to the debt instrument.

As more fully discussed in Note 3, in January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities (effective on January 1, 2009), and changed its accounting to conform to the amended rules in ASC 815-40 (formerly was EITF 07-5) relating o the classification of derivative financial instruments. As a result of adopting the amended provisions of ASC 815-40, the Company was required to bifurcate the embedded conversion feature from the Convertible Debt and classify the liabilities of the financial instrument at fair value. Accounting for the cumulative effect change in this accounting principle required the Company to record an adjustment to its beginning retained earnings during the year ended December 31, 2009 which is the difference between the amounts that it recognized related to the Convertible Notes Payable before the initial application of the amended principle and the amounts that would have been recognized if the amended guidance had been applied from the issuance date of the Convertible Notes Payable, which was February 15, 2008. The following table illustrates the differences that comprise the cumulative effect:

	Convertible notes payable
	Original Allocation		Amended Allocation
Value allocated to debt	$	34,201,374	$	28,379,704
Warrants		798,626		798,626
Compound Embedded Derivative		-		5,821,670
Face value of Convertible Notes payable	$	35,000,000	$	35,000,000
Unamortized discount		660,193		3,891,148
Unamortized value as of December 31, 2008	$	34,339,807		-
Fair value as of January 1, 2009		-	$	31,108,852

As indicated above, on the date of inception, allocation of basis in the financing arrangement to the warrants has resulted in an original issue discount to the face value of the Convertible Notes in the amount of $798,626, which amount is subject to amortization over the Convertible Note’s term using the effective interest method. As of December 31, 2008, the amortization expense recorded by the Company was $138,433, and unamortized discount was $660,193. On January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities (effective January 1, 2009), accounting for the cumulative effect change in this accounting principle resulting in $6,620,296, including $798,626 discount resulted from Warrants and $5,821,670 from embedded conversion feature of the original unamortized discount and the subsequent amortization using the effective interest method. On January 1, 2009, unamortized discount was $3,891,148.

As indicated above, on March 17, 2009, as a result of the Company’s WAP Default, the Convertible Note holders elected to exercise their rights to require the Company to redeem the Convertible Notes. The remaining amount of $3,891,148 unamortized discount was recorded to full face value of the Convertible Notes, including the make-whole redemption amount. On April 8, 2009, the Company and YA Global reached a settlement agreement, and the Company paid a redemption amount of $5,000,000 of the principal and $41,667 of interest to YA Global. On September 22, 2009, LBCCA Liquidator revoked the redemption notices that were sent on April 24, 2009, and continued to hold the Company’s Convertible Note, of which the face value was $30,000,000. The Company accepted such revocation on September 23, 2009.

On each of March 31, 2010 and December 31, 2009, the carrying value of the Company’s Convertible Notes payable was $30,000,000.

14. Compound derivative liabilities

Effective January 1, 2009, the Company adopted the provisions of ASC 815 Derivatives and Hedging Activities that addresses the determination of whether an instrument meets the definition of a derivative being indexed to a company’s own stock for purposes of applying the scope exception as provided for in accordance with ASC 815-15. Upon adoption of the standard on the effective date, the embedded conversion option that is embedded in the Company’s Convertible Notes Payable (see Note 13) no longer met the definition because it embodied certain anti-dilution protections that is not based on input to the fair value of a fixed-for-fixed option. As a result, the embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value at each reporting period, with changes reflected in earnings, until the Convertible Notes are settled.

The Company’s derivative financial instruments (liabilities) consisted of a compound embedded derivative that originated in connection with the Company’s Convertible Note Payable and Warrant Financing Arrangement. Derivative liabilities are carried at fair value.

The following table summarizes the compound derivative liabilities as of March 31, 2010 (unaudited) and December 31, 2009:

Financial Instrument	March 31, 2010		December 31, 2009
	As Restated– note 2		As Restated– note 2
Compound derivative liability	$	59,595,888	$	45,443,506
Common shares to which the derivative liability is linked		4,235,972		4,235,972

Changes in the fair value of compound derivative liabilities are recorded in gain (loss) on change in fair value of derivative column in the income statement. The following tables summarize the components of gain (loss) on change in fair value of derivative arising from fair value adjustments and other changes to compound derivative liabilities during the three months ended March 31, 2010 and 2009 (unaudited):

	Three Months Ended March 31,
	2010		2009
	As Restated– note 2		As Restated– note 2
Balances at January 1	$	45,443,506	$	-
Cumulative effect change in accounting principal		-		2,367,202
Subtotal		45,443,506		2,367,202
Redemptions and settlements:
Redemption		-		(2,367,202	)
Increase (decrease) in fair value adjustments		14,152,382		-
Balances at March 31	$	59,595,888	$	-

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock, which has a high estimated volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes.

The Company’s embedded conversion option derivative represents the conversion option, term-extending option, certain redemption and put features in the Company’s Convertible Notes payable. See Note 14 for additional information about the Company’s Convertible Notes payable. The features embedded in the Senior Convertible Notes were combined into one compound embedded derivative that the Company fair valued using the Monte Carlo valuation technique. Monte Carlo was believed by the Company’s management to be the best available technique for this compound derivative because, in addition to providing for inputs such as trading market values, volatilities and risk free rates, Monte Carlo also embodies assumptions that provide for credit risk, interest risk and redemption behaviors (i.e. assumptions market participants exchanging debt-type instruments would also consider). Monte Carlo simulates multiple outcomes over the period to maturity using multiple assumption inputs also over the period to maturity. The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of March 31, 2010, December 31, 2009 and January 1, 2009 (effective date of accounting principle change):

	Range
March 31, 2010 Assumptions:	Low			High			Equivalent
Volatility		70.65	%		83.40	%		78.56	%
Market adjusted interest rates		6.84	%		9.12	%		7.67	%
Credit risk adjusted rates		15.01	%		16.70	%		15.66	%
Implied expected life (years)		—			—			1.64

				Range
December 31, 2009 Assumptions:	Low			High			Equivalent
Volatility		68.86	%		81.94	%		76.71	%
Market adjusted interest rates		6.40	%		7.87	%		7.05	%
Credit risk adjusted rates		13.39	%		14.20	%		13.63	%
Implied expected life (years)		—			—			1.96

				Range
January 1, 2009 Assumptions:	Low			High			Equivalent
Volatility		63.09	%		91.15	%		74.02	%
Market adjusted interest rates		4.14	%		17.01	%		7.15	%
Credit risk adjusted rates		21.58	%		24.97	%		23.20	%
Implied expected life (years)		—			—			4.27

The Monte Carlo Simulations technique requires the use of inputs that range across all levels in the fair value hierarchy. As a result, the technique is a Level 3 valuation technique in its entirety. The calculations of fair value utilized the Company’s trading market values on the calculation dates. The contractual conversion prices were adjusted to give effect to the value associated with the down-round, anti-dilution protection. Expected volatility for each interval in the Monte Carlo Simulations process was established based upon the Company’s historical volatility for historical periods consistent with the term of each interval in the calculation. Market adjusted interest rates give effect to expected trends or changes in market interest rates by reference to historical trends in LIBOR. Credit risk adjusted rates, or yields, were developed using bond curves, risk free rates, market and industry adjustment factors for companies with similar credit standings as the Company’s.

On February 15, 2009, the warrants expired unexercised and the warrants were forfeited. Accordingly, the fair value of the warrants of $1,977 at the beginning of 2009 decreased to 0 at March 31, 2009 and the change has been recorded in the income statement as a gain of $1,977 for the three months ended March 31, 2009.

15. Accrued expenses and other payables

The Company’s accrued expenses and other payables at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010		December 31, 2009
	As Restated– note 2		As Restated – note 2
Accrued expenses	$	4,531,182	$	4,160,433
Accrued interest (1)		5,222,917		5,751,270
Other payables		2,874,301		1,706,946
Warranty reserves（2）		10,397,124		9,092,464
Dividend payable to non-controlling interest shareholders of Joint-ventures		4,366,057		1,761,339
Balance at the end of the period	$	27,391,581	$	22,472,452

(1)

On March 31, 2010 and December 31, 2009, the Company’s balance of accrued interest was $5,222,917 and $5,751,270, respectively, and the Company accrued provision on make-whole redemption interest pursuant to the term of Convertible Notes was approximately $5,000,000 and $4,800,000, respectively.

