---

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

FORM 10-Q/A

|(Mark One)                                               
|---------------------------------------------------------
|x                                                        
|                                                         
|For the quarterly period ended March 31,   2006          
|                                                         
|o                                                        
|                                                         
|For the transition period from __________   to __________
|                                                         
|Commission file number 000-11991                         

|SORL AUTO   PARTS, INC.                                 
|--------------------------------------------------------
|                                                        
|(Exact name of registrant as specified in   its charter)

|DELAWARE                                                         |  | 30-0091294                         
|---------------------------------------------------------------- |  | -----------------------------------
|                                                                 |  |                                    
|(State or other jurisdiction of   incorporation or organization) |  | (IRS Employer   Identification No.)

|No. 1169 Yumeng Road     Ruian Economic Development District    Ruian City, Zhejiang Province   Peoples Republic Of China
|--------------------------------------------------------------------------------------------------------------------------
|                                                                                                                          
|(Address of principal executive offices)                                                                                  
|                                                                                                                          
|86-577-6581-7720                                                                                                          
|                                                                                                                          
|(Registrants telephone number)                                                                                           

Indicate by check mark whether the
registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 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 April 30, 2006 there were 13,346,555 shares of Common Stock outstanding

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

| |  | The   Statements of Cash Flows for the quarters ended March 31, 2006 and 2005 have   been revised to present the changes in notes receivable balances as a   component of operating  cash flows and   has been removed as a component of the investing cash flows.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                   
| |  | The   Liquidity and Capital resources section under Managements Discussion and   Analysis has also been revised to reflect the change discussed above.                                                                                                           

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INDEX

|PART I.    | FINANCIAL INFORMATION (unaudited)                                                     | 1   
|---------- | ------------------------------------------------------------------------------------- | ----
|           |                                                                                       |     
|Item 1.    | Financial Statements:                                                                 | 1   
|           |                                                                                       |     
|           | Consolidated Balance Sheets                                                           | 2   
|           |                                                                                       |     
|           | Consolidated Statements of Operations for                                             | 3   
|           |                                                                                       |     
|           | Consolidated Statements of Cash Flows for                                             | 5   
|           |                                                                                       |     
|           | Notes to the Condensed Financial Statements                                           | 6-13
|           |                                                                                       |     
|Item 2.    | Managements Discussion and Analysis or Financial Condition and Results of Operations | 14  
|           |                                                                                       |     
|PART II.   | OTHER INFORMATION                                                                     |     
|           |                                                                                       |     
|Item 6.    | Exhibits                                                                              | 23  
|           |                                                                                       |     
|SIGNATURES |                                                                                       | 24  

i

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PART I FINANCIAL INFORMATION

|Item 1. | Financial Statements
|------- | --------------------

SORL AUTO PARTS, INC. AND SUBSIDIARIES Ruian City, ZheJiang Province, China

TABLE OF CONTENTS

|Condensed   Consolidated Balance Sheets                                    | 2   
|-------------------------------------------------------------------------- | ----
|                                                                           |     
|Condensed   Consolidated Statements of Operations and Comprehensive Income | 3   
|                                                                           |     
|Condensed   Consolidated Statements of Stockholders Equity                | 4   
|                                                                           |     
|Condensed   Consolidated Statements of Cash Flows                          | 5   
|                                                                           |     
|Notes to   Condensed Consolidated Financial Statements                     | 6-13

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CONSOLIDATED BALANCE SHEETS

|                                                                                                                          |  | March 31,   2006 |            | December 31,   2005 | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | ------------------- | 
|                                                                                                                          |  |                  |            |                     | 
|                                                                                                                          |  | (Unaudited)      |            | (Audited)           | 
|ASSETS                                                                                                                    |  |                  |            |                     | 
|Current   Assets                                                                                                          |  |                  |            |                     | 
|Cash and cash equivalents                                                                                                 |  |                  | 1,153,781  |                     | 
|Account receivables, net of   provision                                                                                   |  |                  | 28,673,136 |                     | 
|Notes receivables                                                                                                         |  |                  | 2,156,920  |                     | 
|Inventory                                                                                                                 |  |                  | 1,134,773  |                     | 
|Prepayments                                                                                                               |  |                  | 1,321,678  |                     | 
|Other current assets                                                                                                      |  |                  | 510,474    |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Total Current Assets                                                                                                      |  |                  | 34,950,762 |                     | 
|Fixed   Assets                                                                                                            |  |                  |            |                     | 
|Property, plant and   equipment                                                                                           |  |                  | 10,423,487 |                     | 
|Less: Accumulated   depreciation                                                                                          |  |                  | (3,287,358 | )                   | 
|                                                                                                                          |  |                  |            |                     | 
|Fixed Assets, Net                                                                                                         |  |                  | 7,136,129  |                     | 
|Construction in progress                                                                                                  |  |                  | 88,276     |                     | 
|Other   Assets                                                                                                            |  |                  |            |                     | 
|Deferred compensation   cost-stock options                                                                                |  |                  | 173,934    |                     | 
|Intangible assets                                                                                                         |  |                  | 44,590     |                     | 
|Less: Accumulated   amortization                                                                                          |  |                  | (13,790    | )                   | 
|                                                                                                                          |  |                  |            |                     | 
|Intangible   Assets, Net                                                                                                  |  |                  | 30,800     |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Total Other Assets                                                                                                        |  |                  | 204,734    |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Total   Assets                                                                                                            |  |                  | 42,379,901 |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Liabilities   and Shareholders Equity                                                                                    |  |                  |            |                     | 
|Current   Liabilities                                                                                                     |  |                  |            |                     | 
|Accounts payable                                                                                                          |  |                  | 5,349,133  |                     | 
|Deposit received from   customers                                                                                         |  |                  | 1,081,277  |                     | 
|Short term bank loans                                                                                                     |  |                  | 14,511,114 |                     | 
|Accrued expenses                                                                                                          |  |                  | 517,859    |                     | 
|Other current liabilities                                                                                                 |  |                  | 1,112,782  |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Total Current Liabilities                                                                                                 |  |                  | 22,572,165 |                     | 
|Minority   Interest                                                                                                       |  |                  | 1,926,684  |                     | 
|Shareholders   Equity                                                                                                    |  |                  |            |                     | 
|Common stock, $0.002 par   value, 50,000,000 authorized, 13,346,555 issued and outstanding at 03/31/2006   and 12/31/2005 |  |                  | 26,693     |                     | 
|Paid in capital                                                                                                           |  |                  | 4,623,022  |                     | 
|Accumulated other   comprehensive income (loss)                                                                           |  |                  | 451,028    |                     | 
|Retained earnings                                                                                                         |  |                  | 12,780,309 |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Total Current Liabilities                                                                                                 |  |                  | 17,881,052 |                     | 
|                                                                                                                          |  |                  |            |                     | 
|Total   Liabilities and Shareholders Equity                                                                              |  |                  | 42,379,901 |                     | 
|                                                                                                                          |  |                  |            |                     | 

