**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  **FORM
        10-Q**
  (Mark
        One)
  x
                QUARTERLY
                    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                    OF
                    1934
  For
          the
          quarterly period ended March 31, 2007
 
   ̈
                TRANSITION
                    REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                    ACT
  For
                  the transition period from
              
              toCommission
                  file number
              000-11991
  **SORL
        AUTO PARTS, INC.**
 as
        specified in its charter)
  DELAWARE
              30-0091294(State
                  or other jurisdictionof
                  incorporation or organization)
              (IRS
                  Employer Identification No.)
 
 No.
        1169
        Yumeng Road
 Ruian
        Economic Development District
 Ruian
        City, Zhejiang Province
 People’s
        Republic Of China
 
  86-577-6581-7720
 
 
 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 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
                  Filer 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
 
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
  Indicate
        the number of shares outstanding of each of the registrant classes of common
        equity, as of the latest
        practicable date:
 As
        of March 31,
        200 7 there
        were **18,275,126** shares
        of Common Stock outstanding
 
 
  SORL
        AUTO
        PARTS, INC.
 FORM
        10-Q
 For
        the
        Quarter Ended March
        31,
        2007
 
  
  **INDEX**
  PART
                  I.
              FINANCIAL
                  INFORMATION (unaudited)Item
                  1.
              Financial
                  Statements:
              1Condensed
                  Consolidated Balance Sheets as ofMarch
                  31, 2007 (Unaudited) and December 31, 2006 (Audited)
              2Condensed
                  Consolidated Statements of Operations and Comprehensive Income
                  (Unaudited)
                  for the ThreeMonth
                  Ended March 31, 2007 and 2006
              3Condensed
                  Consolidated Statements of Stockholders’ Equity (Unaudited) for the ThreeMonth
                  Ended March 31, 2007 and 2006
              4Condensed
                  Consolidated Statements of Cash Flows (Unaudited) for the ThreeMonth
                  Ended March 31, 2007 and 2006
              5Notes
                  to the Condensed Consolidated Financial Statements (Unaudited)
              6Item
                  2.
              Management’s
                  Discussion and Analysis or Financial Condition and Results of
                  Operations
              16Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              22Item
                  4.
              Controls
                  and Procedures
              23PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              24Item
                  1A.
              Risk
                  Factors
              24Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              24Item
                  3.
              Defaults
                  Upon Senior Securities
              24Item
                  4.
              Submission
                  Of Maters To a Vote of Security Holders
              24Item
                  5.
              Other
                  Information
              24Item
                  6.
              Exhibits
              25SIGNATURES
              25
  
  PART
        I
 FINANCIAL
        INFORMATION
 
 Item
        1.
        Financial Statements
 
 1
 **SORL
        Auto Parts, Inc. and Subsidiaries**
 **Consolidated
        Balance Sheets**
 **Mar
        31, 2007 and December 31,2006**
 
 **March
                    31, 2007**
                
                **December
                    31, 2006****(Unaudited)**
                
                **(Audited)****Assets****Current
                    Assets**Cash
                    and Cash Equivalents
                
                **US$**
                5,852,480
                
                **US$**
                11,137,501Accounts
                    Receivable, Net of Provision
                
                
                29,176,534
                
                
                26,750,778Notes
                    Receivable
                
                
                7,926,848
                
                
                3,494,327Inventory
                
                
                4,841,944
                
                
                4,528,856Prepayments
                
                
                3,658,036
                
                
                5,532,802Other
                    current assets
                
                
                3,145,564
                
                
                2,925,558**Total
                    Current Assets**
                
                
                54,601,406
                
                
                54,369,822**Fixed
                    Assets**Property,
                    Plant and Equipment
                
                
                22,783,011
                
                
                20,418,557Less:
                    Accumulated Depreciation
                
                
                (4,483,501
                )
                
                (4,106,901
                )Property,
                    Plant and Equipment, Net
                
                
                18,299,510
                
                
                16,311,656**Other
                    Assets**Deferred
                    compensation cost-stock options
                
                
                114,298
                
                
                129,207Intangible
                    Assets
                
                
                66,231
                
                
                45,779Less:
                    Accumulated Amortization
                
                
                (19,126
                )
                
                (17,655
                )Intangible
                    Assets, Net
                
                
                47,105
                
                
                28,124Other
                    Non-current Assets
                
                
                41,399
                
                
                41,299Total
                    Other Assets
                
                
                202,802
                
                
                198,630**Total
                    Assets**
                
                **US$**
                **73,103,718**
                
                **US$**
                **70,880,108****Liabilities
                    and Shareholders' Equity****Current
                    Liabilities**Accounts
                    Payable and Notes Payable
                
                **US$**
                3,689,573
                
                **US$**
                4,620,692Deposit
                    Received from Customers
                
                
                800,975
                
                
                508,268Income
                    taxpayable
                
                
                366,126
                
                
                358,367Accrued
                    Expenses
                
                
                1,103,610
                
                
                1,232,845Other
                    Current Liabilities
                
                
                479,266
                
                
                454,430**Total
                    Current Liabilities**
                
                
                6,439,550
                
                
                7,174,602**Minority
                    Interest**
                
                
                6,633,940
                
                
                6,336,557**Shareholders'
                    Equity**Common
                    Stock - $0.002 Par Value; 50,000,000 authorized,18,275,126
                    issued and outstanding as ofMarch
                    31, 2007 and December 31, 2006 respectively
                
                
                36,550
                
                
                36,550Additional
                    Paid In Capital
                
                
                37,444,051
                
                
                37,444,051Reserves
                
                
                1,008,786
                
                
                797,116Accumulated
                    other comprehensive income
                
                
                1,662,216
                
                
                1,102,469Retained
                    Earnings
                
                
                19,878,625
                
                
                17,988,763Total
                    Shareholders' Equity
                
                
                60,030,228
                
                
                57,368,949**Total
                    Liabilities and Shareholders' Equity**
                
                **US$**
                **73,103,718**
                
                **US$**
                **70,880,108**
  **The
        accompanying notes are an integral part of these financial
        statements**
 
 2
  **SORL
        Auto Parts, Inc. and Subsidiaries**
 **Consolidated
        Statements of Income**
 **For
        The First Quarter Ended March 31, 2007 and 2006**
 
 
 
 **Three
                  Months Ended March 31,****2007**
              
              **2006****(Unaudited)**
              
              **(Unaudited)**Sales
              
              
              US$
              
              
              24,416,989
              
              
              19,419,584Cost
                  of Sales
              
              
              
              
              
              18,726,052
              
              
              15,023,826Gross
                  Profit
              
              
              
              
              
              5,690,937
              
              
              4,395,758Expenses:Selling
                  and Distribution Expenses
              
              
              
              
              
              1,183,647
              
              
              868,016General
                  and Administrative Expenses
              
              
              
              
              
              1,693,187
              
              
              1,096,963Financial
                  Expenses
              
              
              
              
              
              143,168
              
              
              265,547Total
                  Operating Expenses
              
              
              
              
              
