*Table
          of Contents*





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 for the fiscal year ended - DECEMBER 31,
                2007




OR




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 for the transition period from




Commission
      file number 0-024828





**SORL
      AUTO PARTS, INC.**


(Name
      of
      Issuer in Its Charter)





DELAWARE
              (State
                or Other jurisdiction
              of
                Incorporation or Organization)
            30-0091294
              (I.R.S.
                Employer Identification No.)





NO.1169
      YUMENG ROAD


RUIAN
      ECONOMIC DEVELOPMENT DISTRICT


RUIAN
      CITY, ZHEJIANG PROVINCE


PEOPLE’S
      REPUBLIC OF CHINA


(Address
      of Principal Executive Offices, including zip code.)




86-577-65817720


(Issuer’s
      Telephone Number, Including Area Code)









*Table
        of Contents*






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





TITLE
                OF EACH CLASS
            
            NAME
                OF EACH
              EXCHANGE
                ON WHICH REGISTEREDCOMMON
                STOCK: 0.002 PARVALUE
            
            NASDAQ
                GLOBAL MARKET





Securities
      registered pursuant to Section 12(g) of the Act: NONE


Indicate
                by check mark if the registrant is a well-known seasoned issuer,
                as
                defined in Rule 405 of the Securities Act.YesoNox





Indicate
                by check mark if the registrant is not required to file reports pursuant
                to Section 13 or Section 15(d) of the Exchange Act. YesoNox





Indicate
                by check mark whether the issuer (1) filed all reports required to
                be
                filed by Section 13 or 15(d) of the Exchange Act during the past
                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. YesxNoo





Indicate
                by check mark if no disclosure of delinquent filers in response to
                Item
                405 of Regulation S-K is not contained in this form, and no disclosure
                will be contained, to the best of registrant’s knowledge, in definitive
                proxy or information statements incorporated by referenced in Part
                III of
                this Form 10-K or any amendment to this Form 10-K.o





Indicate
                by check mark whether the registrant is a large accelerated filer,
                an
                accelerated filer, a non-accelerated filer, or a smaller reporting
                company. See definition of “accelerated filer”, “large accelerated filer”
                and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
              Large
                accelerated fileroAccelerated fileroNon-acceleratedoSmaller Reporting Companyx





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





State
      issuer’s revenues for its most recent fiscal year December 31, 2007:
      $115,760,070





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity as of the last
      business day of registrant’s most recently completed second fiscal quarter. As
      of June 30, 2007, the value was approximately $49,822,927





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity:
      18,279,254 as of March 17, 2008.




*Table
          of Contents*




**TABLE
      OF CONTENTS**





PART
                IITEM
                1.
            DESCRIPTION
                OF BUSINESS
            
            2ITEM
                1A.
            RISK
                FACTORS
            
            15ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS
            
            33ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            
            33ITEM
                3.
            LEGAL
                PROCEEDINGS
            
            33ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            
            33PART
                IIITEM
                5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
                AND ISSUER PURCHASES OF EQUITY SECURITIES
            
            33ITEM
                6.
            CONSOLIDATED
                SELECTED FINANCIAL DATA
            
            36ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR FINANCIAL PLAN OF
                OPERATION
            
            38ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            
            49ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATE
            
            51ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE
            
            73ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            
            73ITEM
                9B.
            OTHER
                INFORMATION
            
            73PART
                IIIITEM
                10.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE
                GOVERNANCE
            
            74ITEM
                11.
            EXECUTIVE
                COMPENSATION
            
            77ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            
            84ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            
            85ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            
            86ITEM
                15.
            EXHIBITS,
                AND FINANCIAL STATEMENT
                SCHEDULES
            
            87SIGNATURES
            
            88




*Table
          of Contents*




**PART
      I**





**ITEM
      1.  DESCRIPTION OF BUSINESS**




**BUSINESS**




Through
      its 90% ownership of the Ruili Group Ruian Auto Parts Co., Ltd., a sino-foreign
      joint venture (the “Joint Venture”), SORL Auto Parts, Inc. (the “Company”)
      develops, manufactures and distributes automotive air brake valves and related
      components to automotive original equipment manufacturers, or OEMs, and the
      related aftermarket both in China and internationally. Installed on the chassis,
      air brake valves include a collection of various air brake components using
      compressed air and functioning as the execution device for service braking
      and
      parking braking. The Company’s products are principally used in commercial
      vehicles weighing over three tons, such as trucks and buses. Air brake valves
      are critical components that ensure driving safety.




The
      Joint
      Venture was formed in China as a sino-foreign joint venture on January 17,
      2004,
      pursuant to the terms of a Joint Venture Agreement (the “JV Agreement”) between
      the Ruili Group Co., Ltd. (the “Ruili Group”) and Fairford Holdings Limited
      (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was
      incorporated in the PRC in 1987 and specialized in the development, production
      and sale of various kinds of automotive parts. Fairford and the Ruili Group
      contributed 90% and 10%, respectively, of the paid-in capital of the Joint
      Venture, which totaled $43.4 million.




Effective
      January 19, 2004 the Joint Venture acquired the business segment of the Ruili
      Group relating to the manufacture and sale of various kinds of valves for
      automotive brake systems and related operations (the “Transferred Business”).
      The Ruili Group began the automotive air brake valve business in 1987. The
      acquisition was accomplished by the transfer from the Ruili Group to Fairford
      of
      the relevant assets and liabilities of the Transferred Business including trade
      receivables, inventories and machinery, and the assumption of short and long
      term borrowings for a purchase price of $6,390,000. The consideration was based
      on a valuation provided by Ruian Ruiyang Assets Valuation Co., Ltd., an
      independent PRC valuation firm. Fairford then transferred these assets and
      liabilities to the Joint Venture as consideration for its 90% ownership interest
      of the Joint Venture. The Ruili Group transferred inventory as its capital
      contribution for its 10% interest in the Joint Venture. The assets and
      liabilities transferred to the Joint Venture by Fairford and the Ruili Group
      represented all the assets and liabilities of the Transferred Business. Certain
      historical information of the Transferred Business is based on the operation
      of
      the Transferred Business when it was owned by the Ruili Group.




On
      November 30, 2006, the Company completed a follow-on public offering of
      4,285,714 shares of common stock at $7.25 per share. Gross proceeds were
      approximately $31.1 million. Net proceeds after approximately $2.2 million
      of
      underwriters’ commissions and approximately $0.7 million of related offering
      expenses were approximately $28.2 million. On December 13, 2006, Maxim Group
      LLC, the lead underwriter of offering, exercised its over-allotment option
      in
      full to purchase an additional 642,857 shares of common stock. After deduction
      of underwriter’s discount of approximately from $0.3 million, the Company
      received $4.3 million. The aggregate net proceeds to the Company of this
      offering was approximately $32.5 million, which included the $4.3 million as
      a
      result of the exercise of the over-allotment option granted to the
      underwriters.


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On
      December 8 and 26, 2006, through Fairford, the Company invested $32.67 million
      in its operating subsidiary, the Ruili Group Ruian Auto Parts Co., Ltd. To
      maintain its 10% shareholding in the Joint Venture, the Ruili Group increased
      its capital investment by $3.63 million. Accordingly,the Company continues
      to
      hold a 90% controlling interest in the operating subsidiary.





The
      Joint
      Venture is located in Ruian City, Wenzhou, Zhejiang Province, People’s Republic
      of China. Wenzhou is a southeast coastal city and is a center of automotive
      parts manufacturing in China. The Company’s main products include spring brake
      chambers, clutch servos, air dryers, and main valves and manual valves, all
      of
      which are widely used in the brake systems for various types of commercial
      vehicles weighing more than three tons such as trucks and buses. Reliable
      functioning of those valves is critical to safety both when driving and
      parking.





**The
      Company’s Products**





Through
      the Joint Venture, the Company manufactures and distributes commercial vehicle
      air brake valves and related components in China and internationally. Installed
      on the chassis, air brake valves include a collection of various air brake
      components using compressed air and functioning as the execution device for
      service braking and parking brake. The products are principally used in
      commercial vehicles weighing over three tons, such as trucks and buses. Air
      brake valves are critical components that ensure driving safety.





The
      Joint
      Venture makes an extensive range of air brake valves and related products
      covering 40 categories and over 1000 specifications, which are widely used
      in
      different types of commercial vehicles. Additionally, the Joint Venture offers
      a
      more complete product line including non-valve products, which are sourced
      from
      the Ruili Group. Such outsourced non-valve products include power steering
      pumps
      and other pumps, automobile electrical components and auto meters. The Joint
      Venture is continually engaged in introducing new products rapidly, maintain
      high quality, and provide excellent customer support. When working with a
      customer, the Joint Venture’s goal is to understand the design intent and brand
      image for each product and leverage the Joint Venture’s extensive experience and
      innovative technology to deliver products that enable the customer to
      differentiate the air brake valves and related components. The Company supports
      its products with a full-range of styling, design, testing and manufacturing
      capabilities, including just-in -time and in-sequence delivery.





The
      following discussion describes the major products within the operations segment
      that the Joint Venture produces as of the date of this report.





**Product**
            
            **Description**RL3530
                Series Spring Brake Chamber
            
            A
                spring brake chamber executes the service, parking and emergency
                braking,
                when the brake system malfunctions, the products can automatically
                provide
                emergency braking force. The RL3530 series Spring Brake Chamber was
                awarded a patent in China. In2007,
                the Joint Venture produced1.16
                millionunits of spring brake chambers, the largest output in China, which
                were
                supplied to OEM customers such as FAW Qingdao and Dongfeng
                Group.Clutch
                Servo
            
            Clutch
                Servos, which are innovative clutch empower devices developed by
                the Joint
                Venture, was awarded a patent in China. They are used for controlling
                the
                performance of brake system clutches by means of a pneumatic-driven
                hydraulic operation. The features of this product are simpler structure,
                smaller size, higher durability and improved effectiveness. With
                an output
                of626
                thousandunits in2007,
                clutch servos are currently supplied to OEM customers such as FAW
                Qingdao.RL3511
                Series Air Dryer
            
            Air
                dryers dry and purify compressed air. Combined with unloader valves
                and
                the heating components, this new type of air dryer requires no separate
                installation of certain other components. The product has a compact
                structure and multiple functions. Furthermore, it improves the reliability
                of the use of other air brake system components, enhancing safe driving.
                Annual output of these series of products reached249
                thousandunits in2007.
                The products are supplied to OEM customers such as FAW Qingdao and
                Dongfeng Group.RL3511
                Series Air Dryer has been patented in China.Relay
                Valves
            
            Electric
                control exhaust relay valves greatly shorten the length of pipeline
                between the air storing tank and the brake chamber, and, as a result,
                enhance the speed to operate the brake system. They are widely used
                in
                different types of commercial vehicles. Annual output is approximately714
                thousandunits in2007.
                Also, we have been awarded a patent for the product.Hand
                Brake Valves
            
            Hand
                brake valves serve as an auxiliary device for parking brakes. Current
                annual output is about387
                thousandunits. They are supplied to many OEM customers including FAW
                Qingdao.




-
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 *Table
          of Contents*


The
      Company obtained ISO9001/QS9000/VDA6.1 System Certifications in 2001. We passed
      the ISO/TS 16949 System Certification test conducted by the TUV CERT
      Certification Body of TUV Industrie Service GmbH in 2004, and its annual review
      in 2007 The ISO/TS 16949 System, a higher standard replacing the
      ISO9001/QS9000/VDA6.1 System, was enacted by the International Automotive Task
      Force and is recognized by major automobile manufacturers all over the world.
      The annual reviews for other certifications which we passed in 2007 included
      ISO14001 on environmental management and OHSAS18001 on health and safety
      management, reflecting the Company’s commitment for workplace safety, health and
      environmental protection.





**CHINA
      AUTOMOBILE AND AUTO PARTS INDUSTRY**





The
      automobile industry is one of China’s key industries, contributing significantly
      to the growth of China’s economy. In 2007, China’s automobile output and sales
      volume both reached their record high levels of 8.88 million and 8.79 million
      units, increasing by 22.02% and 21.79%, respectively, compared to 2006 figures.
      The output and sales volume of commercial vehicle increased 22.21% and 22.25%
      to
      2.50 million units and 2.49 million units, respectively.





The
      2007
      automotive parts output in China reached $88.6 billion, with a growth rate
      of
      20% from last year’s $74.2 billion. According to the latest forecast of the
      total demand in China’s market conducted by the Industry Economy Research
      Department of State Council Development Research Center, inventory of domestic
      automobiles will reach 56.69 million units in 2010 and 131.03 million units
      in
      2020. This figure reflects the potential of the domestic auto market in the
      long
      run and lays a foundation for the continued development of the auto parts
      industry.





The
      overall Chinese auto parts industry is highly fragmented. Management believes
      that the future trends of China’s auto parts industry will be:





·
            To
                keep pace with the rapid development of new automobile
                technologies.





·
            To
                meet the requirements from increasingly demanding OEM customers,
                such as
                zero defects, and cost reduction.





·
            To
                partner with OEM customers in the entire process from product design,
                development and production to costing, quality control and final
                delivery.





·
            To
                implement industry restructuring through integration to form several
                large
                sized auto parts manufacturing groups capable of competing with
                international manufacturers.





**MARKET
      AND CUSTOMERS**





The
      Joint
      Venture is the largest commercial vehicle air brake system manufacturer in
      China. In general, our customers are divided into three groups: OEMs in China,
      aftermarket distributors in China, and international customers, accounting
      for
      approximately 35.6%, 26.9% and 37.5%, respectively, of the Company’s annual
      sales for 2007.





**OEM
      Market -** The
      Joint Venture has established long-term business relationships with most of
      the
      major automobile manufacturers in China. The Joint Venture sells its products
      to
      51 vehicle manufacturers, including all of the key truck manufacturers in China.
      In addition to heavy-duty trucks, the valves are also widely used in air brake
      systems for buses. Typically, bus manufacturers purchase a chassis from truck
      chassis manufacturers which already have incorporated the Joint Venture’s air
      brake valves.





The
      table
      below presents comparative information for 2007 and 2006 on the Company’s top 5
      OEM customers.





**Ranking**
            
            **Customer**
            
            **%
                of**
              **2007**
              **Sales**
            
            **Customer**
            
            **%
                of**
              **2006**
              **Sales**1
            
            FAW
                Jiefang Automotive Co., Ltd.
            
            7.30%
            
            FAW
                Qingdao Automobile Works
            
            4.56%2
            
            FAW
                Qingdao Automobile Works
            
            4.56%
            
            First
                Auto Group Purchase Dept.
            
            4.39%3
            
            Dongfeng
                Axle Co., Ltd.
            
            4.18%
            
            Dongfeng
                Axle Co., Ltd.
            
            3.43%4
            
            Beiqi
                Foton Motor Co., Ltd. Zhucheng Automobile Works
            
            2.85%
            
            Beiqi
                Foton Motor Co., Ltd. Zhucheng Automobile Works
            
            2.07%5
            
            Beiqi
                Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle
                Works
            
            2.57%
            
            Liuzhou
                Special AutoManufacturing
                Co., Ltd.
            
            1.71.%





A
      few of
      our principal OEM customers are:


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 *Table
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FAW
      Group
      Corporation: Established in 1953, FAW is the largest automobile manufacturer
      in
      China. During the past 50 years, its product line has expanded from a single
      product for trucks to a full range of light, medium and heavy vehicles, sedans
      and buses, with output reaching 6.4 million units. FAW has established joint
      ventures with major international firms such as Volkswagen and Toyota, while
      expanding within China through a merger with Tianjin Automobile Industry (Group)
      Co., Ltd. FAW Jiefang Automotive Co., Ltd. and FAW Qingdao Automotive Works
      are
      subsidiaries of FAW Group Corporation.





Dongfeng
      Axle Co., Ltd.: It is a subsidiary of Dongfeng Motors Group. Established in
      1969, Dongfeng ranks among the top three groups in China’s automotive industry.
      Its main products include commercial vehicles, passenger cars and automotive
      parts.





Beiqi
      Foton Motor Co., Ltd.: Headquartered in Chang Ping District, Beijing, Foton
      was
      founded in 1996. It is a public listed company with majority of state-owned
      shares. It possesses total assets exceeding 77 billion RMB and has about 24,000
      employees. As China’s largest commercial vehicle manufacturer with a complete
      range of types, Foton sells under the brand names of Auman, AUV, View, Saga,
      Aumark, Ollin, Sup and Forland.





**Aftermarket
      -** The
      Joint Venture has established sales networks of 28 authorized distributors
      covering the following 7 regions nationwide:





·
            Northeast
                Region (Harbin, Changchun,
                Shenyang)





·
            North
                Region (Beijing, Shijiazhuang, Datong,
                Tianjin)





·
            Northwest
                Region (Urumchi, Xi’an)





·
            Southwest
                Region (Chongqing, Liuzhou, Kunming,
                Chengdu)





·
            Central
                Region (Zhengzhou, Wuhan, Shiyan)





·
            East
                Region (Ji’nan, Qingdao, Hefei, Hangzhou, Nanchang, Quanzhou, Shanghai,
                Najing, Xuzhou)





·
            South
                Region (Guangzhou, Changsha)





The
      28
      authorized distributors sell only “SORL” products and in turn channel the
      products through over 800 sub-distributors.





**International
      Market -** Management views the export market as an important growth area. We have signed
      agreements with 3 distributors in UAE, Australia, and USA, and begun to supply
      our products to the local OEMs in India. We also actively participate in
      international trade shows such as those held in Paris, Dubai and Las Vegas,
      and
      the large-scale domestic trade shows like China Import and Export Fair, and
      China International Auto Parts Expo, through which the Company has been able
      to
      expand its export business to both the aftermarket and OEM segments. In 2007,
      export sales accounted for 37.5% of total revenue. Products are exported to
      more
      than 81 countries and regions in the world. Total export sales in 2007 increased
      by 28.1% compared to that in 2006.





**Ranking**
            
            **Country**
            
            **Customer
                Name**
            
            **%
                of 2007 Sales**
            
            **Country**
            
            **Customer
                Name**
            
            **%
                of 2006 Sales**1
            
            United
                Arab Emirates
            
            GOLDEN
                DRAGAN AUTO SPARE PARTS
            
            6.30%
            
            United
                Arab Emirates
            
            GOLDEN
                DRAGAN AUTO SPARE PARTS
            
            6.24%2
            
            USA
            
            ITM
            
            4.59%
            
            USA
            
            ITM
            
            4.50%3
            
            South
                Africa
            
            MICO
            
            1.10%
            
            South
                Africa
            
            MICO
            
            1.83%4
            
            USA
            
            SAP
            
            1.02%
            
            Nigeria
            
            LIL/MILA
            
            1.35%5
            
            Poland
            
            FOTA
            
            0.98%
            
            Poland
            
            MAKROTECH
            
            0.87%6
            
            South
                Africa
            
            TPE
            
            0.95%
            
            South
                Africa
            
            POLMO
            
            0.73%7
            
            Poland
            
            MAKROTECH
            
            0.94%
            
            Poland
            
            FOTA
            
            0.70%




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          of Contents*




**COMPETITION**





The
      Joint
      Venture conducts its business in a complex and highly competitive industry.
      The
      global automotive parts industry principally involves the supply of systems,
      modules and components to vehicle manufacturers for the manufacture of new
      vehicles. Additionally, suppliers provide components to other suppliers for
      use
      in their product offerings and to the aftermarket for use as replacement or
      enhancement parts for older vehicles. In the current global automotive industry,
      vehicle manufacturers generally only engage in assembling but not manufacturing
      non-key automotive parts. Rather, they source these components through a global
      network of suppliers. As a result, only those automotive parts manufacturers
      with large-scale production, advanced technology and the ability of producing
      system modules, can supply their products to vehicle manufacturers directly.
      The
      automotive parts industry in China is fragmented and there are many small
      manufacturers which mainly target the aftermarket. However, there are not many
      companies who have established both nationwide aftermarket sales networks and
      close relationships with leading OEM manufacturers. As the largest commercial
      vehicle air brake system manufacturer in China, the Joint Venture has
      established long-term business relationships with most of the major automobile
      manufacturers in China, such as FAW Group (a.k.a. First Auto Group), Dongfeng
      Motors Group, Beiqi Foton Motor Co., Ltd., Baotou North-Benz Heavy Duty Truck
      Co., Ltd., Anhui Jianghuai Automobile Co., Ltd. In terms of revenues, the
      Company ranks among the top 100 automotive component suppliers in China.
      Management believes that the key success factors in the commercial vehicle
      air
      brake valves segment are product quality, price competitiveness, technical
      expertise and development capability, new product innovation, and reliability
      and timeliness of delivery, which could be gained by recruiting highly qualified
      managers and other employees, developing improved product design capability
      and
      facilities, and maintaining better customer service.





**Domestic
      Competition -** The
      Joint Venture has three major competitors in China: VIE, Weiming and
      CAFF.





·
            China
                VIE Group: Its principal products are main valves and unloader/governors,
                with a majority supplied to OEM’s, such as Anhui Jianghuai Automobile Co.,
                Ltd., and the remaining portion for aftermarket and
                export.





·
            China
                Shandong Weiming Automotive Products Co. Ltd.: This is a joint venture
                with WABCO of Germany, and mainly produces air dryers, and ABS, primarily
                supplying to truck and bus OEM’s such as China Heavy Duty Truck Group
                Corp., Ltd., and some major bus manufacturers in
                China..





·
            Chongqing
                CAFF Automobile Braking and Steering Systems Co., Ltd.: Its main
                products
                are air dryers and main valves. Its principal customer is Chongqing
                Heavy
                Vehicle Group Co., Ltd.





Management
      believes the Company has the following advantages:





·
            Brand
                Name: As China’s largest commercial vehicle air brake valves manufacturer,
                the Joint Venture’s “SORL” brand is widely known in the
                country.





·
            Technology:
                The Joint Venture views technological innovation and leadership as
                the
                critical means to enhance its core competence. It owns a technology
                center, including a laboratory specializing in the research of automotive
                brake controlling technologies and development of air brake system
                products. In 2007, we installed or upgraded computerized automated
                testing
                equipment which ensured high quality of our products.





·
            Product
                Development: Because management believes that products ultimately
                define a
                manufacturing company’s success, we continue to increase our budget for
                research and development activities. Through its international sales
                offices in the US, Australia and the Middle East, the Joint Venture
                is
                able to promptly collect information about the current trends in
                automotive technologies, which in turn is applied to our new product
                development and used to enhance our capacity of providing domestic
                OEMs
                with advanced products. In addition, IT application and strict
                implementation of ISO/TS16949 standards in the development process
                greatly
                shorten the development lead time and improve new product
                quality.





·
            Sales
                Networks: The Joint Venture has contracted with 28 authorized distributors
                covering 7 regions of China. We help train their sales force and
                improve
                their service quality. These authorized distributors in turn channel
                “SORL” products through over 800 sub-distributors throughout
                China.·
            Production
                Management: The Joint Venture continues to improve production methods
                in
                its manufacturing process. This has resulted in reducing the manufacturing
                cycle, reducing waste, enhancing quality consistency and reducing
                production cost.





**International
      Competition -** In the
      international market, our largest competitors are WABCO and Knorr. While
      management believes our current advantage over WABCO and Knorr is
      lower


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pricing,
      management also believes that the Company’s product quality and brand awareness
      are improving. The Joint Venture’s competitive advantages over other competitors
      in the world market are:





·
            Performance-Cost
                Ratio: “SORL” products enjoy a much lower production costs leveraging on
                the low labor costs in China. Through the Company’s improved product line
                as a result of technology and manufacturing improvements, the Joint
                Venture products’ performance-cost advantage is
                increasing.





·
            Quick
                Adaptation to Local Market: Through its international sales channels
                in
                the US, Australia and Middle East, the Joint Venture has been able
                to
                respond to local market needs.





·
            Diversified
                Auto Products: In addition to its air brake valve products, to fully
                support existing export customers, the Joint Venture also distributes
                a
                wide range of non-valve products which are sourced from the Ruili
                Group.
                This reduces customers’ transaction
                costs.





**SALES
      AND MARKETING**





To
      further increase our market share, in 2007, the Joint Venture expanded its
      sales
      force to strengthen its sales and marketing efforts. As a result, the headcount
      for domestic (PRC) sales and international sales increased to 35 and 37,
      respectively, from 27 and 30. Products are sold under the “SORL” trademark which
      the Joint Venture licenses on a royalty free basis from the Ruili Group. The
      license expires in 2012.





In
      China,
      the commercial vehicle air brake valve market can be divided into 2 segments:
      OEM market and aftermarket.





**OEM
      Market -** In 2007,
      the number of the Joint Venture’s OEM customers increased to 51 from 39 in 2006,
      with the expansion of its business into the municipal bus market. Most of these
      OEM customers have established long-term relationships with the Joint Venture.
      Normally, annual sales contracts with key customers are signed at the beginning
      of the calendar year and are revised as needed.


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According
      to China Association of Automobile Manufacturers, the unit production of the
      Chinese heavy duty vehicle and medium vehicle sectors including completive
      truck, chassis and semi-trailer, grew over 43.3% in 2007 as compared to
      2006. The
      Joint Venture has successfully expanded its production capacity so that it
      is
      able to utilize the opportunity to increase its sales to the OEM market by
      $14.1
      million or 52% for the year ended December 31, 2007, as compared to the year
      ended December 31, 2006. Such sales growth is the result of its enlarged
      customer base and the increasing orders from its existing major
      customers.





**Aftermarket
      -** The
      Joint Venture’s products are also sold in the aftermarket for replacement
      purposes. With the rapid growth of commercial vehicles output in recent years
      and the increasing number of vehicles on the road, demand for replacement parts
      has become stronger. Currently, the Company has 28 authorized distributors
      covering 7 regions nationwide. These distributors sell only the Joint Ventures
      and the Ruili Group’s products under the “SORL” trademark to over 800
      distributors. The Joint Venture provides product technical services to these
      distributors. The Joint Venture also conducts periodic performance evaluations,
      and reserves the right to terminate the distributorship of those with frequent
      delinquencies or poor sales records, and to replace them by other selected
      firms. For 2007, the Company achieved total revenue of $31.1 million in domestic
      aftermarket sales, an increase of 30.3%% from 2006.





**International
      Markets -** .
      The
      Joint Venture sells products to over 81 countries and has signed agreements
      with
      four distributors in UAE, Australia, and USA, sent its engineers to India to
      support its sales to the local OEMs. We also actively participate in
      international trade shows at Paris, Dubai,Las Vegas, Guangzhou, and Beijing
      to
      update our knowledge on automobile technology and local market trends and to
      acquire new customers and new orders.





**DISTRIBUTION**





The
      Joint
      Venture ships finished products directly to OEM customers. The products are
      distributed to aftermarket customers in China through a network of 28 authorized
      distributors, who also function as the distribution centers for their respective
      regions. Shipments are delivered directly to international
      customers.





**INTELLECTUAL
      PROPERTY AND INNOVATION CAPACITY**





The
      Joint
      Venture currently employs 68 technical staff members, including 43 holding
      Engineer or Senior Engineer qualifications. Among which, 3 staff members are
      for
      technological information, 41 for new product development and technique
      designing, 9 for measurement and testing, 6 for MIS and the other nine persons
      are quality management engineers.


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In
      addition to its in-house technical force, the Joint Venture has cooperation
      arrangements with leading universities in automotive engineering industry,
      including:





·
            Tongji
                University at Shanghai and Harbin Institute of Technology: Contract
                for
                co-development of electronic control braking system and automotive
                master
                cable technology; and





·
            Tsinghua
                University E-Tech Technology Co., Ltd. and Zhejiang University: Contract
                for MIS projects, including the development of application software
                for
                product design innovation and production
                management.





Pursuant
      to the arrangements with these universities, we have priority rights to acquire
      the intellectual property which is developed. The financial arrangements as
      to
      amount and terms of payment vary depending on the type of project. Normally,
      we
      make an initial payment in the form of a research grant and then negotiate
      a
      payment upon development of the technology.





We
      also
      consult with the technical staff of the Ruili Group from time to time on a
      no-cost basis. We collaborate with other industry research groups such as the
      research centers of FAW Group and Dongfeng Group.





