----

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

**FORM 10-Q**

| **(Mark One)**                                                      |
|---------------------------------------------------------------------|
|                                                                |   |
| x                                                                   | **QUARTERLY   REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                |   |
| **For the quarterly period ended June 30, 2006**                    |
|                                                                |   |
| o                                                                   | **TRANSITION   REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|                                                                |   |
| **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 July 31, 2006 there were **13,346,555** shares of Common Stock outstanding

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**SORL AUTO PARTS, INC. FORM 10-Q For the Quarter Ended June 30, 2006**

**INDEX**

|       |                                                                                                                                             | **Page** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|       |                                                                                                                                             |          |
| PART I.    | FINANCIAL INFORMATION (unaudited)                                                                                                                | 1        |
|       |                                                                                                                                             |     |
| Item 1.    | Financial Statements:                                                                                                                            | 1        |
|       |                                                                                                                                             |     |
|       | Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited)   and December 31, 2005 (Audited)                                          | 2        |
|       |                                                                                                                                             |     |
|       | Condensed Consolidated Statements of Operations and Comprehensive   Income (Unaudited) for the Three and Six Months Ended June 30, 2006 and 2005 | 3        |
|       |                                                                                                                                             |     |
|       | Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)   for the Three and Six Months Ended June 30, 2006 and 2005           | 4        |
|       |                                                                                                                                             |     |
|       | Condensed Consolidated Statements of Cash Flows (Unaudited) for the   Three and Six Months Ended June 30, 2006 and 2005                          | 5        |
|       |                                                                                                                                             |     |
|       | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                                                             | 6        |
|       |                                                                                                                                             |     |
| Item 2.    | Management’s Discussion and Analysis or Financial Condition and   Results of Operations                                                     | 13       |
|       |                                                                                                                                             |     |
| Item 3.    | Controls and Procedures                                                                                                                          | 24       |
|       |                                                                                                                                             |     |
| Item 4.    | Quantitative and Qualitative Disclosures About Market Risk                                                                                       | 24       |
|       |                                                                                                                                             |     |
| PART II.   | OTHER INFORMATION                                                                                                                                | 24       |
|       |                                                                                                                                             |     |
| Item 1.    | Legal Proceedings                                                                                                                                | 24       |
|       |                                                                                                                                             |     |
| Item 1A.   | Risk Factors                                                                                                                                     | 24       |
|       |                                                                                                                                             |     |
| Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      | 25       |
|       |                                                                                                                                             |     |
| Item 3.    | Defaults Upon Senior Securities                                                                                                                  | 25       |
|       |                                                                                                                                             |     |
| Item 4.    | Submission Of Matters To a Vote of Security Holders                                                                                              | 25       |
|       |                                                                                                                                             |     |
| Item 5.    | Other Information                                                                                                                                | 25       |
|       |                                                                                                                                             |     |
| Item 6.    | Exhibits                                                                                                                                         | 25       |
|       |                                                                                                                                             |     |
| SIGNATURES | 26                                                                                                                                               |

i

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**PART I**

**FINANCIAL INFORMATION**

**Item 1.    Financial Statement**s

- 1 -

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

**SORL Auto Parts, Inc. and Subsidiaries Consolidated Balance Sheets**

|                                                                                                                                    |   |    | **June 30,2006** |   |    | **December   31,2005** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------|------------------|--------|---------|------------------------|--------|
|                                                                                                                                    |   |    |                  |   |    |                        |   |
|                                                                                                                                    |   |    | **(Unaudited)**  |   |    | **(Audited)**          |   |
| **Assets**                                                                                                                              |   |    |             |   |    |                   |   |
| **Current Assets**                                                                                                                      |   |    |             |   |    |                   |   |
| Cash and Cash Equivalents                                                                                                               |   | US$     | 2,221,050        |   | US$     | 961,131                |   |
| Accounts Receivable, Net of Provision                                                                                                   |   |    | 29,368,553       |   |    | 25,339,774             |   |
| Notes Receivable                                                                                                                        |   |    | 1,155,537        |   |    | 1,488,104              |   |
| Inventory                                                                                                                               |   |    | 1,374,179        |   |    | 2,512,583              |   |
| Prepayments                                                                                                                             |   |    | 1,409,268        |   |    | 1,801,829              |   |
| Other current assets                                                                                                                    |   |    | 407,250          |   |    | 48,115                 |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| Total Current Assets                                                                                                                    |   |    | 35,935,837       |   |    | 32,151,536             |   |
| **Fixed Assets**                                                                                                                        |   |    |             |   |    |                   |   |
| Property, Plant and Equipment                                                                                                           |   |    | 10,670,515       |   |    | 10,140,947             |   |
| Less: Accumulated Depreciation                                                                                                          |   |    | (3,494,385       | )      |    | (3,024,281             | )      |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| Property, Plant and Equipment, Net                                                                                                      |   |    | 7,176,130        |   |    | 7,116,666              |   |
| Construction in progress                                                                                                                |   |    | 344,012          |   |    | —       |   |
| **Other Assets**                                                                                                                        |   |    |             |   |    |                   |   |
| Deferred compensation cost-stock options                                                                                                |   |    | 308,551          |   |    | —       |   |
| Intangible Assets                                                                                                                       |   |    | 44,709           |   |    | 44,297                 |   |
| Less: Accumulated Amortization                                                                                                          |   |    | (15,369          | )      |    | (11,873                | )      |
| Intangible Assets, Net                                                                                                                  |   |    | 29,340           |   |    | 32,424                 |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| Total Other Assets                                                                                                                      |   |    | 337,891          |   |    | 32,424                 |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| **Total Assets**                                                                                                                        |   | **US$** | **43,793,870**   |   | **US$** | **39,300,626**         |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| **Liabilities and Shareholders’ Equity**                                                                                           |   |    |             |   |    |                   |   |
| **Current Liabilities**                                                                                                                 |   |    |             |   |    |                   |   |
| Accounts Payable and Notes Payable                                                                                                      |   | US$     | 7,651,396        |   | US$     | 3,746,666              |   |
| Deposit Received from Customers                                                                                                         |   |    | 806,551          |   |    | 1,324,085              |   |
| Short term bank loans                                                                                                                   |   |    | 11,506,328       |   |    | 16,026,717             |   |
| Accrued Expenses                                                                                                                        |   |    | 595,968          |   |    | 482,982                |   |
| Other Current Liabilities                                                                                                               |   |    | 424,403          |   |    | —       |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| Total Current Liabilities                                                                                                               |   |    | 20,984,646       |   |    | 21,580,450             |   |
| **Minority Interest**                                                                                                                   |   |    | 2,196,927        |   |    | 1,735,818              |   |
| **Shareholders’ Equity**                                                                                                           |   |    |             |   |    |                   |   |
| Common Stock - $0.002 Par Value; 50,000,000   authorized, 13,346,555 issued and outstanding as of June 30, 2006 and   December 31, 2005 |   |    | 26,693           |   |    | 26,693                 |   |
| Additional Paid In Capital                                                                                                              |   |    | 4,922,074        |   |    | 4,444,118              |   |
| Accumulated other comprehensive income                                                                                                  |   |    | 505,005          |   |    | 336,993                |   |
| Retained Earnings                                                                                                                       |   |    | 15,158,525       |   |    | 11,176,554             |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
|                                                                                                                                    |   |    | 20,612,297       |   |    | 15,984,358             |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |
| **Total Liabilities and   Shareholders’ Equity**                                                                                   |   | **US$** | **43,793,870**   |   | **US$** | **39,300,626**         |   |
|                                                                                                                                    |   |    |                  |   |    |                        |   |

