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


or the quarterly period ended September  3 0 , 200 9




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


For the
transition period from _________ to _________





Commission
file number 000-11991





SORL AUTO PARTS,
INC.


(Exact
name of registrant as specified in its charter)





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


No. 1169
Yumeng Road


Ruian
Economic Development District


Ruian
City, Zhejiang Province


People’s
Republic Of China


(Address
of principal executive offices)







86-577-6581-7720


(Registrant’s
telephone number)




Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes 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 oSmaller Reporting Companyx





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


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








SORL AUTO
PARTS, INC.


FORM
10-Q


For the
Quarter Ended September 30, 2009





INDEX




PagePART
      I.
                                              
                                              FINANCIAL
      INFORMATION (Unaudited)
                                              
                                              1Item
      1.
                                              
                                              Financial
      Statements:
                                              
                                              1Condensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
      December 31, 2008 (Audited)
                                              
                                              1Condensed
      Consolidated Statements of Income and Comprehensive Income (Unaudited) for
      the Three Months and Nine Months Ended September 30, 2009 and 2008
                                              
                                              2Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Three Months and
      Nine Months Ended September 30, 2009 and 2008
                                              
                                              3Condensed
      Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three
      months and Nine Months Ended September 30, 2009 and 2008
                                              
                                              4Notes
      to the Condensed Consolidated Financial Statements (Unaudited)
                                              
                                              6Item
      2.
                                              
                                              Management’s
      Discussion and Analysis or Financial Condition and Results of Operations
                                              
                                              19Item
      3.
                                              
                                              Quantitative
      and Qualitative Disclosures About Market Risk
                                              
                                              29Item
      4.
                                              
                                              Controls
      and Procedures
                                              
                                              29PART
      II.
                                              
                                              OTHER
      INFORMATION
                                              
                                              30Item
      6.
                                              
                                              Exhibits
                                              
                                              30SIGNATURES
                                              
                                              30





SORL
Auto Parts, Inc. and Subsidiaries


Consolidated
Balance Sheets


September
30, 2009 and December 31, 2008





September 30,
                                              2009
                                            
                                            
                                            December 31,
                                              2008(Unaudited)
                                            
                                            
                                            (Audited)AssetsCurrent
      AssetsCash
      and Cash Equivalents
                                            
                                            US$
                                            12,542,642
                                            
                                            
                                            US$
                                            7,795,987Accounts
      Receivable, Net of Provision
                                            
                                            
                                            42,598,949
                                            
                                            
                                            
                                            35,797,824Notes
      Receivable
                                            
                                            
                                            11,270,861
                                            
                                            
                                            
                                            7,536,534Inventory
                                            
                                            
                                            15,874,610
                                            
                                            
                                            
                                            19,105,845Prepayments,
      including $0 and $187,813 to related parties at September 30, 2009 and
      December 31, 2008, respectively.
                                            
                                            
                                            6,083,150
                                            
                                            
                                            
                                            1,013,440Other
      current assets, including $154,995 and $1,906,070 to related parties at
      September 30, 2009 and December 31, 2008, respectively.
                                            
                                            
                                            493,450
                                            
                                            
                                            
                                            4,445,778Total
      Current Assets
                                            
                                            
                                            88,863,662
                                            
                                            
                                            
                                            75,695,408Fixed
      AssetsProperty,
      Plant and Equipment
                                            
                                            
                                            34,329,214
                                            
                                            
                                            
                                            32,927,306Less:
      Accumulated Depreciation
                                            
                                            
                                            (10,910,816
                                            )
                                            
                                            
                                            (8,951,886
                                            )Property,
      Plant and Equipment, Net
                                            
                                            
                                            23,418,398
                                            
                                            
                                            
                                            23,975,420Leasehold
      Improvements in Progress
                                            
                                            
                                            465,818
                                            
                                            
                                            
                                            ―Land
      Use Rights, Net
                                            
                                            
                                            14,279,268
                                            
                                            
                                            
                                            14,514,983Other
      AssetsDeferred
      compensation cost-stock options
                                            
                                            
                                            ―
                                            
                                            
                                            
                                            9,935Intangible
      Assets
                                            
                                            
                                            161,480
                                            
                                            
                                            
                                            161,347Less:
      Accumulated Amortization
                                            
                                            
                                            (50,543
                                            )
                                            
                                            
                                            (39,018
                                            )Intangible
      Assets, Net
                                            
                                            
                                            110,937
                                            
                                            
                                            
                                            122,329Deferred
      tax assets
                                            
                                            
                                            370,305
                                            
                                            
                                            
                                            189,228Total
      Other Assets
                                            
                                            
                                            481,242
                                            
                                            
                                            
                                            321,492Total
      Assets
                                            
                                            US$
                                            127,508,388
                                            
                                            
                                            US$
                                            114,507,303Liabilities and Shareholders'
      EquityCurrent
      LiabilitiesAccounts
      Payable and Notes Payable, including $1,676,153 and $0 to related parties
      at September 30, 2009 and December 31, 2008, respectively.
                                            
                                            US$
                                            6,694,424
                                            
                                            
                                            US$
                                            4,623,850Deposit
      Received from Customers
                                            
                                            
                                            6,188,582
                                            
                                            
                                            
                                            6,295,857Income
      tax payable
                                            
                                            
                                            1,677,143
                                            
                                            
                                            
                                            340,138Accrued
      Expenses
                                            
                                            
                                            3,253,979
                                            
                                            
                                            
                                            2,389,314Other
      Current Liabilities
                                            
                                            
                                            531,957
                                            
                                            
                                            
                                            460,124Total
      Current Liabilities
                                            
                                            
                                            18,346,085
                                            
                                            
                                            
                                            14,109,283Non-Current
      LiabilitiesDeferred
      tax liabilities
                                            
                                            
                                            171,062
                                            
                                            
                                            
                                            106,826Total
      Liabilities
                                            
                                            
                                            18,517,147
                                            
                                            
                                            
                                            14,216,109Stockholders'
      EquityPreferred
      Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as
      of September 30, 2009 and December 31, 2008
                                            
                                            
                                            ―
                                            
                                            
                                            
                                            ―Common
      Stock - $0.002 Par Value; 50,000,000 authorized, 18,279,254 issued and
      outstanding as of September 30, 2009 and December 31, 2008
                                            
                                            
                                            36,558
                                            
                                            
                                            
                                            36,558Additional
      Paid In Capital
                                            
                                            
                                            37,498,452
                                            
                                            
                                            
                                            37,498,452Reserves
                                            
                                            
                                            3,902,190
                                            
                                            
                                            
                                            3,126,086Accumulated
      other comprehensive income
                                            
                                            
                                            10,926,200
                                            
                                            
                                            
                                            10,848,248Retained
      Earnings
                                            
                                            
                                            45,749,676
                                            
                                            
                                            
                                            38,774,684Total
      SORL Auto Parts, Inc. stockholders' equity
                                            
                                            
                                            98,113,076
                                            
                                            
                                            
                                            90,284,028Noncontrolling
      Interest In Subsidiaries
                                            
                                            
                                            10,878,165
                                            
                                            
                                            
                                            10,007,166Total
      Equity
                                            
                                            
                                            108,991,241
                                            
                                            
                                            
                                            100,291,194Total
      Liabilities and Stockholders' Equity
                                            
                                            US$
                                            127,508,388
                                            
                                            
                                            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 Nine Months Ended September 30,2009 and
2008


Three Months Ended Sept 30,
                  
                  
                  Nine Months Ended Sept 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Sales
                  
                  US$
                  33,989,937
                  
                  
                  
                  32,967,579
                  
                  
                  