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

For the three months ended March 31, 2010 (unaudited) and the year ended December 31, 2009, the warranties activities were as follows:

	March 31, 2010			December 31, 2009
Balance at the beginning of period	$	9,092,462		$	6,335,613
Additions during the period-		2,919,304			10,192,749
Settlement within period, by cash or actual material		(1,617,173	)		(7,442,982	)
Foreign currency translation gain		2,531			7,084
Balance at end of period	$	10,397,124		$	9,092,464

16. Accrued pension costs

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

The activities in the Company’s pension account during the three months ended March 31, 2010 (unaudited) and the year ended December 31, 2009 are summarized as follows:

	March 31, 2010			December 31, 2009
Balance at beginning of the period	$	3,778,187		$	3,806,519
Amounts provided during the period		1,182,448			3,738,373
Settlement during the period		(1,102,446	)		(3,770,220	)
Foreign currency translation gain		1,052			3,515
Balance at end of period	$	3,859,241		$	3,778,187

17. Taxes payable

The Company’s taxes payable at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010		December 31, 2009
	As Restated– note 2		As Restated – note 2
Value-added tax payable	$	9,830,999	$	9,290,149
Income tax payable		3,024,810		1,851,103
Other tax payable		161,121		340,925
Balance at end of the period	$	13,016,930	$	11,482,177

18. Amounts due to shareholders/ directors

The activities in the amounts due to shareholders/directors at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010		December 31, 2009
Balance at the beginning of period	$	-	$	337,370
Increase (decrease) during the period）		186,845		(337,915	)
Foreign currency translation gain		43		545
Balance at end of period	$	186,888	$	-

The amounts due to shareholders/directors were unsecured, interest-free and repayable on demand.

19. Advances payable

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

The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy (see notes 22).

20. Share Capital and Additional paid-in capital

The activities in the Company’s share capital and additional paid-in capital account during the three months ended March 31, 2010 (unaudited) and the year ended December 31, 2009 are summarized as follows:

	Share Capital
	Shares		Par Value		Additional paid-in capital
Balance at January 1, 2009		26,983,244	$	2,698	$	26,648,154
Exercise of stock option by independent directors and management		63,000		6		420,234
Issuance of stock options to independent directors and management*		-		-		446,676
Balance at December 31, 2009		27,046,244	$	2,704	$	27,515,064
Balance at March 31, 2010		27,046,244	$	2,704	$	27,515,064

* The stock options granted during 2009 were exercisable immediately, the fair value on the grant date using the Black-Scholes option pricing model was $196,650, and have been recorded as compensation costs.

The stock options granted during 2008 were partially exercisable immediately, and partially exercisable pro rata during the grant term. The stock options' fair value on the grant date using the Black-Scholes option pricing model was $845,478, of which $345,426 and $250,026 have been recorded as compensation costs in 2008 and 2009. The remaining of $250,026 will be recognized in June 2010.

21. Non-controlling interests

The Company’s activities in respect of the amounts of the non-controlling interests’ equity at March 31, 2010 (unaudited) and December 31, 2009 are summarized as follows:

	March 31, 2010			December 31, 2009
	As Restated– note 2			As Restated – note 2
Balance at beginning of the period	$	27,138,357		$	23,270,820
Add: Additions during the period –
Income attributable to non-controlling interests		3,066,343			7,789,746
Less: Decreases during the period
Dividends declared to the non-controlling interest holders of Joint-venture companies		(2,604,229	)		(3,944,619	)
Foreign currency translation gain		7,554			22,410
Balance at end of period	$	27,608,025		$	27,138,357

22. Retained earnings—

Appropriated

Pursuant to the relevant PRC laws and regulations of Sino-foreign joint venture enterprises, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financial statements, other than based on the financial statement that was prepared in accordance with generally accepted accounting principles in the United States of America, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10%.

When the statutory surplus reserve reaches 50% of the registered capital of a company, additional reserve is no longer required. However, the reserve cannot be distributed to joint venture partners. Based on the business licenses of the Sino-foreign joint ventures, the registered capital of Henglong, Jiulong, Shenyang, Zhejiang, USAI, Jielong, Wuhu, and Hengsheng are $10,000,000, $4,283,170 (RMB35,000,000), $8,132,530 (RMB67,500,000), $7,000,000, $2,600,000, $6,000,000, $3,750,387 (RMB30,000,000), and $10,000,000 respectively.

The Company recorded $798,756 statutory surplus reserve for the year 2009. As of March 31, 2010, the Company did not declare to pay any dividends, so the Company did not record statutory surplus reserve.

Unappropriated

Following is the change in unappropriated retained earning as of March 31, 2010 (unaudited) and December 31, 2009:

	March 31, 2010			December 31, 2009
	As Restated– note 2			As Restated – note 2
Balance at beginning of the year	$	7,685,002		$	34,060,876
Accumulated effect of adoption of ASC 815-40 (1)		—			863,753
Net income ( loss)		(4,106,451	)		(26,440,871	)
Distribution of retained earnings		—			(798,756	)
Balance at end of period	$	3,578,551		$	7,685,002

（1）As discussed in Note 3, effective on January 1, 2009, the Company adopted and applied the amendments to ASC 815 Derivatives and Hedging Activities, the accumulated effect of adoption ASC 815-40 was $863,753.

23. Other Income

During the three months ended March 31, 2010 (unaudited), the other income was $15,528 and mainly from Government subsidies. During the three months ended March 31, 2009 (unaudited), there was no such income.

Government subsidies represent refunds by the Chinese Government of interest paid to banks by companies entitled to such subsidies. This applies only to interest on loans related to production facilities expansion. The Company recorded the refunded interest on projects which achieved their goals into Other income, and refunded interest on projects which have not achieved their goals into advances payable.

24. Financial expenses

During the three months ended March 31, 2010 and 2009 (unaudited), the Company recorded financial expenses which are summarized as follows:

	Three Months Ended March 31,
	2010		2009
	As Restated– note 2		As Restated – note 2
Interest expenses, net（1）	$	458,607	$	2,190,455
Foreign exchange loss, net		9,821		14,568
Loss of note discount, net		15,191		110
Amortization for discount of Convertible Note payable（2）		—		3,891,148
Handling charge		24,602		14,176
Total	$	508,221	$	6,110,457

(1) Decreased interest expenses as a result of the Company’s WAP Default on March 17, 2009, and the Convertible Note holders required Make Whole redemption by the Company. Thus, the Company recorded about $1,200,000 of default interest for the three month period ended March 31, 2009;

(2) On March 17, 2009, due to the Company’s WAP Default, the Convertible Note holders required Make Whole redemption by the Company and the remaining amount of $3,891,148 unamortized discount was fully amortized (see note 13).

25. Gain (loss) on change in fair value of derivative

During the three months ended March 31, 2010 and 2009 (unaudited), the Company recorded gain (loss) on change in fair value of derivative is summarized as follows:

	Three Months Ended March 31,
	2010			2009
	As Restated– note 2			As Restated– note 2
Income (loss) from adjustment of fair value of liabilities in connection with warrants	$	-		$	1,977
Income (loss) from adjustment of fair value of compound derivative liabilities		(14,152,382	)		2,367,202
Total	$	(14,152,382	)	$	2,369,179

During the three months ended March 31, 2009, the gain on change in fair value of the compound derivative liabilities was due to the Company’s WAP default on March 17, 2009, and the Convertible Note holders required Make Whole redemption by the Company. Thus, the embedded conversion feature in Convertible Notes was suspended from conversion rights , making the fair value of derivative liability $0. (see note 13)

During the three months ended March 31, 2010, the Company’s common stock market price rose to $23.10 from $18.71, thus, increased the intrinsic value of the embedded conversion feature in financial instruments, increased the fair value of compound derivative liabilities, and increased the loss on change in fair value of derivatives. (see note 14)

26. Income taxes

The Company’s subsidiaries registered in the PRC, whose enterprise income tax exemption has ceased, are subject to state and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise. The Company’s PRC subsidiaries, which are in the stage of its enterprise income tax exemption currently, are to remain subject to enterprise fixed income tax at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.

On January 1, 2007, Jiulong has used up its enterprise income tax exemption. During 2008, Jiulong was subject to enterprise income tax at a rate of 25%. During 2009, Jiulong was awarded the title of Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2008, 2009 and 2010.

On January 1, 1999, Henglong was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 1999, and a 50% enterprise national income tax deduction and a 100% local income tax deduction for the next nine years thereafter, from 2001 to 2009, for income tax purposes. During 2008, Henglong was awarded the title of Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2008, 2009 and 2010.

On January 1, 2003, Shenyang was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2003, a 75% enterprise national income tax deduction and a 100% local income tax deduction for the next three years thereafter, from 2005 to 2007, and a 50% enterprise national income tax deduction, from January 1, 2008, for income tax purposes and was subject to enterprise income tax at a rate of 18%. During 2009, Shenyang was awarded the title of Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2009 and 2010.