The accompanying notes are an integral part of these financial statements

- 2 -

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**SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Unaudited)**

|                                                                           |   |   | **Three Months Ended June 30,** |   |   | **Six Months Ended June 30,** |   |
|--------------------------------------------------------------------------------|--------|--------|---------------------------------|--------|--------|-------------------------------|--------|
|                                                                           |   |   |                                 |   |   |                               |   |
|                                                                           |   |   | **2006**                        |   |   | **2005**                      |   |   | **2006** |   |   | **2005** |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Sales                                                                          |   | US$    | 20,117,002                      |   |   | 14,924,151                    |   | US$ | 39,536,586 |   |   | 29,440,016 |   |
| Cost   of Sales                                                                |   |   | 15,477,658                      |   |   | 11,561,779                    |   |   | 30,501,484 |   |   | 22,857,952 |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Gross   Profit                                                                 |   |   | 4,639,344                       |   |   | 3,362,372                     |   |   | 9,035,102 |   |   | 6,582,064 |   |
| Operating   Expenses                                                           |   |   |                            |   |   |                          |   |   |   |   |   |   |   |
| Selling and Distribution Expenses                                              |   |   | 1,376,442                       |   |   | 954,666                       |   |   | 2,244,458 |   |   | 1,881,755 |   |
| General and Administrative Expenses                                            |   |   | 86,289                          |   |   | 652,039                       |   |   | 1,183,251 |   |   | 1,206,293 |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Total Operating Expenses                                                       |   |   | 1,462,731                       |   |   | 1,606,705                     |   |   | 3,427,709 |   |   | 3,088,048 |   |
| Operating   Income                                                             |   |   | 3,176,613                       |   |   | 1,755,667                     |   |   | 5,607,393 |   |   | 3,494,016 |   |
| Financial   Expenses                                                           |   |   | (241,900                        | )      |   | (126,348                      | )      |   | (507,447 | ) |   | (186,800 | ) |
| Other   Income                                                                 |   |   | 68,696                          |   |   | —              |   |   | 68,696 |   |   | —   |   |
| Non-Operating   Expenses                                                       |   |   | (67,050                         | )      |   | (66,473                       | )      |   | (156,725 | ) |   | (75,626 | ) |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Income   Before Provision for Income Taxes                                     |   |   | 2,936,359                       |   |   | 1,562,846                     |   |   | 5,011,917 |   |   | 3,231,590 |   |
| Provision   for Income Taxes                                                   |   |   | 293,897                         |   |   | —              |   |   | 587,505 |   |   | —   |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Net   Income Before Minority Interest  &   Other Comprehensive Income |   | US$    | 2,642,462                       |   |   | 1,562,846                     |   | US$ | 4,424,412 |   |   | 3,231,590 |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Minority   Interest                                                            |   |   | 264,246                         |   |   | 156,285                       |   |   | 442,441 |   |   | 323,159 |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Net   Income Attributable to Shareholders                                      |   |   | 2,378,216                       |   |   | 1,406,561                     |   |   | 3,981,971 |   |   | 2,908,431 |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Foreign   Currency Translation Adjustment                                      |   |   | 59,974                          |   |   | —              |   |   | 186,680 |   |   | —   |   |
| Minority   Interest’s Share                                               |   |   | (5,997                          | )      |   | —              |   |   | (18,668 | ) |   | —   |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Comprehensive   Income                                                         |   |   | 2,432,193                       |   |   | 1,406,561                     |   |   | 4,149,983 |   |   | 2,908,431 |   |
|                                                                           |   |   |                                 |   |   |                               |   |   |  |   |   |  |   |
| Weighted   average common share - Basic                                        |   |   | 13,346,555                      |   |   | 13,287,055                    |   |   | 13,346,555 |   |   | 13,287,055 |   |
| Weighted   average common share - Diluted                                      |   |   | 13,359,861                      |   |   | 13,287,055                    |   |   | 13,355,426 |   |   | 13,287,055 |   |
| EPS   - Basic                                                                  |   |   | 0.18                            |   |   | 0.11                          |   |   | 0.30 |   |   | 0.22 |   |
| EPS   - Diluted                                                                |   |   | 0.18                            |   |   | 0.11                          |   |   | 0.30 |   |   | 0.22 |   |

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

- 3 -

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**SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity (Unaudited)**

|                                                 |   | **Three Months Ended June 30, 2006 and 2005** |               |
|------------------------------------------------------|--------|-----------------------------------------------|--------------------|
|                                                 |   |                                               |               |
|                                                 |   | **Number   of Share**                         |               | **Common   Stock** |   | **Additional   Paid-in   Capital** |   | **Retained   Earnings   (Deficit)** |   | **Accumu.    Other   Comprehensive   Income** |   | **Shareholders’   Equity** |   | **Minority   Interest** |   |
|                                                 |   |                                               |               |  |   |  |   |  |   |  |   |  |   |  |   |
| **Beginning Balance - March 31,   2005**             |   |                                          | **13,285,867**     |   |   | **26,572** |   |   | **4,082,239** |   |   | **7,728,814** |   |   | **—  ** |   |   | **11,837,625** |   |   | **1,315,293** |   |
| Common Stock – Adjustment for fractional shares |   |                                          | 1,188              |   |   | 2 |   |   | (2 | ) |   | —   |   |   | —   |   |   | —   |   |   | —   |   |
| Net Income                                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | 1,406,561 |   |   | —   |   |   | 1,406,561 |   |   | 156,285 |   |
| Other Comprehensive Income                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |
| Paid In Capital Contributions                        |   |                                          | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***Ending Balance   - June 30, 2005***               |   |                                          | **13,287,055**     |   |   | **26,574** |   |   | **4,082,237** |   |   | **9,135,375** |   |   | **—  ** |   |   | **13,244,186** |   |   | **1,471,577** |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **Beginning Balance - March 31,   2006**             |   |                                          | **13,346,555**     |   |   | **26,693** |   |   | **4,623,022** |   |   | **12,780,309** |   |   | **451,028** |   |   | **17,881,052** |   |   | **1,926,684** |   |
| Net Income                                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | 2,378,216 |   |   | —   |   |   | 2,378,216 |   |   | 264,246 |   |
| Other Comprehensive Income                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | —   |   |   | 53,977 |   |   | 53,977 |   |   | 5,997 |   |
| Paid In Capital Contributions                        |   |                                          | —   |   |   | —   |   |   | 299,052 |   |   | —   |   |   | —   |   |   | 299,052 |   |   | —   |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***Ending Balance   - June 30, 2006***               |   |                                          | **13,346,555**     |   |   | **26,693** |   |   | **4,922,074** |   |   | **15,158,525** |   |   | **505,005** |   |   | **20,612,297** |   |   | **2,196,927** |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
|                                                 |   |                                          |               |
|                                                 |   | **Six Months Ended June 30, 2006 and 2005**   |               |
|                                                 |   |                                               |               |
|                                                 |   | **Number   of Share**                         |               | **Common   Stock** |   | **Additional   Paid-in   Capital** |   | **Retained   Earnings   (Deficit)** |   | **Accumu.    Other   Comprehensive   Income** |   | **Shareholders’   Equity** |   | **Minority   Interest** |   |
|                                                 |   |                                               |               |  |   |  |   |  |   |  |   |  |   |  |   |
| **Beginning Balance - December 31,   2004**          |   |                                          | **13,282,253**     |   |   | **26,565** |   |   | **4,082,246** |   |   | **6,226,944** |   |   |   |   |   | **10,335,755** |   |   | **1,148,418** |   |
| Common Stock – Adjustment for fractional shares |   |                                          | 4,802              |   |   | 9 |   |   | (9 | ) |   | —   |   |   | —   |   |   | —   |   |   | —   |   |
| Net Income                                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | 2,908,431 |   |   | —   |   |   | 2,908,431 |   |   | 323,159 |   |
| Other Comprehensive Income                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |
| Paid In Capital Contributions                        |   |                                          | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***Ending Balance   - June 30, 2005***               |   |                                          | **13,287,055**     |   |   | **26,574** |   |   | **4,082,237** |   |   | **9,135,375** |   |   | **—  ** |   |   | **13,244,186** |   |   | **1,471,577** |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **Beginning Balance - December 31,   2005**          |   |                                          | **13,346,555**     |   |   | **26,693** |   |   | **4,444,118** |   |   | **11,176,554** |   |   | **336,993** |   |   | **15,984,358** |   |   | **1,735,818** |   |
| Net Income                                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | 3,981,971 |   |   | —   |   |   | 3,981,971 |   |   | 442,441 |   |
| Other Comprehensive Income                           |   |                                          | —   |   |   | —   |   |   | —   |   |   | —   |   |   | 168,012 |   |   | 168,012 |   |   | 18,668 |   |
| Paid In Capital Contributions                        |   |                                          | —   |   |   | —   |   |   | 477,956 |   |   | —   |   |   | —   |   |   | 477,956 |   |   | —   |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***Ending Balance   - June 30, 2006***               |   |                                          | **13,346,555**     |   |   | **26,693** |   |   | **4,922,074** |   |   | **15,158,525** |   |   | **505,005** |   |   | **20,612,297** |   |   | **2,196,927** |   |
|                                                 |   |                                               |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |

