Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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 (the "Exchange Act"). Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words "believe," "expect," "anticipate," "project," "targets," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2007, and other risks mentioned in this Form 10-Q. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

Certain Terms

Except as otherwise indicated by the context, references in this Report to "Wonder Auto," the "Company," "we," "us," or "our" are references to the combined business of Wonder Auto Technology, Inc. and its wholly-owned subsidiary, Wonder Auto Limited, along with Wonder Auto Limited's direct and indirect subsidiaries. References to "China" and "PRC" are to the People's Republic of China. References to "BVI" are to the British Virgin Islands. References to "RMB" are to Renminbi, the legal currency of China, and all references to "$" are to the dollar, the legal currency of the United States of America.

Overview

Wonder Auto Technology, Inc. is a Nevada holding company whose China-based operating subsidiaries, Jinzhou Halla Electrical Equipment Co., Ltd. ("Jinzhou Halla"), Jinzhou Dongwoo Precision Co., Ltd. ("Jinzhou Dongwoo"), Jinzhou Wanyou Mechanical Parts Co., Ltd. ("Jinzhou Wanyou"), Jinzhou Hanhua Electrical System Co., Ltd. ("Jinzhou Hanhua"), Jinzhou Karham Electrical Equipment Co., Ltd. ("Jinzhou Karham"), Jinzhou Wonder Motor Co., Ltd. ("Jinzhou Wonder Motor"), Jinzhou Wonder Dianzhuang Co., Ltd. (aka Jinzhou Wonder Electrical Equipment Co., Ltd.) ("Jinzhou Dianzhuang"), Fuxin Huirui Mechanical Co. Ltd. ("Fuxin Huirui") and Jinan Worldwide Auto Accessory Company ("Jinan Worldwide"), design, develop, manufacture and sell automotive electrical parts, specifically alternators and starters, suspension products, and engine valves and tappets in China. We have been producing alternators and starters in China since 1997. In 2007, we ranked second in sales revenue in China in the market for automobile alternators and starters.

Most of our products are used in passenger cars, especially smaller engine vehicles with engine displacement between 1.3 liters and 2.0 liters. We offer over 150 different models of alternators and over 70 different models of starters. In addition, we have begun to manufacture and sell rectifier and regulator products for use in alternators as well as various rods and shafts for use in shock absorbers, alternators and starters.

We sell our products to automakers, engine manufacturers and, increasingly, auto parts suppliers, based primarily in China, and we are increasingly exporting our products to the international market.

Recent Developments

On October 1, 2008, our subsidiary Jinzhou Halla entered into an equity transfer agreement with Hony Capital II, L.P., a Cayman Islands corporation ("Hony Capital"), under which Jinzhou Halla will purchase 65% equity interest in Year City Limited, a British Virgin Islands corporation, representing all the equity interests in Year City Limited held by Hony Capital, for a total cash consideration of RMB 80 million subject to certain price adjustment. Year City does not have any assets except its 100% equity ownership of Jinan Worldwide, and a loan of US$2.55 million to Jinan Worldwide which we agreed to assume. Jinan Worldwide is a Chinese corporation engaging in the manufacturing of engine valves and tappets. For more information regarding this acquisition, please see our Current Report on Form 8-K filed with the U.S. Securities and Exchange on October 6, 2008.

Third Quarter Financial Performance Highlights

The following are some financial highlights for the third quarter of 2008:

Sales Revenue: Sales revenue increased $12.0 million, or 43.9%, to $39.3 million for the third quarter of 2008 from $27.3 million for the same period last year.

Gross Margin: Gross margin was 25.8% for the third quarter of 2008, as compared to 26.0% for the same period in 2007.

Net Income: Net income increased $2.7 million, or 72.9%, to $6.4 million for the third quarter of 2008, from $3.7 million for the same period of last year.

Fully diluted net income per share: Fully diluted net income per share was $0.24 for the third quarter of 2008, as compared to $0.15 for the same period last year.

Results of Operations

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

      (All amounts, other than percentages, in thousands of U.S. dollars)



                                  Three months ended                         Nine months ended
                                     September 30                              September 30
                                     (unaudited)                                (unaudited)
                              2008                 2007                  2008                 2007
Sales revenue           $ 39,266      100 %  $ 27,294      100 %  $ 107,041      100 %  $ 72,416      100 %
Cost of sales             29,140     74.2 %    20,184     74.0 %     79,239     74.0 %    54,335     75.0 %
Gross profit              10,126     25.8 %     7,110     26.0 %     27,803     26.0 %    18,081     25.0 %
Expenses
Administrative
expenses                   1,677      4.3 %       967      3.5 %      4,444      4.2 %     2,544      3.5 %
Selling expenses           1,209      3.1 %       641      2.3 %      2,912      2.7 %     1,998      2.8 %
Research and
development costs            460      1.2 %       255      0.9 %      1,128      1.1 %       733      1.0 %
Total expenses             3,346      8.5 %     1,863      6.8 %      8,484      7.9 %     5,274      7.3 %
Government grants              -        -           -        -            -        -         786      1.1 %
Net financial Costs         -139      0.4 %       773      2.8 %      1,381      1.3 %     1,730      2.4 %
Income before income
taxes                      7,594     19.3 %     4,519     16.6 %     19,251     18.0 %    11,982     16.5 %
Income taxes                 633      1.6 %       584      2.1        1,860      1.7 %     1,017      1.4 %
Minority interests           608      1.5         260      1.0 %      1,786      1.7 %       747      1.0 %

