UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)


x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      for the quarterly period ended June 30,
  2009





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT




For the
transition period from _________ to _________





Commission
file number 000-11991





SORLAUTOPARTS,
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 o





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 o
              Smaller
      Reporting Companyx





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


Yes oNo 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
June 30, 2009 there were 18,279,254shares of Common Stock
outstanding










SORL AUTO PARTS, INC.


FORM
10-Q


For the
Quarter Ended June 30, 2009





INDEX




PagePART
      I.
            FINANCIAL INFORMATION (Unaudited)Item
      1.
            Financial Statements:Condensed Consolidated Balance
      Sheets as of June 30, 2009 (Unaudited) and December 31, 2008 (Audited)
            
            1Condensed Consolidated Statements
      of Income and Comprehensive Income (Unaudited) for the Three Months and
      Six Months Ended June 30, 2009 and 2008
            
            2Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Three Months and
      Six Months Ended June 30, 2009 and 2008
            
            3Condensed Consolidated Statements
      of Shareholders’ Equity (Unaudited) for the Three monthsand Six Months Ended June 30,
      2009 and 2008
            
            4Notes to the Condensed
      Consolidated Financial Statements (Unaudited)
            
            5Item
      2.
            Management’s Discussion and
      Analysis or Financial Condition and Results of Operations
            
            18Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            27Item
      4.
            Controls and
      Procedures
            
            27PART
      II.
            OTHER INFORMATION
            
            28Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            28Item
      6.
            Exhibits
            
            28SIGNATURES
            
            29









SORL
Auto Parts, Inc. and Subsidiaries
 Consolidated
Balance Sheets
 June
30, 2009 and December 31, 2008




June
      30,
              2009
            
            
            
            December
      31,
              2008(Unaudited)
            
            
            
            (Audited)AssetsCurrent
      AssetsCash
      and Cash Equivalents
            
            US$
            
            
            15,762,830
            
            US$
            
            
            7,795,987Accounts
      Receivable, Net of Provision
            
            
            
            
            40,764,983
            
            
            
            
            35,797,824Notes
      Receivable
            
            
            
            
            8,120,653
            
            
            
            
            7,536,534Inventory
            
            
            
            
            16,246,168
            
            
            
            
            19,105,845Prepayments,
      including $0 and $187,813 to related parties at June 30, 2009 and December
      31, 2008, respectively.
            
            
            
            
            1,568,450
            
            
            
            
            1,013,440Other
      current assets, including $41,042 and $1,906,070 to related parties at
      June 30, 2009 and December 31, 2008, respectively.
            
            
            
            
            562,310
            
            
            
            
            4,445,778Total
      Current Assets
            
            
            
            
            83,025,394
            
            
            
            
            75,695,408Fixed
      AssetsProperty,
      Plant and Equipment
            
            
            
            
            33,494,523
            
            
            
            
            32,927,306Less:
      Accumulated Depreciation
            
            
            
            
            (10,247,047
            )
            
            
            
            (8,951,886
            )Property,
      Plant and Equipment, Net
            
            
            
            
            23,247,476
            
            
            
            
            23,975,420Leasehold
      Improvements in Progress
            
            
            
            
            465,620
            
            
            
            
            ―Land
      Use Rights, Net
            
            
            
            
            14,355,711
            
            
            
            
            14,514,983Other
      AssetsDeferred
      compensation cost-stock options
            
            
            
            
            ―
            
            
            
            
            9,935Intangible
      Assets
            
            
            
            
            161,411
            
            
            
            
            161,347Less:
      Accumulated Amortization
            
            
            
            
            (46,692
            )
            
            
            
            (39,018
            )Intangible
      Assets, Net
            
            
            
            
            114,719
            
            
            
            
            122,329Deferred
      tax assets
            
            
            
            
            531,512
            
            
            
            
            189,228Total
      Other Assets
            
            
            
            
            646,231
            
            
            
            
            321,492Total
      Assets
            
            US$
            
            
            121,740,432
            
            US$
            
            
            114,507,303Liabilities and
      Shareholders' EquityCurrent
      LiabilitiesAccounts
      Payable and Notes Payable, including $1,570,913 and $0 to related parties
      at June 30, 2009 and December 31, 2008, respectively.
            
            US$
            
            
            5,487,114
            
            US$
            
            
            4,623,850Deposit
      Received from Customers
            
            
            
            
            6,435,620
            
            
            
            
            6,295,857Income
      tax payable
            
            
            
            
            1,281,330
            
            
            
            
            340,138Accrued
      Expenses
            
            
            
            
            3,302,262
            
            
            
            
            2,389,314Other
      Current Liabilities
            
            
            
            
            371,389
            
            
            
            
            460,124Total
      Current Liabilities
            
            
            
            
            16,877,715
            
            
            
            
            14,109,283Non-Current
      LiabilitiesDeferred
      tax liabilities
            
            
            
            
            149,616
            
            
            
            
            106,826Total
      Liabilities
            
            
            
            
            17,027,331
            
            
            
            
            14,216,109Stockholders'
      EquityPreferred
      Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as
      of June 30, 2009 and December 31, 2008
            
            
            
            
            ―
            
            
            
            
            ―Common
      Stock - $0.002 Par Value; 50,000,000 authorized, 18,279,254 issued and
      outstanding as ofJune
      30, 2009 and December 31, 2008
            
            
            
            
            36,558
            
            
            
            
            36,558Additional
      Paid In Capital
            
            
            
            
            37,498,452
            
            
            
            
            37,498,452Reserves
            
            
            
            
            3,521,246
            
            
            
            
            3,126,086Accumulated
      other comprehensive income
            
            
            
            
            10,885,312
            
            
            
            
            10,848,248Retained
      Earnings
            
            
            
            
            42,321,182
            
            
            
            
            38,774,684Total
      SORL Auto Parts, Inc. Stockholders' Equity
            
            
            
            
            94,262,750
            
            
            
            
            90,284,028Noncontrolling
      Interest In Subsidiaries
            
            
            
            
            10,450,351
            
            
            
            
            10,007,166Total
      Equity
            
            
            
            
            104,713,101
            
            
            
            
            100,291,194Total
      Liabilities and Stockholders' Equity
            
            US$
            
            
            121,740,432
            
            US$
            
            
            114,507,303





The
accompanying notes are an integral part of these financial
statements
  1




SORL
Auto Parts, Inc. and Subsidiaries
 Consolidated
Statements of Income and Comprehensive Income(Unaudited)
 For
The Three Months and Six Months Ended June 30,2009 and 2008


Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Sales
            
            US$
            
            29,740,212
            
            
            
            42,186,119
            
            
            
            49,983,950
            
            
            
            72,844,561Include:
      sales to related parties
            
            
            
            64,179
            
            
            
            1,004,231
            
            
            
            201,611
            
            
            
            1,822,149Cost
      of Sales
            
            
            
            21,318,699
            
            
            
            30,776,773
            
            
            