On January 1, 2004, Zhejiang was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2004, and a 50% enterprise national income tax deduction, and a 50% local income tax deduction for the next three years thereafter, from 2006 to 2008, for income tax purposes. During 2008, Zhejiang is subject to enterprise income tax at a rate of 16.5%, which is comprised of 15% enterprise national income tax and 1.5% local income tax. During 2009, Zhejiang was awarded the title of Advanced Technology Enterprise, and is subject to enterprise income tax at a rate of 15% for 2009 and 2010.

Wuhu, Jielong and Hengsheng have an enterprise income tax exemption in 2008 and 2009, and are subject to income tax at a rate of 15% for the next three years thereafter, from 2010 to 2012, and a 25% enterprise national income tax commencing from January 1, 2013.

There is no assessable profit for USAI and Center Test in 2010 and 2009. Based on PRC income tax laws, USAI and Center Test have an enterprise income tax exemption in 2009, and are subject to income tax at a rate of 15% for the next three years thereafter, from 2010 to 2012, and a 25% enterprise national income tax for the years commencing from January 1, 2013.

No provision for Hong Kong tax is made as Genesis is an investment holding company, and has no assessable income in Hong Kong for the three months ended March 31, 2010 and 2009. The enterprise income tax of Hong Kong is 16.5%.

No provision for US tax is made as the Company has no assessable income in the US for the three months ended March 31, 2010 and 2009. The enterprise income tax of US is 35%.

27. Income per share

Basic income per share attributable to Parent company is calculated by dividing net income by the weighted average number of common shares outstanding during the period using the two-class method. Diluted income per share is calculated based on the treasury stock method, assuming the issuance of common shares, if dilutive, resulting from the exercise of warrants.

The calculations of income per share attributable to Parent company were:

	Three Months Ended March 31,
	2010 As Restated			2009 As Restated
	(unaudited)			(unaudited)
Numerator:
Net income (loss) attributable to the parent Company	$	(4,106,451	)	$	517,862
Allocation to convertible notes holders		-			(80,164	)
Net income (loss) attributable to the parent Company’s common shareholders – Basic		(4,106,451	)		437,698
Dilutive effect of:
Add back allocation to convertible notes holders					80,164
Net income (loss) attributable to the parent Company’s common shareholders – Diluted		(4,106,451	)		517,862

Denominator:
Weighted average shares outstanding – basic and diluted		27,046,244			26,983,244
Net income per common share attributable to Parent company – basic	$	(0.15	)	$	0.02
Net income per common share attributable to Parent company – diluted	$	(0.15	)	$	0.02

The following table summarizes potential common shares outstanding excluded from the calculation of diluted earnings (loss) per share for the three months ended March 31, 2010 and 2009 (unaudited), because such inclusion would have anti-dilutive effect.

	Three Months Ended March 31,
	2010		2009

Shares issuable under stock options		343,850		388,850
Shares issuable pursuant to convertible senior notes		4,235,972		4,941,967
		4,579,822		5,031,967

28. Significant concentrations

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

During the three months ended March 31, 2010 (unaudited), the Company’s ten largest customers accounted for 78.7% of its consolidated net sales, with each of three customers individually accounting for more than 10% of consolidated net sales, i.e. 18.3%, 12.1%, and 10.7% individually, or an aggregate of 41.1%. At March 31, 2010, approximately 32.3% of accounts receivable were from trade transactions with the aforementioned three customers.

During the three months ended March 31, 2009 (unaudited), the Company’s ten largest customers accounted for 74.2% of its consolidated net sales, with each of four customers individually accounting for more than 10% of consolidated net sales, i.e. 13.8%, 11.7%, 11.1% and 10.9% individually, or an aggregate of 47.5%. At March 31, 2009, approximately 39.7% of accounts receivable were from trade transactions with the aforementioned four customers.

29. Related party transactions and balances

Related party transactions with companies with common directors are as follows:

Related sales (unaudited):

	Three Months Ended March 31,
	2010		2009
Merchandise Sold to Related Parties	$	1,660,393	$	559,011

Related purchases (unaudited):

	Three Months Ended March 31 ,
	2010		2009
Materials Purchased from Related Parties	$	4,347,288	$	2,126,737
Technology Purchased from Related Parties		43,948		43,886
Equipment Purchased from Related Parties		1,127,302		1,076,335
Total	$	5,518,538	$	3,246,958

Related receivables (March 31, 2010, unaudited):

	March 31, 2010		December 31, 2009
Accounts receivable	$	1,526,905	$	1,441,939
Other receivables		332,955		65,416
Total	$	1,859,860	$	1,507,355

Related advances (March 31, 2010, unaudited):

	March 31, 2010		December 31, 2009
Advanced Equipment Payment to Related Parties	$	1,962,472	$	2,579,319
Advanced Expenses and Others to Related Parties		1,080,591		-
Total	$	3,043,063	$	2,579,319

Related payables (March 31, 2010 unaudited)

		March 31, 2010				December 31, 2009
Accounts payable		$	2,685,916			$	1,537,827

These transactions were consummated under similar terms as those with the Company's customers and suppliers.

As of May 6, 2010, the date the Company issued this financial statement, Hanlin Chen, Chairman, owns 55.99% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.

30. Commitments and contingencies

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

The following table summarizes the Company’s major contractual payment obligations and commitments as of March 31, 2010 (unaudited):

	Payment Obligations by Period
	2010 (a)		2011		2012		2013		Thereafter		Total
Obligations for service agreements	$	110,000	$	110,000	$	-	$	-	$	-	$	220,000
Interest and make-whole on Convertible Notes		2,572,917		5,412,500		-		-		-		7,985,417
Obligations for purchasing agreements		11,508,669		2,053,634	$	-	$	-		-		13,562,303
Total	$	14,191,586	$	7,576,134	$	-	$	-	$	-	$	21,767,720

(a) Remaining 9 months in 2010

31. Off-balance sheet arrangements

At March 31, 2010 and 2009 (unaudited), the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

32. Segment reporting

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

During the three months ended March 31, 2010 and 2009 (unaudited), the Company had nine product sectors, five of them were principal profit makers, which were reported as separate sectors which engaged in the production and sales of power steering (Henglong), power steering (Jiulong), power steering (Shenyang), power pumps (Zhejiang), and power steering (Wuhu). The other four sectors which were established in 2005, 2006 and 2007 respectively, engaged in the production and sales of sensor modular (USAI), electronic power steering (Jielong), power steering (Hengsheng), and provider of after sales and R&D services (HLUSA). Since the revenues, net income and net assets of these four sectors are less than 10% of its segment in the consolidated financial statements, the Company incorporated these four sectors into “other sectors”.

The Company’s product sectors information is as follows:

	Henglong		Jiulong		Shenyang		Zhejiang		Wuhu		Other sector			Other *			Total
For the Three Months Ended March 31, 2010 (unaudited) - restated:
Revenue
Net product sales – external	$	41,160,453	$	19,610,124	$	8,128,135	$	5,656,532	$	8,447,995	$	1,229,450		$	-		$	84,232,689
Net product sales – internal		13,274,199		553,227		1,893,176		975,628		-		3,297,365			(19,993,595	)		-
Gain on other sales		52,271		121,657		104,070		10,592		62,250		102,277			(1,507	)		451,610
Total revenue	$	54,486,923	$	20,285,008	$	10,125,381	$	6,642,752	$	8,510,245	$	4,629,092		$	(19,995,102	)	$	84,684,299
Net income (loss)	$	9,513,142	$	1,536,163	$	463,019	$	1,035,165	$	389,325	$	264,986		$	(14,241,908	)	$	(1,040,108	)
Net income attributable to non-controlling interests		1,902,628		291,871		138,906		507,231	88,260		(5,081		)	142,528			3,066,343
Net income attributable to Parent company	$	7,610,514	$	1,244,292	$	324,113	$	527,934	$	301,065	$	270,067		$	(14,384,436	)	$	(4,106,451	)

	Henglong		Jiulong			Shenyang		Zhejiang		Wuhu			Other sector			Other （1）			Total
For the Three Months Ended March 31, 2009 (unaudited) - restated:
Revenue
Net product sales – external	$	18,075,293	$	9,764,562		$	6,405,993	$	5,422,811	$	4,828,229		$	200,558		$	—		$	44,697,446
Net product sales – internal		8541,592		214,904			502,829		120,086		—			—			(9,379,411	)		-
Gain on other sales		42,460		(13,040	)		14,530		3,420		18,135			2,878			(1,504	)		66,879
Total revenue	$	26,659,345	$	9,966,426		$	6,923,352	$	5,546,317	$	4,846,364		$	203,436		$	(9,380,915	)	$	44,764,325
Net income	$	4,865,838	$	426,272		$	763,816	$	505,084	$	(190,181	)	$	(336,051	)	$	(4,133,219	)	$	1,901,559
Net income attributable to noncontrolling interests	973,167		80,992			229,144		247,491		(43,114		)	(37,144		)	(66,839		)	1,383,697
Net income attributable to Parent company	$	3 , 892,671	$	345,280		$	534,672	$	257,593	$	(147,067	)	$	(298,907	)	$	(4,066,380	)	$	517,862

（1） Other includes activity not allocated to the product sectors and elimination of inter-sector transactions.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

This quarterly report on Form 10-Q/A for the quarterly period ended March 31, 2010 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “believes”, “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements which include, but are not limited to, statements concerning the Company’s expectations regarding its working capital requirements, financing requirements, business prospects, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements. In addition, the forward-looking statements in this quarterly report on Form 10-Q/A for the quarterly period ended March 31, 2010 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein. Please see the discussion on risk factors in Item 1A of Part II of this quarterly report on Form 10-Q/A.

