UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q


(Mark
One)


x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      for the quarterly period ended March 31,
  2009





 ̈
            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 xNo  ̈




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


Large
      Accelerated Filero
            Accelerated
      Filero
            Non-Accelerated
      Filer oSmaller
      Reporting Companyx





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


Yes  ̈No x





APPLICABLE
ONLY TO CORPORATE ISSUERS





Indicate
the number of shares outstanding of each of the registrant classes of common
equity, as of the latest practicable date:


As of
March 31, 2009 there were 18,279,254shares of Common Stock
outstanding









SORL AUTO
PARTS, INC.


FORM
10-Q


For the
Quarter Ended March 31, 2009





INDEX





PagePART
      I.
                    
                    FINANCIAL INFORMATION (Unaudited)
                    
                    
                    1Item
      1.
                    
                    Financial Statements:
                    
                    
                    1Condensed Consolidated Balance
      Sheets as of March 31, 2009 (Unaudited) and December 31, 2008 (Audited)
                    
                    
                    2Condensed Consolidated Statements
      of Income and Comprehensive Income (Unaudited) for the Three Months Ended
      March 31, 2009 and 2008
                    
                    
                    3Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Three Months
      Ended March 31, 2009 and 2008
                    
                    
                    4Condensed Consolidated Statements
      of Stockholders’ Equity (Unaudited) for the Three monthsended March 31, 2009 and
      2008
                    
                    
                    5Notes to the Condensed
      Consolidated Financial Statements (Unaudited)
                    
                    
                    6Item
      2.
                    
                    Management’s Discussion and
      Analysis or Financial Condition and Results of Operations
                    
                    
                    17Item
      3.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    
                    23Item
      4.
                    
                    Controls and
      Procedures
                    
                    
                    23PART
      II.
                    
                    OTHER INFORMATION
                    
                    
                    23Item
      6.
                    
                    Exhibits
                    
                    
                    23SIGNATURES
                    
                    
                    23




1




SORL
Auto Parts, Inc. and Subsidiaries


Consolidated
Balance Sheets


March
31, 2009 and December 31, 2008





March
      31, 2009
                                          
                                          December
      31, 2008(Unaudited)
                                          
                                          (Audited)AssetsCurrent
      AssetsCash
      and Cash Equivalents
                                          
                                          US$
                                          
                                          
                                          10,746,963
                                          
                                          US$
                                          
                                          
                                          7,795,987Accounts
      Receivable, Net of Provision
                                          
                                          
                                          
                                          
                                          33,743,368
                                          
                                          
                                          
                                          
                                          35,797,824Notes
      Receivable
                                          
                                          
                                          
                                          
                                          7,358,128
                                          
                                          
                                          
                                          
                                          7,536,534Inventory
                                          
                                          
                                          
                                          
                                          16,098,081
                                          
                                          
                                          
                                          
                                          19,105,845Prepayments, including
      $4,894,825 and $187,813 to related parties at March 31, 2009 and December
      31, 2008, respectively.
                                          
                                          
                                          
                                          
                                          5,850,780
                                          
                                          
                                          
                                          
                                          1,013,440Other
      current assets, including $221,585 and $1,906,070 to related parties
      at March 31, 2009 and December 31, 2008, respectively.
                                          
                                          
                                          
                                          
                                          1,645,347
                                          
                                          
                                          
                                          
                                          4,445,778Total
      Current Assets
                                          
                                          
                                          
                                          
                                          75,442,667
                                          
                                          
                                          
                                          
                                          75,695,408Fixed
      AssetsProperty,
      Plant and Equipment
                                          
                                          
                                          
                                          
                                          33,113,414
                                          
                                          
                                          
                                          
                                          32,927,306Less:
      Accumulated Depreciation
                                          
                                          
                                          
                                          
                                          (9,593,264
                                          )
                                          
                                          
                                          
                                          (8,951,886
                                          )Property,
      Plant and Equipment, Net
                                          
                                          
                                          
                                          
                                          23,520,150
                                          
                                          
                                          
                                          
                                          23,975,420Land
      Use Rights, Net
                                          
                                          
                                          
                                          
                                          14,429,767
                                          
                                          
                                          
                                          
                                          14,514,983Other
      AssetsIntangible
      Assets
                                          
                                          
                                          
                                          
                                          161,317
                                          
                                          
                                          
                                          
                                          161,347Less:
      Accumulated Amortization
                                          
                                          
                                          
                                          
                                          (42,838
                                          )
                                          
                                          
                                          
                                          (39,018
                                          )Intangible
      Assets, Net
                                          
                                          
                                          
                                          
                                          118,479
                                          
                                          
                                          
                                          
                                          122,329Deferred
      compensation cost-stock options
                                          
                                          
                                          
                                          
                                          –
                                          
                                          
                                          
                                          
                                          9,935Deferred
      tax assets
                                          
                                          
                                          
                                          
                                          363,047
                                          
                                          
                                          
                                          
                                          189,228Total
      Other Assets
                                          
                                          
                                          
                                          
                                          481,526
                                          
                                          
                                          
                                          
                                          321,492Total
      Assets
                                          
                                          US$
                                          
                                          
                                          113,874,110
                                          
                                          US$
                                          
                                          
                                          114,507,303Liabilities and Shareholders'
      EquityCurrent
      LiabilitiesAccounts
      Payable and Notes Payable
                                          
                                          US$
                                          
                                          
                                          2,769,922
                                          
                                          US$
                                          
                                          
                                          4,623,850Deposit
      Received from Customers
                                          
                                          
                                          
                                          
                                          6,172,697
                                          
                                          
                                          
                                          
                                          6,295,857Income
      tax payable
                                          
                                          
                                          
                                          
                                          481,678
                                          
                                          
                                          
                                          
                                          340,138Accrued
      Expenses
                                          
                                          
                                          
                                          
                                          2,634,749
                                          
                                          
                                          
                                          
                                          2,389,314Other
      Current Liabilities
                                          
                                          
                                          
                                          
                                          363,900
                                          
                                          
                                          
                                          
                                          460,124Total
      Current Liabilities
                                          
                                          
                                          
                                          
                                          12,422,946
                                          
                                          
                                          
                                          
                                          14,109,283Non-Current
      LiabilitiesDeferred
      tax liabilities
                                          
                                          
                                          
                                          
                                          128,167
                                          
                                          
                                          
                                          
                                          106,826Total
      Liabilities
                                          
                                          
                                          
                                          
                                          12,551,113
                                          
                                          
                                          
                                          
                                          14,216,109Stockholders'
      EquityCommon
      Stock - $0.002 Par Value; 50,000,000 authorized, 18,279,254 issued and
      outstanding as ofMarch
      31, 2009 and December 31, 2008
                                          
                                          
                                          
                                          
                                          36,558
                                          
                                          
                                          
                                          
                                          36,558Additional
      Paid In Capital
                                          
                                          
                                          
                                          
                                          37,498,452
                                          
                                          
                                          
                                          
                                          37,498,452Reserves
                                          
                                          
                                          
                                          
                                          3,221,571
                                          
                                          
                                          
                                          
                                          3,126,086Accumulated
      other comprehensive income
                                          
                                          
                                          
                                          
                                          10,830,966
                                          
                                          
                                          
                                          
                                          10,848,248Retained
      Earnings
                                          
                                          
                                          
                                          
                                          39,624,110
                                          
                                          
                                          
                                          
                                          38,774,684Total
      SORL Auto Parts, Inc. Stockholders' Equity
                                          
                                          
                                          
                                          
                                          91,211,657
                                          
                                          
                                          