            36,049,624
            
            
            
            52,793,354Gross
      Profit
            
            
            
            8,421,513
            
            
            
            11,409,346
            
            
            
            13,934,326
            
            
            
            20,051,207Expenses:Selling
      and Distribution Expenses
            
            
            
            2,060,718
            
            
            
            2,771,803
            
            
            
            3,378,452
            
            
            
            4,611,078General
      and Administrative Expenses
            
            
            
            2,273,064
            
            
            
            2,718,217
            
            
            
            5,065,813
            
            
            
            4,694,418Financial
      Expenses
            
            
            
            9,129
            
            
            
            383,320
            
            
            
            38,091
            
            
            
            752,996Total
      Expenses
            
            
            
            4,342,911
            
            
            
            5,873,340
            
            
            
            8,482,356
            
            
            
            10,058,492Operating
      Income
            
            
            
            4,078,602
            
            
            
            5,536,006
            
            
            
            5,451,970
            
            
            
            9,992,715Other
      Income
            
            
            
            176,244
            
            
            
            222,762
            
            
            
            215,461
            
            
            
            333,840Non-Operating
      Expenses
            
            
            
            (11,002
            )
            
            
            (175,785
            )
            
            
            (14,616
            )
            
            
            (254,963
            )Income
      (Loss) Before Provision for Income Taxes
            
            
            
            4,243,844
            
            
            
            5,582,983
            
            
            
            5,652,815
            
            
            
            10,071,592Provision
      for Income Taxes
            
            
            
            914,125
            
            
            
            318,757
            
            
            
            1,272,091
            
            
            
            882,231Net
      Income
            
            US$
            
            3,329,719
            
            
            
            5,264,226
            
            
            
            4,380,724
            
            
            
            9,189,361Other
      Comprehensive Income (Loss)- Foreign Currency Translation
      Adjustment
            
            
            
            60,385
            
            
            
            2,110,749
            
            
            
            41,183
            
            
            
            5,470,639Total
      Comprehensive Income
            
            
            
            3,390,104
            
            
            
            7,374,975
            
            
            
            4,421,907
            
            
            
            14,660,000Less:Net
      income Attributable to Non-controlling Interest In
      Subsidiaries
            
            
            
            332,972
            
            
            
            527,929
            
            
            
            439,066
            
            
            
            921,948Other
      Comprehensive Income (Loss) Attributable to Non-controlling Interest's
      Share
            
            
            
            6,039
            
            
            
            211,075
            
            
            
            4,119
            
            
            
            547,064Total
      Comprehensive Income (Loss) Attributable to Non-controlling Interest's
      Share
            
            
            
            339,011
            
            
            
            739,004
            
            
            
            443,185
            
            
            
            1,469,012Net
      Income Attributable to Stockholders
            
            
            
            2,996,747
            
            
            
            4,736,297
            
            
            
            3,941,658
            
            
            
            8,267,413Other
      Comprehensive Income (Loss) Attributable to Stockholders
            
            
            
            54,346
            
            
            
            1,899,674
            
            
            
            37,064
            
            
            
            4,923,575Total
      Comprehensive Income (Loss) Attributable to Stockholders
            
            
            
            3,051,093
            
            
            
            6,635,971
            
            
            
            3,978,722
            
            
            
            13,190,988Weighted
      average common share - Basic
            
            
            
            18,279,254
            
            
            
            18,279,254
            
            
            
            18,279,254
            
            
            
            18,279,254Weighted
      average common share - Diluted
            
            
            
            18,279,254
            
            
            
            18,287,764
            
            
            
            18,279,254
            
            
            
            18,288,958EPS
      - Basic
            
            
            
            0.16
            
            
            
            0.26
            
            
            
            0.22
            
            
            
            0.45EPS
      - Diluted
            
            
            
            0.16
            
            
            
            0.26
            
            
            
            0.22
            
            
            
            0.45





The
accompanying notes are an integral part of these financial
statements





2





SORL
Auto Parts, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows(Unaudited)
 For
The Three Months and Six Months Ended June 30, 2009 And 2008





Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Cash
      Flows from Operating ActivitiesNet
      Income
              US$
              
              2,996,747
              
              
              
              4,736,297
              
              
              
              3,941,658
              
              
              
              8,267,413Adjustments
      to reconcile net income (loss) to net cashfrom
      operating activities:Noncontrolling
      Interest In Subsidiaries
              
              
              332,972
              
              
              
              527,929
              
              
              
              439,066
              
              
              
              921,948Bad
      Debt Expense
              
              
              (97,231
              )
              
              
              10,450
              
              
              
              452,925
              
              
              
              21,282Depreciation
      and Amortization
              
              
              746,805
              
              
              
              674,504
              
              
              
              1,476,238
              
              
              
              1,329,059Stock-Based
      Compensation Expense
              
              
              ―
              
              
              
              14,909
              
              
              
              9,935
              
              
              
              29,818Loss
      on disposal of Fixed Assets
              
              
              10,098
              
              
              
              2,519
              
              
              
              10,098
              
              
              
              2,519Changes
      in Assets and Liabilities:Account
      Receivables
              
              
              (6,897,996
              )
              
              
              (2,142,593
              )
              
              
              (5,393,265
              )
              
              
              (6,092,371
              )Notes
      Receivables
              
              
              (757,995
              )
              
              
              (2,102,462
              )
              
              
              (581,005
              )
              
              
              (2,731,319
              )Other
      Currents Assets
              
              
              1,079,180
              
              
              
              (165,931
              )
              
              
              3,871,962
              
              
              
              2,181,644Inventory
              
              
              (138,622
              )
              
              
              (2,164,427
              )
              
              
              2,865,795
              
              
              
              (4,642,399
              )Prepayments
              
              
              4,284,501
              
              
              
              (712,009
              )
              
              
              (553,492
              )
              
              
              (1,828,836
              )Deferred
      tax assets
              
              
              (168,203
              )
              
              
              ―
              
              
              
              (342,074
              )
              
              
              ―Leasehold
      Improvements in Progress
              
              
              (465,484
              )
              
              
              ―
              
              
              
              (465,484
              )
              
              
              ―Accounts
      Payable and Notes Payable
              
              
              2,714,776
              
              
              
              418,290
              
              
              
              861,550
              
              
              
              2,276,580Income
      Tax Payable
              
              
              1,281,330
              
              
              
              218,643
              
              
              
              1,422,870
              
              
              
              358,547Deposits
      Received from Customers
              
              
              259,233
              
              
              
              828,703
              
              
              
              137,259
              
              
              
              1,311,351Other
      Current Liabilities and Accrued Expenses
              
              
              190,883
              
              
              
              1,220,975
              
              
              
              340,719
              
              
              
              1,203,937Deferred
      tax liabilities
              
              
              21,367
              
              
              ―
              
              
              
              42,730
              
              
              ―Net
      Cash Flows from Operating Activities
              
              
              5,392,361
              
              
              