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

2

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

|                                               |  | For the three months ended   March 31, |           
|---------------------------------------------- |  | -------------------------------------- | ----------
|                                               |  |                                        |           
|                                               |  | 2006                                   |           
|                                               |  |                                        |           
|Sales                                          |  | $                                      | 19,419,584
|Cost of Sales                                  |  |                                        | 15,023,826
|                                               |  |                                        |           
|Gross   Profit                                 |  |                                        | 4,395,758 
|Operating   Expenses                           |  |                                        |           
|Selling and Distribution   Expenses            |  |                                        | 868,016   
|General and Administrative   Expenses          |  |                                        | 1,096,962 
|                                               |  |                                        |           
|Total Operating Expenses                       |  |                                        | 1,964,978 
|                                               |  |                                        |           
|Operating   Income                             |  |                                        | 2,430,780 
|Financial Expenses                             |  |                                        | 265,547   
|Non-Operating Expenses                         |  |                                        | 89,675    
|                                               |  |                                        |           
|Net Income   Before Provision for Income Taxes |  |                                        | 2,075,558 
|Provision for Income Taxes                     |  |                                        | 293,608   
|                                               |  |                                        |           
|Net Income   Before Minority Interest          |  |                                        | 1,781,950 
|Minority Interest                              |  |                                        | 178,195   
|                                               |  |                                        |           
|Net Income   Attributable to Shareholders      |  | $                                      | 1,603,755 
|Other   Comprehensive Income                   |  |                                        |           
|Foreign Currency   Translation Adjustment      |  |                                        | 126,705   
|Minority Interests Share                      |  |                                        | 12,671    
|                                               |  |                                        |           
|Comprehensive   Income                         |  | $                                      | 1,717,789 
|Weighted average common   share - Basic        |  |                                        | 13,346,555
|Weighted average common   share - Diluted      |  |                                        | 13,347,123
|Earnings Per Share - Basic                     |  | $                                      | 0.12      
|Earnings Per Share -   Diluted                 |  | $                                      | 0.12      

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

3

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE PERIOD FROM DECEMBER 31, 2004 THROUGH MARCH 31, 2006.

|                                                  |  | Number of   Common   Shares |            | Common   Stock |   | Additional   Paid-In    Capital |  | Retained   Earnings |           | Accumulated Other    Comprehensive Income |   | Total   Stockholders   Equity |  | Minority   Interest |        
|------------------------------------------------- |  | --------------------------- | ---------- | -------------- | - | ------------------------------- |  | ------------------- | --------- | ----------------------------------------- | - | ------------------------------ |  | ------------------- | -------
|                                                  |  |                             |            |                |   |                                 |  |                     |           |                                           |   |                                |  |                     |        
|Beginning Balance - Dec 31, 2004                  |  |                             | 13,282,253 |                | $ | 26,565                          |  | $                   | 4,082,246 |                                           | $ | 6,226,944                      |  |                     |       
|Commom Stock - Adjustment   for fractional shares |  |                             | 3,614      |                |   | 7                               |  |                     | -7        |                                           |   |                               |  |                     |       
|Net Income                                        |  |                             |           |                |   |                                |  |                     |          |                                           |   | 1,501,870                      |  |                     |       
|                                                  |  |                             |            |                |   |                                 |  |                     |           |                                           |   |                                |  |                     |        
|Ending   Balance - Mar 31, 2005                   |  |                             | 13,285,867 |                | $ | 26,572                          |  | $                   | 4,082,239 |                                           | $ | 7,728,814                      |  |                     |       
|                                                  |  |                             |            |                |   |                                 |  |                     |           |                                           |   |                                |  |                     |        
|Beginning   Balance - Dec 31, 2005                |  |                             | 13,346,555 |                | $ | 26,693                          |  | $                   | 4,444,118 |                                           | $ | 11,176,554                     |  | $                   | 336,993
|Net Income                                        |  |                             |           |                |   |                                |  |                     |          |                                           |   | 1,603,755                      |  |                     |       
|Other Comprehensive Income   (Loss)               |  |                             |           |                |   |                                |  |                     |          |                                           |   |                               |  |                     | 114,035
|Paid In Capital   Contributions                   |  |                             |           |                |   |                                |  |                     | 178,904   |                                           |   |                               |  |                     |       
|                                                  |  |                             |            |                |   |                                 |  |                     |           |                                           |   |                                |  |                     |        
|Ending   Balance - Mar 31, 2006                   |  |                             | 13,346,555 |                | $ | 26,693                          |  | $                   | 4,623,022 |                                           | $ | 12,780,309                     |  | $                   | 451,028
|                                                  |  |                             |            |                |   |                                 |  |                     |           |                                           |   |                                |  |                     |        