                  83,973,887
                  
                  
                  
                  105,812,140Include:
      sales to related parties
                  
                  
                  181,873
                  
                  
                  
                  540,304
                  
                  
                  
                  383,484
                  
                  
                  
                  2,362,453Cost
      of Sales
                  
                  
                  25,116,609
                  
                  
                  
                  24,550,613
                  
                  
                  
                  61,166,233
                  
                  
                  
                  77,343,967Gross
      Profit
                  
                  
                  8,873,328
                  
                  
                  
                  8,416,966
                  
                  
                  
                  22,807,654
                  
                  
                  
                  28,468,173Expenses:Selling
      and Distribution Expenses
                  
                  
                  2,131,054
                  
                  
                  
                  2,261,143
                  
                  
                  
                  5,509,506
                  
                  
                  
                  6,872,221General
      and Administrative Expenses
                  
                  
                  1,804,368
                  
                  
                  
                  3,018,390
                  
                  
                  
                  6,870,181
                  
                  
                  
                  7,712,808Including:
      Research and development expenses
                  
                  
                  410,397
                  
                  
                  
                  721,897
                  
                  
                  
                  1,968,155
                  
                  
                  
                  2,458,859Financial
      Expenses
                  
                  
                  37,216
                  
                  
                  
                  221,694
                  
                  
                  
                  75,307
                  
                  
                  
                  974,690Total
      Expenses
                  
                  
                  3,972,638
                  
                  
                  
                  5,501,227
                  
                  
                  
                  12,454,994
                  
                  
                  
                  15,559,719Operating
      Income
                  
                  
                  4,900,690
                  
                  
                  
                  2,915,739
                  
                  
                  
                  10,352,660
                  
                  
                  
                  12,908,454Other
      Income
                  
                  
                  121,567
                  
                  
                  
                  276,752
                  
                  
                  
                  337,028
                  
                  
                  
                  610,592Non-Operating
      Expenses
                  
                  
                  (61,226
                  )
                  
                  
                  (119,677
                  )
                  
                  
                  (75,842
                  )
                  
                  
                  (374,640
                  )Income
      Before Provision for Income Taxes
                  
                  
                  4,961,031
                  
                  
                  
                  3,072,814
                  
                  
                  
                  10,613,846
                  
                  
                  
                  13,144,406Provision
      for Income Taxes
                  
                  
                  728,322
                  
                  
                  
                  468,935
                  
                  
                  
                  2,000,413
                  
                  
                  
                  1,351,166Net
      Income
                  
                  US$
                  4,232,709
                  
                  
                  
                  2,603,879
                  
                  
                  
                  8,613,433
                  
                  
                  
                  11,793,240Other
      Comprehensive Income - Foreign Currency Translation
    Adjustment
                  
                  
                  45,431
                  
                  
                  
                  578,065
                  
                  
                  
                  86,614
                  
                  
                  
                  6,048,704Total
      Comprehensive Income
                  
                  
                  4,278,140
                  
                  
                  
                  3,181,944
                  
                  
                  
                  8,700,047
                  
                  
                  
                  17,841,944Less:Net
      income Attributable to Non-controlling Interest In
      Subsidiaries
                  
                  
                  423,271
                  
                  
                  
                  261,904
                  
                  
                  
                  862,337
                  
                  
                  
                  1,183,852Other
      Comprehensive Income Attributable to Non-controlling Interest's
      Share
                  
                  
                  4,543
                  
                  
                  
                  57,807
                  
                  
                  
                  8,662
                  
                  
                  
                  604,871Total
      Comprehensive Income Attributable to Non-controlling Interest's
      Share
                  
                  
                  427,814
                  
                  
                  
                  319,711
                  
                  
                  
                  870,999
                  
                  
                  
                  1,788,723Net
      Income Attributable to Stockholders
                  
                  
                  3,809,438
                  
                  
                  
                  2,341,975
                  
                  
                  
                  7,751,096
                  
                  
                  
                  10,609,388Other
      Comprehensive Income Attributable to Stockholders
                  
                  
                  40,888
                  
                  
                  
                  520,258
                  
                  
                  
                  77,952
                  
                  
                  
                  5,443,833Total
      Comprehensive Income Attributable to Stockholders
                  
                  
                  3,850,326
                  
                  
                  
                  2,862,233
                  
                  
                  
                  7,829,048
                  
                  
                  
                  16,053,221Weighted
      average common share - Basic
                  
                  
                  18,279,254
                  
                  
                  
                  18,279,254
                  
                  
                  
                  18,279,254
                  
                  
                  
                  18,279,254Weighted
      average common share - Diluted
                  
                  
                  18,279,254
                  
                  
                  
                  18,283,011
                  
                  
                  
                  18,279,254
                  
                  
                  
                  18,287,094EPS
      - Basic
                  
                  
                  0.21
                  
                  
                  
                  0.13
                  
                  
                  
                  0.42
                  
                  
                  
                  0.58EPS
      - Diluted
                  
                  
                  0.21
                  
                  
                  
                  0.13
                  
                  
                  
                  0.42
                  
                  
                  
                  0.58





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 Nine Months Ended September 30, 2009 And 2008





Three Months Ended Sept 30,
                        
                        
                        Nine Months Ended Sept 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Cash
      Flows from Operating ActivitiesNet
      Income
                        
                        US$
                        3,809,438
                        
                        
                        
                        2,341,975
                        
                        
                        
                        7,751,096
                        
                        
                        
                        10,609,388Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Noncontrolling
      Interest In Subsidiaries
                        
                        
                        423,271
                        
                        
                        
                        261,904
                        
                        
                        
                        862,337
                        
                        
                        
                        1,183,852Bad
      Debt Expense
                        
                        
                        (450,102
                        )
                        
                        
                        666,231
                        
                        
                        
                        2,823
                        
                        
                        
                        687,513Depreciation
      and Amortization
                        
                        
                        757,613
                        
                        
                        
                        695,872
                        
                        
                        
                        2,233,851
                        
                        
                        
                        2,024,931Stock-Based
      Compensation Expense
                        
                        
                        ―
                        
                        
                        
                        14,909
                        
                        
                        
                        9,935
                        
                        
                        
                        44,727Loss
      on disposal of Fixed Assets
                        
                        
                        1,734
                        
                        
                        
                        23,176
                        
                        
                        
                        11,832
                        
                        
                        
                        25,695Changes
      in Assets and Liabilities:Account
      Receivables
                        
                        
                        (1,363,177
                        )
                        
                        
                        2,220,955
                        
                        
                        
                        (6,756,442
                        )
                        
                        
                        (3,871,416
                        )Notes
      Receivables
                        
                        
                        (3,146,091
                        )
                        
                        
                        6,053,775
                        
                        
                        
                        (3,727,096
                        )
                        
                        
                        3,322,456Other
      Currents Assets
                        
                        
                        66,151
                        
                        
                        
                        (1,347,718
                        )
                        
                        
                        3,938,113
                        
                        
                        
                        833,926Inventory
                        
                        
                        378,378
                        
                        
                        
                        (7,198,208
                        )
                        
                        
                        3,244,173
                        
                        
                        
                        (11,840,607
                        )Prepayments
                        
                        
                        (4,513,075
                        )
                        
                        
                        596,577
                        
                        
                        
                        (5,066,567
                        )
                        
                        
                        (1,232,259
                        )Deferred
      tax assets
                        
                        
                        161,398
                        
                        
                        
                        ―
                        
                        
                        
                        (180,676
                        )
                        
                        
                        ―Accounts
      Payable and Notes Payable
                        
                        
                        1,204,723
                        
                        
                        
                        (2,958,382
                        )
                        