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

- 4 -

----

**SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)**

|                                                                                    |   |    | **Three   Months Ended June 30,** |   |   | **Six Months   Ended June 30,** |   |
|-----------------------------------------------------------------------------------------|--------|---------|-----------------------------------|--------|--------|---------------------------------|--------|
|                                                                                    |   |    |                                   |   |   |                                 |   |
|                                                                                    |   |    | **2006**                          |   |   | **2005**                        |   |   | **2006** |   |   | **2005** |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| **Cash Flows from Operating Activities**                                                |   |    |                              |   |   |                            |   |   |   |   |   |   |   |
| Net   Income                                                                            |   | US$     | 2,378,216                         |   |   | 1,406,561                       |   | US$ | 3,981,971 |   |   | 2,908,431 |   |
| **Adjustments to reconcile net   income (loss) to net cash from operating activities:** |   |    |                              |   |   |                            |   |   |   |   |   |   |   |
| Minority Interest                                                                       |   |    | 264,246                           |   |   | 156,285                         |   |   | 442,441 |   |   | 323,159 |   |
| Bad Debt Expense                                                                        |   |    | (943,325                          | )      |   | —                |   |   | (786,450 | ) |   | —   |   |
| Depreciation and Amortization                                                           |   |    | 252,001                           |   |   | 200,653                         |   |   | 516,995 |   |   | 392,657 |   |
| Loss on disposal of Fixed Assets                                                        |   |    | 66,903                            |   |   | —                |   |   | 66,903 |   |   | —   |   |
| Stock-Based Compensation Expense                                                        |   |    | 164,435                           |   |   | —                |   |   | 169,405 |   |   | —   |   |
| **Changes in Assets and   Liabilities:**                                                |   |    |                              |   |   |                            |   |   |   |   |   |   |   |
| Account Receivables                                                                     |   |    | 248,361                           |   |   | (1,777,338                      | )      |   | (3,241,876 | ) |   | (6,392,929 | ) |
| Notes Receivables                                                                       |   |    | 1,001,383                         |   |   | (170,336                        | )      |   | 332,567 |   |   | (805,108 | ) |
| Other Currents Assets                                                                   |   |    | 103,224                           |   |   | (32,907                         | )      |   | (359,133 | ) |   | 330,558 |   |
| Inventory                                                                               |   |    | (239,406                          | )      |   | (839,955                        | )      |   | 1,138,404 |   |   | (729,095 | ) |
| Prepayments                                                                             |   |    | (87,590                           | )      |   | 248,863                         |   |   | 392,561 |   |   | (405,756 | ) |
| Account Payables and Notes payable                                                      |   |    | 2,191,393                         |   |   | 657,116                         |   |   | 4,054,538 |   |   | 384,023 |   |
| Deposits Received from Customers                                                        |   |    | (274,726                          | )      |   | (293,533                        | )      |   | (517,534 | ) |   | 638,244 |   |
| Other Currents liability                                                                |   |    | (610,270                          | )      |   | 8,865                           |   |   | 276,416 |   |   | 671,525 |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| **Net Cash Flows from Operating   Activities**                                          |   |    | **4,514,845**                     |   |   | **(435,727**                    | **)**  |   | **6,467,208** |   |   | **(2,684,291** | **)** |
| **Cash Flows from Investing Activities**                                                |   |    |                              |   |   |                            |   |   |   |   |   |   |   |
| Acquisition of Property and Equipment                                                   |   |    | (247,028                          | )      |   | (785,524                        | )      |   | (529,568 | ) |   | (1,072,227 | ) |
| Investment in Construction in progress                                                  |   |    | (255,736                          | )      |   | —                |   |   | (344,012 | ) |   | —   |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| **Net Cash Flows from Investing   Activities**                                          |   |    | **(502,764**                      | **)**  |   | **(785,524**                    | **)**  |   | **(873,580** | **)** |   | **(1,072,227** | **)** |
| **Cash Flows from Financing Activities**                                                |   |    |                              |   |   |                            |   |   |   |   |   |   |   |
| Proceeds from (Repayment of) Bank Loans                                                 |   |    | (3,004,786                        | )      |   | 928,213                         |   |   | (4,520,388 | ) |   | 3,343,672 |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| **Net Cash flows from Financing   Activities**                                          |   |    | **(3,004,786**                    | **)**  |   | **928,213**                     |   |   | **(4,520,388** | **)** |   | **3,343,672** |   |
| **Effects on changes in foreign exchange rate**                                         |   |    | 59,974                            |   |   | —                |   |   | 186,679 |   |   | —   |   |
| Net   Increase (Decrease) in Cash                                                       |   |    | 1,067,269                         |   |   | (293,037                        | )      |   | 1,259,919 |   |   | (412,845 | ) |
| Cash   - Beginning of the term                                                          |   |    | 1,153,781                         |   |   | 610,067                         |   |   | 961,131 |   |   | 729,875 |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| **Cash - End of the term**                                                              |   | **US$** | **2,221,050**                     |   |   | 317,030                         |   | **US$** | **2,221,050** |   |   | 317,030 |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| **Supplemental Cash Flow Disclosures:**                                                 |   |    |                              |   |   |                            |   |   |   |   |   |   |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |
| Interest Paid                                                                           |   |    | 202,700                           |   |   | 142,689                         |   |   | 401,940 |   |   | 177,015 |   |
| Tax Paid                                                                                |   |    | 763,973                           |   |   | 167,325                         |   |   | 805,590 |   |   | 277,733 |   |
|                                                                                    |   |    |                                   |   |   |                                 |   |   |  |   |   |  |   |

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

- 5 -

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

**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 consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K and other reports filed with the SEC.

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.

**Note C -          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 three or six months ended June 30, 2006 and 2005: 

- 6 -

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|                                       |   | **Three Months Ended June   30,** |               | **Six Months Ended June 30,** |   |
|--------------------------------------------|--------|-----------------------------------|--------------------|-------------------------------|--------|
|                                       |   |                                   |               |                               |   |
|                                       |   | **2006**                          |               | **2005**                      |   | **2006** |   | **2005** |   |
|                                       |   |                                   |               |                               |   |  |   |  |   |
| PURCHASES FROM:                            |   |                              |               |                          |   |   |   |   |   |   |   |   |   |
| Ruili Group Co., Ltd.                      |   | $                                 | 4,699,603          |                          | $      | 3,547,121 |   | $ | 10,542,813 |   | $ | 7,438,274 |   |
| Ruian Ruili Haizhiguan Auto Part Co., Ltd. |   |                              | —   |                          |   | 154,351 |   |   | —   |   |   | 279,745 |   |
|                                       |   |                                   |                    |                          |        |  |   |  |  |   |  |  |   |
| Total                                      |   | $                                 | 4,699,603          |                          | $      | 3,701,472 |   | $ | 10,542,813 |   | $ | 7,718,019 |   |
|                                       |   |                                   |                    |                          |        |  |   |  |  |   |  |  |   |
| SALES TO:                                  |   |                              |               |                          |   |   |   |   |   |   |   |   |   |
| Ruili Group Co., Ltd.                      |   | $                                 | 44,384             |                          |   | 649,175 |   | $ | 2,630,198 |   |   | 1,929,420 |   |
|                                       |   |                                   |                    |                          |        |  |   |  |  |   |  |  |   |
| Total                                      |   | $                                 | 44,384             |                          |   | 649,175 |   | $ | 2,630,198 |   |   | 1,929,420 |   |
|                                       |   |                                   |                    |                          |        |  |   |  |  |   |  |  |   |