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

4

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CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                           |  | For the three months ended 
        March 31, |           
|-------------------------------------------------------------------------- |  | --------------------------------------------- | ----------
|                                                                           |  |                                               |           
|                                                                           |  | 2006                                          |           
|                                                                           |  |                                               |           
|Cash Flows from Operating Activities                                       |  |                                               |           
|Net Income                                                                 |  | $                                             | 1,603,755 
|Adjustments to reconcile net income to net cash from operating activities: |  |                                               |           
|Minority Interest                                                          |  |                                               | 178,195   
|Bad Debt Expense                                                           |  |                                               | 156,875   
|Depreciation and Amortization                                              |  |                                               | 264,994   
|Stock-Based Compensation Expense                                           |  |                                               | 4,970     
|Changes in Assets and Liabilities:                                         |  |                                               |           
|Accounts Receivable                                                        |  |                                               | (3,490,237
|Other Receivables                                                          |  |                                               | (462,357  
|Notes Receivables                                                          |  |                                               | (668,816  
|Inventory                                                                  |  |                                               | 1,377,810 
|Prepayments                                                                |  |                                               | 480,151   
|Account Payables                                                           |  |                                               | 1,863,146 
|Deposits Received from Customers                                           |  |                                               | (242,808  
|Other Payables and Accrued Expenses                                        |  |                                               | 886,686   
|                                                                           |  |                                               |           
|Net Cash Flows from Operating Activities                                   |  |                                               | 1,952,364 
|                                                                           |  |                                               |           
|Cash Flows from Investing Activities                                       |  |                                               |           
|Acquisition of Property and Equipment                                      |  |                                               | (282,540  
|Investment in Construction in Progress                                     |  |                                               | (88,276   
|                                                                           |  |                                               |           
|Net Cash Flows from Investing Activities                                   |  |                                               | (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                                |  |                                               | 126,705   
|Net Increase (Decrease) in Cash                                            |  |                                               | 192,650   
|Cash and Cash Equivalents - Beginning of the period                        |  |                                               | 961,131   
|                                                                           |  |                                               |           
|Cash and Cash Equivalents - End of the period                              |  | $                                             | 1,153,781 
|                                                                           |  |                                               |           
|Supplemental Cash Flow Disclosures:                                        |  |                                               |           
|Interest Paid                                                              |  | $                                             | 199,240   
|Tax Paid                                                                   |  | $                                             |          

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

5

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NOTES TO CONDENSED 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 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 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 -          Recent Pronouncements

| | In March   2006, the Financial Accounting Standards Board (FASB) issued Statement of   Financial Accounting Standard (SFAS) No. 156, Accounting for Servicing of   Financial Assets  an amendment of FASB Statement No. 140 (SFAS   156).  SFAS 156 amends FASB Statement No. 140 with respect to the   accounting for separately recognized servicing assets and servicing   liabilities.  SFAS 156 requires all separately recognized servicing   assets and servicing liabilities to be initially measured at fair value, if   practical.  SFAS 156 is effective as of the beginning of the first   fiscal year that begins after September 15, 2006.  As such, the Company   is required to adopt these provisions at the beginning of the fiscal year   ended December 31, 2007.  The Company is currently evaluating the impact   of SFAS 156 on its consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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,   2006 and 2005:                                                                                                                                                                

6

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Note D -          Related Party Transactions-Continued

|                                             |  | Three Months Ended   March 31, |          
|-------------------------------------------- |  | ------------------------------ | ---------
|                                             |  |                                |          
|                                             |  | 2006                           |          
|                                             |  |                                |          
|PURCHASES   FROM:                            |  |                                |          
|Ruili Group Co., Ltd.                        |  | $                              | 5,843,210
|Ruian Ruili Haizhiguan Auto   Part Co., Ltd. |  |                                |         
|                                             |  |                                |          
|Total   Purchases                            |  | $                              | 5,843,210
|                                             |  |                                |          
|SALES TO:                                    |  |                                |          
|Ruili Group Co., Ltd.                        |  | $                              | 2,585,814
|                                             |  |                                |          
|Total   Sales                                |  | $                              | 2,585,814
|                                             |  |                                |          