GENERAL OVERVIEW:

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

The Company owns the following aggregate net interests in nine Sino-foreign joint ventures organized in the PRC as of March 31, 2010 and 2009.

	Percentage Interest
Name of Entity	March 31, 2010			March 31, 2009
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”		81.00	%		81.00	%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”		80.00	%		80.00	%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”		70.00	%		70.00	%
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang”		51.00	%		51.00	%
Universal Sensor Application Inc., “USAI”		83.34	%		83.34	%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”		85.00	%		85.00	%
Wuhu HengLong Automotive Steering System Co., Ltd., “Wuhu”		77.33	%		77.33	%
Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”		100.00	%		100.00	%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”		80.00	%		-	%

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

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

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

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

USAI was established in 2005 and mainly engages in production and sales of sensor modulars.

Jielong was established in 2006 and mainly engages in production and sales of electric power steering, “EPS”.

Wuhu was established in 2006 and mainly engages in production and sales of automobile steering systems.

Hengsheng was established in 2007 and mainly engages in production and sales of automobile steering systems.

CRITICAL ACCOUNTING POLICIES:

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

The Company considers an accounting estimate to be critical if:

• It requires the Company to make assumptions about matters that were uncertain at the time the Company was making the estimate, and

• Changes in the estimate or different estimates that the Company could have selected would have had a material impact on its financial condition or results of operations.

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

Balance Sheet Caption	Critical Estimate Item	Nature of Estimates Required	Assumptions/Approaches Used	Key Factors
Accrued liabilities and other long-term Liabilities	Warranty Obligations	Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. VMs are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.	The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.	• VM (Vehicle Manufacturer) sourcing • VM policy decisions regarding warranty claims VMs

Property, plant and equipment, intangible assets and other long-term assets	Valuation of long- lived assets and investments	The Company is required from time-to-time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.	The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.	• Future Production estimates • Customer preferences and decisions

Accounts and notes receivables	Provision for doubtful accounts and notes receivable	Estimating the provision for doubtful accounts and notes receivable require the Company to analyze and monitor each customer’s credit standing and financial condition regularly. The Company grants credit to its customers, generally on an open account basis. It will have material adverse effect on the Company’s cost disclosure if such assessment were improper.	The Company grants credit to its customers for three to four months based on each customer’s current credit standing and financial data. The Company assesses an allowance on an individual customer basis, under normal circumstances; the Company does not record any provision for doubtful accounts for those accounts receivable amounts which were in credit terms. For those receivables out of credit terms, the Company records any provision for doubtful accounts according to customs financial position assessment.	• Customers’ credit standing and financial condition

Deferred income taxes	Recoverability of deferred tax assets	The Company is required to estimate whether recoverability of the Company’s deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.	The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carryforward period, tax planning opportunities and other relevant considerations.	• Tax law changes • Variances in future projected profitability, including by taxing entity

Convertible notes payable, discount of convertible note payable, warrant liabilities, compound derivative liabilities	Warrant liabilities and compound derivative liabilities	The Company is required to estimate the fair value of warrant liabilities and compound derivative liabilities at conception and completion of each reporting period	The Company uses Black-Scholes option pricing model to determine fair value of warrant; uses Monte Carlo Valuation Model (“MCS”) to determine fair value of compound derivative liabilities	• volatility • Risk-free rate • Interest market risk • Credit risk • Redemption behavior before maturity

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

EXECUTIVE SUMMARY

China Automotive Systems, Inc. is a leading global supplier of automotive power steering systems and other automotive systems. The Company has business relations with more than sixty vehicle manufacturers, including FAW Group and Dongfeng Auto Group, two of the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., the largest light vehicle manufacturer in China; Chery Automobile Co., Ltd, the largest state owned car manufacturer in China, Xi’an BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., the largest private owned car manufacturers. From 2008, the Company has supplied power steering pumps and power steering gear to the Sino-Foreign joint ventures established by General Motors (GM), Citroen and Volkswagen. In 2009, the Company began to supply power steering gear to Chrysler North America. Most of the Company’s production and research and development institutes are located in China. The Company has 3,000 employees dedicated to design, development, manufacture and sales of its products. The Company conducts its business across nine segments, of which five were principal profit makers, including Henglong, Jiulong, Shenyang, Zhejiang, and Wuhu. The Company expected that the other four segments will become new source of revenue in 2011.

By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing work to improve its operations and business structure and achieve profitable growth.

Financial results for the three months ended March 31, 2010 are summarized as follows:

•	Sales of $84,232,689 in 2010 compared to $44,697,446 for the same period of 2009

•	Gross margin of $22,535,017, or 26.8% of sales, up from $10,903,345, or 24.4%, for the same period of 2009

•	Selling expenses of $1,867,803, $803,123 higher than the same period of 2009.

•	General and administrative expenses of $3,604,784, $1,803,082 higher than the same period in 2009

•

Net loss attributable to Parent company of $4,106,451, or loss of $0.15 per share on both a basic and diluted basis, decreased by $4,624,313, or $0.17 per share, compared to the net income of $517,862, or gain of $0.02 per share on a basic and diluted basis, respectively, for the same period in 2009

•	Cash of approximately $51,075,033 as of March 31, 2010, $7,594,857 higher than as of December 31, 2009

•	Cash provided by operating activities of $13,489,439 compared to $8,890,210 for the same period in 2009

•	Capital expenditures of $4,618,816, higher than the same period in 2009 by $29,852

RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

On March 17, 2011, the Company announced that it had identified historical accounting errors relating to the accounting treatment of the Company’s Convertible Notes. The accounting errors have resulted in the misstatement of certain charges arising from fair value adjustments and other changes to derivative liabilities since the first quarter of 2009. The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company’s review determined that the errors resulted from the Company’s failure to properly apply the requirements of Accounting Standard Codification (ASC) 815 (“ASC 815”), with respect to the conversion feature embedded in the convertible notes, effective January 1, 2009. Additionally, management has also identified accounting errors in accumulated depreciation and deferred tax assets reported and accrued payroll and related costs. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. After analyzing the size and timing of the errors, the Company determined that, in the aggregate, the errors were material and would require the Company to restate certain of its previously issued financial statements, including its previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009, including restated comparative financial statements for 2008, and related auditors’ report, and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010.

The effects of the restatement on selected income statement line items for the three-month period ended March 31, 2010 and 2009 (unaudited) are as follows:

	Increase/(Decrease) in income statement line items
	2010		2009
Financial income (expenses)	$	(140,210)	$	(5,670,977)
Gain on change in fair value of derivative		(14,301,410)		3,930,027
Income before income taxes		(14,441,620)		(1,740,950)
Net income attributable to parent company	$	(14,441,620)	$	(1,740,950)

RESULTS OF OPERATIONS——THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (unaudited):

	Net Sales											Cost of sales
	2010			2009			Change					2010			2009			Change
Henglong	$	54,434,652		$	26,616,886		$	27,817,766		104.5	%	$	40,182,809		$	19,017,920		$	21,164,889		111.3	%
Jiulong		20,163,351			9,979,466			10,183,885		102.0			17,233,519			8,678,011			8,555,508		98.6
Shenyang		10,021,311			6,908,822			3,112,489		45.1			8,648,897			5,772,726			2,876,171		49.8
Zhejiang		6,632,160			5,542,896			1,089,264		19.7			4,892,768			4,345,978			546,790		12.6
Wuhu		8,447,995			4,828,229			3,619,766		75.0			8,189,548			4,816,214			3,373,334		70.0
Other Sectors		4,526,815			200,558			4,326,257		2157.1			3,639,291			232,410			3,406,881		1465.9
Other *		(19,993,595	)		(9,379,411	)		(10,614,184	)	113.2			(21,089,160	)		(9,069,158	)		(12,020,002	)	132.5
Total	$	84,232,689		$	44,697,446		$	39,535,243		88.5	%	$	61,697,672		$	33,794,101		$	27,903,571		82.6	%

*Other includes activity not allocated to the product sectors and elimination of inter-sector transactions.