              1,365,797
              
              
              
              8,537,485
              
              
              
              2,609,173Cash
      Flows from Investing ActivitiesAcquisition
      of Property and Equipment
              
              
              (387,131
              )
              
              
              (552,037
              )
              
              
              (613,314
              )
              
              
              (1,109,428
              )Sales
      proceeds of disposal of fixed assets
              
              
              2,897
              
              
              
              ―
              
              
              
              36,692
              
              
              
              ―Investment
      in Intangible Assets
              
              
              ―
              
              
              
              (78,109
              )
              
              
              ―
              
              
              
              (78,737
              )Net
      Cash Flows from Investing Activities
              
              
              (384,234
              )
              
              
              (630,146
              )
              
              
              (576,622
              )
              
              
              (1,188,165
              )Cash
      Flows from Financing ActivitiesProceeds
      from (Repayment of) Bank Loans
              
              
              ―
              
              
              
              930,359
              
              
              
              ―
              
              
              
              (1,502,107
              )Net
      Cash flows from Financing Activities
              
              
              ―
              
              
              
              930,359
              
              
              
              ―
              
              
              
              (1,502,107
              )Effects
      on changes in foreign exchange rate
              
              
              7,740
              
              
              
              82,357
              
              
              
              5,980
              
              
              
              222,065Net
      Change in Cash and Cash Equivalents
              
              
              5,015,867
              
              
              
              1,748,367
              
              
              
              7,966,843
              
              
              
              140,966Cash
      and Cash Equivalents- Beginning of the year
              
              
              10,746,963
              
              
              
              2,732,810
              
              
              
              7,795,987
              
              
              
              4,340,211Cash
      and cash Equivalents - End of the period
              US$
              
              15,762,830
              
              
              
              4,481,177
              
              
              
              15,762,830
              
              
              
              4,481,177Supplemental
      Cash Flow Disclosures:Interest
      Paid
              
              
              ―
              
              
              
              77,081
              
              
              
              13,736
              
              
              
              103,125Tax
      Paid
              
              
              261,825
              
              
              
              505,146
              
              
              
              630,682
              
              
              
              2,388,521





The
accompanying notes are an integral part of these financial
statements





3


SORL
Auto Parts, Inc. and Subsidiaries
 Consolidated
Statements of Changes in Stockholders' Equity
 
 Three
Months Ended June 30, 2009 and 2008





Number of
      Share
              
              
              Common Stock
              
              
              Additional
      Paid-in Capital
              
              
              Reserves
              
              
              Retained
                Earnings
      (Deficit)
              
              
              Accumu.
      Other Comprehensive Income
              
              
              Total
      SORL Auto Parts, Inc. Shareholders' Equity
              
              
              Noncontrolling
      Interest
              
              
              Total
      EquityBeginning
      Balance - April 1, 2008
              
              
              18,279,254
              
              
              
              36,558
              
              
              
              37,498,452
              
              
              
              2,237,597
              
              
              
              30,823,429
              
              
              
              8,456,090
              
              
              
              79,052,126
              
              
              
              8,754,160
              
              
              
              87,806,286Net
      Income
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              4,736,297
              
              
              
              ―
              
              
              
              4,736,297
              
              
              
              527,929
              
              
              
              5,264,226Other
      Comprehensive Income(Loss)
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              
              
              
              
              1,899,674
              
              
              
              1,899,674
              
              
              
              211,075
              
              
              
              2,110,749Transfer
      to reserve
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              424,244
              
              
              
              (424,244
              )
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Ending
      Balance - June 30, 2008
              
              
              18,279,254
              
              
              
              36,558
              
              
              
              37,498,452
              
              
              
              2,661,841
              
              
              
              35,135,482
              
              
              
              10,355,764
              
              
              
              85,688,097
              
              
              
              9,493,164
              
              
              
              95,181,261Beginning
      Balance - April 1, 2009
              
              
              18,279,254
              
              
              
              36,558
              
              
              
              37,498,452
              
              
              
              3,221,571
              
              
              
              39,624,110
              
              
              
              10,830,966
              
              
              
              91,211,657
              
              
              
              10,111,340
              
              
              
              101,322,997Net
      Income
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              2,996,747
              
              
              
              ―
              
              
              
              2,996,747
              
              
              
              332,972
              
              
              
              3,329,719Other
      Comprehensive Income(Loss)
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              54,346
              
              
              
              54,346
              
              
              
              6,039
              
              
              
              60,385Transfer
      to reserve
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              299,675
              
              
              
              (299,675
              )
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Ending
      Balance - June 30, 2009
              
              
              18,279,254
              
              
              
              36,558
              
              
              
              37,498,452
              
              
              
              3,521,246
              
              
              
              42,321,182
              
              
              
              10,885,312
              
              
              
              94,262,750
              
              
              
              10,450,351
              
              
              
              104,713,101Six
      Months Ended June 30, 2009 and 2008Beginning
      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
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              8,267,413
              
              
              
              ―
              
              
              
              8,267,413
              
              
              
              921,948
              
              
              
              9,189,361Other
      Comprehensive Income(Loss)
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              4,923,575
              
              
              
              4,923,575
              
              
              
              547,064
              
              
              
              5,470,639Transfer
      to reserve
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              778,862
              
              
              
              (778,862
              )
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Ending
      Balance - June 30, 2008
              
              
              18,279,254
              
              
              
              36,558
              
              
              
              37,498,452
              
              
              
              2,661,841
              
              
              
              35,135,482
              
              
              
              10,355,764
              
              
              
              85,688,097
              
              
              
              9,493,164
              
              
              
              95,181,261Beginning
      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
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              3,941,658
              
              
              
              ―
              
              
              
              3,941,658
              
              
              
              439,066
              
              
              
              4,380,724Other
      Comprehensive Income(Loss)
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              37,064
              
              
              
              37,064
              
              
              
              4,119
              
              
              
              41,183Transfer
      to reserve
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              395,160
              
              
              
              (395,160
              )
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Ending
      Balance - June 30, 2009
              
              
              18,279,254
              
              
              
              36,558
              
              
              
              37,498,452
              
              
              
              3,521,246
              
              
              
              42,321,182
              
              
              
              10,885,312
              
              
              
              94,262,750
              
              
              
              10,450,351
              
              
              
              104,713,101


The
accompanying notes are an integral part of these financial
statements




4




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.





Further,
in connection with preparation of the condensed consolidated financial
statements and in accordance with the recently issued Statement of Financial
Accounting Standards No. 165 “Subsequent Events” (SFAS 165), management has
evaluated subsequent events through August 13, 2009 (the financial statement
issue date).





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.




5





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. 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.




In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166
“Accounting for Transfers of Financial Assets—an amendment of FASB Statement No.
140” (“SFAS 166”). SFAS 166 improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. SFAS 166 is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. As such, the Company is required to adopt
this standard in January 2010.  The Company is evaluating the impact
the adoption of SFAS 166 will have on its consolidated financial
statements.