| | The total   purchases from Ruili Group during the first quarter ended March 31, 2006   consisted of $5.6 million finished products of non-valve auto parts and $0.2   million of packaging materials.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a)  |  |                                                      |  | (b)  |  | March 31,   2006 |         |  | (c) |      |  | (d) |      | December   31,   2005 |  
|---- |  | ---------------------------------------------------- |  | ---- |  | ---------------- | ------- |  | --- | ---- |  | --- | ---- | --------------------- | -
|     |  |                                                      |  |      |  |                  |         |  |     |      |  |     |      |                       |  
|(e)  |  | Accounts   Payable and Other Payables                |  | (f)  |  |                  |         |  |     | (g)  |  |     | (h)  |                       |  
|(i)  |  | Shuping Chi                                          |  | (j)  |  | $                |        |  |     | (k)  |  |     | (l)  |                       | $
|     |  |                                                      |  |      |  |                  |         |  |     |      |  |     |      |                       |  
|(m)  |  | Total   Related Parties included in Accounts Payable |  | (n)  |  | $                |        |  |     | (o)  |  |     | (p)  |                       | $
|     |  |                                                      |  |      |  |                  |         |  |     |      |  |     |      |                       |  
|(q)  |  | (r)                                                  |  | (s)  |  |                  |         |  |     | (t)  |  |     |      |                       |  
|(u)  |  | Prepayment                                           |  | (v)  |  |                  |         |  |     | (w)  |  |     | (x)  |                       |  
|(y)  |  | Ruili Group Co., Ltd.                                |  | (z)  |  | $                | 473,000 |  |     | (aa) |  |     | (bb) |                       | $
|     |  |                                                      |  |      |  |                  |         |  |     |      |  |     |      |                       |  
|(cc) |  | Total   prepayment                                   |  | (dd) |  | $                | 473,000 |  |     | (ee) |  |     | (ff) |                       | $
|     |  |                                                      |  |      |  |                  |         |  |     |      |  |     |      |                       |  

Note E -          Accounts Receivable

| | The changes   in the allowance for doubtful accounts at March 31, 2006 and December 31,   2005 are summarized as follows:
| | -------------------------------------------------------------------------------------------------------------------------

|                           |  | March 31,   2006 |           | December 31,   2005 |  
|-------------------------- |  | ---------------- | --------- | ------------------- | -
|                           |  |                  |           |                     |  
|Beginning balance          |  | $                | 914,721   |                     | $
|Add: Increase to allowance |  |                  | 156,875   |                     |  
|Less: Accounts written off |  |                  |          |                     |  
|                           |  |                  |           |                     |  
|Ending   balance           |  | $                | 1,071,596 |                     | $
|                           |  |                  |           |                     |  

7

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Note E -          Accounts Receivable-Continued

The companys receivables are summarized as follows:

|                                        |  | March 31,
2006 |                   | December 31,   2005 |      
|--------------------------------------- |  | -------------- | ----------------- | ------------------- | -----
|                                        |  |                |                   |                     |      
|Accounts   receivable                   |  | (rr)           | $      29,744,732 |                     | (tt) 
|Less:   allowance for doubtful accounts |  | (ww)           | 1,071,596         |                     | (yy) 
|                                        |  |                |                   |                     | (ddd)
|                                        |  |                |                   |                     |      
|Account receivable balance, net         |  | (ggg)          | $      28,673,136 |                     | (iii)
|                                        |  |                |                   |                     |      

Note F -          Inventories

On March 31, 2006 and December 31, 2005, inventories consist of the following:

|                  |  | March 31,   2006 |           | December 31,   2005 |  
|----------------- |  | ---------------- | --------- | ------------------- | -
|                  |  |                  |           |                     |  
|Raw   Material    |  | $                | 222,833   |                     | $
|Work   in process |  |                  | 398,869   |                     |  
|Finished   Goods  |  |                  | 513,071   |                     |  
|                  |  |                  |           |                     |  
|Total Inventory   |  | $                | 1,134,773 |                     | $
|                  |  |                  |           |                     |  

8

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Note G -          Property, Plant and Equipment

Property, plant and equipment consisted of the following, on March 31, 2006 and December 31, 2005:

|                                 |  | March 31,   2006 |            | December 31,   2005 |  
|-------------------------------- |  | ---------------- | ---------- | ------------------- | -
|                                 |  |                  |            |                     |  
|Machinery                        |  | $                | 8,967,719  |                     | $
|Moulds                           |  |                  | 1,087,434  |                     |  
|Office   equipment               |  |                  | 191,884    |                     |  
|Vehicle                          |  |                  | 176,450    |                     |  
|                                 |  |                  |            |                     |  
|Sub-Total                        |  |                  | 10,423,487 |                     |  
|Less:   Accumulated depreciation |  |                  | (3,287,358 | )                   |  
|                                 |  |                  |            |                     |  
|PPE, Net                         |  | $                | 7,136,129  |                     | $
|                                 |  |                  |            |                     |  

| | Depreciation   expense charged to operations was $263,077 and $190,225 for the first quarter   ended March 31, 2006 and 2005, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------