NET SALES

Net sales were $84,232,689 for the three months ended March 31, 2010, compared with $44,697,446 for the three months ended March 31, 2009, an increase of $39,535,243, or 88.5%, mainly due to the increases in the income of Chinese residents and significant government investment leading to an increase in the sales of passenger vehicles and commercial vehicles, and the resultant increase in the Company’s sales of steering gear and pumps; the Company has raised the technological contents in, and production efficiency of, its products as a result of technological improvement to its production lines, allowing the Company to reduce costs and, correspondingly, its sales prices which led to increased sales volumes.

Net sales for Henglong was $54,434,652 for the three months ended March 31, 2010, compared with $26,616,886 for the three months ended March 31, 2009, representing an increase of $27,817,766, or 104.5%. The net sales increase was mainly due to increased production volumes with a sales increase of $33,956,890, decreased sales price with a sales decrease of 6,176,556, and the effect of foreign currency translation with a sales increase of $37,432.

Net sales for Jiulong was $20,163,351 for the three months ended March 31, 2010, compared with $9,979,466 for the three months ended March 31, 2009, representing an increase of $10,183,885, or 102.0%. The net sales increase was mainly due to increased production volumes with a sales increase of $9,083,762, increased sales price with a sales increase of $1,086,088, and the effect of foreign currency translation with a sales increase of $14,035.

Net sales for Shenyang was $10,021,311 for the three months ended March 31, 2010, compared with $6,908,822 for the three months ended March 31, 2009, representing an increase of $3,112,489, or 45.1%. The net sales increase was mainly due to increased production volumes with a sales increase of $3,740,319, decreased sales price with a sales decrease of $637,546, and the effect of foreign currency translation with a sales increase of $9,716.

Net sales for Zhejiang was $6,632,160 for the three months ended March 31, 2010, compared with $5,542,896 for the three months ended March 31, 2009, representing an increase of $1,089,264, or 19.7%. The net sales increase was mainly due to increased production volumes with a sales increase of $1,059,530 and increased sales price with a sales increase of $21,938 and the effect of foreign currency translation with a sales increase of $7,796.

Net sales for Wuhu was $8,447,995 for the three months ended March 31, 2010, compared with $4,828,229 for the three months ended March 31, 2009, representing an increase of $3,619,766, or 75.0%. The net sales increase was mainly due to increased production volumes with a sales increase of $3,225,458 and increased sales price with a sales increase of $387,517 and the effect of foreign currency translation with a sales increase of $6,791.

Net sales for Other Sectors was $4,526,815 for the three months ended March 31, 2010, compared with $200,558 for the three months ended March 31, 2009, representing an increase of $4,326,257 or 2,157.1%. The net sales increased mainly due to the development of new market.

COST OF SALES

For the three months ended March 31, 2010, the cost of sales was $61,697,672, compared with $33,794,101 for the same period of 2009, an increase of $27,903,571, or 82.6%, mainly due to the increase of sales.

Cost of sales for Henglong was $40,182,809 for the three months ended March 31, 2010, compared with $19,017,920 for the three months ended March 31, 2009, representing an increase of $21,164,889, or 111.3%. The cost of sales increase was mainly due to increased sale volumes with a cost of sales increase of $24,313,011, decreased unit price with a cost of sales decrease of $3,174,867, and the effect of foreign currency translation with a cost increase of $26,745.

Cost of sales for Jiulong was $17,233,519 for the three months ended March 31, 2010, compared with $8,678,011 for the three months ended March 31, 2009, representing an increase of $8,555,508, or 98.6%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $7,797,897, increased unit price with a cost of sales increase of $745,407, and the effect of foreign currency translation with a cost increase of $12,204.

Cost of sales for Shenyang was $8,648,897 for the three months ended March 31, 2010, compared with $5,772,726 for the three months ended March 31, 2009, representing an increase of $2,876,171, or 49.8%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $3,166,316, decreased unit price with a cost of sales decrease of $298,264, and the effect of foreign currency translation with a cost increase of $8,119.

Cost of sales for Zhejiang was $4,892,768 for the three months ended March 31, 2010, compared with $4,345,978 for the three months ended March 31, 2009, representing an increase of $546,790, or 12.6%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $830,868, decreased unit price with a cost of sales decrease of $290,190, and the effect of foreign currency translation with a cost increase of $6,112.

Cost of sales for Wuhu was $8,189,548 for the three months ended March 31, 2010, compared with $4,816,214 for the three months ended March 31, 2009, representing an increase of $3,373,334, or 70.0%. The cost of sales increase was mainly due to increased sales volumes with a cost of sales increase of $3,217,843, increased unit price with a cost of sales increase of $148,718, and the effect of foreign currency translation with a cost increase of $6,773.

Cost of sales for Other Sectors was $3,639,291 for the three months ended March 31, 2010, compared with $232,410 for the three months ended March 31, 2009, representing an increase of $3,406,881, or 1465.9%. The cost of sales increase was mainly due to increased of sales.

Gross margin was 26.8% for the three months ended March 31, 2010, a 2.4 percentage point increase from 24.4% for the same period of 2009, primarily due to declines in unit cost in excess of sales price reductions. For the three months ended March 31, 2010, the Company classified product warranty expenses as selling cost, which were classified as selling expenses in previous periods. As a result, the Company reclassified product warranty expenses for the same period of 2009 as selling cost to achieve consistency with the presentation of the current period. Effects of the reclassification are set forth in the table below.

	Three Months Ended March 31,
	2010			2009
	(unaudited)			(unaudited)
Warranty expenses	$	2,919,302		$	1,294,486
Before reclassification ：
Net sales		84,232,689			44,697,446
Cost of goods sold before reclassification		58,778,370			32,499,615
Gross profit before reclassification		25,454,319			12,197,831
Gross margin before reclassification		30.2	%		27.3	%
After reclassification ：
Net sales	$	84,232,689		$	44,697,446
Cost of goods sold after reclassification		61,697,672			33,794,101
Gross profit after reclassification	$	22,535,017		$	10,903,345
Gross margin after reclassification		26.8	%		24.4	%

Selling expenses before reclassification	$	4,787,105		$	2,359,166
Minus: Warranty expenses		2,919,302			1,294,486
Selling expenses after reclassification	$	1,867,803		$	1,064,680

The Company plans to take the following measures in the remaining nine months of 2010 to increase gross profit level and to meet its yearly gross margin target of not less than 26.0%.

1. Reduce manufacturing costs by optimizing product design and production techniques. During 2010, the Company’s technical personnel will improve product design and production techniques to reduce wastage in the production process and improve manufacturing efficiency, thus reducing costs.

2. Reduce costs by decreasing materials purchase cost.

GAIN ON OTHER SALES

Gain on other sales consists of net amount retained from sales of materials and other assets. For the three months ended March 31, 2010, gain on other sales was $451,610, compared with $66,879 for the same period of 2009, an increase of $384,731, or 575.3%, mainly due to increased sales of materials.

SELLING EXPENSES

Selling expenses were $1,867,803 for the three months ended March 31, 2010, compared with $1,064,680 for the same period of 2009, an increase of $803,123, or 75.4%. The increases were mainly due to salaries and wages expenses, and transportation expenses.

The salaries of salesmen were indexed with their selling performance. During the three months ended March 31, 2010, sales revenue increased 88.5% compared with the same period of 2009, correspondingly increasing the salaries of salesmen.

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

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $3,604,784 for the three months ended March 31, 2010, compared with $1,801,702 for the same period of 2009, an increase of $1,803,082, or 100.1%. The increases were mainly due to salaries and wages expenses, labor insurance expenses, and provision for bad debts.

The increase in salaries and wages was due to increased staff and performance bonuses resulting from enlarged business size and improved earnings.

The Company’s labor insurance expenses were pension, medicare, injury insurance, unemployment insurance, and housing fund expenses. The increase in labor insurance expenses for the three months ended March 31, 2010 was a result of an increase in the number of employees.

The Company recorded provision for bad debts based on aging of accounts receivable. The increase in provision for bad debts in 2010 was mainly due to decreased credit lines of banks in the PRC, which impacted most domestic automobile manufacturers financially, and correspondingly, the Company’s receivables in excess of credit terms have increased.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses were $1,301,758 for the three months ended March 31, 2010, compared with $439,922 for the three months ended March 31, 2009, an increase of $861,836, or 195.9%.

