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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

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FORM 10-K/AAmendment No. 2

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|x                                 | ANNUAL   REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934   for the fiscal year ended - DECEMBER 31, 2005
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------
|                                  |                                                                                                                                       
|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                                                           |  | 30-0091294                           
|------------------------------------------------------------------ |  | -------------------------------------
|(State or   Other jurisdiction   of Incorporation or Organization) |  | (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)

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

|TITLE OF EACH CLASS |  | NAME OF EACH   EXCHANGE ON WHICH REGISTERED
|------------------- |  | -------------------------------------------
|                    |  |                                            
|NONE                |  | NONE                                       

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

|TITLE OF EACH CLASS |  | COMMON STOCK
|------------------- |  | ------------

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

|Yes
o | No
x
|----- | ----

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.

|Yes
o | No
x
|----- | ----

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.

|Yes
x | No
o
|----- | ----

Indicate by check mark if no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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-KSB or any amendment to this Form 10-KSB.
x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

|Large accelerated filer
o | Accelerated   filer
o | Non-accelerated
x
|------------------------- | --------------------- | -----------------

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

|Yes
o | No
x
|----- | ----

State issuers revenues for its most fiscal year December 31, 2005:  $64.0 Million

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, 2005, the value was $12,530,000.

State the number of shares outstanding of each of the issuers classes of common equity:  13,346,555 as of March 8, 2006.

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Reason For Amendment

This filing is being amended to include, revise or omit information necessary to improve the disclosures as follows:

| |  | The Statements of Cash   Flows for the years ended December 31, 2005 and 2004 have been revised   to present the changes in notes receivable balances as a component of   operating  cash flows and has been   removed as a component of the investing cash flows.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                   
| |  | The Liquidity and Capital   resources section under Managements Discussion and Analysis has also been   revised to reflect the change discussed above.                                                                                                           

Disclosure has been added to the financial statements for the year ended December 31, 2005 under Note 4 Summary of Significant Accounting Policies and Note 18 Stock Compensation Plan to further describe the stock transactions and the impact of the future adoption of Financial Accounting Standard 123R with consideration given to the guidance found in SAB topic 11M.

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PART II

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 $7,100,000.

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 US$6,390,000.

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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 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.

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, vans and buses.  There are forty categories of valves with over eight hundred 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.

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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 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 collectibility of outstanding accounts receivable.

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RESULTS OF OPERATIONS

Year ended December 31, 2005 as compared to year ended December 31, 2004.

SALES

|Sales                                   |  | 2005 |       | 2004 | 
|--------------------------------------- |  | ---- | ----- | ---- | 
|                                        |  |      |       |      | 
|Air brake valves &   related components |  | $    | 47.9M |      | 
|Non-valve products                      |  | $    | 16.3M |      | 
|                                        |  |      |       |      | 
|Total                                   |  | $    | 64.2M |      | 

Sales contains 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 $64,182,544 and $46,815,037 for the fiscal years ended on December 31, 2005 and 2004, respectively.  Net sales in 2005 increased by $17.4 million or 37% to $64.2 million, compared with 2004, despite an approximately 36% decrease in the output of heavy-duty trucks in China.  The increase in sales was primarily due to the expansion in the international market and in Chinas aftermarket as a result of improvement in the Companys China sales network.

A breakdown of net sales revenue for our three market segments, domestic OEM market, domestic aftermarket and international market, in 2005 and 2004 were as follows:

|                     |  | Years   Ended December 31,  |     
|-------------------- |  | --------------------------- | ----
|                     |  |                             |     
|                     |  | 2005                        |     
|                     |  |                             |     
|                     |  | (U.S.   dollars in million) |     
|China OEM market     |  | $                           | 20.6
|China Aftermarket    |  | $                           | 20.2
|International market |  | $                           | 23.4
|                     |  |                             |     
|Total                |  | $                           | 64.2

For 2005, Chinas heavy duty trucks output decreased by 35.7% compared to that in 2004, in contrast to a 45% increase in 2004 from 2003, primarily due to the Chinese Governments macroeconomic regulation policy for 2005.  Notwithstanding the decrease in output, sales revenue for this market segment dropped relatively slightly by 6.4% from $22 million in 2004 to $20.6 million in 2005, principally because of the introduction of new products to satisfy the OEM customers requirements, and the granting of extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain market share and strengthen long term relationships.

Currently SORL has 27 authorized distributors covering nearly all regions in China, who in turn sell the products to over 800 sub-distributors.  Based on the well established and continuously improving sales networks, SORL achieved total revenue of $20.2 million in domestic aftermarket sales, an increase of $8 million, or 65.7% from 2004.  During the year, the Company adjusted its compensation plan for distributors to incentitize sales growth.

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Export sales grew by approximately 83%, from $12.6 million in 2004 to $23.4 million in 2005.  The increase in sales was attributable to the introduction of new products and greater focus on participation in international trade shows leading to increased awareness of the Companys products.  Additionally, 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.  They accounted for approximately 20% of total export sales in both 2005 and 2004.

COST OF SALES

Cost of sales for the fiscal year ended December 31, 2005 increased to $49.9 million from $35.9 million for the fiscal year ended December 31, 2004, or a 39% increase consistent with the increase in revenues.  Gross margin decreased by approximately 1% from 23.3% in 2004 to 22.3%.

We purchase various components and raw materials for use in our manufacturing processes.  The principal raw materials we purchase are aluminum and steel.  The price of aluminum and steel has increased significantly in 2004, with aluminum prices continuing to increase in 2005.  Steel prices peaked in March 2005 and then started to decrease until they reached levels even lower than prices incurred during 2004.  Experts predict that aluminum and steel prices will increase in 2006.

The Companys average purchase price (net of VAT) for steel materials (including stainless steel sheets) in 2005 was approximately $600 per ton, compared with $465 per ton on average in 2004, and $480 per ton at the end of 2005.  The average purchase price (net of VAT) for aluminum ingot in 2005 was approximately $1,865 per ton, in contrast to the levels of $1,680 per ton on average in 2004, and $1,950 per ton at the end of 2005.

Total purchases of steel and aluminum materials in 2005 were 20,371 tons and 3,614 tons, respectively.

GROSS PROFIT

Gross profit for the fiscal year ended December 31, 2005 increased by $3.4 million or 31% to $14.3 million from $10.9 million for the fiscal year ended December 31, 2004, while gross margin decreased by approximately 1% from 23.3% in 2004 to 22.3%.

The approximately 2% appreciation of RMB against USD in late July 2005 had a certain negative impact on the gross margin, since in 2005, about 36% of total revenue was denominated in US Dollars, while nearly all costs were denominated in RMB.  However, this impact was minimal as this resulted in an impact of approximately 0.3% on Gross Margin.

The materials price increases have had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers.  This negatively impacted our gross margin by 1.2% in 2005, or approximately $0.8 million.

This negative impact on Gross Margin was largely offset by economies of scale and consistent efforts in production technique optimization.  For example, in 2005, we replaced the machining approach with a molding process, thereby reducing processing steps, lower materials consumption and increased hourly output.  Meanwhile, in the process of removing impurities from liquid aluminum, historically we used the high-temperature method.  The adoption of a new technique of using a low-temperature method helped save power consumption.

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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the fiscal year ended December 31, 2005 was $8.1 million or 12.6% of net sales compared to $5.2 million or 11.2% of net sales for the fiscal year ended December 31, 2004.

The Company incurred $3.9 million in selling and distribution expenses for 2005, a 43% increase from 2004.  In addition to the increase in sales, the higher selling expenses were mainly attributable to the Companys increased focus in international sales and marketing, including active participation in various trade shows and fairs, in an attempt to gather industry information, keep up with world market trends and acquaint and acquire more new customers.

General and administrative expenses for the fiscal year ended December 31, 2005 amounted to $4.2 million, increasing by 68% from 2004.  The major increase came from the increase in the provision of bad debt expense of $0.85 million in 2005, since we had experienced prolonged account receivable cycles from some of our customers.  The remaining general and administrative expenses as a percentage of sales decreased as compared to 2004 as most of these expenses are fixed in nature, and coupled with the increase in revenues, we experienced economies of scale.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $0.86 million for the fiscal year ended December 31, 2005, compared with depreciation and amortization expense of $0.55 million for the fiscal year ended December 31, 2004.

The increase in depreciation expense was primarily due to new investment in fixed assets, mainly production equipment and tools in 2005 for the amount of $2.6 million, to upgrade the processing techniques and increase output.

