The information contained in this report includes some statements that are not purely historical fact and that are "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, statements regarding our management's expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, available liquidity, ability to refinance outstanding debt, ability to collect on our accounts receivable, completion of our turbine manufacturing facility on our main Wuhan campus and workshop and related facilities of Wuhan Xingelin Machinery Equipment Manufacturing Co., Ltd. , the development of our new industrial parts and machinery equipment business and growth of our businesses. The words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "projects," "should," and similar expressions, or the negatives of such terms, identify forward-looking statements.

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

· vulnerability of our business to general economic downturn;

· our ability to obtain financing on favorable terms;

· our ability to comply with the covenants and other terms of our loan agreements with Standard Chartered Bank (China) Limited, Guangzhou Branch;
· establishing our new business segment relating to industrial parts and machinery equipment;

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

· remediating material weaknesses in our internal control over financial reporting;

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

· our dependence on the steel and iron markets;

· exposure to product liability and defect claims;

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

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

· the other factors referenced in this report.

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

Overview

Wuhan General Group (China), Inc. (the "Company") is a holding company whose primary business operations are conducted through our wholly owned subsidiary, Universe Faith Group, Ltd. ("UFG"), which has no operations of its own and only serves to hold our Chinese operating subsidiaries, Wuhan Blower Co., Ltd. ("Wuhan Blower"), Wuhan Generating Equipment Co., Ltd. ("Wuhan Generating") and Wuhan Xingelin Machinery Equipment Manufacturing Co., Ltd. ("Wuhan Xingelin"). Wuhan Blower is a manufacturer of industrial blowers that are principally components of steam-driven electrical power generation plants. Wuhan Generating manufactures industrial steam and water turbines, which also are principally used in electrical power generation plants. Wuhan Xingelin manufactures silencers, connectors and other general parts for industrial blowers and electrical equipment, and it produces general machinery equipment. Wuhan Blower, Wuhan General and Wuhan Xingelin conduct all of their operations in the People's Republic of China, which we refer to in this report as PRC or China. Our corporate structure is as follows:

[[Image Removed]]

The information and data contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the operating results and financial condition for the three and nine month periods ended September 30, 2009 and 2008.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Sales. Sales decreased $9.2 million, or 27.2%, to $24.7 million for the three months ended September 30, 2009 from $34.0 million for the same period in 2008. The decrease in sales was primarily due to a delay in the equipment replacement cycle within China's steel manufacturing companies which resulted in fewer sales in 2009 and capital expenditure restrictions on our power plant customers due to the global economic crisis.

Cost of Sales. Our cost of sales decreased $6.1 million, or 25.4%, to $17.9 million for the three months ended September 30, 2009 from $23.9 million during the same period in 2008. This decrease was due to the significant decrease in sales of $3.4 million due to lower demand from steel companies and a decrease in sales of $2.6 million in our turbine business.

Gross Profit. Our gross profit decreased $3.2 million, or 31.5%, to $6.9 million for the three months ended September 30, 2009 from $10.0 million for the same period in 2008. Gross profit as a percentage of sales was 27.8% for the three months ended September 30, 2009 compared to 29.5% during the same period in 2008. The decline in gross profit is primarily driven by the decrease in sale price of our turbine products, which decreased about 3% due to increased competition.

Selling Expenses. Our selling expenses for the three months ended September 30, 2009 decreased approximately $75,000, or 9.0%, to approximately $760,000 from approximately $835,000 for the same period in 2008. As a percentage of sales, selling expenses were 3.1% for the three months ended September 30, 2009 compared to 2.5% for the same period in 2008. This increase as a percentage of sales was primarily attributable to the lower economies of scale as a result of the significant decrease in sales.

General and Administrative Expenses. Our general and administrative expenses decreased approximately $649,000, or 30.7%, to $1.5 million for the three months ended September 30, 2009 from approximately $2.1 million for the same period in 2008. As a percentage of sales, general and administrative expenses were 5.9% for the three months ended September 30, 2009 compared to 6.2% for the same period in 2008. This decrease as a percentage of sales was primarily attributable to more aggressive measures implemented to control costs.