Capitalizing
      on these resources, we have successfully developed innovative products and
      technologies such as a new type of clutch servo with sensor ; a combined air
      dryer with build-in temperature-control device and unloader; and an inner-breath
      spring chamber which enables internal air circulation.





The
      Joint
      Venture owns a full range of processing equipment required for development
      of
      new auto part products, including machines for molding, die casting and cutting
      processes. Furthermore, the Joint Venture is capable of designing and making
      over 90% of the technical devices such as tools, jigs and molds that are
      required for producing prototypes. In addition, the partnership with Tsinghua
      University and Zhejiang University in developing software for application in
      new
      product design system has resulted in substantial savings in the cycle time
      for
      new product development.




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**Patented
      Technologies**


We
      have
      reinforced our R&D efforts on patented products. Currently the Joint Venture
      owns 12 utility patents and has filed applications for 6 other patents in China
      and an additional three in the U.S.





**Know-how**





Based
      on
      the many years of manufacturing experience, the Joint Venture has accumulated
      a
      substantial amount of know-how. For instance, the special formula for aluminum
      alloy acquired over years of repeating tests considerably improves the
      compactness of alloy, hence the strength of casting. The Joint Venture also
      possesses a confidential “protection film” processing technique to enhance the
      sealability of products.





Currently,
      the Joint Venture endeavors to establish and master a lean production system.
      The new system has begun to come into effect. Also, in order to ensure the
      high
      quality of our products, the Joint Venture has successfully replaced the
      traditional testing method with computerized testing systems and obtained the
      capacity for online quality testing.





The
      Joint
      Venture has taken numerous steps to protect its proprietary technologies.
      Specific staff is assigned to safe keep documents and filings. Critical
      employees are required to sign a confidentiality agreement with the Joint
      Venture.





**Trademarks**





Our
      principal trademark is “SORL” which we license on a non-exclusive royalty free
      basis from the Ruili Group. The license currently expires in 2012 and we have
      an
      agreement with the Ruili Group that the license will be extended if the
      trademark registration for the trade name is extended. The Ruili Group has
      obtained a registration for “SORL” from the World Intellectual Property
      Organization and, in 2007, registered the trademark in US.





**PRODUCTION**





The
      Joint
      Venture owns the largest commercial vehicle air brake valve products
      manufacturing base in China. During the 2007 fiscal year , the Joint Venture
      added 65 CNC machines, 11 die casting machines, and 15 units of other machines.
      Meanwhile, the
      Joint
      Venture re-deployed and streamlined its production / assembly lines, enabling
      it
      to rapidly expand its production capacity to meet increasing market demands
      for
      its products. The production process includes fixture, jig and die making,
      aluminum alloy die casting, metal sheet stamping, numerical control cutting,
      melding, numerical control processing, surface treatment, filming,
      rubber/plastic processing, final assembly and


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packaging.
      The Joint Venture possesses state-of-the-art manufacturing and testing
      facilities sourced from the US, Korea, Taiwan as well as mainland China,
      including CNC processing centers, CNC lathes, casting, stamping and cutting
      machines, automatic spraying and electroplating lines, cleaning machines,
      automatic assembly lines and 3D COMERO and projectors, etc.





In
      September 2007, the Joint Venture purchased land rights, a manufacturing plant
      and office building with a total floor area of 712,333 square feet, from Ruili
      Group Co., Ltd.. The Joint Veture previously leased part of the facility from
      Ruili and occupied approximately 50% of it. As a result of this transaction,
      the
      additional production space is expected to meet the Company’s growth demand for
      the next few years.





**ENVIRONMENT**





In
      2006,
      we were granted the certification of ISO14001 on environmental management and
      OHSAS18001 on health and safety management, which reflected the Company’s
      commitment to workplace safety, health and environmental protection. The Joint
      Venture carries out staff training to enhance awareness of environment
      protection. It effects controls from the beginning to adopt environment friendly
      production, reducing or preventing pollution, as well as saving energy
      consumption and manufacturing costs. For example, intensity of noise is listed
      as one of the criteria in the selection of new equipment; Waste water is stored,
      purified and recycled in the production process; and compressing machines are
      used in disposal of aluminum and steel scraps, thereby saving both storage
      space
      and power consumption.





**RAW
      MATERIALS**





Raw
      materials used by the Joint Venture in the manufacture of its products primarily
      include steel, aluminum, other metals, rubber and various
      components.





All
      of
      the materials used are generally readily available from numerous sources. We
      have not, in recent years, experienced any significant shortages of manufactured
      components or raw materials and normally do not carry inventories of these
      items
      in excess of what is reasonably required to meet our production and shipping
      schedules. Critical raw materials are generally sourced from at least two or
      more vendors to assure adequate supply and price competition. The Joint Venture
      maintains relationships with over twenty material suppliers. In 2007, the three
      largest suppliers are Shanghai
      Jinshi Materials Co., Ltd, Shanghai Lutie Metal Trading Co., Ltd. and Shanghai
      Jingutong Industry  Development
      Co.,Ltd, which together accounted for 26.4% of the aggregate of raw materials
      we
      purchased.


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When
      planning a purchase order, with such other terms as quality, delivery and credit
      terms being substantially the same, the Joint Venture compares prices quoted
      by
      different suppliers in an attempt to receive the lowest price. In order to
      secure a purchase price and subsequently a predictable cost of sales, the Joint
      Venture generally makes a down payment to suppliers.





Normally,
      the annual purchase plan for raw materials, such as aluminum ingot and steel
      sheet, is determined at the beginning of the calendar year according to our
      OEM
      customer’s orders and our own forecast for the aftermarket and international
      sales. Such purchase plans with key suppliers can be revised quarterly. Our
      actual requirements are based on monthly production plans. Management believes
      that this arrangement prevents us from having excess inventory when the orders
      from customers change.





For
      raw
      materials other than steel and aluminum, we normally maintain from five to
      seven
      days of inventory at our warehouse.





**STRATEGIC
      PLAN**





The
      Joint
      Venture’s strategic plan is to enhance its core competences, maintain steady
      business growth and increase its market share both in China and internationally.
      In anticipation of a possible slowdown in the global economy in 2008, the Joint
      Venture plans to adjust its sales growth rate and its product portfolio and
      to
      improve profitability through the following:




·
            FOCUS
              ON QUALITY CONTROL AND COST REDUCTION. We believe that our products
              offer
              higher quality compared with our competitors in the commercial vehicle
              air
              brake valve market in China, and a superior performance-cost advantage
              in
              the international market. To sustain this competitive advantage and
              at the
              same time obtain higher profit margins, the Joint Venture, based on
              its
              efficient manufacturing base in China, plans to continue focusing on
              quality control and cost reduction, including, for example, reduction
              in
              spoilage and improvement in manufacturing techniques.·
            IMPLEMENT
              THE BRAND STRATEGY. The Joint Venture plans to focus efforts on promotion
              of the “SORL” brand name based on technological innovation.·
            INVEST
                IN NEW PRODUCT DEVELOPMENT. We are investing in the development of
                such
                new products as electronic braking system which our management believes
                has significant market potential.





·
            EXPAND
                PRODUCTION FACILITIES TO MEET FURTHER DEMANDS. Anticipating the increasing
                demands for our products, management plans to acquire new facilities
                and
                procure new equipment, and also to increase the Joint Venture’s sales
                force.





·
            FURTHER
                EXPANSION IN THE INTERNATIONAL MARKET. During 2007, the Joint Venture
                achieved approximately 28.1% growth in export sales, which accounted
                for
                37.5% of total sales for the year. Management believes our products
                are
                competitive in the international market. We plan to set up additional
                authorized sales distributors internationally. We also plan to actively
                seek strategic partnerships with international distributors and
                manufacturers.





·
            EXPAND
                THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS. We are exploring
                opportunities to create long-term growth through new joint ventures
                or
                acquisitions of other automotive parts manufacturers in China, and
                of auto
                parts distributors or repair factories with established sales networks
                outside of China. We will seek synergistic acquisition targets which
                can
                be easily integrated into our product manufacturing and corporate
                management, or companies that have strong joint-venture partners
                that
                would become major customers.





**DOING
      BUSINESS IN CHINA**





**CHINA’S
      ECONOMY**





Management
      believes that the most important factor to understand the Chinese automobile
      industry is the country’s rapid economic growth. According to China’s Statistics
      Bureau, China’s GDP growth rate for 2005, 2006 and 2007 was 9.9%, 11.1% and
      11.4% respectively.





One
      of
      the most important goals for Chinese macro-economic development in 2008 is
      to
      strike a balance between economic development and inflation control. According
      to a Chinese government report, the government set its 2008 goal for GDP growth
      at 8 percent and CPI inrease at about 4.8 percent.




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**THE
      CHINESE LEGAL SYSTEM**


The
      practical effect of the People’s Republic of China legal system on our business
      operations in China can be viewed from two separate but intertwined
      considerations. First, as a matter of substantive law, the Foreign Invested
      Enterprise laws provide significant protection from government interference.
      In
      addition, these laws guarantee the full enjoyment of the benefits of corporate
      Articles and contracts to Foreign Invested Enterprise participants. These laws,
      however, do impose standards concerning corporate formation and governance,
      which are not qualitatively different from the general corporation laws of
      the
      several states. Similarly, the People’s Republic of China accounting laws
      mandate accounting practices, which are not consistent with US Generally
      Accepted Accounting Principles. The China accounting laws require that an annual
      “statutory audit” be performed in accordance with People’s Republic of China
      accounting standards and that the books of account of Foreign Invested
      Enterprises are maintained in accordance with Chinese accounting
      laws.





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





**ECONOMIC
      REFORM ISSUES**





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





·
            We
                will be able to capitalize on economic
                reforms;





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





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





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





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





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





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





**EMPLOYEES
      AND EMPLOYMENT AGREEMENTS**





The
      Company currently employs 2,005 employees, all of whom are employed full time:
      53 for quality control, 68 technical staff, 72 sales and marketing staff, 1,765
      production workers and 47 administrative staff. There are employment agreements
      with all of the employees whereby administrative staff workers agree to three
      years of employment and hourly workers agree to three years. Employment
      contracts with all employees comply with relevant laws and regulations of
      China.





The
      Joint
      Venture is subject to the Sino-foreign Equity Joint Venture Enterprise Labour
      Management Regulations. In compliance with those regulations, the Joint
      Venture’s management may hire and discharge employees and make other
      determinations with respect to wages, welfare, insurance and discipline of
      employees. The Joint Venture has, as required by law, established special funds
      for


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enterprise
      development, employee welfare and incentives, as well as a general reserve.
      In
      addition, the Joint Venture is required to provide its employees with facilities
      sufficient to enable the employees to carry out trade union
      activities.




**DESCRIPTION
      OF THE JOINT VENTURE**





**General**





The
      Joint
      Venture was established on January 17, 2004 pursuant to the terms of a Joint
      Venture Agreement with the Ruili Group. Below is a description of the material
      terms of the Joint Venture.





**Management
      of the Joint Venture**





Pursuant
      to the terms of the Joint Venture Agreement, the Board of Directors of the
      Joint
      Venture consists of three directors; we have the right to designate two members
      of the board and the Ruili Group has the right to designate one member and
      we
      have the authority to appoint the Chairman of the Board. The majority of the
      Board has decision-making authority with respect to operating matters. As a
      result, we maintain operating control over the Joint Venture. However, at this
      time, our two senior executives, Messrs. Xiao Ping Zhang and Xiao Feng Zhang
      are
      the founders of the Ruili Group, and therefore there is limited independence
      between the two entities. The term of the Joint Venture will expire on March
      4,
      2019 although we anticipate that we will be able to extend such term. Extension
      of the agreement will be subject to negotiation with the Ruili Group and
      approval of the Chinese government.





**JV
      DISTRIBUTION OF PROFITS**





After
      provision for social welfare funds for employees and provision for taxation,
      the
      profits, if any, of the Joint Venture will be available for distribution to
      the
      parties in proportion to their respective capital contributions. Any such
      distributions must be authorized by the Joint Venture’s Board of Directors. To
      date, the Joint Venture has not distributed any profits and does not anticipate
      doing so for the near term.




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**JV
      ASSIGNMENT OF INTEREST**




Any
      assignment of an interest in the Joint Venture must be approved by the Chinese
      government. The Chinese joint venture laws also provide for preemptive rights
      and the consent of the other joint venture party for any proposed assignments
      by
      one party to a third party.





**JV
      LIQUIDATION**





Under
      the
      Chinese joint venture laws, the Joint Venture may be liquidated in certain
      limited circumstances, including expiration of the ten-year term or any term
      of
      extension, the inability to continue operations due to severe losses, force
      majeure, or the failure of a party to honor its obligations under the joint
      venture agreement or the Articles Of Association in such a manner as to impair
      the operations of the joint venture. The Chinese joint venture laws provide
      that, upon liquidation, the net asset value (based on the prevailing market
      value of the assets) of a joint venture shall be distributed to the parties
      in
      proportion to their respective registered capital in the joint
      venture.





**JV
      RESOLUTION OF DISPUTES**





In
      the
      event of a dispute between the parties, attempts will be made to resolve the
      dispute through friendly consultation or mediation. In the absence of a friendly
      resolution, the parties have agreed that the matter will first be referred
      to
      the China International Economic and Trade Arbitration Commission in Beijing,
      whose decisions are final and enforceable in Chinese courts.





**JV
      EXPROPRIATION**





The
      Chinese joint venture laws provide that China will not nationalize or
      requisition enterprises in which foreign funds have been invested. However,
      under special circumstances, when public interest requires, enterprises with
      foreign capital may be legally requisitioned and appropriate compensation will
      be made.





**ITEM
      1A.  RISK FACTORS**





Our
      business faces many risks. The risks described below may not be the only risks
      we face. Additional risks that we do not yet know of, or that we currently
      think
      are immaterial, may also impair our business operations or financial results.
      If
      any of the events or circumstances described in the following risks actually
      occurs, our business, financial condition or results of operations could suffer
      and the trading price of our common stock could decline.


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***Our
      ability to effectively implement our business strategy depends upon, among
      other
      factors, the successful recruitment and retention of additional highly skilled
      and experienced management and other key personnel and we cannot assure that
      we
      will be able to hire or retain such employees.***





We
      must
      attract recruit and retain a sizeable workforce of technically competent
      employees. Our ability to effectively implement our business strategy will
      depend upon, among other factors, the successful recruitment and retention
      of
      additional highly skilled and experienced management and other key personnel.
      These individuals are difficult to find in China and as the economy in China
      expands, there is increasing competition for skilled workers. We cannot assure
      that we will be able to find, hire or retain such employees, or even if we
      are
      able to so hire such employees, that the financial costs therefrom will not
      adversely affect our net income.





***Certain
      of our officers and directors have existing responsibilities to other businesses
      in addition to our company and as a result, conflicts of interest between us
      and
      the other activities of those persons may occur from time to
      time.***





Certain
      persons serving as our officers and directors have existing responsibilities
      and, in the future, may have additional responsibilities, to provide management
      and services to other entities in addition to us. In particular, Mr. Xiao Ping
      Zhang, our Chief Executive Officer, and Mr. Xiao Feng Zhang, our Chief Operating
      Officer, are officers and principal stockholders of Ruili Group Co. Ltd. which
      is engaged in the development, production and sale of various kinds of
      automotive parts as well as operating a hotel property and investing in the
      development of real property in China. The management of our joint venture
      is
      shared with the Ruili Group and therefore there may exist conflicts of interest
      between us and the Ruili Group in connection with its operation. Our joint
      venture agreement provides that the Board of Directors of the Joint Venture
      is
      comprised of three persons, two of whom are appointed by us. However, at the
      present time our two senior executives, Messrs, Xiao Ping Zhang and Xiao Feng
      Zhang are the founders of and employed at the Ruili Group. Therefore, the Ruili
      Group exercises considerable control over the Joint Venture. There can be no
      assurance that in the event of a conflict between us and the Ruili Group that
      the operations of the Joint Venture and our interests in the Joint Venture
      will
      not be adversely affected or that our Company’s interests will always be fairly
      represented. The Ruili Group also provides certain services to the Company
      in
      the form of bank guaranties, licensing of certain technology. The Ruili Group
      also sells to us certain non-valve products which allow us to fill out our
      product lines which in 2007 represented approximately 23.0% of our sales. As
      a
      result, conflicts of interest between us and the other activities of those
      persons may occur from time to time. Our officers and directors are accountable
      to us and our shareholders as fiduciaries, which requires that such officers
      and
      directors exercise good faith and integrity in handling our affairs. However,
      the existing responsibilities limit the amount of time such officers and
      directors can spend on our affairs.


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***We
      are and will continue to be under downward pricing pressures on our products
      from our customers and competitors which may adversely affect our growth, profit
      margins and net income.***





We
      face
      continuing downward pricing pressure from our customers and competitors,
      especially in the sales of replacement parts. To retain our existing customers
      and gain new ones, we must continue to keep our unit prices low. In view of
      our
      need to maintain low prices on our products, our growth, profit margins and
      net
      income will suffer if we cannot effectively continue to control our
      manufacturing and other costs.





***Our
      contracts with our customers are generally short-term and do not require the
      purchase of a minimum amount, which may result in periods of time during which
      we have limited orders for our products.***





Our
      customers generally do not provide us with firm, long-term volume purchase
      commitments. Although we enter into manufacturing contracts with certain of
      our
      customers who have continuing demand for a certain product, these contracts
      state terms such as payment method, payment period, quality standards and
      inspection and similar matters rather than provide firm, long-term commitments
      to purchase products from us. As a result of the absence of long term contracts,
      we could have periods during which we have no or only limited orders for our
      products, but will continue to have to pay the costs to maintain our work force
      and our manufacturing facilities and to service our indebtedness without the
      benefit of current revenues.





***We
      consistently face short lead times for delivery of products to customers.
      Failure to meet delivery deadlines in our production agreements could result
      in
      the loss of customers and damage to our reputation and
      goodwill.***





We
      enter
      into production agreements with our customers prior to commencing production,
      which reduces our risk of cancellations. However, these production agreements
      typically contain short lead times for delivery of products, leading to
      production schedules that can strain our resources and reduce our profit margins
      on the products produced. Although we have increased our manufacturing capacity,
      we may lack sufficient capacity at any given time to meet all of our customers’
demands if they exceed the production capacity of levels. We strive for rapid
      response to customer demand, which can lead to reduced purchasing efficiency
      and
      increased material costs. If we are unable to sufficiently meet our customers’
demands, we may lose our customers. Moreover, failure to meet customer demands
      may impair our reputation and goodwill.




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***Because
      of the short lead times in our production agreements, we may not be able to
      accurately or effectively plan our production or supply
      needs.***




We
      make
      significant decisions, including determining the levels of business that we
      will
      seek and accept, production schedules, component procurement commitments,
      facility requirements, personnel needs, and other resource requirements, based
      on our production agreements with our customers. Short lead times of our
      customers’ commitments to their own customers and the possibility of rapid
      changes in demand for their products reduce our ability to estimate accurately
      the future requirements of those customers for our products. Because many of
      our
      costs and operating expenses are fixed, a reduction in customer demand can
      harm
      our gross margins and operating results. We may also occasionally acquire raw
      materials without having customer orders based on a customer’s forecast or in
      anticipation of an order and to secure more favorable pricing, delivery or
      credit terms in view of the short lead times we often have under our customers’
orders. These purchases can expose us to losses from inventory carrying costs
      or
      inventory obsolescence.





***Our
      operations depend highly on Messrs. Xiao Ping Zhang, our Chief Executive
      Officer, and Xiao Feng Zhang, our Chief Operating Officer, and a small number
      of
      other executives and the loss of any such executive could adversely affect
      our
      ability to conduct our business.***





The
      success of our operations depends greatly on a small number of key managers,
      particularly, Messrs. Xiao Ping Zhang and Xiao Feng Zhang. The loss of the
      services of either Mr. Zhang, or any of the other senior executives could
      adversely affect our ability to conduct our business. Even if we are able to
      find other managers to replace any of these managers, the search for such
      managers and the integration of such managers into our business will inevitably
      occur only over an extended period of time. During that time the lack of senior
      leadership could affect adversely our sales and manufacturing, as well as our
      research and development efforts.





***We
      may not be able to effectively respond to rapid growth in demand for our
      products and of our manufacturing operations which could adversely affect our
      customer relations and our growth prospects.***





If
      we
      continue to be successful in obtaining rapid market growth of our products,
      we
      will be required to deliver large volumes of quality products to customers
      on a
      timely basis at a reasonable cost to those customers. Meeting such increased
      demands will require us to expand our manufacturing facilities, to increase
      our
      ability to purchase raw materials, to increase the size of our work force,
      to
      expand our quality control capabilities and to increase the scale upon which
      we
      produce products. Such demands would require more capital and working capital
      than we currently have available.




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***We
      extend relatively long payment terms for accounts receivable which can adversely
      affect our cash flow.***




As
      is
      customary in China, we currently extend relatively long payment terms to certain
      of our China based customers (generally 90-180 days for our OEM customers and
      60-90 days for our aftermarket customers). As a result of the size of many
      of
      our orders, these extended terms adversely affect our cash flow and our ability
      to fund our operations out of our operating cash flow. In addition, the reserves
      we establish for our receivables may not prove to be adequate in view of actual
      levels of bad debts. The failure of our customers to pay us timely would
      negatively affect our working capital, which could in turn adversely affect
      our
      cash flow.





Our
      customers often place large orders for products, requiring fast delivery, which
      impacts our working capital. If our customers do not incorporate our products
      into their products and sell them in a timely fashion, for example, due to
      excess inventories, sales slowdowns or other issues, they may not pay us in
      a
      timely fashion, even on our extended terms. This failure to pay timely may
      defer
      or delay further product orders from us, which may adversely affect our cash
      flows, sales or income in subsequent periods.





***We
      may not be able to finance the development of new products which could
      negatively impact our competitiveness.***





Our
      future operating results will depend to a significant extent on our ability
      to
      continue to provide new products that compare favorably on the basis of cost
      and
      performance with the products of our competitors. Some of our competitors have
      design and manufacturing capabilities and technologies that compete well with
      our products, particularly in markets outside of China. We are currently
      conducting research and development on a number of new products, activities
      requiring a substantial outlay of capital. To remain competitive, we must
      continue to incur significant costs in product development, equipment,
      facilities and invest in research and development of new products. These costs
      may increase, resulting in greater fixed costs and operating expenses. All
      of
      these factors create pressures on our working capital and ability to fund our
      current and future manufacturing activities and the expansion of our
      business.





***We
      receive a significant portion of our revenues from a small number of customers
      which may make it difficult to negotiate attractive prices for our products
      and
      exposes us to risks of substantial losses if we lose certain of these
      customers.***





Although
      no customer individually accounted for more than 8 % of our revenues for the
      fiscal year ended December 31, 2007, our three largest customers accounted
      for
      approximately 18.2% and 15.2% of our revenues in 2007 and 2006 respectively.
      Dependence on a few customers could make it


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difficult
      to negotiate attractive prices for our products and could expose us to the
      risk
      of substantial losses if a single dominant customer stops purchasing our
      products.





***Our
      business depends on our ability to protect and enforce our intellectual property
      effectively which may be difficult particularly in
      China.***





The
      success of our business depends in substantial measure on the legal protection
      of proprietary rights in technology we hold. We hold 12 patents in China,have
      filed applications for 6 others in China and an additional three in the U.S..
      We
      claim proprietary rights in various unpatented technologies, know-how, trade
      secrets and trademarks relating to products and manufacturing processes. We
      protect our proprietary rights in our products and operations through
      contractual obligations, including nondisclosure agreements. If these
      contractual measures fail to protect our proprietary rights, any advantage
      those
      proprietary rights provide us would be negated. Monitoring infringement of
      intellectual property rights is difficult, and we cannot be certain that the
      steps we have taken will prevent unauthorized use of our intellectual property
      and know-how, particularly in China and other countries in which the laws may
      not protect our proprietary rights as fully as the laws of the United States.
      Accordingly, other parties, including competitors, may duplicate our products
      using our proprietary technologies. Pursuing legal remedies against persons
      infringing our patents or otherwise improperly using our proprietary information
      is a costly and time consuming process that would divert management’s attention
      and other resources from the conduct of our other business, and could cause
      delays and other problems with the marketing and sales of our products, as
      well
      as delays in deliveries.





***It
      may be difficult to find or integrate acquisitions which could have an adverse
      effect on our expansion plans.***





An
      important component of our growth strategy is to invest in or acquire companies
      such as other automotive parts manufacturers and distribution companies. We
      may
      be unable to identify suitable investment or acquisition candidates or to make
      these investments or acquisitions on a commercially reasonable basis, if at
      all.
      If we complete an investment or acquisition, we may not realize the anticipated
      benefits from the transaction.





Integrating
      an acquired company is complex, distracting and time consuming, as well as
      a
      potentially expensive process. The successful integration of an acquisition
      would require us to:





·
            integrate
                and retain key management, sales, research and development, and other
                personnel;





·
            incorporate
                the acquired products or capabilities into our offerings both from
                an
                engineering and sales and marketing
                perspective;





·
            coordinate
                research and development efforts;





·
            integrate
                and support pre-existing supplier, distribution and customer
                relationships; and





·
            consolidate
                duplicate facilities and functions and combine back office accounting,
                order processing and support
                functions.





The
      geographic distance between the companies, the complexity of the technologies
      and operations being integrated and the disparate corporate cultures being
      combined may increase the difficulties of combining an acquired company.
      Acquired businesses are likely to have different standards, controls, contracts,
      procedures and policies, making it more difficult to implement and harmonize
      company-wide financial, accounting, billing, information and other systems.
      Management’s focus on integrating operations may distract attention from our
      day-to-day business and may disrupt key research and development, marketing
      or
      sales efforts.




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





The
      automobile parts industry is a highly competitive business. Criteria for our
      customers and potential customers include:





·
            Quality;





·
            Price/cost
                competitiveness;





·
            Product
                performance;





·
            Reliability
                and timeliness of delivery;





·
            New
                product and technology development
                capability;





·
            Degree
                of global and local presence;





·
            Effectiveness
                of customer service; and





·
            Overall
                management capability.





Depending
      on the particular product market (OEM or aftermarket) and geographic market,
      the
      number of our competitors varies significantly. Many of our competitors have
      substantially greater revenues and financial resources than we do, as well
      as
      stronger brand names, consumer recognition, business relationships with vehicle
      manufacturers, and geographic presence than we have, especially where we intend
      to enter a new geographic market. We may not be able to compete favorably and
      increased competition may substantially harm our competitive
      position.





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





***A
      disruption at our sole manufacturing site would significantly interrupt our
      production capabilities, which could have drastic consequences to us, including
      threatening our financial viability.***





We
      currently manufacture all of our products at our sole commercial manufacturing
      facility, which is located near Ruian City, Wenzhou, Zhejiang Province, People’s
      Republic of China. Accordingly, we face risks inherent in operating a single
      manufacturing facility, since any disruption, such as a fire, or natural
      disaster, could significantly interrupt our manufacturing capability.
      We


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currently
      do not have alternative production plans in place or disaster-recovery
      facilities available. In case of a disruption, we will have to establish
      alternative manufacturing sources. This would require substantial capital on
      our
      part, which we may not be able to obtain on commercially acceptable terms or
      at
      all. Additionally, we would likely experience months or years of production
      delays as we build or locate replacement facilities and seek and obtain
      necessary regulatory approvals. If this occurs, we will be unable to satisfy
      customer orders on a timely basis, if at all. Also, operating any new facilities
      may be more expensive than operating our current facility. For these reasons,
      a
      significant disruptive event at our manufacturing facility could have drastic
      consequences on us, including threatening our financial viability.





***The
      cyclical nature of commercial vehicle production and sales could result in
      a
      reduction in automotive sales, which could adversely affect our financial
      liquidity.***





Our
      sales
      to OEMs depend on automotive commercial vehicle production and sales by our
      customers, which are highly cyclical and affected by general economic conditions
      and other factors, including consumer spending and preferences. They also can
      be
      affected by government policies, labor relations issues, regulatory
      requirements, and other factors. In addition, in the last two years, the price
      of commercial vehicles in China has generally declined. As a result, the volume
      of commercial vehicle production in China has fluctuated from year to year,
      which cause fluctuations in the demand for our products.