In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 167
“Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 improves
financial reporting by enterprises involved with variable interest entities and
to address (1) the effects on certain provisions of FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest Entities”, as a
result of the elimination of the qualifying special-purpose entity concept in
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of Interpretation 46(R), including those in which the accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an enterprise’s involvement in a variable interest entity.
SFAS 167 is effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. As such, the Company is required to adopt this standard in
January 2010. The Company is evaluating the impact the adoption of SFAS 167 will
have on its consolidated financial statements.




6




In June
2009, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (“SFAS”) No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles”.  SFAS 168 replaces SFAS 162 and establishes the
FASB Accounting Standards
Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP.  SFAS 168
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009.  The Company is currently evaluating
the impact of SFAS 168 on its consolidated financial statements but does not
expect it to have a material effect.




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.





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.





The
following related party transactions are reported for the three months and six
months ended June 30, 2009 and 2008:





Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008PURCHASES
      FROM:Ruili
      Group Co., Ltd.
              
              $
              5,196,406
              
              
              $
              10,649,765
              
              
              $
              7,893,422
              
              
              $
              19,153,909Total
      Purchases
              
              $
              5,196,406
              
              
              $
              10,649,765
              
              
              $
              7,893,422
              
              
              $
              19,153,909SALES
      TO:Ruili
      Group Co., Ltd.
              
              $
              64,179
              
              
              $
              1,004,231
              
              
              $
              201,611
              
              
              $
              1,822,149Total
      Sales
              
              $
              64,179
              
              
              $
              1,004,231
              
              
              $
              201,611
              
              
              $
              1,822,149





The total purchases from Ruili
Group during the three
months endedJune 30,2009consisted of $4.8million of finished productsofnon-valve auto parts and $0.3million of packaging materials. During
the six months ended June 30,2009, the breakdown was$7.2million of finished products
ofnon-valve auto parts
and approximately $0.6million of packaging
materials.




7





On
September 28, 2007, the Company purchased land use rights, a manufacturing
plant, and an office building from Ruili Group for an aggregate purchase price
of approximately RMB152 million (approximately $20.1 million translated with an
average exchange rate of 7.5567). DTZ Debenham Tie Leung Ltd., an
internationally recognized appraiser, appraised the total asset value at RMB154
million (approximately $20.4 million translated with an average exchange rate of
7.5567). RMB69.4 million (approximately $9.1 million translated with an average
exchange rate of 7.5567) of the purchase price was paid by the transfer of an
existing project of the Company that included construction-in-progress and with
the cash generated from operations and a bank credit line. The Company valued
the project and the related construction in progress that was transferred to the
Ruili Group as part of the purchase price at our historical cost basis in
the assets transferred.





June
      30,
            
            
            December
      31,2009
            
            
            2008PREPAYMENTRuili
      Group Co., Ltd.
            
            $
            ―
            
            
            $
            187,813Total
            
            $
            ―
            
            
            $
            187,813OTHER
      ACCOUNTS RECEIVABLERuili
      Group Co., Ltd.
            
            $
            41,042
            
            
            $
            1,906,070Total
            
            $
            41,042
            
            
            $
            1,906,070ACCOUNTS
      PAYABLERuili
      Group Co., Ltd.
            
            $
            1,570,913
            
            
            $
            ―Total
            
            $
            1,570,913
            
            
            $
            ―





NOTE
E - ACCOUNTS RECEIVABLE




The
changes in the allowance for doubtful accounts at June 30, 2009 and December 31,
2008 were summarized as follows:




June
      30,
              
              
              December
      31,2009
              
              
              2008Beginning
      balance
              
              $
              24,997
              
              
              $
              27,987Add:
      Increase to allowance
              
              
              441,545
              
              
              
              (2,990
              )Ending balance
              
              $
              466,542
              
              
              $
              24,997


June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Accounts
      receivable
                  
                  $
                  41,231,525
                  
                  
                  $
                  35,822,821Less: allowance for doubtful
      accounts
                  
                  
                  (466,542
                  )
                  
                  
                  (24,997
                  )Account receivable balance, net
                  
                  $
                  40,764,983
                  
                  
                  $
                  35,797,824





8




NOTE
F - INVENTORIES




On June
30, 2009 and December 31, 2008, inventories consisted of the
following:




June
      30,
              
              
              December
      31,2009
              
              
              2008Raw
      Material
              
              $
              3,099,729
              
              
              $
              2,705,224Work
      in process
              
              
              3,955,774
              
              
              
              8,074,488Finished
      Goods
              
              9,190,665
              
              
              8,326,133Total
      Inventory
              
              $
              16,246,168
              
              
              $
              19,105,845




NOTE
G - PROPERTY, PLANT AND EQUIPMENT




Property,
plant and equipment consisted of the following, on June 30, 2009 and December
31, 2008:




June
      30,
              
              
              December
      31,2009
              
              
              2008Machinery
              
              $
              22,586,746
              
              
              $
              22,085,672Molds
              
              
              1,276,065
              
              
              
              1,275,561Office
      equipment
              
              
              625,734
              
              
              
              618,403Vehicle
              
              
              1,027,578
              
              
              
              972,422Building
              
              7,978,400
              
              
              7,975,248Sub-Total
              
              33,494,523
              
              
              32,927,306Less:
      Accumulated depreciation
              
              
              (10,247,047
              )
              
              
              (8,951,886
              )Fixed
      Assets, net
              
              $
              23,247,476
              
              
              $
              23,975,420




Depreciation
expense charged to operations was $1,303,639 and $1,164,736 for the six months
ended June 30, 2009 and 2008, respectively.




9




NOTE
H- LAND USE RIGHTS




June
      30,
            
            
            December
      31,2009
            
            
            2008Cost:
            
            $
            14,933,240
            
            
            $
            14,927,340Less:
      Accumulated amortization:
            
            577,529
            
            
            412,357Land
      use rights, net
            
            $
            14,355,711
            
            
            $
            14,514,983




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 $164,944 and
$159,934 for the six months ended June 30, 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 $161,411, less accumulated amortization
of $46,692 for net intangible assets of $114,719 as of June 30, 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 $7,655 and $2,465 for the six months ended June
30, 2009 and 2008 respectively. Future estimated amortization expense is as
follows:




2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            Thereafter$
            8,480
            
            
            $
            16,135
            
            
            $
            16,135
            
            
            $
            16,135
            
            
            $
            16,135
            
            
            $
            41,699




NOTE
J - PREPAYMENT




Prepayment
consisted of the following as of June 30, 2009 and December 31,
2008:




June
      30,
            
            
            December
      31,2009
            
            
            2008Raw
      material suppliers
            
            $
            1,055,270
            
            
            $
            878,374Equipment
      purchase
            
            513,180
            
            
            135,066Total
      prepayment
            
            $
            1,568,450
            
            
            $
            1,013,440




10




NOTE
K - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES





Deferred
tax assets consisted of the following as of June 30, 2009





30-June-09
              
              
              31-Dec-08Deferred
      tax assets - currentProvision
              
              $
              116,138
              
              
              $
              3,990Warranty
              
              
              391,304
              
              
              