Warranty Expense. Our warranty expense increased to approximately $179,000 for the three months ended September 30, 2009 from approximately $90,000 for the same period in 2008. This increase was primarily due to increased repair costs associated with the warranty for our blower products. As a percentage of sales, warranty expense was 0.7% for the three months ended September 30, 2009 compared to 0.3% for the same period in 2008.

Operating Income. Our operating income decreased $2.5 million, or 36.1%, to $4.5 million for the three months ended September 30, 2009 from $7.0 million for the same period in 2008. As a percentage of sales, operating income was 18.1% for the three months ended September 30, 2009 compared to 20.6% for the same period in 2008. This decrease as a percentage of sales was primarily attributable to the lower economies of scale as a result of the significant decrease in sales and the reasons mentioned above.

Interest Income. Our interest income was approximately $289,000 for the three months ended September 30, 2009, which is consistent with that for the same period in 2008.

Other Income (Expenses). Our other income increased to approximately $118,000 for the three months ended September 30, 2009 from approximately $(1,375,000) for the same period in 2008.

Interest Expense. Our interest expense was approximately $1.3 million for the three months ended September 30, 2009, which is consistent with that for the same period in 2008. As a percentage of sales, interest expense was 5.2% for the three months ended September 30, 2009 and 3.7% for the same period in 2008.

Income Taxes. The Company's income tax liability was approximately $586,000 for the three months ended September 30, 2009 compared to $0 for the same period in 2008. This increase resulted from the expiration of the Company's PRC tax holiday on December 31, 2008.

Net Income. Net income decreased $1.6 million, or 35.1%, to $3.0 million during the three months ended September 30, 2009 from $4.6 million during the same period in 2008, as a result of the factors described above.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Sales. Sales decreased $30.6 million, or 33.8%, to $59.9 million for the nine months ended September 30, 2009 from $90.6 million for the same period in 2008. Total sales for the nine months ended September 30, 2009 consisted of $32.3 million from our blower business, $27.4 million from our turbine business and approximately $307,000 from our industrial parts and equipment manufacturing business. The decrease in sales was primarily due to a delay in the equipment replacement cycle within China's steel manufacturing companies which resulted in fewer sales in 2009 and capital expenditure restrictions on our power plant customers due to the global economic crisis.

Cost of Sales. Our cost of sales decreased $17.7 million, or 28.2%, to $45.2 million for the nine months ended September 30, 2009 from $62.9 million during the same period in 2008. Total cost of sales for the nine months ended September 30, 2009 consisted of $23.7 million from our blower business, $21.3 million from our turbine business and approximately $218,000 from our industrial parts and equipment manufacturing business. This decrease was due to the significant decrease in sales of $6.6 million due to lower demand from steel companies and a decrease in sales of $11.3 million in our turbine business.

Gross Profit. Our gross profit decreased $12.9 million, or 46.7%, to $14.7 million for the nine months ended September 30, 2009 from $27.6 million for the same period in 2008. Gross profit as a percentage of sales was 24.6% for the nine months ended September 30, 2009 compared to 30.5% during the same period in 2008. Our gross profit for the nine months ended September 30, 2009 consisted of $8.6 million from our blower business, $6.0 million from our turbine business and approximately $89,000 from our industrial parts and equipment manufacturing business. The decline in gross profit is primarily driven by the decreased sales price of our turbine products, which decreased about 7.6% due to increased competition, and the sales price of our blower products, which decreased approximately 4.8% due to low demand from steel and power companies.

Selling Expenses. Our selling expenses for the nine months ended September 30, 2009 decreased approximately $650,000, or 30.5%, to approximately $1.5 million for the nine months ended September 30, 2009 from approximately $2.1 million for the same period in 2008. As a percentage of sales, selling expenses were 2.5% for the nine months ended September 30, 2009 which is consistent with that for the same period in 2008.