The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce advanced products on a cost-competitive basis. In order to maintain its competitiveness, the Company needs to invest more in R & D expenses.

DEPRECIATION AND AMORTIZATION EXPENSE

For the three months ended March 31, 2010, depreciation and amortization expenses excluded from that recorded under cost of sales were $321,793, compared with $571,413 for the same period of 2009, a decrease of $249,620, or 43.7%, as a result of certain fixed assets of the Company having been fully depreciated.

INCOME FROM OPERATIONS

Income from operations was $15,890,489 for the three months ended March 31, 2010, compared with $7,092,507 for the three months ended March 31, 2009, an increase of $8,797,982, or 124.0%, as a result of an increase of $11,631,672, or 106.7%, in gross profit, a decrease of $384,731, or 575.3%, in gain on other sales, and an increase of $3,218,421, or 83.0%, in operating expenses.

FINANCIAL EXPENSES

Financial expenses were $508,221 for the three months ended March 31, 2010, compared to financial expenses of $6,110,457 for the same period of 2009, a decrease of $5,602,236, or 91.7%, primarily as a result of a decrease in interest expense. In March 2009, due to the Company’s WAP Default, the Convertible Note holders required Make Whole redemption by the Company. Thus, the Company amortized $3,900,000 of remaining discount of Convertible Notes and accrued additional $1,200,000 of penalty interest (see note 13).

GAIN (LOSS) ON CHANGE IN FAIR VALUE OF DERIVATIVE

Loss on change in fair value of derivative was $14,152,382 for the three months ended March 31, 2010, compared with a gain of $2,369,179 (including $1,977 in gain on change of fair value of warranty) for the same period of 2009, a decrease of $16,521,561.

For the three months ended March 31, 2010, increase in loss on change in fair value of derivatives was mainly due to an increase in the intrinsic value of the embedded conversion feature in the financial instruments, as the Company’s common stock market price rose to $23.10 (March 31, 2010) form $18.71 at the beginning of the year, and the Company was required to bifurcate the embedded conversion feature in Convertible Notes payable upon adopting ASC 815-40 on January 1, 2009.

For the three months ended March 31, 2009, gain on change in fair value of derivatives was mainly due to the Company’s WAP Default, and the Convertible Note holders required Make Whole redemption by the Company and the intrinsic value of the embedded conversion feature in the Convertible Notes payable being $0. (see note 13)

INCOME BEFORE INCOME TAXES

Income before income taxes was $1,245,414 for the three months ended March 31, 2010, compared with $3,351,229 for the three months ended March 31, 2009, a decrease of $2,105,815, or 62.8%, including an increase in income from operations of $8,797,982, an increase in gain on others of $15,528, a decrease in financial expenses of $5,602,236, and a decrease in gain on change in fair value of derivative of $16,521,561.

INCOME TAXES

Income tax expense was $2,285,522 for the three months ended March 31, 2010, compared with $1,449,670 of income tax expense for the three months ended March 31, 2009, an increase of $835,852, mainly because of: (1) an increase in income before income tax in the PRC market that was not offset by losses before income tax in the U.S. market and the Company made a provision for deferred income tax assets in the U.S. (see Note 10), (2) while there was a loss before income tax in the U.S. mainly due to a change in the fair value of convertible notes, the Company cannot recognize such loss as a deferred income tax asset or a tax benefit as if it was a permanent change.

NET INCOME/LOSS

Net loss was $1,040,108 for the three months ended March 31, 2010, compared with net income of $1,901,559 for the three months ended March 31, 2009, a decrease of $2,941,667, or 154.7%, including a decrease in income before income taxes of $2,105,815, or 62.8%, and an increase in income taxes expenses of $835,852, or 57.7%.

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

Minority interest in the earnings of the Sino-foreign Joint-ventures amounted to $3,066,343 for the three months ended March 31, 2010, compared with $1,383,697 for the three months ended March 31, 2009, an increase of $1,682,646, or 121.6%.

The Company owns different equity interest in nine Sino-foreign joint ventures, through which it conducts its operations. All the operating results of these nine Sino-foreign joint ventures were consolidated in the Company’s financial statements as of March 31, 2010 and 2009. The Company records the non-controlling interest's share in the earnings of the respective Sino-foreign joint ventures for each period.

In 2010, non-controlling interest increased significantly compared with 2009, primarily due to the increase in Sino-foreign joint ventures’ net income.

NET INCOME/LOSS ATTRIBUTABLE TO PARENT COMPANY

Net loss was $4,106,451 for the three months ended March 31, 2010, compared with a net income of $517,862 for the three months ended March 31, 2009, a decrease of $4,624,313, or 893.0%, mainly due to the increase in the Company’s operation profit, increase in financial expenses and increase in the loss on change of fair value of derivatives.

LIQUIDITY AND CAPITAL RESOURCES

Capital resources and use of cash

The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptance, issuances of capital stock and notes and internally generated cash. As of March 31, 2010, the Company had cash and cash equivalents of $51,075,033, compared with $37,585,291 as of March 31, 2009, an increase of $13,489,742, or 35.9%.

The Company had working capital of $5,895,664 as of March 31, 2010, compared with $12,486,023 as of December 31, 2009, a decrease of $6,590,359, or 52.8%.

Capital source:

The Company’s capital source is multifaceted, such as obtaining bank loans and banker’s acceptance bill facilities. In financing activities and operating activities, the Company’s banks require the Company to sign a line of credit agreement and repay such facilities within one year. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such one year facilities can be extended for another year.

The Company had bank loans maturing in less than one year of $4,394,767 and bankers’ acceptances of $40,019,391 as of March 31, 2010.

The Company currently expects to be able to obtain similar bank loans and bankers’ acceptance bills in the future if it can provide adequate mortgage security following the termination of the above mentioned agreements (See the table in section (a) Bank loan). If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Owing to depreciation, the value of the mortgages securing the above-mentioned bank loans and banker's acceptance bills will be devalued by approximately $7,576,386. If the Company wishes to obtain the same amount of bank loans and banker's acceptance bills, it will have to provide $$7,576,386 additional mortgages as of the maturity date of such agreements (See the table in section (a) Bank loan). The Company still can obtain a reduced line of credit with a reduction of $3,547,848, which is 46.83% (the mortgage rates) of $7,576,386, if it cannot provide additional mortgages. The Company expects that the reduction of bank loans will not have a material adverse effect on its liquidity.

On February 15, 2008, the Company issued $35,000,000 of convertible notes to Lehman Brothers Commercial Corporation Asia Limited, LBCCA, and YA Global Investments, L.P., YA Global, maturing in 5 years. According to the terms of the Senior Convertible Notes (as described in Note 13), convertible notes may be required to be repaid in cash on or prior to their maturity. For example, Convertible Note holders are entitled to require the Company redeem all or any portion of the Convertible Notes in cash, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days is less than $3.187 at any time following February 15, 2009, the “WAP Default”, by delivering written redemption notice to the Company within five (5) business days after the receipt of the Company’s notice of the WAP Default.

As a result of the worldwide financial turmoil in 2008 and the first half of 2009, the Company’s stock’s WAP for twenty (20) consecutive trading days ended on March 16, 2009 was below $3.187. On March 17, 2009, the Company delivered two WAP Default notices to the Convertible Note holders. On March 27, 2009, the Company received a letter dated March 26, 2009 via fax from YA Global, one of the Convertible Note holders, electing to require the Company to redeem all the three Convertible Notes it held in the total principal amount of $5,000,000, together with interest, late charges, if any, and the Other Make Whole Amount as defined in Section 5(d) of the Convertible Notes. After negotiation, on April 15, 2009, the Company paid YA Global $5,041,667 for the total principal amount ($5,000,000), together with interest and late charges, if any. YA Global has waived its entitlement to the Other Make Whole Amount.

Following the WAP Default notices, the Company received a letter from the provisional liquidator acting on behalf of LBCCA, the “LBCCA Liquidator”, requesting that it be granted an extension until April 24, 2009 to consider its rights under the Convertible Notes. The Company has granted an extension to April 15, 2009. The LBCCA Liquidator further requested another extension to April 24, 2009. On April 24, 2009, LBCCA’s lawyers sent three Holder Redemption Notices via fax electing to redeem the entire outstanding principal of $30,000,000, together with interest, late charges, if any, and the Other Make Whole Amount, to be paid on July 23, 2009. The Company has discussed settlement with the LBCCA Liquidator, and on or about July 22, 2009, the Company and the LBCCA Liquidator agreed to extend the applicable holder mandatory redemption date for two months to September 23, 2009 to give more time to the Company and the LBCCA Liquidator to pursue settlement discussion. The Company received a letter dated September 22, 2009 from the LBCCA Liquidator stating that upon the Company’s acceptance of the revocation, all holder redemption notices dated April 24, 2009 shall be immediately revoked as if they were never issued, and the letter and the revocation did not purport to amend, restate or supplement any other terms and conditions under the three Notes and Securities Purchase Agreement dated 1 February 2008 between the Company and the LBCCA Liquidator. The Company accepted such revocation on September 23, 2009.