Net income              $  6,354     16.2 %  $  3,675     13.5 %  $  15,605     14.6 %  $ 10,219     14.1 %

Comparison of Three Months Ended September 30, 2008 and September 30, 2007

Sales Revenue. Our sales revenue is generated from sales of our alternator and starter products, and increasingly from the sale of rods and shafts used in shock absorbers, alternators and starters. Sales revenue increased $12.0 million, or 43.9%, to $39.3 million for the three months ended September 30, 2008 from $27.3 million for the same period last year. Such increase was mainly attributable to increased market demand for mid to small displacement alternator and starter products, the growth rate of which was higher and faster than that of the overall automobile industry, increased sales to our new and existing customers and growth in export sales. In this quarter, sales to our existing clients increased $7.4 million as compared to that in the same period last year. Our cost effective products with high quality also helped us to win more new customers. Sales to new customers contributed $4.6 million in the third quarter of 2008. In addition, we expanded our oversea sales channels and our export sales increased significantly to $6.2 million for the three months ended September 30, 2008 from $2.6 million for the same period last year. Our management expects the sales revenue to reach $150 million in 2008 and $220-$230 million in 2009.

Cost of Sales. Our cost of sales is primarily comprised of the costs of our raw materials, components, labor and overhead. Our cost of sales increased $9.0 million, or 44.4%, to $29.1 million for the three months ended September 30, 2008 from $20.2 million during the same period in 2007. We believe the increase of cost of sales correlates with the revenue increase.

Gross Profit. Our gross profit equals to the difference between our sales revenue and our cost of sales. Our gross profit increased $3.0 million, or 42.4%, to $10.1 million for the three months ended September 30, 2008 from $7.1 million for the same period in 2007. Gross margin (gross profit as a percentage of sales revenue) was 25.8% for the three-month period ended September 30, 2008, as compared to 26.0% during the same period in 2007. Such percentage decrease was mainly due to the change of our product portfolio. Due to the high market demand for small displacement starters and alternators, we manufactured more smaller displacement starter and alternator products in this quarter. Our smaller displacement products generally have a lower gross margin than larger displacement products.

Total Expenses. Our total expenses, which are comprised primarily of administrative expenses, research and development expenses and selling expenses, increased $1.5 million, or 79.6%, to $3.3 million for the three months ended September 30, 2008 from $1.9 million for the same period in 2007. The dollar increase was primarily attributable to an increase of administrative expenses and selling expenses as discussed below. As a percentage of sales revenue, our total expenses for the three months ended September 30, 2008 increased to 8.5% from 6.8% for the same period of last year.

Administrative Expenses. Our administrative expenses consist of the costs associated with staff and support personnel who manage our business activities and professional fees paid to third parties. Our administrative expenses increased $709,771, or 73.4%, to $1.7 million for the three months ended September 30, 2008 from $967,086 for the same period in 2007. As a percentage of sales revenue, administrative expenses increased to 4.3% for the three months ended September 30, 2008, as compared to 3.5% for the same period in 2007. The dollar and percentage increases were primarily attributable to the consolidation of the financial results of Jinzhou Hanhua and Jinzhou Karham and the audit and assessment costs in complying with the rules and regulations related to
Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"). We also incurred a non-cash employee compensation of $109,772 for the three months ended September 30, 2008 as a result of the adoption of the equity incentive plan in April 2008 and grants to senior management and other staff made under the equity incentive plan after its adoption.

Research and Development Costs. Our research and development costs consist of amounts spent on developing new products and enhancing our existing products. Our research and development costs increased $204,718, or 80.3%, to $459,804 for the three months ended September 30, 2008 from $255,086 for the same period in 2007. We plan to continue to focus on the research and development of new materials and improve technology to reduce raw material consumption per unit of production.

Selling Expenses. Our selling expenses include sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, after-sale support services and other sales related costs. Our selling expenses increased $567,965 to or 88.6%, to $1.2 million for the three months ended September 30, 2008 from $641,205 for the same period in 2007. As a percentage of sales revenue, our selling expenses increased to 3.1% for the three months ended September 30, 2008, as compared to 2.3% for the same period of last year. The increase in the amount and percentage of selling expenses was mainly attributable to the increase of sales commissions and salaries resulting from the growth of sales revenue. In addition, transportation costs increased during the Beijing Olympics.

