**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-Q**




(Mark
      One)




x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the quarterly period ended June 30, 200 7




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 jurisdictionof incorporation or organization)
            (IRS
                Employer Identification
                No.)




No.
      1169
      Yumeng Road


Ruian
      Economic Development District


Ruian
      City, Zhejiang Province


People’s
      Republic Of China


(Address
      of principal executive offices)





86-577-6581-7720


(Registrant’s
      telephone number)









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


Yes x  No
      o





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


Large
                  Accelerated Filer o
              Accelerated
                  Filer o
              Non-Accelerated
                  Filer x





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


Yes
      o   No
      x




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




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


As
      of June 30, 2007 there were **18,275,126** shares of Common Stock outstanding









SORL
      AUTO
      PARTS, INC.


FORM
      10-Q


For
      the
      Quarter Ended June
      30,
      2007









INDEX




**Page**PART
                I.
            
            FINANCIAL
                INFORMATION (unaudited)
            
            1Item
                1.
            
            Financial
                Statements:
            
            1Condensed
                Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December
                31, 2006 (Audited)
            
            2Condensed
                Consolidated Statements of Operations and Comprehensive Income (Unaudited)
                for the Three and Six Months Ended June 30, 2007and 2006
            
            2Condensed
                Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three
                and Six Months Ended June 30, 2007 and 2006
            
            4Condensed
                Consolidated Statements of Cash Flows (Unaudited) for the Three and
                Six
                Months Ended June 30, 2007 and 2006
            
            3Notes
                to the Condensed Consolidated Financial Statements (Unaudited)
            
            5Item
                2.
            
            Management’s
                Discussion and Analysis or Financial Condition and Results of Operations
            
            16Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            30Item
                4.
            
            Controls
                and Procedures
            
            30PART
                II.
            
            OTHER
                INFORMATION
            
            31Item
                1.
            
            Legal
                Proceedings
            
            31Item
                1A.
            
            Risk
                Factors
            
            31Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            31Item
                3.
            
            Defaults
                Upon Senior Securities
            
            31Item
                4.
            
            Submission
                Of Matters To a Vote of Security Holders
            
            32Item
                5.
            
            Other
                Information
            
            32Item
                6.
            
            Exhibits
            
            32SIGNATURES
            
            32









**PART
      I**




**FINANCIAL
      INFORMATION**




**Item
      1. Financial Statement**s





**SORL
      Auto Parts, Inc. and Subsidiaries**


**Consolidated
      Balance Sheets**


**June
      30, 2007 and December 31,2006**





**June
                30, 2007**
            
            **December
                31, 2006****(unaudited)**
            
            **(Audited)****Assets****Current
                Assets**Cash
                and Cash Equivalents
            
            **US$**
            5,751,342
            
            **US$**
            11,137,501Accounts
                Receivable, Net of Provision
            
            
            31,994,767
            
            
            26,750,778Notes
                Receivable
            
            
            9,297,671
            
            
            3,494,327Inventory
            
            
            7,362,666
            
            
            4,528,856Prepayments
            
            
            2,290,204
            
            
            5,532,802Other
                current assets
            
            
            3,872,774
            
            
            2,925,558**Total
                Current Assets**
            
            
            60,569,424
            
            
            54,369,822**Fixed
                Assets**Property,
                Plant and Equipment
            
            
            26,435,259
            
            
            20,418,557Less:
                Accumulated Depreciation
            
            
            (4,924,874
            )
            
            (4,106,901
            )Property,
                Plant and Equipment, Net
            
            
            21,510,385
            
            
            16,311,656**Other
                Assets**Deferred
                compensation cost-stock options
            
            
            99,389
            
            
            129,207Intangible
                Assets
            
            
            67,264
            
            
            45,779Less:
                Accumulated Amortization
            
            
            (20,916
            )
            
            (17,655
            )Intangible
                Assets, Net
            
            
            46,348
            
            
            28,124Other
                Non-current Assets
            
            
            42,045
            
            
            41,299Total
                Other Assets
            
            
            187,782
            
            
            198,630**Total
                Assets**
            
            **US$**
            **82,267,591**
            
            **US$**
            **70,880,108****Liabilities
                and Shareholders' Equity****Current
                Liabilities**Accounts
                Payable and Notes Payable
            
            **US$**
            5,823,167
            
            **US$**
            4,620,692Deposit
                Received from Customers
            
            
            809,348
            
            
            508,268Short
                term bank loans
            
            
            1,504,571
            
            
            -Income
                tax payable
            
            
            430,981
            
            
            358,367Accrued
                Expenses
            
            
            916,109
            
            
            1,232,845Other
                Current Liabilities
            
            
            439,357
            
            
            454,430**Total
                Current Liabilities**
            
            
            9,923,533
            
            
            7,174,602**Minority
                Interest**
            
            
            7,203,435
            
            
            6,336,557**Shareholders'
                Equity**Common
                Stock - $0.002 Par Value; 50,000,000 authorized, 18,275,126 issued
                and
                outstanding as of June 30, 2007 and December 31, 2006
                respectively
            
            
            36,550
            
            
            36,550Additional
                Paid In Capital
            
            
            37,467,252
            
            
            37,444,051Reserves
            
            
            1,424,523
            
            
            797,116Accumulated
                other comprehensive income
            
            
            2,630,299
            
            
            1,102,469Retained
                Earnings
            
            
            23,581,999
            
            
            17,988,763Total
                Shareholders' Equity
            
            
            65,140,623
            
            
            57,368,949**Total
                Liabilities and Shareholders' Equity**
            
            **US$**
            **82,267,591**
            
            **US$**
            **70,880,108**





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




1





**SORL
      Auto Parts, Inc. and Subsidiaries**


**Consolidated
      Statements of Operations and Comprehensive Income**


**For
      The Second Quarter Ended June 30, 2007 and 2006**





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Sales
            
            US$
            29,189,572
            
            
            20,117,002
            
            US$
            53,606,561
            
            
            39,536,586Cost
                of Sales
            
            
            22,829,287
            
            
            15,477,658
            
            
            41,555,339
            
            
            30,501,484Gross
                Profit
            
            
            6,360,285
            
            
            4,639,344
            
            
            12,051,222
            
            
            9,035,102Operating
                ExpensesSelling
                and Distribution Expenses
            
            
            1,331,643
            
            
            1,376,442
            
            
            2,515,290
            
            
            2,244,458General
                and Administrative Expenses
            
            
            1,027,436
            
            
            86,289
            
            
            2,720,623
            
            
            1,183,251Financial
                Expenses
            
            
            114,268
            
            
            241,900
            
            
            257,436
            
            
            507,447Total
                Operating Expenses
            
            
            2,473,347
            
            
            1,704,631
            
            
            5,493,349
            
            
            3,935,156Operating
                Income
            
            
            3,886,938
            
            
            2,934,713
            
            
            6,557,873
            
            
            5,099,946Other
                Income
            
            
            351,932
            
            
            68,696
            
            
            384,272
            
            
            68,696Non-Operating
                Expenses
            
            
            (80,550
            )
            
            (67,050
            )
            
            (84,639
            )
            
            (156,725
            )Income
                Before Provision for Income Taxes
            
            
            4,158,320
            
            
            2,936,359
            
            
            6,857,506
            
            
            5,011,917Provision
                for Income Taxes
            
            
            (422,721
            )
            