The Company’s ability to redeem the Convertible Notes and meet its payment obligations depends on its cash position and its ability to refinance or generate significant cash flow, which is subject to general economic, financial and competition factors and other factors beyond the Company’s control. The Company cannot assure you that it has sufficient funds available or will be able to obtain sufficient funds to meet its payment obligations under the Convertible Notes, and the Company’s redemption of the Convertible Notes would result in an adverse effect on its liquidity and capital resources, business, results of operations or financial condition.

(a) Bank loans

As of March 31, 2010, the principal outstanding under the Company’s credit facilities and lines of credit was as follows:

	Bank	Due Date	Amount available		Amount Borrowed
Comprehensive credit facilities	Bank of China	Oct -10	$	8,057,073	$	7,156,894
Comprehensive credit facilities	China Construction Bank	Oct-10		8,789,535		4,385,978
Comprehensive credit facilities	Shanghai Pudong Development Bank	Oct-10		6,592,151		-
Comprehensive credit facilities	Jingzhou Commercial Bank	Oct-10		9,521,996		5,483,205
Comprehensive credit facilities	Industrial and Commercial Bank of China	Sep-10		2,929,845		873,231
Comprehensive credit facilities	Bank of Communications Co., Ltd	Sep-10		3,340,023		3,049,189
Comprehensive credit facilities	China Merchants Bank	Sep -10		3,456,307		3,456,307
Comprehensive credit facilities	China CITIC Bank	Jul -10		12,450,648		12,450,648
Comprehensive credit facilities	China Hua Xia Bank	Oct-10		7,324,612		5,691,224
Comprehensive credit facilities	Guangdong Development Bank	Oct-10		2,599,944		2,599,944
Total			$	65,062,134	$	45,146,620

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

The Company refinanced its short-term debt during early 2010 at annual interest rates of 5.31%, and maturity terms of nine to twelve months. Pursuant to the refinancing arrangement, the Company pledged $40,403,854 of equipment, land use rights and buildings as security for its comprehensive credit facility with the Bank of China; pledged $13,513,997 of land use rights and buildings as security for its comprehensive credit facility with Shanghai Pudong Development Bank; pledged $15,528,764 of land use rights and equipment as security for its revolving comprehensive credit facility with Jingzhou Commercial Bank; pledged $2,643,439 of land use rights and buildings as security for its comprehensive credit facility with Industrial and Commercial Bank of China; pledged $13,479,279 of accounts receivable, land use rights and buildings as security for its comprehensive credit facility with China Construction Bank; pledged $9,992,705 of land use rights, notes receivable and buildings as security for its comprehensive credit facility with China CITIC Bank; pledged $2,197,384 of land use rights and buildings as security for its comprehensive credit facility with China Merchants Bank; pledged $6,501,604 of land use rights and buildings as security for its comprehensive credit facility with Bank of Communications Co., Ltd,; and pledged $3,332,406 of accounts receivable as security for its comprehensive credit facility with Guangdong Development Bank. The Company’s subsidiary, Henglong’s comprehensive credit facility with China Hua Xia Bank, was guaranteed by Jiulong, the Company’s other subsidiary.

(b) Financing from investors:

On February 15, 2008, the Company sold $30,000,000 and $5,000,000 convertible notes to Lehman Brothers Commercial Corporation Asia Limited, LBCCA, and YA Global Investments, L.P., YA Global, respectively, with a scheduled maturity date of February 15, 2013 and an initial conversion price for conversion into the Company’s common stock of $8.8527 per share.

On April 15, 2009, the Company paid YA Global $5,041,667 to redeem the total principal amount ($5,000,000), together with interest, and late charges. YA Global has waived its entitlement to the Other Make Whole Amount.

Cash Requirements:

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

	Payment Due Dates
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 Years
Short-term bank loan	$	4,394,767	$	4,394,767	$	-	$	-	$	-
Notes payable		40,019,392		40,019,392		-		-		-
Convertible Notes payable		30,000,000		30,000,000		-		-		-
Interests, including make-whole amount on convertible notes*		7,985,417		7,985,417		-		-		-
Other contractual purchase commitments, including information technology		13,782,303		11,618,669		-		-		-
Total	$	96,181,879	$	94,018,245	$	-	$	-	$	-

* Interest, including make-whole amount on convertible note is computed based on the contractual rate as per the convertible note agreement.

Short-term bank loans:

The following table summarizes the contract information of short-term borrowings between the banks and the Company as of March 31, 2010 (unaudited):

Bank

Purpose

Borrowing

Date

Borrowing

Term

(Year)

Annual

Percentage

Rate

Date of

Interest

Payment

Date of

Payment

Amount

Payable on

Due Date

Bank of China

Working Capital

Nov 10, 09

5.31

Pay monthly

Nov 10, 10

2,197,383

China Merchants Bank

Working Capital

May 5, 09

0.9

5.31

Pay monthly

Apr 5, 10

2,197,384

Total

4,394,767

The Company must use the loans for the purposes described in the table. If the Company fails, it will be charged a penalty interest at 100% of the specified loan rate. The Company has to pay interest at the interest rate described in the table on the 20th of each month. If the Company fails, it will be charged a compound interest at the specified rate. The Company has to repay the principal outstanding on the specified date in the table. If it fails, it will be charged a penalty interest at 50% of the specified loan rate. Management believes that the Company had complied with such financial covenants as of March 31, 2010, and will continue to comply with them.

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2010 (unaudited):

Purpose	Term (Month)	Due Date	Amount Payable on Due Date
Working Capital	3-6	Apr - 10	$	5,594,314
Working Capital	3-6	May -10		6,937,874
Working Capital	3-6	Jun-10		10,814,805
Working Capital	3-6	Jul - 10		7,933,727
Working Capital	3-6	Aug- 10		1,413,650
Working Capital	3-6	Sep - 10		7,325,022
Total			$	40,019,392

The Company must use the loan for the purposes described in the table. If it fails, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital source. The Company has to deposit sufficient cash in the designated account of the bank on the due date of notes payable for payment to the suppliers. If the bank has advanced payment to the Company, it will be charged a penalty interest at 150% of the specified loan rate. Management believes that the Company had complied with such financial covenants as of March 31, 2010, and will continue to comply with them.

The Company had approximately $13,562,303 of capital commitments as of March 31, 2010, arising from equipment purchases for expanding production capacity. The Company intends to disperse $11,508,669 in the remaining nine months of 2010 using its working capital. Management believes that it will not have a material adverse effect on the Company’s liquidity.

Cash flows:

(a)	Operating activities

Net cash generated from operations during the three months ended March 31, 2010 was $13,489,439, compared with $8,890,210 for the same period of 2009, an increase of $4,599,229.

Similar to the same period of 2009, the increased cash outflows from operating activities were primarily due to increases in accounts receivable and inventories.

At March 31, 2010, the Company’s cash outflow caused by increase of accounts receivable and increase of inventories were $17,900,000 and $7,970,000 respectively, compared with December 31, 2009. Increase of accounts receivable was primarily due to sales increase during the three months ended March 31, 2010. The credit terms on sale of goods between customers and the Company generally range from 3 to 4 months, which resulted in increased accounts receivable as sales increased. Increase of inventories was primarily due to inventory increase for turnover as result of production and sales increases. These are a normal capital circulation and the Company believes that it will not have a material adverse effect on future cash flows.

(b)	Investing activities

The Company expended net cash of $5,360,787 in investment activities during the three months ended March 31, 2010, compared with $4,666,339 during the same period of 2009, an increase of $694,448, mainly due to:

Similar to 2009, the Company invested cash for equipment purchases and building facility to expand production to meet market needs. Cash used for equipment purchases and building facility during the three months ended March 31, 2010 and 2009 were $4,616,312 and $4,296,391, respectively.

(c)	Financing activities

During the three months ended March 31, 2010, the Company expended net cash of $545,617 in financing activities, as compared to expended net cash of $3,744,935 in financing activities for the same period of 2009, a decrease of $3,199,318 as a result of the following factors:

The Company repaid bank loans of $732,462 during the three months ended March 31, 2010, compared to the three months ended March 31, 2009 where the Company repaid bank loans of $2,194,298.