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





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





***Longer
      product life of parts may reduce aftermarket demand for some of our
      products.***





In
      2007,
      approximately 64% of our sales were to the aftermarket. The average useful
      life
      of original equipment parts has been steadily increasing in recent years due
      to
      improved quality and innovations in products and technologies. The longer
      product lives allow vehicle owners to replace parts of their vehicles less
      often. Additional increases in the average useful life of automotive parts
      are
      likely to adversely affect the demand for our aftermarket
      products.


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





We
      face
      an inherent business risk of exposure to product liability and warranty claims
      if our products actually or allegedly fail to perform as expected or the use
      of
      our products results, or is alleged to result, in bodily injury and/or property
      damage. We have not obtained product liability insurance and therefore may
      be
      exposed to potential liability without any insurance. We cannot ensure you
      that
      we will not incur significant costs to defend these claims or that we will
      not
      experience any product liability losses in the future. In addition, if any
      of
      our designed products are or are alleged to be defective, we may be required
      to
      participate in a recall of such products. We cannot assure you that the future
      costs associated with providing product warranties and/or bearing the cost
      of
      repair or replacement of our products will not have an adverse effect on our
      financial condition and liquidity.





***We
      are subject to environmental and safety regulations, which may increase our
      compliance costs.***





We
      are
      subject to the requirements of environmental and occupational safety and health
      laws and regulations in China and other countries where we sell our products.
      To
      the extent that we expect to expand our operations into other geographic areas,
      we will become subject to such laws and regulations of those countries as well.
      We cannot provide assurance that we have been or will be at all times in full
      compliance with all of these requirements, or that we will not incur material
      costs or liabilities in connection with these requirements. The capital
      requirements and other expenditures that may be necessary to comply with
      environmental requirements could increase and become a material expense of
      doing
      business.





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





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




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***Our
      commercial viability depends significantly on our ability to operate without
      infringing the patents and other proprietary rights of third
      parties.***




In
      the
      event that our technologies infringe or violate the patent or other proprietary
      rights of third parties, we may be prevented from pursuing product development,
      manufacturing or commercialization of our products that utilize such
      technologies. There may be patents held by others of which we are unaware that
      contain claims that our products or operations infringe. In addition, given
      the
      complexities and uncertainties of patent laws, there may be patents of which
      we
      know that we may ultimately be held to infringe, particularly if the claims
      of
      the patent are determined to be broader than we believe them to be. As a result,
      avoiding patent infringement may be difficult.




***If
      a third party claims that we infringe its patents, any of the following may
      occur:***





·
            we
                may become liable for substantial damages for past infringement if
                a court
                decides that our technologies infringe upon a competitor’s
                patent;





·
            a
                court may prohibit us from selling or licensing our product without
                a
                license from the patent holder, which may not be available on commercially
                acceptable terms or at all, or which may require us to pay substantial
                royalties or grant cross-licenses to our patents;
                and





·
            we
                may have to redesign our product so that it does not infringe upon
                others’
                patent rights, which may not be possible or could require substantial
                funds or time.





In
      addition, employees, consultants, contractors and others may use the trade
      secret information of others in their work for us or disclose our trade secret
      information to others. Either of these events could lead to disputes over the
      ownership of inventions derived from that information or expose us to potential
      damages or other penalties. If any of these events occurs, our business will
      suffer and the market price of our common stock will likely
      decline.





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





Our
      long-term business strategy relies on the expansion of our international sales
      outside China by targeting markets, such as Europe and the United States. Risks
      affecting our international expansion include challenges caused by distance,
      language and cultural differences, conflicting and changing laws and
      regulations, 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


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could
      harm our international expansion efforts, which could in turn materially and
      adversely affect our business, operating results and financial
      condition.





***If
      we cannot continue to satisfy the Nasdaq Global Market’s listing maintenance
      requirements and other Nasdaq rules, our common stock could be delisted, which
      could negatively affect the price of our ordinary shares and your ability to
      sell them.***





In
      order
      to maintain our listing on the Nasdaq Global Market, we will be required to
      comply with Nasdaq rules which include rules regarding minimum shareholders’
equity, minimum share price, and certain corporate governance requirements.
      We
      may not be able to continue to satisfy the listing maintenance requirements
      of
      the Nasdaq Global Market and other applicable Nasdaq rules. If we are unable
      to
      satisfy the Nasdaq criteria for maintaining listing, our common stock could
      be
      subject to delisting. If our common stock is delisted, trading, if any, of
      our
      common stock would thereafter be conducted in the over-the-counter market,
      in
      the so-called “pink sheets” or on the National Association of Securities
      Dealers, Inc.’s “electronic bulletin board.” As a consequence of any such
      delisting, our share price could be negatively affected and our stockholders
      would likely find it more difficult to dispose of, or to obtain accurate
      quotations as to the prices of, our common stock.





***We
      do not intend to pay dividends on shares of our common stock in the foreseeable
      future.***





We
      have
      never paid cash dividends on our common stock. Our current Board of Directors
      does not anticipate that we will pay cash dividends in the foreseeable future.
      Instead, we intend to retain future earnings for reinvestment in our business
      and/or to fund future acquisitions. Determination of net income under PRC
      accounting standards and regulations may differ from determination under U.S.
      GAAP in significant aspects, such as the use of different principles for
      recognition of revenues and expenses. Under PRC law, our PRC joint venture
      is
      required to set aside a portion of its net income each year to fund designated
      statutory reserve funds.





**Risks
      Related to Doing Business in China**





We
      operate from facilities that are located in China. Our principal operating
      subsidiary, Ruili Group Ruian Auto Parts Co., Ltd., is a sino-foreign joint
      venture organized under the laws of the PRC.




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***Changes
      in China’s political and economic policies and conditions could cause a
      substantial decline in the demand for our products and
      services.***




Historically,
      we have derived a substantial portion of our revenues from China. We anticipate
      that China will continue to be our primary production and an important sales
      base in the near future and currently almost all of our assets are located
      in
      China. While the PRC government has pursued economic reforms to transform its
      economy from a planned economy to a market-oriented economy since 1978, a large
      part of the PRC economy is still being operated under varying degrees of control
      by the PRC government. By imposing industrial policies and other economic
      measures, such as restrictions on lending to certain sectors of the economy,
      control of foreign exchange, taxation and restrictions on foreign participation
      in the domestic market of various industries, the PRC government exerts
      considerable direct and indirect influence on the development of the PRC
      economy. Many of the economic reforms carried out by the PRC government are
      unprecedented or experimental and are expected to be refined and improved.
      Other
      political, economic and social factors may also lead to further adjustments
      of
      the PRC reform measures. This refining and adjustment process may not
      necessarily have a positive effect on our operations and our future business
      development. For example, the PRC government has in the past implemented a
      number of measures intended to slow down certain segments of the PRC economy
      that the government believed to be overheating, including placing additional
      limitation on the ability of commercial banks to make loans by raising bank
      reserve-against-deposit rates. Historically, this restrictive policy on loans
      had the effect of decreasing infrastructure projects resulting in a decrease
      in
      demand for heavy trucks, thus adversely impacting our product sales to our
      OEM
      Customers. Because of the negative impact of the Chinese government policies
      on
      the truck manufacturers, we also were required to extend our normal credit
      terms
      to certain of these manufacturers. Our operating results may be materially
      and
      adversely affected by changes in the PRC economic and social conditions and
      by
      changes in the policies of the PRC government, such as measures to control
      inflation, changes in the rates or method of taxation and the imposition of
      additional restrictions on currency conversion.





***Changes
      in foreign exchange regulation in China may affect our ability to pay dividends
      in foreign currencies.***





Currently,
      the RMB is not a freely convertible currency and the restrictions on currency
      exchanges in China may limit our ability to use revenues generated in RMB to
      fund our business activities outside China or to make dividends or other
      payments in U.S. dollars. The PRC government strictly regulates conversion
      of
      RMB into foreign currencies. Over the years, the PRC government has
      significantly reduced its control over routine foreign exchange transactions
      under current accounts, including trade-and service-related foreign exchange
      transactions, foreign debt service and payment of dividends. In accordance
      with
      the existing foreign exchange regulations in China, our PRC joint venture may
      pay dividends in foreign currencies, without prior approval from the PRC State
      Administration of Foreign Exchange, or SAFE, by complying with certain
      procedural requirements. The PRC government may, however, at its discretion,
      restrict access in the future to foreign currencies for current account
      transactions and prohibit us from converting our RMB-denominated earnings into
      foreign currencies. If this occurs, our PRC joint venture may not be able to
      pay
      us dividends in foreign currency without prior approval from SAFE. In addition,
      conversion of RMB for most capital account


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items,
      including direct investments, is still subject to government approval in China
      and companies are required to open and maintain separate foreign exchange
      accounts for capital account items.





***Fluctuation
      in the value of RMB could adversely affect the value of, and dividends payable
      on, our shares in foreign currency terms.***





The
      value
      of RMB is subject to changes in PRC government policies and depends to a large
      extent on China’s domestic and international economic, financial and political
      developments, as well as the currency’s supply and demand in the local market.
      For over a decade from 1994, the conversion of RMB into foreign currencies,
      including the U.S. dollar, was based on exchange rates set and published daily
      by the People’s Bank of China, the PRC central bank, based on the previous day’s
      interbank foreign exchange market rates in China and exchange rates on the
      world
      financial markets. The official exchange rate for the conversion of RMB into
      U.S. dollars remained stable until RMB was revalued in July 2005 and allowed
      to
      fluctuate by reference to a basket of foreign currencies, including the U.S.
      dollar. Under the new policy, RMB will be permitted to fluctuate within a band
      against a basket of foreign currencies. This change in policy resulted initially
      in an approximately 6.5% appreciation in the value of Renminbi against the
      U.S.
      dollar. There remains significant international pressure on the PRC government
      to adopt a substantially more liberalized currency policy, which could result
      in
      a further and more significant appreciation in the value of RMB against the
      U.S.
      dollar. Further revaluations of RMB against the U.S. dollar may also occur
      in
      the future.





***The
      uncertain legal environment in China could limit the legal protections available
      to you.***





The
      PRC
      legal system is a civil law system based on written statutes. Unlike the
      common-law system, the civil law system is a system in which decided legal
      cases
      have little precedential value. In the late 1970s, the PRC government began
      to
      promulgate a comprehensive system of laws and regulations to provide general
      guidance on economic and business practices in China and to regulate foreign
      investment. Our PRC joint venture is a Sino-foreign joint venture and is subject
      to laws and regulations applicable to foreign investment in China in general
      and
      laws and regulations applicable to foreign-invested enterprises in particular.
      China has made significant progress in the promulgation of laws and regulations
      dealing with economic matters such as corporate organization and governance,
      foreign investment, commerce, taxation and trade. However, the promulgation
      of
      new laws, changes of existing laws and abrogation of local regulations by
      national laws may have a negative impact on our business and prospects. In
      addition, as these laws, regulations and legal requirements are relatively
      recent and because of the limited volume of published cases and their
      non-binding nature, the interpretation and enforcement of those laws,
      regulations and legal requirements involve significant uncertainties. These
      uncertainties could limit the legal protections available to foreign investors,
      including you. For example, it is not clear if a PRC court would enforce in
      China a foreign court decision brought by you against us in shareholders’
derivative actions.


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Moreover,
      the enforceability of contracts in China, especially with governmental entities,
      is relatively uncertain. If counterparties repudiated our contracts or defaulted
      on their obligations, we might not have adequate remedies. Such uncertainties
      or
      inability to enforce our contracts could materially and adversely affect our
      revenues and earnings.





***Our
      primary source of funds for dividend and other distributions from our operating
      subsidiary in China is subject to various legal and contractual restrictions
      and
      uncertainties as well as the practice of such subsidiary in declaring dividends,
      and our ability to pay dividends or make other distributions to our shareholders
      is negatively affected by those restrictions, uncertainties and dividend
      practices.***





We
      conduct our core business operations through our PRC joint venture. As a result,
      our profits available for distribution to our shareholders are dependent on
      the
      profits available for distribution from our PRC joint venture. Under current
      PRC
      law, our PRC joint venture is regarded as a foreign-invested enterprise in
      China. Although dividends paid by foreign invested enterprises are not subject
      to any PRC corporate withholding tax, PRC law permits payment of dividends
      only
      out of net income as determined in accordance with PRC accounting standards
      and
      regulations. Determination of net income under PRC accounting standards and
      regulations may differ from determination under U.S. generally accepted
      accounting principles in significant aspects, such as the use of different
      principles for recognition of revenues and expenses. Under PRC law, our PRC
      joint venture is required to set aside 10% of its net income each year to fund
      a
      designated statutory reserve fund until such funds reach 50% of registered
      share
      capital. These reserves are not distributable as cash dividends. As a result,
      our primary internal source of funds for dividend payments is subject to these
      and other legal and contractual restrictions and uncertainties, which in turn
      may limit or impair our ability to pay dividends to our shareholders although
      we
      do not presently anticipate paying any dividends. Moreover, any transfer of
      funds from us to our PRC joint venture, either as a shareholder loan or as
      an
      increase in registered capital, is subject to registration with or approval
      by
      PRC governmental authorities. These limitations on the flow of funds between
      us
      and our PRC joint venture could restrict our ability to act in response to
      changing market conditions. Additionally to date, our PRC Joint Venture has
      not
      distributed any profits and does not anticipate doing so for the near term.





***PRC
      economic reform policies or nationalization could result in a total investment
      loss in our common stock.***





Since
      1979, the Chinese government has reformed its economic systems. Because many
      reforms are unprecedented or experimental, they are expected to be refined
      and
      improved. Other political, economic and social factors, such as political
      changes, changes in the rates of economic growth, unemployment or inflation,
      or
      in the disparities in per capita wealth between regions within


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China,
      could lead to further readjustment of the reform measures. This refining and
      readjustment process may negatively affect our operations.





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





·
            We
                will be able to capitalize on economic
                reforms;





·
            The
                Chinese government will continue its pursuit of economic reform
                policies;·
            The
              economic policies, even if pursued, will be successful;·
            Economic
              policies will not be significantly altered from time to time;
              and




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





Over
      the
      last few years, China’s economy has registered a high growth rate. However, as a
      result of an increase in China’s rate of inflation in 2007, the Chinese
      government recently has implemented tighter monetary policy. These measures
      have
      included further increasing deposit reserve requirement ratio, conducting more
      open market operations, and raising base interest rates. These measures alone
      may not succeed in slowing down the economy’s excessive expansion or control
      inflation, and may result in significant dislocations in the Chinese
      economy.





The
      Chinese government may adopt additional measure to further combat inflation,
      including the establishment of freezes or restraints on certain projects or
      markets. These measures may adversely affect our operations. For example, we
      believe that certain macroeconomic measures adopted by the Chinese government
      negatively impacted the demand for trucks in 2005, thus decreasing the demand
      from Chinese truck manufacturers for our products.


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There
      can
      be no assurance that the reforms to China’s economic system will continue or
      that we will not be adversely affected by changes in China’s political,
      economic, and social conditions and by changes in policies of the Chinese
      government, such as changes in laws and regulations, measures which may be
      introduced to control inflation, changes in the rate or method of taxation,
      imposition of additional restrictions on currency conversion and remittance
      abroad, and reduction in tariff protection and other import restrictions. A
      material change in reforms on economic policy could cause instability or other
      harmful results.





***Because
      our principal operating company is organized under the laws of China, and
      substantially all of our assets are located in China, you may experience
      difficulties in effecting service of legal process, enforcing foreign judgments
      or bringing original actions in China based on U.S. or other foreign law against
      our management and us.***





Our
      joint
      venture operating company is incorporated under the laws of China and
      substantially all of our assets are located in China. In addition, all of our
      directors and executive officers reside within China, and substantially all
      of
      the assets of these persons are located within China. As a result, it may not
      be
      possible to effect service of process within the United States or elsewhere
      outside China upon certain directors or executive officers, including with
      respect to matters arising under U.S. federal securities laws or applicable
      state securities laws. Moreover, China does not have treaties providing for
      the
      reciprocal recognition and enforcement of judgments of courts with the United
      States, the United Kingdom, Japan or many other countries. As a result,
      recognition and enforcement in China of judgments of a court in the United
      States and any of the other jurisdictions mentioned above in relation to any
      matter may be difficult or impossible. Furthermore, an original action may
      be
      brought in China against us, our directors, managers, or executive officers
      only
      if the actions are not required to be arbitrated by Chinese law and only if
      the
      facts alleged in the complaint give rise to a cause of action under PRC law.
      In
      connection with any such original action, a Chinese court may award civil
      liability, including monetary damages.





***Any
      occurrence of serious infectious diseases, such as recurrence of severe acute
      respiratory syndrome (SARS) causing widespread public health problems, could
      adversely affect our business operations.***





A
      renewed
      outbreak of SARS or other widespread public health problems in China, where
      a
      substantial portion of our revenue is derived, and in Ruian City, where our
      operations are headquartered, could have a negative effect on our operations.
      Our operations may be impacted by a number of public health-related factors,
      including the following:





·
            quarantines
                or closures of our factories or subsidiaries which would severely
                disrupt
                its operations;





·
            the
                sickness or death of the key officers and employees;
                and





·
            general
                slowdown in the Chinese economy resulting from an
                outbreak.





Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could result in reduction in net sales of our products.





***Because
      it is likely that China will adopt additional environmental regulations and
      additional or modified regulations relating to the manufacture, transportation,
      storage, use and disposal of materials used to manufacture our products or
      restricting disposal of any waste will increase our operating
      costs.***





National,
      provincial and local laws impose various environmental controls on the
      manufacture of automotive parts and/or of certain materials used in the
      manufacture of automotive parts. Although we believe that our operations are
      in
      substantial compliance with current environmental regulations, there can be
      no
      assurance that changes in such laws and regulations will not impose costly
      compliance requirements on us or otherwise subject us to future liabilities.
      In
      addition, China is experiencing substantial problems with environmental
      pollution. Accordingly, it is likely that the national, provincial and local
      governmental agencies will adopt stricter pollution controls. Any such
      regulation relating to the manufacture, transportation, storage, use and
      disposal of materials used to manufacture our products or restricting disposal
      of any waste will increase our operating costs.




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**Risks
      Related to Our Common Stock**





***The
      market price for our common stock may be volatile which could result in a
      complete loss of your investment.***





The
      market price for our common stock may be volatile and subject to fluctuations
      in
      response to factors including the following:




·
            actual
                or anticipated fluctuations in our quarterly operating
                results,





·
            announcements
                of new products by us or our
                competitors,





·
            changes
                in financial estimates by securities
                analysts,





·
            conditions
                in the automotive market,





·
            changes
                in the economic performance or market valuations of other companies
                involved in the production of automotive
                parts,





·
            announcements
                by our competitors of significant acquisitions, strategic partnerships,
                joint ventures or capital
                commitments,





·
            additions
                or departures of key personnel, or





·
            potential
                litigation.





In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are not related to the operating performance
      of particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.





***We
      may issue additional shares of our capital stock to raise additional cash for
      working capital. If we issue additional shares of our capital stock, our
      stockholders will experience dilution in their respective percentage ownership
      in us.***





We
      may
      seek to further expand our operations and therefore we may issue additional
      shares of our capital stock to raise additional cash for working capital. If
      we
      issue additional shares of our capital stock, our stockholders will experience
      dilution in their respective percentage ownership in us.


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***A
      large portion of our common stock is controlled by a small number of
      stockholders and as a result, these stockholders are able to influence the
      outcome of stockholder votes on various matters.***





A
      large
      portion of our common stock is held by a small number of stockholders. Mr.
      Xiao
      Ping Zhang, our Company’s Chief Executive Officer, and his brother, Xiao Feng
      Zhang, our Chief Operating Officer, hold approximately 49.7% and 6.2%,
      respectively, of the Company’s common stock. As a result, these stockholders are
      able to control the outcome of stockholder votes on various matters, including
      the election of directors and other corporate transactions including business
      combinations.





***The
      occurrence of sales of a large number of shares of our common stock, or the
      perception that these sales could occur, may affect our stock price and could
      impair our ability to obtain capital through an offering of equity
      securities.***





The
      occurrence of sales of a large number of shares of our common stock, or the
      perception that these sales could occur, may affect our stock price and could
      impair our ability to obtain capital through an offering of equity securities.
      This will have an adverse affect on the business by restricting access to
      working capital to fund growth and operations. Furthermore, the current ratios
      of ownership of our common stock reduce the public float and liquidity of our
      common stock which can in turn affect the market price of our common
      stock.





***We
      are responsible for the indemnification of our officers and directors which
      could result in substantial expenditures, which we may be unable to
      recoup.***





Our
      Bylaws provide for the indemnification of our directors, officers, employees,
      and agents, under certain circumstances, against attorney’s fees and other
      expenses incurred by them in any litigation to which they become a party arising
      from their association with or activities on behalf of us. This indemnification
      policy could result in substantial expenditures, which we may be unable to
      recoup.





***Compliance
      with the Sarbanes-Oxley act could cost hundreds of thousands of dollars, require
      additional personnel and require hundreds of man hours of effort, and there
      can
      be no assurance that we will have the personnel, financial resources or
      expertise to meet requirements of these regulations.***





The
      US
      Public Company Accounting Reform and Investor Protection Act of 2002, better
      known as Sarbanes-Oxley, is the most sweeping legislation to affect publicly
      traded companies in 70 years. Sarbanes-Oxley created a set of complex and
      burdensome regulations. Compliance with such


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regulations
      requires hundreds of thousands of dollars, additional personnel and hundreds
      of
      man hours of effort. There can be no assurance that we will have the personnel,
      financial resources or expertise to meet requirements of these
      regulations.





**ITEM
      1B.  UNRESOLVED STAFF COMMENTS**





Not
      Applicable.





**ITEM
      2.  DESCRIPTION OF PROPERTY**





Our
      facilities are located in Ruian District of Wenzhou City in the Zhejiang
      Province, which is the center of automotive parts production in China. The
      facilities include a manufacturing plant and office building with a total floor
      area of 712,333 square feet, which we purchased from Ruili Group Co. Ltd.,
      a
      related party, for an aggregate purchase price of approximately RMB152 million
      (approximately US$20.2 million)..Before the transaction, we occupied 271,713 square
      feet of factory and warehouse, leased from the Ruili Group under a ten year
      lease. At the production facility, the Company has production equipment, which
      are imported from the United States, Korea, Taiwan as well as manufactured
      in
      mainland China.





**ITEM
      3.  LEGAL PROCEEDINGS**





We
      are
      not a party to any pending litigation.





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





There
      were no matters submitted to the stockholders in the fourth quarter of
      2007.




**PART
      II**





**ITEM
      5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS
      AND ISSUERS PURCHASES OF EQUITY SECURITIES**





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            33
            -
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            of Contents*




**Price
      Range of Common Stock**





On
      April
      18, 2006, SORL Auto Parts, Inc. was approved for listing its common shares
      on
      the NASDAQ Capital Market and commence trading its shares on NASDAQ under the
      symbol “SORL”. The Company was further approved for listing on NASDAQ Global
      Market on November 21, 2006. High and low sales prices per share of our Common
      Shares for each quarter ended during 2007 and 2006 are as follows:





**Quarter
                Ended**
            
            **High**
            
            **Low****2007**First
                Quarter
            
            
            9.88
            
            
            7.37Second
                Quarter
            
            
            8.96
            
            
            6.75Third
                Quarter
            
            
            8.30
            
            
            6.01Forth
                Quarter
            
            
            9.46
            
            
            6.07**2006**First
                Quarter
            
            
            5.95
            
            
            4.16Second
                Quarter
            
            
            12.00
            
            
            5.65Third
                Quarter
            
            
            8.21
            
            
            5.81Forth
                Quarter
            
            
            12.00
            
            
            5.77





**Stockholders**





At
      March
      12, 2008, we had approximately 848 registered stockholders of record of our
      common stock. This number does not include shares held by brokerage clearing
      houses, depositories or otherwise in unregistered form.


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**Dividend**





We
      have
      not historically declared or paid any cash dividends on our common stock and
      do
      not anticipate paying any cash dividends in the foreseeable future. Payment
      of
      cash dividends, if any, in the future will be at the discretion of our board
      of
      directors and will depend upon our debt and equity structure, earnings and
      financial condition, need for capital in connection with possible future
      acquisitions and other factors including economic conditions, regulatory
      restrictions and tax considerations. Additionally, amounts available for
      dividends are dependent on the profits available for distribution from our
      PRC
      joint venture. Under current PRC law, our PRC joint venture is regarded as
      a
      foreign invested enterprise in China. Although dividends paid by foreign
      invested enterprises are not subject to any PRC corporate withholding tax,
      PRC
      law permits payment of dividends only out of net income as determined in
      accordance with PRC accounting standards and regulations. Determination of
      net
      income under PRC accounting standards and regulations may differ from
      determination under U.S. GAAP in significant aspects, such as the use of
      different principles for recognition of revenues and expenses. Under PRC law,
      our PRC joint venture is required to set aside a portion of its net income
      each
      year to fund designated statutory reserve funds. These reserves are not
      distributable as cash dividends. As a result, our primary internal source of
      funds for dividend payments is subject to these and other legal and contractual
      restrictions and uncertainties, which in turn may limit or impair our ability
      to
      pay dividends to our shareholders although we do not presently anticipate paying
      any dividends. Moreover, any transfer of funds from us to our PRC joint venture,
      either as a shareholder loan or as an increase in registered capital, is subject
      to registration with or approval by PRC governmental authorities. These
      limitations on the flow of funds between us and our PRC joint venture could
      restrict our ability to act in response to changing market conditions.
      Additionally to date, our PRC Joint Venture has not distributed any profits
      and
      does not anticipate doing so for the near term.





**Securities
      Authorized For Issuance under Equity Compensation Plans**





The
      following table summarizes the securities authorized for issuance under our
      2005
      Stock Compensation Plan, the number of shares of our common stock issuable
      upon
      the exercise of outstanding options, warrants and rights, the weighted average
      exercise of such options and the number of additional shares of our common
      stock
      remaining available for issuance.





**Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted
                average exercise price of outstanding option warrants and
                rights**
            
            **Number
                of securities available for future issuance under equity compensation
                plans**Equity
                Compensation plans not approved by security holders
            
            
            64,128
            
            
            
            
            
            1,582,244Total
            
            
            64,128
            
            
            
            
            
            1,582,244





Our
      2005
      Stock Compensation Plan was adopted by our board of directors in July 2005.
      We
      have reserved 1,700,000 shares for issuance under the 2005 Stock Compensation
      Plan of which options to purchase 64,128 shares have been granted and 53,628
      shares have been awarded to date.





**Recent
      Sales of Registered Securities; Use of Proceeds from Registered
      Securities.**





On
      November 30, 2006, SORL completed its follow-on public offering of 4,285,714
      shares of common stock at $7.25 per share. Maxim Group LLC and Chardan Capital
      Markets, LLC acted as representatives of the underwriters. Gross proceeds were
      approximately $31.1 million. Net proceeds after approximately $2.2 million
      of
      underwriters’ commissions and approximately $0.7 million of related offering
      expenses were approximately $28.2 million. On December 13, 2006, Maxim Group
      LLC, the lead underwriter of the follow-on offering, exercised the
      over-allotment option in full to purchase an additional 642,857 shares of common
      stock. After deduction of the underwriter’s discount of $0.3 million,
      approximately $4.3 million was received by the Company. The aggregate net
      proceeds to the Company of this offering were approximately US$32.5 million,
      which included $4.3 million as a result of the exercise of the over-allotment
      option.




As
      of
      December 31, 2006, the Company used approximately $22.7 million out of the
      net
      proceeds for working capital or new projects, including approximately $16.6
      million for temporary repayment of short-term bank loan and $6.1 million as
      capital expenditures for the purchase of the land use right from the Ruili
      Group
      (a related party) and for the construction of the new plant. The Company had
      reached agreement with a local bank to temporarily repay its outstanding
      obligations when it had sufficient cash in account before spending the funds
      according to its business plan.