                                          
                                          90,284,028Non-controlling
      Interest In Subsidiaries
                                          
                                          
                                          
                                          
                                          10,111,340
                                          
                                          
                                          
                                          
                                          10,007,166Total
      Equity
                                          
                                          
                                          
                                          
                                          101,322,997
                                          
                                          
                                          
                                          
                                          100,291,194Total
      Liabilities and Stockholders' Equity
                                          
                                          US$
                                          
                                          
                                          113,874,110
                                          
                                          US$
                                          
                                          
                                          114,507,303





The
accompanying notes are an integral part of these financial
statements




2




SORL
Auto Parts, Inc. and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income(Unaudited)


For
The Three Months Ended on March 31, 2009 and 2008





Three
      Months Ended March 31,2009
                                          
                                          
                                          2008Sales
                                          
                                          US$
                                          
                                          
                                          20,243,738
                                          
                                          
                                          
                                          30,658,442Include:
      sales to related parties
                                          
                                          
                                          
                                          
                                          137,432
                                          
                                          
                                          
                                          817,918Cost
      of Sales
                                          
                                          
                                          
                                          
                                          14,730,925
                                          
                                          
                                          
                                          22,016,581Gross
      Profit
                                          
                                          
                                          
                                          
                                          5,512,813
                                          
                                          
                                          
                                          8,641,861Expenses:Selling
      and Distribution Expenses
                                          
                                          
                                          
                                          
                                          1,317,734
                                          
                                          
                                          
                                          1,839,275General
      and Administrative Expenses
                                          
                                          
                                          
                                          
                                          2,792,749
                                          
                                          
                                          
                                          1,976,201Financial
      Expenses
                                          
                                          
                                          
                                          
                                          28,962
                                          
                                          
                                          
                                          369,676Total
      Expenses
                                          
                                          
                                          
                                          
                                          4,139,445
                                          
                                          
                                          
                                          4,185,152Operating
      Income
                                          
                                          
                                          
                                          
                                          1,373,368
                                          
                                          
                                          
                                          4,456,709Other
      Income
                                          
                                          
                                          
                                          
                                          39,217
                                          
                                          
                                          
                                          111,078Non-Operating
      Expenses
                                          
                                          
                                          
                                          
                                          (3,614
                                          )
                                          
                                          
                                          (79,178
                                          )Income
      Before Provision for Income Taxes
                                          
                                          
                                          
                                          
                                          1,408,971
                                          
                                          
                                          
                                          4,488,609Provision
      for Income Taxes
                                          
                                          
                                          
                                          
                                          357,966
                                          
                                          
                                          
                                          563,474Net
      Income
                                          
                                          US$
                                          
                                          
                                          1,051,005
                                          
                                          
                                          
                                          3,925,135Other
      Comprehensive Income (Loss)- Foreign Currency Translation
      Adjustment
                                          
                                          
                                          
                                          
                                          (19,202
                                          )
                                          
                                          
                                          3,359,890Total
      Comprehensive Income
                                          
                                          
                                          
                                          
                                          1,031,803
                                          
                                          
                                          
                                          7,285,025Less:Net
      income Attributable to Non-controlling Interest In
      Subsidiaries
                                          
                                          
                                          
                                          
                                          106,094
                                          
                                          
                                          
                                          394,019Other
      Comprehensive Income (Loss) Attributable to Non-controlling Interest's
      Share
                                          
                                          
                                          
                                          
                                          (1,920
                                          )
                                          
                                          
                                          335,989Total
      Comprehensive Income (Loss) Attributable to Non-controlling Interest's
      Share
                                          
                                          
                                          
                                          
                                          104,174
                                          
                                          
                                          
                                          730,008Net
      income Attributable to Stockholders
                                          
                                          
                                          
                                          
                                          944,911
                                          
                                          
                                          
                                          3,531,116Other
      Comprehensive Income (Loss) Attributable to Stockholders
                                          
                                          
                                          
                                          
                                          (17,282
                                          )
                                          
                                          
                                          (3,023,901
                                          )Total
      Comprehensive Income (Loss) Attributable to Stockholders
                                          
                                          
                                          
                                          
                                          927,629
                                          
                                          
                                          
                                          6,555,017Weighted
      average common share - Basic
                                          
                                          
                                          
                                          
                                          18,279,254
                                          
                                          
                                          
                                          18,279,254Weighted
      average common share - Diluted
                                          
                                          
                                          
                                          
                                          18,279,254
                                          
                                          
                                          
                                          18,290,126EPS
      - Basic
                                          
                                          
                                          
                                          
                                          0.05
                                          
                                          
                                          
                                          0.19EPS
      - Diluted
                                          
                                          
                                          
                                          
                                          0.05
                                          
                                          
                                          
                                          0.19





The
accompanying notes are an integral part of these financial
statements




3




SORL
Auto Parts, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows(Unaudited)


For
The Three Months Ended on March 31, 2009 and 2008





Three
      Months Ended March 31,2009
                                  
                                  
                                  2008Cash
      Flows from Operating ActivitiesNet
      Income
                                  
                                  US$
                                  
                                  
                                  944,911
                                  
                                  
                                  
                                  3,531,116Adjustments
      to reconcile net income to net cash from
      operating activities:Non-controlling
      Interest In Subsidiaries
                                  
                                  
                                  
                                  
                                  106,094
                                  
                                  
                                  
                                  394,019Bad
      Debt Expense
                                  
                                  
                                  
                                  
                                  550,156
                                  
                                  
                                  
                                  10,832Depreciation
      and Amortization
                                  
                                  
                                  
                                  
                                  729,433
                                  
                                  
                                  
                                  654,555Stock-Based
      Compensation Expense
                                  
                                  
                                  
                                  
                                  9,935
                                  
                                  
                                  
                                  14,909Changes
      in Assets and Liabilities:Account
      Receivables
                                  
                                  
                                  
                                  
                                  1,504,731
                                  
                                  
                                  
                                  (3,949,778
                                  )Notes
      Receivables
                                  
                                  
                                  
                                  
                                  176,990
                                  
                                  
                                  
                                  (628,857
                                  )Other
      Currents Assets
                                  
                                  
                                  
                                  
                                  2,792,782
                                  
                                  
                                  
                                  2,347,575Inventory
                                  
                                  
                                  
                                  
                                  3,004,417
                                  
                                  
                                  
                                  (2,477,972
                                  )Prepayments
                                  
                                  
                                  
                                  
                                  (4,837,993
                                  )
                                  
                                  
                                  (1,116,827
                                  )Deferred
      tax assets
                                  
                                  
                                  
                                  
                                  (173,871
                                  )
                                  
                                  
                                  –Accounts
      Payable and Notes Payable
                                  
                                  
                                  
                                  
                                  (1,853,226
                                  )
                                  
                                  
                                  1,858,290Income
      Tax Payable
                                  
                                  
                                  
                                  
                                  141,540
                                  
                                  
                                  
                                  139,904Deposits
      Received from Customers
                                  
                                  
                                  
                                  
                                  (121,974
                                  )
                                  
                                  
                                  482,648Other
      Current Liabilities and Accrued Expenses
                                  
                                  
                                  
                                  
                                  149,836
                                  
                                  
                                  
                                  (17,038
                                  )Deferred
      tax liabilities
                                  
                                  
                                  
                                  
                                  21,363
                                  
                                  
                                  –Net
      Cash Flows from Operating Activities
                                  
                                  
                                  
                                  
                                  3,145,124
                                  
                                  
                                  
                                  1,243,376Cash
      Flows from Investing ActivitiesAcquisition
      of Property and Equipment
                                  
                                  
                                  