FINANCIAL EXPENSE

Financial expense for the fiscal year ended December 31, 2005 increased by $401,378 to $688,811 from $287, 433 for the fiscal year ended December 31, 2004.  Financial expenses consisted of mainly interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $16 million as of December 31, 2005, an increase of $11.2 million from $4.8 million at the end of 2004.  The new drawdown of bank loans in 2005 was primarily for purpose of working capital use, as well as new equipment purchase, to support the sales growth.

Interest rates ranged between 4.964% and 6.003% per annum.

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, per applicable PRC tax regulations, the Company is exempted from PRC income tax in both fiscal 2004 and 2005.

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the company.  Minority interest in income amounted to US$549,957 and US$534,105 for the fiscal year ended December 31, 2005 and 2004, respectively.

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FOURTH QUARTER ADJUSTMENT

During the fourth quarter of 2005, a significant adjustment in the amount of $794,000 was made to provide for potentially uncollectible accounts.  That change was necessitated by the extension of temporary special credit terms to certain customers.  Those special credit terms extended payment arrangements for certain customers for up to one year or more.

The Company evaluates its accounts receivable for impairment on potentially uncollectible accounts each reporting period.  The Company generally writes off any accounts it deems uncollectible during the period in which that determination is made.  The Company also establishes an allowance based upon the overall balances and the aging of the accounts receivable.  The overall increase in accounts receivable has necessitated an increase in the allowance for doubtful accounts based upon the Companys policy.

NET INCOME

The net income for the fiscal year ended December 31, 2005 increased by approximately $142,666, to a net income of $4,949,610 from a net income of $4,806,944 for the fiscal year ended December 31, 2004 due to the factors discussed above.  Earnings per share (EPS) for basic and diluted for 2005 and 2004, was $0.37 per share.

RESULTS OF OPERATIONS

Year ended December 31, 2004 as compared to year ended December 31, 2003.

SALES

|Sales              |  | 2004 |       | 2003 | 
|------------------ |  | ---- | ----- | ---- | 
|                   |  |      |       |      | 
|Brake Valves       |  | $    | 35.9M |      | 
|Non-Valve Products |  | $    | 10.9M |      | 
|                   |  |      |       |      | 
|Total              |  | $    | 46.8M |      | 

Sales for the year ended December 31, 2004 increased by $13,694,037 or 41.4% to $46,815,037 from $33,121,000 for the year ended December 31, 2003, primarily as a result of the increase in the volume of our products shipped.  The total number of units of valves we shipped increased by 36.6%, from 2,572,000 units to 3,513,000 units between these two periods.  The average price of our products per unit increased modestly from $9.88 per unit to $10.23 per unit.

Two factors contribute to the increase in the sales:  (1) There was an increase in export sales by 105.1% from $6,143,016 to $12,601,492 between the two years and (2) There was an increase in domestic auto sales in China due to the increase in demand from the repair market and from OEM manufacturers.  Total sales from domestic market increased by 26.9% from $26,966,082 to $34,213,545 between these two years.

COST OF SALES

Cost of sales for the year ended December 31, 2004 increased to $35,904,232 from $26,263,000 for the year ended December 31, 2003.  The increase in cost of sales was due to the increase in sales.  Material costs for the year ended December 31, 2004 was $24,349,164 or 52.0% of sales compared to $18,406,876 or 55.6% of sales for the year ended December 31, 2003.  Raw material prices for steel and aluminum increased approximately 20% from 2003 to 2004.  This negatively impacted our gross margin by 4.8% for 2004.  The decrease in material costs as a percentage of sales occurred because we have successfully implemented several measures to reduce cost, such as strengthening internal management, optimizing the production process and improving product structural design.

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GROSS PROFIT

Gross profit for the year ended December 31, 2004 increased by $4,052,805 or 59.1 % to $10,910,805 from $6,858,000 for the year ended December 31, 2003.  This improvement in gross profit was primarily due to the increase in the sales both in the domestic and international market.  Gross margin improved slightly from 20.7% for the year ended December 31, 2003 to 23.3% for the year ended December 31, 2004.  The improvement in the gross margin, despite the increase in the raw material pricing, was due to modest increase in the selling price, and better cost management, such as optimizing production process and better structural design of our products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31, 2004 was $5,227,256 or 11.2% of sales compared to $3,156,825 or 9.5% of sales for the year ended December 31, 2003.  The increase in selling, general and administrative expenses as a percentage of sales was due primarily to the legal and accounting costs ($0.7M or 1.6% of sales) incurred in connection with the corporate restructuring and registration with the Securities Exchange Commission.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased by $1,243,739 to $554,261 during the year ended December 31, 2004 from $1,798,000 for year ended December 31, 2003.  The decrease was primarily attributable to the fact that during 2003, the Company incurred depreciation expense in connection with the building owned by the Companys predecessor.  Starting in 2004, SORL Auto Parts, Inc. signed a rental agreement with Ruili Group to rent a total of 25,443 square meters of factory and warehouse from Ruili Group for 15 years at an annual rental of US$439,000, resulting in rental expenses amounting to less than the depreciation expense.

FINANCIAL EXPENSE

Financial expense for the year ended December 31, 2004 decreased by $4,742 to $287,433 from $292,175 for the year ended December 31, 2003.  The decrease in interest expense is due to the decrease in total debt.

OTHER INCOME

There was no other income for the year ended December 31, 2004.  For the year ended December 31, 2003, the other income was $435,000.  This was primarily due to the tax rebate and interest expense subsidy from the local government to SORL Auto Parts, Inc. for its investments in upgrading its technology.

INCOME TAX

There was no income tax for the year ended December 31, 2004 compared with income tax of $546,000 for the year ended December 31, 2003.  As a result of the Joint Venture (i.e.  Ruili Group Auto Parts Co., Ltd.) obtaining its foreign joint-venture status in 2004, it is exempted from PRC income tax.

MINORITY INTEREST

Minority Interest represents a 10% non-controlling interest in the company.  Minority Interest in income amounted to $534,105 and US$-0- for year ended December 31, 2004 and 2003, respectively.

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NET INCOME

The net income for the year ended December 31, 2004 increased by $4,191,049, or 364.4% to a net income of $5,341,049 from a net income of US$1,150,000 for the year ended December 31, 2003 due to the factors discussed above.

FINANCIAL CONDITION

|(1) | LIQUIDITY   AND CAPITAL RESOURCES
|--- | ---------------------------------

OPERATING -The Companys operations utilized cash resources of $8,714,706 for the fiscal year ended December 31, 2005, as compared to generating cash resources of $2,336,592 for the fiscal year ended December 31, 2004, primarily as a result of the following:

1.          For the year ended December 31, 2005, cash flow provided by sales was $7,631,346, as compared to $5,963,694 for the year ended December 31, 2004, an increase of $1,667,652.  The increase was primarily as a result of the increase in sales.

2.          For the year ended December 31, 2005, account receivables increased by $13,590,206, primarily due to the temporary extension of credit terms to selected OEM customers as well as certain domestic aftermarket distributors as discussed above.  Management believes this situation will be largely mitigated in 2006 through the Companys strategically move of its sales focus from its domestic OEM market to international markets, therefore providing the Company with the ability to restructure its OEM customer base by gradually phasing out customers with lower return and higher credit risks.

The Company temporarily extended credit terms to selected OEM customers and aftermarket distributors to strengthen our competitiveness in the Chinese domestic market. The approval of the credit term extension is centralized at the top management level. Approval is granted to OEM customers based on evaluation of their financial strength, long-term viability and track records. The OEM customers who generally obtain extended terms are large, state-owned auto manufacturers with satisfactory track records with the Company.

In 2005, the Chinese Governments macroeconomic control policy, which was designed to prevent a hyper expansionary economy, indirectly impacted Chinas heavy duty truck market. Management believes the impact is temporary and will not impair the customers ability to participate in the overall high economic growth in China in the long run.

The Company temporarily extended credit terms to selected aftermarket distributors to support their financial needs for marketing activities in anticipating the aftermarket growth potentials.  The authorized distributors sell only SORL products and have long term relationship with the Company.  Management believes those receivables are collectible and under control. However, in accounting practice, management provides sufficient amount of allowance for doubtful accounts on a prudent basis.