The total purchases from Ruili Group during the three months ended June 30, 2006 consisted of $4.5 million of finished products for non-valve auto parts and $0.2 million of packaging materials. During the six months ended June 30, 2006, the breakdown was $ 10.1 million and $ 0.4 million, respectively..

|                                  |   | **June 30,   2006** |               | **December 31, 2005** |   |
|---------------------------------------|--------|---------------------|--------------------|----------------------------|--------|
|                                  |   |                     |               |                            |   |
| ACCOUNTS PAYABLE   AND OTHER PAYABLES |   |                |               |                       |   |   |   |
| Ruili Group Co., Ltd.                 |   | $                   | 1,982,441          |                       | $      | —   |   |
| Shuping Chi                           |   |                | —   |                       |   | 273,559 |   |
|                                  |   |                     |                    |                       |        |  |   |
| Total                                 |   |                | 1,982,441          |                       |   | 273,559 |   |
|                                  |   |                     |                    |                       |        |  |   |
|                                  |   |                |               |                       |   |   |   |
|                                  |   | **June 30,   2006** |               | **December 31,    2005**   |   |
|                                  |   |                     |               |                            |   |
| Prepayment                            |   |                |               |                       |   |   |   |
| Ruili Group Co., Ltd.                 |   | $                   | —   |                       | $      | 1,060,193 |   |
|                                  |   |                     |                    |                       |        |  |   |
| Total                                 |   |                | —   |                       |   | 1,060,193 |   |
|                                  |   |                     |                    |                       |        |  |   |

**Note E -          Accounts Receivable**

The changes in the allowance for doubtful accounts at June 30, 2006 and December 31, 2005 are summarized as follows:

|                                  |   | **June 30,   2006** |               | **December 31,    2005** |   |
|---------------------------------------|--------|---------------------|--------------------|--------------------------|--------|
|                                  |   |                     |               |                          |   |
| Beginning balance                     |   | $                   | 914,721            |                     | $      | 68,384 |   |
| Add: Increase (Decrease) to allowance |   |                | (767,797           | )                        |   | 846,337 |   |
| Less: Accounts written off            |   |                | —   |                     |   | —   |   |
|                                  |   |                     |                    |                     |        |  |   |
| Ending balance                        |   | $                   | 146,924            |                     | $      | 914,721 |   |
|                                  |   |                     |                    |                     |        |  |   |

- 7 -

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The company’s receivables are summarized as follows:

|                                  |   | **June 30,   2006** |       | **December 31,   2005** |   |
|---------------------------------------|--------|---------------------|------------|-------------------------|--------|
|                                  |   |                     |       |                         |   |
| Accounts receivable                   |   | $                   | 29,515,477 |                    | $      | 26,254,495 |   |
| Less: allowance for doubtful accounts |   |                | (146,924   | )                       |   | (914,721 | ) |
|                                  |   |                     |            |                    |        |  |   |
| Account receivable balance, net       |   | $                   | 29,368,553 |                    | $      | 25,339,774 |   |
|                                  |   |                     |            |                    |        |  |   |

**Note F -          Inventories**

On June 30, 2006 and December 31, 2005, inventories consisted of the following: 

|            |   | **June 30,   2006** |      | **December 31,   2005** |   |
|-----------------|--------|---------------------|-----------|-------------------------|--------|
|            |   |                     |      |                         |   |
| Raw Material    |   | $                   | 540,861   |                    | $      | 747,858 |   |
| Work in process |   |                | 301,504   |                    |   | 1,057,740 |   |
| Finished Goods  |   |                | 531,814   |                    |   | 706,985 |   |
|            |   |                     |           |                    |        |  |   |
| Total Inventory |   | $                   | 1,374,179 |                    | $      | 2,512,583 |   |
|            |   |                     |           |                    |        |  |   |

**Note G -          Property, Plant and Equipment**

Property, plant and equipment consisted of the following, on June 30, 2006 and December 31, 2005:

|                                |   |   | **June 30,   2006** |       | **December 31,   2005** |   |
|--------------------------------|--------|--------|---------------------|------------|-------------------------|--------|
|                                |   |   |                     |       |                         |   |
| Machinery                      |   |   | $                   | 9,142,492  |                    | $      | 8,706,039 |   |
|  Moulds                   |   |   |                | 1,090,343  |                    |   | 1,080,291 |   |
| Office equipment               |   |   |                | 201,023    |                    |   | 185,088 |   |
| Vehicle                        |   |   |                | 236,657    |                    |   | 169,529 |   |
|                                |   |   |                     |            |                    |        |  |   |
| ** Sub-Total**            |   |   |                | 10,670,515 |                    |   | 10,140,947 |   |
| Less: Accumulated depreciation |   |   |                | (3,494,385 | )                       |   | (3,024,281 | ) |
|                                |   |   |                     |            |                    |        |  |   |
| **PPE, Net**                   |   |   | $                   | 7,176,130  |                    | $      | 7,116,666 |   |
|                                |   |   |                     |            |                    |        |  |   |

Depreciation expense charged to operations was $513,499 and $389,098 for the six months ended June 30, 2006 and 2005, respectively.

- 8 -

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**Note H -  ****        Construction In Progress**

Construction in progress included an investment of $ 344,012 for a warehouse as of June 30, 2006.

**Note****I****-          Intangible Assets**

Gross intangible assets were $44,709, less accumulated amortization of $15,369 for net intangible assets of $29,340 as of June 30, 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 $3,496 and $3,559 for the six months ended June 30, 2006 and 2005 respectively. Future estimated amortization expense is as follows: 

| **2006** |   | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **Thereafter** |   |   |
|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|--------|
|          |   |          |   |          |   |          |   |          |   |                |   |   |
| $1,580   |   | $3,617   |   | $3,617   |   | $3,617   |   | $3,617   |   | $12,880        |   |   |

**Note****J****-          Prepayment**

Prepayment consisted of the following as of June 30, 2006 and December 31, 2005: 

|                   |   | **June 30,    2006** |      | **December 31,    2005** |   |
|------------------------|--------|----------------------|-----------|--------------------------|--------|
|                   |   |                      |      |                          |   |
| Raw material suppliers |   | $                    | 1,045,002 |                     | $      | 1,584,192 |   |
| Equipment purchase     |   |                 | 364,266   |                     |   | 217,637 |   |
|                   |   |                      |           |                     |        |  |   |
| Total prepayment       |   | $                    | 1,409,268 |                     | $      | 1,801,829 |   |
|                   |   |                      |           |                     |        |  |   |

**Note****K****-          Accrued Expenses**

Accrued expenses consisted of the following as of June 30, 2006 and December 31, 2005: 

|                   |   | **June 30,    2006** |               | **December 31,    2005** |   |
|------------------------|--------|----------------------|--------------------|--------------------------|--------|
|                   |   |                      |               |                          |   |
| Accrued payroll        |   | $                    | 328,499            |                     | $      | 297,928 |   |
| Accrued rent           |   |                 | —   |                     |   | —   |   |
| Accrued legal          |   |                 | —   |                     |   | —   |   |
| Other accrued expenses |   |                 | 267,469            |                     |   | 185,054 |   |
|                   |   |                      |                    |                     |        |  |   |
| Total accrued expenses |   | $                    | 595,968            |                     | $      | 482,982 |   |
|                   |   |                      |                    |                     |        |  |   |

**Note****L****-          Bank Loans**

Bank loans represented the following as of June 30, 2006 and December 31, 2005: 

|                  |   | **June 30,   2006** |               | **December 31,    2005** |   |
|-----------------------|--------|---------------------|--------------------|--------------------------|--------|
|                  |   |                     |               |                          |   |
| Secured               |   | $                   | 11,506,328         |                     | $      | 16,026,717 |   |
|                  |   |                     |                    |                     |        |  |   |
| Less: Current portion |   | $                   | (11,506,328        | )                        | $      | (16,026,717 | ) |
|                  |   |                     |                    |                     |        |  |   |
| Non-current portion   |   | $                   | —   |                     | $      | —   |   |
|                  |   |                     |                    |                     |        |  |   |

- 9 -

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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 were provided for those bank loans as follows:

|   | $8.1M |   | Guaranteed by Ruili Group   Co., Ltd., a related party;                                                                              |
|--------|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|   | $2.0M |   | Guaranteed by Ruili Group   Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi,   both principal shareholders; |
|   | $1.4M |   | Guaranteed by Shenghuabo   Group Co., Ltd., a non-related party.                                                                     |

The Company did not provide any sort of guarantee to any other parties. Interest rates for the loans ranged between 5.220% and 5.580% per annum.