General and Administrative Expenses. Our general and administrative expenses decreased approximately $2.2 million, or 33.4%, to $4.4 million for the nine months ended September 30, 2009 from approximately $6.6 million for the same period in 2008. This decrease reflected lower costs associated with decreased sales activities, including approximately $830,000 attributable to lower administrative costs from our turbine business, approximately $250,000 attributable to lower administrative costs from our blower business and approximately $330,000 attributable to decreased, consulting and legal expenses related to capital market activities. As a percentage of sales, general and administrative expenses were 7.3% for the nine months ended September 30, 2009, which is consistent with that for the same period in 2008.

Warranty Expense. Our warranty expense decreased to approximately $482,000 for the nine months ended September 30, 2009 from approximately $647,000 for the same period in 2008. This decrease was primarily due to decreased repair costs associated with the warranty for our blower products. As a percentage of sales, warranty expense was 0.8% for the nine months ended September 30, 2009 compared to 0.7% for the same period in 2008.

Operating Income. Our operating income decreased $9.9 million, or 54.1%, to $8.4 million for the nine months ended September 30, 2009 from $18.3 million for the same period in 2008. As a percentage of sales, operating income was 14.0% for the nine months ended September 30, 2009 compared to 20.2% for the same period in 2008. This decrease as a percentage of sales was primarily attributable to the lower economies of scale as a result of the significant decrease in sales and the reasons mentioned above.

Interest Income. Our interest income decreased to approximately $494,000 for the nine months ended September 30, 2009 from approximately $637,000 for the same period in 2008. This decrease was due to a decrease in bank deposit interest rates and decreased average bank deposit balance.

Other Income (Expenses). Our other income increased to approximately income of $80,000 for the nine months ended September 30, 2009 from approximately $(1.5) million for the same period in 2008.

Interest Expense. Our interest expense was approximately $2.6 million for the nine months ended September 30, 2009, which was consistent with that for the same period in 2008.

Income Taxes. The Company's income tax liability was approximately $1.1 million for the nine months ended September 30, 2009 compared to $0 for the same period in 2008. This increase resulted from the expiration of the Company's PRC tax holiday on December 31, 2008.

Net Income. Net income decreased $10.8 million, or 72.2%, to $4.1 million during the nine months ended September 30, 2009 from $14.9 million during the same period in 2008, as a result of the factors described above. In addition, there was $1.2 million stock penalty for late listing on NASDAQ during the nine months ended September 30, 2009 that also contributed to the decrease in net income.

Liquidity and Capital Resources

Our primary capital needs have been to fund the working capital requirements necessitated by the expansion of our manufacturing facilities and the development of our new industrial parts and machinery equipment business. We finance our business operations primarily through cash generated by our operations, bank loans and various financing transactions. As of September 30, 2009, we had cash and cash equivalents of $8.4 million, including restricted cash of $7.5 million.

As discussed above, for the nine months ended September 30, 2009, our sales decreased 33.8% compared to the same period in 2008. This decrease in sales was primarily due to a delay in the equipment replacement cycle within China's steel manufacturing companies which resulted in fewer sales and capital expenditure restrictions on our power plant customers due to the global economic crisis. For many of the same reasons, we also have experienced significant delays in receiving payments from our customers. As discussed in more detail below, the number of days sales were outstanding increased 112 days at September 30, 2009, compared to September 30, 2008. The combination of these factors resulted in our income from operations being insufficient to meet our working capital needs. At the same time, banks tightened their lending policies as a result of the turmoil in the credit markets. This required us to use bridge loans to finance our working capital needs during this period.

On November 11, 2009, we closed a new loan facility with Standard Chartered Bank
(China) Limited, Guangzhou Branch; this loan facility provides up to RMB 303,100,000 (approximately $44.4 million) in senior secured debt financing. As described in more detail below, once we fulfill certain conditions required to receive funding under the loan facility, we will use the proceeds to repay our existing bank loans and notes and fund our ongoing construction projects. This should allow us to use our operating income to fund our working capital needs.