            293,897
            
            
            (60,256
            )
            
            587,505Net
                  Income Before Minority Interest & Other Comprehensive
                  Income
            
            US$
            4,581,041
            
            
            2,642,462
            
            US$
            6,917,762
            
            
            4,424,412Minority
                Interest
            
            
            461,930
            
            
            264,246
            
            
            697,119
            
            
            442,441Net
                Income Attributable to Shareholders
            
            
            4,119,111
            
            
            2,378,216
            
            
            6,220,643
            
            
            3,981,971Foreign
                Currency Translation Adjustment
            
            
            1,075,648
            
            
            59,974
            
            
            1,697,589
            
            
            186,680Minority
                Interest's Share
            
            
            (107,565
            )
            
            (5,997
            )
            
            (169,759
            )
            
            (18,668
            )Comprehensive
                Income
            
            
            5,087,194
            
            
            2,432,193
            
            
            7,748,473
            
            
            4,149,983Weighted
                average common share - Basic
            
            
            18,275,126
            
            
            13,346,555
            
            
            18,275,126
            
            
            13,346,555Weighted
                average common share - Diluted
            
            
            18,322,260
            
            
            13,359,861
            
            
            18,328,526
            
            
            13,355,426EPS
                - Basic
            
            
            0.23
            
            
            0.18
            
            
            0.34
            
            
            0.30EPS
                - Diluted
            
            
            0.22
            
            
            0.18
            
            
            0.34
            
            
            0.30





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




2





**SORL
      Auto Parts, Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**For
      The Second Quarter Ending June 30, 2007 and 2006**





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Cash
                Flows from Operating Activities**Net
                Income
            
            US$
            4,119,111
            
            
            2,378,216
            
            US$
            6,220,643
            
            
            3,981,971**Adjustments
                to reconcile net income (loss) to net****cash
                from operating activities:**Minority
                Interest
            
            
            461,930
            
            
            264,246
            
            
            697,119
            
            
            442,441Bad
                Debt Expense (Reverse)
            
            
            (234,154
            )
            
            (943,325
            )
            
            187,176
            
            
            (786,450
            )Depreciation
                and Amortization
            
            
            370,097
            
            
            252,001
            
            
            710,394
            
            
            516,995Loss
                on disposal of Fixed Assets
            
            
            -
            
            
            66,903
            
            
            1,108
            
            
            66,903Stock-Based
                Compensation Expense
            
            
            38,110
            
            
            164,435
            
            
            53,019
            
            
            169,405**Changes
                in Assets and Liabilities:**Accounts
                Receivable
            
            
            (2,100,597
            )
            
            248,361
            
            
            (4,634,961
            )
            
            (3,241,876
            )Notes
                Receivable
            
            
            (1,237,625
            )
            
            1,001,383
            
            
            (5,615,402
            )
            
            332,567Other
                Currents Assets
            
            
            (680,963
            )
            
            103,224
            
            
            (912,057
            )
            
            (359,133
            )Inventory
            
            
            (2,426,343
            )
            
            (239,406
            )
            
            (2,694,515
            )
            
            1,138,404Prepayments
            
            
            1,413,829
            
            
            (87,590
            )
            
            3,332,649
            
            
            392,561Accounts
                Payable and Notes payable
            
            
            2,060,032
            
            
            2,191,393
            
            
            991,030
            
            
            4,054,538Deposits
                Received from Customers
            
            
            (4,080
            )
            
            (274,726
            )
            
            282,352
            
            
            (517,534
            )Other
                Current Liabilities and Accrued Expenses
            
            
            (190,993
            )
            
            (610,270
            )
            
            (312,631
            )
            
            276,416**Net
                Cash Flows from Operating Activities**
            
            
            **1,588,354**
            
            
            **4,514,845**
            
            
            **(1,694,076**
            **)**
            
            **6,467,208****Cash
                Flows from Investing Activities**Acquisition
                of Property and Equipment
            
            
            (3,271,641
            )
            
            (502,764
            )
            
            (5,335,361
            )
            
            (873,580
            )Investment
                in Intangible Assets
            
            
            
            
            
            
            
            
            (19,915
            )**Net
                Cash Flows from Investing Activities**
            
            
            **(3,271,641**
            **)**
            
            **(502,764**
            **)**
            
            **(5,355,276**
            **)**
            
            **(873,580**
            **)****Cash
                Flows from Financing Activities**Proceeds
                from (Repayment of) Bank Loans
            
            
            1,492,936
            
            
            (3,004,786
            )
            
            1,492,936
            
            
            (4,520,388
            )**Net
                Cash flows from Financing Activities**
            
            
            **1,492,936**
            
            
            **(3,004,786**
            **)**
            
            **1,492,936**
            
            
            **(4,520,388**
            **)****Effects
                on changes in foreign exchange rate**
            
            
            89,213
            
            
            59,974
            
            
            170,257
            
            
            186,679Net
                Increase (Decrease) in Cash
            
            
            (101,138
            )
            
            1,067,269
            
            
            (5,386,159
            )
            
            1,259,919Cash
                - Beginning of the term
            
            
            5,852,480
            
            
            1,153,781
            
            
            11,137,501
            
            
            961,131**Cash
                - End of the term**
            
            **US$**
            **5,751,342**
            
            
            2,221,050
            
            **US$**
            **5,751,342**
            
            
            2,221,050**Supplemental
                Cash Flow Disclosures:**Interest
                Paid
            
            
            12,914
            
            
            202,700
            
            
            12,914
            
            
            401,940Tax
                Paid
            
            
            495,257
            
            
            763,973
            
            
            853,436
            
            
            805,590





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




3





**SORL
      Auto Parts, Inc. and Subsidiaries**


**Consolidated
      Statements of Changes in Shareholders' Equity**





**Three
      Months Ended June 30, 2007 and 2006**





**Additional**
            
            
            
            **Retained**
            
            **Accumu.
                Other****Number**
            
            **Common**
            
            **Paid-in**
            
            
            
            **Earnings**
            
            **Comprehensive**
            
            **Shareholders'**
            
            **Minority****of
                  Share**
            
            **Stock**
            
            **Capital**
            
            **Reserves**
            
            **(Deficit)**
            
            **Income**
            
            **Equity**
            
            **Interest****Beginning
                Balance - March 31, 2006**
            
            
            **13,346,555**
            
            
            **26,693**
            
            
            **4,623,022**
            
            
            -
            
            
            **12,780,309**
            
            
            **451,028.00**
            
            
            **17,881,052**
            
            
            **1,926,684**Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,378,216
            
            
            -
            
            
            2,378,216
            
            
            264,246Other
                Comprehensive Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            53,977
            
            
            53,977
            
            
            5,997Paid
                In Capital Contributions
            
            
            -
            
            
            -
            
            
            299,052
            
            
            -
            
            
            -
            
            
            -
            
            
            299,052
            
            
            -***Ending
                Balance - June 30, 2006***
            
            
            **13,346,555**
            
            
            **26,693**
            
            
            **4,922,074**
            
            
            ****
            
            
            **15,158,525**
            
            
            **505,005**
            
            
            **20,612,297**
            
            
            **2,196,927****Beginning
                Balance - March 31, 2007**
            
            
            **18,275,126**
            
            
            **36,550**
            
            
            **37,444,051**
            
            
            **1,008,786**
            
            
            **19,878,625**
            
            
            **1,662,216**
            
            
            **60,030,228**
            
            
            **6,633,940**Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,119,111
            
            
            -
            
            
            4,119,111
            
            
            461,930Other
                Comprehensive Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            968,083
            