During
      the first and second quarter of 2007, approximately $3.5 million, $2.1 million,
      and $0.6 million out of the net offering proceeds were used for new machinery
      purchase, construction of the new plant, and R&D efforts, respectively.
      Also, the Joint Venture once again incurred bank a debt position with
      approximately $1.5 million in short term bank loans occurring in the second
      quarter of 2007.


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On
      September 28, 2007, Ruili Group Ruian Auto Parts Co. Ltd., a subsidiary of
      the
      Company purchased land rights, a manufacturing plant, and an office building
      from Ruili Group Co. Ltd., a related party, for an aggregate purchase price
      of
      approximately RMB152 million (approximately US$20.2 million). DTZ Debenham
      Tie Leung Ltd., an internationally recognized appraiser, appraised the total
      asset value at RMB154 million (approximately US$20.5 million). The purchase
      price was paid by the Company by transferring to Ruili Group the Company’s $9
      million investment in an existing project that includes a
      new-facility-in-progress and prepayment of land use rights. The remaining
      balance of $11 million was paid by the cash generated from operations and a
      bank credit
      line .





Other
      than the payments to Ruili Group as mentioned above, none of the net offering
      proceeds were paid, directly or indirectly, to directors, officers and persons
      who beneficially own ten percent or more of our equity securities. .





**ITEM
      6.  CONSOLIDATED SELECTED FINANCIAL DATA.**





The
      following selected consolidated financial data should be read in conjunction
      with the Consolidated Financial Statements and Notes thereto and “Management’s
      Discussion and Analysis of Financial Condition and Results or Operation”
appearing elsewhere in this report.





**Years
                ended December 31,****(in
                thousands, of US dollars except per share data)**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****RESULTS
                OF OPERATIONS**Revenues
            
            
            115,760
            
            
            84,898
            
            
            64,183
            
            
            46,815
            
            
            33,121Income
                before income tax provision
            
            
            12,588
            
            
            9,748
            
            
            5,500
            
            
            5,341
            
            
            3,844Income
                tax provision
            
            
            (637
            )
            
            (1,253
            )
            
            —
            
            
            —
            
            
            (546
            )Net
                income before minority interest
            
            
            11,951
            
            
            8,495
            
            
            5,500
            
            
            5,341
            
            
            1,150Minority
                interest
            
            
            (1,207
            )
            
            (797
            )
            
            (550
            )
            
            (534
            )
            
            —Net
                income attributable to shareholders
            
            
            10,744
            
            
            7,698
            
            
            4,950
            
            
            4,807
            
            
            1,150Earnings
                per share:Basic
            
            
            0.59
            
            
            0.56
            
            
            0.37
            
            
            0.37
            
            
            0.09Diluted
            
            
            0.59
            
            
            0.56
            
            
            0.37
            
            
            0.37
            
            
            0.09**FINANCIAL
                POSITION**Cash,
                cash equivalents and restricted cash
            
            
            4,340
            
            
            11,138
            
            
            961
            
            
            730
            
            
            —Total
                assets
            
            
            93,974
            
            
            70,880
            
            
            39,301
            
            
            22,520
            
            
            12,903Long
                term debt, net of current portion
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,208




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**SELECTED
      UNAUDITED QUARTERLY RESULTS OF OPERATIONS**




In
      the
      opinion of management, the accompanying unaudited quarterly financial
      information presented below includes all adjustments which management considers
      necessary to present fairly the results of its operations for the periods
      presented below in conformity with accounting principles generally accepted
      in
      the United States of America. This quarterly financial information has been
      prepared consistently with the accounting policies described in the accompanying
      audited consolidated financial statements for the year ended December 31, 2007.
      The results of operations for the periods presented below are not necessarily
      indicative of the results of operations to be expected in the
      future




**Fiscal
                  Quarters Ended,****2007**
              
              **2006**
              
              **2005****(in
                  thousands of US dollars****except
                  per share data)**
              
              **Mar.
                  31**
              
              **Jun.
                  30**
              
              **Sep.
                  30**
              
              **Dec.
                  31**
              
              **Mar.
                  31**
              
              **Jun.
                  30**
              
              **Sep.
                  30**
              
              **Dec.
                  31**
              
              **Mar.
                  31**
              
              **Jun.
                  30**
              
              **Sep.
                  30**
              
              **Dec.
                  31**Revenues
              
              
              24,417
              
              
              29,190
              
              
              29,703
              
              
              32,451
              
              
              19,420
              
              
              20,117
              
              
              21,288
              
              
              24,073
              
              
              14,516
              
              
              14,924
              
              
              16,377
              
              
              18,366Operating
                  expenses
              
              
              (3,020
              )
              
              (2,473
              )
              
              (3,960
              )
              
              (5,552
              )
              
              (1,965
              )
              
              (1,463
              )
              
              (2,192
              )
              
              (2,740
              )
              
              (1,481
              )
              
              (1,607
              )
              
              (1,673
              )
              
              (1,351
              )Income
                  (loss) from operations
              
              
              2,671
              
              
              3,887
              
              
              2,679
              
              
              2,760
              
              
              2,431
              
              
              3,177
              
              
              2,585
              
              
              2,714
              
              
              1,738
              
              
              1,756
              
              
              1,794
              
              
              940Interest
                  income (expense), net
              
              
              (143
              )
              
              (114
              )
              
              (349
              )
              
              (395
              )
              
              (266
              )
              
              (242
              )
              
              (260
              )
              
              (287
              )
              
              (60
              )
              
              (126
              )
              
              (145
              )
              
              (358
              )Other
                  income (expense)
              
              
              28
              
              
              271
              
              
              108
              
              
              183
              
              
              (90
              )
              
              2
              
              
              (52
              )
              
              36
              
              
              (9
              )
              
              (66
              )
              
              (13
              )
              
              (49
              )Pre-tax
                  income (loss)
              
              
              2,699
              
              
              4,158
              
              
              2,787
              
              
              2,944
              
              
              2,076
              
              
              2,936
              
              
              2,274
              
              
              2,462
              
              
              1,669
              
              
              1,563
              
              
              1,636
              
              
              631Income
                  tax provision
              
              
              (362
              )
              
              423
              
              
              (434
              )
              
              (264
              )
              
              (294
              )
              
              (294
              )
              
              (311
              )
              
              (354
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  income
              
              
              2,102
              
              
              4,012
              
              
              2,113
              
              
              2,517
              
              
              1,604
              
              
              2,378
              
              
              1,766
              
              
              1,950
              
              
              1,502
              
              
              1,407
              
              
              1,473
              
              
              568




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





The
      following is management’s discussion and analysis of certain significant factors
      that have affected our financial position and operating results during the
      periods included in the accompanying consolidated financial statements, as
      well
      as information relating to the plans of our current management. This report
      includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
      terminology are intended to identify forward-looking statements. Such statements
      are subject to certain risks and uncertainties, including the matters set forth
      in this report or other reports or documents we file 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 that speak only as of the date
      hereof. We undertake no obligation to update these forward-looking statements.





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





**OVERVIEW**





On
      May
      10, 2004, we acquired all of the issued and outstanding equity interests of
      Fairford Holdings Limited, a Hong Kong limited liability company (“Fairford”).
      Until we acquired Fairford, we had only nominal assets and liabilities and
      limited business operations. Although Fairford became a wholly-owned subsidiary
      following the acquisition, because the acquisition resulted in a change of
      control, the acquisition was recorded as a “reverse merger” whereby Fairford is
      considered to be the accounting acquirer. As such, the following results of
      operations are those of Fairford.





Fairford
      was organized in Hong Kong as a limited liability company on November 3, 2003.
      Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co.,
      Ltd., a Sino-foreign joint venture (the “Joint Venture”) established pursuant to
      the laws of the People’s Republic of China (“PRC” or “China”). The Joint Venture
      is a joint venture between Fairford and Ruili Group Co., Ltd. (the “Ruili
      Group”).




The
      Ruili
      Group was incorporated in the PRC in 1987 to specialize in the development,
      production and sale of various kinds of automotive parts. Its headquarters
      are
      located in Ruian City of Wenzhou Area, one of the leading automotive parts
      manufacturing centers of China with more than 1400 auto parts manufacturing
      companies. Its major product lines include valves for air brake systems, auto
      metering products, auto electric products, anti-lock brake systems and
      retarders. Some of those products were developed and are manufactured through
      affiliated companies of Ruili Group. Due to its leading position in the
      industry, the Chairman of the Ruili Group, Mr. Xiao Ping Zhang, has been elected
      as the Chairman of Wenzhou Auto Parts Association, one of the leading auto
      parts
      trade associations in China. Mr. Zhang is also Chairman and Chief Executive
      Officer of the Company. The Joint Venture was established in the PRC as a
      Sino-foreign joint venture company with limited liability by the Ruili Group
      and
      Fairford. Fairford and Ruili Group contributed 90% and 10%, respectively, of
      the
      paid-in capital in the aggregate amount of approximately $43.4
      million.




In
      connection with its formation, effective January 19, 2004 the Joint Venture
      acquired the business of the Ruili Group relating to the manufacture and sale
      of
      various kinds of valves for automotive brake systems and related operations
      (the
“Transferred Business”). This was accomplished by the transfer from the Ruili
      Group to Fairford of the relevant assets and liabilities of the Transferred
      Business including trade receivables, inventories and machinery, and the
      assumption of short and long term borrowings, at a consideration of
      approximately $6.39million.





The
      consideration was based on a valuation by an independent PRC valuation firm.
      Fairford then contributed these assets and liabilities as a capital contribution
      for its 90% interest in the Joint Venture. The Ruili Group also transferred
      inventory as its capital contribution for its 10% interest in the Joint Venture.
      The assets and liabilities transferred to the Joint Venture by Fairford and
      the
      Ruili Group represented all the relevant assets and liabilities of the
      Transferred Business. Certain historical


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information
      of the Transferred Business is based on the operation of the Transferred
      Business when it was owned by the Ruili Group.





Pursuant
      to the formation of the Joint Venture, on January 17, 2004, the Ruili Group
      and
      Fairford signed a binding Joint Venture agreement (the “JV Agreement”). Pursuant
      to the JV Agreement, the Board of Directors consists of three directors;
      Fairford has the right to designate two members of the board and the Ruili
      Group
      has the right to designate one member. The majority of the Board has decision
      making authority with respect to operating matters. As a result, Fairford
      maintains operating control over the Joint Venture.





The
      transactions were accounted for as a reverse spin-off in accordance with EITF
      02-11 “Accounting for Spin-offs.” Accordingly SORL Auto Parts, Inc. was deemed
      to be the “spinnor” for accounting purposes.





In
      December 2006, through Fairford, SORL invested a further approximately $32.67
      million in its operating subsidiary- the Joint Venture. To maintain its 10%
      shareholding in the Joint Venture, the Ruili Group increased its capital
      investment by approximately $3.63million. SORL Auto Parts, Inc. continues to
      hold a 90% controlling interest in the operating subsidiary.





As
      a
      result of the foregoing, through Fairford’s 90% interest in the Joint Venture,
      the Company manufactures and distributes automotive air brake valves and related
      components in China and internationally for use primarily in vehicles weighing
      over three tons, such as trucks and buses. There are forty categories of valves
      with over one thousand different specifications. Management believes that it
      is
      the largest manufacturer of automotive brake valves in China.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





Below
      is
      a description of accounting policies, which we consider critical to the
      preparation and understanding of our financial statements. In addition, certain
      amounts included in or affecting our financial statements and related disclosure
      must be estimated, which requires us to make assumptions with respect to values
      or conditions which cannot be known with certainty at the time the financial
      statements are prepared. Actual results may differ from these estimates under
      different assumptions or conditions. The selection of critical accounting
      policies, the judgments and other uncertainties affecting the application of
      those policies and the sensitivity of reported results to changes in conditions
      and assumptions are factors to be considered when reviewing our consolidated
      financial statements.





We
      believe that the following critical accounting policies set forth below involve
      the most significant judgments and estimates used in the preparation of our
      consolidated financial statements. We evaluate these policies on an ongoing
      basis, based upon historical results and experience, consultation with experts,
      trends and other methods we consider reasonable in the particular circumstances,
      as well as our forecasts as to how these might change in the future.





**ACCOUNTING
      METHOD**




The
      Company uses the accrual method of accounting which recognizes revenues when
      earned and expenses when incurred.





**ACCOUNTS
      RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS**





The
      Company presents accounts receivable, net of allowance for doubtful accounts.
      The allowance is calculated based on review of individual customer accounts.





**INVENTORIES**





Inventories
      are stated at the lower of cost or net realizable value. Cost is calculated
      on
      the weighted-average basis and includes all costs to acquire and other costs
      incurred in bringing the inventories to their present location and condition.
      The Company evaluates the net realizable value of


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its
      inventories on a regular basis and records a provision for loss to reduce the
      computed weighted-average cost if it exceeds the net realizable value.





**INCOME
      TAXES**





Taxes
      are
      calculated in accordance with taxation principles currently effective in the
      PRC. Deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized as income in
      the
      period that includes the enactment date. A valuation allowance is provided
      for
      the amount of deferred tax assets and liabilities that, based on available
      evidence, are not expected to be realized.





Under
      a
      Tax Holiday in PRC, the Company is granted an exemption from income taxes for
      two years commencing from the first cumulative profit-making year and a 50%
      reduction in the income tax rates for the following three years. Fiscal year
      ended December 31, 2004 was the first accumulative profit-making year. SORL
      is
      entitled to a 50% income tax reduction in the fiscal years ended December 31,
      2006, 2007 and 2008. The applicable income tax rate is 26.4% in Ruian City
      which
      is located in the coastal economic development zones.





**REVENUE
      RECOGNITION**





In
      accordance with the provisions of Staff Accounting Bulletin No. 103, revenue
      is
      recognized when merchandise is shipped and title passes to the customer and
      collectibility is reasonably assured. Revenues consist of the invoice value
      of
      the sale of goods and services net of value added tax, rebates and discounts.
      The Company is subject to the following surtaxes, which are recorded as
      deductions from gross sales: Education Tax.





The
      Company does not receive revenue for shipping and handling costs to customers.
      Shipping and handling expenses incurred by the Company are included in selling
      and administrative expenses in the accompanying consolidated statements of
      income.





**CONCENTRATION
      OF CREDIT RISK**





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





**RESULTS
      OF OPERATIONS**





Year
      ended December 31, 2007 as compared to year ended December 31,
      2006:


**Years
                Ended December 31,****2007**
            
            **%**
            
            **2006**
            
            **%****Sales**
            **(U.S. 
                dollars in million)**Air
                brake valves & related components
            $
            89.2
            
            
            77.0
            %
            $
            63.0
            
            
            74.1
            %Non-valve
                products
            $
            26.6
            
            
            23.0
            %
            $
            21.9
            
            
            25.9
            %Total
            $
            115.8
            
            
            100
            %
            $
            84.9
            
            
            100
            %




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Sales
      consisted of air brake valves and related components manufactured by SORL and
      sold to domestic OEM and aftermarket customers and international customers;
      as
      well as distribution of non-valve auto parts sourced from related parties.





Total
      net
      sales were $115,760,070 and $84,898,316 for the fiscal years ended December
      31,
      2007 and 2006, respectively, representing an increase of $30.9 million or 36.4%
      year over year. The increase in sales was the result of to the balanced growth
      in all three market segments: the domestic OEM market, the domestic aftermarket
      and international market. A breakdown of net sales revenue for our three market
      segments, domestic OEM market, domestic aftermarket and international markets,
      in 2007 and 2006 is as follows:


**Years
                Ended December 31,****2007**
            
            **%**
            
            **2006**
            
            **%****(U.S.
                dollars in million)**China
                OEM market
            
            $
            41.2
            
            
            35.6
            %
            $
            27.1
            
            
            31.9
            %China
                Aftermarket
            
            $
            31.1
            
            
            26.9
            %
            $
            23.9
            
            
            28.2
            %International
                market
            
            $
            43.4
            
            
            37.5
            %
            $
            33.9
            
            
            39.9
            %Total
            
            $
            115.8
            
            
            100
            %
            $
            84.9
            
            
            100
            %





In
      2007,
      the heavy duty truck market increased faster than the other segmented markets
      of
      the China auto industry. According to the statistics of China Association of
      Automobile Manufacturers, the sales volume of heavy duty truck (including
      non-complete vehicles) increased by 44.3% year over year to 487,481 sets. For
      t he
      Joint
      Venture, its sales for the OEM market increased by $14.1 million or 52.0% for
      the fiscal year ended December 31, 2007, as compared to the fiscal year ended
      December 31, 2006. With its
      continuing efforts on new product R&D, and timely delivery of products and
      services, the Joint Venture was able to fully utilize its well-established
      relationship with major OEM customers and to grow its business faster than
      the
      overall market.





As
      of December
      31 ,
      2007, the
      Joint
      Venture had 28
      authorized distributors covering nearly all regions in China, which in turn
      channel our products through over 800 sub-distributors. Based on its nation-wide
      sales networks as well as increased production capacity, the Joint Venture
      achieved total revenue of $31.1 million in domestic aftermarket sales
      for the
      fiscal year ended December 31, 2007 ,
      an
      increase of $7.2 million, or 30.1% as compared to the same period of last year.





The
      Joint
      Venture’s overseas sales to Asian countries and the North American market, the
      largetst oversea market segments for the Company, increased by 40.3% and 47.0%.
      As the result, our export sales increased by $9.5 million or approximately
      28.1%
      for the fiscal
      year ended December 31 ,
      2007,
      as compared to $33.9 million for the same period of 2006.This increase reflects
      the introduction of new products, the expansion of the contract sales force,
      and
      the implementation of a focused market plan on these market segments.





**COST
      OF SALES**




Cost
      of
      sales for the fiscal year ended December 31, 2007 increased to $88.8 million
      from $65.6 million for the fiscal year ended December 31, 2006, $23.2 million
      or
      a 35.4% increase, consistent with the increase in revenues.





**GROSS
      PROFIT**





Gross
      profit for the fiscal year ended December 31, 2007 increased by approximately
      $7.7 million or 39.4% to $27.0 million from $19.3 million for the fiscal year
      ended December 31, 2006. Gross margin increased by approximately 0.6% from
      22.7%
      in 2006 to 23.3% in 2007.


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In
      view
      of the increase of primary raw materials price and the negative impact
      associated with the appreciation of RMB against the U.S. dollar, during the
      fiscal year ended December 31 ,
      2007,
      the Joint Venture took various measures to lower the cost per product. Those
      measures included selecting the suppliers which are physically close to the
      Joint Venture to reduce the cost of transportation; reducing inventories of
      raw
      material in excess of those required to meet production when the market price
      is
      volatile; having short-term pricing agreements with some of our suppliers that
      reduce our exposure to raw material price increases; optimizing production
      techniques to reduce raw material consumption; and adopting one piece flow
      process to improve production efficiency. Further, the Joint Venture will
      continue to improve gross margin by economies of scale, shift of products mix
      and the introduction of new valve products with higher profit
      margins.





**SELLING
      EXPENSES**




Selling
      expenses were $7,461,652 for the
      fiscal year ended December 31, 2007 ,
      as
      compared to $5,101,313 for the
      fiscal year ended December 31, 2006 ,
      an
      increase of $2,360,339 or 46.3%. The increase was mainly due to the following
      factors:




(1)
            The
                salaries, travel and overhead costs of sales and marketing personnel
                in
                2007 increased by $97,688, as the Joint Venture increased its sales
                force.


(2)
            Advertising
                cost, public relations costs, exhibition fees and export sundry charges
                in
                2007 rose by $251,029, as compared to 2006 year, due to general increases
                in the level of such activities.


(3)
            Transportation
                costs and packaging costs increased by $1,726,158 forthe
                fiscal year ended December 31,
                2007, as compared to $2,185,477 forthe
                fiscal year ended December 31,2006. The increase was the result of higher volumes of sales realized
                in
                2007 year from our two segments, leading to higher transportation
                costs
                and and packaging costs in 2007, as compared to those of the corresponding
                period of 2006.


(4)
            The
                Company recorded $2,152,978 of product warranty expenses for the
                fiscal
                year ended December 31, 2007, as compared to $1,867,514 for the fiscal
                year ended December 31, 2006, an increase of $285,465, mainly attributed
                to a specific “3-R Warranties” service charge (for repair, replacement and
                refund) paid to an OEM customer.




**GENERAL
      AND ADMINISTRATIVE EXPENSES**





General
      and administrative expenses were $6,542,522 for the
      fiscal year ended December 31, 2007 ,
      as
      compared to $3,259,066 for the
      fiscal year ended December 31, 2006 ,
      an
      increase of $3,283,456 or 100.7%. The increase was mainly due to the following
      factors:





(1)
            The
                expansion of economic activities, facilities and workforce resulted
                in
                increased depreciation, office expenses, staff salary and welfare,
                travel
                expenses, supplies and utilities totaling $1,405,602, as compared
                to 2006
                year.


(2)
            R&D
                expense, which is included in general and administrative expenses,
                increased by $ 1,021,951, as compared to figure for fiscal year ended
                December 31, 2006, as discussed
                below.


(3)
            Duringthe
                fiscal year ended December 31, 2006,
                the Joint Venture reversed a bad debt provision resulting from collecting
                a significant portion of accounts receivable with aging over one
                year,
                which had been reflected as a reduction to general and administrative
                expenses. Compared with the reversed $911,000 of bad debt provision
                forthe
                fiscal year ended December 31, 2006,
                the bad debt provision included in general and administrative expenses
                was
                $33,848 forthe
                fiscal year ended December 31, 2007,
                an increase of $944,848.





The
      abovementioned increases were partly offset by a decreased stock-based
      compensation expenses and professional fees of $234,704 and $80,260,
      respectively.




**RESEARCH
      AND DEVELOPMENT EXPENSE**




Research
      and development expense was $1,795,510 for the fiscal year ended December 31,
      2007, as compared to $773,559 for the fiscal year ended December 31, 2006,
      an
      increase of $1,021,951; as a result of the Company’s investment in new R&D
      instrument purchases and the expansion of its staff to develop new innovative
      products.


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**DEPRECIATION
      AND AMORTIZATION**




Depreciation
      and amortization expense increased to $1.77 million for the fiscal year ended
      December 31, 2007, compared with depreciation and amortization expense of $1.06
      million for the fiscal year ended December 31, 2006.





The
      increase in depreciation and amortization expense was primarily due to more
      purchase of production equipment, plant and land use rights in 2007
      year.





**FINANCIAL
      EXPENSE**




Financial
      expense for the fiscal year ended December 31, 2007 decreased by $54,306 to
      $1,000,931 from $1,055,237 for the fiscal year ended December 31, 2006. 
Financial expense mainly consists of interest expense and exchange loss. The
      interest expense decreased by $634,981 to $148,813 for the fiscal year ended
      December 31, 2007, compared with $783,794 for the fiscal year ended December
      31,
      2006, mainly due to the lower outstanding average debt balance during current
      period. The funds were mainly used for new equipment purchases, as well as
      working capital purposes. Because a large part of our accounts receivable arose
      from export sales denominated in US dollars, the appreciation of the RMB against
      the U.S. dollar resulted in larger exchange loss during the fiscal year ended
      December 31, 2007.The Company recognized the exchange losses of $926,076 and
      $263,727 for the fiscal year ended December 31, 2007and 2006,
      respectively.




**OTHER
      INCOME**





For
      the
      fiscal year ended December 31, 2007, other income included subsidy income of
      $503,464 compared with $139,308 for the fiscal year ended December 31, 2006.
      Through local governments, these subsidies were provided to the Company as
      economic incentives to secure business commitments and no repayment is required.





**INCOME
      TAX**





There
      was
      no income tax expense for the fiscal year ended December 31, 2005 and 2004.
      As a
      result of the Joint Venture obtaining its Sino-foreign joint venture status
      in
      2004, in accordance with applicable PRC tax regulations, the Joint Venture
      was
      exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the
      Joint
      Venture is entitled to a tax concession of 50% of the applicable income tax
      rate
      of 26.4% commencing the three years ended December 31, 2006, 2007, and 2008.
      In
      accordance with China's relevant regulations of income taxes, the Joint Venture
      has a benefit of a refund of 40% of domestic equipment purchases from increased
      income taxes for the purchasing year over those of the previous year. During
      the
      second quarter ended June 30, 2007, the Joint Venture received an income tax
      benefit of $991,133 for purchase of domestic equipment, which has been reflected
      as a reduction to current income tax expense. As a result, income tax expense
      was $636,976 for the fiscal year ended December 31, 2007 compared with $1,252,858 for
      the
      fiscal year ended December 31, 2006, a decrease of $615,882.





**STOCK–BASED
      COMPENSATION**





On
      January 5, 2006 the Company issued 100,000 warrants for the financial services
      to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
      exercise price of $6.25 per share and a contractual term of four years. In
      accordance with the common stock purchase warrant agreement, the warrants became
      vested and exercisable immediately on the date thereof. Total deferred
      stock-based compensation expenses related to the 100,000 warrants granted was
      $299,052. This amount is amortized over one year in a manner consistent with
      Financial Accounting Standards Board Interpretation No. 123 (R). The
      amortization of deferred stock-based compensation for these equity arrangements
      was $ 299,052 for the fiscal year ended December 31, 2006.





On
      March
      1, 2006, the Board of Directors approved a total of 60,000 options to be issued
      to the four independent members of the Board of Directors. The contractual
      term
      of the options is three years. Total deferred stock-based compensation expenses
      related to stock options amounted to


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$178,904.
      This amount is amortized over the three year vesting period in a manner
      consistent with Financial Accounting Standards Board Interpretation No. 123R.
      The amortization of deferred stock-based compensation for these equity
      arrangements was $59,636 and $49,697 for the fiscal year ended December 31,
      2007
      and 2006, respectively.





On
      June
      20, 2007, the Company granted to its previous senior manager of investor
      relations, David Ming He, options to purchase 4,128 shares of its common stock
      with an exercise price of $7.25 per share. In accordance with the agreement,
      the
      option became vested and exercisable immediately on the date thereof. Total
      deferred stock-based compensation expenses related to the 4,128 stock options
      granted amounted to $23,201. This amount was charged to G&A during the
      fiscal year ended December 31, 2007.





Although
      the Company anticipates future issuances of stock awards to have a material
      impact on net income, in future financial statements we do not expect these
      transactions to have a material impact on future cash flow.





**MINORITY
      INTEREST**





Minority
      interest represents a 10% non-controlling interest in the JV company. Minority
      interest in income was $ 1,206,515 and $797,117 for the fiscal year ended
      December 31, 2007 and 2006, respectively.





**NET
      INCOME**





The
      net
      income for the fiscal year ended December 31, 2007 increased by $3,046,137,
      to
      $10,744,031 from net income of $7,697,894 for the fiscal year ended December
      31,
      2006 due to the factors discussed above. Earnings per share (“EPS”) for basic
      and diluted for 2007 and 2006, was $0.59 and $0.56 per share, respectively.




**FINANCIAL
      CONDITION**




**LIQUIDITY
      AND CAPITAL RESOURCES**




OPERATING
      - Net cash provided in operating activities was $8,858,603 for the fiscal year
      ended December 31, 2007, as compared to $454,474 of net cash used by operating
      activities for the fiscal year ended December 31, 2006, an increase of
      $9,313,077.