              3,020,002
              
              
              2,230,526Operating
                  Income
              
              
              
              
              
              2,670,935
              
              
              2,165,232Other
                  Income
              
              
              
              
              
              32,340
              
              
              ——Non-Operating
                  Expenses
              
              
              
              
              
              (4,089
              )
              
              (89,675
              )Income
                  (Loss) Before Provision for Income Taxes
              
              
              
              
              
              2,699,186
              
              
              2,075,557Provision
                  for Income Taxes
              
              
              
              
              
              362,465
              
              
              293,608Net
                  Income Before Minority Interest&
                  Other Comprehensive Income
              
              
              US$
              
              
              2,336,721
              
              
              1,781,950Minority
                  Interest
              
              
              
              
              
              235,189
              
              
              178,195Net
                  Income Attributable to Shareholders
              
              
              
              
              
              2,101,532
              
              
              1,603,755Foreign
                  Currency Translation Adjustment
              
              
              
              
              
              621,941
              
              
              126,705Minority
                  Interest's Share
              
              
              
              
              
              62,194
              
              
              12,671Comprehensive
                  Inclome (Loss)
              
              
              
              
              
              2,661,279
              
              
              1,717,789Weighted
                  average common share - Basic
              
              
              
              
              
              18,275,126
              
              
              13,346,555Weighted
                  average common share - Diluted
              
              
              
              
              
              18,333,009
              
              
              13,347,123EPS
                  - Basic
              
              
              
              
              
              0.11
              
              
              0.12EPS
                  - Diluted
              
              
              
              
              
              0.11
              
              
              0.12
  **The
        accompanying notes are an integral part of these financial
        statements**
 
 3
 
 **SORL
        Auto Parts, Inc. and Subsidiaries**
 **Consolidated
        Statements of Changes in Shareholders' Equity (Unaudited)**
 **For
        The First Quarter Ended March 31, 2007 and 2006**
 
 **Number**
                **of
                  Share**
              
              **Common**
                **Stock**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Reserves**
              
              **Retained**
                **Earnings**
                **(Deficit)**
              
              **Accumu.
                  Other**
                **Comprehensive**
                **Income**
              
              **Shareholders'**
                **Equity**
              
              **Minority**
                **Interest****Beginning
                  Balance January 01, 2006**
              
              
              **13,346,555**
              
              
              **26,693**
              
              
              **4,444,118**
              
              
              ——
              
              
              **11,176,554**
              
              
              **336,993**
              
              
              **15,984,358**
              
              
              1,735,818Net
                  Income
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              1,603,755
              
              
              ——
              
              
              **1,603,755**
              
              
              178,195Other
                  Comprehensive Income
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              114,035
              
              
              **114,035**
              
              
              12,671Paid
                  In Capital Contributions
              
              
              ——
              
              
              ——
              
              
              178,904
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              **178,904**
              
              
              ——***Ending
                  Balance - Mar 31, 2006***
              
              
              **13,346,555**
              
              
              **26,693**
              
              
              **4,623,022**
              
              
              **——**
              
              
              **12,780,309**
              
              
              **451,028**
              
              
              **17,881,052**
              
              
              **1,926,684****Beginning
                  Balance - January 01, 2007**
              
              
              **18,275,126**
              
              
              **36,550**
              
              
              **37,444,051**
              
              
              **797,116**
              
              
              **17,988,763**
              
              
              **1,102,469**
              
              
              **57,368,949**
              
              
              **6,336,557**Net
                  Income
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              2,101,532
              
              
              ——
              
              
              2,101,532
              
              
              235,189Other
                  Comprehensive Income
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              559,747
              
              
              559,747
              
              
              62,194Transfer
                  to reserve
              
              
              ——
              
              
              ——
              
              
              ——
              
              
              211,670
              
              
              (211,670
              )
              
              ——
              
              
              ——
              
              
              ——***Ending
                  Balance - March 31, 2007***
              
              
              **18,275,126**
              
              
              **36,550**
              
              
              **37,444,051**
              
              
              **1,008,786**
              
              
              **19,878,625**
              
              
              **1,662,216**
              
              
              **60,030,228**
              
              
              **6,633,940**
  **The
        accompanying notes are an integral part of these financial
        statements**
  4
  **SORL
        Auto Parts, Inc. and Subsidiaries**
 **Consolidated
        Statements of Cash Flows**
 **For
        The First Quarter Ended March 31, 2007 and 2006**
 
 **Three
                  Months Ended March 31,****2,007**
              
              **2,006****(Unaudited)**
              
              **(Unaudited)****Cash
                  Flows from Operating Activities**Net
                  Income
              
              
              US$
              
              
              2,101,532
              
              
              1,603,755**Adjustments
                  to reconcile net income (loss) to net cash from operating
                  activities:**Minority
                  Interest
              
              
              
              
              
              235,189
              
              
              178,195Bad
                  Debt Expense
              
              
              
              
              
              421,330
              
              
              156,875Depreciation
                  and Amortization
              
              
              
              
              
              340,297
              
              
              264,994Stock-Based
                  Compensation Expense
              
              
              
              
              
              14,909
              
              
              4,970Loss
                  on disposal of Fixed Assets
              
              
              
              
              
              1,108
              
              
              ——**Changes
                  in Assets and Liabilities:**Account
                  Receivables
              
              
              
              
              
              (2,534,364
              )
              
              (3,490,237
              )Notes
                  Receivables
              
              
              
              
              
              (4,377,777
              )
              
              (668,816
              )Other
                  Currents Assets
              
              
              
              
              
              (231,094
              )
              
              (462,357
              )Inventory
              
              
              
              
              
              (268,172
              )
              
              1,377,810Prepayments
              
              
              
              
              
              1,918,820
              
              
              480,151Accounts
                  Payable and Notes Payable
              
              
              
              
              
              (1,069,002
              )
              
              1,863,146Deposits
                  Received from Customers
              
              
              
              
              
              286,432
              
              
              (242,808
              )Other
                  Current Liabilities and Accrued Expenses
              
              
              
              
              
              (121,638
              )
              
              886,686**Net
                  Cash Flows from Operating Activities**
              
              
              
              
              
              **(3,282,430**
              **)**
              
              **1,952,364****Cash
                  Flows from Investing Activities**Acquisition
                  of Property and Equipment
              
              
              
              
              
              (2,063,720
              )
              
              (370,816
              )Investment
                  in Intangible Assets
              
              
              
              
              
              (19,915
              )
              
              ——**Net
                  Cash Flows from Investing Activities**
              
              
              
              
              
              **(2,083,635**
              **)**
              
              **(370,816**
              **)****Cash
                  Flows from Financing Activities**Proceeds
                  from (Repayment of) Bank Loans
              
              
              
              
              
              ——
              
              
              (1,515,603
              )**Net
                  Cash flows from Financing Activities**
              
              
              
              
              
              -
              
              
              **(1,515,603**
              **)****Effects
                  on changes in foreign exchange rate**
              
              
              
              
              
              81,044
              
              
              126,705Net
                  Change in Cash and Cash Equivalents
              
              
              