**Note****M****-          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 was 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 six months ended June 30, 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****N****-          Lease**

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 expenses for the six months ended June 30, 2006 and 2005, were $226,483 and $219,504 respectively.

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

| **2006** |   | **2007** |   | **2008** |   | **2009** |   | **2010** |   | **Thereafter** |   |   |
|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|--------|
|          |   |          |   |          |   |          |   |          |   |                |   |   |
| $213,057 |   | $439,540 |   | $439,540 |   | $439,540 |   | $439,540 |   | $1,321,620     |   |   |

**Note****O****-          Advertising Costs**

Advertising costs are expensed as incurred and are classified as selling expenses.  Advertising costs were $22,023 and $16,957 for the six months ended June 30, 2006 and 2005, respectively.

- 10 -

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**Note****P****-          Research and Development Expenses**

Research and development costs are expensed as incurred and were $240,430 and $ 49,496 for the six months ended June 30, 2006 and 2005, respectively.

**Note****Q****-          Warranty Claims**

Warranty claims were $883,540 and $228,521 for the six months ended June 30, 2006 and 2005, respectively. The movement of accrued warranty expenses for the six months ended June 30, 2006 is as follows. Accrued warranty expenses are included in Accrued Expenses.

| Beginning balance at January 01, 2006                         |   | $ | 179,932 |   |
|---------------------------------------------------------------|--------|---|---------|--------|
| Accrued during the six months ended June 30,2006:             |   | $ | 883,540 |   |
| Less: Actual Paid during the six months   ended June 30,2006: |   | $ | 817,975 |   |
|                                                          |   |   |         |   |
| **Ending balance at June   30, 2006:**                        |   | $ | 245,497 |   |
|                                                          |   |   |         |   |

**Note****R****-          Stock-Based Compensation**

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

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

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

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

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

Total deferred stock-based compensation expenses related to the 60,000 stock options granted within the six months ended June 30, 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 $14,909 and $ 19,879 respectively for the three months ended June 30, 2006 and the six months ended June 30, 2006. As of June 30, 2006, there was $159,025 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 2.7 years.

- 11 -

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A summary of option activity under the Plan as of June 30, 2006 and changes during the six 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                                                   |   |                              | 3   Years          |   |   | —   |   |
| Exercised                         |   |        | —   |                                     |   | —                                       |   |                              | —   |   |   | —   |   |
| Forfeited                         |   |        | —   |                                     |   | —                                       |   |                              | —   |   |   | —   |   |
|                              |   |             |                    |                                     |        |                                                        |   |                                   |                    |   |  |  |   |
| Outstanding at June 30, 2006 |   |        | 60,000             |                                     | $      | 4.79                                                   |   |                              | 2.7   Years        |   | $ | 130,200 |   |
|                              |   |             |                    |                                     |        |                                                        |   |                                   |                    |   |  |  |   |
| Exercisable at June 30, 2006 |   |        | —   |                                     |   | —                                       |   |                              | —   |   |   | —   |   |
|                              |   |             |                    |                                     |        |                                                        |   |                                   |                    |   |  |  |   |

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

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

The Company accounts for stock-basedcompensation in accordance with SFAS No. 123 Revised, “Share-BasedPayment.” The fair value of each warrant is estimated on the date of grantusing the Black-Scholes-Merton option-pricing model that uses the assumptionsnoted in the following table. 

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

Total deferred stock-based compensation expenses related to the 100,000 warrants granted within the six months ended June 30, 2006 amounted to $299,052.  This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R).  The amortization of deferred stock-based compensation for these equity arrangements was $ 149,526 for the six months ended June 30, 2006. As of June 30, 2006, there was $149,526 of total unrecognized compensation cost related to the share-based compensation arrangements granted under the agreement. The cost is expected to be recognized over a period of six months.

A summary of warrant activity  as of June 30, 2006 and changes during the six months then ended is as follows:

|                              |   | **Warrants** |               | **Weighted   Average   Exercise Price** |   | **Weighted    Average   Remaining   Contractual Term** |   | **Aggregate   Intrinsic   Value** |               |
|-----------------------------------|--------|--------------|--------------------|-----------------------------------------|--------|--------------------------------------------------------|--------|-----------------------------------|--------------------|
|                              |   |              |               |                                         |   |                                                        |   |                                   |               |
| January 1, 2006                   |   |         | —   |                                    | $      | —                                       |   |                              | —   |   | $ | —   |   |
| Granted                           |   |         | 100,000            |                                    | $      | 6.25                                                   |   |                              | 4 Years            |   |   | —   |   |
| Exercised                         |   |         | —   |                                    |   | —                                       |   |                              | —   |   |   | —   |   |
| Forfeited                         |   |         | —   |                                    |   | —                                       |   |                              | —   |   |   | —   |   |
|                              |   |              |                    |                                    |        |                                                        |   |                                   |                    |   |  |  |   |
| Outstanding at June 30, 2006 |   |         | 100,000            |                                    | $      | 6.25                                                   |   |                              | 3.5 Years          |   | $ | 71,000 |   |
|                              |   |              |                    |                                    |        |                                                        |   |                                   |                    |   |  |  |   |
| Exercisable at June 30, 2006 |   |         | 100,000            |                                    | $      | 6.25                                                   |   |                              | 3.5 Years          |   | $ | 71,000 |   |
|                              |   |              |                    |                                    |        |                                                        |   |                                   |                    |   |  |  |   |

**Note****S****-          Commitments and Contingencies**

None.

**Note****T****-          Subsequent Event**

None.

- 12 -

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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 timeto 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 10-Q. 

**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 tradereceivables, 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. 

          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. 

- 13 -

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          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. 

*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. 

- 14 -

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*Revenue Recognition*

          In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue is recognized when merchandise is shipped and title passes to the customer and collectibility is reasonably assured.  Revenues consist of the invoice value of the sale of goods and services net of value added tax, rebates and discounts.

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

*Concentration of Credit Risk*

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

***Results of Operations***

***(1) Results of operations for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005.***

**SALES**

|                                      |   | **Three Months ended June   30, 2006** |   | **Three Months ended June   30, 2005** |   |
|-------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
|                                      |   |                                        |   |                                        |   |
| Air brake valves & related components |   | $                                      | 15.1   | M                                      |   | 75 | % | $ | 11.4 | M |   | 77 | % |
| Non-valve products                        |   | $                                      | 5.0    | M                                      |   | 25 | % | $ | 3.5 | M |   | 23 | % |
|                                      |   |                                        |        |                                   |        |  |   |  |  |   |  |  |   |
| Total                                     |   | $                                      | 20.1   | M                                      |   | 100 | % | $ | 14.9 | M |   | 100 | % |

          Sales consist of air brake valves and related components manufactured by SORL and sold to domestic original equipment manufacturers (OEM) and aftermarket customers as well as distribution of non-valve auto parts sourced from the Ruili Group. 

          Net sales were $20,117,002 and $14,924,151 for the three months ended June 30, 2006 and 2005, respectively. Net sales for the three months ended June 30, 2006 increased by $5.2 million or 34.8% to $20.1 million, compared with the same period of 2005. The increase in sales was mainly from the international market.  This increase was a result of the Company’s efforts to develop more customers and penetrate these market segments.  