                                  
                                  (226,183
                                  )
                                  
                                  
                                  (557,391
                                  )Sales
      proceeds of disposal of fixed assets
                                  
                                  
                                  
                                  
                                  33,795
                                  
                                  
                                  
                                  –Investment
      in Intangible Assets
                                  
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (628
                                  )Net
      Cash Flows from Investing Activities
                                  
                                  
                                  
                                  
                                  (192,388
                                  )
                                  
                                  
                                  (558,019
                                  )Cash
      Flows from Financing ActivitiesProceeds
      from (Repayment of) Bank Loans
                                  
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (2,432,466
                                  )Net
      Cash flows from Financing Activities
                                  
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  (2,432,466
                                  )Effects
      on changes in foreign exchange rate
                                  
                                  
                                  
                                  
                                  (1,760
                                  )
                                  
                                  
                                  139,708Net
      Change in Cash and Cash Equivalents
                                  
                                  
                                  
                                  
                                  2,950,976
                                  
                                  
                                  
                                  (1,607,401
                                  )Cash
      and Cash Equivalents- Beginning of the period
                                  
                                  
                                  
                                  
                                  7,795,987
                                  
                                  
                                  
                                  4,340,211Cash
      and cash Equivalents - End of the period
                                  
                                  US$
                                  
                                  
                                  10,746,963
                                  
                                  
                                  
                                  2,732,810Supplemental
      Cash Flow Disclosures:Interest
      Paid
                                  
                                  
                                  
                                  
                                  13,736
                                  
                                  
                                  
                                  26,044Tax
      Paid
                                  
                                  
                                  
                                  
                                  368,857
                                  
                                  
                                  
                                  1,883,375





The
accompanying notes are an integral part of these financial
statements




4




SORL
Auto Parts, Inc. and Subsidiaries


Consolidated
Statements of Changes in Stockholders' Equity


For
The Three Months Ended on
March 31, 2009 and 2008





Additional
                            
                            
                            
                            
                            
                            Retained
                            
                            
                            Accumu. Other
                            
                            
                            Total SORL Auto
                              Parts, Inc.Number
                            
                            
                            Common
                            
                            
                            Paid-in
                            
                            
                            
                            
                            
                            Earnings
                            
                            
                            Comprehensive
                            
                            
                            Stockholders'
                            
                            
                            Non-controlling
                            
                            
                            Totalof Share
                            
                            
                            Stock
                            
                            
                            Capital
                            
                            
                            Reserves
                            
                            
                            (Deficit)
                            
                            
                            Income
                            
                            
                            Equity
                            
                            
                            Interest
                            
                            
                            EquityBeginning
      Balance - January 1, 2008
                            
                            
                            18,279,254
                            
                            
                            
                            36,558
                            
                            
                            
                            37,498,452
                            
                            
                            
                            1,882,979
                            
                            
                            
                            27,646,931
                            
                            
                            
                            5,432,189
                            
                            
                            
                            72,497,109
                            
                            
                            
                            8,024,152
                            
                            
                            
                            80,521,261Net
      Income
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            3,531,116
                            
                            
                            
                            –
                            
                            
                            
                            3,531,116
                            
                            
                            
                            394,019
                            
                            
                            
                            3,925,135Other
      Comprehensive Income(Loss)
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            3,023,901
                            
                            
                            
                            3,023,901
                            
                            
                            
                            335,989
                            
                            
                            
                            3,359,890Transfer
      to reserve
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            354,618
                            
                            
                            
                            (354,618
                            )
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –Ending
      Balance - March 31, 2008
                            
                            
                            18,279,254
                            
                            
                            
                            36,558
                            
                            
                            
                            37,498,452
                            
                            
                            
                            2,237,597
                            
                            
                            
                            30,823,429
                            
                            
                            
                            8,456,090
                            
                            
                            
                            79,052,126
                            
                            
                            
                            8,754,160
                            
                            
                            
                            87,806,286Beginning
      Balance - January 1, 2009
                            
                            
                            18,279,254
                            
                            
                            
                            36,558
                            
                            
                            
                            37,498,452
                            
                            
                            
                            3,126,086
                            
                            
                            
                            38,774,684
                            
                            
                            
                            10,848,248
                            
                            
                            
                            90,284,028
                            
                            
                            
                            10,007,166
                            
                            
                            
                            100,291,194Net
      Income
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            944,911
                            
                            
                            
                            –
                            
                            
                            
                            944,911
                            
                            
                            
                            106,094
                            
                            
                            
                            1,051,005Other
      Comprehensive Income(Loss)
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            (17,282
                            )
                            
                            
                            (17,282
                            )
                            
                            
                            (1,920
                            )
                            
                            
                            (19,202
                            )Transfer
      to reserve
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            95,485
                            
                            
                            
                            (95,485
                            )
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –Ending
      Balance - March 31, 2009
                            
                            
                            18,279,254
                            
                            
                            
                            36,558
                            
                            
                            
                            37,498,452
                            
                            
                            
                            3,221,571
                            
                            
                            
                            39,624,110
                            
                            
                            
                            10,830,966
                            
                            
                            
                            91,211,657
                            
                            
                            
                            10,111,340
                            
                            
                            
                            101,322,997





The
accompanying notes are an integral part of these financial
statements




5





NOTES
TO UNAUDITED 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 1,000 different specifications.





NOTE
B - BASIS OF PRESENTATION





The
condensed consolidated financial statements include the accounts of the Company
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 as permitted by the rules and regulations of the United States
Securities and Exchange Commission, although the Company believes that the
disclosures contained in this report 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 condensed unaudited interim consolidated financial statements
reflect all adjustments of a normal and recurring nature which are, in the
opinion of management, necessary to present fairly the financial position,
results of operations and cash flows of the Company for the interim periods
presented. The results of operations for these periods are not necessarily
comparable to, or indicative of, results of any other interim period or for the
fiscal year taken as a whole.





NOTE
C- RECENTLY ISSUED FINANCIAL STANDARDS





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





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





In
December 2007, the FASB issued FASB 160 "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No.51" of which the
objective is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards by
requiring all entities to report noncontrolling (minority) interests in
subsidiaries in the same way - as an entity in the consolidated financial
statements. Moreover, Statement 160 eliminates the diversity that currently
exists in accounting for transactions between an entity and noncontrolling
interests by requiring they be treated as equity transactions.




6


Both FASB
141(R) and FASB 160 are effective for fiscal years beginning after December 15,
2008. The adoption of these standards has not had any significant impact on
its consolidated financial statements.





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





In March
2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments and
Hedging Activities- an amendment of FASB statement No.133.SFAS No.161 requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. SFAS No.161 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after November 15, 2008, with early application encouraged. As such,
the Company is required to adopt these provisions at the beginning of the fiscal
year ending December 31, 2009. The adoption of SFAS No. 161 has not had
significant impact on its consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP in the United States. SFAS 162 is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company does not believe that the
adoption of SFAS 162 will have any impact on its consolidated
financial statements.





Also in
May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60" (“SFAS 163”).
SFAS 163 interprets Statement 60 and amends existing accounting pronouncements
to clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ended December 31,
2009. The adoption of SFAS 163 has not had any impact on its consolidated
financial statements.




In June
2008, the FASB Task Force reached a consensus-for-exposure that an entity should
determine whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock first by evaluating the instrument’s contingent
exercise provisions, if any, and then by evaluating the instrument’s settlement
provisions. Issue No. 07-5 (EITF 07-5), "Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity's Own Stock" is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. The adoption of EITF 07-5 has not had any significant impact on its
consolidated financial statements.