3.          For the year ended December 31, 2005, inventory increased by $637,283.  The Company maintains a low level of inventory with an Inventory Conversion Period of approximately 19 days for 2005, the same as that for 2004, which largely reduced working capital requirements.  Because of the strong demands for its products, the Company maintains less than one week of finished goods inventory.  A low level of raw materials for approximately four to five days of production requirements are maintained in stock.  Raw materials are readily available, given our access to different suppliers and efficient and timely delivery available.  The majority of the WPI balances are incurred during later steps in manufacturing.  The Company effectively adopts a pull system in its production.

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4.          For the year ended December 31, 2005, account payables decreased by $970,989, or 20.5%, compared to the year ended December 31, 2004, mainly due to suppliers reluctance to extend long credit terms given the increased material prices.  Prepayments at December 31, 2005 primarily represented advance payments for equipment purchase.  Prepayments as of December 31, 2005 increased by 28% to $1.8 million from $1.4 million at the end of 2004.

At December 31, 2005, the Company had cash and cash equivalents of $961,131, as compared to cash and cash equivalents of $729,875 at December 31, 2004.  The Company had working capital of $10,571,086 at December 31, 2005, as compared to working capital of $6,092,799 at December 31, 2004, reflecting current ratios of 1.49:1 and 1.55:1, respectively.

INVESTING - During the fiscal year ended December 31, 2005, the Company expended net cash of $2,624,274 in the investing activities, including $2,623,151 for acquisition of property and equipment to support the growth of business.  For the fiscal year ended December 31, 2004, the Company utilized $638,635 in investing activities.

FINANCING  During the fiscal year ended December 31, 2005, the Company made new net drawdowns amounting to $11,195,799 from banks.  During the fiscal year ended December 31, 2004, the Company paid off $968,082 on its outstanding debt.  Net proceeds from bank loans were utilized primarily to cover the increasing working capital requirements in line with the rapid business growth, as well as cash requirements for new equipment acquisition given the growing demand for products and the limited production capacity buffer of the existing equipment.

The Company primarily uses bank borrowings to finance the increased accounts receivables resulting from the extended credit terms to the customers. The Company maintains good relationships with local banks. We have secured sufficient lines of credit to cover working capital requirements, and expect the ability to obtain more credit line in the event that receivables continue to increase.

In addition, the Company actively seeks opportunities of fund raising, part of proceeds from which to supplement the working capital needs. Management deems the short term liquidity is at an acceptable level and under control.

Management of the Company has taken a number of steps to restructure its customer base and phase out accounts which frequently fail to make prompt payments and bring lower returns in long run, placing more efforts on receivables collection, and continuing development of high profit margin new product, as well as adopting steps for further cost saving such as improving material utilization rate.  Meanwhile, the Company maintains good relationships with local banks.  In addition, the Company actively seeks opportunities for fund raising from the capital markets to finance further expansion of production, the building of international sales networks in new markets, strengthening of R&D force, and to supplement the working capital.

At December 31, 2005, the Company does not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

- 11-

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Contractual Obligations

A summary of the Companys contractual Obligations at December 31, 2005 is as follows:

|                                                                                  |  |  |     |       | Payments   due by period |                   
|--------------------------------------------------------------------------------- |  |  | --- | ----- | ------------------------ | ------------------
|                                                                                  |  |  |     |       |                          |                   
|Contractual Obligations                                                           |  |  |     | Total |                          | Less Than   1 Year
|                                                                                  |  |  |     |       |                          |                   
|Short-Term   Debt Obligations                                                     |  |  | (A) |       | $                        | 16,026,717        
|Capital   Lease Obligations                                                       |  |  |     |       |                          |                  
|Operating   Lease Obligations                                                     |  |  | (B) |       |                          | 3,519,320         
|Other   Long-Term Liabilities Reflected on the Companys Balance Sheet Under GAAP |  |  |     |       |                          |                  
|                                                                                  |  |  |     |       |                          |                   
|Total                                                                             |  |  |     |       | $                        | 19,546,037        

|
|
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- 12-

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of SORL Auto Parts, Inc. Ruian City, Zhejiang Province Peoples Republic of China

We have audited the accompanying consolidated balance sheets of SORL Auto Parts, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity and cash flows for the years then ended.  These financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with The Public Company Accounting Oversight Board Standards.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SORL Auto Parts, Inc. as of December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in conformity with generally accounting principles accepted in the United States of America.

|/s/ Rotenberg and Co. LLP                                        | 
|---------------------------------------------------------------- | 
|                                                                 | 
|ROTENBERG AND COMPANY, LLP   Rochester, New York   March 9, 2006 | 

- 13-

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Ruili Group Corporation China

We have audited the accompanying statements of income, changes in stockholders equity, and cash flows for the year ended December 31, 2003, of Ruili Group Corporation China, a Peoples Republic of China limited liability company, (the Company).  These financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2003, in conformity with generally accepted accounting principles in the United States of America.

|/s/ Clancy and Co.,   P.L.L.C.              | 
|------------------------------------------- | 
|                                            | 
|Clancy and Co., P.L.L.C.   Phoenix, Arizona | 
|April 1, 2004                               | 

- 14-

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SORL Auto Parts, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2005 and 2004

|                                                                                                                          |  |  |     | 2005 |  | 2004       |  
|------------------------------------------------------------------------------------------------------------------------- |  |  | --- | ---- |  | ---------- | -
|                                                                                                                          |  |  |     |      |  |            |  
|Assets                                                                                                                    |  |  |     |      |  |            |  
|Current Assets                                                                                                            |  |  |     |      |  |            |  
|Cash and cash   equivalents                                                                                               |  |  | US$ |      |  | 961,131    |  
|Accounts receivable,   net of allowance                                                                                   |  |  |     |      |  | 25,339,774 |  
|Notes receivable                                                                                                          |  |  |     |      |  | 1,488,104  |  
|Inventory                                                                                                                 |  |  |     |      |  | 2,512,583  |  
|Prepayments                                                                                                               |  |  |     |      |  | 1,801,829  |  
|Other current   assets                                                                                                    |  |  |     |      |  | 48,115     |  
|                                                                                                                          |  |  |     |      |  |            |  
|Total Current Assets                                                                                                      |  |  |     |      |  | 32,151,536 |  
|Fixed Assets                                                                                                              |  |  |     |      |  |            |  
|Property, plant   and equipment                                                                                           |  |  |     |      |  | 10,140,947 |  
|Less: Accumulated   depreciation                                                                                          |  |  |     |      |  | (3,024,281 | )
|                                                                                                                          |  |  |     |      |  |            |  
|Fixed Assets, Net                                                                                                         |  |  |     |      |  | 7,116,666  |  
|Other Assets                                                                                                              |  |  |     |      |  |            |  
|Intangible assets                                                                                                         |  |  |     |      |  | 44,297     |  
|Less: Accumulated   amortization                                                                                          |  |  |     |      |  | (11,873    | )
|                                                                                                                          |  |  |     |      |  |            |  
|Intangible Assets,   Net                                                                                                  |  |  |     |      |  | 32,424     |  
|                                                                                                                          |  |  |     |      |  |            |  
|Total Other Assets                                                                                                        |  |  |     |      |  | 32,424     |  
|                                                                                                                          |  |  |     |      |  |            |  
|Total   Assets                                                                                                            |  |  | US$ |      |  | 39,300,626 |  
|                                                                                                                          |  |  |     |      |  |            |  
|Liabilities   and Shareholders Equity                                                                                    |  |  |     |      |  |            |  
|Current Liabilities                                                                                                       |  |  |     |      |  |            |  
|Accounts payable   and other payables                                                                                     |  |  | US$ |      |  | 3,746,666  |  
|Deposits received   from customers                                                                                        |  |  |     |      |  | 1,324,085  |  
|Short term bank   loans                                                                                                   |  |  |     |      |  | 16,026,717 |  
|Accrued expenses                                                                                                          |  |  |     |      |  | 482,982    |  
|                                                                                                                          |  |  |     |      |  |            |  
|Total Liabilities                                                                                                         |  |  |     |      |  | 21,580,450 |  
|Minority Interest                                                                                                         |  |  |     |      |  | 1,735,818  |  
|Shareholders Equity                                                                                                      |  |  |     |      |  |            |  
|Common stock,   $0.002 par value, 50,000,000 authorized, 13,346,555 and 13,282,253 issued and   outstanding, respectively |  |  |     |      |  | 26,693     |  
|Additional Paid-In   capital                                                                                              |  |  |     |      |  | 4,444,118  |  
|Accumulated other   comprehensive income                                                                                  |  |  |     |      |  | 336,993    |  
|Retained earnings                                                                                                         |  |  |     |      |  | 11,176,554 |  
|                                                                                                                          |  |  |     |      |  |            |  
|                                                                                                                          |  |  |     |      |  | 15,984,358 |  
|                                                                                                                          |  |  |     |      |  |            |  
|Total   Liabilities and Shareholders Equity                                                                              |  |  | US$ |      |  | 39,300,626 |  
|                                                                                                                          |  |  |     |      |  |            |  