The majority of our customers pay us in installments at various stages of project completion. The percentage of the purchase price due at the various stages varies somewhat between contracts. In our standard sales contract, we receive 60% of the purchase price of a piece of equipment at the time of delivery. Alternatively, some sales contracts provide for 15% due upon signing and 45% due upon delivery. We generally receive an additional 30% of the purchase price when the equipment is installed and runs without problem for 72 hours. However, since our equipment is generally a component of a larger project, there are times that customers do not allow us to install the equipment immediately upon delivery. We generally receive the final 10% at 18 months following the installation. Although the payment terms in our standard sales contract result in a long payment cycle, we believe our payment terms are typical in our industry in China. Nonetheless, we are seeking more aggressive payment schedules on new sales contracts in order to improve our liquidity position.

At September 30, 2009, we had $47.8 million in accounts receivable, compared to $41.5 million at December 31, 2008. In order to manage this increase in accounts receivable, we have employed additional resources in collecting on outstanding accounts receivable and have aligned more closely sales commissions with the collection on sales. The accounts receivable balance increased by $6.4 million, with a corresponding increase in days sales outstanding of 112 days, at September 30, 2009 compared to September 30, 2008. This increase resulted primarily from delayed payments from our major customers. Our major customers, particularly state-owned steel companies and power generating companies, delayed their payments to the Company due to the economic slow down and the resulting restrictions on their cash. This resulted in a significant increase in days sales outstanding for our accounts receivable. In addition, most of our major customers demanded lower prepayments and progress billings and longer payment terms. All of these negatively affected the Company's operating cash flow.

At September 30, 2009, we had $1.3 million in other receivables, which is a decrease of approximately $0.4 million compared to the balance at December 31, 2008.

We also had advances to suppliers of $15.9 million at September 30, 2009, which decreased by $4.4 million compared to the balance at December 31, 2008. The decrease was mainly due to significant payments made at the end of 2008 to suppliers for electrical power generators and raw materials. We typically need to place a deposit in advance with our suppliers on a portion of the purchase price, and for some suppliers, we must maintain a deposit for future orders. We generally ask for a certain amount of deposit from customers before we begin a new project.

We had inventory turnover of 2.9 times and 5.3 times for the nine months ended September 30, 2009 and September 30, 2008, respectively. Inventory increased $3.9 million in raw materials, $10.5 million in work in progress and $49,795 in finished goods for the nine months ended September 30, 2009. The raw materials increase resulted from the Company's effort to increase desired stock levels to take advantage of decreased steel price during 2009 and to increase production level.

We provide for bad debts principally based upon the aging of accounts receivable, in addition to collectability of specific customer accounts, our history of bad debts and the general condition of the industry. Pursuant to the Company's accounting policies, the allowance for doubtful accounts is determined by applying a rate of five percent on outstanding accounts receivables. Bad debts are charged against the allowance when outstanding accounts receivables have been determined to be uncollectible. Due to the difficulty in assessing future trends and the global economic downturn, we could be required to increase our provisions for doubtful accounts. As our accounts receivable age and become uncollectible, our cash flow and results of operations are negatively impacted.

Net cash used in operating activities for the three months ended September 30, 2009 was approximately $5.6 million, as compared to approximately $1.4 million provided in the same period in 2008. This change was primarily due to a decrease in net operating income coupled with an increase in receivables with a relatively long collection period and increased advances to suppliers, but partially offset by an increase in customer deposits.

Net cash used in investing activities for the three months ended September 30, 2009 was approximately $1.8 million, as compared to approximately $7.2 million used in the same period in 2008. This change was mainly a result of a decrease in restricted cash.

Net cash provided by financing activities for the three months ended September 30, 2009 was approximately $6.1 million, as compared to approximately $14.8 million provided in the same period in 2008. This change was primarily due to the proceeds raised from the exercise of warrants by investors in 2008.