Note H -          Intangible Assets

| | Gross   intangible assets were $44,590, less accumulated amortization of $13,790 for   net intangible assets of $30,800 as of March 31, 2006.  Gross intangible   assets were $44,297, less accumulated amortization of $11,873 for net   intangible assets of $32,424 as of December 31, 2005. Amortization expenses   were $1,916 and $1,780 for the first quarter ended March 31, 2006 and 2005   respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Future   estimated amortization expense is as follows:                                                                                                                                                                                                                                                                                                                                                            

|  | 2006  |  |   | 2007  |  |   | 2008  |  |   | 2009  |  |   | 2010  |  |   | Thereafter | 
|- | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ---------- | 
|  |       |  |   |       |  |   |       |  |   |       |  |   |       |  |   |            | 
|$ | 5,076 |  | $ | 3,617 |  | $ | 3,617 |  | $ | 3,617 |  | $ | 3,617 |  | $ | 12,880     | 

Note I -          Prepayment

Prepayment consisted of the following as of March 31, 2006 and December 31, 2005:

|                         |  | March 31,   2006 |           | December 31,   2005 |  
|------------------------ |  | ---------------- | --------- | ------------------- | -
|                         |  |                  |           |                     |  
|Raw   material suppliers |  | $                | 1,168,456 |                     | $
|Equipment   purchase     |  |                  | 153,222   |                     |  
|                         |  |                  |           |                     |  
|Total prepayment         |  | $                | 1,321,678 |                     | $
|                         |  |                  |           |                     |  

9

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Note J -          Accrued Expenses

Accrued expenses consisted of the following as of March 31, 2006 and December 3, 2005:

|                         |  | March 31,   2006 |         | December 31,   2005 |  
|------------------------ |  | ---------------- | ------- | ------------------- | -
|                         |  |                  |         |                     |  
|Accrued   payroll        |  | $                | 287,501 |                     | $
|Other   accrued expenses |  |                  | 230,358 |                     |  
|                         |  |                  |         |                     |  
|Total accrued expenses   |  | $                | 517,859 |                     | $
|                         |  |                  |         |                     |  

Note K -          Bank Borrowings

Bank borrowings represent the following as of March 31, 2006 and December 31, 2005:

|                        |  | March 31,   2006 |            | December 31,   2005 |  
|----------------------- |  | ---------------- | ---------- | ------------------- | -
|                        |  |                  |            |                     |  
|Secured                 |  | $                | 14,511,114 |                     | $
|Less:   Current portion |  |                  | 14,511,114 |                     |  
|                        |  |                  |            |                     |  
|Non-current   portion   |  | $                |           |                     | $
|                        |  |                  |            |                     |  

| | These   loans were from two banks, Bank of China and CITIC Bank, to finance general   working capital as well as new equipment acquisition. Corporate or personal   guarantees are provided for those bank loans as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | $8.69M | Guaranteed   by Ruili Group Co., Ltd., a related party;                                                                             
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------
| | $2.45M | Guaranteed   by Ruili Group Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms.   Shu Ping Chi, both principal shareholders;
| | $3.37M | Guaranteed   by Shenghuabo Group Co., Ltd., a non-related party.                                                                    

| | The   Company does not provide any sort of guarantee to any other parties. Interest   rates for the loans ranged between 4.964% and 6.003% per annum.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

10

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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 Manufacturers, 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,   2006 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

| | The   Company has a lease agreement with Ruili Group Co., Ltd., a related party,   for the rental of a manufacturing plant.  The lease is for a ten year   term ending in February 2014.  Rent expense for the first quarter ended   March 31, 2006 and 2005, was $109,752 and $109,752 respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                      
| | Future   minimum rental payments for the years ended December 31 are as follows:                                                                                                                                                                                                                     

|2006 |         | 2007 |   | 2008    |  | 2009 |         | 2010 |   | Thereafter | 
|---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ---------- | 
|     |         |      |   |         |  |      |         |      |   |            | 
|$    | 439,540 |      | $ | 439,540 |  | $    | 439,540 |      | $ | 439,540    | 

Note N -          Advertising Costs

| | Advertising   costs are expensed as incurred and are classified as selling expenses.    Advertising costs were $3,819 and $4,275 for the first quarter ended March   31, 2006 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note O -          Research and Development Expenses

| | Research   and development costs are expensed as incurred and were $63,196 and $24,788   for the first quarter ended March 31, 2006 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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Note P -          Warranty Claims

| | Warranty   claims were $228,335 and $101,533 for the first quarter ended March 31, 2006   and 2005, respectively. The movement of accrued warranty expenses or the   first quarter ended March 31, 2006 is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Beginning   balance at January 01, 2006               |  | $ | 179,932 | 
|----------------------------------------------------- |  | - | ------- | 
|Accrued   during the first quarter of 2006:           |  | $ | 176,005 | 
|Less:   Actual Paid during the first quarter of 2006: |  | $ | 127,602 | 
|                                                      |  |   |         | 
|Ending balance at March 31, 2006:                     |  | $ | 228,335 | 
|                                                      |  |   |         | 

Note Q -          Stock Compensation Plan

| | 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       

| | 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    | %
|Expected   life                |  |   | 3 years |  
|Stock   price at date of grant |  | $ | 4.79    |  
|Exercise   Price               |  | $ | 4.79    |  