- 15-

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SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2005, 2004, and 2003

|                                                  |  |  |     | 2005 |   | 2004       |   | (Rounded)   2003 |           
|------------------------------------------------- |  |  | --- | ---- | - | ---------- | - | ---------------- | ----------
|                                                  |  |  |     |      |   |            |   |                  |           
|Sales                                             |  |  | US$ |      |   | 64,182,544 |   |                  | 46,815,037
|Cost of Sales                                     |  |  |     |      |   | 49,865,235 |   |                  | 35,904,232
|                                                  |  |  |     |      |   |            |   |                  |           
|Gross Profit                                      |  |  |     |      |   | 14,317,309 |   |                  | 10,910,805
|Expenses:                                         |  |  |     |      |   |            |   |                  |           
|Selling and   Distribution Expenses               |  |  |     |      |   | 3,919,996  |   |                  | 2,737,652 
|General and   Administrative Expenses             |  |  |     |      |   | 4,169,460  |   |                  | 2,489,604 
|Financial Expenses                                |  |  |     |      |   | 688,811    |   |                  | 287,433   
|                                                  |  |  |     |      |   |            |   |                  |           
|                                                  |  |  |     |      |   | 8,778,267  |   |                  | 5,514,689 
|Operating Income                                  |  |  |     |      |   | 5,539,042  |   |                  | 5,396,116 
|Other Income                                      |  |  |     |      |   | 52,592     |   |                  |          
|Non-Operating Expenses                            |  |  |     |      |   | (92,067    | ) |                  | (55,067   
|                                                  |  |  |     |      |   |            |   |                  |           
|Income Before Provision for Income Taxes          |  |  |     |      |   | 5,499,567  |   |                  | 5,341,049 
|Provision for Income Taxes                        |  |  |     |      |   |           |   |                  |          
|                                                  |  |  |     |      |   |            |   |                  |           
|Income From Continuing Operations                 |  |  |     |      |   | 5,499,567  |   |                  | 5,341,049 
|Loss From Discontinued Operations                 |  |  |     |      |   |           |   |                  |          
|Minority Interest                                 |  |  |     |      |   | 549,957    |   |                  | 534,105   
|                                                  |  |  |     |      |   |            |   |                  |           
|Net Income Attributable to Shareholders           |  |  |     |      |   | 4,949,610  |   |                  | 4,806,944 
|Other Comprehensive Income                        |  |  |     |      |   |            |   |                  |           
|Foreign Currency Translation Adjustment           |  |  |     |      |   | 374,437    |   |                  |          
|Minority Interests Share                         |  |  |     |      |   | 37,444     |   |                  |          
|                                                  |  |  |     |      |   |            |   |                  |           
|Comprehensive Income (Loss)                       |  |  | US$ |      |   | 5,286,603  |   |                  | 4,806,944 
|                                                  |  |  |     |      |   |            |   |                  |           
|Earnings per Share From Continuing   Operations   |  |  |     |      |   |            |   |                  |           
|Basic                                             |  |  |     |      | $ | 0.37       |   | $                | 0.37      
|Diluted                                           |  |  |     |      | $ | 0.37       |   | $                | 0.37      
|Earnings per Share From Discontinued   Operations |  |  |     |      |   |            |   |                  |           
|Basic                                             |  |  |     |      | $ |           |   | $                |          
|Diluted                                           |  |  |     |      | $ |           |   | $                |          
|Weighted average common shares - Basic            |  |  |     |      |   | 13,302,763 |   |                  | 13,165,241
|Weighted average common shares - Diluted          |  |  |     |      |   | 13,302,763 |   |                  | 13,165,241

- 16-

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SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders Equity Years Ended December 31, 2005, 2004, and 2003

|                                                          |  | Number of   Shares |            | Common   Stock |  | Additional   Paid-in   Capital |  | Retained   Earnings |             | Accumulated Other   Comprehensive   Income |  | Shareholders   Equity |  | Minority   Interest |        
|--------------------------------------------------------- |  | ------------------ | ---------- | -------------- |  | ------------------------------ |  | ------------------- | ----------- | ------------------------------------------ |  | ---------------------- |  | ------------------- | -------
|                                                          |  |                    |            |                |  |                                |  |                     |             |                                            |  |                        |  |                     |        
|Balance - January 1, 2003                                 |  |                    | 12,953,720 |                |  | 25,908                         |  |                     | 17,122,092  |                                            |  | 270,000                |  |                     |       
|Capital Contribution                                      |  |                    |           |                |  |                               |  |                     | 9,736,000   |                                            |  |                       |  |                     |       
|Net Income                                                |  |                    |           |                |  |                               |  |                     |            |                                            |  | 1,150,000              |  |                     |        
|                                                          |  |                    |            |                |  |                                |  |                     |             |                                            |  |                        |  |                     |        
|Balance - December 31,   2003                             |  |                    | 12,953,720 |                |  | 25,908                         |  |                     | 26,858,092  |                                            |  | 1,420,000              |  |                     |       
|Corporate Reorganization:                                 |  |                    |            |                |  |                                |  |                     |             |                                            |  |                        |  |                     |        
|Distribution of   discontinued operations to shareholders |  |                    |           |                |  |                               |  |                     | (22,775,189 | )                                          |  |                       |  |                     |       
|Acquisition of Enchanted Village                          |  |                    | 328,533    |                |  | 657                            |  |                     | (657        | )                                          |  |                       |  |                     |       
|Capital contributed by Minority   Shareholder             |  |                    |           |                |  |                               |  |                     |            |                                            |  |                       |  |                     |       
|Net Income                                                |  |                    |           |                |  |                               |  |                     |            |                                            |  | 4,806,944              |  |                     |       
|                                                          |  |                    |            |                |  |                                |  |                     |             |                                            |  |                        |  |                     |        
|Balance - December 31,   2004                             |  |                    | 13,282,253 |                |  | 26,565                         |  |                     | 4,082,246   |                                            |  | 6,226,944              |  |                     |       
|Adjustment for fractional shares                          |  |                    | 4802       |                |  | 9                              |  |                     | (9          | )                                          |  |                       |  |                     |       
|Common Stock issued to consultants                        |  |                    | 10,000     |                |  | 20                             |  |                     | 64,980      |                                            |  |                       |  |                     |       
|Common Stock issued to employees                          |  |                    | 49,500     |                |  | 99                             |  |                     | 296,901     |                                            |  |                       |  |                     |       
|Net Income                                                |  |                    |           |                |  |                               |  |                     |            |                                            |  | 4,949,610              |  |                     |       
|Other Comprehensive Income                                |  |                    |           |                |  |                               |  |                     |            |                                            |  |                       |  |                     | 336,993
|                                                          |  |                    |            |                |  |                                |  |                     |             |                                            |  |                        |  |                     |        
|Balance - December 31,   2005                             |  |                    | 13,346,555 |                |  | 26,693                         |  |                     | 4,444,118   |                                            |  | 11,176,554             |  |                     | 336,993
|                                                          |  |                    |            |                |  |                                |  |                     |             |                                            |  |                        |  |                     |        