NOTE
D - RELATED PARTY TRANSACTIONS





The
Company continued to purchase non-valve automotive products, components for
valve parts and packaging materials from the Ruili Group Co., Ltd. The Ruili
Group Co., Ltd. is the minority shareholder of the Joint Venture and is
controlled by the Zhang family, who is also the controlling party of the
Company.




7




The
following related party transactions are reported for the fiscal quarter ended
March 31, 2009 and 2008:





Three
      Months Ended March 31,2009
                                
                                
                                2008PURCHASES
      FROM :Ruili
      Group Co., Ltd.
                                
                                $
                                2,697,016
                                
                                
                                $
                                8,504,144Total
      Purchases
                                
                                $
                                2,697,016
                                
                                
                                $
                                8,504,144SALES
      TO:Ruili
      Group Co., Ltd.
                                
                                $
                                137,432
                                
                                
                                $
                                817,918Total
      Sales
                                
                                $
                                137,432
                                
                                
                                $
                                817,918





The total
purchases from Ruili Group during the first quarter ended March 31,
2009 consisted of approximately $2.4 million of finished products of
non-valve auto parts and approximately $0.3 million of packaging
materials.





March
      31,
                            
                            
                            December
      31,2009
                            
                            
                            2008PREPAYMENTRuili
      Group Co., Ltd.
                            
                            $
                            4,894,825
                            
                            
                            $
                            187,813Total
                            
                            $
                            4,894,825
                            
                            
                            $
                            187,813OTHER
      ACCOUNTS RECEIVABLERuili
      Group Co., Ltd.
                            
                            $
                            221,585
                            
                            
                            $
                            1,906,070Total
                            
                            $
                            221,585
                            
                            
                            $
                            1,906,070





NOTE
E - ACCOUNTS RECEIVABLE




The
changes in the allowance for doubtful accounts at March 31, 2009 and December
31, 2008 were summarized as follows:




March
      31,
                                              
                                              December
      31,2009
                                              
                                              2008Beginning
      balance
                                              $
                                              
                                              24,997
                                              
                                              $
                                              
                                              27,987Add:
      Increase to allowance
                                              
                                              
                                              543,056
                                              
                                              
                                              
                                              (2,990
                                              )Ending
      balance
                                              $
                                              
                                              568,053
                                              
                                              $
                                              
                                              24,997
  March
      31,
                                                
                                                December
      31,2009
                                                
                                                2008Accounts
      receivable
                                                $
                                                
                                                34,311,421
                                                
                                                $
                                                
                                                35,822,821Less:
      allowance for doubtful accounts
                                                
                                                
                                                (568,053
                                                )
                                                
                                                
                                                (24,997
                                                )Account
      receivable balance, net
                                                $
                                                
                                                33,743,368
                                                
                                                $
                                                
                                                35,797,824


8


NOTE
F - INVENTORIES




On March
31, 2009 and December 31, 2008, inventories consisted of the
following:




March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Raw
      Material
                      
                      $
                      2,021,563
                      
                      
                      $
                      2,705,224Work
      in process
                      
                      
                      5,965,398
                      
                      
                      
                      8,074,488Finished
      Goods
                      
                      
                      8,111,120
                      
                      
                      
                      8,326,133Total
      Inventory
                      
                      $
                      16,098,081
                      
                      
                      $
                      19,105,845





NOTE
G - PROPERTY, PLANT AND EQUIPMENT




Property,
plant and equipment consisted of the following, on March 31, 2009 and
December 31, 2008:




March
      31,
                            
                            
                            December
      31,2009
                            
                            
                            2008Machinery
                            
                            $
                            22,217,586
                            
                            
                            $
                            22,085,672Molds
                            
                            
                            1,275,319
                            
                            
                            
                            1,275,561Office
      equipment
                            
                            
                            620,692
                            
                            
                            
                            618,403Vehicle
                            
                            
                            1,026,086
                            
                            
                            
                            972,422Building
                            
                            
                            7,973,731
                            
                            
                            
                            7,975,248Sub-Total
                            
                            
                            33,113,414
                            
                            
                            
                            32,927,306Less:
      Accumulated depreciation
                            
                            
                            (9,593,264
                            )
                            
                            
                            (8,951,886
                            )Fixed
      Assets, net
                            
                            $
                            23,520,150
                            
                            
                            $
                            23,975,420




Depreciation
expense charged to operations was $643,142 and $573,927 for the first quarter
ended March 31, 2009 and 2008, respectively.




NOTE
H- LAND USE RIGHTS




March
      31,
                                
                                December
      31,2009
                                
                                2008Cost:
                                $
                                
                                14,924,502
                                
                                
                                $
                                14,927,340Less:
      Accumulated amortization:
                                
                                
                                494,735
                                
                                
                                
                                412,357Land
      use rights, net
                                $
                                
                                14,429,767
                                
                                
                                $
                                14,514,983




9


According
to the law of China, the government owns all the land in China. Companies and
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. The company purchased the land use
rights from Ruili Group for approximately $13.9 million on September 28, 2007.
The Company has applied to obtain the land use right certificate, but has
not yet obtained the certificate. Amortization expenses were $82,464 and $78,704
for the first quarter ended March 31, 2009 and 2008, respectively.




NOTE
I - INTANGIBLE ASSETS




Intangible
assets owned by the Company included patent technology and management software
licenses. Gross intangible assets were $161,317, less accumulated amortization
of $42,838 for net intangible assets of $118,479 as of March 31, 2009. Gross
intangible assets were $161,347, less accumulated amortization of
$39,018 for net intangible assets of $122,329 as of December 31, 2008.
Amortization expenses were $3,827and $1,925 for the first quarter ended March 31, 2009 and 2008
respectively. Future estimated amortization expense is as follows:




2009
                            
                            2010
                            
                            2011
                            
                            2012
                            
                            2013
                            
                            Thereafter$
                            11,481
                            
                            $
                            15,308
                            
                            $
                            15,308
                            
                            $
                            15,308
                            
                            $
                            15,308
                            
                            $
                            45,766




NOTE
J - PREPAYMENT




Prepayment,
including related party transactions described above in Note D, consisted of the
following as of March 31, 2009 and December 31, 2008:




March
      31,
                          
                          December
      31,2009
                          
                          2008Raw
      material suppliers
                          
                          $
                          5,313,723
                          
                          
                          $
                          878,374Equipment
      purchase
                          
                          
                          537,057
                          
                          
                          
                          135,066Total
      prepayment
                          
                          $
                          5,850,780
                          
                          
                          $
                          1,013,440




The
Company has a contract with the related party Ruili Group in the amount of 90
million RMB, or about $13.1 million USD, for the period from January 1, 2009 to
December 31, 2009, to purchase auto parts and materials.