              
              
              (5,285,021
              )
              
              192,650Cash
                  and Cash Equivalents- Beginning of the year
              
              
              
              
              
              11,137,501
              
              
              961,131**Cash
                  and cash Equivalents - End of the year**
              
              
              **US$**
              
              
              **5,852,480**
              
              
              1,153,781**Supplemental
                  Cash Flow Disclosures:**Interest
                  Paid
              
              
              
              
              
              ——
              
              
              199,240Tax
                  Paid
              
              
              
              
              
              358,179
              
              
              ——
  5
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        A - DESCRIPTION OF BUSINESS**
  SORL
        Auto
        Parts, Inc. (the “Company”) 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
        (the
“Joint Venture”) in the People’s Republic of China (“PRC” or “China”).  The
        Company distributes products both in China and internationally under the
        SORL
        trademarks.  The Company’s product range includes approximately 40
        categories of brake valves with over 800 different specifications.
  **NOTE
        B - BASIS OF PRESENTATION**
  The
        condensed 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. Certain information and footnote disclosures normally included
        in
        financial statements prepared in conjunction with generally accepted accounting
        principles have been condensed or omitted pursuant to such rules and
        regulations, although the Company believes that the disclosures are adequate
        to
        make the information presented not misleading. These condensed consolidated
        financial statements should be read in conjunction with the annual audited
        consolidated financial statements and the notes thereto included in the
        Company’s annual report on Form 10-K and other reports filed with the SEC.
  The
        accompanying unaudited interim consolidated financial statements reflect
        all
        adjustments of a normal and recurring nature which are, in the opinion of
        management, necessary to present fairly the financial position, results of
        operations and cash flows of the Company for the interim periods presented.
        The
        results of operations for these periods are not necessarily comparable to,
        or
        indicative of, results of any other interim period or for the fiscal year
        taken
        as a whole.
  **NOTE
        C-** **RECENTLY ISSUED FINANCIAL STANDARDS**
  In
        February 2007, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standard (“SFAS”) No. 159, "The Fair Value
        Option for Financial Assets and Financial Liabilities, including an amendment
        of
        FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many
        financial instruments and certain other items at fair value at specified
        election dates. This Statement applies to all entities, including not-for-profit
        organizations. SFAS 159 is effective as of the beginning of an entity’s first
        fiscal year that begins after November 15, 2007. As such, the Company is
        required to adopt these provisions at the beginning of the fiscal year ended
        December 31, 2008. The Company is currently evaluating the impact of SFAS
        159 on
        its consolidated financial statements.
  6
  **NOTE
        D - 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 Joint Venture, and also has the common controlling party,
        i.e. the Zhang family.
  The
        following related party transactions occurred for the first quarter ended
        March
        31, 2007 and 2006:
  Three
                    Months Ended March 31,2007
                
                2006PURCHASES
                    FROM:Ruili
                    Group Co., Ltd.
                
                $
                5,378,595
                
                $
                5,843,210Total
                
                $
                5,378,595
                
                $
                5,843,210SALES
                    TO:Ruili
                    Group Co., Ltd.
                
                $
                914,683
                
                
                2,585,814Total
                
                $
                914,683
                
                
                2,585,814
  The
        total
        purchases from Ruili Group during the first quarter ended March 31, 2007
        consisted of approximately $5.1 million of finished products of non-valve
        auto
        parts and approximately $0.3 million of packaging materials.
  **March
                  31,2007**
              
              **December
                  31,2006**PrepaymentRuili
                  Group Co., Ltd.
              
              $
              642,202
              
              $
              2,309,073Total
              
              
              642,202
              
              
              2,309,073Other
                  Accounts receivableRuili
                  Group Co., Ltd.
              
              $
              1,269,375
              
              $
              903,304Total
              
              
              1,269,375
              
              
              903,304
  7
  **NOTE
        E - ACCOUNTS RECEIVABLE**
  The
        changes in the allowance for doubtful accounts at March 31, 2007 and December
        31, 2006 were summarized as follows:
  March
                  31,2007
              
              December
                  31,2006Beginning
                  balance
              
              $
              8,769
              
              $
              914,721Add:
                  Increase to allowance
              
              
              378,576
              
              
              -905,952Less:
                  Accounts written off
              
              
              —
              
              
              —Ending
                  balance
              
              $
              387,345
              
              $
              8,769
  The
        company’s receivables were summarized as follows:
  March
                    31,
                  2007
                
                December
                    31,
                  2006Accounts
                    receivable
                
                $
                29,563,879
                
                $
                26,759,547Less:
                    allowance for doubtful accounts
                
                
                (387,345
                )
                
                (8,769
                )Account
                    receivable balance, net
                
                $
                29,176,534
                
                $
                26,750,778
 **NOTE
        F - INVENTORIES**
  On
        March
        31, 2007 and December 31, 2006, inventories consisted of the following:
  March
                  31, 2007
              
              December
                  31, 2006Raw
                  Material
              
              $
              1,351,010
              
              $
              1,081,569Work
                  in process
              
              
              2,118,536
              
              
              2,429,979Finished
                  Goods
              
              
              1,372,398
              
              
              1,017,308Total
                  Inventory
              
              $
              4,841,944
              
              $
              4,528,856
  **NOTE
        G - PROPERTY, PLANT AND EQUIPMENT**
  Property,
        plant and equipment consisted of the following, on March 31, 2007 and December
        31, 2006:
  **March
                    31,2007**
                
                **December
                    31,2006**Machinery
                
                $
                13,137,776
                
                $
                12,123,775Molds
                
                
                1,127,195
                
                
                1,116,441Office
                    equipment
                
                
                247,729
                
                
                226,647Vehicle
                
                
                559,943
                
                
                310,681Building
                
                
                585,714
                
                
                580,126Construction
                    In Progress
                
                
                7,124,654
                
                
                6,060,887Sub-Total
                
                
                22,783,011
                
                
                20,418,557Less:
                    Accumulated depreciation
                
                
                (4,483,501
                )
                
                (4,106,901
                )Fixed
                    Assets, net
                
                $
                18,299,510
                
                $
                16,311,656
  8
 Depreciation
        expense charged to operations was $339,002 and $263,077 for the first quarter
        ended March 31, 2007 and 2006, respectively.
  **NOTE
        H - INTANGIBLE ASSETS**
  Gross
        intangible assets were $66,231, less accumulated amortization of $19,126
        for net
        intangible assets of $47,105 as of March 31, 2007. Gross intangible assets
        were
        $45,779, less accumulated amortization of $17,655 for net intangible assets
        of
        $28,124 as of December 31, 2006. Amortization expenses were $1,295 and
        $1,916 for the first quarter ended March 31, 2007 and 2006 respectively.
  Future
        estimated amortization expense is as follows:
  **2007**
                
                **2008**
                
                **2009**
                
                **2010**
                
                **2011**
                
                **Thereafter**$4,384
                
                $5,845
                
                $5,845
                
                $5,845
                
                $5,845
                
                $19,341
 **NOTE
        I - PREPAYMENT**
  Prepayment
        consisted of the following as of March 31, 2007 and December 31,
        2006
  **March
                    31,**
                  **2007**
                