- 17-

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SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004, and 2003

|                                                                                   |  |  |     |  |   | 2005        |   |   | 2004        |   |   | (Rounded)   2003 |  
|---------------------------------------------------------------------------------- |  |  | --- |  | - | ----------- | - | - | ----------- | - | - | ---------------- | -
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Cash Flows from Operating   Activities                                             |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Net Income                                                                         |  |  | US$ |  |   | 4,949,610   |   |   | 4,806,944   |   |   | 1,150,000        |  
|Adjustments   to reconcile net income to net cash flows from operating activities: |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Minority Interest                                                                  |  |  |     |  |   | 549,957     |   |   | 534,105     |   |   | 12,000           |  
|Bad Debt Expense                                                                   |  |  |     |  |   | 846,337     |   |   | 68,384      |   |   |                 |  
|Depreciation and   Amortization                                                    |  |  |     |  |   | 866,558     |   |   | 554,261     |   |   | 1,798,000        |  
|Stock compensation    employees                                                   |  |  |     |  |   | 297,000     |   |   |            |   |   |                 |  
|Stock compensation   - financial advisory                                          |  |  |     |  |   | 65,000      |   |   |            |   |   |                 |  
|Changes   in Assets and Liabilities:                                               |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Accounts   Receivable                                                              |  |  |     |  |   | (13,590,206 | ) |   | (9,507,289  | ) |   | (1,782,000       | )
|Other Receivables                                                                  |  |  |     |  |   | 345,184     |   |   | (393,300    | ) |   |                 |  
|Notes Receivables                                                                  |  |  |     |  |   | (1,358,429  | ) |   | (129,675    | ) |   |                 |  
|Inventory                                                                          |  |  |     |  |   | (637,283    | ) |   | (38,300     | ) |   | 726,000          |  
|Prepayments                                                                        |  |  |     |  |   | (397,119    | ) |   | 1,197,290   |   |   | (2,602,000       | )
|Account Payables                                                                   |  |  |     |  |   | (970,989    | ) |   | 4,717,655   |   |   | (12,000          | )
|Deposits Received   from Customers                                                 |  |  |     |  |   | 462,461     |   |   | 861,624     |   |   |                 |  
|Accrued Expenses                                                                   |  |  |     |  |   | (142,787    | ) |   | 625,769     |   |   |                 |  
|Net Working   Capital from Discontinued Operations                                 |  |  |     |  |   |            |   |   | (960,876    | ) |   | (11,630,000      | )
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|                                                                                   |  |  |     |  |   | (8,714,706  | ) |   | 2,336,592   |   |   | (12,340,000      | )
|Cash Flows from Investing   Activities                                             |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Acquisition of   Property and Equipment                                            |  |  |     |  |   | (2,623,151  | ) |   | (593,488    | ) |   | (2,016,000       | )
|Investments in   Intangible Assets                                                 |  |  |     |  |   | (1,123      | ) |   | (28,720     | ) |   |                 |  
|Investing   activities - Discontinued operations                                   |  |  |     |  |   |            |   |   | (16,427     | ) |   | (14,924,000      | )
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|                                                                                   |  |  |     |  |   | (2,624,274  | ) |   | (638,635    | ) |   | (16,940,000      | )
|Cash Flows from Financing   Activities                                             |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Proceeds from   (Repayment of) Bank Loans                                          |  |  |     |  |   | 11,195,799  |   |   | (968,082    | ) |   | 2,174,000        |  
|Financing   Activities - Discontinued Operations                                   |  |  |     |  |   |            |   |   |            |   |   | 17,370,000       |  
|Capital   Contribution  Owners                                                    |  |  |     |  |   |            |   |   |            |   |   | 9,736,000        |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|                                                                                   |  |  |     |  |   | 11,195,799  |   |   | (968,082    | ) |   | 29,280,000       |  
|Effects on changes in   foreign exchange rate                                      |  |  |     |  |   | 374,437     |   |   |            |   |   |                 |  
|Net Change in Cash and Cash Equivalents                                            |  |  |     |  |   | 231,256     |   |   | 729,875     |   |   |                 |  
|Cash and Cash Equivalents- Beginning of   the year                                 |  |  |     |  |   | 729,875     |   |   |            |   |   |                 |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Cash and cash Equivalents   - End of the year                                      |  |  | US$ |  |   | 961,131     |   |   | 729,875     |   |   |                 |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Supplemental Cash Flow   Disclosures:                                              |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Interest Paid                                                                      |  |  |     |  | $ | 513,776     |   | $ | 287,433     |   | $ | 1,245,000        |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Income Taxes Paid                                                                  |  |  |     |  | $ |            |   | $ |            |   | $ | 435,000          |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Supplemental Disclosures   of Non-Cash Investing and Financing Activities:         |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Common stock   Issued in Exchange for Preferred Stock                              |  |  |     |  | $ |            |   | $ | 25,908      |   | $ |                 |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Distribution of Discontinued   Operations                                          |  |  |     |  | $ |            |   | $ | (22,775,189 | ) | $ |                 |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Common stock   issued for advisory service                                         |  |  |     |  | $ | 65,000      |   | $ |            |   | $ |                 |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  
|Common stock   issued to key employees                                             |  |  |     |  | $ | 297,000     |   | $ |            |   | $ |                 |  
|                                                                                   |  |  |     |  |   |             |   |   |             |   |   |                  |  

- 18-

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SORL AUTO PARTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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|NOTE 1 - | DESCRIPTION OF BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|         | 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 800 different specifications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 2 - | REORGANIZATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | In March 2004, pursuant to a Joint Venture   Agreement between the Ruili Group Co., Ltd., a PRC corporation (Ruili   Group), and Fairford Holdings, Inc., a Hong Kong Company (Fairford), the   parties formed a sino-foreign joint venture (the Joint Venture) under the   name Ruili Group Ruian Auto Parts Co. Ltd., of which Fairford owned 90% and   the Ruili Group owned 10%.  The   shareholders and their respective equity interests in Fairford and the Ruili   Group were identical.  In connection   with its formation, 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).  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, plant 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.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | In May 2004, pursuant to the terms of a   Share Exchange Agreement (the Exchange Agreement) dated as of April 4,   2004, among the Company, Keating Reverse Merger Fund, LLC, Xiao Ping Zhang,   Xiao Feng Zhang and Shuping Chi (collectively, the Sellers); and Fairford,   the Company acquired from the Sellers (the Acquisition) all of the issued   and outstanding equity interests of Fairford (the Fairford Shares).  As consideration for the Fairford Shares,   the Company issued 1,000,000 shares of its Series A Convertible Preferred   Stock, which were convertible into an aggregate of the 194,305,800 shares of   common stock.  The consideration for   the Acquisition was determined through arms length negotiations between the   management and the Fairford Sellers.    As a result of the Acquisition, the Fairford Sellers acquired   approximately 97.5% of the Companys common stock on an as converted
basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|         | A current report on Form 8-K was filed on   May 24, 2004 to present the financials of the predecessor company (Ruili   Group) for the years ended December 31, 2003 and 2002.  The historical financial statements filed   with the 8-K reflected the assets and liabilities of both the Transferred   Business and the non-transferred business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|         | Subsequent to the transfer and   reorganization that occurred in March, 2004, the Company began presenting its   financial statements as that of the successor company, being only those   assets, liabilities, results of operations, and cash flows relating to the   Transferred Business.  Prior periods   were restated to reflect comparable prior period results of the Transferred   Business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|NOTE 3 - | BASIS OF PRESENTATION OF   THE FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | The financial statements for the year   ended December 31, 2005 and 2004 have been prepared to present the financial   position, results of operations and cash flows of the continuing business of   SORL Auto Parts, Inc (the successors financial statements).  The financial statements reflect the   accounts of the transferred business (as described in the preceding   paragraphs titled REORGANIZATION), from the Ruili Group to the Joint Venture.                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | The financial statements for the year   ended December 31, 2003 have been restated to present the financial position,   results of operations and cash flows for the transferred business to provide   comparative financial information to that of fiscal 2005 and2004.  The financial statements have been   restated to remove the assets, liabilities and results of operations related   to non-transferred business as described in the preceding paragraphs titled   REORGANIZATION.  The assets,   liabilities and results of operations of the non-transferred business have   been presented as discontinued operations in the accompanying financial   statements. These transactions have been accounted for as a reverse spin-off   in according with EITF 02-11, Accounting for Reverse Spinoffs Followed by a   Recapitalization.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 4 - | 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 intercompany 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.                                                                                                                                                                                                      

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| | FINANCIAL RISK FACTORS   AND FINANCIAL RISK MANAGEMENT 
| | -------------------------------------------------------
| |                                                        
| | The Company is exposed to the following   risk factors:

| | (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.
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| |       |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (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 5.58% 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 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 better7ments 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.                                                                                

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| | INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | During fiscal years ended December 31,   2003 and 2004 the Companys general policy regarding the extension of credit   terms was that invoices were due within 45 - 60 days of shipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Beginning in 2005, in response to changing   economic conditions in China, the Company has modified its collection   policies.  Certain individual   customers or certain classes of customers may have custom payment   arrangements based upon criteria set by management.                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Accounts receivables generated from credit   sales in 2005 have general credit terms of 90 days for domestic aftermarket   customers.  However, the Company has   extended credit terms to certain customers for a period of 1 year or   more.  As of December 31, 2005 and   2004 no customers had balances that are due in more than 1 year and   accordingly all accounts receivable have been classified as current in the   accompanying statements.                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The allowances are calculated based on   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 get the 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 is subject to the Education Surtax (levied at 4% of   net VAT payable) until August 31, 2005, which is recorded as deductions from   gross sales.  The Company nets sales   return in gross revenue, i.e., the revenue shown in the income statement is   the net sales.  Goods are generally   only returnable if the product is defective.