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| | Total   deferred stock-based compensation expenses related to 60,000 stock options   granted within the first quarter ended March 31, 2006 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 $4,970 for the three months ended March 31, 2006. As   of March 31, 2006, there was $173,934 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 2.9 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | A   summary of option activity under the Plan as of March 31, 2006 and changes   during the three months then ended is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                |  | Options |        | Weighted   Average   Exercise   price |   | Weighted   Average   Remaining   Contractual   Term |  | Aggregate   Intrinsic   Value |          
|------------------------------- |  | ------- | ------ | ------------------------------------- | - | --------------------------------------------------- |  | ----------------------------- | ---------
|                                |  |         |        |                                       |   |                                                     |  |                               |          
|January   1, 2006               |  |         |       |                                       | $ |                                                    |  |                               |         
|Granted                         |  |         | 60,000 |                                       |   | 4.79                                                |  |                               | 2.9 Years
|Exercised                       |  |         |       |                                       |   |                                                    |  |                               |         
|Forfeited                       |  |         |       |                                       |   |                                                    |  |                               |         
|                                |  |         |        |                                       |   |                                                     |  |                               |          
|Outstanding   at March 31, 2006 |  |         | 60,000 |                                       | $ | 4.79                                                |  |                               | 2.9 Years
|                                |  |         |        |                                       |   |                                                     |  |                               |          
|Exercisable   at March 31, 2006 |  |         |       |                                       |   |                                                    |  |                               |         
|                                |  |         |        |                                       |   |                                                     |  |                               |          

Note R -          Commitments and Contingencies

| | During   the first quarter ended March 31, 2006, the Company has contracted with   WenZhou Great Wall Structural Foundation Engineering Company, ZheJiang   BaoDing Structural Steelwork Engineering Co., Ltd .and ShangHai YueHai   Architectural Design Co., Ltd for the construction of a temporary plant,   amounting to $180,052.  During the first quarter ended March 31, 2006,   the Company had paid $88,276, and has an obligation with the remaining   $91,776 scheduled the date of completion.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note S -          Subsequent Event

| | On   April 18, 2006, the company was approved to list its common shares on the   NASDAQ Capital Market and commence trading its shares on NASDAQ under the   symbol NASDAQ: SORL.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 10K.

OVERVIEW

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

Fairford was organized in Hong Kong as a limited liability company on November 3, 2003.  Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co., Ltd., a Sino-foreign joint venture (the Joint Venture) established pursuant to the laws of the Peoples Republic of China (PRC or China).  The Joint Venture is a joint venture between Fairford and Ruili Group Co., Ltd.  (the Ruili Group).  In connection with its formation, effective January 19, 2004 the Joint Venture acquired the business of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the Transferred Business).  This was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade
receivables, inventories and machinery, and the assumption of short and long term borrowings, at a consideration of US$6,390,000.  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.

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

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

As a result of the foregoing, through Fairfords 90% interest in the Joint Venture, the Company manufactures and distributes automotive air brake valves and related components in China and internationally for use primarily in vehicles weighing over three tons, such as trucks 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.

On a going forward basis, we are taking the following steps to improve our operating results:  We are restructuring our customer base to phase out those accounts which frequently fail to make prompt payments.  We are placing more effort on receivables collection.  We are continuing to develop higher profit margin new products.  We are adopting steps for further cost saving such as improving material utilization rates.

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.

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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.

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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.

Results of Operations

Three months ended March 31, 2006 as compared to three Months ended March 31, 2005:

SALES

|Sales                                   |  | Three   Months end 2006 |       | Three   Months end 2005 | 
|--------------------------------------- |  | ----------------------- | ----- | ----------------------- | 
|                                        |  |                         |       |                         | 
|Air   brake valves & related components |  | $                       | 13.6M |                         | 
|Non-valve   products                    |  | $                       | 5.8M  |                         | 
|                                        |  |                         |       |                         | 
|Total                                   |  | $                       | 19.4M |                         | 

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 Ruian Group.

Net sales were $19,419,584 and $14,515,866 for the first quarter ended March 31, 2006 and 2005, respectively. Net sales for the three months ended 2006 increased by $4.9 million or 33.8% to $19.4 million, compared with the same period of 2005, despite a decrease in the production of heavy duty trucks in China.  The increase in sales was mainly from the aftermarket both internationally and within China.  This increase was a result of the Companys efforts to develop more customers and penetrate these market segments.

17

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

|                           |  | Three   Months ended
March 31, 2006 |      | Three Months ended   March 31, 2005 | 
|-------------------------- |  | ----------------------------------- | ---- | ----------------------------------- | 
|                           |  |                                     |      |                                     | 
|(U.S. Dollars in millions) |  |                                     |      |                                     | 
|China   OEM market         |  | $                                   | 5.8  |                                     | 
|China   Aftermarket        |  | $                                   | 7.5  |                                     | 
|International   market     |  | $                                   | 6.1  |                                     | 
|                           |  |                                     |      |                                     | 
|Total                      |  | $                                   | 19.4 |                                     | 

Because of the Chinese Governments macroeconomic regulation policy, the Chinese heavy duty truck market has been sluggish since 2005.  This caused a decrease of the sales for the OEM market by $0.8 million or 12.1% for the first quarter of 2006, as compared to the same period of 2005.  However, the Companys sales to the OEM market in the first quarter of 2006 were higher than that in the fourth quarter of 2005, which had sales of $4.3 million.  The Companys strategy is to introduce more innovative products to meet the OEM customers needs, and to grant extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain and further penetrate this important market segment.