                **December
                    31,**
                  **2006**Raw
                    material suppliers
                
                $
                2,895,489
                
                $
                5,080,452Equipment
                    purchase
                
                
                762,547
                
                
                452,350Total
                    prepayment
                
                $
                3,658,036
                
                $
                5,532,802
 9
  **NOTE
        J - ACCRUED EXPENSES**
  Accrued
        expenses consisted of the following as of March 31, 2007 and December 3,
        2006:
  March
                  31,2007
              
              December
                  31,2006Accrued
                  payroll
              
              $
              474,597
              
              $
              448,420Other
                  accrued expenses
              
              
              629,013
              
              
              784,425Total
                  accrued expenses
              
              $
              1,103,610
              
              $
              1,232,845
  **NOTE
        K - RESERVE**
  The
        reserve funds are comprised of the following:
  **March
                    31,**
                  **2007**
                
                **December31,
                    2006**Statutory
                    surplus reserve fund
                
                $
                1,008,786
                
                $
                797,116Total
                
                $
                1,008,786
                
                $
                797,116
 Pursuant
        to the relevant laws and regulations of Sino-foreign joint venture enterprises,
        the profits of the Company's subsidiary, which are based on their PRC statutory
        financial statements, are available for distribution in the form of cash
        dividends after they have satisfied all the PRC tax liabilities, provided
        for
        losses in previous years, and made appropriations to reserve funds, as
        determined at the discretion of the board of directors in accordance with
        PRC
        accounting standards and regulations.
  As
        stipulated by the relevant laws and regulations for enterprises operating
        in the
        PRC, the Company's Sino-foreign joint venture is required to make annual
        appropriations to two reserve funds, consisting of the statutory surplus
        and
        public welfare funds. In accordance with the relevant PRC regulations and
        the
        articles of association of the respective companies, the Joint Venture is
        required to allocate a certain percentage of its profits after taxation,
        as
        determined in accordance with PRC accounting standards applicable to the
        company, to the statutory surplus reserve until such reserve reaches 50%
        of the
        registered capital of the company.
  Net
        income as reported in the US GAAP financial statements differs from that
        as
        reported in the PRC statutory financial statements. In accordance with the
        relevant laws and regulations in the PRC, the profits available for distribution
        are based on the statutory financial statements. If the Joint Venture has
        foreign currency available after meeting its operational needs, the Joint
        Venture may make its profit distributions in foreign currency to the extent
        foreign currency is available. Otherwise, it is necessary to obtain approval
        and
        convert such distributions at an authorized bank.
  10
  **NOTE
        L - INCOME TAXES**
  The
          Joint
          Venture is registered in the PRC, and is therefore subject to state and
          local
          income taxes within the PRC at the applicable tax rate on the taxable income
          as
          reported in the PRC statutory financial statements in accordance with relevant
          income tax laws.  According to applicable tax laws regarding Sino-Foreign
          Joint Venture, the Joint Venture is exempted from income taxes in the PRC
          for
          the fiscal years ended December 31, 2005 and 2004.  Thereafter, the Joint
          Venture is entitled to a tax concession of 50% of the statutory income
          tax rate
          of 26.4%, for the following three years ended December 31, 2006, 2007,
          and
          2008.
  The
          reconciliation of the effective income tax rate of the Joint Venture to
          the
          statutory income tax rate in the PRC for the first quarter ended March
          31, 2007
          is as follows:
 Statutory
                  tax rate
              
              
              26.4
              %Tax
                  holidays and concessions
              
              
              -13.2
              %Effective
                  tax rate
              
              
              13.2
              %
 
 No
          provision for deferred tax liabilities has been made, since the Joint Venture
          had no material temporary differences between the tax bases of assets and
          liabilities and their carrying amounts.
  **NOTE
        M -  LEASES**
  Commencing
        in 2004, the Company has a lease agreement with Ruili Group Co., Ltd., a
        related
        party, for the lease of a manufacturing plant. The lease is for a ten year
        term
        ending in February 2014.
  In
        December 2006, the Company entered into one new lease agreement with Ruili
        Group
        Co., Ltd. for the lease of two apartment buildings. These two apartment
        buildings are respectively for its management personnel and ordinary staff.
        The
        lease term is from January 2007 to December 2011 for one of the apartment
        buildings and from January 2007 to December 2012 for the other.
  Rent
        expense for the first quarter ended March 31, 200 7
        and
        2006, was $178,752and $109,752 respectively.
 
 **2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **2011**
              
              **Thereafter**Rental
                  of plant
              
              
              340,911
              
              
              457,845
              
              
              457,845
              
              
              457,845
              
              
              457,845
              
              
              991,998Rental
                  of apartment buildings
              
              
              180,225
              
              
              242,043
              
              
              242,043
              
              
              242,043
              
              
              242,043
              
              
              58,727Total
              
              
              521,136
              
              
              699,888
              
              
              699,888
              
              
              699,888
              
              
              699,888
              
              
              1,050,725
 
 11
  **NOTE
        N - ADVERTISING COSTS**
 No
          advertising costs incurred in the first quarter ended March 31, 2007.
          Advertising costs were $3,819 for the first quarter ended March 31,
          2006.
  **NOTE
        O -  RESEARCH AND DEVELOPMENT
        EXPENSE**
  Research
          and development costs are expensed as incurred and were $222,875 and $63,196
          for
          the first quarter ended March 31, 2007 and 2006, respectively.
  **NOTE
        P - WARRANTY CLAIMS**
  Warranty
          claims were $264,803 and $228,335for the first quarter ended March 31,
          2007and
          2006, respectively. The movement of accrued warranty expenses or the first
          quarter ended March 31, 2007 was as follows:
  Beginning
                  balance at January 01, 2007
              
              $
              613,917Accrued
                  during the first quarter of 2007:
              
              $
              264,803Less:
                  Actual Paid during the first quarter of 2007:
              
              $
              658,317Ending
                  balance at March 31, 2007
              
              $
              220,403
  **N** **OTE
        Q -  STOCK COMPENSATION
        PLAN**
  (1)
        The
        Company’s 2005 Stock Compensation Plan (the Plan) permits the grant of share
        options and shares to its employees for up to 1,700,000 shares of common
        stock.
        The Company believes that such awards better align the interests of its
        employees with those of its shareholders. Option awards are generally granted
        with an exercise price equal to the market price of the Company’s stock at the
        date of grant.
  Pursuant
        to the Plan, the Company issued 60,000 options with an exercise price of
        $4.79
        per share on March 1, 2006. In accordance with the vesting provisions of
        the
        grants, the options will become vested and exercisable under the following
        schedules.
  **Number
                  of Shares**
              
              **%
                  of Shares Issued**
              
              **Initial
                  Vesting Date**60,000
              
              100%
              
              March
                  1, 2009
  12
  The
        Company accounts for stock-based compensation in accordance with SFAS No.
        123
        Revised, “Share-Based Payment.” The fair value of each option award is estimated
        on the date of grant using the Black-Scholes-Merton option-pricing model
        that
        uses the assumptions noted in the following table.
  Dividend
                  Yield
              