Our
      primary cash flows from net income were realized through the sale of automotive
      parts. Cash flows from accounts receivable and notes receivables decreased
      by
      approximately $4.9 million for the fiscal year ended December 31,
      200 7 as
      compared with the fiscal year ended December 31, 200 6 ,
      as a
      result of a high level of accounts receivable and notes receivables as of
      December 31, 200 7 .
      The
      increase of accounts receivable was primarily due to the increase of sales
      volumes. The ending balance of accounts receivables as of December 31,
      200 7 was
      consistent with the Joint Venture’s normal practice. During the fiscal year
      ended December 31, 2007, most of accounts receivable were collected by bank
      acceptance, hence the increase in notes receivables. In accordance with the
      increase in sales orders, the Company maintained a higher level of inventory
      to
      meet the requirements from OEM and overseas customers and required more raw
      materials to keep its production capacity. This resulted in a cash outflow
      of
      approximately $ 1.2 million. The abovementioned decreased cash flow was largely
      offset by the effect of the 2007 increase in net income after deducting non-cash
      items. Additionally, cash flows contributed from prepayments, deposits from
      customers and account payables and notes payables increased by approximately
      $9.9 million for the fiscal year ended December 31, 2007 as compared to the
      fiscal year ended December 31,2006.





As
      of the
      fiscal year ended December 31, 2007 ,
      the
      Company had cash and cash equivalents of $4,340,211, as compared to cash and
      cash equivalents of $11,137,501 at December 31, 2006. The Company had working
      capital of $ 44,715,988 at December 31, 2007, as compared to working capital
      of
      $47,195,220 at December 31, 2006, reflecting current ratios of 4.32:1and 7.58:1,
      respectively.


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INVESTING
      - During the fiscal year ended December 31, 2007, the Company expended net
      cash
      of $19,427,339 in investing activities, mainly including the funds for
      acquisition of plant, land use rights and new equipment to support the growth
      of
      business. For the fiscal year ended December 31, 2006, the Company utilized
      $10,354,802 in investing activities.





FINANCING
      -Net cash provided by financing activities was $3,257,911 for the fiscal year
      ended December 31, 2007 compared to a net cash inflow in financing activities
      of
      $20,135,117 for the fiscal year ended December 31, 2006. During fiscal 2006
      ,
      net cash provided by financing activities was primarily attributable to the
      net
      proceeds of our follow-on public offering of approximately $32.5 million,
      including approximately $4.3 million as a result of the exercise of the
      over-allotment option granted to the underwriters. Additionally, another capital
      increase of $3.63 million was contributed from Ruili Group to the JV.
      Additionally, during fiscal 2006, the Company received in aggregate
      approximately $19.8 million short-term bank loans under its credit facilities.
      As a temporary approach to apply cash balances thereby saving interest expense,
      during fiscal 2006, the Company paid off outstanding loans which totaled $
      35.8
      million. A large portion of the repayments, approximately $16.6 million, was
      funded from the net proceeds the public offering, with approval by the Company’s
      board of directors. During the fiscal year ended December 31, 2007, the Company
      received aggregate bank loans in the amount of $3,953,521 under its credit
      facilities, and the Company repaid $ 583,193 on its outstanding debt. Those
      loan
      were secured for new equipment purchases and working capital
      requirements.





Management
      of the Company has taken a number of steps to restructure its customer base
      and
      phase out the accounts which had failed to make prompt payments, the Company
      also placed more emphasis on receivable collection. During the quarter, the
      Company continued to develop high profit margin new products, as well as
      adopting steps for further cost saving such as improving material utilization
      rate. While we believe that funds generated from operations and our revolving
      bank lines of credit will be sufficient to finance our working capital
      requirements for the foreseeable future, we continue our efforts to raise
      capital to finance further expansion of production, build our international
      sales networks in new markets, strengthen our R&D workforce, and supplement
      our working capital.





**OFF-BALANCE
      SHEET AGREEMENTS**





At
      December 31, 2007, we did not have any material commitments for capital
      expenditures or have any transactions, obligations or relationships that could
      be considered off-balance sheet arrangements.





**RESULTS
      OF OPERATIONS**





Year
      ended December 31, 2006 as compared to year ended December 31, 2005:





**SALES**




**Years
                Ended December 31,****2006**
            
            **%**
            
            **2005**
            
            **%****(U.S.
                dollars in million)****Sales**Air
                brake valves & related components
            
            $
            63.0
            
            
            74.2
            %
            $
            47.9
            
            
            74.6
            %Non-valve
                products
            
            $
            21.9
            
            
            25.8
            %
            $
            16.3
            
            
            25.4
            %Total
            
            $
            84.9
            
            
            100.0
            %
            $
            64.2
            
            
            100.0
            %





Sales
      consisted of air brake valves and related components manufactured by SORL and
      sold to domestic OEM and aftermarket customers and international customers;
      as
      well as distribution of non-valve auto parts sourced from related parties.





Total
      net
      sales were $84,898,316 and $64,182,544 for the fiscal years ended December
      31,
      2006 and 2005, respectively, representing an increase of $20.7 million or 32%
      year over year. The


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increase
      in sales was primarily due to the expansion in the domestic OEM market, the
      domestic aftermarket and international market as a result of improvement in
      the
      Company’s sales network.





A
      breakdown of net sales revenue for our three market segments, domestic OEM
      market, domestic aftermarket and international markets, in 2006 and 2005 is
      as
      follows:




**Years
                Ended December 31,****2006**
            
            **%**
            
            **2005**
            
            **%****(U.S.
                dollars in million)**China
                OEM market
            
            $
            27.1
            
            
            32
            %
            $
            20.6
            
            
            32
            %China
                Aftermarket
            
            $
            23.9
            
            
            28
            %
            $
            20.2
            
            
            32
            %International
                market
            
            $
            33.9
            
            
            40
            %
            $
            23.4
            
            
            36
            %Total
            
            $
            84.9
            
            
            100
            %
            $
            64.2
            
            
            100
            %




After
      experiencing a market decline in 2005, China’s heavy duty trucks output and
      sales volume increased by 15.4 % year over year in 2006. With the Chinese heavy
      duty truck market’s rebounding gradually, the Joint Venture’s sales for the OEM
      market increased by $6.5 million or 31.6% for the year ended December 31, 2006,
      as compared to the year ended December 31, 2005. The Joint Venture expanded
      its
      OEM market share basically from its existing major customers. The Company has
      been able to quickly respond to customers’ requirements for new products.





With
      one
      new distributor’s joining in 2006, we now have 28 authorized distributors
      covering nearly all regions in China. Those distributors are responsible for
      selling our products through over 800 sub-distributors in turn. With the rapid
      growth of commercial vehicles output in recent years and the increasing amount
      of vehicles on the road, demand for parts has increased. Based on our well
      established sales networks, SORL achieved revenue of $23.9 million in domestic
      aftermarket sales, an increase of $3.7 million, or 18.3% from 2005.





In
      2006,
      the Middle East segment had the largest share of overseas sales. The American
      segment experienced the fastest growth, followed by the European segment. Export
      sales grew by approximately 44.9%, from $23.4 million in 2005 to $33.9 million
      in 2006. The increase reflects our continued focus on sales and marketing
      efforts. Moreover, the Company has been able to offer a more complete product
      line including non-valve products which are sourced from the Ruili Group. Such
      outsourced non-valve products include power steering pumps and other pumps,
      automobile electrical components and auto meters. Those accounted for
      approximately 25.8 % and 25.4% of total sales in 2006 and 2005, respectively.
      To
      penetrate the India OEM market, in 2006, the Joint Venture set up a sales office
      in Pune, India.





**COST
      OF SALES**





Cost
      of
      sales for the fiscal year ended December 31, 2006 increased to $65.6 million
      from $49.9 million for the fiscal year ended December 31, 2005, $15.7 million
      or
      a 31.6% increase, consistent with the increase in revenues.





**GROSS
      PROFIT**





Gross
      profit for the fiscal year ended December 31, 2006 increased by approximately
      $5.0 million or 34.6% to $19.3 million from $14.3 million for the fiscal year
      ended December 31, 2005. Gross margin increased by approximately 0.4% from
      22.3%
      in 2005 to 22.7% in 2006. The improvement in gross profit margin was primarily
      attributable to economies of scale, shift of products mix and the introduction
      of new valve products with higher profit margins and continuing efforts in
      production technique optimization.


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We
      purchase various components and raw materials for use in our manufacturing
      processes. The principal raw materials are aluminum and steel. Aluminum and
      steel accounted for 33% and 17% of our total raw material purchases in 2006,
      respectively. For the fiscal year ended December 31, 2006, the price of steel
      plate decreased by approximately 22%, as compared with 2005.However, the average
      price of aluminum still continued to increase as it had in the past two years.
      The average price of aluminum increased by approximately 14 % in 2006 compared
      to 2005. The increased price of raw material has had an adverse effect on our
      profit, but the decrease in the price of steel partly offset the negative impact
      of the increase of aluminum. Additionally, we took several steps to lower our
      production cost. For example, we replaced the machining approach with a molding
      process, thereby reducing processing steps and materials consumption and
      increasing productivity. In addition, in the process of removing impurities
      from
      liquid aluminum, historically we have used the high-temperature method. The
      adoption of the new technique of using a low-temperature method helped save
      power consumption.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general and administrative expenses for the fiscal year ended December 31,
      2006
      were $8.4 million or 9.85% of net sales compared to $8.1 million or 12.6% of
      net
      sales for the fiscal year ended December 31, 2005. The increase in expenses
      is
      primarily due to the effect of the following factors:




(1) Increased
      product warranty expenses. The Company recorded $1,867,514 of product warranty
      expenses for the fiscal year ended December 31, 2006, as compared to $778,763
      for the fiscal year ended December 31, 2005, an increase of $1,088,751, mainly
      attributed to a specific “3-R Warranties” service charge (for repair,
      replacement and refund) paid to an OEM customer.




(2) Professional
      fees increased by $303,534 compared with 2005. The professional fees include
      auditing and legal fees associated with SEC filings, director’s fees and related
      consulting fees, stock transfer fees and other items associated with the costs
      of being a public entity.




(3) R&D
      expense, which is included in general and administrative expenses, increased
      by
      $412,129, as compared to the fiscal year ended 2005, as discussed
      below.




(4) The
      aforementioned increases were largely offset by the reversing of a bad debt
      provision of $ 911,000, which was mainly due to the collection of a significant
      portion of account receivables with aging over one year during 2006.




**DEPRECIATION
      AND AMORTIZATION**





Depreciation
      and amortization expense increased to $1.06 million for the fiscal year ended
      December 31, 2006, compared with depreciation and amortization expense of $0.86
      million for the fiscal year ended December 31, 2005.




The
      increase in depreciation expense was primarily due to new investment in fixed
      assets, mainly production equipment and tools in 2006 in the amount of $4.4
      million, to upgrade the processing techniques and increase output.




**FINANCIAL
      EXPENSE**





Financial
      expense for the fiscal year ended December 31, 2006 increased by $366,426 to
      $1,055,237 from $688,811 for the fiscal year ended December 31, 2005. Financial
      expense mainly consist of interest expense and exchange loss. The interest
      expense increased by approximately $0.26 million to approximately $0.78 million
      for 2006, compared with $0.52 million for 2005. The increase was mainly due
      to
      higher average borrowing levels. Additionally, accounts receivable and deposits
      received from customers, associated with overseas sales, are denominated in
      US
      dollars. The appreciation of the RMB against the U.S. dollar resulted in larger
      exchange loss during 2006. The Company recognized the exchange loss of $0.26
      million and $0.15 million for the fiscal year ended December 31, 2006 and 2005,
      respectively, an increase of $0.11 million.





**OTHER
      INCOME**





For
      the
      fiscal year ended December 31, 2006, other income included subsidy income of
      $139,308 compared with $52,592 for the fiscal year ended December 31, 2005.
      Through local


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governments,
      these subsidies were provided to the Company as economic incentives to secure
      business commitments and no repayment is required.





**INCOME
      TAX**





There
      was
      no income tax expense for the fiscal year ended December 31, 2005 and 2004.
      As a
      result of the Joint Venture obtaining its sino-foreign joint venture status
      in
      2004, in accordance with applicable PRC tax regulations, the Joint Venture
      was
      exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the
      Joint
      Venture is entitled to a tax concession of 50% of the applicable income tax
      rate
      of 26.4% for the three years ended December 31, 2006, 2007, and 2008. Income
      taxes expense of $1,252,858 was recorded for the fiscal year ended December
      31,
      2006.





**STOCK-BASED
      COMPENSATION**





On
      January 5, 2006 the Company issued 100,000 warrants for the financial services
      to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
      exercise price of $6.25 per share and a contractual term of four years. In
      accordance with the common stock purchase warrant agreement, the warrants became
      vested and exercisable immediately on the date thereof. Total deferred
      stock-based compensation expenses related to the 100,000 warrants granted was
      $299,052. This amount is amortized over one year in a manner consistent with
      Financial Accounting Standards Board Interpretation No. 123 (R). The
      amortization of deferred stock-based compensation for these equity arrangements
      was $ 299,052 for the fiscal year ended December 31, 2006.





On
      March
      1, 2006, the Board of Directors approved a total of 60,000 options to be issued
      to the four independent members of the Board of Directors. The contractual
      term
      of the options is three years. Total deferred stock-based compensation expenses
      related to stock options amounted to $178,904. This amount is amortized over
      the
      three year vesting period in a manner consistent with Financial Accounting
      Standards Board Interpretation No. 123R. The amortization of deferred
      stock-based compensation for these equity arrangements was $49,697 for the
      fiscal year ended December 31, 2006.




Although
      the Company anticipates future issuances of stock awards to have a material
      impact on net income, we do not expect these awards to have a material impact
      on
      future cash flow.





**MINORITY
      INTEREST**




Minority
      interest represents a 10% non-controlling interest in the JV company. Minority
      interest in income was $ 797,117 and $549,957 for the fiscal year ended December
      31, 2006 and 2005, respectively.





**NET
      INCOME**





The
      net
      income for the fiscal year ended December 31, 2006 increased by approximately
      $2,748,284, to $7,697,894 from net income of $4,949,610 for the fiscal year
      ended December 31, 2005 due to the factors discussed above. Earnings per share
      (“EPS”) for basic and diluted for 2006 and 2005, was $0.56 and $0.37 per share,
      respectively.





**FINANCIAL
      CONDITION**




**LIQUIDITY
      AND CAPITAL RESOURCES**





OPERATING
      - Net cash used in operating activities was $454,474 in the year ended December
      31, 2006 compared with that of $8,714,706 in the same period in 2005, a decrease
      of $8,260,232 or 94.8%. Our improvement in cash flow was primarily a result
      of
      the following:





Our
      primary cash flows from net income were realized through the sale of automotive
      parts. The timely collection of accounts receivable will improve our liquidity.
      Our lower cash flow from operating activities in 2005 was mainly attributable
      to
      increased level of accounts receivable. However, in 2006, only $0.51 million
      of
      cash outflow was due to the same factor, a decrease of $13.1 million or 96%
      as
      compared with that for 2005. This is mainly due to our efforts of collecting
      a
      significant portion


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of
      the
      accounts receivable aged over one year. Additionally, to meet the requirements
      of sales growth and capacity expansion, we were required to keep a relatively
      higher level of inventories than in 2005. The level of prepayments also
      increased, as a result of the requirements to expand production facilities
      and
      purchase raw materials. For the fiscal year ended December 31, 2006, after
      adjustments for non-cash items, net income provided cash inflows of $9.1
      million, which largely covered the increased working capital requirements as
      abovementioned. Management believes our cash flow will be improved gradually
      through the Company’s strategic move of its sales focus from the domestic OEM
      market to international markets, thereby providing the Company with the ability
      to restructure its OEM customer base by gradually phasing out customers with
      lower returns and higher credit risks.





At
      December 31, 2006, the Company had cash and cash equivalents of $11,137,501,
      as
      compared to cash and cash equivalents of $961,131 at December 31, 2005. The
      Company had working capital of $47,195,220 at December 31, 2006, as compared
      to
      working capital of $10,571,086 at December 31, 2005, reflecting current ratios
      of 7.58:1 and1.49:1, respectively. The increase of working capital was mainly
      attributed to the balance of proceeds received from the follow-on public
      offering near the end of 2006, a large portion of which is scheduled to be
      gradually spent in the year of 2007.




INVESTING
      - Net cash used in investing activities was $10,354,802 and $2,624,274 for
      the
      fiscal years ended December 31, 2006 and 2005, respectively. During fiscal
      2006,
      additional machines and equipment for purpose of capacity expansion were
      acquired for a total of $4,445,131. Other than machines and equipment, another
      major capital expenditure was for acquisition of the land use rights from Ruili
      Group for $5,909,671. A new plant, for further expansion of air brake valves
      production capacity, will be constructed on the land. The Company has a total
      budget of approximately $15 million for this new plant building, inclusive
      of
      costs for land acquisition, leveling and construction of plant
      buildings.




FINANCING
      - Net cash provided by financing activities was $20,135,117 for the year ended
      December 31, 2006 compared to a net cash inflow in financing activities of
      $11,195,799 for the same period in 2005. During fiscal 2006, net cash provided
      by financing activities was primarily attributable to the net proceeds of our
      follow-on public offering of approximately $32.5 million, including
      approximately $4.3 million as a result of the exercise of the over-allotment
      option granted to the underwriters. Additionally, another capital increase
      of
      $3.63 million was contributed from Ruili Group to the JV. Additionally, during
      fiscal 2006, the Company received in aggregate approximately $19.8 million
      short-term bank loans under its credit facilities. As a temporary approach
      to
      apply cash balances thereby saving interest expense, during fiscal 2006, the
      Company paid off outstanding loans which totaled $ 35.8 million. A large portion
      of the repayments, approximately $16.6 million, was funded from the net proceeds
      the public offering, with approval by the Company’s board of directors. The
      Company expects to make re-drawdowns in 2007 under the bank lines of credit,
      in
      line with its investment schedule related to the public offering.




Management
      of the Company has taken a number of steps to restructure its customer base
      and
      phase out accounts which had failed to make prompt payments. The Company also
      placed more emphasis on receivable collection. During 2006, the Company
      continued developing higher profit margin new products, and adopting steps
      for
      further cost saving such as improving material utilization rate. Meanwhile,
      the
      Company maintains good relationships with local banks. We believe that our
      current cash and cash equivalents and anticipated cash flow generated from
      operations and our bank lines of credit will be sufficient to finance our
      working capital requirements for the foreseeable future.




**OFF-BALANCE
      SHEET AGREEMENTS**




At
      December 31, 2006, we did not have any material commitments for capital
      expenditures or have any transactions, obligations or relationships that could
      be considered off-balance sheet arrangements.





**ITEM
      7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





The
      Company did not have any market risk with respect to such factors as commodity
      prices, equity prices, and other market changes that affect market risk
      sensitive investments.


-
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Although
      our reporting currency is the U.S. dollar, the functional currency of Joint
      Venture is RMB. As a result, we are exposed to foreign exchange risk as our
      revenues and results of operations may be affected by fluctuations in the
      exchange rate between U.S. dollars and RMB. If the RMB depreciates against
      the
      U.S. dollar, the value of our Renminbi revenues, earnings and assets as
      expressed in our U.S. dollar financial statements will decline. Assets and
      liabilities of our operating subsidiaries are translated into U.S. dollars
      at
      the exchange rate at the balance sheet date, their equity accounts are
      translated at historical exchange rate and their income and expenses items
      are
      translated using the average rate for the period. Any resulting exchange
      differences are recorded in accumulated other comprehensive income or loss.
      Because of the approximately 6.5% appreciation of the RMB against the USD,
      we
      recorded an exchange loss of $926,076 for the fiscal year ended on December
      31,
      2007. But any further RMB appreciation against USD, if any, would be on a
      prudent, gradual basis with relatively small adjustments, so as to avoid drastic
      impacts on the Chinese economy as a whole.




As
      the
      Company’s historical debt obligations are primarily short-term in nature, with
      fixed interest rates, the Company does not have any risk from an increase in
      market interest rates. However, to the extent that the Company arranges new
      borrowings in the future, an increase in market interest rate would cause a
      commensurate increase in the interest expense related to such
      borrowings.




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**ITEM
      8.  FINANCAL STATEMENTS AND SUPPLEMENTARY
      DATA**




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
        the
        Board of Directors and Stockholders of and Stockholders
 SORL
        Auto
        Parts, Inc. and Subsidiaries
 Ruian
        City, Zhejiang Province
 People’s
        Republic of China
  We
        have
        audited the accompanying consolidated balance sheets of SORL Auto Parts,
        Inc.
        and Subsidiaries as of December 31, 2007 and 2006, and the related statements
        of
        income, changes in shareholders' equity, and cash flows for each of three
        years
        ended December 31, 2007, 2006 and 2005. SORL Auto Parts, Inc. and Subsidiaries’
management is responsible for these consolidated financial statements. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        company
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the company’s internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements, assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall consolidated financial statement presentation. We
        believe
        that our audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of SORL Auto Parts, Inc.
        and
        Subsidiaries as of December 31, 2007 and 2006, and the results of its operations
        and its cash flows for each of the years in the three-year period ended December
        31, 2007, 2006 and 2005 in conformity with accounting principles generally
        accepted in the United States of America.
   /s/
        Rotenberg & Co., LLP
 Rotenberg
        & Co., LLP
 Rochester,
        New York
 March
        27,
        2008
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**SORL
                Auto Parts, Inc. and Subsidiaries****Consolidated
                Balance Sheets****December
                31, 2007 and 2006****December
                31, 2007**
            
            **December
                31, 2006****(Audited)**
            
            **(Audited)****Assets****Current
                Assets**Cash
                and Cash Equivalents
            US$
            4,340,211
            US$
            11,137,501Accounts
                Receivable, Net of Provision
            
            30,586,239
            
            26,750,778Notes
                Receivable
            
            9,410,385
            
            3,494,327Inventory
            
            8,220,373
            
            4,528,856Prepayments,including
                $0 and $2,309,073 from related parties at December 31, 2007 and December
                31, 2006, respectively.
            
            1,336,212
            
            5,532,802Other
                current assets,including
                $1,761,007 and $903,304 from related parties at December 31, 2007
                and
                December 31, 2006, respectively.
            
            4,275,294
            
            2,925,558**Total
                Current Assets**
            
            58,168,714
            
            54,369,822**Fixed
                Assets**Property,
                Plant and Equipment
            
            27,889,182
            
            20,418,557Less:
                Accumulated Depreciation
            
            (6,094,229)
            
            (4,106,901)Property,
                Plant and Equipment, Net
            
            21,794,953
            
            16,311,656**Land
                Use Rights, Net**
            
            13,889,705
            
            —**Other
                Assets**Deferred
                compensation cost-stock options
            
            69,571
            
            129,207Intangible
                Assets
            
            76,150
            
            45,779Less:
                Accumulated Amortization
            
            (25,116)
            
            (17,655)Intangible
                Assets, Net
            
            51,034
            
            28,124Other
                Non-current Assets
            
            —
            
            41,299Total
                Other Assets
            
            120,605
            
            198,630**Total
                Assets**
            **US$**
            **93,973,977**
            **US$**
            **70,880,108****Liabilities
                and Shareholders' Equity****Current
                Liabilities**Accounts
                Payable and Notes Payable, including $97,503 and $0 due to related
                parties
                at December 31, 2007 and December 31, 2006, respectively.
            US$
            5,305,172
            US$
            4,620,692Deposit
                Received from Customers
            
            2,079,946
            
            508,268Short
                term bank loans
            
            3,370,328
            
            —Income
                tax payable
            
            373,769
            
            358,367Accrued
                Expenses
            
            1,859,938
            
            1,232,845Other
                Current Liabilities
            
            463,563
            
            454,430**Total
                Current Liabilities**
            
            13,452,716
            
            7,174,602**Minority
                Interest**
            
            8,024,152
            
            6,336,557**Shareholders'
                Equity**Common
                Stock - $0.002 Par Value; 50,000,000 authorized,18,279,254
                and 18,275,126 issued and outstanding as ofDecember
                31, 2007 and December 31, 2006 respectively
            
            36,558
            
            36,550Additional
                Paid In Capital
            
            37,498,452
            
            37,444,051Reserves
            
            1,882,979
            
            797,116Accumulated
                other comprehensive income
            
            5,432,189
            
            1,102,469Retained
                Earnings
            
            27,646,931
            
            17,988,76372,497,109
            
            57,368,949**Total
                Liabilities and Shareholders' Equity**
            **US$**
            **93,973,977**
            **US$**
            **70,880,108****The
                accompanying notes are an integral part of these financial
                statements**




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**SORL
                Auto Parts, Inc. and Subsidiaries****Consolidated
                Statements of Income****For
                Years Ended on December 31, 2007 and 2006****2007**
            
            **2006**
            
            **2005**Sales
            
            
            115,760,070
            
            
            84,898,316
            
            
            64,182,544Include
                : sales to related parties
            
            
            1,398,638
            
            
            5,778,660
            
            
            4,471,022Cost
                of Sales
            
            
            88,757,611
            
            
            65,631,004
            
            
            49,865,235Gross
                Profit
            
            
            27,002,459
            
            
            19,267,312
            
            
            14,317,309Expenses:Selling
                and Distribution Expenses
            
            
            7,461,652
            
            
            5,101,313
            
            
            3,919,996General
                and Administrative Expenses
            
            
            6,542,522
            
            
            3,259,066
            
            
            4,169,460Financial
                Expenses
            
            
            1,000,931
            
            
            1,055,237
            
            
            688,811Total
                Expenses
            
            
            15,005,105
            
            
            9,415,616
            
            
            8,778,267Operating
                Income
            
            
            11,997,354
            
            
            9,851,696
            
            
            5,539,042Other
                Income
            
            
            731,982
            
            
            146,530
            
            
            52,592Non-Operating
                Expenses
            
            
            (141,814
            )
            
            (250,357
            )
            
            (92,067
            )Income
                (Loss) Before Provision for Income Taxes
            
            
            12,587,522
            
            
            9,747,869
            
            
            5,499,567Provision
                for Income Taxes
            
            
            636,976
            
            
            1,252,858
            
            
            —Net
                Income Before Minority Interest&
                Other Comprehensive Income
            
            
            11,950,546
            
            
            8,495,011
            
            
            5,499,567Minority
                Interest
            
            
            1,206,515
            
            
            797,117
            
            
            549,957Net
                Income Attributable to Shareholders
            
            
            10,744,031
            
            
            7,697,894
            
            
            4,949,610Foreign
                Currency Translation Adjustment
            
            
            4,810,800
            
            
            850,529
            
            
            374,437Minority
                Interest's Share
            
            
            481,080
            
            
            85,053
            
            
            37,444Comprehensive
                Income (Loss)
            
            
            15,073,751
            
            
            8,463,370
            
            
            5,286,603Weighted
                average common share - Basic
            
            
            18,277,094
            
            
            13,753,991
            
            
            13,302,763Weighted
                average common share - Diluted
            
            
            18,323,315
            
            
            13,778,535
            
            
            13,302,763EPS
                - Basic
            
            
            0.59
            
            
            0.56
            
            
            0.37EPS
                - Diluted
            
            
            0.59
            
            
            0.56
            
            
            0.37**The
                accompanying notes are an integral part of these financial
                statements**





-
          53 -
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          of Contents*




**SORL
                Auto Parts, Inc. and Subsidiaries****Consolidated
                Statements of Cash Flows****For
                Years Ended on December 31, 2007 and
                2006**




**2007**
            
            **2006**
            
            **2005****Cash
                Flows from Operating Activities**Net
                Income
            
            
            $US
            
            
            10,744,031
            
            
            7,697,894
            
            
            4,949,610**Adjustments
                to reconcile net income (loss) to net cash****from
                operating activities:**Minority
                Interest
            
            
            
            
            
            1,206,515
            
            
            797,117
            
            
            549,957Bad
                Debt Expense
            
            
            
            
            
            33,848
            
            
            (911,000
            )
            
            846,337Depreciation
                and Amortization
            
            1,769,647
            
            
            1,058,261
            
            
            866,558Stock-Based
                Compensation Expense
            
            114,045
            
            
            348,749
            
            
            362,000Loss
                on disposal of Fixed Assets
            
            41,418
            
            
            69,600
            
            
            —**Changes
                in Assets and Liabilities:**Account
                Receivables
            
            
            
            
            
            (1,940,993
            )
            
            (505,052
            )
            
            (13,590,206
            )Notes
                Receivables
            
            
            
            
            
            (5,485,625
            )
            
            (2,006,223
            )
            
            (1,358,429
            )Other
                Currents Assets
            
            
            
            
            