Net financial costs. Our financial costs decreased $912,007 to ($139,381) for the three months ended September 30, 2008 from $772,626 for the same period in 2007. We have a loan in the amount of €8.3 million (approximately $12.1 million) outstanding. Since such loan is denominated in Euro and RMB appreciated against Euro during the three months ended September 30, 2008, we had $853,061 foreign exchange gain during the three months ended September 30, 2008.

Income before Income Taxes. Income before income taxes increased $3.1 million, or 68.1%, to $7.6 million during the three months ended September 30, 2008 from $4.5 million during the same period in 2007. Income before income taxes as a percentage of sales revenue increased to 19.3% during the three months ended September 30, 2008 from 16.6% during the same period in 2007 due to the factors described above.

Provision for Income Taxes.

United States

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

BVI

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

PRC

Before the implementation of the corporate income tax ("CIT") law (as discussed below), Foreign Invested Enterprises ("FIE") established in the PRC are generally subject to a CIT rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax. FIEs established in Coastal Open Economic Zones, Special Economic Zones or Economic and Technical Development Zones, such as our PRC subsidiaries, were subject to a CIT rate of 27.0%, which is comprised of a 24.0% state income tax and a 3.0% local income tax. In addition, FIEs engaging in manufacturing businesses with an operating an history of at least ten years may, subject to approval from local taxation authorities, be entitled to a two-year tax exemption from PRC CIT starting from the year they become profitable and a 50% tax reduction for the three years thereafter. As approved by the relevant PRC tax authority, our subsidiaries Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Hanhua and Jinzhou Karham were entitled to a two-year exemption from CIT followed by a 50.0% tax exemption for the next three years, commencing from the first cumulative profit-making year in the fiscal financial year.

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

On March 16, 2007, the National People's Congress of China passed the new Corporate Income Tax Law ("CIT Law"), and on November 28, 2007, the State Council of China passed the Implementing Rules for the CIT Law ("Implementing Rules") which took effect on January 1, 2008. The CIT Law and Implementing Rules impose a unified CIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws and its associated preferential tax treatments, beginning January 1, 2008.

Despite these pending changes, the CIT Law gives the FIEs established before March 16, 2007 ("Old FIEs") a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original CIT Law shall gradually increase their CIT rate by 2% per year until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for the "two-year exemption and three-year half reduction" or "five-year exemption and five-year half-reduction" under the original CIT Law, are allowed to remain to enjoy their preference until these holidays expire. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse effect on any organization's business, fiscal condition and current operations in China.

In addition to the changes to the current tax structure, under the CIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to a CIT of 25.0% on its global income. The Implementing Rules define the term "de facto management bodies" as "an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that the Company should be classified as a resident enterprise, then the organization's global income will be subject to PRC income tax of 25.0%.

Jinzhou Halla and Jinzhou Dianzhuang are subject to a CIT rate of 25.0%. Jinzhou Dongwoo and Jinzhou Hanhua are each subject to a CIT rate of 12.5% in 2008. Jinzhou Wanyou, Jinzhou Karham and Fuxin Huirui are exempt from CIT in 2008.

Our provision for income taxes increased $48,791 to $632,570 during the three months ended September 30, 2008 from $583,779 during the same period in 2007. Because of the implementation of the CIT law, Jinzhou Halla is subject to a CIT rate of 25% in the third quarter of 2008, as compared to 12.5% for the same period last year. Jinzhou Halla is in the process of applying for high technology enterprise status.

Minority Interest. Our financial statements reflect an adjustment to our consolidated group net income, and our minority interest increased $347,693, or 133.5% to $608,120 for the three months ended September 30, 2008 from $260,427 for the same period in 2007, reflecting the minority interests held by third parties in Jinzhou Dong Woo, Jinzhou Hanhua and Jinzhou Karham.

Net income. Our net income increased $2.7 million to $6.4 million during the three months ended September 30, 2008 from $3.7 million during the same period in 2007, as a result of the factors described above.

Comparison of Nine Months Ended September 30, 2008 and September 30, 2007

Sales Revenue. Sales revenue increased $34.6 million, or 47.8%, to $107.0 million for the nine months ended September 30, 2008 from $72.4 million for the same period ended on September 30, 2007. Such increase was mainly attributable to increased market demand for mid to small displacement alternator and starter products, the growth rate of which was higher and faster than that of the overall automobile industry, increased sales to our new and existing customers and growth in export sales. In the nine months ended September 30, 2008, sales to our existing clients increased $18.5 million as compared to that in the same period last year. Our cost effective products with high quality also helped us to win more new customers. Sales to new customers contributed $16.1 million in the first nine months of 2008. In addition, we expanded our oversea sales channels and our export sales increased significantly to $16.4 million for the nine months ended September 30, 2008 from $6.4 million for the same period last year.