Currently SORL has 27 authorized distributors covering nearly all regions in China, who in turn sell our products to over 800 sub-distributors.  Based on the well established and continuously improving sales networks, SORL achieved total revenue of $7.5 million in domestic aftermarket sales for the first quarter ended March 31, 2006, an increase of $3.8 million, or 102.7% as compared to the same period of last year.

Export sales grew by $1.9 million or approximately 45.2% for the three months ended March 31, 2006, as compared to $4.2 million for the same period of 2005.  The increase in sales was attributable to the introduction of new products and greater focus on participation in international trade shows leading to increased awareness of the Companys products.  Additionally, the Company has been able to offer a 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, 2006 increased to $15 million from $ 11.3 million for the same period of 2005, a $3.7 million or 33 % increase which was consistent with the increase in revenues.  Gross margin increased by approximately 0.46% from 22.2% in 2005 to 22.64%.

We purchase various components and raw materials for use in our manufacturing processes.  The principal raw materials we purchase are aluminum and steel.  For the three months ended March 31, 2006, the market price of aluminum and steel continued to increase.  Although we maintain a relatively low inventory of raw material and purchase it on favorable terms to decrease our production cost, the average goods cost per unit for the first quarter ended March 31,2006 increased $ 0.79 or 9.4% , as compared to the comparable quarter last year.

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GROSS PROFIT

For the first quarter ended March 31, 2006, gross profit was $4,395,758, as compared to $3,219,692 for the first quarter ended March 31, 2005, an increase of $1,176,066 or 36.5%.  Gross margin was 22.64% for the first quarter ended March 31, 2006, an increase of 0.46% from 22.2% for the same period of 2005.

The approximately 3.2% appreciation of RMB against the U.S. dollar (USD) had a slight negative impact on gross margin.  About 31% of total revenue for the three months ended March 31,2006 was denominated in USD, while nearly all costs were denominated in RMB.  However, the impact from the appreciation of the RMD was relatively minimal (approximately 0.77% on Gross Margin).  However, the rising price of materials had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers.  This negatively impacted our gross margin by 4.2% in 2006, or approximately $0.34 million.

This negative impact on Gross Margin was largely offset by economies of scale, shift of sales mix and consistent efforts in production technique optimization.  In 2006, we shifted the product mix and introduced valve products with a higher profit margin.  The average selling price of valve products per unit increased $1.3 or 11%, as compared to the first quarter of last year.  The price increase contributed $1.25 million to gross profit and impacted gross margin by approximately 6.4%.  Furthermore, we took some other steps to mitigate the adverse impact from the increase in raw material cost.  For example, we replaced the machining approach with a molding process, thereby reducing processing steps and materials consumption and increasing hourly output.  Meanwhile, in the process of removing impurities from liquid aluminum, historically we have used the high-temperature
method.  The adoption of a new technique of using a low-temperature method helped save power consumption.

SELLING EXPENSES

Selling expenses were $868,016 for the three months ended March 31 2006, as compared to $927,089 for the same period of 2005, a decrease of $59,073 or 6.4%. The decrease in 2006 was mainly due to the net effect of the following factors:

(1)     Decreased transportation expenses. The Company recorded $220,822 of transportation expenses for the three months ended March 31, 2006, as compared to $362,953 for the same period of 2005, a decrease of $142,131 or 39.2%, as a result of the increase in international sales which are generally made on an FOB basis.

(2)     Increased product warranty expenses. The Company recorded $176,005 of product warranty expenses for the three months ended March 31, 2006, as compared to $101,533 for the same period of 2005, an increase of $74,472 or 73.3%, because virtually all vehicle manufacturers required automotive parts suppliers to pay a 3-R Warranties service charge (for repair, replacement and refund) in an amount equal to one percent of the total amount of parts supplied. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years.

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GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $1,096,962 for the three months ended March 31, 2006, as compared to $ 554,254 for the same period of 2005, an increase of $542,708 or 97.9%. The major increase came from an increase in professional fees of $300,070 and bad debt expenses of $156,875.  The professional fees included audit and legal fees associated with SEC filings, directors fees and related consulting fees, stock transfer fees and other items associated with the costs of being a public entity.  The remaining general and administrative expenses as a percentage of sales decreased as compared to the same period of 2005 since most of these expenses are fixed in nature.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense was $63,196 in the first quarter of 2006, as compared to $24,788 for the same period of 2005, an increase of $38,408 or 155%, 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 $264,994 for the first quarter ended March 31, 2006, compared with that of $192,004 for the same period of 2005, an increase of $72,990 or 38%, as a result of new investment in fixed assets, mainly production equipment and tools.

FINANCIAL EXPENSE

Financial expense for the first quarter ended March 31, 2006 increased by $205,095 to $265,547 from $60,452 for the same period of 2005.  Financial expense consists mainly of interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $14.5 million as of March 31, 2006, an increase of $7.3 million from $7.2 million at the end of March 31, 2005.  The funds were used for working capital purposes, as well as new equipment purchases, to support the anticipated increase in revenues in the second quarter of fiscal 2006.

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

20

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INCOME TAX

There was no income tax expense for the fiscal year ended December 31, 2005 and 2004.  As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005.  Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% commencing the three years ended December 31, 2006, 2007, and 2008. Income taxes expense of $293,608 was recorded for the first quarter of 2006.