              277,892Revenue
              
              24,070
              
              
              
              ―Deferred
      tax assets
              
              
              531,512
              
              
              
              281,883Valuation
      allowance
              
              ―
              
              
              
              ―Net
      deferred tax assets - current
              
              $
              531,512
              
              
              $
              281,883Deferred
      tax liabilities - currentRevenue
              
              $
              ―
              
              
              $
              92,655Deferred
      tax liabilities - current
              
              
              ―
              
              
              
              92,655Net
      deferred tax assets - current
              
              531,512
              
              
              
              189,228Deferred
      tax liabilities - non-currentLand
      use right
              
              149,616
              
              
              
              106,826Deferred
      tax liabilities - non-current
              
              149,616
              
              
              
              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 June 30, 2009 and December 31,
2008:




June
      30,
            
            
            December
      31,2009
            
            
            2008Accrued
      payroll
            
            $
            1,029,436
            
            
            $
            617,522Other
      accrued expenses
            
            2,272,826
            
            
            1,771,792Total
      accrued expenses
            
            $
            3,302,262
            
            
            $
            2,389,314





11




NOTE
M – RESERVE




The
reserve funds are comprised of the following:




June
      30,
            
            
            December
      31,2009
            
            
            2008Statutory
      surplus reserve fund
            
            $
            3,521,246
            
            
            $
            3,126,086Total
            
            $
            3,521,246
            
            
            $
            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 six months ended June 30, 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 six months ended June 30, 2009 and 2008, respectively, are summarized as
follows:





2009
            
            
            2008PRC
      only:Current
            
            $
            1,571,435
            
            
            $
            882,231Deferred
            
            (299,344)
            
            
            ―Total
            
            $
            1,272,091
            
            
            $
            882,231




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 June 30, 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 for the Joint Venture’s management personnel and staff,
respectively. 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.





In May
2009, the Joint Venture entered into a lease agreement with Ruili Group Co.,
Ltd. for the lease of a manufacturing plant. The lease
term is from June 2009 to May 2017. The Joint Venture will start to make lease
payments and amortize leasehold improvements from January 2010 when the
improvement project is completed and the plant is put in
use.




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





2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              ThereafterManufacturing
      Plant
              
              $
              ―
              
              
              $
              329,136
              
              
              $
              329,136
              
              
              $
              329,136
              
              
              $
              1,453,684Buildings
              
              $
              140,583
              
              
              $
              281,167
              
              
              $
              281,167
              
              
              $
              68,219
              
              
              $
              ―Total
              
              $
              140,583
              
              
              $
              610,303
              
              
              $
              610,303
              
              
              $
              397,355
              
              
              $
              1,453,684




13




NOTE P
- ADVERTISING COSTS





Advertising
costs were $995 and $4,261 for the six months ended June 30, 2009 and
2008, respectively.





NOTE
Q - RESEARCH AND DEVELOPMENT EXPENSE





Research
and development costs are expensed as incurred and were $1,557,758 and
$1,736,962 for the six months ended June 30, 2009 and 2008,
respectively.





NOTE
R - WARRANTY CLAIMS





Warranty
claims were $657,492 and $1,060,353 for the six months ended June 30,
2009 and 2008, respectively. The movement of accrued warranty expenses for
the six months ended June 30, 2009 was as follows:




Beginning
      balance at January 01, 2009
            
            
            1,111,569Aggregate
      reduction for payments made
            
            
            (203,846
            )Aggregate
      increase for new warranties issued during current period
            
            
            657,492Aggregate
      changes in the liability related to pre-existing warranties (changes in
      estimate)
            
            
            ―Ending
      balance at June 30, 2009:
            
            
            1,565,215





NOTE
S – SEGMENT INFORMATION





The
Company produces air brake valves for commercial vehicles weighing more than
three tons.  Although it manufactures about 40 varieties of products
of air brake valves and related components, they are basically one
general line - all air brake valves. Management does not analyze revenues based
on different features of air brake valves but on one general line of air brake
valves only. Hence, no separate analysis of segment by products is presented as
the Company’s only products are air brake valves and related
components.





Net sales
from our Chinese market were $21.3 million and $28.0 million for the three
months ended June 30, 2009 and 2008, respectively. Net sales from international
market were $8.4 million and $14.1 million for the three months ended June 30,
2009 and 2008, respectively.





Net sales
from our Chinese market were $36.9 million and $48.6 million for the six
months ended June 30, 2009 and 2008, respectively. Net sales from international
market were $13.0 million and $24.2 million for the six months ended June 30,
2009 and 2008, respectively.





All of
the Company’s long-lived assets are located in the PRC. The Company and its
subsidiaries do not have long-lived assets in U.S., Hong Kong or anywhere else
in the world outside PRC for the reporting periods.





Our
Chinese customer, Dongfeng Axle Co., Ltd., amount to $4,329,308, representing
14.6% of the Company’s total net sales for the three months ended June 30, 2009
and $1,650,875, representing 3.9% of total net sales in the same
period of last year.





Our
Chinese customer, Dongfeng Axle Co., Ltd., amount to $5,758,585, representing
11.5% of the Company’s total net sales for the six months ended June 30, 2009
and $5,471,105, representing 7.5% of total net sales in the same
period of last year.





NOTE
T – PURCHASE DISCOUNT





Purchase
discounts represent discounts received from vendors for purchasing raw
materials. The Company did not receive any purchase discounts during
the six months ended June 30, 2009 and 2008.




NOTE
U – SHIPPING AND HANDLING COSTS





Shipping
and handling costs incurred by the Company are included in selling expenses in
the accompanying consolidated statements of income. Shipping and handling
costs were $724,919 and $1,449,916 for the six month ended June 30, 2009 and
2008, respectively.





14


NOTE
V – 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





As of
March 31, 2009 all expenses related to the 60,000 options issued had been fully
amortized and the amortization of deferred stock-based compensation for these
equity arrangements was $9,935 for the six months ended June 30,
2009.





A summary
of option activity under the Plan as of June 30, 2009 and changes during
the six months ended June 30, 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 June 30, 2009
            —
            
            $
            —
            
            —
            
            $
            —Exercisable
      at June 30, 2009
            —
            
            $
            —
            
            —
            
            $
            —




15




(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.





A summary
of option activity under the Plan as of June 30, 2009 and changes during
the six months ended June 30, 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 June 30, 2009
            4,128
            
            $
            7.25
            
            1
      Year
            
            $
            —Exercisable
      at June 30, 2009
            4,128
            
            $
            7.25
            
            1
      Year
            
            $
            —





(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.




16




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.