            
            968,083
            
            
            107,565Transfer
                to reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            415,737
            
            
            -415,737
            
            
            -
            
            
            -
            
            
            -4,128
                options issued
            
            
            -
            
            
            -
            
            
            23,201
            
            
            
            
            
            -
            
            
            -
            
            
            23,201
            
            
            -***Ending
                Balance - June 30, 2007***
            
            
            **18,275,126**
            
            
            **36,550**
            
            
            **37,467,252**
            
            
            **1,424,523**
            
            
            **23,581,999**
            
            
            **2,630,299**
            
            
            **65,140,623**
            
            
            **7,203,435**




**Six
        Months Ended June 30, 2007 and 2006**




**Additional**
            
            
            
            **Retained**
            
            **Accumu.
                Other****Number**
            
            **Common**
            
            **Paid-in**
            
            
            
            **Earnings**
            
            **Comprehensive**
            
            **Shareholders'**
            
            **Minority****of
                  Share**
            
            **Stock**
            
            **Capital**
            
            **Reserves**
            
            **(Deficit)**
            
            **Income**
            
            **Equity**
            
            **Interest****Beginning
                Balance - December 31, 2005**
            
            
            **13,346,555**
            
            
            **26,693**
            
            
            **4,444,118**
            
            
            -
            
            
            **11,176,554**
            
            
            **336,993**
            
            
            **15,984,358**
            
            
            **1,735,818**Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,981,971
            
            
            -
            
            
            3,981,971
            
            
            442,441Other
                Comprehensive Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            168,012
            
            
            168,012
            
            
            18,668Paid
                In Capital Contributions
            
            
            -
            
            
            -
            
            
            477,956
            
            
            -
            
            
            -
            
            
            -
            
            
            477,956
            
            
            -***Ending
                Balance - June 30, 2006***
            
            
            **13,346,555**
            
            
            **26,693**
            
            
            **4,922,074**
            
            
            -
            
            
            **15,158,525**
            
            
            **505,005**
            
            
            **20,612,297**
            
            
            **2,196,927****Beginning
                Balance - December 31, 2006**
            
            
            **18,275,126**
            
            
            **36,550**
            
            
            **37,444,051**
            
            
            **797,116**
            
            
            **17,988,763**
            
            
            **1,102,469**
            
            
            **57,368,949**
            
            
            **6,336,557**Net
                Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,220,643
            
            
            
            
            
            6,220,643
            
            
            697,119Other
                Comprehensive Income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,527,830
            
            
            1,527,830
            
            
            169,759Transfer
                to reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            627,407
            
            
            -627,407
            
            
            -
            
            
            -
            
            
            -4,128
                options issued
            
            
            -
            
            
            -
            
            
            23,201
            
            
            -
            
            
            -
            
            
            -
            
            
            23,201
            
            
            -***Ending
                Balance - June 30, 2007***
            
            
            **18,275,126**
            
            
            **36,550**
            
            
            **37,467,252**
            
            
            **1,424,523**
            
            
            **23,581,999**
            
            
            **2,630,299**
            
            
            **65,140,623**
            
            
            **7,203,435**





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





4


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      A - DESCRIPTION OF BUSINESS**





SORL
      Auto Parts, Inc. (the “Company”) is principally engaged in the manufacture and
      distribution of automotive air brake valves and related components for
      commercial vehicles weighing more than three tons, such as trucks and buses,
      through its 90% ownership of Ruili Group Ruian Auto Parts Company Limited (the
      “Joint Venture”) in the People’s Republic of China (“PRC” or “China”). The
      Company distributes products both in China and internationally under the SORL
      trademarks. The Company’s product range includes approximately 40 categories of
      brake valves with over 800 different specifications.





**NOTE
      B - BASIS OF PRESENTATION**





The
      condensed consolidated financial statements include the accounts of SORL Auto
      Parts, Inc. and its majority owned subsidiaries. All significant intercompany
      balances and transactions have been eliminated in the consolidation. Certain
      information and footnote disclosures normally included in financial statements
      prepared in conjunction with generally accepted accounting principles have
      been
      condensed or omitted pursuant to such rules and regulations, although the
      Company believes that the disclosures are adequate to make the information
      presented not misleading. These condensed consolidated financial statements
      should be read in conjunction with the annual audited consolidated financial
      statements and the notes thereto included in the Company’s annual report on Form
      10-K and other reports filed with the SEC.





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





**NOTE
      C- RECENTLY ISSUED FINANCIAL STANDARDS**





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 159, "The Fair Value
      Option for Financial Assets and Financial Liabilities, including an amendment
      of
      FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value at specified
      election dates. This Statement applies to all entities, including not-for-profit
      organizations. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. As such, the Company is
      required to adopt these provisions at the beginning of the fiscal year ended
      December 31, 2008. The Company is currently evaluating the impact of SFAS 159
      on
      its consolidated financial statements.




5




**NOTE
      D - RELATED PARTY TRANSACTIONS**




The
      Company continued to purchase non-valve automotive components and packaging
      materials from the Ruili Group Co., Ltd., which is the minority shareholder
      of
      the Joint Venture, and also has the common controlling party, i.e. the Zhang
      family. The following related party transactions occurred for the three or
      six
      months ended June 30, 2007and 2006:




**Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**PURCHASES
                  FROM:Ruili
                  Group Co., Ltd.
              
              $
              7,300,184
              
              $
              4,699,603
              
              $
              12,678,779
              
              $
              10,542,813Total
              
              $
              7,300,184
              
              $
              4,699,603
              
              $
              12,678,779
              
              $
              10,542,813SALES
                  TO:Ruili
                  Group Co., Ltd.
              
              $
              —
              
              $
              44,384
              
              $
              914,683
              
              $
              2,630,198Total
              
              $
              —
              
              $
              44,384
              
              $
              914,683
              
              $
              2,630,198




The
      total purchases from Ruili Group during the three months ended June 30, 2007
      consisted of $6.7million of finished products for non-valve auto parts and
      $0.6
      million of packaging materials. During the six months ended June 30, 2007,
      the
      breakdown was $ 11.8 million and $ 0.9 million, respectively.




**June
                  30, 2007**
              
              **December
                  31, 2006**PrepaymentRuili
                  Group Co., Ltd.
              
              $
              —
              
              $
              2,309,073Total
              
              
              —
              
              
              2,309,073Other
                  Accounts receivableRuili
                  Group Co., Ltd.
              
              $
              1,540,937
              
              $
              903,304Total
              
              
              1,540,937
              
              
              903,304Accounts
                  payableRuili
                  Group Co., Ltd.
              