            (1,111,529
            )
            
            (2,877,443
            )
            
            345,184Inventory
            
            
            
            
            
            (3,266,270
            )
            
            (2,016,273
            )
            
            (637,283
            )Prepayments
            
            
            
            
            
            4,425,704
            
            
            (3,730,973
            )
            
            (397,119
            )Accounts
                Payable and Notes Payable
            
            353,406
            
            
            874,026
            
            
            (970,989
            )Income
                Tax Payable
            
            
            
            
            
            (9,019
            )
            
            358,367
            
            
            —Deposits
                Received from Customers
            
            1,485,349
            
            
            (815,817
            )
            
            462,461Other
                Current Liabilities and Accrued Expenses
            
            498,076
            
            
            1,204,293
            
            
            (142,787
            )**Net
                Cash Flows from Operating Activities**
            
            
            
            
            
            **8,858,603**
            
            
            **(454,474**
            **)**
            
            **(8,714,706**
            **)****Cash
                Flows from Investing Activities**Acquisition
                of Property and Equipment
            
            (10,103,783
            )
            
            (10,354,802
            )
            
            (2,623,151
            )Acquisition
                of Land Use Rights
            
            (9,297,253
            )
            
            —
            
            
            —Investment
                in Intangible Assets
            
            (26,304
            )
            
            —
            
            
            (1,123
            )**Net
                Cash Flows from Investing Activities**
            
            
            
            
            
            **(19,427,340**
            **)**
            
            **(10,354,802**
            **)**
            
            **(2,624,274**
            **)****Cash
                Flows from Financing Activities**Proceeds
                from (Repayment of) Bank Loans
            
            3,257,911
            
            
            (16,026,717
            )
            
            11,195,799Proceeds
                from Share Issuance
            
            —
            
            
            32,531,834
            
            
            —Capital
                contributed by Minority S/H
            
            —
            
            
            3,630,000
            
            
            —**Net
                Cash flows from Financing Activities**
            
            
            
            
            
            **3,257,911**
            
            
            **20,135,117**
            
            
            **11,195,799****Effects
                on changes in foreign exchange rate**
            
            513,536
            
            
            850,529
            
            
            374,437Net
                Change in Cash and Cash Equivalents
            
            (6,797,290
            )
            
            10,176,370
            
            
            231,256Cash
                and Cash Equivalents- Beginning of the year
            
            11,137,501
            
            
            961,131
            
            
            729,875**Cash
                and cash Equivalents - End of the year**
            
            
            **$US**
            
            
            **4,340,211**
            
            
            **11,137,501**
            
            
            **961,131****Supplemental
                Cash Flow Disclosures:**Interest
                Paid
            
            
            
            
            
            148,813
            
            
            783,794
            
            
            513,776Tax
                Paid
            
            
            
            
            
            1,784,965
            
            
            900,388
            
            
            —**Supplemental
                Disclosures of Non-Cash Investing and Financing
                Activities:**Common
                stock of 10,000 shares issued to Keating for advisory
                service
            
            65,000Common
                stock of 49,500 shares issued to key employees
            
            297,00060,000
                options issued in 2006 to employees
            
            59,636
            
            
            49,697100,000
                warrants issued in 2006 for financial service
            
            299,0524,128
                options issued in 2007 for service rendered
            
            23,201Common
                stock of 4,128 shares issued in 2007 for service rendered
            
            31,208**Non-Cash
                Transaction Disclosure:**Exchange
                of Construction in Progress for Acquisition of Property and
                Equipment:
            
            2,059,276Exchange
                of Construction in Progress for Acquisition of Land Use
                Rights
            
            4,203,728**The
                accompanying notes are an integral part of these financial
                statements**




-
          54 -
 *Table
          of Contents*




**SORL
                Auto Parts, Inc. and Subsidiaries****Consolidated
                Statements of Changes in Shareholders' Equity****For
                Years Ended on December 31, 2007, 2006 and
                2005**




**Additional**
                  
                  
                  
                  **Retained**
                  
                  **Accumu.
                      Other****Number**
                  
                  **Common**
                  
                  **Paid-in**
                  
                  
                  
                  **Earnings**
                  
                  **Comprehensive**
                  
                  **Shareholders'**
                  
                  **Minority****of
                      Share**
                  
                  **Stock**
                  
                  **Capital**
                  
                  **Reserves**
                  
                  **(Deficit)**
                  
                  **Income**
                  
                  **Equity**
                  
                  **Interest****Beginning
                      Balance - Jan 1, 2005**
                  
                  
                  **13,282,253**
                  
                  
                  **26,565**
                  
                  
                  **4,082,246**
                  
                  
                  —
                  
                  
                  **6,226,944**
                  
                  
                  —
                  
                  
                  **10,335,755**
                  
                  
                  1,148,417Adjustment
                      for fractional shares
                  
                  
                  4802
                  
                  
                  9
                  
                  
                  (9
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Common
                      Stock issued to consultants
                  
                  
                  10,000
                  
                  
                  20
                  
                  
                  64,980
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  65,000
                  
                  
                  —Common
                      Stock issued to employees
                  
                  
                  49,500
                  
                  
                  99
                  
                  
                  296,901
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  297,000
                  
                  
                  —Net
                      Income (Loss)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4,949,610
                  
                  
                  —
                  
                  
                  4,949,610
                  
                  
                  549,957Other
                      Comprehensive Income (Loss)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  336,993
                  
                  
                  336,993
                  
                  
                  37,444***Ending
                      Balance - Dec 31, 2005***
                  
                  
                  13,346,555
                  
                  
                  26,693
                  
                  
                  4,444,118
                  
                  
                  —
                  
                  
                  11,176,554
                  
                  
                  336,993
                  
                  
                  15,984,358
                  
                  
                  1,735,818Net
                      Income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  7,697,894
                  
                  
                  —
                  
                  
                  7,697,894
                  
                  
                  797,117Other
                      Comprehensive Income(Loss)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  765,476
                  
                  
                  765,476
                  
                  
                  85,053Common
                      stock issued in public offering
                  
                  
                  4,928,571
                  
                  
                  9,857
                  
                  
                  32,521,977
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  32,531,834
                  
                  
                  —Capital
                      contributed by Minority S/H
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,630,000Transfer
                      to reserve
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  797,116
                  
                  
                  (885,685
                  )
                  
                  —
                  
                  
                  (88,569
                  )
                  
                  88,56960,000
                      options issued in 2006
                  
                  
                  —
                  
                  
                  —
                  
                  
                  178,904
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  178,904
                  
                  
                  —100,000
                      warrants issued in 2006
                  
                  
                  —
                  
                  
                  —
                  
                  
                  299,052
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  299,052
                  
                  
                  —***Ending
                      Balance - December 31, 2006***
                  
                  
                  **18,275,126**
                  
                  
                  **36,550**
                  
                  
                  **37,444,051**
                  
                  
                  **797,116**
                  
                  
                  **17,988,763**
                  
                  
                  **1,102,469**
                  
                  
                  **57,368,949**
                  
                  
                  **6,336,557**Net
                      Income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  10,744,031
                  
                  
                  —
                  
                  
                  10,744,031
                  
                  
                  1,206,515Other
                      Comprehensive Income(Loss)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4,329,720
                  
                  
                  4,329,720
                  
                  
                  481,080Common
                      stock of 4,128 shares issued in 2007 for service rendered
                  
                  
                  4,128
                  
                  
                  8
                  
                  
                  31,200
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  31,208
                  
                  
                  —Transfer
                      to reserve
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  1,085,863
                  
                  
                  (1,085,863
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —4,128
                      options issued in 2007 for service rendered
                  
                  
                  —
                  
                  
                  —
                  
                  
                  23,201
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  23,201
                  
                  
                  —***Ending
                      Balance - December 31, 2007***
                  
                  
                  **18,279,254**
                  
                  
                  **36,558**
                  
                  
                  **37,498,452**
                  
                  
                  **1,882,979**
                  
                  
                  **27,646,931**
                  
                  
                  **5,432,189**
                  
                  
                  **72,497,109**
                  
                  
                  **8,024,152**


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


-
            55 -
 *Table
            of Contents*




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - DESCRIPTION OF BUSINESS**





SORL
      Auto
      Parts, Inc. is principally engaged in the manufacture and distribution of
      automotive air brake valves and related components for commercial vehicles
      weighing more than three tons, such as trucks, and buses, through its 90%
      ownership of Ruili Group Ruian Auto Parts Company Limited (“Ruian”, or “the
      Company”) in the People’s Republic of China (“PRC” or “China”). The Company
      distributes products both in China and internationally under SORL trademarks.
      The Company’s product range includes 40 categories of brake valves with over
      1000 different specifications.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**ACCOUNTING
      METHOD**





The
      Company uses the accrual method of accounting for financial statement and tax
      return purposes.





**PRINCIPLES
      OF CONSOLIDATION**





The
      consolidated financial statements include the accounts of SORL Auto Parts,
      Inc.
      and its majority owned subsidiaries. All significant inter-company balances
      and
      transactions have been eliminated in the consolidation.





**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with U.S generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and 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.
      Management makes its best estimate of the outcome for these items based on
      historical trends and other information available when the financial statements
      are prepared. Changes in estimates are recognized in accordance with the
      accounting rules for the estimate, which is typically in the period when new
      information becomes available to management. Actual results could differ from
      those estimates.





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





For
      certain of the Company’s financial instruments, including cash and cash
      equivalents, trade receivables and payables, prepaid expenses, deposits and
      other current assets, short-term bank borrowings, and other payables and
      accruals, the carrying amounts approximate fair values due to their short
      maturities.





**RELATED
      PARTY TRANSACTIONS**





A
      related
      party is generally defined as (i) any person that holds 10% or more of the
      Company’s securities and their immediate families, (ii) the Company’s
      management, (iii) someone that directly or indirectly controls, is controlled
      by
      or is under common control with the Company, or (iv) anyone who can
      significantly influence the financial and operating decisions of the Company.
      A
      transaction is considered to be a related party transaction when there is a
      transfer of resources or obligations between related parties. The Company’s
      policy is that all related party transactions must be in arm’s length.





**FINANCIAL
      RISK FACTORS AND FINANCIAL RISK MANAGEMENT**





The
      Company is exposed to the following risk factors:


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          56 -
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(i) Credit
      risks
      - The Company has policies in place to ensure that sales of products are made
      to
      customers with an appropriate credit history. The Company has two customers
      that
      respectively account for more than 5% of its total revenues for the period.
      The
      Company also has a concentration of credit risk due to geographic sales as
      a
      majority of its products are marketed and sold in the PRC.




(ii) Liquidity
      risks - Prudent liquidity risk management implies maintaining sufficient cash,
      the availability of funding through an adequate amount of committed credit
      facilities and ability to close out market positions.




(iii) Interest
      rate
      risk - The interest rate and terms of repayments of short-term and long-term
      bank borrowings are approximately 7.47% per annum. The Company’s income and cash
      flows are substantially independent of changes in market interest rates. The
      Company has no significant interest-bearing assets. The Company’s policy is to
      maintain all of its borrowings in fixed rate instruments.





**CASH
      AND CASH EQUIVALENTS**





The
      Company considers all highly liquid instruments purchased with an original
      maturity of three months or less to be cash equivalents.





**INVENTORIES**





Inventories
      are stated at the lower of cost or net realizable value, with cost computed
      on a
      weighted-average basis. Cost includes all costs of purchase, cost of conversion
      and other costs incurred in bringing the inventories to their present location
      and condition. Net realizable value is the estimated selling price in the
      ordinary course of business less the estimated costs of completion and the
      estimated costs necessary to make the sale.





**PROPERTY,
      PLANT AND EQUIPMENT**





Property,
      plant and equipment are stated at cost less accumulated depreciation and
      impairment losses. The initial cost of the asset comprises its purchase price
      and any directly attributable costs of bringing the asset to its working
      condition and location for its intended use. Depreciation is provided using
      the
      straight-line method over the assets estimated useful life for periods ranging
      from five to ten years. Significant improvements and betterments are capitalized
      where it is probable that the expenditure resulted in an increase in the future
      economic benefits expected to be obtained from the use of the asset beyond
      its
      originally assessed standard of performance. Routine repairs and maintenance
      are
      expensed when incurred. Gains and losses on disposal of fixed assets are
      recognized in the income statement based on the net disposal proceeds less
      the
      carrying amount of the assets.





**IMPAIRMENT
      OF LONG-LIVED ASSETS**





Long-lived
      assets, such as property, plant and equipment and other non-current assets,
      including intangible assets, are reviewed for impairment whenever events or
      changes in circumstances indicate that the carrying value of an asset may not
      be
      recoverable. An impairment loss is recognized when the estimated undiscounted
      cash flows associated with the asset or group of assets is less than their
      carrying value. If impairment exists, an adjustment is made to write the asset
      down to its fair value, and a loss is recorded as the difference between the
      carrying value and fair value. Fair values are determined based on quoted market
      values, discounted cash flows or internal and external appraisals, as
      applicable. Assets to be disposed of are carried at the lower of carrying value
      or estimated net realizable value.





**INTANGIBLE
      ASSETS**





Intangible
      assets represent mainly the patent of technology, plus the computer software.
      Intangible assets are measured initially at cost. Intangible assets are
      recognized if it is probable that the future economic benefits that are
      attributable to the asset will flow to the enterprise and the cost of the asset
      can be measured reliably. After initial recognition, intangible assets are
      measured at cost less any impairment losses. Intangible assets with definite
      useful lives are amortized on a straight-line basis over their useful lives.


-
          57 -
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          of Contents*


**ACCOUNTS
      RECEIVABLES AND ALLOWANCE FOR BAD DEBTS**





The
      Company presents accounts receivables, net of allowances for doubtful accounts
      and returns, to ensure accounts receivable are not overstated due to
      uncollectibility. Accounts receivables generated from credit sales have general
      credit terms of 90 days for domestic aftermarket customers.





The
      allowances are calculated based on a detailed review of certain individual
      customer accounts, historical rates and an estimation of the overall economic
      conditions affecting the Company’s customer base. The Company reviews a
      customer’s credit history before extending credit. If the financial condition of
      its customers were to deteriorate, resulting in an impairment of their ability
      to make payments, additional allowances may be required.





The
      Company will write off the uncollectible receivables once the customers are
      bankrupt or there is a remote possibility that the Company will collect the
      outstanding balance. The write-off must be reported to the local tax authorities
      and receive official approval from them. To date, the Company has not written
      off any account receivable.





**NOTES
      RECEIVABLE**





Notes
      receivable are issued by some customers to pay certain outstanding receivable
      balances to the Company with specific payment terms and definitive due dates.
      Notes receivable do not bear interest.





**REVENUE
      RECOGNITION**





Revenue
      from the sale of goods is recognized when the risks and rewards of ownership
      of
      the goods have transferred to the buyer. Revenue consists of the invoice value
      for the sale of goods and services net of value-added tax (“VAT”), rebates and
      discounts and returns. The Company nets sales return in gross revenue, i.e.,
      the
      revenue shown in the income statement is the net sales.





**INCOME
      TAXES**





The
      Company accounts for income taxes under the provision of Statement of Financial
      Accounting Standards (“SFAS” No. 109), “Accounting for Income Taxes,” whereby
      deferred income tax assets and liabilities are computed for differences between
      the financial statements and tax bases of assets and liabilities that will
      result in taxable or deductible amounts in the future, based on enacted tax
      laws
      and rates applicable to the periods in which the differences are expected to
      affect taxable income. Valuation allowances are established when necessary;
      to
      reduce deferred income tax assets to the amount expected to be realized.





**FOREIGN
      CURRENCY TRANSLATION**





The
      Company maintains its books and accounting records in Renminbi (“RMB”), the
      currency of the PRC, The Company’s functional currency is also RMB. The Company
      has adopted SFAS 52 in translating financial statement amounts from RMB to
      the
      Company’s reporting currency, United States dollars (“US$”). All assets and
      liabilities are translated at the current rate. The shareholders’ equity
      accounts are translated at appropriate historical rate. Revenue and expenses
      are
      translated at the weighted average rates in effect on the transaction dates.





Foreign
      currency gains and losses, if any, are included in the Consolidated Statements
      of Income as a component of other comprehensive income.





**STOCK-BASED
      COMPENSATION**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R revises FASB Statement No.
      123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25
“Accounting for Stock Issued to Employees”. SFAS 123R requires all public and
      non-public companies to measure and recognize compensation expense for
      all


-
          58 -
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          of Contents*


stock-based
      payments for services received at the grant-date fair value, with the cost
      recognized over the vesting period (or the requisite service period). The
      Company has adopted SFAS 123R as of January 1, 2005.





**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development costs are classified as general and administrative expenses
      and
      are expensed as incurred.





**SHIPPING
      AND HANDLING COSTS**





Shipping
      and handling cost are classified as selling expenses and are expensed as
      incurred.





**ADVERTISING
      COSTS**





Advertising
      costs are classified as selling expenses and are expensed as
      incurred.




**WARRANTY
      CLAIMS**





The
      Company offers product warranties for certain products. Warranty claims are
      classified as selling expenses and are expensed as incurred. The Company accrues
      the costs of unsettled product warranty claims based on the historical claims
      made in previous years.





**PURCHASE
      DISCOUNTS**





Purchase
      discounts, if applicable, are netted in the cost of goods sold.





**LEASE
      COMMITMENTS**





The
      Company has adopted SFAS No. 13, “Accounting for Leases”. If the lease terms
      meet one or all of the following four criteria, it will be classified as a
      capital lease, otherwise, it is an operating lease: (1) The lease transfers
      the
      title to the lessee at the end of the term; (2) the lease contains a bargain
      purchase option; (3) the lease term is equal to 75% of the estimated economic
      life of the leased property or more; (4) the present value of the minimum lease
      payment in the term equals or exceeds 90% of the fair value of the leased
      property.





**RECENTLY
      ISSUED FINANCIAL STANDARDS**




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities-Including an Amendment of SFAS 115",
      which allows for the option to measure financial instruments and certain other
      items at fair value. Unrealized gains and losses on items for which the fair
      value option has been elected are reported in earnings. The adoption of SFAS
      No.
      159 has not had a material impact on the Company's consolidated results of
      operations or financial position.




In
      December 2007, the FASB issued FASB 141(R), "Business Combinations" of which
      the
      objective is to improve the relevance, representational faithfulness, and
      comparability of the information that a reporting entity provides in its
      financial reports about a business combination and its effects. The new standard
      requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities
      assumed in the transaction; establishes the acquisition-date fair value as
      the
      measurement objective for all assets acquired and liabilities assumed; and
      requires the acquirer to disclose to investors and other users all of the
      information they need to evaluate and understand the nature and financial effect
      of the business combination.




In
      December 2007, the FASB issued FASB 160 "Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of ARB No.51" of which the
      objective is to improve the relevance, comparability, and transparency of the
      financial information that a reporting entity provides in its consolidated
      financial statements by establishing accounting and reporting standards by
      requiring all entities to report noncontrolling (minority)
      interests


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in
      subsidiaries in the same way - as an entity in the consolidated financial
      statements. Moreover, Statement 160 eliminates the diversity that currently
      exists in accounting for transactions between an entity and noncontrolling
      interests by requiring they be treated as equity transactions.




Both
      FASB
      141(R) and FASB 160 are effective for fiscal years beginning after December 15,
      2008. The Company does not believe that the adoption of these standards will
      have any impact on its financial statements.




In
      December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB
      110”) .
      SAB 110
      permits companies to continue to use the simplified method, under certain
      circumstances, in estimating the expected term of “plain vanilla” options beyond
      December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously
      stated that the Staff would not expect a company to use the simplified method
      for share option grants after December 31, 2007. Adoption of SAB 110 is not
      expected to have a material impact on the Company’s consolidated financial
      statements.




**NOTE
      3 - RELATED PARTY TRANSACTIONS**





The
      Company continued to purchase non-valve automotive components and packaging
      materials from the Ruili Group Co., Ltd., which is the minority shareholder
      of
      the JV and has the common controlling party, i.e. the Zhang family. It also
      sources some non-valve parts from Ruian Ruili Haizhiguan Auto Part Co., Ltd.,
      a
      subsidiary of Ruili Group.





The
      following related party transactions occurred for the fiscal year ended December
      31, 2007 and 2006:




**December
                31,****2007**
            
            **2006**PURCHASES
                NON-VALVE PRODUCT AND PACKAGING MATERIAL FROM FROM:Ruili
                Group Co., Ltd.
            
            $
            26,589,425
            
            $
            21,882,495Total
                Purchases
            
            $
            26,589,425
            
            
            21,882,495PURCHASES
                LAND USE RIGHTS FROM RUILI GROUP CO., LTD.
            
            $
            13,501,009
            
            $
            5,909,671PURCHASES
                PLANT FROM RUILI GROUP CO., LTD.
            
            $
            6,613,724
            
            $
            —SALES
                TO:Ruili
                Group Co., Ltd.
            
            
            1,398,638
            
            
            5,778,660Total
                Sales
            
            $
            1,398,638
            
            $
            5,778,660




**December
                31,****2007**
            
            **2006**ACCOUNTS
                PAYABLE AND OTHER PAYABLESRuili
                Group Co., Ltd.
            
            $
            97,503
            
            $
            —Total
            
            $
            97,503
            
            $
            —PREPAYMENTSRuili
                Group Co., Ltd.
            
            $
            —
            
            $
            2,309,073Total
            
            $
            —
            
            $
            2,309,073OTHER
                ACCOUNTS RECEIVABLERuili
                Group Co., Ltd.
            
            $
            1,761,007
            
            $
            903,304Total
            
            $
            1,761,007
            
            $
            903,304




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1.
            The
                total purchases from Ruili Group during the fiscal year ended December
                31,
                2007 consisted of $ 24.6 million of finished products for non-valve
                auto
                parts and $1.9 million of packaging
                materials.


2.
            On
                September 28, 2007, the Company purchased land use rights, a manufacturing
                plant, and an office building from Ruili Group for an aggregate purchase
                price of approximately RMB152 million (approximately $20.1 million
                translated with an average exchange rate of 7.5567). DTZ Debenham
                Tie
                Leung Ltd., an internationally recognized appraiser, appraised the
                total
                asset value at RMB154 million (approximately $20.4 million translated
                with
                an average exchange rate of 7.5567). RMB69.4 million (approximately
                $9.1
                million translated with an average exchange rate of 7.5567) of the
                purchase price was paid on a transfer of the Company’s an existing project
                that includes a construction-in-progress and prepayment of land use
                rights. The remaining balance was paid by the cash generated from
                operation and a bank credit line.




**NOTE
      4 - ACCOUNTS RECEIVABLE**





The
      changes in the allowance for doubtful accounts at December 31, 2007 and December
      31, 2006 were summarized as follows:




**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**Beginning
                balance
            
            $
            8,769
            
            $
            914,721Add:
                Increase to allowance
            
            
            19,218
            
            
            (905,952
            )Less:
                Accounts written off
            
            
            
            
            
            —Ending
                balance
            
            $
            27,987
            
            $
            8,769




**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Accounts
                receivable
            
            $
            30,614,226
            
            $
            26,759,547Less:
                allowance for doubtful accounts
            
            
            (27,987
            )
            
            (8,769
            )Account
                receivable balance, net
            
            $
            30,586,239
            
            $
            26,750,778




**NOTE
      5 - INVENTORIES**





On
      December 31, 2007 and December 31, 2006, inventories consisted of the
      following:




**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Raw
                Material
            
            $
            2,354,637
            
            $
            1,081,569Work
                in process
            
            
            4,157,643
            
            
            2,429,979Finished
                Goods
            
            
            1,708,093
            
            
            1,017,308Total
                Inventory
            
            $
            8,220,373
            
            $
            4,528,856




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**NOTE
      6 - PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consisted of the following, on December 31, 2007 and
      December 31, 2006:


**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Machinery
            
            $
            18,118,125
            
            $
            12,123,775Molds
            
            
            1,193,488
            
            
            1,116,441Office
                equipment
            
            
            358,163
            
            
            226,647Vehicle
            
            
            757,311
            
            
            310,681Building
            
            
            7,462,096
            
            
            580,126Construction
                In Progress
            
            
            
            
            
            6,060,887Sub-Total
            
            
            27,889,182
            
            
            20,418,557Less:
                Accumulated depreciation
            
            
            (6,094,229
            )
            
            (4,106,901
            )Fixed
                Assets, net
            
            $
            21,794,953
            
            $
            16,311,656




Depreciation
      expense charged to operations was $1,689,021 and $1,052,965 for the fiscal
      year
      ended December 31, 2007 and 2006, respectively.




**NOTE
      7 - LAND USE RIGHTS**




**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Cost:
            
            $
            13,966,870
            
            $
            —Less:
                Accumulated amortization:
            
            
            77,165
            
            
            —Land
                use rights, net
            
            $
            13,889,705
            
            $
            —





According
      to the law of China, the government owns all the land in China. Companies and
      individuals are authorized to possess and use the land only through land use
      rights granted by the Chinese government. The company purchased the land use
      rights from Ruili Group for approximately $13.9 million on September 28, 2007.
      The Company has not yet obtained the land use right certificate. However, the
      Company is in the process of applying to obtain the land use right
      certificate. Amortization expenses were $77,165 for the fiscal years ended December 31,
      2007.




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**NOTE
      8 - INTANGIBLE ASSETS**


Gross
      intangible assets were $76,150, less accumulated amortization of $25,116 for
      net
      intangible assets of $51,034 as of December 31,
      2007. Gross intangible assets were $45,779, less accumulated amortization of
      $17,655 for net intangible assets of $28,124 as of December 31, 2006. Amortization
      expenses were $6,035 and $5,296 for the fiscal years ended December 31, 2007
      and
      2006 respectively. Future estimated amortization expense is as
      follows:





**2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Thereafter**$
            6,821
            
            $
            6,821
            
            $
            6,821
            
            $
            6,821
            
            $
            6,821
            
            $
            16,929





**NOTE
      9 - PREPAYMENT**





Prepayment
      consisted of the following as of December 31, 2007 and December 31,
      2006:




**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Raw
                material suppliers
            
            $
            929,178
            
            $
            5,080,452Equipment
                purchase
            
            
            407,035
            
            
            452,350Total
                prepayment
            
            $
            1,336,212
            
            $
            5,532,802





**NOTE
      10 - ACCRUED EXPENSES**





Accrued
      expenses consisted of the following as of December 31, 2007 and December 31,
      2006:




**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Accrued
                payroll
            
            $
            601,733
            
            $
            448,420Other
                accrued expenses
            
            
            1,258,205
            
            
            784,425Total
                accrued expenses
            
            $
            1,859,938
            
            $
            1,232,845





**NOTE
      11 - BANK LOANS**





Bank
      loans represented the following as of December 31, 2007 and December 31,
      2006:




**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Secured
            
            $
            3,370,328
            
            $
            —Less:
                Current portion
            
            $
            (3,370,328
            )
            $
            —Non-current
                portion
            
            $
            —
            
            $
            —





As
      of
      December 31, 2007, the outstanding short-term loans with banks were $
      3,013,928, bearing
      interest at 6.54% and 5.7375% per annum, respectively.  Those
      loans were used
      primarily to finance
      new equipment acquisition from overseas suppliers as
      well
      as the general working capital .
      Corporate or personal guarantees are provided for those bank loans as
      follows:




$1.0M
            
            Guaranteed
                by Ruili Group Co., Ltd., a related party;$2.0M
            
            Guaranteed
                by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal
                shareholders;





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In
      the
      third quarter of 2007, the Company entered into an accounts receivable financing
      agreement with Bank of China. The facility has a credit line of $7.0M, which
      was
      secured by eligible accounts receivable due from oversea customers. All these
      accounts receivable must have credit terms no longer than 180 days. As of
      December 31, 2007, the outstanding amount
      from the credit line was $ 356,400.





The
      Company did not provide any sort of guarantee to any other parties.