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| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| | 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 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, 2006.                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Company expects the adoption of this   standard to have a material effect on its final financial statements, as   discussed in Note 18, the Company has adopted a stock compensation plan which   authorizes the Company to issue up to 1,700,000 shares of common stock over a   10-year period.  The issuance of stock   or granting of options, warrants or other common stock equivalents will   result in a change to income based upon grant date fair value which will be   recognized over the vesting period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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.  Shipping and handling costs amounted to approximately   $1,150,000, $638,000, and $470,000 for the years ended December 31, 2005,   2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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.  The   current lease agreement with Ruili Group Co.    Ltd.  does not meet any of the   above criteria, so it is classified and recorded as an operating lease.                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | RECENTLY ISSUED   ACCOUNTING STANDARDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In January 2003, and subsequently revised   in December 2003, the FASB issued Interpretation No. 46 Consolidation of   Variable Interest Entities, an Interpretation of ARB No.  51 (FIN 46).  FIN 46 requires certain variable interest entities to be   consolidated by the primary beneficiary of the entity if the equity investors   in the entity do not have the characteristics of a controlling financial   interest or do not have sufficient equity at risk for the entity to finance   its activities without additional subordinated financial support from other   parties.  FIN 46 is effective for all   new variable interest entities created or acquired after January 31,   2003.  For variable interest entities   created or acquired prior to February 1, 2003, the provisions of FIN 46 must   be applied for the first interim or annual period beginning after June 15,   2003.  FIN 46 does not have any impact   on the financial position or
results of operations of the Company.

- 24 -

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| | In April 2003, the FASB issued SFAS No.   149, Accounting for Amendment of statement 133 on Derivative Instruments and   Hedging Activities, which amends and clarifies financial accounting and   reporting for derivative instruments, including  certain derivative instruments embedded in other contracts and   for hedging  activities under FASB   Statement No. 133, Accounting for Derivative Instruments and Hedging   Activities.  This Statement is   generally effective for contracts entered into or modified after June 30,   2003, and all provisions should be applied prospectively.  This statement does not affect the   Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In May 2003, the FASB issued SFAS No. 150,   Accounting for Certain Financial Instruments with Characteristics of both   Liabilities and Equity, which establishes standards for how an issuer   classifies and measures certain financial instruments with characteristics of   both liabilities and equity.  It   requires that an issuer classify a financial instrument that is within its   scope as a liability (or an asset in some circumstances).  This Statement is effective for financial   instruments entered into or modified after May 31, 2003, and otherwise   is effective at the beginning of the first interim period beginning after June 15,   2003.  It is to be implemented by   reporting the cumulative effect of a change in an accounting principle for   financial instruments created before the issuance date of the Statement and   still existing at the beginning of the interim period of adoption.  Restatement is not
permitted.  This statement does not affect the   Company.                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In November 2004, the FASB issued SFAS No.   151 Inventory Costs - an amendment of ARB No. 43, Chapter 4 (SFAS   151).  This statement amends the   guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the   accounting for abnormal amounts of idle facility expense, freight, handling   costs, and wasted material (spoilage).    SFAS 151 requires that those items be recognized as current-period   charges.  In addition, this Statement   requires that allocation of fixed production overheads to costs of conversion   be based upon the normal capacity of the production facilities.  The provisions of SFAS 151 are effective   for fiscal years beginning after June 15, 2005.  As such, the Company is required to adopt these provisions at   the beginning of the fiscal year ended December 31, 2006.  The Company is currently evaluating the   impact of SFAS 151 on its consolidated financial
statements.                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In December 2004, the FASB issued SFAS No.   152 Accounting for Real Estate Time-Sharing Transactions - an amendment of   FASB Statements No. 66 and 67 (SFAS 152).    This statement amends FASB Statement No. 66 Accounting for Sales of   Real Estate to reference the financial accounting and reporting guidance for   real estate time-sharing transactions that is provided in AICPA Statement of   Position 04-2 Accounting for Real Estate Time-Sharing Transactions (SOP   04-2).  SFAS 152 also amends FASB   Statement No.  67 Accounting for   Costs and Initial Rental operations of Real Estate Projects to state that   the guidance for incidental operations and costs incurred to sell real estate   projects does not apply to real estate time-sharing transactions, with the   accounting for those operations and costs being subject to the guidance in   SOP 04-2.  The provisions of SFAS
152   are effective in fiscal years beginning after June 15, 2005.  As such, the Company is required to adopt   these provisions at the beginning of the fiscal year ended December 31,   2006.  The Company is currently   evaluating the impact of SFAS 152 on its consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In December 2004, the FASB issued SFAS No.   153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29   (SFAS 153).  SFAS 153 replaces the   exception from fair value measurement in APB Opinion No. 29 for nonmonetary   exchanges of similar productive assets with a general exception from fair   value measurement for exchanges of nonmonetary assets that do not have   commercial substance.  A nonmonetary exchange   has commercial substance if the future cash flows of the entity are expected   to change significantly as a result of the exchange.  SFAS 153 is effective for all interim   periods beginning after June 15, 2005.    As such, the Company is required to adopt these provisions at the   beginning of the fiscal quarter ended September 30, 2005.  This statement has had no effect on the   Company.                                                                                                                                                                                                                                                                                                                                                                          

- 25 -

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|         | In March 2005, the FASB issued   Interpretation No. 47, Accounting for Conditional Asset Retirement   Obligations - an interpretation of FASB Statement No. 143 (FIN 47).  FIN 47 clarifies that the term conditional   asset retirement obligation refers to a legal obligation to perform and asset   retirement activity in which the timing and (or) method of settlement are   conditional on a future event that may or may not be within the control of   the entity.  Accordingly, an entity is   required to recognize a liability for the fair value of a conditional asset   retirement obligation if the fair value of the liability can be reasonably   estimated.  FIN 47 is effective for   fiscal years that end after December 15, 2005.  As such, the Company is required to adopt these provisions for   the fiscal year ended December 31, 2005.    This statement has had no effect on the Company.
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | In May 2005, the FASB issued SFAS No. 154,   Accounting Changes and Error Corrections - a replacement of APB Opinion No.   20 and FASB Statement No. 3 (SFAS 154).    SFAS 154 changes the requirements for the accounting for and reporting   of a change in accounting principle.    These requirements apply to all voluntary changes and changes required   by an accounting pronouncement in the unusual instance that the pronouncement   does not include specific transition provisions.  SFAS 154 is effective for fiscal years beginning after December   15, 2005.  As such, the Company is   required to adopt these provisions at the beginning of the fiscal year ended   December 31, 2006.  The Company is   currently evaluating the impact of SFAS 154 on its consolidated financial   statements.                                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | In February 2006, the FASB issued SFAS No.   155, Accounting for Certain Hybrid Financial Instruments - an amendment of   FASB Statement No. 133 and 140 (SFAS 155).  SFAS 155 resolves issues addressed in Statement 133   Implementation Issue No. D1, Application of Statement 133 to Beneficial   Interests in Securitized Financial Assets.    SFAS 155 is effective for all financial instruments acquired or issued   after the beginning of the first fiscal year that begins after   September 15, 2006.  As such, the   Company is required to adopt these provisions at the beginning of the fiscal   year ended December 31, 2007.  The   Company is currently evaluating the impact of SFAS 155 on its consolidated   financial statements.                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE 5 - | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         | The Company continued to purchase   non-valve automotive components, raw materials and packaging materials from   the Ruili Group Co., Ltd., which is the minority shareholder of the JV, and   also has the common controlling party, i.e.    the Zhang family; as well as 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, 2005, 2004 and 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                           | December 31, |     
|------------------------------------------ | ------------ | ----
|                                           |              |     
|                                           |              | 2005
|                                           |              |     
|PURCHASES FROM:                            |              |     
|Ruili Group Co., Ltd.                      |              | $   
|Ruian Ruili Haizhiguan Auto Part Co., Ltd. |              |     
|Total Purchases                            |              | $   
|SALES TO:                                  |              |     
|Ruili Group Co., Ltd.                      |              | $   
|Total Sales                                |              | $   