              $
              445,090
              
              $
              —Total
              
              
              445,090
              
              
              —




6




**NOTE
      E - ACCOUNTS RECEIVABLE**




The
      changes in the allowance for doubtful accounts at June 30, 2007 and December
      31,
      2006 were summarized as follows:




**June
                30, 2007**
            ****
            **December
                31, 2006**Beginning
                balance
            
            $
            8,769
            
            $
            914,721Add:
                Increase to allowance
            
            
            138,111
            
            
            (905,952
            )Less:
                Accounts written off
            
            
            —
            
            
            —Ending
                balance
            
            $
            146,880
            
            $
            8,769





The
      company’s receivables were summarized as follows:




**June
                30, 2007**
            
            **December 31,
                2006**Accounts
                receivable
            
            $
            32,141,647
            
            $
            26,759,547Less:
                allowance for doubtful accounts
            
            
            (146,880
            )
            
            (8,769
            )Accounts
                receivable balance, net
            
            $
            31,994,767
            
            $
            26,750,778





**NOTE
      F - INVENTORIES**





On
      June 30, 2007 and December 31, 2006, inventories consisted of the following:





**June
                30, 2007**
            ****
            **December
                31, 2006**Raw
                Material
            
            $
            1,631,179
            
            $
            1,081,569Work
                in process
            
            
            3,720,478
            
            
            2,429,979Finished
                Goods
            
            
            2,011,009
            
            
            1,017,308Total
                Inventory
            
            $
            7,362,666
            
            $
            4,528,856




**NOTE
      G - PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consisted of the following, on June 30, 2007 and December
      31, 2006:




**June
                30, 2007**
            
            **December
                31, 2006**Machinery
            
            $
            15,611,312
            
            $
            12,123,775Molds
            
            
            1,144,764
            
            
            1,116,441Office
                equipment
            
            
            278,032
            
            
            226,647Vehicle
            
            
            614,720
            
            
            310,681Building
            
            
            594,843
            
            
            580,126Construction
                In Progress
            
            
            8,191,588
            
            
            6,060,887Sub-Total
            
            
            26,435,259
            
            
            20,418,557Less:
                Accumulated depreciation
            
            
            (4,924,874
            )
            
            (4,106,901
            )Fixed
                Assets, net
            
            $
            21,510,385
            
            $
            16,311,656




7




Depreciation
      expense charged to operations was $707,617 and $513,499 for the six months
      ended
      June 30, 2007 and 2006, respectively.




**NOTE
      H - INTANGIBLE ASSETS**




Gross
      intangible assets were $67,264, less accumulated amortization of $20,916 for
      net
      intangible assets of $46,348 as of June 30, 2007. Gross intangible assets were
      $45,779, less accumulated amortization of $17,655 for net intangible assets
      of
      $28,124 as of December 31, 2006. Amortization expenses were $2,775 and $3,496
      for the six months ended June 30, 2007 and 2006 respectively. Future estimated
      amortization expense is as follows:




Future
      estimated amortization expense is as follows:




**2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**$
            2,904
            
            $
            5,845
            
            $
            5,845
            
            $
            5,845
            
            $
            5,845
            
            $
            19,341




**NOTE
      I - PREPAYMENT**





Prepayment
      consisted of the following as of June 30, 2007 and December 31, 2006




**June
                30, 2007**
            
            **December
                31, 2006**Raw
                material suppliers
            
            $
            891,688
            
            $
            5,080,452Equipment
                purchase
            
            
            1,398,516
            
            
            452,350Total
                prepayment
            
            $
            2,290,204
            
            $
            5,532,802




**NOTE
      J - ACCRUED EXPENSES**





Accrued
      expenses consisted of the following as of June 30, 2007 and December 31, 2006:





**June
                30, 2007**
            ****
            **December
                31, 2006**Accrued
                payroll
            
            $
            519,399
            
            $
            448,420Other
                accrued expenses
            
            
            396,710
            
            
            784,425Total
                accrued expenses
            
            $
            916,109
            
            $
            1,232,845




8




**NOTE
      K - BANK LOANS**




Bank
      loans represented the following as of June 30, 2007 and December 31, 2006:




**June
                30, 2007**
            
            **December
                31, 2006**Secured
            
            $
            1,504,,571
            
            $
            —Less:
                Current portion
            
            $
            (1,504,,571
            )
            $
            —Non-current
                portion
            
            $
            —
            
            $
            —




To
      finance new equipment acquisition from overseas suppliers, during the second
      quarter of 2007, the company obtained two short term dollar loans from
      Agricultural Bank of China, with interest bearing at 6.15313% and 5.73750%
      per
      annum, respectively. These loans were guaranteed by Ruili Group Co., Ltd.,
      a
      related party. The Company did not provide any sort of guarantee to any other
      parties.




**NOTE
      L - RESERVE**





The
      reserve funds are comprised of the following:





**June
                30,****2007**
            
            **December31,
                2006**Statutory
                surplus reserve fund
            
            $
            1,424,523
            
            $
            797,116Total
            
            $
            1,424,523
            
            $
            797,116




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 two reserve funds, consisting of the statutory surplus and
      public welfare 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.




9




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.




**NOTE
      M - INCOME TAXES**




The
      Joint Venture is registered in the PRC, and is therefore subject to state and
      local income taxes within the PRC at the applicable tax rate on the taxable
      income as reported in the PRC statutory financial statements in accordance
      with
      relevant income tax laws. According to applicable tax laws regarding
      Sino-Foreign Joint Venture, the Joint Venture is exempted from income taxes
      in
      the PRC for the fiscal years ended December 31, 2005 and 2004. Thereafter,
      the
      Joint Venture is entitled to a tax concession of 50% of the statutory income
      tax
      rate of 26.4%, for the following three years ended December 31, 2006, 2007,
      and
      2008.





The
      reconciliation of the effective income tax rate of the Joint Venture to the
      statutory income tax rate in the PRC for the second quarter ended June 30, 2007
      is as follows:




Statutory
                tax rate
            
            
            26.4
            %Tax
                holidays and concessions
            
            
            -13.2
            %Effective
                tax rate
            
            
            13.2
            %





No
      provision for deferred tax liabilities has been made, since the Joint Venture
      had no material temporary differences between the tax bases of assets and
      liabilities and their carrying amounts.





In
      addition,  in
      accordance with China's relevant regulations of income taxes, there is a benefit
      of a refund of 40% of domestic equipment purchases from increased income taxes
      for the purchasing year over those of the previous year.





**NOTE
      N - LEASES**





Commencing
      in 2004, the Company has a lease agreement with Ruili Group Co., Ltd., a related
      party, for the lease of a manufacturing plant. The lease is for a ten year
      term
      ending in February 2014.





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




10




Rent
      expense for the six months ended June 30, 2007 and 2006, was $359,754and $226,483 respectively.





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





**2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**Rental
                of plant
            
            
            222,505
            
            
            457,845
            
            
            457,845
            
            
            457,845
            
            
            457,845
            
            
            991,998Rental
                of apartment buildings
            
            
            117,629
            
            
            242,043
            
            
            242,043
            
            
            242,043
            
            
            242,043
            
            
            58,727Total
            
            
            340,134
            
            
            699,888
            
            
            699,888
            
            
            699,888
            
            
            699,888
            
            
            1,050,725





**NOTE
      O - ADVERTISING COSTS**




Advertising
      costs are expensed as incurred and are classified as selling expenses.
      Advertising costs were $586 and$22,023 for the six months ended June 30, 2007
      and 2006, respectively.