During the three months ended March 31, 2009, the Company distributed dividend of $1,550,637 to minority shareholders, while there was no such dividend distribution in the same period of 2010.

OFF-BALANCE SHEET ARRANGEMENTS

At March 31, 2010 and 2009, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

COMMITMENTS AND CONTINGENCIES

The following table summarizes the Company’s contractual payment obligations and commitments as of March 31, 2010:

	Payment Obligations by Period
	2010 (a)		2011		2012		2013		Thereafter		Total
Obligations for service agreements	$	110,000	$	110,000	$	-	$	-	$	-	$	220,000
Interest and make-whole on Convertible Notes		2,572,917		5,412,500		-		-		-		7,985,417
Obligations for purchasing agreements		11,508,669		2,053,634		-		-		-		13,562,303
Total	$	14,191,586	$	7,576,134	$	-	$	-	$	-	$	21,767,720

(a)	Remaining 9 months in 2010

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4

CONTROLS AND PROCEDURES

(A)

Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2010, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q/A, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In connection with the restatement of our financial statement in this amended Quarterly Report on Form 10-Q/A described in the introductory Explanatory Note, management reevaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2010. Based on that reevaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2010.

The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

(B)

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three-month period ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.— OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

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

ITEM 1A

RISK FACTORS

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

Risks Related to the Company’s Business and Industry

Because the Company is a holding company with substantially all of its operations conducted through its subsidiaries, its performance will be affected by the performance of its subsidiaries.

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

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

The Senior Convertible Notes are the Company’s unsecured obligations, but are not obligations of its subsidiaries. In addition, the Company’s secured commercial debt is senior to the Senior Convertible Notes.

With the automobile parts markets being highly competitive and many of the Company’s competitors having greater resources than it does, the Company may not be able to compete successfully.

The automobile parts industry is a highly competitive business. Criteria for the Company’s customers include:

•

Quality;

•

Price/cost competitiveness;

•

System and product performance;

•

Reliability and timeliness of delivery;

•

New product and technology development capability;

•

Excellence and flexibility in operations;

•

Degree of global and local presence;

•

Effectiveness of customer service; and

•

Overall management capability.

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

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

The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which could adversely affect the Company’s business and results of operations.

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

Increasing costs for manufactured components and raw materials may adversely affect the Company’s profitability.

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

Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business and results of operations.

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

The Company’s business, revenues and profitability would be materially and adversely affected if the Company loses any of its large customers.

As of March 31, 2010, approximately 18.3% of sales were to Xi’an BYD Electric Car Co., Ltd,; approximately 12.1% were to Chery Automobile Corporation Limited and approximately 10.7% were to Geely Holding Group, the Company’s three largest customers. The loss of, or significant reduction in purchases by, one or more of these major customers could adversely affect the Company’s business.

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

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

The Company is subject to environmental and safety regulations, which may increase its compliance costs and may adversely affect its results of operation.

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

Non-performance by the Company’s suppliers may adversely affect the Company’s operations by delaying delivery or causing delivery failures, which may negatively affect demand, sales and profitability.

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

The Company’s business and growth may suffer if it fails to attract and retain key personnel.

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

The Company’s management controls approximately 75.3 % of its outstanding common stock and may have conflicts of interest with its minority stockholders.

Members of the Company’s management beneficially own approximately 75.3% of the outstanding shares of its common stock. As a result, these majority stockholders have control over decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders, which could result in the approval of transactions that might not maximize stockholders’ value. Additionally, these stockholders control the election of members of the Company’s board, have the ability to appoint new members to its management team and control the outcome of matters submitted to a vote of the holders of its common stock. The interests of these majority stockholders may at times conflict with the interests of the Company’s other stockholders. The Henglong Acquisition was a transaction involving the Company and a counterparty controlled by Mr. Hanlin Chen, the Company’s Chairman and controlling stockholder. The Company regularly engages in transactions with entities controlled by one of more of its officers and directors.

Covenants contained in the Securities Purchase Agreement and the Senior Convertible Notes may restrict the Company’s operating flexibility.

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

There is a limited public float of the Company’s common stock. Of the Company’s outstanding common stock, approximately 24.7% is considered part of the public float. The term “public float” refers to shares freely and actively tradable on the NASDAQ GlobalMarket and not owned by officers, directors or affiliates, as such term is defined under the Securities Act. As a result of the limited public float and the limited trading volume on some days, the market price of the Company’s common stock can be volatile, and relatively small changes in the demand for or supply of the Company’s common stock can have a disproportionate effect on the market price for its common stock. This stock price volatility could prevent a securityholder seeking to sell the Company’s common stock or derivative securities from being able to sell them at or above the price at which the stock or derivative securities were bought, or at a price which a fully liquid market would report.

Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware may discourage a takeover attempt.

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

The Company does not pay cash dividends on its common stock.

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

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

Because the Company’s operations are all located outside of the United States and are subject to Chinese laws, any change of Chinese laws may adversely affect its business.

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

The Company’s international expansion plans subject it to risks inherent in doing business internationally.

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

The Company faces risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect its operating margins.

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

If relations between the United States and China worsen, the Company’s stock price may decrease and the Company may have difficulty accessing the U.S. capital markets.

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

Failure to achieve and maintain effective internal control over financial reporting could have a material adverse effect on the Company’s business, results of operations and the trading price of its shares.

The Company is subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, the “SEC,” as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management in its annual report that contains an assessment by management of the effectiveness of such company’s internal control over financial reporting. The Company’s management has conducted an evaluation of the effectiveness of its internal control over financial reporting and concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2009 and material weaknesses were noted due to: 1) not having sufficient personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues, and to prepare and review financial statements and related disclosures under U.S. GAAP; and 2) not having formalized closing procedures and adequate period-end review procedures to ensure a) proper preparation of the period-end financial statement closing entries and b) consistency of application of accounting policies and completeness and accuracy of the financial statement disclosures. If the Company fails to maintain the effectiveness or fails to remediate the deficiencies of its internal control over financial reporting, the Company may not be able to conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act.

Effective internal controls are necessary for the Company to produce reliable financial reports. For the deficiencies identified in this fiscal year, the Company’s management team is evaluating remediation measures that can be undertaken to address these material weaknesses and will continue such evaluation so that it may institute a comprehensive remediation plan in order to maintain effective internal control over financial reporting. Any failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could negatively impact the trading price of the Company’s shares. Furthermore, the Company may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.

The Chinese Government could change its policies toward private enterprise, which could adversely affect the Company’s business.

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

The economic, political and social conditions in China could affect the Company’s business.

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

The Chinese Government’s macroeconomic policies could have a negative effect on the Company’s business and results of operations

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

Government control of currency conversion and future movements in exchange rates may adversely affect the Company’s operations and financial results.

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

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

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

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

It may be difficult to serve the Company with legal process or enforce judgments against the Company’s management or the Company.

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

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5 OTHER INFORMATION

None

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

Exhibit Number		Description

3.1(i)		Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123.)

3.1(ii)		Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002.)

10.1		Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to the exhibit 10.8 to the Company’s Form 10Q Quarterly Report on May 10, 2006 )

10.2		Securities Purchase Agreement dated February 1, 2008 among us, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.3		Securities Purchase Agreement dated February 15, 2008 between us and the investors. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.4		Escrow Agreement dated February 15, 2008 among us, U.S. Bank National Association, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.5		Registration Rights Agreement dated February 15, 2008 among us, Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments, L.P. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.6		Senior Convertible Note dated February 15, 2008 in the original principal amount of $8,571,429 issued by us in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.7		Senior Convertible Note dated February 15, 2008 in the original principal amount of $6,428,571 issued by us in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)
10.8		Senior Convertible Note dated February 15, 2008 in the original principal amount of $15,000,000 issued by us in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.9		Closing Warrant to purchase 564,799 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by us in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

10.10		Escrow Warrant to purchase 564,799 shares of common stock at $8.8527 per share, dated February 15, 2008, issued by us in favor of TFINN & CO. as nominee for Lehman Brothers Commercial Corporation Asia Limited. (incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2007.)

31.1		Rule 13a-14(a) Certification*

31.2		Rule 13a-14(a) Certification*

32.1		Section 1350 Certification*

32.2		Section 1350 Certification*

* Filed herewith

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CHINA AUTOMOTIVE SYSTEMS, INC.
		(Registrant)

Date: June 24, 2011	By:	/s/ Qizhou Wu
		Qizhou Wu
		President and Chief Executive Officer

Date: June 24, 2011	By:	/s/ Jie Li
		Jie Li
		Chief Financial Officer

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