                        
                        2,066,273
                        
                        
                        
                        (681,802
                        )Income
      Tax Payable
                        
                        
                        395,813
                        
                        
                        
                        (240,729
                        )
                        
                        
                        1,818,683
                        
                        
                        
                        117,818Deposits
      Received from Customers
                        
                        
                        (249,718
                        )
                        
                        
                        1,953,771
                        
                        
                        
                        (112,459
                        )
                        
                        
                        3,265,122Other
      Current Liabilities and Accrued Expenses
                        
                        
                        110,096
                        
                        
                        
                        (85,437
                        )
                        
                        
                        450,815
                        
                        
                        
                        1,118,500Deferred
      tax liabilities
                        
                        
                        21,378
                        
                        
                        
                        ―
                        
                        
                        
                        64,108
                        
                        
                        
                        ―Net
      Cash Flows from Operating Activities
                        
                        
                        (2,392,170
                        )
                        
                        
                        2,998,671
                        
                        
                        
                        6,610,799
                        
                        
                        
                        5,607,844Cash
      Flows from Investing ActivitiesAcquisition
      of Property and Equipment
                        
                        
                        (834,010
                        )
                        
                        
                        (1,559,786
                        )
                        
                        
                        (1,447,324
                        )
                        
                        
                        (2,669,214
                        )Leasehold
      Improvements in Progress
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        (465,484
                        )
                        
                        
                        ―Sales
      proceeds of disposal of fixed assets
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        36,692
                        
                        
                        
                        ―Investment
      in Intangible Assets
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        (78,737
                        )Net
      Cash Flows from Investing Activities
                        
                        
                        (834,010
                        )
                        
                        
                        (1,559,786
                        )
                        
                        
                        (1,876,116
                        )
                        
                        
                        (2,747,951
                        )Cash
      Flows from Financing ActivitiesProceeds
      from (Repayment of) Bank Loans
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        (1,502,107
                        )Net
      Cash flows from Financing Activities
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        ―
                        
                        
                        
                        (1,502,107
                        )Effects
      on changes in foreign exchange rate
                        
                        
                        5,992
                        
                        
                        
                        30,925
                        
                        
                        
                        11,972
                        
                        
                        
                        252,990Net
      Change in Cash and Cash Equivalents
                        
                        
                        (3,220,188
                        )
                        
                        
                        1,469,810
                        
                        
                        
                        4,746,655
                        
                        
                        
                        1,610,776Cash
      and Cash Equivalents- Beginning of the period
                        
                        
                        15,762,830
                        
                        
                        
                        4,481,177
                        
                        
                        
                        7,795,987
                        
                        
                        
                        4,340,211Cash
      and cash Equivalents - End of the period
                        
                        US$
                        12,542,642
                        
                        
                        
                        5,950,987
                        
                        
                        
                        12,542,642
                        
                        
                        
                        5,950,987Supplemental
      Cash Flow Disclosures:Interest
      Paid
                        
                        
                        ―
                        
                        
                        
                        33,564
                        
                        
                        
                        13,736
                        
                        
                        
                        136,689Tax
      Paid
                        
                        
                        845,072
                        
                        
                        
                        512,562
                        
                        
                        
                        1,475,754
                        
                        
                        
                        2,901,083





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 September 30, 2009 and 2008




Additional
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Accumu.
      Other
                                  
                                  
                                  Total
      SORL
                                    Auto
      Parts,
                                    Inc.Number
                                  
                                  
                                  Common
                                  
                                  
                                  Paid-in
                                  
                                  
                                  
                                  
                                  
                                  Retained
                                  
                                  
                                  Comprehensive
                                  
                                  
                                  Shareholders'
                                  
                                  
                                  Noncontrollingof
      Share
                                  
                                  
                                  Stock
                                  
                                  
                                  Capital
                                  
                                  
                                  Reserves
                                  
                                  
                                  Earnings
                                  
                                  
                                  Income
                                  
                                  
                                  Equity
                                  
                                  
                                  Interest
                                  
                                  
                                  Total EquityBeginning
      Balance -  July 1, 2008
                                  
                                  
                                  18,279,254
                                  
                                  
                                  
                                  36,558
                                  
                                  
                                  
                                  37,498,452
                                  
                                  
                                  
                                  2,661,841
                                  
                                  
                                  
                                  35,135,482
                                  
                                  
                                  
                                  10,355,764
                                  
                                  
                                  
                                  85,688,097
                                  
                                  
                                  
                                  9,493,164
                                  
                                  
                                  
                                  95,181,261Net
      Income
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  2,341,975
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  2,341,975
                                  
                                  
                                  
                                  261,904
                                  
                                  
                                  
                                  2,603,879Other
      Comprehensive Income
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  520,258
                                  
                                  
                                  
                                  520,258
                                  
                                  
                                  
                                  57,807
                                  
                                  
                                  
                                  578,065Transfer
      to reserve
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  235,714
                                  
                                  
                                  
                                  (235,714
                                  )
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―Ending
      Balance – September 30, 2008
                                  
                                  
                                  18,279,254
                                  
                                  
                                  
                                  36,558
                                  
                                  
                                  
                                  37,498,452
                                  
                                  
                                  
                                  2,897,555
                                  
                                  
                                  
                                  37,241,743
                                  
                                  
                                  
                                  10,876,022
                                  
                                  
                                  
                                  88,550,330
                                  
                                  
                                  
                                  9,812,875
                                  
                                  
                                  
                                  98,363,205Beginning
      Balance -  July 1, 2009
                                  
                                  
                                  18,279,254
                                  
                                  
                                  
                                  36,558
                                  
                                  
                                  
                                  37,498,452
                                  
                                  
                                  
                                  3,521,246
                                  
                                  
                                  
                                  42,321,182
                                  
                                  
                                  
                                  10,885,312
                                  
                                  
                                  
                                  94,262,750
                                  
                                  
                                  
                                  10,450,351
                                  
                                  
                                  
                                  104,713,101Net
      Income
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  3,809,438
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  3,809,438
                                  
                                  
                                  
                                  423,271
                                  
                                  
                                  
                                  4,232,709Other
      Comprehensive Income
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  40,888
                                  
                                  
                                  
                                  40,888
                                  
                                  
                                  
                                  4,543
                                  
                                  
                                  
                                  45,431Transfer
      to reserve
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  380,944
                                  
                                  
                                  
                                  (380,944
                                  )
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―Ending
      Balance – September 30, 2009
                                  
                                  
                                  18,279,254
                                  
                                  
                                  
                                  36,558
                                  
                                  
                                  
                                  37,498,452
                                  
                                  
                                  
                                  3,902,190
                                  
                                  
                                  
                                  45,749,676
                                  
                                  
                                  
                                  10,926,200
                                  
                                  
                                  
                                  98,113,076
                                  
                                  
                                  
                                  10,878,165
                                  
                                  
                                  
                                  108,991,241




The
accompanying notes are an integral part of these financial
statements


4


SORL
Auto Parts, Inc. and Subsidiaries


Consolidated
Statements of Changes in Stockholders' Equity


Nine
Months Ended September 30, 2009 and 2008





Additional
                                
                                
                                
                                
                                
                                
                                
                                
                                Accumu.
      OtherNumber
                                
                                
                                Common
                                
                                
                                Paid-in
                                
                                
                                
                                
                                
                                Retained
                                
                                
                                Comprehensive
                                
                                
                                Shareholders'
                                