**NOTE
      12 - INCOME TAXES**





The
      Joint
      Venture is registered in the PRC, and is therefore subject to state and local
      income taxes within the PRC at the applicable tax rate on the taxable income
      as
      reported in the PRC statutory financial statements in accordance with relevant
      income tax laws. According to applicable tax laws regarding Sino-Foreign Joint
      Venture, the Joint Venture is exempted from income taxes in the PRC for the
      fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture
      is
      entitled to a tax concession of 50% of the statutory income tax rate of 26.4%,
      for the following three years ended December 31, 2006, 2007, and 2008.





The
      reconciliation of the effective income tax rate of the Joint Venture to the
      statutory income tax rate in the PRC for the fiscal year ended on December
      31,
      2007 is as follows:





Statutory
                tax rate
            
            
            26.4
            %Tax
                holidays and concessions
            
            
            -13.2
            %Effective
                tax rate
            
            
            13.2
            %





No
      provision for deferred tax liabilities has been made, since the Joint Venture
      had no material temporary differences between the tax bases of assets and
      liabilities and their carrying amounts.





In
      addition, in accordance with China's relevant regulations of income taxes,
      there
      is a benefit of a refund of 40% of domestic equipment purchases from increased
      income taxes for the purchasing year over those of the previous year. The
      company received an income tax benefit of $$991,133 and $0 in 2007 and 2006,
      respectively.





**NOTE
      13 - LEASES**





Commencing
      in 2004, the Joint Venture has a lease agreement with Ruili Group Co., Ltd.,
      a
      related party, for the lease of a manufacturing plant. The lease is for a ten
      year term ending in February 2014. The Joint Venture purchased the plant in
      September 2007. As a result, the lease has been terminated according to the
      purchase agreement with Ruili Group Co., Ltd. The office building purchased
      in
      the quarter ended September 30, 2007 is not part of the lease.





In
      December 2006, the Joint Venture entered into one new lease agreement with
      Ruili
      Group Co., Ltd. for the lease of two apartment buildings. These two apartment
      buildings are respectively for its management personnel and staff. The lease
      term is from January 2007 to December 2011 for one of the apartment buildings
      and from January 2007 to December 2012 for the other.





Future
      minimum rental payments for the years ended December 31, are as
      follows:




**2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Thereafter**Buildings
            
            $
            263,076
            
            $
            263,076
            
            $
            263,076
            
            $
            263,076
            
            $
            63,830
            
            $
            —Total
            
            $
            263,076
            
            $
            263,076
            
            $
            263,076
            
            $
            263,076
            
            $
            63,830
            
            $
            —




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**NOTE
      14 - ADVERTISING COSTS**





Advertising
      costs are expensed as incurred and are classified as selling expenses.
      Advertising costs were$110,512 and $30,927 for the fiscal years ended December
      31, 2007 and 2006, respectively.




**NOTE
      15 - RESEARCH AND DEVELOPMENT EXPENSE**





Research
      and development costs are expensed as incurred and were $1,795,510 and $773,559
      for the fiscal years ended December 31, 2007 and 2006, respectively.




**NOTE
      16 - WARRANTY CLAIMS**





Warranty
      claims were $2,152,978 and $1,867,514for the fiscal year ended on December
      31,
      2007 and 2006 respectively. The movement of accrued warranty expenses for fiscal
      year 2007 is as follows. Accrued
      warranty expenses are included in Accrued Expenses.


Beginning
                balance at Jan 01, 2007
            
            $
            613,917Accrued
                during thefiscal
                yearended December 31, 2007:
            
            $
            2,152,978Less:
                Actual Paid during thefiscal
                yearended December 31, 2007:
            
            $
            1,903,467Ending
                balance at December 31, 2007
            
            $
            863,428





**NOTE
      17 - STOCK COMPENSATION PLAN**





(1)
      The
      Company’s 2005 Stock Compensation Plan (the Plan) permits the grant of share
      options and shares to its employees for up to 1,700,000 shares of common stock.
      The Company believes that such awards better align the interests of its
      employees with those of its shareholders. Option awards are generally granted
      with an exercise price equal to the market price of the Company’s stock at the
      date of grant.





Pursuant
      to the Plan, the Company issued 60,000 options with an exercise price of $4.79
      per share on March 1, 2006. In accordance with the vesting provisions of the
      grants, the options will become vested and exercisable under the following
      schedule.





**Number
                of Shares**
            
            **%
                of Shares Issued**
            
            **Initial
                Vesting Date**60,000
            
            100%
            
            March
                1, 2009





The
      Company accounts for stock-based compensation in accordance with SFAS No. 123
      Revised, “Share-Based Payment.” The fair value of each option award is estimated
      on the date of grant using the Black-Scholes-Merton option-pricing model that
      uses the assumptions noted in the following table.


Dividend
                Yield
            
            
            0.00
            %Expected
                Volatility
            
            
            96.54
            %Risk-Free
                Interest Rate
            
            
            4.59
            %Contractual
                Term
            
            
            3
                yearsStock
                Price at Date of Grant
            
            $
            4.79Exercise
                Price
            
            $
            4.79





Total
      deferred stock-based compensation expenses related to the 60,000 stock options
      granted amounted to $178,904.  This amount is amortized over three years in
      a manner consistent with Financial Accounting Standards Board Interpretation
      No.
      123 (R). The amortization of deferred stock-based compensation for these
      equity arrangements was $59,636 and $49,697 for the fiscal year ended December
      31, 2007 and 2006, respectively. As of December 31, 2007, there was $ 69,571
      of
      total unrecognized compensation cost related to non-vested share-based
      compensation arrangements granted under the plan. The cost is expected to be
      recognized over a period of 1.2 years.


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A
      summary
      of option activity under the Plan as of December 31, 2007
      and changes during the fiscal year ended December 31, 2007 is as follows:




**Options**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual
                Term**
            
            **Aggregate**
              **Intrinsic**
              **Value**January
                1, 2006
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Granted
            
            
            60,000
            
            
            4.79
            
            
            3Years
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                atDecember31, 2007
            
            
            60,000
            
            $
            4.79
            
            
            1.2Years
            
            $
            132,000Exercisable
                atDecember31, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —




(ii).
      Subject to all the terms and provisions of the 2005 Stock Compensation
      Plan,  on
      June
      20, 2007, the
      Company granted to its previous senior manager of investor relations, David
      Ming
      He options to purchase 4,128 shares of its common stocks with an exercise price
      of $7.25 per share. The
      option became vested and exercisable immediately on the date
      thereof.





**Number
                of Shares**
            
            **%
                of Shares Issued**
            
            **Initial
                Vesting Date**4,128
            
            100%
            
            June
                20, 2007





The
      Company accounts for stock-based compensation in accordance with SFAS No. 123
      Revised, “Share-Based Payment.” The fair value of each warrant is estimated on
      the date of grant using the Black-Scholes-Merton option-pricing model that
      uses
      the assumptions noted in the following table.


Dividend
                Yield
            
            
            0.00
            %Expected
                Volatility
            
            
            141.47
            %Risk-Free
                Interest Rate
            
            
            5.14
            %Contractual
                Term
            
            
            3
                yearsStock
                Price at Date of Grant
            
            $
            7.09Exercise
                Price
            
            $
            7.25





Total
      stock-based compensation expenses related to the 4,128 stock options granted
      amounted to $23,201. This amount is charged to G&A during 2007
      year.




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          66 -
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          of Contents*





A
      summary
      of option activity under the Plan as of December 31, 2007 and changes during the fiscal year ended December 31, 2007 is as follows:




**Options**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual
                Term**
            
            **Aggregate**
              **Intrinsic**
              **Value**January
                1, 2007
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Granted
            
            
            4,128
            
            $
            7.25
            
            
            3Years
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                atDecember31, 2007
            
            
            4,128
            
            $
            7.25
            
            
            2.6Years
            
            $
            289Exercisable
                atDecember31, 2007
            
            
            4,128
            
            $
            7.25
            
            
            2.6Years
            
            $
            289





(2)
      On
      January 5, 2006, the Company issued 100,000 warrants for financial services
      to
      be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
      exercise price of $6.25 per share. In accordance with the common stock purchase
      warrant agreement, the warrants became vested and exercisable immediately on
      the
      date thereof. As set forth in the agreement, the Company will retain Maxim
      Group
      LLC and Chardan Capital Markets, LLC as its exclusive financial advisors and
      investment bankers for a period of twelve months.





**Number
                of Shares**
            
            **%
                of Shares Issued**
            
            **Initial
                Vesting Date**100,000
            
            100%
            
            January
                5, 2006





The
      Company accounts for stock-based compensation in accordance with SFAS No. 123
      Revised, “Share-Based Payment.” The fair value of each warrant is estimated on
      the date of grant using the Black-Scholes-Merton option-pricing model that
      uses
      the assumptions noted in the following table.


Dividend
                Yield
            
            
            0.00
            %Expected
                Volatility
            
            
            95.01
            %Risk-Free
                Interest Rate
            
            
            4.36
            %Contractual
                Term
            
            
            4
                yearsStock
                Price at Date of Grant
            
            $
            4.70Exercise
                Price
            
            $
            6.25





Total
      deferred stock-based compensation expenses related to the 100,000 warrants
      granted amounted to $299,052. This amount is amortized over one year in a manner
      consistent with Financial Accounting Standards Board Interpretation No. 123
      (R).
      The amortization of deferred stock-based compensation for these equity
      arrangements was $299,052 for the fiscal year ended December 31, 2006.





A
      summary
      of option activity with respect to the warrants as of December 31, 2007
      and changes during the fiscal year ended December 31, 2007 is as follows:





**Warrants**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual
                Term**
            
            **Aggregate**
              **Intrinsic**
              **Value**January
                1, 2006
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Granted
            
            
            100,000
            
            $
            6.25
            
            
            4Years
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                atDecember31, 2007
            
            
            100,000
            
            $
            6.25
            
            
            2.1Years
            
            $
            151,800Exercisable
                atDecember31, 2007
            
            
            100,000
            
            $
            6.25
            
            
            2.1Years
            
            $
            151,800




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          of Contents*




**NOTE
      18- COMMON STOCK**





**** On
      July
      11st, 2007, the Company granted 4,128 shares of common stock to its previous
      senior manager of investor relations, David Ming He, for his service. The
      transaction was recorded as $31,208 of general and administrative
      expenses.





**NOTE
      19- COMMITMENTS AND CONTINGENCIES**





(1) According
      to
      the law of China, the government owns all the land in China. Companies and
      individuals are authorized to possess and use the land only through land use
      rights granted by the Chinese government. The company purchased the land use
      rights from Ruili Group for approximately $13.9 million on September 28, 2007.
      The Company has not yet obtained the land use right certificate. However, the
      Company is in the process of applying to obtain the land use right
      certificate.





(2) The
      information of lease commitments is provided in Note 14.





**NOTE
      20 - OFF-BALANCE SHEET ARRANGEMENTS**





At December 31,
      2007, we do not have any material commitments for capital expenditures or have
      any transactions, obligations or relationships that could be considered
      off-balance sheet arrangements.





**NOTE
      21 - SUBSEQUENT EVENTS**





None .




**NOTE
      22 - RESTRICTED NET ASSETS**




Relevant
      PRC laws and regulations permit payments of dividends by our PRC subsidiaries
      only out of their retained earnings, if any, as determined in accordance with
      PRC accounting standards and regulations. In addition, PRC laws and regulations
      require that annual appropriations of 10% of after-tax income should be set
      aside prior to payment of dividends as a general reserve fund. As a result
      of
      these PRC laws and regulations, our PRC subsidiaries and our affiliated PRC
      entities are restricted in their ability to transfer a portion of their net
      assets to us whether in the form of dividends, loans or advances. As of December
      31, 2007 and 2006, the amounts of our restricted net assets were approximately
      $39 million and $38 million, respectively.




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**Additional
      Information—Financial Statement Schedule I**




**This
      financial statements schedule has been prepared in conformity with accounting
      principles generally accepted in the United States of America.**





**** **SORL
      AUTO PARTS, INC.**





This
      financial statements schedule has been prepared in conformity with accounting
      principles generally accepted in the United States of America. The
      parent company financial statements have been prepared using the same accounting
      principles and policies described in the notes to the consolidated financial
      statements, with the only exception being that the company accounts for its
      subsidiaries using the equity method. Please refer to the notes to the
      consolidated financial statements presented above for additional information
      and
      disclosures with respect to these financial statements.




**31-Dec-07**
              
              **31-Dec-06****ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              33,288
              
              $
              48,246Other
                  current assets
              
              
              16,161
              
              
              1,765**Total
                  current assets**
              
              
              49,449
              
              
              50,011Deferred
                  compensation cost-stock options
              
              
              69,571
              
              
              129,207Investments
                  in subsidiaries
              
              
              69,521,035
              
              
              58,662,397**TOTAL
                  ASSETS**
              
              **$**
              69,640,055
              
              **$**
              58,841,615**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  Liabilities:**Other
                  current liability
              
              
              2,486,566
              
              
              2,486,566**Total
                  current liabilities**
              
              
              2,486,566
              
              
              2,486,566**Total
                  liabilities**
              
              
              2,486,566
              
              
              2,486,566**Shareholders'
                  equity:**Common
                  Stock - $0.002 Par Value; 50,000,000 authorized, 18,279,254 and
                  18,275,126
                  issued and outstanding as of December 31, 2007 and December 31, 2006
                  respectively
              
              
              36,558
              
              
              36,550Additional
                paid-in
                capital
              
              
              37,498,452
              
              
              37,444,051Retained
                  earnings
              
              
              29,618,479
              
              
              18,874,448**Total
                  shareholders' equity**
              
              
              67,153,489
              
              
              56,355,049**TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              **$**
              69,640,055
              
              **$**
              58,841,615






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**Financial
                Information of parent company****STATEMENTS
                OF INCOME**




**Year
                Ended Dec 31,****2007**
            
            **2006**
            
            **2005**Operating
                Expenses:General
                and administrative expenses
            
            
            114,045
            
            
            359,437
            
            
            362,000Financial
                expenses
            
            
            562
            
            
            2,404
            
            
            —Total
                Operating Expenses:
            
            
            114,607
            
            
            361,841
            
            
            362,000Equity
                in earnings of subsidiaries
            
            **$**
            10,858,638
            
            $
            8,059,735
            
            $
            5,311,610**Net
                income attributable to shareholders**
            
            **$**
            10,744,031
            
            **$**
            7,697,894
            
            **$**
            4,949,610Weighted
                average common share - Basic
            
            
            18,277,094
            
            
            13,753,991
            
            
            13,302,763Weighted
                average common share - Diluted
            
            
            18,323,315
            
            
            13,778,535
            
            
            13,302,763EPS
                - Basic
            
            
            0.59
            
            
            0.56
            
            
            0.37EPS
                - Diluted
            
            
            0.59
            
            
            0.56
            
            
            0.37





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**Financial
                Information of parent company****For
                Years Ended on December 31, 2007, 2006 and
                2005**




**Additional**
            
            **Retained****Number**
            
            **Common**
            
            **Paid-in**
            
            **Earnings**
            
            **Shareholders'****of
                  Share**
            
            **Stock**
            
            **Capital**
            
            **(Deficit)**
            
            **Equity****Beginning
                Balance - Jan 1, 2005**
            
            
            **13,282,253**
            
            
            **26,565**
            
            
            **4,082,246**
            
            
            **6,226,944**
            
            
            **10,335,755**Adjustment
                for fractional shares
            
            
            4802
            
            
            9
            
            
            -9
            
            
            —
            
            
            —Common
                Stock issued to consultants
            
            
            10,000
            
            
            20
            
            
            64,980
            
            
            —
            
            
            65,000Common
                Stock issued to employees
            
            
            49,500
            
            
            99
            
            
            296,901
            
            
            —
            
            
            297,000Net
                Income (Loss)
            
            
            —
            
            
            —
            
            
            —
            
            
            4,949,610
            
            
            4,949,610***Ending
                Balance - Dec 31, 2005***
            
            
            13,346,555
            
            
            26,693
            
            
            4,444,118
            
            
            11,176,554
            
            
            15,647,365Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            7,697,894
            
            
            7,697,894Common
                stock issued in public offering
            
            
            4,928,571
            
            
            9,857
            
            
            32,521,977
            
            
            —
            
            
            32,531,83460,000
                options issued in 2006
            
            
            —
            
            
            —
            
            
            178,904
            
            
            —
            
            
            178,904100,000
                warrants issued in 2006
            
            
            —
            
            
            —
            
            
            299,052
            
            
            —
            
            
            299,052***Ending
                Balance - December 31, 2006***
            
            
            **18,275,126**
            
            
            **36,550**
            
            
            **37,444,051**
            
            
            **18,874,448**
            
            
            **56,355,049**Net
                Income
            
            
            —
            
            
            —
            
            
            —
            
            
            10,744,031
            
            
            10,744,031Common
                stock of 4,128 shares issued
            
            
            4,128
            
            
            8
            
            
            31,200
            
            
            —
            
            
            31,2084,128
                options issued in 2007
            
            
            —
            
            
            —
            
            
            23,201
            
            
            —
            
            
            23,201***Ending
                Balance - December 31, 2007***
            
            
            **18,279,254**
            
            
            **36,558**
            
            
            **37,498,452**
            
            
            **29,618,479**
            
            
            **67,153,489**





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**Financial
                Information of parent company****STATEMENTS
                OF CASHFLOWS**




**Year
                Ended Dec 31,****2007**
            
            **2006**
            
            **2005****Cash
                flow from operating activities:**Net
                income
            
            $
            10,744,031
            
            $
            7,697,894
            
            $
            4,949,610Adjustments
                to reconcile net income to net cash provided by operating activitiesEquity
                in earnings of subsidiaries
            
            
            -10,858,638
            
            
            -8,059,735
            
            
            -5,311,610Stock-Based
                Compensation Expense
            
            
            114,045
            
            
            348,749
            
            
            362,000Changes
                in other current assets
            
            
            -14,396
            
            
            12,613
            
            
            14,378Changes
                in other current liabilities
            
            
            0
            
            
            169,789
            
            
            2,725**Net
                cash provided by operating activities**
            
            $
            -14,958
            
            $
            169,309
            
            $
            17,103**Cash
                flows from investing activities:**Investment
                in subsidiaries, net of cash acquired
            
            $
            —
            
            $
            -32,670,000
            
            $
            —**Net
                cash (used in) provided by investing activities**
            
            $
            —
            
            $
            -32,670,000
            
            $
            —**Cash
                flows from financing activities:**Proceeds
                from Share Issuance
            
            $
            —
            
            $
            32,531,834
            
            $
            —**Net
                cash provided by (used in) financing activities**
            
            $
            —
            
            $
            32,531,834
            
            $
            —**Net
                change in increase in cash and cash equivalents**
            
            $
            -14,958
            
            $
            31,143
            
            $
            17,103**Cash
                and cash equivalents, beginning of period**
            
            
            48,246
            
            
            17,103**Cash
                and cash equivalents, end of period**
            
            **$**
            33,288
            
            **$**
            48,246
            
            **$**
            17,103




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





**** Not
      applicable.





**ITEM
      9A. CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      December 31, 2007, an evaluation was performed under the supervision and with
      the participation of the Company’s management, including the chief executive
      officer (“CEO”) and the chief financial officer (“CFO”), of the effectiveness of
      the design and operation of the Company’s disclosure controls and procedures.
      Based on that evaluation, the Company’s management, including the CEO and CFO,
      conclude that the Company’s disclosure controls and procedures were effective as
      of December 31, 2007.





**Changes
      in Internal Control over Financial Reporting**




There
      was
      no change in our internal controls over financial reporting that occurred during
      the fourth fiscal quarter of the fiscal year covered by this Annual Report
      on
      Form 10-K that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





**Management’s
      Report on Internal Control over Financial Reporting**




Our
      management is responsible for establishing adequate internal control over
      financial reporting, as such item is defined in Exchange Act Rule 13a-15(f)
      and
      15d-15(f). In evaluating the Company’s internal control over financial
      reporting, management has adopted the framework in *Internal
      Control-Integrated Framework* issued
      by
      the Committee of Sponsoring Organization of the Treadway Commission. Under
      the
      supervision and with the participation of our management, including the
      principal executive officer and principal financial officer, we conducted an
      evaluation of the effectiveness of our internal control over financial
      reporting, as of December 31, 2007. Based on our evaluation under the framework
      in *Internal
      Control-Integrated Framework* ,
      our
      management has concluded that our internal control over financial reporting
      was
      effective as of December 31, 2007.





Because
      of inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements. Also, projection of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with policies and procedure may deteriorate.





This
      report does not include an attestation report of the company’s registered public
      accounting firm regarding internal control over financial reporting. The
      management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary roles of the Securities and
      Exchange Commission that permit the company to provide only a management’s
      report in this Annual Report.





**ITEM
      9B. OTHER INFORMATION**





None.




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**PART
      III**




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE**





The
      following table sets forth our executive officers, directors and key employees,
      their ages and the positions they held as of December 31, 2007.





**Name**
            
            **Age**
            
            **Position**Xiao
                Ping Zhang
            
            45
            
            Chief
                Executive Officer and ChairmanXiao
                Feng Zhang
            
            40
            
            Chief
                Operating Officers and DirectorZong
                Yun Zhou
            
            53
            
            Chief
                Financial OfficerLi
                Min Zhang
            
            52
            
            Director(1)
                (3)Zhi
                Zhong Wang
            
            63
            
            Director(1),(2)(3)Yi
                Guang Huo
            
            65
            
            Director(1),(2)Jiang
                Hua Feng
            
            42
            
            Director(2)
                (3)Jung
                Kang Chang
            
            42
            
            DirectorJason
                Zhang
            
            44
            
            Deputy
                General Manager





(1)
            Member
                of Audit Committee


(2)
            Member
                of Compensation Committee


(3)
            Member
                of Nominating and Corporate Governance
                Committee





All
      directors have a term of office expiring at the next annual general meeting,
      unless re-elected or earlier vacated in accordance with the Bylaws. All officers
      have a term of office lasting until their removal or replacement by the Board
      of
      Directors.





**Executive
      Officers and Directors**





**XIAO
      PING ZHANG - CHAIRMAN OF THE BOARD OF DIRECTORS AND CEO**





Xiao
      Ping
      Zhang has served as CEO and chairman of the board since our inception. He
      founded the Ruili Group, a company specializing in a variety of automotive
      parts
      and components, in 1987, and has served as chairman of Ruili Group since then.
      In 2003, he was elected the President of Wenzhou Auto Parts Association, and
      Vice-President of China Federation of Industry and Commerce Auto & Motorbike
      Parts Chamber of Commerce. Mr. Zhang is also a member of the Standing Committee
      of the People’s Congress in Rui’an City, Zhejiang, China. He is also currently
      engaged as a mentor in entrepreneurship for graduate students of Zhejiang
      University. Mr. Zhang graduated from Zhejiang Radio and TV University in 1986
      with a major in Industrial Management.





**XIAO
      FENG ZHANG - CHIEF OPERATING OFFICER AND DIRECTOR**





Xiao
      Feng
      Zhang has served as COO and a member of the board of directors since our
      inception. He is responsible for sales and marketing. Mr. Zhang co-founded
      the
      Ruili Group with his brother, Mr. Xiao Ping Zhang, in 1987, and served as the
      General Manager of Ruili Group until March 2004. Mr. Zhang received his diploma
      in economics from Shanghai Fudan University in 1994.





**ZONG
      YUN ZHOU - CHIEF FINANCIAL OFFICER**





Zong
      Yun
      Zhou has served as our CFO since our inception. Between April 2002 and May
      2004,
      Ms. Zhou served as the Financial Controller of Shanghai Huhao Auto Parts
      Manufacturing Company Limited, a joint venture between Ruili Group and Shanghai
      Automotive Industry Corporation. From January 1996 until April 2002, Ms. Zhou
      worked for the Auditing Department of Anhui Province, China, in charge of
      auditing state-owned companies


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in
      Anhui
      Province. Ms. Zhou is a Chinese Certified Public Accountant, and a member of
      the
      Institute of Internal Auditors (IIA). Ms. Zhou completed her undergraduate
      studies at Anhui University.





**JUNG
      KANG CHANG - DIRECTOR**





Jung
      Kang
      Chang has served as a member of our board of directors since our inception.
      He
      is also in charge of our international sales. From January 1998 to May 2004,
      Mr.
      Chang served as the General Manager of JieXiangHao Enterprise Company Limited
      based in Taipei, Taiwan; before taking office as the general manager, he was
      the
      sales engineer and sales manager with JieXiangHao in Taipei. Mr. Chang graduated
      from Taiwan Taoyuan Longhua Industry College in 1986.





**LI
      MIN ZHANG - DIRECTOR**





Dr.
      Li
      Min Zhang has served as a member of our board of directors since August 2004.
      He
      chairs the audit committee of our board, and serves as a member of nominating
      and corporate governance committee of our board. Dr. Zhang currently is a
      professor at Sun Yat-Sen University Management School in Guangdong, China,
      coaching PhD candidates with an accounting major. During 1994 and 1995, Dr.
      Zhang conducted academic research at the University of Illinois at
      Urbana-Champaign, and practiced at Mok & Chang CPAs in USA. In 1986, he
      conducted academic research at the Office of Auditor General of Canada. Dr.
      Zhang currently also serves as vice chairman of China Audit Society, and
      secretary of China Association of Chief Financial Officers. He is a member
      of
      American Accounting Association. Also, Dr. Zhang is involved with the China
      CPA
      Society Auditing Principles Task Force and China Audit Society Training
      Committee. Dr. Zhang earned his Ph.D. in Economics in January 1991.





**ZHI
      ZHONG WANG - DIRECTOR**





Zhi
      Zhong
      Wang has served as a member of our board of directors since August 2004,and
      serves as a member of audit, compensation, and nominating and corporate
      governance committeesFrom 1980 until present, Mr. Wang has served as instructor
      and professor at Beijing Jiaotong University (formerly Northern Jiaotong
      University), Department of Electrical Engineering. Before 1980, he was an
      electrical engineer with Science and Technology Institute of the Qiqihaer
      Railway Administration, Heilongjiang, China. Mr. Wang has led over twenty
      research projects such as novel pneumatic generator and streamer discharging,
      and corona power supply for desulphurization. His numerous publications include
      Research on the Novel AC Voltage Stabilized Power Supply in Power Electronics
      .
      Mr. Wang received his bachelor degree in electrical engineering from Northern
      Jiaotong University in 1968.





**YI
      GUANG HUO - DIRECTOR**





Yi
      Guang
      Huo has served as a member of our board of directors since August 2004, and
      serve as a member of the audit committee, and chairs the compensation committee.
      . Mr. Huo has been engaged in scientific and technological work and has been
      responsible for various national key research projects, such as designing and
      conducting experiments for automotive products, drafting ministry standards
      and
      econo-technological policies, etc. He has been awarded ministry-level First
      Prize for Technology Innovation. Mr. Huo has also served as President of China
      Federation of Industry and Commerce Auto & Motorbike Parts Chamber of
      Commerce, a board member and visiting professor of Wuhan University of
      Technology, and secretary of Society of Auto Engineering - China. Between 1995
      and 1996, Mr. Huo conducted academic research as a visiting researcher at Tokyo
      University Economics Department. During 1987 and 1988, he studied Scientific
      Research and Management with Japan Automobile Research Institute as well as
      Japanese automobile companies including Nissan, Hino, Isuzu and Mitsubishi.
      Mr.
      Huo earned his B.S. degree from Jilin University Automobile Department in
      1965.


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**JIANG
      HUA FENG - DIRECTOR**





Jiang
      Hua
      Feng has served as a member of our board of directors since August 2004, and
      serves as a member of the compensation committee and as the chairman of the
      nominating and corporate governance. Since 1988, Mr. Feng has also served as
      chief lawyer at Yuhai Law Firm, Rui’an, Zhejiang. Mr. Feng is a member of China
      Lawyers Association. He was elected People’s Congress representative for Wenzhou
      area, Zhejiang. Mr. Feng received his bachelor degree in law from East China
      University of Politics and Law.