              
              0.00
              %Expected
                  Volatility
              
              
              96.54
              %Risk-Free
                  Interest Rate
              
              
              4.59
              %Contractual
                  Term
              
              
              3
                  yearsStock
                  Price at Date of Grant
              
              $
              4.79Exercise
                  Price
              
              $
              4.79
  Total
        deferred stock-based compensation expenses related to the 60,000 stock options
        granted amounted to $178,904.  This amount is amortized over three years in
        a manner consistent with Financial Accounting Standards Board Interpretation
        No.
        123 (R).  The amortization of deferred stock-based compensation for these
        equity arrangements was $14,909 for the
        first
        quarter ended March 31, 2007 .
        As of
        March 31, 2007, there was $ 114,298 of total unrecognized compensation cost
        related to non-vested share-based compensation arrangements granted under
        the
        plan. The cost is expected to be recognized over a period of 1.9 years.
  A
        summary
        of option activity under the Plan as of March 31, 2007 and changes during the
        first
        quarter ended March 31, 2007 is as
        follows:
  **Options**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual
                  Term**
              
              **Aggregate**
                **Intrinsic**
                **Value**1-Jan-06
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Granted
              
              
              60,000
              
              
              4.79
              
              
              3Years
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
              
              
              —
              
              
              —
              
              
              —
              
              
              —Outstanding
                  at March 31, 2007
              
              
              60,000
              
              $
              4.79
              
              
              1.9Years
              
              $
              228,000Exercisable
                  at March 31, 2007
              
              
              —
              
              
              —
              
              
              —
              
              
              —
  (2)
        On
        January 5, 2006 the Company issued 100,000 warrants for financial services
        to be
        provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise
        price of $6.25 per share. In accordance with the common stock purchase warrant
        agreement, the warrants became vested and exercisable immediately on the
        date
        thereof. As set forth in the agreement, the Company will retain Maxim Group
        LLC
        and Chardan Capital Markets, LLC as its exclusive financial advisors and
        investment bankers for a period of twelve months.
  13
  **Number
                  of Shares**
              
              **%
                  of Shares Issued**
              
              **Initial
                  Vesting Date**100,000
              
              100%
              
              January
                  5, 2006
  The
        Company accounts for stock-based compensation in accordance with SFAS No.
        123
        Revised, “Share-Based Payment.” The fair value of each warrant is estimated on
        the date of grant using the Black-Scholes-Merton option-pricing model that
        uses
        the assumptions noted in the following table.
  Dividend
                  Yield
              
              
              0.00
              %Expected
                  Volatility
              
              
              95.01
              %Risk-Free
                  Interest Rate
              
              
              4.36
              %Contractual
                  Term
              
              
              4
                  yearsStock
                  Price at Date of Grant
              
              $
              4.70Exercise
                  Price
              
              $
              6.25
  Total
        deferred stock-based compensation expenses related to the 100,000 warrants
        granted amounted to $299,052. This amount is amortized over one year in a
        manner
        consistent with Financial Accounting Standards Board Interpretation No. 123
        (R).  The amortization of deferred stock-based compensation for these
        equity arrangements was $299,052 for the fiscal year ended December 31, 2006.
  A
        summary
        of option activity under the Plan as of March 31, 2007 and changes during the
        first
        quarter ended March 31, 2007 is as
        follows:
  **Warrants**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual
                  Term**
              
              **Aggregate**
                **Intrinsic**
                **Value**1-Jan-06
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Granted
              
              
              100,000
              
              $
              6.25
              
              
              4Years
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
              
              
              —
              
              
              —
              
              
              —
              
              
              —Outstanding
                  at March 31, 2007
              
              
              100,000
              
              $
              6.25
              
              
              2.8Years
              
              $
              234,000Exercisable
                  at March 31, 2007
              
              
              100,000
              
              $
              6.25
              
              
              2.8Years
              
              $
              234,000
  14
  **NOTE
        R- COMMITMENTS AND CONTINGENCIES**
  (1)
        In
        November 2006, the Joint Venture purchased approximately 861,543 square feet
        of
        land for $5.9 million from Ruili Group, a related party. The Joint Venture
        has
        commenced building one new plant on the site. To build the new plant, the
        anticipated aggregate investment is $ 15.4 million, inclusive of $5.9 million
        paid for purchasing the land use right.
  According
        to relevant PRC laws and regulations, a land use right certificate, along
        with
        government approvals for land planning, project planning, and construction
        need
        to be obtained before construction of the building is commenced. An ownership
        certificate will be granted by government upon application under the condition
        that the aforementioned certificate and government approvals are obtained.
  The
        Joint
        Venture has applied for but not yet received the land use right certificate
        of
        approval. However, the Ruili Group owned the land use right certificate and
        has
        acquired government approval for building one new plant on the site.
        Accordingly, there is no risk that the buildings to be constructed will have
        to
        be vacated.
 (2)
        The
        following table shows the Company's significant contractual obligations as
        of
        March 31, 2007.
  **Payment
                  Due by Period****(in
                  thousands)**
              
              **Total**
                **Contractual**
                **Obligations**
              
              **Less
                  than**
                **1
                  year**
              
              **Between**
                **2-3
                  years**
              
              **Between**
                **4-5
                  years**
              
              **Over
                  5**
                **years**New
                  equipment purchase obligation
              
              
              117
              
              
              117Capital
                  commitments (2)
              
              
              674
              
              
              640
              
              
              34
              
              
              
              
              
              —$
              791
              
              $
              757
              
              $
              34
              
              $
              0
              
              $
              0
  (*)
              Capital
                  commitments include the investment for construction of a new plant
                  to
                  expand the production capacity of air brake valves and related
                  products.
                  The Company has budgeted an aggregate amount of approximately $15.4
                  million for construction of the new plant. However, some of the
                  projected
                  amounts without existing contractual commitments nor scheduled
                  maturities
                  are not listed in this table.(3)
              The
                  information of lease commitments is provided in Note L.
 