- 26 -

---



| | The total purchases from Ruili Group in   2005 consisted of $15.2 million finished products of non-valve auto parts,   $0.3 million raw materials, and $1.2 million packaging materials.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ACCOUNTS PAYABLE AND OTHER PAYABLES                  |  |   |           |  |   |           |  |  |   | 
|---------------------------------------------------- |  | - | --------- |  | - | --------- |  |  | - | 
|Ruili Group Co., Ltd.                                |  | $ | 1,060,193 |  | $ | 2,239,054 |  |  |  | 
|Ruian Ruili Haizhiguan Auto Part Co., Ltd.           |  |   |          |  |   | 11,862    |  |  |  | 
|Xiaofeng Zhang, Board Director                       |  |   |          |  |   | 265,701   |  |  |  | 
|Shuping Chi                                          |  |   | 273,559   |  |   |          |  |  |  | 
|Total Related Parties included in Accounts   Payable |  |   | 1,333,752 |  |   | 2,516,617 |  |  |  | 

|         | There were no related party transactions   for the fiscal year ended December 31, 2003.                      
|-------- | -------------------------------------------------------------------------------------------------------------
|         |                                                                                                              
|NOTE 6 - | ACCOUNTS RECEIVABLE                                                                                          
|         |                                                                                                              
|         | The changes in the allowance for doubtful   accounts at December 31, 2005 and 2004 are summarized as follows:

|                           |  | 2005 |         | 2004 |  
|-------------------------- |  | ---- | ------- | ---- | -
|                           |  |      |         |      |  
|Beginning balance          |  | $    | 68,384  |      | $
|Add: Increase to allowance |  |      | 846,337 |      |  
|Less: Accounts written off |  |      |        |      |  
|                           |  |      |         |      |  
|Ending balance             |  | $    | 914,721 |      | $
|                           |  |      |         |      |  

| | The companys receivables are summarized   as follows:
| | ------------------------------------------------------

|                                      |  | 2005 |            | 2004 |  
|------------------------------------- |  | ---- | ---------- | ---- | -
|                                      |  |      |            |      |  
|Balance before allowance              |  | $    | 26,254,495 |      | $
|Less: Allowance for doubtful accounts |  |      | (914,721   | )    |  
|                                      |  |      |            |      |  
|Account receivable balance, net       |  | $    | 25,339,774 |      | $
|                                      |  |      |            |      |  

|NOTE 7 - | INVENTORIES                                                           
|-------- | ----------------------------------------------------------------------
|         |                                                                       
|         | On December 31, 2005 and 2004, inventories   consist of the following:

|                |  | 2005 |           | 2004 |  
|--------------- |  | ---- | --------- | ---- | -
|                |  |      |           |      |  
|Raw Material    |  | $    | 747,858   |      | $
|Work in process |  |      | 1,057,740 |      |  
|Finished Goods  |  |      | 706,985   |      |  
|                |  |      |           |      |  
|Total Inventory |  | $    | 2,512,583 |      | $
|                |  |      |           |      |  

- 27 -

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|NOTE 8 - | PROPERTY, PLANT AND   EQUIPMENT                                                                 
|-------- | ------------------------------------------------------------------------------------------------
|         |                                                                                                 
|         | Property, plant and equipment consisted of   the following, on December 31, 2005, 2004 and 2003:

|                                  |  | 2005 |            | 2004 |   | 2003       |  
|--------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                  |  |      |            |      |   |            |  
|Machinery                         |  | $    | 8,706,639  |      | $ | 6,361,447  |  
|Molds                             |  |      | 1,080,291  |      |   | 1,015,016  |  
|Office equipment                  |  |      | 185,088    |      |   | 42,755     |  
|Vehicle                           |  |      | 169,529    |      |   | 98,578     |  
|                                  |  |      |            |      |   |            |  
|Sub-Total                         |  |      | 10,140,947 |      |   | 7,517,796  |  
|Less:    Accumulated depreciation |  |      | (3,024,281 | )    |   | (2,165,142 | )
|                                  |  |      |            |      |   |            |  
|Fixed Assets, net                 |  | $    | 7,116,666  |      | $ | 5,352,654  |  
|                                  |  |      |            |      |   |            |  

|         | Depreciation expense charged to operations   was $859,139, $535,620, and $1,798,000 (rounded) for the years ended December   31, 2005, 2004, and 2003, respectively.                                                                                                                                                                                                                                                                                    
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|NOTE 9 - | INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | Gross intangible assets were $44,297, less   accumulated amortization of $11,873 for net intangible assets of $32,424 as   of December 31, 2005.  Gross   intangible assets were $43,174, less accumulated amortization of $4,454 for   net intangible assets of $38,720 as of December 31, 2004 and $0 as of   December 31, 2003.  Amortization   expenses were $7,419 and $4,454 for the fiscal years ended December 31, 2005   and 2004 respectively.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|         | Future estimated amortization expense is   as follows:                                                                                                                                                                                                                                                                                                                                                                                                  

|2006 |       | 2007 |   | 2008  |  | 2009 |       | 2010 |   | Thereafter | 
|---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- | 
|     |       |      |   |       |  |      |       |      |   |            | 
|$    | 5,076 |      | $ | 3,617 |  | $    | 3,617 |      | $ | 3,617      | 

|NOTE 10 - | PREPAYMENT                                                               
|--------- | -------------------------------------------------------------------------
|          |                                                                          
|          | Prepayment consisted of the following as   of December 31, 2005 and 2004:

|                       |  | 2005 |           | 2004 |  
|---------------------- |  | ---- | --------- | ---- | -
|                       |  |      |           |      |  
|Raw material suppliers |  | $    | 1,584,193 |      | $
|Equipment purchase     |  |      | 217,637   |      |  
|Total prepayment       |  | $    | 1,801,829 |      | $

|NOTE 11 - | ACCRUED EXPENSES                                                               
|--------- | -------------------------------------------------------------------------------
|          |                                                                                
|          | Accrued expenses consisted of the   following as of December 31, 2005 and 2004:

|                         |  | 2005 |         | 2004 |  
|------------------------ |  | ---- | ------- | ---- | -
|                         |  |      |         |      |  
|Accrued payroll          |  | $    | 297,928 |      | $
|Accrued rent             |  |      |        |      |  
|Accrued legal            |  |      |        |      |  
|Other accrued expenses   |  |      | 185,054 |      |  
|                         |  |      |         |      |  
|Total accrued   expenses |  | $    | 482,982 |      | $
|                         |  |      |         |      |  

|NOTE 12 - | BANK BORROWINGS                                             
|--------- | ------------------------------------------------------------
|          |                                                             
|          | Bank borrowings represent the following as   of December 31:

- 28 -

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|                      |  | 2005 |            | 2004 | 
|--------------------- |  | ---- | ---------- | ---- | 
|                      |  |      |            |      | 
|Secured               |  |      | 16,026,717 |      | 
|                      |  |      |            |      | 
|Less: Current portion |  |      | 16,026,717 |      | 
|                      |  |      |            |      | 
|Non-current portion   |  |      |           |      | 
|                      |  |      |            |      | 

|          | These loans were from two banks, Bank of   China and CITIC Bank, to finance the general working capital as well as   urgent new equipment acquisition. Corporate or personal guarantees are   provided for those bank loans as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | $10.25M                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | $2.43M                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | $3.35M                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | The Company does not provide any sort of   guarantee to any other parties. Interest rates for the loans ranged between   4.964% and 6.003% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|NOTE 13 - | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | The Company is registered in the PRC, and   is therefore subject to provincial 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 Manufacturers, the Company is   exempted from income taxes in the PRC for the fiscal years ended December 31,   2005 and 2004.  Thereafter, the   Company is entitled to a tax concession of 50% of the applicable income tax   rate of 26.4%, for the following three years ended December 31, 2006,   2007, and 2008.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | Had the Company not been entitled to the   tax holiday, income tax expense computed for the years ended December 31,   2005 and 2004 would have been approximately $1,395,000 and $1,269,000   respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          | Provision for income taxes consists of the   following for the year ended December 31, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                   |  |   |     | 
|------------------ |  | - | --- | 
|(In Thousands)     |  |   |     | 
|                   |  |   |     | 
|Income tax expense |  |   |     | 
|Current year       |  | $ | 444 | 
|Prior year         |  |   | 102 | 
|                   |  |   |     | 
|Total              |  | $ | 546 | 
|                   |  |   |     | 

| | The reconciliation of the applicable tax   rate to the effective tax rate is as follows:
| | ----------------------------------------------------------------------------------------

|(In Thousands)                                                    |  |   |      |  
|----------------------------------------------------------------- |  | - | ---- | -
|                                                                  |  |   |      |  
|Expected PRC income tax charge at Statutory   tax rate of 33% (i) |  |   | 619  |  
|Non-taxable income (ii)                                           |  |   | (201 | )
|Non-deductible expenses                                           |  |   | 26   |  
|                                                                  |  |   |      |  
|Current year income tax expense                                   |  | $ | 444  |  
|                                                                  |  |   |      |  

| |     
| | ----
| | (i) 
| |     
| | (ii)