                                
                                Noncontrollingof
      Share
                                
                                
                                Stock
                                
                                
                                Capital
                                
                                
                                Reserves
                                
                                
                                Earnings
                                
                                
                                Income
                                
                                
                                Equity
                                
                                
                                Interest
                                
                                
                                Total
      EquityBeginning
      Balance - January 1, 2008
                                
                                
                                18,279,254
                                
                                
                                
                                36,558
                                
                                
                                
                                37,498,452
                                
                                
                                
                                1,882,979
                                
                                
                                
                                27,646,931
                                
                                
                                
                                5,432,189
                                
                                
                                
                                72,497,109
                                
                                
                                
                                8,024,152
                                
                                
                                
                                80,521,261Net
      Income
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                10,609,388
                                
                                
                                
                                ―
                                
                                
                                
                                10,609,388
                                
                                
                                
                                1,183,852
                                
                                
                                
                                11,793,240Other
      Comprehensive Income
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                5,443,833
                                
                                
                                
                                5,443,833
                                
                                
                                
                                604,871
                                
                                
                                
                                6,048,704Transfer
      to reserve
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                1,014,576
                                
                                
                                
                                (1,014,576
                                )
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―Ending
      Balance - September 30, 2008
                                
                                
                                18,279,254
                                
                                
                                
                                36,558
                                
                                
                                
                                37,498,452
                                
                                
                                
                                2,897,555
                                
                                
                                
                                37,241,743
                                
                                
                                
                                10,876,022
                                
                                
                                
                                88,550,330
                                
                                
                                
                                9,812,875
                                
                                
                                
                                98,363,205Beginning
      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
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                7,751,096
                                
                                
                                
                                ―
                                
                                
                                
                                7,751,096
                                
                                
                                
                                862,337
                                
                                
                                
                                8,613,433Other
      Comprehensive Income
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                77,952
                                
                                
                                
                                77,952
                                
                                
                                
                                8,662
                                
                                
                                
                                86,614Transfer
      to reserve
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                776,104
                                
                                
                                
                                (776,104
                                )
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―
                                
                                
                                
                                ―Ending
      Balance - September 30, 2009
                                
                                
                                18,279,254
                                
                                
                                
                                36,558
                                
                                
                                
                                37,498,452
                                
                                
                                
                                3,902,190
                                
                                
                                
                                45,749,676
                                
                                
                                
                                10,926,200
                                
                                
                                
                                98,113,076
                                
                                
                                
                                10,878,165
                                
                                
                                
                                108,991,241





The
accompanying notes are an integral part of these financial
statements


5


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
A - DESCRIPTION OF BUSINESS




SORL Auto
Parts, Inc. (the “Company”) is principally engaged in the manufacture and
distribution of automotive air brake systems 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 Financial Accounting
Standard Board (“FASB”) ASC 855-10 (Prior authoritative literature: FASB
Statement No. 165 “Subsequent Events”), management has evaluated subsequent
events through November 13, 2009 (the financial statement issue
date).





NOTE
C- RECENTLY ISSUED FINANCIAL STANDARDS




In
December 2007, the FASB issued FASB ASC 810-10-65 (Prior authoritative
literature: FASB Statement No. 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, FASB
ASC 810-10-65 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions.





FASB ASC
810-10-65 is 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 June
2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature: FASB
Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of
FASB Statement No. 140”).  FASB ASC 860-10-05 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. FASB ASC 860-10-05 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 FASB ASC 860-10-05 will have on its
consolidated financial statements.


6




In June
2009, the FASB issued FASB ASC 810-10-05 (Prior authoritative literature: FASB
Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC
810-10-05 improves financial reporting by enterprises involved with variable
interest entities and to address (1) the effects on certain provisions of prior
authoritative literature 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 prior authoritative literature
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of prior authoritative literature 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. FASB ASC 810-10-05 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 of the adoption of FASB ASC 810-10-05 will have on its
consolidated financial statements.




In June
2009, the FASB issued FASB ASC 105-10 (Prior authoritative literature: FASB
Statement No. 168, "The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles”). FASB ASC 105-10 replaces prior authoritative
literature 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.  FASB ASC
105-10 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company does not believe that the
adoption of FASB ASC 105-10 has had a material effect on its consolidated
financial statements.




NOTE
D - RELATED PARTY TRANSACTIONS




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





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 nine
months ended September 30, 2009 and 2008:





Three Months EndedSeptember
                                    30,
                                  
                                  
                                  NineMonths EndedSeptember
                                    30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008PURCHASES
      FROM:Ruili
      Group Co., Ltd.
                                  
                                  $
                                  4,240,790
                                  
                                  
                                  $
                                  9,295,010
                                  
                                  
                                  $
                                  12,134,212
                                  
                                  
                                  $
                                  28,448,919Total
      Purchases
                                  
                                  $
                                  4,240,790
                                  
                                  
                                  $
                                  9,295,010
                                  
                                  
                                  $
                                  12,134,212
                                  
                                  
                                  $
                                  28,448,919SALES
      TO:Ruili
      Group Co., Ltd.
                                  
                                  $
                                  181,873
                                  
                                  
                                  $
                                  540,304
                                  
                                  
                                  $
                                  383,484
                                  
                                  
                                  $
                                  2,362,453Total
      Sales
                                  
                                  $
                                  181,873
                                  
                                  
                                  $
                                  540,304
                                  
                                  
                                  $
                                  383,484
                                  
                                  
                                  $
                                  2,362,453




7





The total purchases from Ruili Group
during the three months endedSeptember30,2009consisted of $3.9million of finished productsofnon-valve auto parts and$0.3million of packaging materials. During theninemonths endedSeptember30,2009, the breakdown was$11.1million of finished products of
non-valve auto parts and approximately $0.9million of packaging
materials.





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.





September30,
                                            
                                            
                                            December 31,2009
                                            
                                            
                                            2008PREPAYMENTRuili
      Group Co., Ltd.
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            187,813Total
                                            
                                            $
                                            ―
                                            
                                            
                                            $
                                            187,813OTHER
      ACCOUNTS RECEIVABLERuili
      Group Co., Ltd.
                                            
                                            $
                                            154,995
                                            
                                            
                                            $
                                            1,906,070Total
                                            
                                            $
                                            154,995
                                            
                                            
                                            $
                                            1,906,070ACCOUNTS
      PAYABLERuili
      Group Co., Ltd.
                                            
                                            $
                                            1,676,153
                                            
                                            
                                            $
                                            ―Total
                                            
                                            $
                                            1,676,153
                                            
                                            
                                            $
                                            ―





NOTE
E - ACCOUNTS RECEIVABLE




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


8




September
      30,
                                                                
                                                                December
      31,2009
                                                                
                                                                2008Beginning
      balance
                                                                $
                                                                24,997
                                                                
                                                                $
                                                                27,987Add:
      Increase to allowance
                                                                
                                                                (11,446
                                                                )
                                                                
                                                                (2,990
                                                                )Ending
      balance
                                                                $
                                                                13,551
                                                                
                                                                $
                                                                24,997September
      30,
                                                                
                                                                December
      31,2009
                                                                
                                                                2008Accounts
      receivable
                                                                $
                                                                42,612,500
                                                                
                                                                $
                                                                35,822,821Less:
      allowance for doubtful accounts
                                                                
                                                                (13,551
                                                                )
                                                                
                                                                (24,997
                                                                )Account
      receivable balance, net
                                                                $
                                                                42,598,949
                                                                
                                                                $
                                                                35,797,824




NOTE
F - INVENTORIES




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




September
      30,
                                            
                                            
                                            December
      31,2009
                                            
                                            
                                            2008Raw
      Material
                                            
                                            $
                                            3,626,312
                                            
                                            
                                            $
                                            2,705,224Work
      in process
                                            
                                            
                                            3,114,928
                                            
                                            
                                            