 **NOTE
        S - OFF-BALANCE SHEET ARRANGEMENTS**
  At
        March
        31, 2007, we do not have any material commitments for capital expenditures
        or
        have any transactions, obligations or relationships that could be considered
        off-balance sheet arrangements.
  **NOTE
        T - SUBSEQUENT EVENTS**
  None.
  15
  **Item
        2.     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 10Q.
  OVERVIEW
  On
        May
        10, 2004, we acquired all of the issued and outstanding equity interests
        of
        Fairford Holdings Limited, a Hong Kong limited liability company (“Fairford”).
        Until we acquired Fairford, we had only nominal assets and liabilities and
        limited business operations. Although Fairford became a wholly-owned subsidiary
        following the acquisition, because the acquisition resulted in a change of
        control, the acquisition was recorded as a “reverse merger” whereby Fairford is
        considered to be the accounting acquirer. As such, the following results
        of
        operations are those of Fairford.
  Fairford
        was organized in Hong Kong as a limited liability company on November 3,
        2003.
        Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts
        Co.,
        Ltd., a Sino-foreign joint venture (the “Joint Venture”) established pursuant to
        the laws of the People’s Republic of China (“PRC” or “China”). The Joint Venture
        is a joint venture between Fairford and Ruili Group Co., Ltd. (the “Ruili
        Group”).
  The
        Ruili
        Group was incorporated in the PRC in 1987 to specialize in the development,
        production and sale of various kinds of automotive parts. Its headquarters
        are
        located in Ruian City of Wenzhou Area, one of the leading automotive parts
        manufacturing centers of China with more than 1400 auto parts manufacturing
        companies. Its major product lines include valves for air brake systems,
        auto
        metering products, auto electric products, anti-lock brake systems and
        retarders. Some of those products were developed and are manufactured through
        affiliated companies of Ruili Group. Due to its leading position in the
        industry, the Chairman of the Ruili Group, Mr. Xiao Ping Zhang, has been
        elected
        as the Chairman of Wenzhou Auto Parts Association, one of the leading auto
        parts
        trade associations in China. Mr. Zhang is also Chairman and Chief Executive
        Officer of the Company. The Joint Venture was established in the PRC as a
        Sino-foreign joint venture company with limited liability by the Ruili Group
        and
        Fairford. Fairford and Ruili Group contributed 90% and 10%, respectively,
        of the
        paid-in capital in the aggregate amount of approximately $43.4 million.
  In
        connection with its formation, effective January 19, 2004 the Joint Venture
        acquired the business of the Ruili Group relating to the manufacture and
        sale of
        various kinds of valves for automotive brake systems and related operations
        (the
“Transferred Business”). This was accomplished by the transfer from the Ruili
        Group to Fairford of the relevant assets and liabilities of the Transferred
        Business including trade receivables, inventories and machinery, and the
        assumption of short and long term borrowings, at a consideration of
        approximately $6.39million.
  16
  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.
  In
        December 2006, through Fairford, SORL invested a further approximately $32.67
        million in its operating subsidiary- the Joint Venture. To maintain its 10%
        shareholding in the Joint Venture, the Ruili Group increased its capital
        investment by approximately $3.63million. SORL Auto Parts, Inc. continues
        to
        hold a 90% controlling interest in the operating subsidiary.
  As
        a
        result of the foregoing, through Fairford’s 90% interest in the Joint Venture,
        the Company manufactures and distributes automotive air brake valves and
        related
        components in China and internationally for use primarily in vehicles weighing
        over three tons, such as trucks and buses. There are forty categories of
        valves
        with over 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.
  17
  *Accounting
        Method*
  The
        Company uses the accrual method of accounting which recognizes revenues when
        earned and expenses when incurred.
  *Accounts
        Receivable and Allowance for Doubtful Accounts*
  The
        Company presents accounts receivable, net of allowance for doubtful
        accounts.  The allowance is calculated based on review of individual
        customer accounts.
  *Inventories*
  Inventories
        are stated at the lower of cost or net realizable value. Cost is calculated
        on the weighted-average basis and includes all costs to acquire and other
        costs
        incurred in bringing the inventories to their present location and
        condition.  The Company evaluates the net realizable value of 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 Joint Venture was 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. The Joint Venture is entitled to a 50% income tax reduction in the
        fiscal years ended December 31, 2006, 2007 and 2008. The statutory income
        tax
        rate is 26.4% in Ruian City which is located in the coastal economic development
        zones, the Joint Venture was subject to a tax rate of 13.2% from the years
        of
        2006 to 2008.
  *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 does not receive revenue for shipping and handling costs to
        customers.  Shipping and handling expenses incurred by the Company are
        included in selling 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.
  18
  *Results
        of Operations*
  Three
        months ended March 31, 2007 as compared to three Months ended March 31, 2006:
  SALES
  Sales
              
              Three
                  Months end 2007
              
              Three
                  Months end 2006Air
                  brake valves & related components
              
              $
              19.1M
              
              
              78.3
              %
              $
              13.6M
              
              
              70.1
              %Non-valve
                  products
              
              $
              5.3M
              
              
              21.7
              %
              $
              5.8M
              
              
              29.9
              %Total
              
              $
              24.4M
              
              
              100
              %
              $
              19.4M
              
              
              100
              %
 
 Sales
        consist of air brake valves and related components manufactured by SORL and
        sold
        to domestic original equipment manufacturers (OEM) and aftermarket customers
        as
        well as distribution of non-valve auto parts sourced from the Ruili Group.
  Net
        sales
        were $24,416,989 and $19,419,584 for the first quarter ended March 31, 2007
        and
        2006, respectively. Net sales for the three months ended March 31, 2007
        increased by approximately $5.0 million or 25.7% to approximately $24.4 million,
        compared with the same period of 2006.  The increase in sales was mainly
        from the international market segment and the domestic OEM
        segment. . This increase was a result of the Company’s efforts to
        develop more customers and penetrate these market segments.
  A
        breakdown of net sales revenue for our three market segments, domestic OEM,
        domestic aftermarket and the international market, for the first quarter
        of 2007
        and 2006 is as follows:
 
 Three
                  Months ended March 31,2007
              
              %
              
              Three
                  Months ended March 31, 2006
              
              %(U.S. 
                  dollars in million)
              
              
              
              (U.S. 
                  dollars in million)China
                  OEM market
              
              $
              8.9
              
              
              36
              %
              $
              5.8
              
              
              30
              %China
                  Aftermarket
              
              $
              7.1
              
              
              29
              %
              $
              7.5
              
              
              39
              %International
                  market
              
              $
              8.4
              
              
              35
              %
              $
              6.1
              
              
              31
              %Total
              
              $
              24.4
              
              
              100
              %
              $
              19.4
              
              
              100
              %
 
 Taking
        advantage of its established relationship with major OEM customers, the Joint
        Venture further expanded its OEM market share in the first quarter of 2007.The
        Joint Venture’s sales for the OEM market increased by approximately $3.1 million
        or 53.4% for the first quarter ended March 31, 2007, as compared with the
        first
        quarter ended March 31, 2006.
  As
        of
        March 31,2007, the Joint Venture has 28 authorized distributors covering
        nearly
        all regions in China, who in turn sell our products to over 800
        sub-distributors. The Joint Venture achieved total revenue of approximately
        $7.1 million in domestic aftermarket sales for the first quarter ended March
        31,
        2007. The sales for the domestic aftermarket decreased slightly by approximately
        $0.4 million as compared with the first quarter ended March 31, 2006. In
        the
        first quarter of 2007, the Joint Venture’s strategy was to maintain sales for
        the domestic aftermarket to that for the same period of 2006, and to schedule
        production and distribution to meet the increasing requirements from the
        OEM
        market and overseas market.
  19
  Export
        sales grew by approximately $2.3 million or approximately 37.7% for the three
        months ended March 31, 2007, as compared to $6.1 million for the same period
        of
        2006.   The increase reflects our continued focus on customer service,
        strong execution, introduction of new products, increased productivity of
        our
        expanded contract sales force, more efficient targeted marketing spending
        on our
        catalogs, web sites and international trade shows as well as the continued
        success of our customer acquisition and retention efforts resulting from
        improved service levels in this market segment.  Additionally, the Joint
        Venture has been able to offer a much wider product line including non-valve
        products which are outsourced from the RuiLi Group.  Such outsourced
        non-valve products include power steering pumps and other pumps, automobile
        electrical components and auto meters.
 