**NOTE
      P - RESEARCH AND DEVELOPMENT EXPENSE**




Research
      and development costs are expensed as incurred and were $553,672 and $240,430
      for the six months ended June 30, 2007 and 2006, respectively.





**NOTE
      Q - WARRANTY CLAIMS**




Warranty
      claims were $585,888 and $883,540 for the six months ended June 30, 2007 and
      2006, respectively. The movement of accrued warranty expenses for the six months
      ended June 30, 2007 was as follows. Accrued warranty expenses are included
      in
      Accrued Expenses.




Beginning
                balance at January 01, 2007
            
            $
            613,917Accrued
                during the six months ended June 30, 2007:
            
            $
            585,888Less:
                Actual Paid during the six months ended June 30, 2007:
            
            $
            937,943Ending
                balance at June 30, 2007
            
            $
            261,862





**NOTE
      R - 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. In accordance with the vesting provisions of the
      grants, the options will become vested and exercisable under the following
      schedules.




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




11




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




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




Total
      deferred stock-based compensation expenses related to the 60,000 stock options
      granted amounted to $178,904. This amount is amortized over three years in
      a
      manner consistent with Financial Accounting Standards Board Interpretation
      No.
      123 (R). The
      amortization of deferred stock-based compensation for these equity arrangements
      was $29,818 and $19,879 respectively for the six months ended June 30, 2007
      and
      the six months ended June 30, 2006. As of June 30, 2007, there was $ 99,389 of total unrecognized compensation
      cost
      related to non-vested share-based compensation arrangements granted under the
      plan. The cost is expected to be recognized over a period of 1.7 years.





A
      summary of option activity under the Plan as of June 30, 2007 and changes during
      the second quarter ended June 30, 2007 is as follows:




**Options**
            
            **Weighted****Average****Exercise
                Price**
            
            **Weighted****Average****Remaining****Contractual
                Term**
            
            **Aggregate****Intrinsic****Value**1-Jan-06
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Granted
            
            
            60,000
            
            
            4.79
            
            
            3
                Years
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at June 30, 2007
            
            
            60,000
            
            $
            4.79
            
            
            1.7
                Years
            
            $
            138,000Exercisable
                at June 30, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —





(2)  Subject to all the terms and provisions of the 2005 Stock Compensation
      Plan,  on
      June 20, 2007, the
      Company entered into an arrangement with its previous senior manager of investor
      relations, David Ming He, relating to 4,128 share options on its stock with
      an
      exercise price of $7.25 per option. In
      accordance with the agreement, the option became vested and exercisable
      immediately on the date thereof.





**Number
                of Shares**
            
            **%
                of Shares Issued**
            
            **Initial
                Vesting Date**4,128
            
            100%
            
            June
                20, 2007




12




The
      Company accounts for stock-based compensation in accordance with SFAS No. 123
      Revised, “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
              
              
              141.47
              %Risk-Free
                  Interest Rate
              
              
              5.14
              %Contractual
                  Term
              
              
              3
                  yearsStock
                  Price at Date of Grant
              
              $
              7.09Exercise
                  Price
              
              $
              7.25





Total
      deferred stock-based compensation expenses related to the 4,128 stock options
      granted amounted to $23,201. This amount is charged to G&A during the second
      quarter of 2007.





A
      summary of option activity under the Plan as of June 30, 2007 and changes during
      the second quarter ended June 30, 2007 is as follows:




**Options**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Weighted**
                **Average**
                **Remaining****Contractual
                  Term**
              
              **Aggregate**
                **Intrinsic****Value**1-Jan-07
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Granted
              
              
              4,128
              
              $
              7.25
              
              
              3
                  Years
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
              
              
              —
              
              
              —
              
              
              —
              
              
              —Outstanding
                  at June 30,2007
              
              
              4,128
              
              $
              7.25
              
              
              3
                  Years
              
              $
              29,928Exercisable
                  at June 30,2007
              
              
              4,128
              
              $
              7.25
              
              
              3
                  Years
              
              $
              29,928




(3)
      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 retained Maxim Group
      LLC and Chardan Capital Markets, LLC as its exclusive financial advisors and
      investment bankers for a period of twelve months.





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




13




The
      Company accounts for stock-based compensation in accordance with SFAS No. 123
      Revised, “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
            
            
            95.01
            %Risk-Free
                Interest Rate
            
            
            4.36
            %Contractual
                Term
            
            
            4
                yearsStock
                Price at Date of Grant
            
            $
            4.70Exercise
                Price
            
            $
            6.25





Total
      deferred stock-based compensation expenses related to the 100,000 warrants
      granted amounted to $299,052. This amount is amortized over one year in a manner
      consistent with Financial Accounting Standards Board Interpretation No. 123
      (R).
      The amortization of deferred stock-based compensation for these equity
      arrangements was $299,052 for the fiscal year ended December 31, 2006.





A
      summary of option activity under the Plan as of June 30, 2007 and changes during
      the second quarter ended June 30, 2007 is as follows:








**Warrants**
            
            **Weighted****Average****Exercise
                Price**
            
            **Weighted****Average****Remaining****Contractual
                Term**
            
            **Aggregate****Intrinsic****Value**1-Jan-06
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —Granted
            
            
            100,000
            
            $
            6.25
            
            
            4
                Years
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at June 30, 2007
            
            
            100,000
            
            $
            6.25
            
            
            2.5
                Years
            
            $
            84,000Exercisable
                at June 30, 2007
            
            
            100,000
            
            $
            6.25
            
            
            2.5
                Years
            
            $
            84,000





**NOTE
      S- COMMITMENTS AND CONTINGENCIES**





(1)
      In November 2006, the Joint Venture purchased approximately 861,543 square
      feet
      of land for $5.9 million from Ruili Group, a related party. The Joint Venture
      has commenced building one new plant on the site. To build the new plant, the
      anticipated aggregate investment is $ 15.4 million, inclusive of $5.9 million
      paid for purchasing the land use right.




14




According
      to relevant PRC laws and regulations, a land use right certificate, along with
      government approvals for land planning, project planning, and construction
      need
      to be obtained before construction of the building is commenced. An ownership
      certificate will be granted by government upon application under the condition
      that the aforementioned certificate and government approvals are obtained.





The
      Joint Venture has applied for but not yet received the land use right
      certificate of approval. However, the Ruili Group owned the land use right
      certificate and has acquired government approval for building one new plant
      on
      the site. Accordingly, there is no risk that the buildings to be constructed
      will have to be vacated.





(2)  The following table shows the Company's significant contractual obligations
      as
      of June 30, 2007.





**Payment
                Due by Period****Total****Contractual**
            
            **Less
                  than**
            
            **Between**
            
            **Between**
            
            **Over
                5****(in
                thousands)**
            
            **Obligations**
            
            **1
                year**
            
            **2-3
                years**
            
            **4-5
                years**
            
            **years**Capital
                commitments (i)
            
            
            475
            
            
            441
            
            
            34
            
            
            
            
            
            —$
            475
            
            $
            441
            
            $
            34
            
            $
            —
            
            $
            —





(i)
            Capital
                commitments include the investment in construction of a new plant
                to
                expand the production capacity of air brake valves and related products.
                The Company has budgeted an aggregate amount of approximately $15.4
                million for construction of the new plant. However, some of the projected
                amounts without existing contractual commitments nor scheduled maturities
                are not listed in this table.(ii)
            The
                information of lease commitments is provided in Note N.