                                            8,074,488Finished
      Goods
                                            
                                            
                                            9,133,370
                                            
                                            
                                            
                                            8,326,133Total
      Inventory
                                            
                                            $
                                            15,874,610
                                            
                                            
                                            $
                                            19,105,845




NOTE
G - PROPERTY, PLANT AND EQUIPMENT




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




September
      30,
            
            
            December
      31,2009
            
            
            2008Machinery
            
            $
            23,354,710
            
            
            $
            22,085,672Molds
            
            
            1,276,607
            
            
            
            1,275,561Office
      equipment
            
            
            660,743
            
            
            
            618,403Vehicle
            
            
            1,055,366
            
            
            
            972,422Building
            
            
            7,981,788
            
            
            
            7,975,248Sub-Total
            
            
            34,329,214
            
            
            
            32,927,306Less:
      Accumulated depreciation
            
            
            (10,910,816
            )
            
            
            (8,951,886
            )Fixed
      Assets, net
            
            $
            23,418,398
            
            
            $
            23,975,420




9




Depreciation
expense charged to operations was $1,974,900 and $1,774,361 for the nine
months ended September 30, 2009 and 2008, respectively.





NOTE
H- LAND USE RIGHTS




September
      30,
                                                    
                                                    
                                                    December
      31,2009
                                                    
                                                    
                                                    2008Cost:
                                                    
                                                    $
                                                    14,939,581
                                                    
                                                    
                                                    $
                                                    14,927,340Less:
      Accumulated amortization:
                                                    
                                                    
                                                    (660,313
                                                    )
                                                    
                                                    
                                                    (412,357
                                                    )Land
      use rights, net
                                                    
                                                    $
                                                    14,279,268
                                                    
                                                    
                                                    $
                                                    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 $247,466 and
$242,356 for the nine months ended September 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 $161,480, less accumulated amortization
of $50,543 for net intangible assets of $110,937 as of September 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 $11,485 and $8,215 for the nine months ended
September 30, 2009 and 2008 respectively. Future estimated amortization expense
is as follows:




2009
                            
                            
                            2010
                            
                            
                            2011
                            
                            
                            2012
                            
                            
                            2013
                            
                            
                            Thereafter$
                            4,650
                            
                            
                            $
                            16,135
                            
                            
                            $
                            16,135
                            
                            
                            $
                            16,135
                            
                            
                            $
                            16,135
                            
                            
                            $
                            41,699


10


NOTE
J - PREPAYMENT




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




September
      30,
                                  
                                  December
      31,2009
                                  
                                  2008Raw
      material suppliers
                                  
                                  $
                                  3,329,716
                                  
                                  
                                  $
                                  878,374Equipment
      purchase
                                  
                                  
                                  2,753,434
                                  
                                  
                                  
                                  135,066Total
      prepayment
                                  
                                  $
                                  6,083,150
                                  
                                  
                                  $
                                  1,013,440





NOTE
K - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES




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





30-Sep-09
                                                                                
                                                                                
                                                                                31-Dec-08Deferred
      tax assets - currentProvision
                                                                                
                                                                                $
                                                                                3,637
                                                                                
                                                                                
                                                                                $
                                                                                3,990Warranty
                                                                                
                                                                                
                                                                                290,717
                                                                                
                                                                                
                                                                                
                                                                                277,893Revenue
                                                                                
                                                                                
                                                                                124,910
                                                                                
                                                                                
                                                                                
                                                                                ―Deferred
      tax assets
                                                                                
                                                                                
                                                                                419,264
                                                                                
                                                                                
                                                                                
                                                                                281,883Valuation
      allowance
                                                                                
                                                                                
                                                                                ―
                                                                                
                                                                                
                                                                                
                                                                                ―Net
      deferred tax assets - current
                                                                                
                                                                                $
                                                                                419,264
                                                                                
                                                                                
                                                                                $
                                                                                281,883Deferred
      tax liabilities - current Revenue
                                                                                
                                                                                $
                                                                                48,959
                                                                                
                                                                                
                                                                                $
                                                                                92,655Deferred
      tax liabilities - current
                                                                                
                                                                                
                                                                                48,959
                                                                                
                                                                                
                                                                                
                                                                                92,655Net
      deferred tax assets - current
                                                                                
                                                                                $
                                                                                370,305
                                                                                
                                                                                
                                                                                $
                                                                                189,228Deferred
      tax liabilities - non-currentLand
      use right
                                                                                
                                                                                
                                                                                171,062
                                                                                
                                                                                
                                                                                
                                                                                106,826Deferred
      tax liabilities - non-current
                                                                                
                                                                                $
                                                                                171,062
                                                                                
                                                                                
                                                                                $
                                                                                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.


11




NOTE
L - ACCRUED EXPENSES




Accrued
expenses consisted of the following as of September 30, 2009 and December 31,
2008:




September
      30,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008Accrued
      payroll
                                  
                                  $
                                  1,303,426
                                  
                                  
                                  $
                                  617,522Other
      accrued expenses
                                  
                                  
                                  1,950,553
                                  
                                  
                                  
                                  1,771,792Total
      accrued expenses
                                  
                                  $
                                  3,253,979
                                  
                                  
                                  $
                                  2,389,314




NOTE
M – RESERVE




The
reserve funds are comprised of the following:




September
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008Statutory
      surplus reserve fund
                              
                              $
                              3,902,190
                              
                              
                              $
                              3,126,086Total
                              
                              $
                              3,902,190
                              
                              
                              $
                              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.


12





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.





The
reconciliation of the effective income tax rate of the Joint Venture to the
statutory income tax rate in the PRC for the nine months ended September 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 nine months ended September 30, 2009 and 2008, respectively, are summarized
as follows:





2009
                                  
                                  2008PRC
      only:Current
                                  
                                  $
                                  2,116,981
                                  
                                  
                                  $
                                  1,351,166Deferred
                                  
                                  
                                  (116,568
                                  )
                                  ―Total
                                  
                                  $
                                  2,000,413
                                  
                                  
                                  $
                                  1,351,166


13


The
Company adopted the provisions of FASB ASC 740-10-05 (Prior authoritative
literature: FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes”), on January 1, 2007. As the result of the implementation of the FASB ASC
740-10-05, the Company recognized no material adjustments to unrecognized tax
benefits. At the adoption date of January 1, 2007 and as of September 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 has entered into a lease agreement with Ruili Group Co.,
Ltd. for the lease of a manufacturing plant. The lease term is from
September 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
                    
                    $
                    70,248
                    
                    
                    $
                    281,167
                    
                    
                    $
                    281,167
                    
                    
                    $
                    68,219
                    
                    
                    $
                    ―Total
                    
                    $
                    70,248
                    
                    
                    $
                    610,303
                    
                    
                    $
                    610,303
                    
                    
                    $
                    397,355
                    
                    
                    $
                    1,453,684




NOTE
P - ADVERTISING COSTS




Advertising
costs were $2,532 and $4,261 for the nine months ended September 30, 2009
and 2008, respectively.





NOTE
Q - RESEARCH AND DEVELOPMENT EXPENSE




Research
and development costs are expensed as incurred and were $1,968,155 and
$2,458,859 for the nine months ended September 30, 2009 and 2008,
respectively.