 COST
        OF
        SALES
  Cost
        of
        sales for the first quarter ended March 31, 2007 increased to $18.7 million
        from
        $ 15 million for the same period of 2006, a $3.7 million or 24.6 % increase
        which was consistent with the increase in revenues.
 GROSS
        PROFIT
  For
        the
        first quarter ended March 31, 2007, gross profit was $5,690,937, as compared
        to
        $4,395,758 for the first quarter ended March 31, 2006, an increase of $1,295,179
        or 29.46%.  Gross margin was 23.31% for the first quarter ended March 31,
        2007, an increase of 0.67% from 22.64% for the same period of 2006.
  The
        average price of primary raw
        materials, such as aluminum
        ingot, still continued to increase as it had in the past two years. The
        increases have had an adverse impact on gross profit, since some of the
        increases cannot be passed onto the customers. To reduce the impact of these
        price increases, we have taken some measures, such as selecting the suppliers
        which are physically close to the Joint Venture to reduce the cost of
        transportation, not to carrying inventories of raw material in excess of
        those
        required to meet production when the market price is volatile, having short-term
        pricing agreements with some of our suppliers that reduce our exposure to
        aluminum pricing increases, and optimizing production technique to reduce
        raw
        material consumption. Additionally, this negative impact on Gross Margin
        was
        largely offset by economies of scale, shift of products mix and the introduction
        of new valve products with higher profit margins.
  SELLING
        EXPENSES
  Selling
        expenses were $1,183,647 for the three months ended March 31 2007, as compared
        to $868,016 for the same period of 2006, an increase of $315,631 or
        36.4%. Packaging costs were $ 437,810 for the three months ended March 31,
        2007, as compared to $212,289 for the same period of 2006, an increase of
        $
        225,521 or 106.2%, as a result of the increase in international sales which
        generally require a higher standard for packaging material. As sales order
        increase, most of the goods could be shipped in a whole container and delivered
        to the customer, so that the average transportation cost will be lower.
        Additionally, more transactions for overseas customers were on a FOB basis
        since
        2006, so a larger portion of the transportation expense was assumed by
        the customer. Because of these factors, the transportation expenses for domestic
        and export sales increased only by $28,177 as compared to the same period
        of
        2006. The Company recorded $264,803 of product warranty expenses for the
        three
        months ended March 31, 2007, as compared to $176,005 for the same period
        of
        2006, an increase of $88,798, mainly attributed to a specific “3-R Warranties”
service charge (for repair, replacement and refund) paid to an OEM customer.
        The
        remaining selling expenses as a percentage of sales decreased as compared
        to the
        same period of 2006 since most of these expenses are fixed in nature.
  20
  GENERAL
        AND ADMINISTRATIVE EXPENSES
  General
        and administrative expenses w ere
        $1,693,187 for the three months ended March 31, 2007, as compared to $1,096,963
        for the same period of 2006, an increase of $596,224 or 54.3%. The major
        increase came from an increase in R&D expense of $159,679 and bad debt
        expenses of $264,455. The expansion of economic activities, facilities and
        workforce resulted in increased depreciation, office expenses, staff salary
        and
        welfare, travel expenses, supplies and utilities totaling $336,814, as compared
        to the same period of 2006.
 
 RESEARCH
        AND DEVELOPMENT EXPENSE
  Research
        and development expense was $222,875 in the first quarter of 2007, as compared
        to $ $63,196 for the same period of 2006, an increase of $159,679 or 253%,
        as a
        result of the Company’s establishment of a team to develop new innovative
        products.  This increase was primarily due to higher personnel-related
        costs resulting from an increase in employee headcount in our project team
        as we
        strengthened our internal development efforts.
  DEPRECIATION
        AND AMORTIZATION
  Depreciation
        and amortization expense increased to $340,297 for the first quarter ended
        March
        31, 2007, compared with that of $264,994 for the same period of 2006, an
        increase of $75,303 or 28.4%, as a result of new investment in fixed assets,
        mainly production equipment and tools.
  FINANCIAL
        EXPENSE
  Financial
        expense mainly consisted of interest expense and exchange loss.  Before
        the fiscal year end of 2006, the Joint Venture paid off the outstanding balance
        of the short term bank loans. In the first quarter of 2007, no new bank loans
        were obtained. As a result, financial expense for the first quarter ended
        March
        31, 2007 decreased by $122,379 to $143,168 from $265,547 for the same period
        of
        2006.
  INCOME
        TAX
  The
        Joint
        Venture obt ained its
        sino-foreign joint venture status in 2004. In accordance with applicable
        PRC tax
        regulations, the Joint Venture was exempted from PRC income tax in both fiscal
        2004 and 2005. Thereafter, the Joint Venture is entitled to a tax concession
        of
        50% of the applicable income tax rate of 26.4% for the three years ended
        December 31, 2006, 2007, and 2008. Income tax expense of $362,465 and $ 293,608
        was recorded for the
        first
        quarter ended March 31, 2007 and 2006, respectively .
  MINORITY
        INTEREST
  Minority
        interest represents a 10% non-controlling interest in the Joint Venture. 
Minority interest in income amounted to US$235,189 and US$178,195 for the
        first
        quarter ended March 31, 2007 and 2006, respectively.
  STOCK-BASED
        COMPENSATION ****
  On
        March
        1, 2006, the Board of Directors approved a total of 60,000 options to be
        issued
        to the four independent members of the Board of Directors. The contractual
        term
        of the options is three years. Total deferred stock-based compensation expenses
        related to stock options amounted to $178,904. This amount is amortized over
        the
        three year vesting period in a manner consistent with Financial Accounting
        Standards Board Interpretation No. 123R. The amortization of deferred
        stock-based compensation for these equity arrangements was $ 14,909 for the
        first
        quarter ended March 31, 2007 .
  21
  Although
        the Company anticipates future issuances of stock awards to have a material
        impact on net income, we do not expect these awards to have a material impact
        on
        future cash flow.
  **FINANCIAL
        CONDITION**
  **Liquidity
        and Capital Resources**
  OPERATING
        - N et
        cash
        used in operating activities was $ **** 3,282,430
        for the first quarter ended March 31, 2007 compared with $ 1,952,364 of net
        cash provided in operating activities in the same period in 2006, a decrease
        of
        $ 5,234,794 .
 Our
        primary cash flows from net income were realized through the sale of automotive
        parts. The timely collection of account receivables will improve our liquidity.
        In the first quarter of 2007, most of account receivables were collected
        by bank
        acceptance. The maturity date of those bank acceptances is from May 15, 2007
        to
        September 21, 2007. As a result, cash flow from account receivables and notes
        receivables decreased by $2,753,088
        as compared with the
        same
        period of 2006. Additionally, with the
        increase of sales orders, the Company kept a higher level of inventory to
        meet
        the requirements from OEM and overseas customers and required more raw materials
        to keep its production capacity. This resulted in a negative cash flow of
        $
        1,645,982.
  At
        March
        31, 2007, the Company had cash and cash equivalents of $5,852,480, as compared
        to cash and cash equivalents of $11,137,501 at December 31, 2006.  The
        Company had working capital of $ 48,161,856 at March 31, 2007, as compared
        to
        working capital of $47,195,220 at December 31, 2006, reflecting current ratios
        of 8.48:1 and 7.58:1, respectively.
  INVESTING
        - During the first quarter ended March 31, 2007, the Company expended net
        cash
        of $2,083,635 in investing activities, including $2,063,720 for acquisition
        of
        property and equipment to support the growth of the business.  For the
        first quarter ended March 31, 2006, the Company utilized $370,816 in investing
        activities.
  FINANCING
        -The Joint Venture paid off all outstanding balance of the short term bank
        loans
        before the fiscal year end of 2006. During the first quarter ended March
        31,
        2007, the Company did not obtain any bank loans under its credit
        facilities.
  Management
        of the Company has taken a number of steps to restructure its customer base
        and
        phase out accounts which had failed to make prompt payments. The Company
        also
        placed more emphasis on receivable collection. During the first quarter of
        2007,
        the Company continued developing higher profit margin new products, and adopting
        steps for further cost saving such as improving material utilization rate.
        Meanwhile, the Company maintains good relationships with local banks. We
        believe
        that our current cash and cash equivalents and anticipated cash flow generated
        from operations and our bank lines of credit will be sufficient to finance
        our
        working capital requirements for the foreseeable future.
 