A summary
of option activity with respect to the warrants as of June 30, 2009 and changes
during the six months ended June 30, 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 June 30, 2009
            100,000
            
            $
            6.25
            
            0.5Year
            
            $
            —Exercisable
      at June 30, 2009
            100,000
            
            $
            6.25
            
            0.5Year
            
            $
            —




NOTE
W- COMMITMENTS AND CONTINGENCIES




Information
      on lease commitments is provided in Note
O.





NOTE
X - OFF-BALANCE SHEET ARRANGEMENTS





At June
30, 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.





17


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.





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




(1)
Results of operations for the three months ended June 30, 2009 as compared to
the three months ended June 30, 2008.




SALES


Three
      Months ended
              
              
              Three
      Months ended30-Jun-09
              
              
              30-Jun-08(U.S. 
      dollars in millions)Air
      brake valves & related components
              
              $
              24.7
              
              
              
              83
              %
              
              $
              31.6
              
              
              
              75
              %Non-valve
      products
              
              $
              5.0
              
              
              
              17
              %
              
              $
              10.5
              
              
              
              25
              %Total
              
              $
              29.7
              
              
              
              100
              %
              
              $
              42.1
              
              
              
              100
              %




18




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 $29,740,212 and $42,186,119 for the three months ended June 30, 2009
and 2008, respectively. Compared with the same period of 2008, net sales for the
three months ended June 30, 2009 decreased by $12.4 million or 29.5% to $29.7
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.




A
breakdown of net sales revenue for these markets for the second quarter of
the 2009 and 2008 fiscal years, respectively, is set forth below:




Three
      Months
                
                
                Percent
                
                
                Three
      Months
                
                
                Percentended
                
                
                of
                
                
                ended
                
                
                of
                
                
                Percentage30-June-09
                
                
                Total
      Sales
                
                
                30-June
      -08
                
                
                Total
      Sales
                
                
                Change(U.S.
      dollars in million)China
      OEM market
                
                $
                14.1
                
                
                
                48
                %
                
                $
                17.5
                
                
                
                42
                %
                
                
                -19.4
                %China
      Aftermarket
                
                $
                7.2
                
                
                
                24
                %
                
                $
                10.5
                
                
                
                25
                %
                
                
                -31.4
                %International
      market
                
                $
                8.4
                
                
                
                28
                %
                
                $
                14.1
                
                
                
                33
                %
                
                
                -40.4
                %Total
                
                $
                29.7
                
                
                
                100
                %
                
                $
                42.1
                
                
                
                100
                %
                
                
                -29.5
                %




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 half year 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 heavy duty
trucks and the demand for air brake valves from our OEM customers declined in
the second 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. As a result of these negative factors and our positive
actions, our Chinese OEM sales decreased by $3.4 million, or 19.4%, to $14.1
million for the three months ended June 30, 2009, compared to $17.5 million for
the same period of 2008.




Our
Chinese Joint Venture achieved total revenue of $7.2 million in Chinese
aftermarket sales for the three months ended June 30, 2009, a decrease of $3.3
million, or 31.4% from $10.5 million compared to the same period of last year,
as a result of our customers decreasing their inventories in order to lower
their risk.





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 $5.7 million or 40.4%, to $8.4 million for the three
months ended June 30, 2009, as compared to $14.1 million for the same period of
2008.




COST
OF SALES AND GROSS PROFIT




Cost of
sales for the three months ended June 30, 2009 were $21,318,699, a decrease
of $9,458,074, or 30.7% from $30,776,773 for the same period last year. Our
gross profit decreased by 26.2% from $11,409,346 for the second quarter of 2008
to $8,421,513 for the second quarter of 2009.




19




We
focused on increasing management efficiency, improving the technologies of
products, and improving product portfolio to increase our gross profit margin.
Gross margin increased to 28.3% from 27.0% for the three months ended June
30, 2009 compared with 2008. We believe that our continued expansion to the
higher-profit new valve products will also help us to maintain or increase our
gross profit margins.





SELLING
AND DISTRIBUTION EXPENSES





Selling
and distribution expenses were $2,060,718 for the three months ended June 30,
2009, as compared to $2,771,803 for the same period of 2008, a decrease of
$711,085 or 25.7%.





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 three months ended June
30, 2009 was primarily due to the following factors:




(1)
            Decreased
      transportation expense: During the second quarter of 2009, transportation
      costs decreased by $439,700 to $497,306 from $937,006 for the second
      quarter of 2008. The decrease in transportation expense was mainly due to
      decreased sales.


(2)
            Decreased
      product warranty expense. The Company recorded $391,205 of product
      warranty expenses for the three months ended June 30, 2009, as compared to
      $612,994 for the three months ended June 30, 2008, a decrease of $221,789,
      also related to decreased sales.





GENERAL
AND ADMINISTRATIVE EXPENSES





General
and administrative expenses were $2,273,064 for the three months ended June 30,
2009, as compared to $2,718,217 for the same period of 2008, a decrease of
$445,153 or 16.4%.The decrease was mainly due to the decrease in R&D
expense, which is included in general and administrative expenses. During
the three months ended June 30, 2009, R&D expense decreased by $476,357 to
$791,307, as compared to $1,267,664 of R&D expense for the same period
of 2008, as discussed below.




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 June 30, 2009, research and development expense was $791,307, as
compared to $1,267,664 for the same period of 2008, a decrease of
$476,357. The Company expects to maintain the ratio of research and
development expenses to total sales at approximately 2.5%, the same level as in
2008.




DEPRECIATION
AND AMORTIZATION




Depreciation
and amortization expense increased to $746,805 for the three months ended June
30, 2009, compared with that of $674,504 for the same period of 2008, an
increase of $72,301. 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 June 30, 2009 decreased by $374,191
to $9,129 from $383,320 for the same period of 2008, which was
mainly attributed to fluctuations in the exchange rate between U.S. dollars
and RMB. Management is studying alternative methods for managing its risks
associated with currency translation, such as the diversification of currencies
used in export sales.




20




OTHER
INCOME




Other
income was $176,244 for the three months ended June 30, 2009, as compared to
$222,762 for the three months ended June 30, 2008, a decrease of $46,518. The
decrease was mainly due to a decrease in sales of raw material scraps for the
three months ended June 30, 2009.




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. During the second quarter
ended June 30, 2009 and 2008, the Joint Venture received an income tax benefit
of $0 and $384,342 for purchase of domestic equipment, respectively, which has
been reflected as a reduction to current income tax expense. As a result,
income tax expense of $914,125 and $318,757 were recorded for the
quarter ended June 30, 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 was three years. Total deferred stock-based compensation expenses
related to stock options amounted to $178,904. This amount was amortized over
the three year vesting period in a manner consistent with Financial Accounting
Standards Board Statement No. 123R. The amortization of deferred stock-based
compensation for these equity arrangements was $0 and $14,909 for the three
months ended June 30, 2009 and 2008, respectively. 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.