NOTE
R - WARRANTY CLAIMS




Warranty
claims were $1,104,598 and $1,539, 396 for the nine months ended
September 30, 2009 and 2008, respectively. The movement of accrued warranty
expenses for the nine months ended September 30, 2009 was as
follows:


Beginning
      balance at January 01, 2009
                
                
                1,111,569Aggregate
      reduction for payments made
                
                
                (1,053,297
                )Aggregate
      increase for new warranties issued during current period
                
                
                1,104,598Aggregate
      changes in the liability related to pre-existing warranties (changes in
      estimate)
                
                
                ―Ending
      balance at September 30, 2009:
                
                
                1,162,870





NOTE
S – SEGMENT INFORMATION




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


14





Net sales
from our Chinese market were $26.1 million and $18.8 million for the three
months ended September 30, 2009 and 2008, respectively. Net sales from
international market were $7.8 million and $14.1 million for the three months
ended September 30, 2009 and 2008, respectively.





Net sales
from our Chinese market were $63.1 million and $67.4 million for the nine
months ended September 30, 2009 and 2008, respectively. Net sales from
international market were $20.8 million and $38.3 million for the nine months
ended September 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.





For the
three months ended September 30, 2009, our three biggest customers Dongfeng Axle
Co., Ltd., FAW Qingdao Automobile Works and Beiqi Foton Motor Co., Ltd. Beijing
Auman Heavy-Duty Vehicle Works accounted for approximately 9.8%, 9.4% and 6.3%
of our total sales revenue, respectively. For the three months ended September
30, 2008, Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works and Beiqi Foton
Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works accounted for
approximately 1.3%, 4.2% and 2.8% of our total sales revenue,
respectively.





For the
nine months ended September 30, 2009, our three biggest customers Dongfeng Axle
Co., Ltd., FAW Qingdao Automobile Works and Beiqi Foton Motor Co., Ltd. Beijing
Auman Heavy-Duty Vehicle Works accounted for approximately 10.8%, 7.3% and 4.1%
of our total sales revenue, respectively. For the nine months ended September
30, 2008, Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works and Beiqi Foton
Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works accounted for
approximately 5.6%, 4.7% and 2.7% of our total sales revenue,
respectively.





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 nine months ended September 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 $1,198,654 and $2,134,569 for the nine month ended September 30, 2009
and 2008, respectively.





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 FASB ASC 505-50
(Prior authoritative literature: FASB Statement 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.


15





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 nine months ended September 30,
2009.





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





(ii).
Subject to all the terms and provisions of the 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


16





The
Company accounts for stock-based compensation in accordance with FASB ASC 505-50
(Prior authoritative literature: FASB Statement 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 September 30, 2009 and changes during
the nine months ended September 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 September 30, 2009
                            
                            
                            4,128
                            
                            
                            $
                            7.25
                            
                            
                            0.8 Year
                            
                            
                            $
                            —Exercisable
      at September 30, 2009
                            
                            
                            4,128
                            
                            
                            $
                            7.25
                            
                            
                            0.8
      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.


17





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





The
Company accounts for these warrants in accordance with FASB ASC 505-50 (Prior
authoritative literature: FASB Statement 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 FASB ASC 505-50, was recognized during the fiscal year
ended December 31, 2006.


A summary
of option activity with respect to the warrants as of September 30, 2009 and
changes during the nine months ended September 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 September 30, 2009
                                
                                
                                100,000
                                
                                
                                $
                                6.25
                                
                                
                                0.3 Year
                                
                                
                                $
                                —Exercisable
      at September 30, 2009
                                
                                
                                100,000
                                
                                
                                $
                                6.25
                                
                                
                                0.3
      Year
                                
                                
                                $
                                —


18




NOTE
W- COMMITMENTS AND CONTINGENCIES




Information
on lease commitments is provided in Note O.





NOTE
X - OFF-BALANCE SHEET ARRANGEMENTS




At
September 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.





NOTE
Y- SUBSEQUENT EVENTS




In
November 2009, the Company entered into a joint venture agreement with MGR,
a Hong Kong-based global auto parts distribution specialist firm. The joint
venture is named SORL International Holding, Ltd. (“SIH”). SORL holds
a 60% interest in the joint venture.





SIH will
be primarily devoted to expanding SORL’s international sales
network in the Asia-Pacific region and expanding the
company's business in Europe, the Middle East and Africa. The joint
venture will complement the Company’s current international sales centers in
Australia, United Arab Emirates, India, and the United States.





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 systems 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 system 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.


19





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 September 30, 2009 as compared
to the three months ended September 30, 2008.




SALES




Three
      Months ended
                    
                    
                    Three
      Months ended30-Sep-09
                    
                    
                    30-Sep-08(U.S. 
      dollars in millions)Air
      brake systems & related components
                    
                    $
                    29.9
                    
                    
                    
                    88
                    %
                    
                    $
                    24.5
                    
                    
                    
                    74
                    %Non-valve
      products
                    
                    $
                    4.1
                    
                    
                    
                    12
                    %
                    
                    $
                    8.5
                    
                    
                    
                    26
                    %Total
                    
                    $
                    34.0
                    
                    
                    
                    100
                    %
                    
                    $
                    33.0
                    
                    
                    
                    100
                    %





Sales
consist of air brake systems 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 $33,989,937 and $32,967,579 for the three months ended September 30,
2009 and 2008, respectively. Compared with the same period of 2008, net sales
for the three months ended September 30, 2009 increased by $1.0 million
or 3.1% to $34.0 million.




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




Three
                            Months
                            ended
                            30-Sep-09
                          
                          
                          Percent
                            of
                            Total Sales
                          
                          
                          Three
                            Months
                            ended
                            30-Sep-08
                          
                          
                          Percent
                            of
                            TotalSales
                          
                          
                          Percentage
                            Change(U.S.
      dollars in million)China
      OEM market
                          
                          $
                          17.4
                          
                          
                          
                          51
                          %
                          
                          $
                          10.4
                          
                          
                          
                          32
                          %
                          
                          
                          67.3
                          %China
      Aftermarket
                          
                          $
                          8.7
                          
                          
                          
                          26
                          %
                          
                          $
                          8.4
                          
                          
                          
                          26
                          %
                          
                          
                          3.6
                          %International
      market
                          
                          $
                          7.8
                          
                          
                          
                          23
                          %
                          
                          $
                          14.1
                          
                          
                          
                          42
                          %
                          
                          
                          -44.7
                          %Total
                          
                          $
                          34.0
                          
                          
                          
                          100
                          %
                          
                          $
                          33.0
                          
                          
                          
                          100
                          %
                          
                          
                          3.0
                          %


20




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. Further, during the 2008 Beijing Olympic Games, our major customers, such
as FAW Qiongdao, Beiqi Foton Zhucheng and Beiqi Foton Aumen halted production
due to the traffic control in the regions around Beijing. Consequently, our OEM
sales in the third quarter of 2008 were sharply decreased compared to the second
quarter of 2008.




However,
the Chinese’s government’s 4 trillion RMB stimulus package, which positively
affected the development of China’s automobile industry, materially benefited
our results in the third quarter of 2009. Further, we promoted our
integrated system and modular supplies of air brake systems to our OEM
customers and we increasingly focused on the bus and agricultural vehicle market
in the third quarter of 2009. As a result of these positive factors, our
Chinese OEM sales increased by $7.0 million, or 67.3%, to $17.4 million for the
three months ended September 30, 2009, compared to $10.4 million for the same
period of 2008.




Our
Chinese Joint Venture achieved total revenue of $8.7 million in Chinese
aftermarket sales for the three months ended September 30, 2009,
an increase of $0.3 million, or 3.6% from $8.4 million compared to
the same period of last year.