10




NOTE
K - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES





Deferred
tax assets consisted of the following as of March 31, 2009




31-Mar-09
                                                                                  
                                                                                  
                                                                                  31-Dec-08Deferred
      tax assets - currentProvision
                                                                                  
                                                                                  $
                                                                                  141,515
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,990Warranty
                                                                                  
                                                                                  
                                                                                  333,400
                                                                                  
                                                                                  
                                                                                  
                                                                                  277,892Deferred
      tax assets
                                                                                  
                                                                                  
                                                                                  474,915
                                                                                  
                                                                                  
                                                                                  
                                                                                  281,883Valuation
      allowance
                                                                                  
                                                                                  
                                                                                  ―
                                                                                  
                                                                                  
                                                                                  
                                                                                  ―Net
      deferred tax assets - current
                                                                                  
                                                                                  $
                                                                                  474,915
                                                                                  
                                                                                  
                                                                                  $
                                                                                  281,883Deferred
      tax liabilities - currentRevenue
                                                                                  
                                                                                  $
                                                                                  111,868
                                                                                  
                                                                                  
                                                                                  $
                                                                                  92,655Deferred
      tax liabilities - current
                                                                                  
                                                                                  
                                                                                  111,868
                                                                                  
                                                                                  
                                                                                  
                                                                                  92,655Net
      deferred tax assets - current
                                                                                  
                                                                                  
                                                                                  363,047
                                                                                  
                                                                                  
                                                                                  
                                                                                  189,228Deferred
      tax liabilities - non-currentLand
      use right
                                                                                  
                                                                                  
                                                                                  128,167
                                                                                  
                                                                                  
                                                                                  
                                                                                  106,826Deferred
      tax liabilities - non-current
                                                                                  
                                                                                  
                                                                                  128,167
                                                                                  
                                                                                  
                                                                                  
                                                                                  106,826




Deferred
taxation is calculated under the liability method in respect of taxation effect
arising from all timing differences, which are expected with reasonable
probability to realize in the foreseeable future. The Company and its
subsidiaries do not have income tax liabilities in U.S. and Hong Kong as the
Company had no taxable income for the reporting period. The Company’s subsidiary
registered in the PRC is subject to income taxes within the PRC at the
applicable tax rate.




NOTE
L - ACCRUED EXPENSES




Accrued
expenses consisted of the following as of March 31, 2009 and December 31,
2008:




March
      31,
                                            
                                            December
      31,2009
                                            
                                            2008Accrued
      payroll
                                            $
                                            
                                            554,074
                                            
                                            $
                                            
                                            617,522Other
      accrued expenses
                                            
                                            
                                            2,080,675
                                            
                                            
                                            
                                            1,771,792Total
      accrued expenses
                                            $
                                            
                                            2,634,749
                                            
                                            $
                                            
                                            2,389,314





11




NOTE
M – RESERVE




The
reserve funds are comprised of the following:




March
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008Statutory
      surplus reserve fund
                        
                        $
                        3,221,571
                        
                        
                        $
                        3,126,086Total
                        
                        $
                        3,221,571
                        
                        
                        $
                        3,126,086





Pursuant
to the relevant laws and regulations of Sino-foreign joint venture enterprises,
the profits of the Company's subsidiary, which are based on their PRC statutory
financial statements, are available for distribution in the form of cash
dividends after they have satisfied all the PRC tax liabilities, provided for
losses in previous years, and made appropriations to reserve funds, as
determined at the discretion of the board of directors in accordance with PRC
accounting standards and regulations.





As
stipulated by the relevant laws and regulations for enterprises operating in the
PRC, the Company's Sino-foreign joint venture is required to make annual
appropriations to the statutory surplus funds. In accordance with the relevant
PRC regulations and the articles of association of the
respective companies, the Joint Venture is required to allocate a certain
percentage of its profits after taxation, as determined in accordance with PRC
accounting standards applicable to the Company, to the statutory surplus reserve
until such reserve reaches 50% of the registered capital of the
Company.





Net
income as reported in the US GAAP financial statements differs from that as
reported in the PRC statutory financial statements. In accordance with the
relevant laws and regulations in the PRC, the profits available for distribution
are based on the statutory financial statements. If the Joint Venture has
foreign currency available after meeting its operational needs, the Joint
Venture may make its profit distributions in foreign currency to the extent
foreign currency is available. Otherwise, it is necessary to obtain approval and
convert such distributions at an authorized bank. The reserve fund consists of
retained earnings which has been allocated to the statutory reserve
fund.




NOTE
N - 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
Ventures, the Joint Venture was exempt from income taxes in the PRC for each of
the fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture
was entitled to a 50% income tax deduction for each of the three years ended
December 31, 2008. Thus, the Joint Venture was exempted from PRC income tax in
both fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st January
2008, China’s enterprises are generally subject to a PRC income tax rate of
25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.




The
Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of the
People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture was eligible for additional preferential tax
treatment for the years 2007 and 2008. In those years, the Joint Venture
was entitled to an income tax exemption on all pre-tax income generated by the
company above its pre-tax income generated in the fiscal year 2006. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006 pre-tax
income.  In addition, the Joint Venture was entitled to a PRC tax
credit equal to 40% of the additional investment in the Joint Venture used to
purchase eligible domestic equipment, subject to certain
limitations.




12




The
reconciliation of the effective income tax rate of the Joint Venture to the
statutory income tax rate in the PRC for the first quarter ended March 31, 2009
is as follows:





Statutory
      tax rate
                      
                      
                      25.0
                      %Tax
      Tax holidays and concessions
                      
                      
                      —EffeEffective
      tax rate
                      
                      
                      25.0
                      %





Income
taxes are calculated on a separate entity basis. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes Significant components of the Company’s net deferred tax
assets and liabilities are approximately as follows. No valuation allowance is
deemed necessary. There currently is no tax benefit or burden recorded for
the United States or Hong Kong. The provisions for income taxes for
the first quarter ended March 31, 2009 and 2008, respectively, are summarized as
follows:




2009
                      
                      
                      2008PRC
      only:Current
                      
                      $
                      510,475
                      
                      
                      $
                      563,474Deferred
                      
                      
                      (152,508
                      )
                      
                      
                      —Total
                      
                      $
                      357,967
                      
                      
                      $
                      563,474





The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As the result of the
implementation of the FASB Interpretation No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes – In Interpretation of FASB Statement No. 109, the
Company recognized no material adjustments to unrecognized tax benefits. At the
adoption date of January 1, 2007 and as of March 31, 2009 and 2008, the Company
has no unrecognized tax benefits. The PRC regulators normally have three years
that they can go back to examine corporate tax returns.





NOTE
O - LEASES





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





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




2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                ThereafterBuildings
                
                $
                210,882
                
                
                $
                281,167
                
                
                $
                281,167
                
                
                $
                68,219
                
                
                $
                —Total
                
                $
                210,882
                
                
                $
                281,167
                
                
                $
                281,167
                
                
                $
                68,219
                
                
                $
                —





NOTE
P - ADVERTISING COSTS





Advertising
costs were $0 and $559 for the first quarter ended March 31, 2009 and 2008,
respectively.





NOTE
Q - RESEARCH AND DEVELOPMENT EXPENSE





Research
and development costs are expensed as incurred and were $766,451 and $469,298
for the first quarter ended March 31, 2009 and 2008, respectively.




13




NOTE
R - WARRANTY CLAIMS





Warranty
claims accrued were $266,288 and $447,359 for the first quarter ended March
31, 2009 and 2008, respectively. The change in accrued warranty expenses or
the first quarter ended March 31, 2009 was as follows:





Beginning
      balance at Jan 01, 2009
                    
                    $
                    1,111,569Accrued
      during the first quarter ended March 31, 2009:
                    
                    $
                    266,288Less:
      Actual Paid during the first quarter ended March 31, 2009:
                    
                    $
                    44,256Ending
      balance at March 31, 2009
                    
                    $
                    1,333,601




NOTE
S - STOCK COMPENSATION PLAN





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





Pursuant
to the Plan, the Company issued 60,000 options with an exercise price of $4.79
per share on March 1, 2006. The 60,000 options became fully vested and
exercisable on March 1, 2006, and expired on March 1,
2009.





The
Company accounts for stock-based compensation in accordance with SFAS No. 123R,
“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
                                
                                
                                75.75
                                %Risk-Free
      Interest Rate
                                
                                
                                4.59
                                %Contractual
      Term
                                
                                3
      yearsStock
      Price at Date of Grant
                                
                                $
                                4.79Exercise
      Price
                                
                                $
                                4.79





The
amortization of deferred stock-based compensation for these equity arrangements
was $9,935 for the quarter ended March 31, 2009 and as of March 31, 2009
all expenses related to the 60,000 options issued had been fully
amortized.