**NOTE
      T - OFF-BALANCE SHEET ARRANGEMENTS**





At
      June 30, 2007, 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
      U - SUBSEQUENT EVENTS**





None.





15





**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





The
      following is management’s discussion and analysis of certain significant factors
      that have affected our financial position and operating results during the
      periods included in the accompanying consolidated financial statements, as
      well
      as information relating to the plans of our current management. This report
      includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
      terminology are intended to identify forward-looking statements. Such statements
      are subject to certain risks and uncertainties, including the matters set forth
      in this report or other reports or documents we file with the Securities and
      Exchange Commission from time to time, which could cause actual results or
      outcomes to differ materially from those projected. Undue reliance should not
      be
      placed on these forward-looking statements that speak only as of the date
      hereof. We undertake no obligation to update these forward-looking statements.





The
      following discussion and analysis should be read in conjunction with our
      consolidated financial statements and the related notes thereto and other
      financial information contained elsewhere in this Form 10Q.





**OVERVIEW**





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





Fairford
      was organized in Hong Kong as a limited liability company on November 3, 2003.
      Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co.,
      Ltd., a Sino-foreign joint venture (the “Joint Venture”) established pursuant to
      the laws of the People’s Republic of China (“PRC” or “China”). The Joint Venture
      is a joint venture between Fairford and Ruili Group Co., Ltd. (the “Ruili
      Group”).





The
      Ruili Group was incorporated in the PRC in 1987 to specialize in the
      development, production and sale of various kinds of automotive parts. Its
      headquarter was located in Ruian City of Wenzhou Area, one of the leading
      automotive parts manufacturing centers of China with more than 1400 auto parts
      manufacturing companies. Its major product lines included valves for air brake
      systems, auto metering products, auto electric products, anti-lock brake systems
      and retarders. Some of those products were developed and manufactured through
      affiliated companies of Ruili Group. Due to its leading position in the
      industry, the Chairman of the Ruili Group, Mr. Xiao Ping Zhang, has been elected
      as the Chairman of Wenzhou Auto Parts Association, one of the leading auto
      parts
      trade associations in China. Mr. Zhang is also Chairman and Chief Executive
      Officer of the Company. The Joint Venture was established in the PRC as a
      Sino-foreign joint venture company with limited liability by the Ruili Group
      and
      Fairford. Fairford and Ruili Group contributed 90% and 10%, respectively, of
      the
      paid-in capital in the aggregate amount of approximately $43.4 million.




16




In
      connection with its formation, effective January 19, 2004 the Joint Venture
      acquired the business of the Ruili Group relating to the manufacture and sale
      of
      various kinds of valves for automotive brake systems and related operations
      (the
“Transferred Business”). This was accomplished by the transfer from the Ruili
      Group to Fairford of the relevant assets and liabilities of the Transferred
      Business including trade receivables, inventories and machinery, and the
      assumption of short and long term borrowings, at a consideration of
      approximately $6.39million.





The
      consideration was based on a valuation by an independent PRC valuation firm.
      Fairford then contributed these assets and liabilities as a capital contribution
      for its 90% interest in the Joint Venture. The Ruili Group also transferred
      inventory as its capital contribution for its 10% interest in the Joint Venture.
      The assets and liabilities transferred to the Joint Venture by Fairford and
      the
      Ruili Group represented all the relevant assets and liabilities of the
      Transferred Business. Certain historical information of the Transferred Business
      is based on the operation of the Transferred Business when it was owned by
      the
      Ruili Group.





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





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





In
      December 2006, through Fairford, SORL invested a further approximately $32.67
      million in its operating subsidiary- the Joint Venture. To maintain its 10%
      shareholding in the Joint Venture, the Ruili Group increased its capital
      investment by approximately $3.63million. SORL Auto Parts, Inc. continues to
      hold a 90% controlling interest in the operating subsidiary.





As
      a result of the foregoing, through Fairford’s 90% interest in the Joint Venture,
      the Company manufactures and distributes automotive air brake valves and related
      components in China and internationally for use primarily in vehicles weighing
      over three tons, such as trucks and buses. There are forty categories of valves
      with over eight hundred different specifications. Management believes that
      it is
      the largest manufacturer of automotive brake valves in China.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





Below
      is a description of accounting policies, which we consider critical to the
      preparation and understanding of our financial statements. In addition, certain
      amounts included in or affecting our financial statements and related disclosure
      must be estimated, which requires us to make assumptions with respect to values
      or conditions which cannot be known with certainty at the time the financial
      statements are prepared. Actual results may differ from these estimates under
      different assumptions or conditions. The selection of critical accounting
      policies, the judgments and other uncertainties affecting the application of
      those policies and the sensitivity of reported results to changes in conditions
      and assumptions are factors to be considered when reviewing our consolidated
      financial statements.




17




We
      believe that the following critical accounting policies set forth below involve
      the most significant judgments and estimates used in the preparation of our
      consolidated financial statements. We evaluate these policies on an ongoing
      basis, based upon historical results and experience, consultation with experts,
      trends and other methods we consider reasonable in the particular circumstances,
      as well as our forecasts as to how these might change in the future.





*Accounting
      Method*




The
      Company uses the accrual method of accounting which recognizes revenues when
      earned and expenses when incurred.





*Accounts
      Receivable and Allowance for Doubtful Accounts*




The
      Company presents accounts receivable, net of allowance for doubtful accounts.
      The allowance is calculated based on review of individual customer accounts.





*Inventories*




Inventories
      are stated at the lower of cost or net realizable value. Cost is calculated
      on the weighted-average basis and includes all costs to acquire and other costs
      incurred in bringing the inventories to their present location and condition.
      The Company evaluates the net realizable value of its inventories on a regular
      basis and records a provision for loss to reduce the computed weighted-average
      cost if it exceeds the net realizable value.





*Income
      Taxes*




Taxes
      are calculated in accordance with taxation principles currently effective in
      the
      PRC. Deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax assets and liabilities of a change in tax rates is recognized as income
      in
      the period that includes the enactment date. A valuation allowance is provided
      for the amount of deferred tax assets and liabilities that, based on available
      evidence, are not expected to be realized.





Under
      a Tax Holiday in PRC, the Joint Venture was granted an exemption from income
      taxes for two years commencing from the first cumulative profit-making year
      and
      a 50% reduction in the income tax rates for the following three years. Fiscal
      year ended December 31, 2004 was the first accumulative profit-making
      year. The Joint Venture is entitled to a 50% income tax reduction in the
      fiscal years ended December 31, 2006, 2007 and 2008. The statutory income tax
      rate is 26.4% in Ruian City which is located in the coastal economic development
      zones, the Joint Venture was subject to a tax rate of 13.2% from the years
      of
      2006 to 2008.