The
global financial crisis has negatively affected our international customers, and
caused local currencies to depreciate against the US dollar, while the lack of
confidence in the growth of the world macro-economy has made our customers
decrease their inventories in order to lower their risk. Consequently, our
export sales decreased by $6.3 million or 44.7%, to $7.8 million for the three
months ended September 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 September 30, 2009 were $25,116,609,
an increase of $565,996, or 2.3% from $24,550,613 for the same period last
year. Our gross profit increased by 5.4% from $8,416,966 for the third
quarter of 2008 to $8,873,328 for the third quarter of 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 to 26.1% from 25.5% for the three months ended
September 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 $2,131,054 for the three months ended
September 30, 2009, as compared to $2,261,143 for the same period of 2008,
a decrease of $130,089 or 5.8%.





Selling
and distribution expenses include salaries and wages, transportation expense,
packaging expense, warranty expense, other 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
September 30, 2009 was primarily due to the decreased transportation expense.
During the third quarter of 2009, transportation costs decreased by
$210,919 to $473,735 from $684,654 for the same period of 2008. The
decrease in transportation expense was mainly due to decreased international
sales and increased delivery efficiency.




GENERAL
AND ADMINISTRATIVE EXPENSES




General
and administrative expenses were $1,804,368 for the three months ended
September 30, 2009, as compared to $3,018,390 for the same period of 2008, a
decrease of $1,214,022 or 40.2%.The decrease was mainly due to the
following factors:


21


(1)
            Because of the impact of the U.S.
      financial crisis and weakening international macroeconomic factors, the
      Company extended the payment term accordingly for accounts receivable for
      our international distributors. As a result, the Company recorded more
      allowance for doubtful accounts in the third quarter of 2008. During the
      three months ended September 30, 2009, The Joint Venture reversed a bad
      debt provision resulting from collecting a significant portion of accounts
      receivable, which had been reflected as a reduction to general and
      administrative expenses. Compared with the $666,231 of bad debt provision
      for the three months ended September 30, 2008, the bad debt provision was
      negative $450,102 for the three months ended September 30, 2009, a
      decrease of $1,116,333.


(2)
              Research and
      developmentexpense,which is included in general and
      administrative expensesdecreased by $311,501to$410,397, as compared to$721,897of R&D expense for
the same period of2008, 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. We invest in
R&D on a regular basis, although the amount may vary from period to period.
For the three months ended September 30, 2009, research and development expense
was $410,397, as compared to $721,897 for the same period of 2008, a decrease of
$311,501. The Company will continue to invest in new product development,
particularly in upgrading traditional valve products and in developing
electronic controlled products..




DEPRECIATION
AND AMORTIZATION




Depreciation
and amortization expense increased to $757,613 for the three months ended
September 30, 2009, compared with that of $695,872 for the same period of 2008,
an increase of $61,741. The increase in depreciation and amortization expense
was primarily due to the addition of purchased production
equipment.




FINANCIAL
EXPENSE




Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the three months ended September 30, 2009 decreased by
$184,478 to $37,216 from $221,694 for the same period of 2008, which
was mainly due to the lesser exchange loss incurred as compared to the
three months ended September 30, 2008.




OTHER
INCOME




Other
income was $121,567 for the three months ended September 30, 2009, as compared
to $276,752 for the three months ended September 30, 2008, a decrease of
$155,185. The decrease was mainly due to more subsidies received from local
governments for the three months ended September 30, 2008. These subsidies were
provided to the Company as economic incentives to secure business commitments
and no repayment by the Company is required.




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.


22





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 third quarter
ended September 30, 2009, the Joint Venture received an income tax
refund of $694,843, which has been reflected as a reduction to current
income tax expense. Income tax expense of $728,322 and
$468,935 were recorded for the quarter ended September 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 FASB ASC 505-50 (Prior
authoritative literature: FASB Statement No. 123R). The amortization of deferred
stock-based compensation for these equity arrangements was $0 and $14,909 for
the three months ended September 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 $423,271 and $261,904 for the quarters ended September 30, 2009
and 2008, respectively.




NET
INCOMEATTRIBUTABLE TO STOCKHOLDERS




The net
income attributable to stockholders for the quarter ended September 30,
2009 increased by $1,467,463 to $3,809,438 from $2,341,975 for the quarter
ended September 30, 2008 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the quarter ended September 30, 2009 and
2008, were $0.21 and $0.13 per share, respectively.




FINANCIAL
CONDITION




Liquidity
and Capital Resources




OPERATING
- Net cash used in operating activities was $2,392,170 for three months
ended September 30, 2009 compared with $2,998,671 of net cash provided in
operating activities in the same period in 2008, a decrease of $5,390,841,
primarily due to the decreased cash flow contributed by changes in prepayments,
accounts receivable and notes receivable.





At
September 30, 2009, the Company had cash and cash equivalents of $12,542,642 as
compared to cash and cash equivalents of $7,795,987 at December 31, 2008. The
Company had working capital of $70,517,577 at September 30, 2009, as compared to
working capital of $61,586,125 at December 31, 2008, reflecting current ratios
of 4.84:1 and 5.36:1, respectively.


23





INVESTING
- During the three months ended September 30, 2008, the Company expended net
cash of $1,599,786 in investing activities for acquisition of property and
equipment to support the growth of the business. For the three months ended
September 30, 2009, the Company utilized $834,010 in investing
activities.





FINANCING
- The Company had no borrowings under its credit facilities during the
quarter ended September 30, 2009 and the third quarter ended September 30,
2008.





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 third 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 September 30, 2009, (i) we recorded an exchange loss of $19,927 from
export sales for which the payments to us were in USD, and (ii) we also recorded
a foreign currency translation adjustment of $45,431 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.





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
September 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 nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008.





SALES




Nine
      months ended
                
                
                Nine
      months ended30-Sep-09
                
                
                30-Sep-08(U.S. 
      dollars in millions)Air
      brake systems & related components
                
                $
                72.0
                
                
                
                86
                %
                
                $
                80.2
                
                
                
                76
                %Non-valve
      products
                
                $
                12.0
                
                
                
                14
                %
                
                $
                25.6
                
                
                
                24
                %Total
                
                $
                84.0
                
                
                
                100
                %
                
                $
                105.8
                
                
                
                100
                %


24





Sales
consist of air brake systems 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 $83,973,887 and $105,812,140 for the nine months ended September 30,
2009 and 2008, respectively. Compared with the same period of 2008, net sales
for the nine months ended September 30, 2009 decreased by $21.8 million
or 20.6% to $84.0 million.




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




Nine
                      months
                      ended
                      30-Sep-09
                    
                    
                    Percent
                      of
                      Total
                      Sales
                    
                    
                    Nine
                      months
                      ended
                      30-Sep-08
                    
                    
                    Percent
                      of
                      Total
                      Sales
                    
                    
                    Percentage
                      Change(U.S.
      dollars in million)China
      OEM market
                    
                    $
                    40.7
                    
                    
                    
                    48.5
                    %
                    
                    $
                    38.6
                    
                    
                    
                    36.5
                    %
                    
                    
                    5.4
                    %China
      Aftermarket
                    
                    $
                    22.4
                    
                    
                    
                    26.7
                    %
                    
                    $
                    28.8
                    
                    
                    
                    27.3
                    %
                    
                    
                    -22.2
                    %International
      market
                    
                    $
                    20.8
                    
                    
                    
                    24.8
                    %
                    
                    $
                    38.3
                    
                    
                    
                    36.2
                    %
                    
                    
                    -45.7
                    %Total
                    
                    $
                    84.0
                    
                    
                    
                    100
                    %
                    
                    $
                    105.8
                    
                    
                    
                    100
                    %
                    
                    
                    -20.6
                    %




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. Furthermore, during the 2008 Beijing Olympic Games, our major customers,
such as FAW Qiongdao, Beiqi Foton Zhucheng and Beiqi Foton Aumen halted
production due to the traffic control in the regions around Beijing.
Consequently, our OEM sales in the third quarter of 2008 were sharply decreased
compared to the second quarter of 2008. However, our Chinese OEM sales achieved
a strong growth in the nine months of 2009.