**JASON
      ZHANG - DEPUTY GENERAL MANAGER**





Jason
      Zhang joined us in May 2006 as Deputy General Manager, supervising our capital
      market operations and M&A strategies. Before joining us, Mr. Zhang served as
      the Managing Director of JPK Capital Inc., an investment company based in
      Shenzhen, China. From 1999 to 2001, he worked for Qiao Xing Group Corporation
      as
      the Manager of Capital Market Business Department. From 1996 to 1999, he served
      as the General Manager of Shenzhen Zhihui Finance Co., Ltd. 1994 till 1996,
      he
      served as the General Manager of the Underwriting Division of Shenzhen
      Non-Ferrous Metals Finance Co., Ltd. From 1992 to 1994, he served as the General
      Manager of the Investment Department of Shenzhen Lantern Fund Management
      Company. Mr. Zhang received his master degree in economics from Xiamen
      University.





**Committees
      of the Board of Directors**




**Nominating
      and Corporate Governance Committee.** The
      Board
      of Directors of SORL Auto Parts, Inc., has established a Nominating and
      Corporate Governance Committee consisting of three directors, all of whom meet
      the requirements for “independent directors”. The members of our nominating and
      corporate governance committee are Messrs, Jiang and Wang and Professor Zhang.
      Messrs. Jiang chairs the nominating and corporate governance committee. The
      purpose of the nominating and corporate governance committee is to:





·
            Identify
                qualified individuals to become Board
                members;





·
            Determine
                the composition of the Board and its committees;





·
            Monitor
                a process to assess the effectiveness of the Board and Board committees;
                and





·
            Ensure
                good corporate governance.





**Audit
      Committee.** The
      members of our audit committee are Professor Zhang and Messrs. Wang and Huo.
      Professor Zhang chairs the audit committee. Our audit committee assists our
      board of directors in its oversight of:





·
            the
                integrity of our financial
                statements;





·
            our
                independent auditors’ qualifications and independence;
                and






·
            the
                performance of our independent
                auditors.




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The
      audit
      committee has the sole and direct responsibility for appointing, evaluating
      and
      retaining our independent auditors and for overseeing their work. All audit
      services and all non-audit services, other than de minimis non-audit services,
      to be provided to us by our independent auditors must be approved in advance
      by
      our audit committee. We believe that the composition of our audit committee
      meets the requirements for independence under the current Nasdaq Capital Market
      and SEC rules and regulations. We believe that the functioning of our audit
      committee complies with the applicable requirements of the Nasdaq National
      Market and SEC rules and regulations. We intend to comply with future
      requirements as applicable.





**Compensation
      Committee** .
      The
      members of our compensation committee are Messrs. Wang, Feng and Huo. Mr. Huo
      chairs the compensation committee. The purpose of our compensation committee
      is
      to discharge the responsibilities of our board of directors relating to
      compensation of our executive officers. Specific responsibilities of our
      compensation committee include:





·
            reviewing
                and recommending approval of compensation of our executive
                officers;





·
            administering
                our stock incentive and employee stock purchase plans;
                and





·
            reviewing
                and making recommendations to our board with respect to incentive
                compensation and equity plans.





**Compensation
      Committee Interlocks and Insider Participation**





As
      noted
      above, the compensation committee of our board of directors consists of Messrs.
      Wang, Feng and Huo. None of our executive officers serve as a member of the
      board of directors or compensation committee of any entity that has one or
      more
      executive officers who serve on our board of directors or compensation
      committee.





Changes
      in Procedures to Nominate Directors





Since
      the
      date of the Company’s last disclosures, pursuant to schedule 14A of the
      Securities Exchange Act of 1934 as amended, the Company has formed a Nominating
      and Corporate Governance Committee, the duties of which are described above.





**ITEM
      11.  EXECUTIVE COMPENSATION**





**Compensation
      Discussion and Analysis**





***Overview
      of Executive Compensation Program***





The
      Compensation Committee of our board of directors has responsibility for
      establishing, implementing and monitoring our executive compensation program
      philosophy and practices. The Compensation Committee seeks to ensure that the
      total compensation paid to our named executive officers is fair, reasonable
      and
      competitive.


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Generally,
      the types of compensation and benefits provided to named executive officers
      are
      similar to those provided to our other officers.





Throughout
      this Annual Report, the individuals who served as our Chief Executive Officer
      and Chief Financial Officer during fiscal 2007, and who are included in the
      Summary Compensation Table are referred to as the “named executive
      officers.”





***Compensation
      Philosophy and Objectives***





The
      Compensation Committee believes that an effective executive compensation program
      should provide base annual compensation that is reasonable in relation to
      individual executive’s job responsibilities and reward the achievement of both
      annual and long-term strategic goals of our company.





Because
      of the size of our company, the small number of executive officers in our
      company, and our company’s financial priorities, the Committee has decided not
      to implement or offer any retirement plans, pension benefits, deferred
      compensation plans, or other similar plans for our executive officers.
      Accordingly, the components of the executive compensation currently consist
      of
      cash salary. The Compensation Committee will consider using stock option grants
      to provide executives with longer-term incentives.





As
      a
      manufacturing company operating in Zhejiang Province, China, the Compensation
      Committee also takes the local average executives’ salary level into account in
      its compensation decisions. The Compensation Committee may reassess the proper
      level of equity and cash compensation in light of the company’s improved
      profitability and working capital situation.





***Role
      of Executive Officers in Compensation Decisions***





The
      Compensation Committee makes all compensation decisions for the named executive
      officers and approves recommendations regarding equity awards to all of our
      officers. Decisions regarding the non-equity compensation of other officers
      are
      made by the Chief Executive Officer.





The
      Compensation Committee and the Chief Executive Officer annually review the
      performance of each named executive officer (other than the Chief Executive
      Officer, whose performance is reviewed only by the Committee). The conclusions
      reached and recommendations based on these reviews, including with respect
      to
      salary adjustments and annual award amounts, are presented to the Committee.
      The
      Committee can exercise its discretion in modifying any recommended adjustments
      or awards to executives.





***Setting
      Executive Compensation***





Based
      on
      the foregoing objectives, the Committee has structured the Company’s annual cash
      and incentive-based cash and non-cash executive compensation to motivate
      executives to achieve the business goals set by the Company, to reward the
      executives for achieving such goals, and to retain the executives. In doing
      so,
      the Committee does not employ outside compensation consultants. The Compensation
      Committee utilized this data to set compensation for our executive officers
      at
      levels targeted at or around the average of the compensation amounts provided
      to
      executives at comparable local companies considering, for each individual,
      their
      individual experience level related to their position with us. There is no
      pre-established policy or target for the allocation between either cash and
      non-cash incentive compensation.


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***2007
      Executive Compensation Components***





For
      2007,
      the sole component of compensation for the named executive officers was base
      salary.





The
      Company provides named executive officers and other employees with a base salary
      to compensate them for services rendered during the fiscal year. Base salary
      ranges for the named executive officers are determined for each executive based
      on his or her position and responsibility.





During
      its review of base salaries for executives, the Committee primarily considers:





·
            the
                negotiated terms of each executive employment
                agreement;





·
            internal
                review of the executive’s compensation, both individually and relative to
                other executive officers; and





·
            individual
                performance of the executive.





Salary
      levels are typically considered annually as part of the company’s performance
      review process, as well as upon a change in job responsibility. Merit-based
      increases to salaries are based on the Compensation Committee’s assessment of
      the individual’s performance. Base salaries for the named executive officers in
      2007 have not been changed from the base salaries in effect during the prior
      year.





**Compensation
      Committee Report**





The
      Compensation Committee has reviewed and discussed with management the
“Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K
      and, based on such review and discussions, has recommended to our board of
      directors that the foregoing “Compensation Discussion and Analysis” be included
      in this Annual Report.





**Yi
                Guang Huo**
            **Zhi
                Zhong Wang**
            **Jiang
                Hua Feng**





**Summary
      Compensation Table**





The
      following table presents summary information concerning all compensation paid
      or
      accrued by us for services rendered in all capacities during 2007 by Mr. Xiao
      Ping Zhang and Ms. Zong Yun Zhou, who are the only individuals who served as
      our
      principal executive and financial officers during the year ended December 31,
      2007. No other executive officer received compensation in excess of $100,000
      for
      the fiscal year then ended.




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**Summary
      Compensation Table**




**Bonus**
            
            **Option
                Awards**
            
            **Total****Name
                and Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **($)
                (1)**
            
            **($)
                (2)**
            
            **($)**Mr.
                Xiao Ping Zhang, CEO (1)
            
            
            2007
            
            
            50,000
            
            
            —
            
            
            —
            
            
            50,000Ms.
                Zong Yun Zhou, CFO (2)
            
            
            2007
            
            
            20,000
            
            
            —
            
            
            —
            
            
            20,000





(1)
            Mr.
                Zhang is also employed by the Ruili Group which makes separate payments
                to
                him for his services to that company. Mr. Zhang did not receive any
                compensation other than the cash salary of $50,000 listed herein
                from the
                Company in 2006;


(2)
            Ms.
                Zhou did not receive any of compensation other than the cash salary
                of
                $20,000 listed herein from the Company in 2006




**Employment
      Agreements**





Effective
      May 1, 2006, the Company entered into employment agreements with Mr. Xiao Ping
      Zhang, our Chief Executive Officer, Mr. Xiao Feng Zhang, our Chief Operating
      Officer, and Ms. Zong Yun Zhou, our Chief Financial Officer. The term of their
      employment with the Company is for a period of five years with an additional
      one
      year period unless the Company decides not to renew. Their compensation is
      subject to an annual review by the Compensation Committee of the Board of
      Directors. The agreements also set forth their respective duties and
      confidentiality responsibilities.





**Severance
      and Change of Control Arrangements**





There
      is
      no severance or change of control arrangements.





**Equity
      Benefit Plans**





Our
      2005
      Stock Compensation Plan was adopted by our board of directors in July 2005.





Share
      Reserve. We have reserved 1,700,000 shares for issuance under the 2005 Stock
      Compensation Plan of which options to purchase 64,128 shares have been granted
      and 53,628 shares have been awarded to date.





Administration
      . The Compensation Committee of our board of directors administers the 2005
      Compensation Plan and has complete discretion to make all decisions relating
      to
      our 2005 Compensation Plan. Our compensation committee may also re-price
      outstanding options and modify outstanding awards in other ways.





Eligibility.
      Employees, non-employee members of our board of directors, advisors and
      consultants are eligible to participate in our 2005 Stock Compensation Plan.





Types
      of
      Awards. Our 2005 Stock Compensation Plan provides for awards of stock options
      to
      purchase shares of our common stock and awards of restricted shares of our
      common stock, stock appreciation rights and performance shares.


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Change
      in
      Control . If we are merged or consolidated with another company, and such merger
      or consolidation results in a change in control, an award under the 2005 Stock
      Compensation Plan will be subject to the terms of the merger agreement, which
      may provide that the option continues, is assumed or substituted, fully vests
      or
      is settled for the full value of such option in cash, followed by the
      cancellation of such option.





Amendments
      or Termination. Our board of directors may amend, suspend or terminate the
      2005
      Stock Compensation Plan at any time. If our board amends the plan, it does
      not
      need to seek stockholder approval of the amendment unless required to comply
      with any applicable tax or regulatory environment. No award may be made under
      the 2005 Stock Compensation Plan after the tenth anniversary of the effective
      date of the Plan.





Options.
      The Board may determine the number of shares covered by each option, the
      exercise price therefore, the conditions and limitations on the exercise and
      any
      restrictions on the shares issuable. Optionees may pay the exercise price by
      using cash, shares of common stock that the optionee already owns or, at the
      election of the Board, a promissory note, an immediate sale of the option shares
      through a broker designated by us, or other property.





Performance
      Shares . The Board may make performance share awards entitling recipients to
      acquire shares of Common Stock upon the attainment of specified performance
      goals.





Stock
      Appreciation Rights . A participant who exercises a stock appreciation right
      receives the increase in fair market value of our common stock over the fair
      market value on the date of grant.





Restricted
      Shares . Restricted shares may be awarded under the 2005 Stock Compensation
      Plan. Restricted shares vest at the times and payment terms therefor shall
      be
      determined by our compensation committee.





Adjustments
      . If there is a subdivision of our outstanding shares of common stock, a
      dividend declared in stock or a combination or consolidation of our outstanding
      shares of common stock into a lesser number of shares, corresponding adjustments
      will be automatically made in each of the following: (a) the number of shares
      of
      common stock available for future awards under the 2005 Stock Compensation
      Plan;
      (b) any limitation on the maximum number of shares of common stock that may
      be
      subject to awards in a fiscal year; (c) the number of shares of common stock
      covered by each outstanding option or stock appreciation right, as well as
      the
      exercise price under each such award; (d) the number of shares of common stock
      covered by the options to be granted under the automatic option grant program;
      or (e) the number of stock units included in any prior award that has not yet
      been settled.





**Stock
      Option Grants**





None
      of
      the Company’s executive officers have received any grant of stock options or
      stock awards.





**Limitation
      of Liability and Indemnification of Officers and Directors**





As
      permitted by Delaware law, we have adopted provisions in our amended and
      restated certificate of incorporation and bylaws, both of which will become
      effective upon the closing of this offering, that limit or eliminate the
      personal liability of our directors and officers to the fullest extent permitted
      by Delaware law, as it now exists or may in the future be amended, and against
      all expenses and liabilities reasonably incurred in connection with their
      service for or on behalf of SORL. In addition, the new amended and restated
      certificate of incorporation provides that our directors will not be personally
      liable for monetary damages to us for breaches of their
      fiduciary


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duty
      as
      directors, unless they violated their duty of loyalty to us or our stockholders,
      acted in bad faith, knowingly or intentionally violated the law, authorized
      illegal dividends or redemptions or derived an improper personal benefit from
      their action as directors.  We maintain liability insurance which insures
      our directors and officers against certain losses and which insures us against
      our obligations to indemnify our directors and officers.





In
      addition, we have entered into separate indemnification agreements with each
      of
      our directors and officers. These agreements, among other things, require us
      to
      indemnify each director and officer to the fullest extent permitted by Delaware
      law, including indemnification of expenses such as attorneys’ fees, judgments,
      fines and settlement amounts incurred by the director or officer in any action
      or proceeding, including any action or proceeding by or in right of us, arising
      out of the person’s services as a director or officer. At present, we are not
      aware of any pending or threatened litigation or proceeding involving any of
      our
      directors, officer, employees or agents in which indemnification would be
      required or permitted. We believe provisions in our new amended and restated
      certificate of incorporation and indemnification agreements are necessary to
      attract and retain qualified persons as directors and officers.





**Compensation
      of Directors**





The
      following table sets forth the compensation paid to our directors other than
      our
      Chief Executive Officer for 2007:




**Director
      Compensation Table**





**Name
                (1)**
            
            **Fees
                Earned or**
              **Paid
                in Cash**
              **($)
                (2)**
            
            **Option**
              **Awards**
              **($)
                (3)**
            
            **All
                other compensation**
              **($)**
            
            **Total**
              **($)**Xiao
                Feng Zhang (4)
            
            
            —
            
            
            —
            
            
            30,000
            
            
            30,000COO
                & DirectorJung
                Kang Chang (5)
            
            
            —
            
            
            —
            
            
            15,000
            
            
            15,000DirectorLi
                Min Zhang
            
            
            10,000
            
            
            14,909
            
            
            
            
            
            24,909DirectorZhi
                Zhong Wang
            
            
            10,000
            
            
            14,909
            
            
            
            
            
            24,909DirectorYi
                Guang Huo
            
            
            10,000
            
            
            14,909
            
            
            
            
            
            24,909DirectorJiang
                Hua Feng
            
            
            10,000
            
            
            14,909
            
            
            
            
            
            24,909Director





(1)
            Mr.
                Xiaoping Zhang does not receive additional compensation for his role
                as a
                Director. For information relating to Mr. Xiaoping Zhang’s compensation as
                Chairman and Chief Executive Officer, see the Summary Compensation
                Table
                above.




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(2)
            The
                amounts in this column represent cash payments made to Non-Employee
                Directors for attendance at meetings during the
                year.





(3)
            The
                amounts in this column represent the compensation cost of stock options
                awarded by the Compensation Committee granted in 2006, except that
                these
                amounts do not include any estimate of forfeitures. The grant date
                fair
                value of option awards granted were determined in accordance with
                Statement of Financial Accounting Standards No. 123R (SFAS123(R))
                and are
                recognized as compensation cost over the requisite service period.
                The
                amount recognized for these awards was calculated using the Black
                Scholes
                option-pricing model, and our 2005 Compensation Plan is described
                under
                this Item 11.





(4)
            Mr.
                Xiao Feng Zhang is not a non-employee director and did not receive
                cash
                compensation for attending board meetings or other stock options
                in 2006.
                However, he received cash compensation of $30,000 as salary for his
                managerial role with the Company. Mr. Zhang is also employed by the
                Ruili
                Group which makes separate payments to him for his services to that
                company.





(5)
            Mr.
                Jung Kang Chang is not a non-employee director and did not receive
                cash
                compensation for attending board meetings or other stock options
                in 2006.
                However, he received cash compensation of $15,000 as salary for his
                managerial role with the Company.





We
      use a
      combination of cash and stock-based compensation to attract and retain qualified
      candidates to serve on our board of directors. Directors who also are employees
      of our company currently receive no compensation for their service as directors
      or as members of board committees. In setting director compensation, we consider
      the significant amount of time that directors dedicate to the fulfillment of
      their director responsibilities, as well as the competency and skills required
      of members of our board. The directors’ current compensation schedule has been
      in place since March 2007. The directors’ annual compensation year begins with
      the annual election of directors at the annual meeting of shareholders. The
      annual retainer year period has been in place for directors since 2007.
      Periodically, our board of directors reviews our director compensation policies
      and, from time to time, makes changes to such policies based on various criteria
      the board deems relevant.





Non-employee
      directors are reimbursed for travel, lodging and other reasonable out-of-pocket
      expenses incurred in attending meetings of our board of directors and for
      meetings of any committees of our board of directors on which they serve. During
      2007, our non-employee directors had each received or earned cash compensation
      for attending board or committee meetings of $10,000. On March 1, 2006, the
      Board of Directors approved a total of 60,000 options (See note 17) to be issued
      to the four non-employee directors. Each non-employee director received options
      to purchase 15,000 shares of common stock with an exercise price of $4.79 per
      share. The contractual term of the options was three years.





**Compensation
      Committee Interlocks and Insider Participation**





As
      noted
      above, the compensation committee of our board of directors consists of Messrs.
      Wang, Feng and Huo. None of our executive officers serve as a member of the
      board of directors or compensation committee of any entity that has one or
      more
      executive officers who serve on our board of directors or compensation
      committee.




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




The
      following table sets forth certain information known to us regarding beneficial
      ownership of our common stock as of December 31, 2007 and as adjusted to reflect
      the sale of the shares of common stock in this offering and the conversion
      of
      all outstanding shares of our convertible preferred stock by:





·
            each
                person known by us to be the beneficial owner of more than 5% of
                any class
                of our voting securities;





·
            our
                named executive officers;





·
            each
                of our directors; and





·
            all
                executive officers and directors as a
                group.





Beneficial
      ownership is determined according to the rules of the SEC and generally means
      that a person has beneficial ownership of a security if he or she possesses
      sole
      or shared voting or investment power of that security, and includes options
      and
      warrants that are currently exercisable within 60 days. Information with respect
      to beneficial ownership has been furnished to us by each, director, executive
      officer or 5% or more stockholder, as the case may be. Unless otherwise
      indicated, to our knowledge, each stockholder possesses sole voting and
      investment power over the shares listed, except for shares owned jointly with
      that person’s spouse.





This
      table lists applicable percentage ownership based on 18,279,254 shares of common
      stock outstanding as of December 31, 2007.





The
      address for each of the stockholders in the table is c/o of the
      Company.





**NAME
                OF BENEFICIAL OWNER**
            
            **AMOUNT
                AND NATURE**
              **BENEFICIAL
                OWNER**
            
            **POSITION**
            
            **PERCENT
                OF**
              **CLASS**Xiao
                Ping Zhang
            
            
            9,087,527
            
            
            Chief
                Executive Officer and Chairman
            
            
            49.7
            %Xiao
                Feng Zhang
            
            
            1,135,938
            
            
            Chief
                Operating Officer and Director
            
            
            6.2
            %Zong
                Yun Zhou
            
            
            —
            
            
            Chief
                Financial Officer
            
            
            *Jung
                Kang Chang
            
            
            —
            
            
            Director
            
            
            *Li
                Min Zhang
            
            
            15,000
                (1)
            
            
            Director
            
            
            *Zhizhong
                Wang
            
            
            15,000
                (1)
            
            
            Director
            
            
            *Yiguang
                Huo
            
            
            15,000
                (1)
            
            
            Director
            
            
            *Jianghua
                Feng
            
            
            15,000
                (1)
            
            
            Director
            
            
            *Officers
                and Directors as a Group (8 persons)
            
            
            10,223,465
            
            
            
            
            
            55.9
            %PRINCIPAL
                SHAREHOLDERSShu
                Ping Chi
            
            
            1,135,938
            
            
            
            
            
            6.2
            %





(1)
            Represents
                options to purchase Common Stock


*
            Less
                than 1%




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**ITEM
      13.  CERTAIN RELATIONSHIPS AND RELATED PARTY
      TRANSACTIONS**





**Capital
      Stock Issuances in the Reverse Acquisition**





Pursuant
      to the reverse acquisition, Mr. Xiao Ping Zhang, our Chief Executive Officer,
      and Mr. Xiao Feng Zhang, our Chief Operating Officer, received 9,087,527 shares
      and 1,135,938 shares, respectively, of our Common Stock representing 68.4%
      and
      8.55% respectively, of our then outstanding shares.





**Ruili
      Group**





Mr.
      Xiao
      Ping Zhang and Mr. Xiao Feng Zhang are the principal shareholders of the Ruili
      Group which was the owner of the assets contributed to the Joint Venture in
      the
      reverse acquisition. We purchase non-valve automotive products and packaging
      material from the Ruili Group. In 2007, we purchased products from the Ruili
      Group representing approximately $26.6 million of our sales. We generate only
      a
      small profit on these sales, but our sales of these products represent an
      important marketing benefit as they enable us to fill out our product line
      and
      reduce our customers’ transaction costs. The Ruili Group also guaranteed certain
      bank loans to the Joint Venture without fee and licensed two patents and the
      trademark “SORL” to the Joint Venture on a royalty free basis. The two patents
      licensed were assigned to the JV in 2007 for $50,000.





The
      Joint
      Venture has leased two apartment building from Ruili Group Co., Ltd. for its
      management personnel and ordinary staff. The lease term is from January 2007
      to
      December 2011 for one apartment building, and is from January 2007 to December
      2012 for the other. The annual rental of the two apartment buildings is
      approximately $242,043.





On
      September 28, 2007, the Joint Venture purchased land rights, a manufacturing
      plant, and an office building from Ruili Group Co. Ltd., with purchase price
      of
      approximately RMB152 million (approximately US$20.2 million by the moment).
      DTZ
      Debenham Tie Leung Ltd., an internationally recognized appraiser, appraised
      the
      total asset value at RMB154 million (approximately US$20.5 million by the
      moment). The purchase price was paid by the Company by transferring to Ruili
      Group the Company’s $9 million investment in an existing project that includes a
      new-facility-in-progress and prepayment of land use rights. The remaining
      balance of $11 million was paid by the cash generated from operation and a
      bank credit
      line .





The
      Company believes that the transactions above-mentioned are of arm’s length, and
      all prices charged and payments made between them are at least as favorable
      to
      the Joint Venture as would be obtained from a third party.




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**ITEM
      14.  PRINCIPAL ACCOUNTANT FEES AND
      SERVICES.**




Rotenberg
      & Co. LLP, Certified Public Accountants, was the Registrant’s independent
      registered public accounting firm engaged to examine the financial statements
      of
      the Registrant for the fiscal year ended December 31, 2007 and 2006. The
      Registrant changed its fiscal year end from January 31 to December 31 on May
      19,
      2004. Rotenberg & Co. LLP performed the following services and has been paid
      the following fees.





**FISCAL
      YEAR ENDED DECEMBER 31, 2007 and 2006**





**AUDIT
      FEES**





Rotenberg
      & Co. LLP was paid aggregate fees of approximately $170,500 and $120,000 for
      the fiscal years ended December 31, 2007 and 2006, respectively, for
      professional services rendered for the audit of the Registrant’s annual
      financial statements and for the reviews of the financial statements included
      in
      the Registrant’s quarterly reports on Form 10-Q for the periods ended March 31,
      2007 and 2006, June 30, 2007 and 2006, as well as September 30, 2007 and
      2006.





**AUDIT-RELATED
      FEES**





Rotenberg
      & Co. LLP was not paid additional fees for the fiscal years December 31,
      2007 and December 31, 2006 for assurance and related services reasonably related
      to the performance of the audit or review of the Registrant’s financial
      statements.





**TAX
      FEES**




Rotenberg
      & Co. LLP was not paid any fees for the fiscal years ended December 31, 2007
      and December 31, 2006 for professional services rendered for tax compliance,
      tax
      advice and tax planning. This service was not provided.





**ALL
      OTHER FEES**




Rotenberg
      & Co. LLP was paid no other fees for professional services during the fiscal
      years ended December 31, 2007and December 31, 2006.





**AUDIT
      COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES**





Our
      Audit
      Committee’s policy is to pre-approve all audit and permissible non-audit
      services provided by our independent auditors. These services may include audit
      services, audit-related services, tax services and other services. Pre-approval
      is generally provided for up to one year and any pre-approval is detailed as
      to
      the particular service or category of services. The independent auditor and
      management are required to periodically report to the Audit Committee regarding
      the extent of services provided by the independent auditor in accordance with
      this pre-approval.




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**ITEM
      15.  EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES**





EXHIBIT
                NO.
            
            DOCUMENT
                DESCRIPTION3.1
            
            Articles
                of Incorporation (1)3.2
            
            Bylaws
                (1)10.1
            
            Share
                Exchange Agreement and Plan of Reorganization (2)10.2
            
            Joint
                Venture Agreement (revised)10.3
            
            Employment
                Agreement—Xiao Ping Zhang (3)10.4
            
            Employment
                Agreement—Xiao Feng Zhang (3)10.5
            
            Employment
                Agreement—Zong Yun Zhou (3)31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as
                amended.31.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as
                amended.32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 (Chief Executive
                Officer).32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 (Chief Financial
                Officer).





(1)
            Incorporated
                herein by reference from the Registrant’s Form 10-QSB filed with the
                Securities and Exchange Commission, on May 28,
                2003.





(2)
            Incorporated
                herein by reference from the Registrant’s Form 8-K Current Report and
                amendment thereto as filed with the Securities and Exchange Commission,
                on
                May 24, 2004.





(3)
            Incorporated
                herein by reference from the Registrant’s Form S-1 as filed with the
                Securities and Exchange Commission on August 31,
                2006.





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**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
      of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, on this 26 th day of
      March 2008.


**SORL
                AUTO PARTS, INC.**By:
            /s/
                Xiao Ping ZhangXiao
                Ping ZhangChief
                Executive Officer and Chairman





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following person on behalf of the Registrant and in the
      capacities.





Name
            
            Position
            
            Date/s/
                Xiao Ping Zhang
            
            Chief
                Executive Officer, and Chairman
            
            March
                27, 2008Xiao
                Ping Zhang/s/
                Xiao Feng Zhang
            
            Chief
                Operating Officer and Director
            
            March
                27, 2008Xiao
                Feng Zhang/s/
                Zong Yun Zhou
            
            Chief
                Financial Officer
            
            March
                27, 2008Zong
                Yun Zhou/s/
                Li Min Zhang
            
            Director
            
            March
                27, 2008Li
                Min Zhang/s/
                Zhi Zhong Wang
            
            Director
            
            March
                27, 2008Zhi
                Zhong Wang/s/
                Yi Guang Huo
            
            Director
            
            March
                27, 2008Yi
                Guang Huo/s/
                Jiang Hua Feng
            
            Director
            
            March
                27, 2008Jiang
                Hua Feng/s/Jung
                Kang Chang
            
            Director
            
            March
                27, 2008Jung
                Kang Chang


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