          A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for the three months ended June 30, 2006 and 2005 is as follows:

|                 |   | **Three MonthsendedJune 30, 2006**    |   | **%**  |   | **Three MonthsendedJune 30, 2005** |   | **%** |   |
|----------------------|--------|---------------------------------------|--------|--------|--------|------------------------------------|--------|-------|--------|
|                 |   |                                       |   |        |   |                                    |   |       |   |
|                 |   | **(U.S.  dollars in   million)** |   |
| China OEM market     |   | $                                     | 6.0    |   |   | 30                                 | %      | $     | 5.1    |   |   | 34 | % |
| China Aftermarket    |   | $                                     | 5.2    |   |   | 26                                 | %      | $     | 4.7    |   |   | 32 | % |
| International market |   | $                                     | 8.9    |   |   | 44                                 | %      | $     | 5.1    |   |   | 34 | % |
|                 |   |                                       |        |   |        |                                    |   |       |        |   |  |  |   |
| Total                |   | $                                     | 20.1   |   |   | 100                                | %      | $     | 14.9   |   |   | 100 | % |

- 15 -

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          The sluggish Chinese heavy duty truck market has been gradually restoring. The sales for the OEM market increased $0.9 million or 17.6% for the three months ended June 30, 2006, as compared to the same period of 2005.  The Company’s strategy is to introduce more innovative products to meet the OEM customers’ needs.   

          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 $5.2 million in domestic aftermarket sales for the three months ended June 30, 2006, an increase of $0.5 million, or 10.6% as compared to the same period of last year.  

          Export sales grew by $3.8 million or approximately 74.5% for the three months ended June 30, 2006, as compared to $5.1 million for the same period of 2005. This increase reflects our continued focus on customer service, strong execution, introduction of new products, increased productivity of our expanded contract sales force, more efficient targeted marketing spending on our catalogs, web sites and international trade shows as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in these market segments.  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 three months ended June 30, 2006 increased to $15.5 million from $ 11.6 million for the same period of 2005, a $3.9 million or 33.9 % increase which was consistent with the increase in revenues. 

 **GROSS PROFIT**

          For the three months ended June 30, 2006, gross profit was $4,639,344, as compared to $3,362,372 for the same period of 2005, an increase of $1,276,972 or 38.0%.  Gross margin was 23.1% for the three months ended June 30, 2006, an increase of 0.6% from 22.5% for the same period of 2005.

          The approximately 3.4% appreciation of RMB against the U.S. dollar (USD) had certain negative impact on gross margin.  About 44% of total revenue for the three months ended June 30, 2006 was denominated in USD, while nearly all costs were denominated in RMB.  The impact from the appreciation of the RMB was approximately 1.1% on Gross Margin. 

          We purchase various components and raw materials for use in our manufacturing processes.  The principal raw materials we purchased are aluminum and steel.  For the three months ended June 30, 2006, the market price ofsteel remained relatively stable, but the market price of aluminum increased $425 per ton or 24.3% as compared to the same period of 2005.  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 approximately $0.49 million in the second quarter of 2006.

          Those negative impacts on Gross Margin were largely offset by economies of scale, shift of sales mix and consistent efforts in production technique optimization. In 2006, we took several steps to mitigate the adverseimpact from the increase in raw material cost. For example, from April 2006, we used substitute material of lowercost in our production while maintaining the same quality level of products, thereby reducing material costs byapproximately $0.48 million for the three months ended June 30, 2006. Meanwhile, we replaced the machiningapproach with a molding process, thereby reducing processing steps and materials consumption and increasingproductivity. Furthermore, we shifted the product mix and introduced valve products with higher profit margins. Inaddition, in the process of removing impurities from liquid aluminum, historically we have used the high-temperaturemethod. The adoption of a new technique of using a low-temperature method helped save powerconsumption. 

- 16 -

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**SELLING EXPENSES**

          Selling expenses were $1,376,442 for the three months ended June 30, 2006, as compared to $954,666 for the same period of 2005, an increase of $421,776 or 44.2%. The increase was mainly due to the effect of the following factors: 

          (1)     Decreased transportation expenses. The Company recorded $150,644 of transportation expenses for the three months ended June 30, 2006, as compared to $221,601 for the same period of 2005, a decrease of $70,957 or 32%, partially because of the reduced shipping costs due to the intense competition in the Chinese transportation industry, and partially because of the Company’s selling on ex-works terms to some domestic customers, as well as the efforts to optimize its shipping management and the increase in international sales which are generally made on FOB basis. In the circumstances of rising material costs, while it was difficult to pass such increased costs to customers by raising selling prices, the Company managed to require certain buyers to assume the shipping expenses for their own accounts. 

          (2)     Increased product warranty expenses. The Company recorded $707,535 of product warranty expenses for the three months ended June 30, 2006, as compared to $126,988 for the same period of 2005, an increase of $580,547, mainly attributed to a specific “3-R Warranties” service charge (for repair, replacement and refund) paidto an OEM customer. Due to miscommunication in certain technical parameters for the products, the Company borethe responsibility and reached an agreement with the customer for a one-time indemnification to cover its remedialexpenses. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years. 

**GENERAL AND ADMINISTRATIVE EXPENSES**

          General and administrative expenses were $86,289 for the three months ended June 30, 2006, as compared to $652,039 for the same period of 2005, a decrease of $565,750 or 86.8%. The decrease was mainly due to such factors as below: The stock-based compensation expenses increased by $164,435, and there was no comparable expense in the prior year since the options were issued in 2006. The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary and welfare, travel expenses, supplies and utilities totaling $82,911 as compared to the same period of 2005. The R&D expense, which is included in general and administrative expenses, increased by $ 145,178 as compared to the same period of 2005, as discussed below. The aforementioned increases were largely offset by the reversing of bad debt provision of $ 943,325, which was mainly due to thecollection of a significant portion of account receivables with aging over one year during the six months ended June 30, 2006. In 2005, the Company temporarily extended credit terms to certain OEM customers and aftermarket distributors as our then domestic market strategy. On the other hand, the Company still provided allowances for bad debt consistent with our normal practices. During the three months ended June 30, 2006, those account receivables under the above mentioned extended term arrangements gradually matured and were collected, hence the reversing of bad debt provision.

**RESEARCH AND DEVELOPMENT EXPENSE**

          Research anddevelopment expense was $177,234 for the three months ended June 30, 2006, ascompared to $24,708 for the same period of 2005, an increase of $152,526, as aresult of the Company’s establishment of a team to develop new innovativeproducts.  This increase was primarily due to higher personnel-relatedcosts resulting from an increase in employee headcount in our project team,material consumption and supplies and utilities as we strengthened our internaldevelopment efforts.

**DEPRECIATION AND AMORTIZATION**

          Depreciation and amortization expense increased to $252,001 for the three months ended June 30, 2006, compared with that of $200,653 for the same period of 2005, an increase of $51,348 or 25.6%, as a result of new investment in fixed assets, mainly production equipment and tools.  

**FINANCIAL EXPENSE**

          Financial expense for the three months ended June 30, 2006 increased by $115,552 to $241,900 from $126,348 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 $11.5 million as of June 30, 2006, an increase of $3.3 million from $8.2 million at the end of June 30, 2005.  The funds were used for working capital purposes, as well as new equipment purchases, to support the anticipated increase in revenues in the third quarter of fiscal 2006.

- 17 -

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          Interest rates ranged between 5.220% and 5.580% per annum. 

**OTHER INCOME**

          Other income included $ 68,696 of subsidy income from local governments for the three months ended June 30, 2006. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.

**INCOME TAX**

          There was no income tax expense for the fiscal year ended December 31, 2005 and 2004.  As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005.  Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% for the three years ended December 31, 2006, 2007, and 2008. Income taxes expense of $293,897 was recorded for the second quarter of 2006.

**STOCK—BASED COMPENSATION**

          On January 5, 2006 the Company issued 100,000 warrants for the financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share and a contractualterm of four years. In accordance with the common stock purchase warrant agreement, the warrants will become vested and exercisable immediately on the date thereof. Total deferred stock-based compensation expenses related to 100,000 warrants amounted to $299,052.  This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R).  The amortization of deferred stock-based compensation for these equity arrangements was $ 149,526 as of June 30, 2006.