14




A summary
of option activity under the Plan during the quarter ended March 31, 2009 and
changes during the quarter ended March 31, 2009 is as follows:





Options
                                  
                                  Weighted
                                    Average
                                    Exercise
                                    Price
                                  
                                  Weighted
                                    Average
                                    Remaining
                                    Contractual
                                    Term
                                  
                                  Aggregate
                                    Intrinsic
                                    ValueJanuary
      1, 2006
                                  —
                                  
                                  $
                                  —
                                  
                                  —
                                  
                                  $
                                  —Granted
      March 1, 2006
                                  60,000
                                  
                                  
                                  4.79
                                  
                                  3Years
                                  
                                  
                                  —Exercised
                                  —
                                  
                                  
                                  —
                                  
                                  —
                                  
                                  
                                  —Forfeited
                                  —
                                  
                                  
                                  —
                                  
                                  —
                                  
                                  
                                  —Expired
                                  60,000
                                  
                                  
                                  4.79
                                  
                                  —
                                  
                                  
                                  —Outstanding
      at March 31, 2009
                                  —
                                  
                                  $
                                  —
                                  
                                  —
                                  
                                  $
                                  —Exercisable
      at March 31, 2009
                                  —
                                  
                                  $
                                  —
                                  
                                  —
                                  
                                  $
                                  —





(ii).
Subject to all the terms and provisions of the 2005 Stock Compensation Plan, on
June 20, 2007, the Company granted to its previous senior manager of investor
relations, David Ming He, options to purchase 4,128 shares of its common stocks
with an exercise price of $7.25 per share. The option became vested and
exercisable immediately on the date thereof and will expire, unless
exercised, on June 20, 2010.





Number of Shares
                    
                    % of Shares
                      Issued
                    
                    Initial Vesting
                      Date4,128
                    
                    
                    100
                    %
                    June
      20, 2007





The
Company accounts for stock-based compensation in accordance with SFAS No. 123R ,
“Share-Based Payment.” The fair value of each option 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
                            
                            
                            66.70
                            %Risk-Free
      Interest Rate
                            
                            
                            5.14
                            %Contractual
      Term
                            
                            3
      yearsStock
      Price at Date of Grant
                            
                            $
                            7.09Exercise
      Price
                            
                            $
                            7.25





Total
stock-based compensation expenses related to the 4,128 stock options granted
amounted to $23,201. This amount was charged to General and Administrative
Expense during 2007.




15




A summary
of option activity under the Plan as of March 31, 2009 and changes during the
quarter ended March 31, 2009 is as follows:




Options
                                      
                                      Weighted
                                        Average
                                        Exercise
                                        Price
                                      
                                      Weighted
                                        Average
                                        Remaining
                                        Contractual
                                        Term
                                      
                                      Aggregate
                                        Intrinsic
                                        ValueJanuary
      1, 2007
                                      —
                                      
                                      $
                                      —
                                      
                                      —
                                      
                                      $
                                      —Granted
      June 20, 2007
                                      4,128
                                      
                                      $
                                      7.25
                                      
                                      3Years
                                      
                                      
                                      —Exercised
                                      —
                                      
                                      
                                      —
                                      
                                      —
                                      
                                      
                                      —Forfeited
                                      —
                                      
                                      
                                      —
                                      
                                      —
                                      
                                      
                                      —Outstanding
      at March 31, 2009
                                      4,128
                                      
                                      $
                                      7.25
                                      
                                      1.3Years
                                      
                                      $
                                      —Exercisable
      at March 31, 2009
                                      4,128
                                      
                                      $
                                      7.25
                                      
                                      1.3Years
                                      
                                      $
                                      —





(2) On
January 5, 2006, the Company issued 100,000 warrants for financial services to
be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
exercise price of $6.25 per share. In accordance with the common stock purchase
warrant agreement, the warrants became vested and exercisable immediately on the
date thereof. As set forth in the agreement, the Company would retain Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of
January 5, 2006. The agreement has expired, and unless exercised, the warrants
will expire on January 5, 2010.




Number of Shares
                    
                    % of Shares
                      Issued
                    
                    Initial Vesting
                      Date100,000
                    
                    
                    100
                    %
                    January
      5, 2006





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




Dividend
      Yield
                            
                            
                            0.00
                            %Expected
      Volatility
                            
                            
                            77.62
                            %Risk-Free
      Interest Rate
                            
                            
                            4.36
                            %Contractual
      Term
                            
                            4
      yearsStock
      Price at Date of Grant
                            
                            $
                            4.70Exercise
      Price
                            
                            $
                            6.25





Total
expense associated with the 100,000 warrants amounted to $299,052, which,
consistent with Financial Accounting Standards Board Interpretation No. 123 (R),
was recognized during the fiscal year ended December 31, 2006.




16




A summary
of option activity with respect to the warrants as of March 31, 2009 and changes
during the quarter ended March 31, 2009 is as follows:





Warrants
                              
                              Weighted
                                Average
                                Exercise Price
                              
                              Weighted
                                Average
                                Remaining
                                Contractual
                                Term
                              
                              Aggregate
                                Intrinsic
                                ValueJanuary
      1, 2006
                              —
                              
                              $
                              —
                              
                              —
                              
                              $
                              —Granted
      January 5, 2006
                              100,000
                              
                              $
                              6.25
                              
                              4Years
                              
                              
                              —Exercised
                              —
                              
                              
                              —
                              
                              —
                              
                              
                              —Forfeited
                              —
                              
                              
                              —
                              
                              —
                              
                              
                              —Outstanding
      at March 31, 2009
                              100,000
                              
                              $
                              6.25
                              
                              0.8Years
                              
                              $
                              —Exercisable
      at March 31, 2009
                              100,000
                              
                              $
                              6.25
                              
                              0.8Years
                              
                              $
                              —




NOTE
T- COMMITMENTS AND CONTINGENCIES




Information
      on lease commitments is provided in Note
O.





NOTE
U - OFF-BALANCE SHEET ARRANGEMENTS





At March
31, 2009, we do not have any material commitments for capital expenditures or
have any transactions, obligations or relationships that could be considered
off-balance sheet arrangements.








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 condensed consolidated financial
statements, as well as information relating to the plans of our current
management. This quarterly report on Form 10-Q includes forward-looking
statements. Any statements contained in this report that are not statements of
historical fact may be deemed to be forward-looking statements. Generally, the
words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,”
“estimate,” “continue,” and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those anticipated. 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
condensed consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this Form 10-Q.





OVERVIEW





The
Company manufactures and distributes automotive air brake valves and related
components in China and internationally for use primarily in vehicles weighing
over three tons, such as trucks and buses. There are forty categories of valves
with over one thousand different specifications. Management believes that it is
the largest manufacturer of automotive brake valves in China.




17




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





For a
summary of our accounting policies and estimates, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates” in our Annual Report on
Form 10-K for the Fiscal Year ended December 31, 2008.





See Note
N to the attached Unaudited Consolidated Financial Statements for the
information regarding changes in taxation by the government of
China.




Results
of Operations




Results
of operations for the three months ended March 31, 2009 as compared to the three
months ended March 31, 2008.