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the Joint Venture.  Minority interest in income amounted to US$178,195 and US$166,875 for the first quarter ended March 31, 2006 and 2005, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - The Companys operations generated cash of $1,952,364 for the first quarter ended March 31, 2006, as compared to a negative operating cash flow of $2,248,564 for the same period of 2005, primarily as a result of the following:

1.          For the first quarter ended March 31, 2006, net income was $1,603,755 as compared to $1,501,870 for the same period of 2005, an increase of $101,885. The increase was primarily as a result of the increase in sales.

2.          For the first quarter ended March 31, 2006, account receivables increased by $3,490,237 primarily due to temporary extension of credit terms to selected OEM customers which are state-owned and the largest automobile manufacturers in China. Management believes that the risk of uncollectibility for such receivables is low. Management further believes this situation will be mitigated gradually through the Companys strategic move of its sales focus from the domestic OEM market to international markets, thereby providing the Company with the ability to restructure its OEM customer base by gradually phasing out customers with lower return and higher credit risks. Receivables with aging over one year due from domestic aftermarket customers for the first quarter ended March 31, 2006, however, decreased by $968,784.

3.          For the first quarter ended by March 31, 2006, inventory decreased by $ 1,377,810.  The Company maintains a low level of inventory to reduce working capital requirements.  Because of the strong demand for its products, the Company maintains less than one week of finished goods inventory.  A low level of raw materials for approximately four to five days of production requirements are maintained.  Raw materials are readily available, given our access to different suppliers and efficient and timely delivery available.  The majority of the WIP balances are incurred during later steps in manufacturing.  The Company effectively adopts a pull system in its production.

4.          Because of the rise and volatility of raw material prices, the Company maintains relatively low levels of raw materials, so purchasing frequency is higher than before.  For the first quarter ended March 31, 2006, account payables increased by
$1,863,146, or 53.4 %, compared to December 31, 2005, mainly due to bulk purchasing occurring near the end of the accounting period, but all within the payment cycle approved by the supplier.  Prepayments as of March 31, 2006 primarily represented advance payments for raw materials and equipment purchases. Prepayments as of March 31, 2006 decreased by 26.6% to $1.32 million from $1.80 million as of December 31, 2005.

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At March 31, 2006, the Company had cash and cash equivalents of $1,153,781, as compared to cash and cash equivalents of $961,131 at December 31, 2005.  The Company had working capital of $ 12,378,597 at March 31, 2006, as compared to working capital of $10,571,086 at December 31, 2005, reflecting current ratios of 1.55:1 and 1.49:1, respectively.

INVESTING - During the first quarter ended March 31, 2006, the Company expended net cash of $370,816 in investing activities, including $282,540 for acquisition of property and equipment to support the growth of business.  For the first quarter ended March 31, 2005, the Company utilized $286,703 in investing activities.

FINANCING During the first quarter ended March 31, 2006, the Company received aggregate advances under its credit facilities of $5,737,807, and the Company repaid $7,359,361 on its outstanding debt.

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 receivable collection.  During the quarter, the Company continue to develop high profit margin new products, as well as adopting steps for further cost saving such as improving material utilization rate.

While we believe that funds generated from operations and our bank revolving lines of credit will be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future, we continue our efforts to raise capital to finance further expansion of production, build our international sales networks in new markets, strengthen our R&D workforce, and supplement our working capital.

The Company has commitments under contracts for the construction of a temporary plant, amounting to $91,776 at March 31, 2006.

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 term of the options is three years. Total deferred stock-based compensation expenses related to stock options granted within the first quarter ended March 31, 2006 amounted to $178,904.  This amount is amortized over three years in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R.  The amortization of deferred stock-based compensation for these equity arrangements was $4,970 for the three months ended March 31, 2006.  Although the Company anticipates future issuances of stock awards to have a material impact on net income, in future financial statements it does not expect these transactions to have a material impact on future cash outflows.

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Item 6.          Exhibits.

|(a) |  | Exhibits: |  |                                                                                                                                                                         
|--- |  | --------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |           |  |                                                                                                                                                                         
|    |  | 3.1       |  | Articles of   Incorporation (1)                                                                                                                                         
|    |  |           |  |                                                                                                                                                                         
|    |  | 3.2       |  | Bylaws (1)                                                                                                                                                              
|    |  |           |  |                                                                                                                                                                         
|    |  | 10.1      |  | Share   Exchange Agreement and Plan of Reorganization (2)                                                                                                               
|    |  |           |  |                                                                                                                                                                         
|    |  | 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.  (3)
|    |  |           |  |                                                                                                                                                                         
|    |  | 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.  (3)
|    |  |           |  |                                                                                                                                                                         
|    |  | 32.1      |  | Certification   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (3)                                                                                         
|    |  |           |  |                                                                                                                                                                         
|    |  | 32.2      |  | Certification   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (3)                                                                                         

|   
|---
|(1)
|(2)
|(3)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to report to be signed on its behalf by the undersigned thereunto duly authorized.

|Dated:  July   24, 2006 | SORL AUTO   PARTS, INC.
|----------------------- | -----------------------
|                        |                        
|                        |                        
|                        | By:                    
|                        |                        
|                        | Name:                  
|                        | Title:                 

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