          On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors.  The contractual term of the options is three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904.  This amount is amortized over the three year vesting period in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R.  The amortization of deferred stock-based compensation for these equity arrangements was $ 14,909 for the three months ended June 30, 2006.  

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

**MINORITY INTEREST**

          Minority interest represents a 10% non-controlling interest in the Joint Venture.  Minority interest in income amounted to $ 264,246 and $156,285 for the three months ended June 30, 2006 and 2005, respectively. 

**FINANCIAL CONDITION**

          **Liquidity and Capital Resources**

          OPERATING - The Company’s operations generated cash of $4,514,845 for the three months ended June 30, 2006, as compared to a negative operating cash flow of $435,727 for the same period of 2005, primarily as a result of the following: 

          1.          For the three months ended June 30, 2006, net income was $2,378,216 as compared to $1,406,561 for the same period of 2005, an increase of $971,655. The increase was primarily as a result of the increase in sales.  

- 18 -

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          2.          For the three months ended June 30, 2006, accounts receivable and trade related notes receivable decreased by $1,249,744 primarily due to the accelerating collection efforts for OEM customers.

          3.          During the three months ended June 30, 2006, inventory increased by $ 239,406, and account payables and notes payables increased by $ 2,191,393. These changes combined with the effects of the increase or decrease in other operating assets and liabilities resulted in an aggregate increase of cash inflows from operations by $ 1,082,625.

          As of June 30, 2006, the Company had cash and cash equivalents of $2,221,050, as compared to cash and cash equivalents of $961,131 as of December 31, 2005.  The Company had working capital of $ 14,951,191as of June 30, 2006, as compared to working capital of $10,571,086 as of December 31, 2005, reflecting current ratios of 1.71:1 and 1.49:1, respectively. 

          INVESTING - During the three months ended June 30, 2006, the Company expended net cash of $ 502,764 in investing activities, including $247,028 for acquisition of property and equipment to support the growth of business and $ 255,736 for investment in construction in progress.  For the three months ended June 30, 2005, the Company utilized $785,524 in investing activities. 

          FINANCING –During the three months ended June 30, 2006, the Company received aggregate bank loans in the amount of $1,375,757 under its credit facilities, and the Company repaid $ 4,419,381 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 on receivable collection.  During the quarter, the Company continued to develop high profit margin new products, as well as adopting steps for further cost saving such as improving material utilization rate.

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

***(******2) Results of operations for the******six months ended June 30, 2006 as compared to the six months ended June 30, 2005.***

**SALES**

|                                      |   | **Six Months ended   June 30, 2006** |   | **Six Months ended   June 30, 2005** |   |
|-------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                      |   |                                      |   |                                      |   |
| Air brake valves & related components |   | $                                    | 28.7   | M                                    |   | 73 | % | $ | 22.5 | M |   | 77 | % |
| Non-valve products                        |   | $                                    | 10.8   | M                                    |   | 27 | % | $ | 6.9 | M |   | 23 | % |
|                                      |   |                                      |        |                                 |        |  |   |  |  |   |  |  |   |
| Total                                     |   | $                                    | 39.5   | M                                    |   | 100 | % | $ | 29.4 | M |   | 100 | % |

          Sales consist of air brake valves and related components manufactured by SORL and sold to domestic original equipment manufacturers (OEM) and aftermarket customers as well as distribution of non-valve auto parts sourced from the Ruili Group. 

          Net sales were $39,536,586 and $29,440,016 for the six months ended June 30, 2006 and 2005, respectively. Net sales for the six months ended June 30, 2006 increased by $10.1 million or 34.3% to $39.5 million, compared with the same period of 2005. The increase in sales was mainly from the international market.  This increase was the result of the Company’s efforts to develop more customers and penetrate these market segments.  

          A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for six months ended June 30, 2006 and 2005 is as follows:

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|                 |   | **Six Months   ended   June 30, 2006** |   | **%**  |   | **Six Months   ended   June 30, 2005** |   | **%** |   |
|----------------------|--------|----------------------------------------|--------|--------|--------|----------------------------------------|--------|-------|--------|
|                 |   |                                        |   |        |   |                                        |   |       |   |
|                 |   | **(U.S.  dollars in   million)**  |   |
| China OEM market     |   | $                                      | 11.8   |   |   | 30                                     | %      | $     | 11.7   |   |   | 40 | % |
| China Aftermarket    |   | $                                      | 12.7   |   |   | 32                                     | %      | $     | 8.4    |   |   | 29 | % |
| International market |   | $                                      | 15.0   |   |   | 38                                     | %      | $     | 9.3    |   |   | 31 | % |
|                 |   |                                        |        |   |        |                                        |   |       |        |   |  |  |   |
| Total                |   | $                                      | 39.5   |   |   | 100                                    | %      | $     | 29.4   |   |   | 100 | % |

          The sluggish Chinese heavy duty truck market has been gradually restoring. The sales for the OEM market increased only $0.1 million or 0.9% for the six months ended June 30, 2006, as compared to the same period of 2005, it is mainly due to the decrease in sales by $ 0.8 million for the first quarter of 2006 as compared to the same period of 2005.  The Company’s strategy is to introduce more innovative products to meet the OEM customers’ needs.   

          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 $12.7 million in domestic aftermarket sales for the six months ended June 30, 2006, an increase of $4.3 million, or 51.2% as compared to the same period of last year.  

          Export sales grew by $5.7 million or approximately 61.3% for the six months ended June 30, 2006, as compared to $9.3 million for the same period of 2005. This increase reflects our continued focus on customer service, strong execution, introduction of new products, increased productivity of our expanded contract sales force, more efficient targeted marketing spending on our catalogs, web sites and international trade shows as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in these market segments.  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 six months ended June 30, 2006 increased to $30.5 million from $ 22.9 million for the same period of 2005, a $7.6 million or 33.4% increase which was consistent with the increase in revenue. 

**GROSS PROFIT**

          For the six months ended June 30, 2006, gross profit was $9,035,102, as compared to $6,582,064 for the same period of 2005, an increase of $2,453,038 or 37.3%.  Gross margin was 22.9% for the six months ended June 30, 2006, an increase of 0.5% from 22.4% for the same period of 2005.

          The approximately 3.4% appreciation of RMB against the U.S. dollar (USD) had certain negative impact on gross margin.  About 38% of total revenue for the six months ended June 30, 2006 was denominated in USD, while nearly all costs were denominated in RMB. 

          We purchase various components and raw materials for use in our manufacturing processes.  The principal raw materials we purchased are aluminum and steel.  For the six months ended June 30, 2006, the market price ofsteel remained relatively stable, but the market price of aluminum increased $425 per ton or 24.3% as compared to the same period of 2005. The rising price of materials had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers.  

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          Those negative impacts on Gross Margin were offset by economies of scale, shift of sales mix and consistent efforts in production technique optimization.  In 2006, we took several steps to mitigate the adverse impact from theincrease in raw material cost. For example, from April 2006, we used substitute material of lower cost in ourproduction while maintaining the same quality level of products, thereby reducing material costs by approximately$0.48 million for the six months ended June 30, 2006. Meanwhile, we replaced the machining approach with amolding process, thereby reducing processing steps and materials consumption and increasing productivity.Furthermore, we shifted the product mix and introduced valve products with higher profit margins.   In addition, 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 methodhelped save power consumption.  

**SELLING EXPENSES**

          Selling expenses were $2,244,458 for the six months ended June 30, 2006, as compared to $ 1,881,755 for the same period of 2005, an increase of $ 362,703 or 19.3%. The increase was mainly due to the effect of the following factors: 

          (1)     Decreased transportation expenses. The Company recorded $371,466 of transportation expenses for the six months ended June 30, 2006, as compared to $584,554 for the same period of 2005, a decrease of $213,088 or 36.5%, partially because of the reduced shipping costs due to the fierce competition in the transportation industry, and partially because of the Company’s selling on ex-works terms to some domestic customers, as well as the efforts to optimize its shipping management and the increase in international sales which are generally made on FOB basis. In the circumstances of rising material costs, while it was difficult to pass such increased costs to customers by raising selling prices, the Company managed to require certain buyers to assume the shipping expenses for their own accounts.