18




*Revenue
      Recognition*




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





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





*Concentration
      of Credit Risk*




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




***Results
      of Operations***




***(1)
      Results of operations for the three months ended June 30, 2007 as compared
      to
      the three months ended June 30, 2006.***




**SALES**




**Three
                Months ended**
            
            
            **Three
                Months ended****30-Jun-07**
            
            
            **30-Jun-06**Air
                brake valves & related components
            
            $
            22.2
            M
            
            76
            %
            $
            15.1
            M
            
            75
            %Non-valve
                products
            
            $
            7.0
            M
            
            24
            %
            $
            5.0
            M
            
            25
            %Total
            
            $
            29.2
            M
            
            100
            %
            $
            20.1
            M
            
            100
            %




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




Net
      sales were $29,189,572  and
      $20,117,002 for the three months ended June 30, 2007 and 2006, respectively.
      Net
      sales for the three months ended June 30, 2007 increased by $9.1 million or
      45.1% to $29.2 million, compared with the same period of 2006. The
      increase in sales was mainly from the international market segment and the
      domestic OEM segment. This increase was a result of the Company’s efforts to
      develop more customers and penetrate these market segments.




19




A
      breakdown of net sales revenue for our three market segments, domestic OEM,
      domestic aftermarket and the international market, for the three months ended
      June 30, 2007 and 2006 is as follows:




**Three
                Months**
            
            
            
            **Three
                Months****ended**
            
            
            
            **ended****30-Jun-07**
            
            **%**
            
            **30-Jun-06**
            
            **%****(U.S.
                dollars in million)**China
                OEM market
            
            $
            12
            
            
            41
            %
            $
            6
            
            
            30
            %China
                Aftermarket
            
            $
            6.3
            
            
            22
            %
            $
            5.2
            
            
            26
            %International
                market
            
            $
            10.9
            
            
            37
            %
            $
            8.9
            
            
            44
            %Total
            
            $
            29.2
            
            
            100
            %
            $
            20.1
            
            
            100
            %





In
      the first half of 2007, the Chinese heavy-duty truck OEM market experienced
      a
      high growth.  In
      response to this growth, the Joint Venture installed new equipment to increase
      production capacity and to meet the growing demand. In addition, the Joint Venture took advantage of its established relationship with major OEM customers and continued
      with new product R&D while enhancing unit production efficiency, lowering
      the product defect ratio and shortening the overall logistic cycle. The Joint
      Venture further expanded its OEM market share in the second quarter of 2007.The
      Joint Venture’s sales to the OEM market increased by approximately $6 million or
      100% for the second quarter ended June 30, 2007, as compared with the second
      quarter ended June 30, 2006.




As
      of June
      30 ,
      2007, the Joint Venture had 28 authorized distributors covering nearly all
      regions in China, who in turn sell our products to over 800
      sub-distributors. Based
      on the well established sales networks as well as increased production capacity,
      the Joint Venture achieved total revenue of $6.3 million in domestic aftermarket
      sales for the three months ended June 30, 2007, an increase of $1.1 million,
      or
      21.2% as compared to the same period of last year.




Export
      sales grew by $2.0 million or approximately 22.5% for the three months ended
      June 30, 2007, as compared to $8.9 million for the same period of
      2006. This increase reflects our continued focus on customer service,
      strong execution, introduction of new products, increased productivity of our
      expanded contract sales force, more efficient targeted marketing spending on
      our
      catalogs, web sites and international trade shows as well as the continued
      success of our customer acquisition and retention efforts resulting from
      improved service levels in this market segment.




**COST
      OF SALES**




Cost
      of sales for the three months ended June 30, 2007 increased to $22.8 million
      from $ 15.5million for the same period of 2005, a $7.3 million or 47.1 %
      increase which was consistent with the increase in revenues.




**GROSS
      PROFIT**




For
      the three months ended June 30, 2007, gross profit was $6,360,285, as compared
      to $4,639,344 for the same period of 2006, an increase of $1,720,941 or 37.1%.
      Gross margin was 21.8% for the three months ended June 30, 2007, a decrease
      of
      1.3% from 23.1% for the same period of 2006. The decrease was mainly due to
      the
      appreciation of RMB, Chinese currency, against the U.S. dollar  which
      negatively impacted the profit margin for our export sales.




20




In
      view of the increase of primary raw materials price and the negative impact
      associated with the appreciation of RMB against the U.S. dollar , during the
      three months ended June 30, 2007, the Joint Venture took various measures to
      lower the cost per product,. Those measures included selecting the suppliers
      which are physically close to the Joint Venture to reduce the cost of
      transportation; reducing inventories of raw material in excess of those required
      to meet production when the market price is volatile; having short-term pricing
      agreements with some of our suppliers that reduce our exposure to raw materials
      price increases; and optimizing production techniques to reduce raw material
      consumption. In the remaining six months of 2007, the Joint Venture plans to
      improve gross margin by economies of scale, shift of products mix and the
      introduction of new valve products with higher profit margins.




**SELLING
      EXPENSES**




Selling
      expenses were $1,331,643 for the three months ended June 30, 2007, as compared
      to $1,376,442 for the same period of 2006, a decrease of $44,799 or 3.3%. The
      decrease was mainly due to the fact that our product warranty expenses for
      the
      three months ended June 30, 2007 were $386,452 less than the amount for the
      same
      period of 2006. The Company recorded $321,083 of product warranty expenses
      for
      the three months ended June 30, 2007, but $707,535 for the same period of 2006.
      In the second quarter of 2006, there was one large amount of a one-time
      indemnification payment to an OEM customer, resulting from miscommunication
      in
      certain technical parameters for the products .But such situation has never
      incurred since then.




Packaging
      costs were $ 463,754 for the three months ended June 30, 2007, as compared
      to
      $270,529 for the same period of 2006, an increase of $193,225; and t ransportation
      expenses were $ 335,397 for the three months ended June 30, 2007, as compared to $150,644
      for the same period of 2006, an increase of $ 184,753.




**GENERAL
      AND ADMINISTRATIVE EXPENSES**




General
      and administrative expenses were $1,027,436 for the three months ended June
      30,
      2007, as compared to $86,289 for the same period of 2006, an increase of
      $941,147. The increase was mainly due to the following factors:




(1)
      During the second quarter of 2006, the Company collected a significant portion
      of accounts receivables with aging over one year and reversed the bad debt
      provision thereof. The reversing of the bad debt provision resulted in the
      decrease of $ 943,325 in general and administrative expenses for the three
      months ended June 30, 2006, but only $234,154 for the three months ended June
      30, 2007.




21




(2)
      The expansion of economic activities, facilities and workforce resulted in
      increased depreciation, office expenses, staff salary and welfare, travel
      expenses, supplies and utilities, totaling $204,445 as compared to the same
      period of 2006.




(3)
      R&D expense, which is included in general and administrative expenses,
      increased by $ 153,563 as compared to the same period of 2006, as discussed
      below.




(4)
      The stock-based compensation expenses decreased by $126,325 for the three months
      ended June 30, 2007, as compared to $164,435 for the same period of 2006.




*RESEARCH
      AND DEVELOPMENT EXPENSE*




Research
      and development expense was $330,797 for the three months ended June 30, 2007,
      as compared to $177,234 for the same period of 2006, an increase of $153,563,
      as
      a result of the Company’s investment in new R&D instrument purchases and
      establishment of a team to develop new innovative products.