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 systems from our OEM customers declined in the
first half year of 2009. However, the Chinese’s government’s 4 trillion RMB
stimulus package, which positively affected the development of China’s
automobile industry, materially benefited our results in the third quarter
of 2009. Further, we promoted our integrated system and modular supplies of air
brake systems to our OEM customers and we increasingly focused on the bus
and agricultural vehicle market in the third quarter of 2009. As a
result our Chinese OEM sales increased by $2.1 million, or 5.4%, to
$40.7 million for the nine months ended September 30, 2009, compared to
$38.6 million for the same period of 2008.




In the
first half year of 2009, our customers decreased their inventories in order to
lower their risk due to financial crisis. Meanwhile, we improved product
portfolio to decrease low profit margin products in the nine months of
2009. Our Chinese Joint Venture achieved total revenue of $22.4 million in
Chinese aftermarket sales for the nine months ended September 30, 2009, a
decrease of $6.4 million, or 22.2% from $28.8 million compared to
the same period of last year.


25





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 $17.5 million or 45.7%, to $20.8 million for the nine
months ended September 30, 2009, as compared to $38.3 million for the same
period of 2008.




COST
OF SALES AND GROSS PROFIT




For theninemonthsendedSeptember30, 2009, cost of sales was $61,166,233, a
decrease of $16,177,734, or 20.9% from $77,343,967 for the same period last
year.Our gross profit decreased by19.9% from$28,468,173for theninemonths endedSeptember30, 2008 to $22,807,654for theninemonths endedSeptember30, 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 0.3% for the nine months ended September 30, 2009, to
27.2% from 26.9% 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 $5,509,506 for the nine months ended
September 30, 2009, as compared to $6,872,221 for the same period of 2008,
a decrease of $1,362,715 or 19.8%.





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 nine months ended September 30, 2009,
      transportation costs decreased by $935,915 to $1,198,654 from
      $2,134,569 for the nine months ended September 30, 2008. The decrease in
      transportation expense was mainly due to decreased international sales and
      increased delivery efficiency.


(2)
            Decreased
      product warranty expense. The Company recorded $1,104,598 of product
      warranty expenses for the nine months ended September 30, 2009, as
      compared to $1,539,396 for the nine months ended September 30, 2008, a
      decrease of $434,798, along with the decreased
  sales.




GENERAL
AND ADMINISTRATIVE EXPENSES




General
and administrative expenses were $6,870,181 for the nine months ended September
30, 2009, as compared to $7,712,808 for the same period of 2008, a decrease of
$842,627 or 10.9% mainly due to the following factor:




(1)
            Because of the impact of the U.S.
      financial crisis and weakening international macroeconomic, the Company
      extended the payment term accordingly for accounts receivable for our
      international distributors. As a result, the Company recorded more
      allowance for doubtful accounts in the third quarter of 2008. During the
      three months ended September 30, 2009, The Joint Venture reversed a bad
      debt provision resulting from collecting a significant portion of accounts
      receivable, which had been reflected as a reduction to general and
      administrative expenses. Compared with the $687,513 of bad debt provision
      for the nine months ended September 30, 2008, the bad debt provision was
      $2,823 for the nine months ended September 30, 2009, a decrease of
      $684,690.


(2)
              Research
      and development expense, which is included in general and administrative
      expenses decreased by $490,704 to $1,968,155, as compared to
      $2,458,859 of R&D expense for the same period of 2008, as
      discussed below.


26




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. We invest in
R&D on a regular basis, although the amount may vary from period to period.
For the nine months ended September 30, 2009, research and development expense
was $1,968,155, as compared to $2,458,859 for the same period of 2008, a
decrease of $490,704. The Company will continue to invest in new product
development, particularly in upgrading traditional valve products and in
developing electronic controlled products.




DEPRECIATION
AND AMORTIZATION




Depreciation and amortization expense
increased to $2,233,851for theninemonths endedSeptember30, 2009, compared with that
of$2,024,931for the same period of2008, an increase of $208,920.The increase in depreciation and
amortization expense was primarily due totheadditionofpurchasedproduction
equipment.




FINANCIAL
EXPENSE




Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the nine months ended September 30, 2009 decreased by
$899,383 to $75,307 from $974,690 for the same period of 2008, which was
mainly the lesser exchange loss incurred as compared to the nine months of
2009.




OTHER
INCOME




Other
income was $337,028 for the nine months ended September 30, 2009, as
compared to $610,592 for the nine months ended September 30, 2008, a
decrease of $273,564. The decrease was mainly due to more subsidies
received from local governments for the nine months ended September 30,
2008.




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 nine months ended
September 30, 2009 and 2008, the Joint Venture received an income tax
refund of $694,843 and $384,342, respectively, which has been
reflected as a reduction to current income tax expense. Income tax expense
of $2,000,413 and $1,351,166 were recorded for the nine months
ended September 30, 2009 and 2008, respectively.


27




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 FASB ASC 505-50 (Prior
authoritative literature: FASB Statement No. 123R). The amortization of deferred
stock-based compensation for these equity arrangements was $9,935 and $44,727
for the nine months ended September 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
INCOMEATTRIBUTABLE TONON-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 $862,337 and $1,183,852 for the nine months ended September 30, 2009
and 2008, respectively.




NET
INCOMEATTRIBUTABLE TO STOCKHOLDERS




The net
income attributable to stockholders for the nine months ended September 30,
2009 decreased by $2,858,292, to $7,751,096 from $10,609,388 for the
nine months ended September 30, 2008 due to the factors discussed above.
Earnings per share (“EPS”), both basic and diluted, for the nine months ended
September 30, 2009 and 2008, were $0.42 and $0.58 per share,
respectively.




FINANCIAL
CONDITION




Liquidity
and Capital Resources




OPERATING
- Net cash provided in operating activities was $6,610,799 for nine months
ended September 30, 2009 compared with $5,607,844 of net cash provided in
operating activities in the same period in 2008, an increase of $1,002,955
primarily due to the increased cash flow contributed by changes in inventory,
other current assets, income tax payable and accounts payable and notes
payable.





At
September 30, 2009, the Company had cash and cash equivalents of $12,542,642 as
compared to cash and cash equivalents of $7,795,987 at December 31, 2008. The
Company had working capital of $70,517,577 at September 30, 2009, as compared to
working capital of $61,586,125 at December 31, 2008, reflecting current ratios
of 4.84:1 and 5.36:1, respectively.





INVESTING
- During the nine months ended September 30, 2008, the Company expended net cash
of $2,747,951 in investing activities for acquisition of property and equipment
to support the growth of the business. For the nine months ended September 30,
2009, the Company utilized $1,876,116 in investing activities.





FINANCING
- During the nine months ended September 30, 2008 , the Company received
aggregate bank loans in the amount of $1,967,686 under its credit facilities;
these cash inflows was offset by repayments of $3,469,793 on its outstanding
debt. The Company had no borrowings under its credit facilities during
the nine months ended September 30, 2009.





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 nine months ended September
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.


28





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 nine
months ended on September 30, 2009, (i) we recorded an exchange loss of $56,249
from export sales for which the payments to us were in USD, and (ii) we also
recorded a foreign currency translation adjustment of $86,614 for the nine
months ended on September 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
September 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 September 30, 2009 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.


29





PART
II OTHER INFORMATION





ITEM
6. EXHIBITS


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





SIGNATURES


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





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





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


30