- 29 -

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|          | No provision for deferred tax liabilities   has been made, since the Company had no material temporary differences   between the tax bases of assets and liabilities and their carrying amounts.                                                                                                                           
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                            
|NOTE 14 - | LEASES                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                            
|          | The Company has a lease agreement with   Ruili Group Co., Ltd., a related party, for the rental of a manufacturing   plant.  The lease is for a ten year   term ending in February 2014.  Rent   expense for the fiscal years ended December 31, 2005, 2004, and 2003 was   $439,009, $439,009, and $365,840, respectively.
|          |                                                                                                                                                                                                                                                                                                                            
|          | Future minimum rental payments for the   years ended December 31 are as follows:                                                                                                                                                                                                                                           

|2006 |         |  | 2007 |         |  | 2008 |         |  | 2009 |         |  | 2010 |         |  | Thereafter |           |  | Total |          
|---- | ------- |  | ---- | ------- |  | ---- | ------- |  | ---- | ------- |  | ---- | ------- |  | ---------- | --------- |  | ----- | ---------
|     |         |  |      |         |  |      |         |  |      |         |  |      |         |  |            |           |  |       |          
|$    | 439,540 |  | $    | 439,540 |  | $    | 439,540 |  | $    | 439,540 |  | $    | 439,540 |  | $          | 1,321,620 |  | $     | 3,519,320

|NOTE 15 - | ADVERTISING COSTS                                                                                                                                                                                                        
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                          
|          | Advertising costs are expensed as incurred   and are classified as selling expenses.    Advertising costs were $19,622, $1,661, and $8,069, for the fiscal years   ended December 31, 2005, 2004, and 2003, respectively.
|          |                                                                                                                                                                                                                          
|NOTE 16 - | RESEARCH AND DEVELOPMENT   EXPENSES                                                                                                                                                                                      
|          |                                                                                                                                                                                                                          
|          | Research and development costs are   expensed as incurred and were $361,503, $79,962, and $55,784, for the fiscal   years ended December 31, 2005, 2004, and 2003, respectively.                                         
|          |                                                                                                                                                                                                                          
|NOTE 17 - | WARRANTY CLAIMS                                                                                                                                                                                                          
|          |                                                                                                                                                                                                                          
|          | Warranty claims were $778,763, $205,314   and $112,063 for the fiscal years ended on December 31, 2005, 2004 and 2003   respectively. The movement of accrued warranty expenses for fiscal year 2005   is as follows:    

|Accrued in 2005:           |  | $ | 778,763  |  
|-------------------------- |  | - | -------- | -
|Less: Actual Paid in 2005: |  | $ | (598,831 | )
|Ending balance at 2005:    |  | $ | 179,932  |  

|NOTE 18 - | STOCK COMPENSATION PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | The Company established a stock   compensation plan in October 2005 for the purpose of enhancing its ability to   attract, retain and provide incentives to directors, officers, employees and   independent contractors who are crucial to the future growth and success of   the Company.  The plan outlined that   over the next ten years the Company will issue approximately 1,700,000 common   shares to qualified directors, officers, employees and independent   contractors.  During 2005 the Company   issued 49,500 shares of common stock to employees valued at $6 per share   resulting in a change to income of $297,000.    The value of the stock issued was determined by using the approximate   quoted market price of the stock at the date of issuance.  The above issuance did not result in any   cash outflows to the Company.

- 30 -

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|          | Additionally, the Company issued 10,000   shares of common stock to consultants valued at $6.50 per share resulting in   a change to income of $65,000.  During   2005, the value of the stock issued was determined by using the approximated   quoted market price at the date of issuance.    The above issuance did not result in any cash outflows to the Company.                                                                             
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | No stock options, warrants or similar   stock equivalent instruments were issued during 2005.                                                                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 19 - | SUBSEQUENT EVENT                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | On January 5, 2006, the Company signed the   Financial Advisory Agreement with Maxim Group LLC (Maxim) and Chardan   Capital Markets, LLC (Chardan) to provide general financial advisory and   investment banking services to the Company on an exclusive basis for a period   of twelve months.                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | Effective February 2006, the Company shall   pay to Maxim and Chardan (i) a monthly retainer of $5,000 at the beginning of   each month for the term of this Agreement and (ii) issue to Maxim and Chardan   a warrant (Warrant) to purchase 100,000 shares of the Companys common   stock.  The Warrant shall be   exercisable at any time during the four-year period commencing on the date   thereof at an exercise price of $6.25 per share.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | On March 1, 2006, the Company resolved to   issue 60,000 options with an exercise price of $4.79 per share and three-year   validity to the four independent directors under the 2005 Stock Compensation   Plan.  These options will be vested 3   years after date of grant.                                                                                                                                                                       

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ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|EXHIBIT NO. |  | DOCUMENT DESCRIPTION                                                                                                                                                
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                     
|3.1         |  | Articles of Incorporation (1)                                                                                                                                       
|            |  |                                                                                                                                                                     
|3.2         |  | Bylaws (1)                                                                                                                                                          
|            |  |                                                                                                                                                                     
|10.1        |  | Share Exchange Agreement and Plan of Reorganization (2)                                                                                                             
|            |  |                                                                                                                                                                     
|10.2        |  | Joint Venture Agreement (3)                                                                                                                                         
|            |  |                                                                                                                                                                     
|10.3        |  | 2005 Stock Compensation Plan (3)                                                                                                                                    
|            |  |                                                                                                                                                                     
|23.1        |  | Consent of Rotenberg & Co., LLP                                                                                                                                     
|            |  |                                                                                                                                                                     
|23.2        |  | Consent of Clancy and Co., PLLC                                                                                                                                     
|            |  |                                                                                                                                                                     
|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)
|   
|(2)
|   
|(3)

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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 24th day of July 2006.

| | SORL AUTO PARTS, INC.
| | ---------------------
| |                      
| |                      
| | By:                  
| |                      
| |                      
| |                      



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 |  | July 24, 2006
|                   |  |                                       |  |              
|Xiao Ping Zhang    |  |                                       |  |              
|                   |  |                                       |  |              
|/s/Xiao Feng Zhang |  | Chief Operating Officer and Director  |  | July 24, 2006
|                   |  |                                       |  |              
|Xiao Feng Zhang    |  |                                       |  |              
|                   |  |                                       |  |              
|/s/Zong Yun Zhou   |  | Chief Financial Officer               |  | July 24, 2006
|                   |  |                                       |  |              
|Zong Yun Zhou      |  |                                       |  |              
|                   |  |                                       |  |              
|/s/Li Min Zhang    |  | Director                              |  | July 24, 2006
|                   |  |                                       |  |              
|Li Min Zhang       |  |                                       |  |              
|                   |  |                                       |  |              
|/s/ Zhi Zhong Wang |  | Director                              |  | July 24, 2006
|                   |  |                                       |  |              
|Zhi Zhong Wang     |  |                                       |  |              
|                   |  |                                       |  |              
|/s/Yi Guang Huo    |  | Director                              |  | July 24, 2006
|                   |  |                                       |  |              
|Yi Guang Huo       |  |                                       |  |              
|                   |  |                                       |  |              
|/s/Jiang Hua Feng  |  | Director                              |  | July 24, 2006
|                   |  |                                       |  |              
|Jiang Hua Feng     |  |                                       |  |              
|                   |  |                                       |  |              
|/s/Jung Kang Chang |  | Director                              |  | July 24, 2006
|                   |  |                                       |  |              
|Jung Kang Chang    |  |                                       |  |              

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