SALES




Three
      Months ended
                                  
                                  
                                  Three
      Months ended31-MAR-09
                                  
                                  
                                  31-MAR-08Air
      brake valves & related components
                                  
                                  $
                                  17.3
                                  
                                  
                                  
                                  M
                                  
                                  
                                  
                                  85.6
                                  %
                                  
                                  $
                                  24.1
                                  
                                  
                                  
                                  M
                                  
                                  
                                  
                                  78.5
                                  %Non-valve
      products
                                  
                                  $
                                  2.9
                                  
                                  
                                  
                                  M
                                  
                                  
                                  
                                  14.4
                                  %
                                  
                                  $
                                  6.6
                                  
                                  
                                  
                                  M
                                  
                                  
                                  
                                  21.5
                                  %Total
                                  
                                  $
                                  20.2
                                  
                                  
                                  
                                  M
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  $
                                  30.7
                                  
                                  
                                  
                                  M
                                  
                                  
                                  
                                  100
                                  %





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





Net sales
were $20,243,738 for the three months ended March 31, 2009, compared with
$30,658,442 for the same period 2008, Net sales for the three months ended
March 31, 2009 decreased by $10.5 million or 34.2% to $20.2 million. The
decrease in sales was primarily due to the global financial crisis and
macro-economic recession, which weakened demand from our Chinese
and international customers.




The
following table sets forth the breakdown of net sales revenue by
markets for the first quarter of the 2009 and 2008 fiscal
years:





Three
                                                    Months
                                                  
                                                  Percent
                                                  
                                                  Three
                                                    Months
                                                  
                                                  Percentended
                                                  
                                                  of
                                                  
                                                  ended
                                                  
                                                  of
                                                  
                                                  Percentage31-Mar-09
                                                  
                                                  Total
      Sales
                                                  
                                                  31-Mar-08
                                                  
                                                  Total
      Sales
                                                  
                                                  Change(U.S.
      dollars in million)China
      OEM market
                                                  
                                                  $
                                                  9.2
                                                  
                                                  45
                                                  %
                                                  $
                                                  10.7
                                                  
                                                  35
                                                  %
                                                  -14.0
                                                  %China
      Aftermarket
                                                  
                                                  $
                                                  6.5
                                                  
                                                  32
                                                  %
                                                  $
                                                  9.9
                                                  
                                                  32
                                                  %
                                                  -34.3
                                                  %International
      market
                                                  
                                                  $
                                                  4.6
                                                  
                                                  23
                                                  %
                                                  $
                                                  10.1
                                                  
                                                  33
                                                  %
                                                  -54.5
                                                  %Total
                                                  
                                                  $
                                                  20.2
                                                  
                                                  100
                                                  %
                                                  $
                                                  30.7
                                                  
                                                  100
                                                  
                                                  -34.2
                                                  %




18




With the
implementation of China III emission standard beginning on July 1, 2008,
the consumption of commercial vehicles equipped with China II engines
spurred significantly in the first half year of 2008, which resulted in the
higher than usual output and sales volume of commercial vehicles in the first
quarter of 2008. However, owing to the global financial crisis, persistent
downturn of the macro-economy and weak global auto market, the output and
sales of Commercial Vehicle and the demand for air brake valves from our OEM
customers declined in the first quarter of 2009. In light of these negative
factors, we increasingly focused on the bus and agricultural vehicle market to
lessen the negative impact of these factors. Our Chinese OEM
sales decreased by $1.5 million, or 14.0%, to $9.2 million for
the first quarter of 2009, compared to $10.7 million for the same period of
2008.




Our
Chinese Joint Venture achieved total revenue of $6.5 million in Chinese
aftermarket sales for the three months ended March 31, 2009, a decrease of $3.4
million, or 34.3% from thesame period
of last year.




The global
financial crisis has negatively affected our international customers, and caused
local currencies to depreciate against the US dollar, while the lack
of confidence in the growth of the world macro-economy has made our
customers decrease their inventories in order to lower their risk. Consequently,
our export sales decreased by $5.5 million or 54.5%, to $4.6 million for the
first quarter of 2009, as compared to $10.1 million for the same period of
2008.




COST
OF SALES AND GROSS PROFIT




For the
quarter ended March 31, 2009, cost of sales was $14,730,925, a decrease of
$7,285,656, or 33.1% from $22,016,581 for the same period last
year.




From
$8,641,861 for the first quarter of 2008 to $5,512,813 for the first quarter of
2009, gross profit decreased by 36.2%, exceeding our revenue decrease rate.
Therefore, gross margin decreased 1.0 percentage points for the three
months ended March 31, 2009, to 27.2% from 28.2 % for the same period of
2008.




The
decrease in gross margin was primarily the result of the
decreased output. However, certain fixed production costs, such as
depreciation, did not decrease accordingly. We will be committed to
increasing management efficiency, improving the technologies of products, and
improving product portfolio to increase our gross profit margin. Meanwhile, our
continued expansion to the higher-profit bus market will also help us to
maintain or increase our gross profit margins.




SELLING
AND DISTRIBUTION EXPENSES




Selling
and distribution expenses were $1,317,734 for the three months ended March
31, 2009, as compared to $1,839,275 for the same period of 2008, a
decrease of $521,541 or 28.4%.





Selling
and distribution expenses include salaries and wages, transportation expense,
packaging expense, warranty expense, expenses associated with traveling,
advertising, promotions, trade shows and seminars, and other expenses. The
decrease in selling and distribution expenses for the quarter was primarily due
to the following factors:




19




(1)
            Decreased
      transportation expense: During the first quarter of 2009, transportation
      costs decreased by $285,295 from $512,908 for the first quarter of
      2008. The decrease in transportation expense was mainly due to decreased
      sales.


(2)
            Decreased
      packaging expense: Packaging costs were $468,762 for the three months
      ended March 31, 2009, a decrease of $104,340 from $573,102 for the
      same period of 2008, which was associated with the revenue
      decrease.


(3)
            Decreased
      product warranty expense. The Company recorded $266,288 of product
      warranty expenses for the three months ended March 31, 2009, as compared
      to $447,359 for the three months ended March 30, 2008, a decrease of
      $181,072.




GENERAL
AND ADMINISTRATIVE EXPENSES




General
and administrative expenses were $2,792,749 for the three months ended
March 31, 2009, as compared to $1,976,201 for the same period of 2008,
an increase of $816,548 or 41.3%. The increase was mainly due to the
following factors:





(1)
            R&D
      expenses, which is included in general and administrative expenses,
      increased by $297,153 to $766,451 from $469,298 of R&D
      expense for the same period of 2008, as discussed
  below.


(2)
            With
      the impact of the U.S. financial crisis and weakening macro-economic
      environment, the Company extended the payment term accordingly for
      accounts receivable for our certain customers. As a result, the Company
      recorded more allowance for doubtful accounts. Because of better credit
      record and credit capacity of these customers, we believe we can
      collect the accounts receivable in a timely manner. During the three
      months ended March 31, 2009, the bad debt provision was $550,156, as
      compared to $10,832 for the same period of
2008.




RESEARCH
AND DEVELOPMENT EXPENSE




Research
and development expenses include payroll, employee benefits, and other
headcount-related expenses associated with product development. Research and
development expenses also include third-party development costs. For the three
months ended March 31, 2009, research and development expense was $766,451, as
compared to $469,298 for the same period of 2008, an increase of $297,153,
mainly because the Company enhanced research and development
activities on new products for the bus and agricultural vehicle market
segments.




DEPRECIATION
AND AMORTIZATION




Depreciation
and amortization expense increased to $729,433 for the three months ended March
31, 2009, compared with that of $654,555 for the same period of 2008,
an increase of $74,878. The increase in depreciation and amortization
expense was primarily due to the purchase of production
equipment.