NET
INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES




Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the Joint
Venture. Net income attributable to non-controlling interest in subsidiaries
amounted to $332,972 and $527,929 for the quarters ended June 30, 2009 and 2008,
respectively.





NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS




The net
income attributable to stockholders for the quarter ended June 30,
2009 decreased by $1,739,551, to $2,996,746 from $4,736,297 for the quarter
ended June 30, 2008 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the quarter ended June 30, 2009 and 2008,
were $0.16 and $0.26 per share, respectively.




21





FINANCIAL
CONDITION





Liquidity
and Capital Resources





OPERATING
- Net cash provided in operating activities was $5,392,361 for three months
ended June 30, 2009 compared with $1,365,797 of net cash provided in operating
activities in the same period in 2008, an increase of $4,026,564, primarily
due to the increased cash flow contributed by changes in prepayments, inventory,
other current assets, income tax payable, and notes receivable and
payable.





At June
30, 2009, the Company had cash and cash equivalents of $15,762,830, as compared
to cash and cash equivalents of $7,795,987 at December 31, 2008. The Company had
working capital of $66,147,679 at June 30, 2009, as compared to working capital
of $61,586,125 at December 31, 2008, reflecting current ratios of 4.92:1 and
5.36:1, respectively.





INVESTING
- The Company expended less cash for investing activities in the second quarter
of 2009 than in the second quarter of 2008. During the three months ended
June 30, 2008, the Company expended net cash of $630,146 in investing
activities, including $552,037 for acquisition of property and equipment to
support the growth of the business. For the three months ended June 30, 2009,
the Company utilized $384,234 in investing activities.





FINANCING
- The Company had no borrowings under its credit facilities during the
quarter ended June 30, 2009. During the second quarter ended June 30, 2008, the
Company borrowed $1,967,686 and repaid $1,037,327 of its outstanding
debt.





Management
of the Company has taken a number of steps to restructure its customer base and
phase out accounts which failed to make prompt payments. The Company also placed
more emphasis on receivable collection. During the second 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 appreciation of the RMB against the USD during the quarter
ended on June 30, 2009, (i) we recorded an exchange loss of $17,120 from export
sales for which the payments to us were in USD, and (ii) we also recorded a
foreign currency translation adjustment of $54,346 for the quarter, a positive
number due to our functional currency in RMB and the appreciation of the RMB
against the USD. 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.




22





As the
Company is currently free of indebtedness for borrowed money, we do not have any
interest rate risk at present. 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 June
30, 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.




(
2) Results of operations for the six months ended June 30, 2009 as compared to
the six months ended June 30, 2008.





SALES




Six
      months ended
              
              
              Six
      months ended30-Jun-09
              
              
              30-Jun-08(U.S. 
      dollars in millions)Air
      brake valves & related components
              
              $
              42.1
              
              
              
              84
              %
              
              $
              55.7
              
              
              
              77
              %Non-valve
      products
              
              $
              7.9
              
              
              
              16
              %
              
              $
              17.1
              
              
              
              23
              %Total
              
              $
              50.0
              
              
              
              100
              %
              
              $
              72.8
              
              
              
              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 $49,983,950 and $72,844,561 for the six months ended June 30, 2009 and
2008, respectively. Compared with the same period of 2008, net sales for the six
months ended June 30, 2009 decreased by $22.8 million or 31.3% to $50.0 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.




A
breakdown of net sales revenue for these markets for the six months ended
June 30, 2009 and 2008 fiscal years, respectively, is set forth
below:




Six
      months
                  
                  
                  Percent
                  
                  
                  Six
      months
                  
                  
                  Percentended
                  
                  
                  of
                  
                  
                  ended
                  
                  
                  of
                  
                  
                  Percentage30-Jun-09
                  
                  
                  Total
      Sales
                  
                  
                  30-Jun-08
                  
                  
                  Total
      Sales
                  
                  
                  Change(U.S.
      dollars in million)China
      OEM market
                  
                  $
                  23.3
                  
                  
                  
                  47
                  %
                  
                  $
                  28.2
                  
                  
                  
                  39
                  %
                  
                  
                  -17.7
                  %China
      Aftermarket
                  
                  $
                  13.7
                  
                  
                  
                  27
                  %
                  
                  $
                  20.4
                  
                  
                  
                  28
                  %
                  
                  
                  -32.8
                  %International
      market
                  
                  $
                  13.0
                  
                  
                  
                  26
                  %
                  
                  $
                  24.2
                  
                  
                  
                  33
                  %
                  
                  
                  -46.3
                  %Total
                  
                  $
                  50.0
                  
                  
                  
                  100
                  %
                  
                  $
                  72.8
                  
                  
                  
                  100
                  %
                  
                  
                  -31.5
                  %




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 half year 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 heavy duty
trucks and the demand for air brake valves from our OEM customers declined in
the six months ended June 30, 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. As a result of these negative factors and our
positive actions, our Chinese OEM sales decreased by $5.0 million, or 17.7%, to
$23.2 million for the six months ended June 30, 2009, compared to $28.2 million
for the same period of 2008.




23




Our
Chinese Joint Venture achieved total revenue of $13.7 million in Chinese
aftermarket sales for the six months ended June 30, 2009, a decrease of $6.7
million, or 32.8% from $20.4 million compared to the same period of last year,
as a result of our customers decreasing their inventories in order to lower
their risk.





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 $11.2 million or 46.3%, to $13.0 million for the six
months ended June 30, 2009, as compared to $24.2 million for the same period of
2008.




COST
OF SALES AND GROSS PROFIT





For thesix monthsendedJune 30, 2009, cost of sales was $36,049,624, a
decrease of $16,743,730, or 31.7% from $52,793,354 for the same period last
year.Our gross profit
decreased by 30.5% from$20,051,207for the six months ended June 30, 2008
to $13,934,326 for the six months ended June 30, 2009.




We
focused on increasing management efficiency, improving the technologies of
products, and improving product portfolio to increase our gross profit margin.
Gross margin increased by 0.4% for the six months ended June 30, 2009, to 27.9%
from 27.5 % for the same period of 2008. We believe that our continued expansion
to the higher-profit new valve products will also help us to maintain or
increase our gross profit margins.





SELLING
AND DISTRIBUTION EXPENSES





Selling
and distribution expenses were $3,378,452 for the six months ended June 30,
2009, as compared to $4,611,078 for the same period of 2008, a decrease of
$1,232,626 or 26.7%.





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:


(1)
            Decreased
      transportation expense: During the six months ended June 30, 2009,
      transportation costs decreased by $724,997 to $724,919 from
      $1,449,916 for the six months ended June 30, 2008. The decrease in
      transportation expense was mainly due to decreased
  sales.


(2)
            Decreased
      product warranty expense. The Company recorded $657,452 of product
      warranty expenses for the six months ended June 30, 2009, as compared to
      $1,060,353 for the six months ended June 30, 2008, a decrease of $402,901,
      also related to decreased sales.