We intend to expend a significant amount of capital to complete our facilities and the installation of equipment and to make deposits for performance bonds for new projects that we have obtained. In light of the Company's new credit facility with Standard Chartered Bank, which is discussed below, the Company believes that its currently available working capital, combined with cash from operations and bank financing, should be adequate to sustain operations at current levels through at least the next 12 months. For our long-term strategic growth, the Company will continue to rely upon debt and capital markets for any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary objectives of the Company's capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense.

Bank Loans Generally

As of September 30, 2009, we had banking facilities in the form of bank loans and loan facilities from other non-bank entities totaling approximately $34.2 million (based on an exchange rate of 6.8376 RMB per 1 U.S. dollar). Information regarding these loans is set forth below in US $.

Short-term Loans                                                           Interest            At
                                                                           Rate Per       September 30,
   Subsidiary           Type           Name of Creditor       Due Date      Annum             2009
                                    Wuhan Kangfuman
Wuhan Blower       Bank Loans       Consulting Company       On Demand             -             292,500
                                    Wuhan Jiangan
Wuhan Blower       Bank Loans       Huachuang Loan Company   On Demand         19.20 %         2,660,729
                                    Guangdong Development
Wuhan Blower       Bank Loans       Bank                     6/15/2010          6.37 %           731,251
                                    Guangdong Development
Wuhan Blower       Bank Loans       Bank                     6/15/2010          6.37 %           877,501
                                    Agricultural Bank of
Wuhan Blower       Bank Loans       China                    8/13/2010          5.84 %         2,925,003
                                    Agricultural Bank of
Wuhan Blower       Bank Loans       China                    8/28/2010          5.84 %         3,656,254
                                    Agricultural Bank of
Wuhan Blower       Bank Loans       China                     8/6/2010          5.84 %           731,251
Wuhan Blower       Bank Loans       Bank of China, Ltd.      3/12/2010          5.40 %           804,375
Subtotal                                                                                 $    12,678,864

                                    Wuhan Pinghu Materials
Wuhan Blower       Notes Payable    Company                  12/2/2009             -             548,438
Wuhan Blower       Notes Payable    Wuhan Zhongxingshimao
                                    Materials Company        12/4/2009             -             305,827
Wuhan Blower       Notes Payable    Bank of Communications   12/10/2009            -           4,095,004
                                    Wuhan Pinghu Materials
Wuhan Blower       Notes Payable    Company                  1/24/2010             -             892,126
Subtotal                                                                                 $     5,841,395

                                    Wuhan Fuxintai Trade
Wuhan Generating   Notes Payable    Company                  1/22/2010             -           5,850,006
Wuhan Generating   Notes Payable    Bank of Communications   12/16/2009            -           6,873,757
Subtotal                                                                                 $    12,723,763
Total                                                                                    $    31,244,022

Long-term Loans
Wuhan Generating   Long Term Loan   Bank of Communications   12/23/2010         5.67 %         1,462,501
Wuhan Generating   Long Term Loan   Bank of Communications   1/15/2011          5.40 %         1,462,501
Total                                                                                    $     2,925,002

We plan to either repay this debt as it matures or refinance this debt with other debt. Our subsidiary, Wuhan Blower, recently financed up to RMB 303,100,000 (approximately $44.4 million) in the form of a bank loan to be used to repay our current bank debt, purchase equipment for Wuhan Generating and complete the capital expenditure investments of Wuhan Xingelin. Since funding will be available to Wuhan Generating to complete its construction projects, the Company can use the funds generated from operations for working capital.

Loan Facility with Standard Chartered Bank

On November 11, 2009, Wuhan Blower, Wuhan Generating and Wuhan Xingelin (collectively, the "Borrowers") entered into a Loan Agreement with Standard Chartered Bank (China) Limited, Guangzhou Branch (the "Standard Chartered"). The Loan Agreement provides for a loan facility totaling RMB 303,100,000 (approximately $44.4 million) in senior secured debt financing consisting of a term loan facility for up to RMB 211,600,000 (approximately $31.0 million) (the "Tranche A Loan") and a term loan facility for up to RMB 91,500,000 . . .