FINANCIAL
EXPENSE




Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the three months ended March 31, 2009 decreased by
$340,714 to $28,962 from $369,676 for the same period of 2008, which
was mainly attributed to more exchange loss resulted from the accelerated
appreciation of Chinese currency against the U.S. dollar during the three months
ended March 31, 2008. Management is studying alternative methods for managing
its risks associated with currency translation, such as the diversification of
currencies used in export sales.




OTHER
INCOME




Other
income was $39,217 for the three months ended March 31, 2009, as compared to
$111,078 for the three months ended March 31, 2008, a decrease of
$71,861.Other income was mainly due to the sales of raw material
scraps.




20




INCOME
TAX




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
Ventures, the Joint Venture was exempt from income taxes in the PRC for each of
the fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture
was entitled to a 50% income tax deduction for each of the three years ended
December 31, 2008. Thus, the Joint Venture was exempted from PRC income tax in
both fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st January
2008, China’s enterprises are generally subject to a PRC income tax rate of
25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.




The
Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of the
People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture was eligible for additional preferential tax
treatment for the years 2007 and 2008. In those years, the Joint Venture
was entitled to an income tax exemption on all pre-tax income generated by the
company above its pre-tax income generated in the fiscal year 2006. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006 pre-tax
income. In addition, the Joint Venture was entitled to a PRC tax credit equal to
40% of the additional investment in the Joint Venture used to purchase eligible
domestic equipment, subject to certain limitations. Income tax expense of
$357,966 and $563,474 was recorded for the quarters ended March
31, 2009 and 2008, respectively.




STOCK-BASED
COMPENSATION




On March
1, 2006, the Board of Directors approved a total of 60,000 options to be issued
to the four independent members of the Board of Directors. The contractual term
of the options is three years. Total deferred stock-based compensation expenses
related to stock options amounted to $178,904. This amount is amortized over the
three year vesting period in a manner consistent with Financial Accounting
Standards Board Interpretation No. 123R. The amortization of deferred
stock-based compensation for these equity arrangements was $9,935 for the first
quarter ended March 31, 2009 and as of March 31, 2009 all expenses related
to 60,000 options issued had been fully amortized.





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




NON-CONTROLLING
INTEREST IN SUBSIDIARIES




Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the Joint
Venture. Non-controlling interest in subsidiaries amounted to $106,094 and
$394,019 for the first quarter ended March 31, 2009 and 2008,
respectively.




NET
INCOME




The net
income for the first quarter ended March 31, 2009 decreased by $2,586,205,
to $944,911 from net income of $3,531,116 for the first quarter ended March
31, 2008 due to the factors discussed above. Earnings per share (“EPS”), both
basic and diluted, for the first quarter ended March 31, 2009 and 2008, were
$0.05 and $0.19 per share, respectively.




21




FINANCIAL
CONDITION





Liquidity
and Capital Resources





OPERATING
- Net cash provided in operating activities was $3,145,124 for the first
quarter ended March 31, 2009 compared with $1,243,376 of net cash provided in
operating activities in the same period in 2008, an increase of $1,901,748,
primarily due to decreases in accounts receivable and inventories compared with
March 31, 2008. During the three months ended March 31, 2008, our higher sales
resulted in increased accounts receivable and inventories. Since the impact
of the U.S. financial crisis and weakening macro-economic, during the three
months ended March 31, 2009, the Company decreased sales on credit and placed
more emphasis on receivables collection as compared with the same period of last
year. Thus, cash flow from operations increased compared with the first quarter
of 2008.





At March
31, 2009, the Company had cash and cash equivalents of $10,746,963, as compared
to cash and cash equivalents of $7,795,987 at December 31, 2008. The Company had
working capital of $63,019,721 at March 31, 2009, as compared to working capital
of 61,586,125 at December 31, 2008, reflecting current ratios of 6.07:1 and
5.36:1, respectively.





INVESTING
- The Company expended less cash for investing activities in the first quarter
of 2009 than in the first quarter of 2008. During the three months ended
March 31, 2008, the Company expended net cash of $558,019 in investing
activities, including $557,391 for acquisition of property and equipment to
support the growth of the business. For the three months ended March 31, 2009,
the Company utilized $192,388 in investing activities.





FINANCING
- The Company used less cash in financing activities during the first quarter of
2009 than in the first quarter of 2008. The Company had no borrowings under
its credit facilities during the quarter ended March 31, 2009,
and during the first quarter ended March 31, 2008, the Company repaid all
$2,432,466 of its outstanding bank 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 first quarter of 2009,
the Company continued developing higher profit margin new products, and adopting
steps for further cost saving such as improving material utilization rate.
Meanwhile, the Company maintains good relationships with local banks. We believe
that our current cash and cash equivalents and anticipated cash flow generated
from operations and our bank lines of credit will be sufficient to finance
our working capital requirements for the foreseeable future.





CURRENCY
RISK AND FINANCIAL INSTRUMENTS - Although our reporting currency is the U.S.
dollar, the functional currency of Joint Venture is RMB. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be affected by fluctuations in the exchange rate between U.S. dollars and RMB.
If the RMB depreciates against the U.S. dollar, the value of our Renminbi
revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. In recent years, the RMB has been appreciating against
the U.S. dollar.





Assets
and liabilities of our operating subsidiaries are translated into U.S. dollars
at the exchange rate at the balance sheet date, their equity accounts are
translated at historical exchange rate and their income and expenses items are
translated using the average rate for the period. Any resulting exchange
differences are recorded in accumulated other comprehensive income or loss.
Because of the minor depreciation of the RMB against the USD during the quarter
ended on March 31, 2009, we recorded an exchange loss of $19,202 for the
quarter. The Company is adopting such steps as the diversification of currencies
used in export sales, and the negotiation of export contracts with fixed
exchange rates.





As the
Company is currently free of indebtedness for borrowed money, we do not have any
risk from an increase in market interest rates. However, to the extent that the
Company arranges new borrowings in the future, an increase in market interest
rate would cause a commensurate increase in the interest expense related to such
borrowings.





OFF-BALANCE
SHEET AGREEMENTS





At March
31, 2009, we did not have any material commitments for capital expenditures or
have any transactions, obligations or relationships that could be considered
off-balance sheet arrangements.




22




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





See the
discussion in Item 2 above, “Liquidity and Capital Resources”.





ITEM
4. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures:




As of the
end of the period covered by this report, management, including our chief
executive officer and chief financial officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(“Exchange Act”)). Based upon that evaluation, our chief executive officer and
chief financial officer concluded that the disclosure controls and procedures
were effective to ensure that information required to be disclosed in reports we
file or submit under the Exchange Act is (1) recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and (2) accumulated and communicated
to our management to allow their timely decisions regarding required
disclosure.




Changes
in Internal Control over Financial Reporting:




There
were no changes in the Company’s internal controls over financial reporting
during the quarter ended March 31, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





PART
II OTHER INFORMATION





ITEM
6. EXHIBITS


(a)
                                        Exhibits:31.1
                                        Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended.31.2
                                        Certification
      of Principal Accounting Officer pursuant to Rule 13a-14 and Rule 15d-14(a)
      promulgated under the Securities and Exchange Act of 1934, as
      amended.32.1
                                        Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.





SIGNATURES


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


Dated :
      May 13, 2009
                SORL
      AUTO PARTS, INC.By:
      /s/ Xiao Ping ZhangName:
      Xiao Ping ZhangTitle:
      Chief Executive Officer





By:
      /s/ Zong Yun ZhouName:
      Zong Yun ZhouTitle:
      Chief Financial Officer
                    (Principal
      Financial
Officer)




23