          (2)     Increased product warranty expenses. The Company recorded $883,540 of product warranty expenses for the six months ended June 30, 2006, as compared to $228,521 for the same period of 2005, an increase of $655,019, mainly attributed to a specific “3-R Warranties” service charge (for repair, replacement and refund) paidto an OEM customer. Due to miscommunication in certain technical parameters for the products, the Company borethe responsibility and reached an agreement with the customer for a one-time indemnification to cover its remedialexpenses. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years. 

**GENERAL AND ADMINISTRATIVE EXPENSES**

          General and administrative expenses were $1,183,251 for the six months ended June 30, 2006, as compared to $ 1,206,293 for the same period of 2005, a decrease of $ 23,042 or 1.91%.The decrease was mainly due to such factors as below: The stock-based compensation expenses increased $169,405, and there was no comparable expense in the prior year since the options were issued in 2006. The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary and welfare, travel expenses, supplies and utilities totaling $419,776 as compared to the same period of 2005. The R&D expense, which is included in general and administrative expenses, increased by $ 190,934 as compared to the same period of 2005, as we will discussed below. The aforementioned increases were largely offset by the reversing of bad debt provision during the second quarter of 2006,as discussed above in the section of results of operations for the three months ended June 30, 2006.

**RESEARCH AND DEVELOPMENT EXPENSE**

          Research and development expense was $240,430 for the six months ended June 30, 2006, as compared to $49,496 for the same period of 2005, an increase of $190,934, 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, material consumption and supplies and utilities as we strengthened our internal development efforts.

**DEPRECIATION AND AMORTIZATION**

          Depreciation and amortization expense increased to $516,995 for the six months ended June 30, 2006, compared with that of $ 392,657 for the same period of 2005, an increase of $124,338 or 31.7%, as a result of new investment in fixed assets, mainly production equipment and tools.

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**FINANCIAL EXPENSE**

          Financial expense for the six months ended June 30, 2006 increased by $ 320,647 to $ 507,447, from $186,800 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 $11.5 million as of June 30, 2006, an increase of $3.3 million from $8.2 million at the end of June 30, 2005.  The funds were used for working capital purposes, as well as new equipment purchases, to support the anticipated increase in revenues in the third quarter of fiscal 2006.

          Interest rates ranged between 5.220% and 5.580% per annum. 

**OTHER INCOME**

          Other income included $ 68,696 of subsidy income from local governments for the six months ended June 30, 2006. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required. 

**INCOME TAX**

          There was no income tax expense for the fiscal year ended December 31, 2005 and 2004.  As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005.  Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% commencing the three years ended December 31, 2006, 2007, and 2008. Income taxes expense of $ 587,505 was recorded for the six months ended June 30, 2006.

**MINORITY INTEREST**

          Minority interest represents a 10% non-controlling interest in the Joint Venture.  Minority interest in income amounted to $ 442,441 and $ 323,159 for the six months ended June 30, 2006 and 2005, respectively. 

**STOCK—BASED COMPENSATION**

          On January 5, 2006 the Company issued 100,000 warrants for the financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share and a contractual term offour years. In accordance with the common stock purchase warrant agreement, the warrants became vested and exercisable immediately on the date thereof. Total deferred stock-based compensation expenses related to the 100,000 warrants granted within the six months ended June 30, 2006 amounted to $299,052.  This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R).  The amortization of deferred stock-based compensation for these equity arrangements was $ 149,526 for the six months ended June 30, 2006.

          On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors.  The contractual term of the options is three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904.  This amount is amortized over the three year vesting period in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R.  The amortization of deferred stock-based compensation for these equity arrangements was $ 19,879 for the six months ended June 30, 2006.  

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

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**FINANCIAL CONDITION**

          **Liquidity and Capital Resources**

          OPERATING - The Company’s operations generated cash of $6,467,208 for the six months ended June 30, 2006, as compared to a negative operating cash flow of $ 2,684,291 for the same period of 2005, primarily as a result of the following: 

          1.          For the six months ended June 30, 2006, net income was $3,981,971 as compared to $ 2,908,431 for the same period of 2005, an increase of $1,073,540. The increase was primarily as a result of the increases in sales.  

         2.          During the six months ended June 30, 2006, the increase or decrease of various current operating assets and liabilities resulted in an aggregate increase of cash inflows from operations of $ 2,075,943.

          As of June 30, 2006, the Company had cash and cash equivalents of $2,221,050, as compared to cash and cash equivalents of $961,131 as of December 31, 2005.  The Company had working capital of $ 14,951,191 as of June 30, 2006, as compared to working capital of $10,571,086 as of December 31, 2005, reflecting current ratios of 1.71:1 and 1.49:1, respectively. 

          INVESTING - During the six months ended June 30, 2006, the Company expended net cash of $ 873,580 in investing activities, including $ 529,568 for acquisition of property and equipment to support the growth of business and $ 344,012 for investment in construction in progress.  For the six months ended June 30, 2005, the Company utilized $ 1,072,227 in investing activities.  

          FINANCING – During the six months ended June 30, 2006, the Company received aggregate bank loans in the amount of $7,113,564 under its credit facilities, and the Company repaid $11,778,742 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 on receivable collection.  During the quarter, the Company continued to develop high profit margin new products, as well as adopting steps for further cost saving such as improving material utilization rate.

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

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**Item 3.**          **Controls And Procedures**

          (a)          Evaluation of Disclosure Controls and Procedures.

          The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that the Company files or submits pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

          In conjunction with the close of each fiscal quarter and under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company conducts an update, a review and an evaluation of the effectiveness of the Company’s disclosure controls and procedures. It is the conclusion of the Company’s Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that the Company’s disclosure controls and procedures were effective.

          (b)          Changes in Internal Controls.

          During the period covered by the Quarterly Report on Form 10-Q, there were no changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

**Item 4.**          **Quantitative and Qualitative Disclosures about Market Risk**

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

          With respect to foreign currency exchange rates, the approximately 3.4% appreciation or fluctuation of the RMB against the USD did not have a material adverse effect on the Company’s operations, even though the Company has over one third of its total revenue denominated in USD.  This is because of the relatively small change and our ability to absorb such effect through cost saving approaches.  It is believed that further RMB appreciation against USD, if any, would be on a gradual basis with relatively small adjustments, so as to avoid a drastic impact on the Chinese economy as a whole.  

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

**PART II OTHER INFORMATION**

**Item 1.**          **Legal Proceedings.**

None.

**Item 1A.**        **Risk Factors**

Not applicable.

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**Item 2.**          **Unregistered Sales of Securities and Use of Proceeds.**

None.

**Item 3.**          **Defaults Upon Senior Securities.**

None.

**Item 4.**          **Submission of Matters to a Vote of Security Holders.**

None.

**Item 5.**          **Other Information.**

None.

**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)    | Incorporated   herein by reference from the Registrant’s Form 10-QSB filed with the   Securities and Exchange Commission, File No. 000-11991 on May 28, 2003. |
|   |   |
| (2)    | Incorporated   herein by reference from the Registrant’s Form 8-K Current Report and   amendment thereto as filed with the Securities and Exchange Commission, on   May 24, 2004. |
|   |   |
| (3)    | Filed   herewith. |

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**SIGNATURES**

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

| Dated:  August   8, 2006 |  SORL AUTO   PARTS, INC. |
|------------------------------------|-------------------------------|
|                               |                          |   |
|                               |                          |   |
|                               | By:                           | /s/Xiao Ping   Zhang |
|                               |                          |  |
|                               | Name:                         | Xiao Ping   Zhang |
|                               | Title:                        | Chief   Executive Officer |
|                               |                          |   |
|                               |                          |   |
|                               | By:                           | /s/Zong Yun   Zhou |
|                               |                          |  |
|                               | Name:                         | Zong Yun   Zhou |
|                               | Title:                        | Chief   Financial Officer |
|                               |                          | (Principal   Financial Officer) |

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