Cost of Sales. Our cost of sales increased $24.9 million, or 45.8%, to $79.2 million for the nine months ended September 30, 2008 from $54.3 million during the same period in 2007. This increase was mainly due to the increase of our sales revenue. As a percentage of sales revenue, the cost of goods sold decreased to 74.0% during the nine months ended September 30, 2008 from 75.0% in the same period of 2007. Such decrease was mainly due to the decrease of per unit cost of products resulting from the economies of scale. We also benefited from more efficient cost control management and improved technology which allowed us to reduce raw material and component consumption per unit of production.

Gross Profit. Our gross profit increased $9.7 million, or 53.8%, to $27.8 million for the nine months ended September 30, 2008 from $18.1 million for the same period in 2007. Gross margin increased to 26.0% for the nine-month period ended September 30, 2008, from 25.0% during the same period in 2007 due to the reasons as discussed above.

Total Expenses. Our total expenses increased $3.2 million, or 60.9%, to $8.5 million for the nine months ended September 30, 2008 from $5.3 million for the same period in 2007. As a percentage of sales revenue, our total expenses increased to 7.9% for the nine months ended September 30, 2008, as compared to 7.3% for the same period in 2007. The dollar and percentage increase was primarily attributable to the increase of administrative expenses and selling expenses as discussed below.

Administrative Expenses. Our administrative expenses increased $1.9 million, or 74.7%, to $4.4 million for the nine months ended September 30, 2008 from $2.5 million for the same period in 2007. As a percentage of sales revenue, administrative expenses increased to 4.2% for the nine months ended September 30, 2008, as compared to 3.5% for the same period in 2007. This dollar and percentage increase was primarily attributable to the consolidation of the financial results of Jinzhou Hanhua and Jinzhou Karham and the audit and assessment costs in complying with the rules and regulations related to SOX 404. We also incurred a non-cash employee compensation of $109,772 for the nine months ended September 30, 2008 as a result of the adoption of the equity incentive plan in April 2008 and grants to senior management and other staff made under the equity incentive plan after its adoption.

Research and Development Costs. Our research and development costs increased $395,320, or 54.0%, to $1.1 million for the nine months ended September 30, 2008 from $732,706 for the same period in 2007. As a percentage of sales revenue, research and development costs increased to 1.1% for the nine months ended September 30, 2008 from 1.0% for the same period in 2007.

Selling Expenses. Our selling expenses increased $914,200, or 45.8%, to $2.9 million for the nine months ended September 30, 2008 from $2.0 million for the same period in 2007. The increase in the amount of selling expenses was mainly attributable to the increase of sales commissions and salaries resulting form the growth of our sales revenue. In addition, transportation costs increased during the Beijing Olympics. As a percentage of sales revenue, our selling expenses decreased to 2.7% for the nine months ended September 30, 2008, as compared to 2.8% for the same period of last year.

Income before Income Taxes. Income before income taxes increased $7.3 million, or 60.7%, to $19.3 million during the nine months ended September 30, 2008 from $12.0 million during the same period in 2007. Income before income taxes as a percentage of sales revenue increased to 18.0% during the nine months ended September 30, 2008 from 16.5% during the same period in 2007 due to the factors described above.

Provision for Income Taxes. Our provision for income taxes increased $843,310, or 83.0%, to $1.9 million during the nine months ended September 30, 2008 from $1.0 million during the same period in 2007. As a percentage of sales revenue, our provision for income taxes increased to 1.7% for the nine months ended September 30, 2008 from 1.4% for the same period of last year.

Minority Interest. Minority interest reflected an adjustment to our consolidated group net income, and our minority interest increased $1.0, or 139.2%, to $1.8 million for the nine months ended September 30, 2008 from $746,504 for the same period of last year, reflecting minority interests held by third parties in Jinzhou Dongwoo, Jinzhou Hanhua and Jinzhou Karham.

Net income. Our net income increased $5.4 million, or 52.7 %, to $15.6 million during the nine months ended September 30, 2008 from $10.2 million during the same period in 2007.

Business Segment Information

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

In the third quarter of 2008, our sales revenue from our alternator product line was $19.2 million, our sales revenue from our starter product line was $15.3 million and our sales from our rods and shafts product line was $4.8 million. Among the three principal products, shock absorber production enjoyed the fastest growth rate and the highest gross margin, reaching approximately 25-30%.

Additional information regarding our alternator, starter and rods and shafts product lines can be found at Note 13 to our unaudited consolidated financial statements contained under Part I, Item I "FINANCIAL STATEMENTS" above.