GENERAL
AND ADMINISTRATIVE EXPENSES





General
and administrative expenses were $5,065,813 for the six months ended June 30,
2009, as compared to $4,694,418 for the same period of 2008, an increase of
$371,395 or 7.9% mainly due to the following factor:





With the
impact of the U.S. financial crisis and weakening macro-economic environment,
the Company extended its payment terms on accounts receivable from certain
customers. As a result, the Company recorded more allowance for doubtful
accounts in the first quarter of 2009. During the six months ended June 30,
2009, the bad debt provision was $452,925, as compared to $21,282 for the same
period of 2008.




24




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 six
months ended June 30, 2009, research and development expense was $1,557,758, as
compared to $1,736,962 for the same period of 2008, a decrease of
$179,204.




DEPRECIATION
AND AMORTIZATION




Depreciation and amortization expense
increased to $1,476,238for the six months endedJune 30, 2009, compared with that
of$1,329,059 for the same period of 2008,
an increase of $147,179.The increase in
depreciation and amortization expense was primarily duetothepurchase of production
equipment.




FINANCIAL
EXPENSE




Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the six months ended June 30, 2009 decreased by $714,905
to $38,091 from $752,996 for the same period of 2008, which was
mainly attributed to fluctuations in the exchange rate between U.S. dollars
and RMB. 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 $215,461 for the six months ended June 30, 2009, as compared to
$333,840 for the six months ended June 30, 2008, a decrease of
$118,379. The decrease was mainly due to a decrease in sales of raw
material scraps for the six months ended June 30, 2009.




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. During the six months ended
June 30, 2009 and 2008, the Joint Venture received an income tax benefit of
$0 and $384,342 for purchase of domestic equipment, respectively, which has
been reflected as a reduction to current income tax expense. As a result,
income tax expense of $1,272,091 and $882,231 were recorded for
the six months ended June 30, 2009 and 2008, respectively.




25




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 was three years. Total deferred stock-based compensation expenses
related to stock options amounted to $178,904. This amount was amortized over
the three year vesting period in a manner consistent with Financial Accounting
Standards Board Statement No. 123R. The amortization of deferred stock-based
compensation for these equity arrangements was $9,935 and $29,818 for the six
months ended June 30, 2009 and 2008, respectively. 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.





NET
INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES




Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the Joint
Venture. Net income attributable to non-controlling interest in subsidiaries
amounted to $439,066 and $921,948 for the six months ended June 30, 2009 and
2008, respectively.





NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS




The net
income attributable to stockholders for the six months ended June 30,
2009 decreased by $4,325,755, to $3,941,658 from $8,267,413 for the
six months ended June 30, 2008 due to the factors discussed above. Earnings per
share (“EPS”), both basic and diluted, for the six months ended June 30, 2009
and 2008, were $0.22 and $0.45 per share, respectively.





FINANCIAL
CONDITION





Liquidity
and Capital Resources





OPERATING
- Net cash provided in operating activities was $8,537,485 for six months
ended June 30, 2009 compared with $2,609,173 of net cash provided in operating
activities in the same period in 2008, an increase of $5,928,312, primarily
due to the increased cash flow contributed by changes in prepayments, inventory,
other current assets, income tax payable and notes receivable.





At June
30, 2009, the Company had cash and cash equivalents of $15,762,830, as compared
to cash and cash equivalents of $7,795,987 at December 31, 2008. The Company had
working capital of $66,147,679 at June 30, 2009, as compared to working capital
of $61,586,125 at December 31, 2008, reflecting current ratios of 4.92:1 and
5.36:1, respectively.





INVESTING
- The Company expended less cash for investing activities in the six months
ended June 30, 2009 than in the six months ended June 30, 2008. During the six
months ended June 30, 2008, the Company expended net cash of
$1,188,165 in investing activities, including $1,109,428 for acquisition of
property and equipment to support the growth of the business. For the six months
ended June 30, 2009, the Company utilized $576,622 in investing
activities.





FINANCING
- The Company had no borrowings under its credit facilities during the
six months ended June 30, 2009. During the six months ended June 30, 2008, the
Company borrowed $1,967,686 and repaid $3,469,793 of its outstanding
debt.





Management
of the Company has taken a number of steps to restructure its customer base and
phase out accounts which failed to make prompt payments. The Company also placed
more emphasis on receivable collection. During the six months ended June 30,
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.




26





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 appreciation of the RMB against the USD during the six
months ended on June 30, 2009, (i) we recorded an exchange loss of $36,322 from
export sales for which the payments to us were in USD, and (ii) we also recorded
a foreign currency translation adjustment of $37,064 for the six months ended on
June 30, 2009, a positive number due to our functional currency in RMB and the
appreciation of the RMB against the USD. 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
interest rate risk at present. 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





As of
June 30, 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.





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 June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




27





PART
II OTHER INFORMATION





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




On June
10, 2009, the Company held its Annual Meeting of Stockholders. At the meeting,
the stockholders elected Xiao Ping Zhang, Xiao Feng Zhang, Jung Kang Chang, Li
Min Zhang, Zhi Zhong Wang, Yi Guang Huo and Jiang Hua Feng as directors,
approved the Amended and Restated Certificate of Incorporation of the Company
and ratified the appointment of Rotenberg & LLP as the Company’s independent
registered public accounting firm for the fiscal year ending December 31, 2009.
The stockholders did not approve an amendment to the Certificate of
Incorporation of the Company to delete an anti-takeover provision. The following
table sets forth the votes for, against and votes withheld with respect to each
matter.





1.
            Election
      of Directors





For
            WithheldXiao
      Ping Zhang
            17,080,484
            73,711Xiao
      Feng Zhang
            17,078,860
            75,335Jung
      Kang Chang
            16,954,187
            200,008Li
      Min Zhang
            17,074,821
            79,374Zhi
      Zhong Wang
            17,076,461
            77,734Yi
      Guang Huo
            17,076,559
            77,636Jiang
      Hua Feng
            17,964,759
            189,436





2.
            To
      approve an Amendment to our Certificate of Incorporation to delete an
      anti-takeover provision





For
            Against
            Abstain
            Not
      Voted13,923,532
            20,243
            52,800
            3,157,620





3.
            To
      approve an Amended and restated Certificate of
    Incorporation





For
            Against
            Abstain
            Not
      Voted13,922,109
            21,752
            52,714
            3,157,620





4.
            Ratification
      of Auditors





For
            Against
            Abstain16,817,196
            24,795
            312,204




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.





28





SIGNATURES




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


Dated :
      August 13, 2009
            SORL
      AUTO PARTS, INC.By: 
      /s/ Xiao Ping Zhang
              
              Name:
      Xiao Ping ZhangTitle:
      Chief Executive Officer





By: 
      /s/ Zong Yun Zhou
              
              Name:
      Zong Yun Zhou
                Title:
      Chief Financial Officer(Principal
      Financial Officer)




29