 **Item
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
  The
        Company does not have any market risk with respect to such factors as commodity
        prices, equity prices, and other market changes that affect market risk
        sensitive investments.
  22
  With
        respect to foreign currency exchange rates, the appreciation or fluctuation
        of
        the RMB against the USD did not have a material adverse effect on the Company’s
        operations, even though the Company has over one third of its total revenue
        denominated in USD. This is because of the relatively small change and our
        ability to absorb such effect through cost saving approaches. It is believed
        that further RMB appreciation against USD, if any, would be on a gradual
        basis
        with relatively small adjustments, so as to avoid a drastic impact on the
        Chinese economy as a whole.
  **Item
        4. Controls And Procedures**
  (a)
            Evaluation
                of Disclosure Controls and
                Procedures.  The
        Company maintains disclosure controls and procedures that are designed to
        ensure
        that information required to be disclosed in reports that the Company files
        or
        submits pursuant to the Securities Exchange Act of 1934 is recorded, processed,
        summarized and reported within the time periods specified in the Securities
        and
        Exchange Commission’s (SEC) rules and forms, and that such information is
        accumulated and communicated to the Company’s management, including its Chief
        Executive Officer and Chief Financial Officer, as appropriate, to allow timely
        decisions regarding required disclosure.
  In
        conjunction with the close of the fiscal quarter and under the supervision
        of
        the Chief Executive Officer and Chief Financial Officer, the Company conducted
        an update, a review and an evaluation of the effectiveness of the Company’s
        disclosure controls and procedures. As defined in Rule 13a-15(e), it is the
        conclusion of the Company’s Chief Executive Officer and Chief Financial Officer,
        based upon an evaluation completed as of the end of the most recent fiscal
        quarter reported on herein, that the Company’s disclosure controls and
        procedures were effective.
  (b)
            Changes
                in Internal Controls.  During
        the period covered by the Quarterly Report on Form 10-Q, there were no
        changes in our internal controls over financial reporting as defined in Rule
        13a-15(f) or in other factors that have materially affected, or are reasonably
        likely to materially affect, our internal controls over financial
        reporting.
  23
 
 **PART
        II**  ****
  **OTHER
        INFORMATION**
  **Item
        1.** **Legal
        Proceedings.**
  None.
  **Item
        1A.**  **Risk
        Factors**
  Not
        applicable.
  **Item
        2.** **Unregistered
        Sales of Securities and Use of Proceeds.**
  On
        November 30, 2006, SORL completed its follow-on public offering of 4,285,714
        shares of common stock at $7.25 per share. Maxim Group LLC and Chardan Capital
        Markets, LLC acted as representatives of the underwriters. Gross proceeds
        were
        approximately $31.1 million. Net proceeds after approximately $2.2 million
        of
        underwriters’ commissions and approximately $0.7 million of related offering
        expenses were approximately $28.2 million. On December 13, 2006, Maxim Group
        LLC, the lead underwriter of the follow-on offering, exercised the
        over-allotment option in full to purchase an additional 642,857 shares of
        common
        stock. After deduction of the underwriter’s discount of $0.3 million,
        approximately $4.3 million was received by the Company. The aggregate net
        proceeds to the Company of this offering were approximately US$32.5 million,
        which included $4.3 million as a result of the exercise of the over-allotment
        option.
  As
        of
        December 31, 2006, the Company used approximately $22.7 million out of the
        net
        offering proceeds for working capital or new projects, including approximately
        $16.6 million for temporary repayment of short-term bank loans and $6.1 million
        as capital expenditures for the purchase of the land use right from the Ruili
        Group (a related party) and for construction of the new plant. The Company
        has
        reached agreement with local banks to temporarily repay its outstanding
        obligations when it has sufficient cash in account before spending the funds
        according to its business plan.
  During
        the first quarter of 2007, approximately $0.9 million and $ 1.2 million out
        of
        the net offering proceeds were used for new machinery purchase and construction
        of the new plant, respectively. Other than the payments to Ruili Group as
        mentioned above, none of the net offering proceeds were paid, directly or
        indirectly, to directors, officers and persons who beneficially own ten percent
        or more of our equity securities.
  In
        subsequent periods, the remaining net offering proceeds will be invested
        in new
        plant construction, new machinery and equipment purchase, R&D efforts,
        international sales and marketing activities, as well as to meet additional
        working capital requirements.
  **Item
        3.** **Defaults
        Upon Senior Securities.**
  None.
  **Item
        4.** **Submission
        of Matters to a Vote of Security Holders.**
  None.
  **Item
        5.** **Other
        Information.**
  None.
  24
  **Item
        6.** **Exhibits.**
  (a)
              Exhibits:
  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 Accounting 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 Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2
                Certification
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 SIGNATURES
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  Dated:
                May
                8, 2007
              SORL
                AUTO PARTS,
                INC.By:
              /s/ Xiao
                Ping
                ZhangName:Xiao
                Ping ZhangTitle:Chief
                Executive Officer
  By:
              /s/ Zong
                Yun
                ZhouName:Zong
                Yun ZhouTitle:Chief
                Financial Officer (Principal Financial
                Officer)
  25