*DEPRECIATION
      AND AMORTIZATION*




Depreciation
      and amortization expense increased to $370,097 for the three months ended June
      30, 2007, compared with that of $252,001 for the same period of 2006, an
      increase of $118,096 or 46.9%, as a result of new investment in fixed assets,
      mainly production equipment and tools.




**FINANCIAL
      EXPENSE**




Financial
      expense for the three months ended June 30, 2007 decreased by $127,632 to
      $114,268 from $241,900 for the same period of 2006, mostly caused by the
      decrease in interest expense. The decrease in interest expense was due to the
      lower outstanding debt balance during these months, which was approximately
      $1.5
      million as of June 30, 2007, a decrease of $10 million from $11.5 million at
      the
      end of June 30, 2006. The funds were mainly used for new equipment
      import.




Interest
      rates ranged between 5.73750% and 6.15313% per annum.




**OTHER
      INCOME**




Other
      income was $351,932 for the three months ended June 30, 2007, as compared to
      $
      68,696 for the three months ended June 30, 2006, an increase of $283,236.The
      increase was mainly due to $ 260,591 of subsidy income from local governments
      for the three months ended June 30, 2007. 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 obtained its sino-foreign joint venture status in 2004. In
      accordance with applicable PRC tax regulations, the Joint Venture was exempted
      from PRC income tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture
      is entitled to a tax concession of 50% of the applicable income tax rate of
      26.4% for the three years ended December 31, 2006, 2007, and 2008. In accordance
      with China's relevant regulations of income taxes, the Joint Venture has a
      benefit of a r efund
      of 40% of domestic equipment purchases from increased income taxes for the
      purchasing year over those of the previous year. During the second quarter
      ended
      June 30, 2007, the Joint Venture received an income tax benefit of $991,133
      for
      purchase of domestic equipment, which has been reflected as a reduction to
      current income tax expense. As a result, income tax expense was negative
      $422,721 for the second quarter ended June 30, 2007 compared with $293,897
      for
      the second quarter ended June 30, 2006, a decrease of $716,618 or 243.8%.




22




**STOCK—BASED
      COMPENSATION**




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




On
      March 1, 2006, the Board of Directors approved a total of 60,000 options to
      be
      issued to the four independent members of the Board of Directors. The
      contractual term of the options is three years. Total deferred stock-based
      compensation expenses related to stock options amounted to $178,904. This
      amount is amortized over the three year vesting period in a manner consistent
      with Financial Accounting Standards Board Interpretation No. 123R. The
      amortization of deferred stock-based compensation for these equity arrangements
      was both $ 14,909 for the three months ended June 30, 2007and 2006.




On
      June 20, 2007, the
      Company entered into an arrangement with its previous senior manager of investor
      relations, David Ming He, relating to 4,128 share options on its stock with
      an
      exercise price of $7.25 per option. In
      accordance with the agreement, the option became vested and exercisable
      immediately on the date thereof. Total deferred stock-based compensation
      expenses related to the 4,128 stock options granted amounted to $23,201. This
      amount was charged to G&A during the second quarter of 2007.




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




**MINORITY
      INTEREST**




Minority
      interest represents a 10% non-controlling interest in the Joint Venture.
      Minority interest in income amounted to $ 461,930 and $ 264,246 for the three
      months ended June 30, 2007 and 2006, respectively.




23




**FINANCIAL
      CONDITION**




**Liquidity
      and Capital Resources**




OPERATING
      - Net cash provided in operating activities was $1,588,354 for
      the three months ended June 30, 2007, as compared to $4,514,845 of net cash provided in operating activities for
      the three months ended June 30, 2006 ,
      a decrease of $ 2,926,491.




Our
      primary cash flows from net income were realized through the sale of automotive
      parts. The timely collection of account receivables will improve our liquidity.
      Prior to June 30, 2006 ,
      the
      Joint Venture maintained a high level of accounts
      receivable with
      aging over one year, as a result of its then domestic market strategy to
      temporarily extend credit terms to certain OEM customers and aftermarket
      distributors. The Joint Venture collected a substantial portion of accounts receivable with
      aging over one year during the three months ended June 30, 2006,  which
      has been reflected as an increase of cash flows in consolidated statements
      of
      cash flows for the three months ended June 30, 2006. An increase in the level
      of
      accounts receivable contributed to the negative cash flow of approximately
      $2.1
      million for the three months ended June 30, 2007,but the ending balance of
      accounts receivables as of June 30, 2007 was consistent with the
      Joint
      Venture’s normal practice. Cash
      flows from notes receivable decreased by approximately $2.2 million for the
      three months ended June 30, 2007, as compared to the same period of 2006, as
      a
      result of more accounts receivable collected by bank acceptance. In accordance
      with the increase of sales orders, the Company maintainted a higher level of
      inventory to meet the requirements from OEM and overseas customers and required
      more raw materials to keep its production capacity. This resulted in a negative
      cash flow of approximately $ 2.4 million. Additionally, basing on a good established relationship with suppliers, we have negotiated
      extended payment terms from them, reducing the working capital required. As
      a
      result, cash flows contributed from account payables and notes payables totaled to
      approximately $2.1 million for the three months ended June 30, 2007.In addition,
      during this period, cash flows from prepayments contributed approximately 1.4
      million.





At
      June 30, 2007, the Company had cash and cash equivalents of$5,751,342,
      as compared to cash and cash equivalents of $11,137,501 at December 31,
      2006. The Company had working capital of $ 50,645,891 at June 30, 2007, as
      compared to working capital of $47,195,220 at December 31, 2006, reflecting
      current ratios of 6.10:1 and 7.58:1, respectively.




INVESTING
      - During the three months ended June 30, 2007, the Company expended net cash
      of
      $3,271,641 in investing activities, including the funds for acquisition of
      new
      equipment to support the growth of business and financing construction in
      progress. For the three months ended June 30, 2006, the Company utilized
      $502,764 in investing activities.




FINANCING
      - Net cash provided by financing activities was $1,492,396 for the three months
      ended June 30, 2007 compared to $3,004,786 used in financing activities in
      the
      same period in 2006. During the three months ended June 30, 2006, the Joint
      Venture received aggregate bank loans in the amount of $1,375,757 under its
      credit facilities; the impact of these cash inflows was offset by repayments
      of
      $ 4,419,381 on its outstanding debt. The Joint Venture paid off all outstanding
      balances of the short term bank loans in prior to December 31, 2006. In the
      second quarter of 2007,the cash inflows mainly attributable to a $1,492,396
      increase in proceeds from borrowing due to one new loan being secured for new
      equipment purchases .




24




Management
      of the Company has taken a number of steps to restructure its customer base
      and
      phase out accounts which had failed to make prompt payments. The Company also
      placed more emphasis on receivable collection. During the three months ended
      June 30, 2007, 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.




***(
      2) Results of operations for the six months ended June 30, 2007 as compared
      to
      the six months ended June 30, 2006.***




**SALES**




**Six
                  Months ended**
              
              **Six
                  Months ended****30-Jun-07**
              
              **30-Jun-06**Air
                  brake valves & related components
              
              $
              41.3
              M
              
              77
              %
              $
              28.7
              M
              
              73
              %Non-valve
                  products
              
              $
              12.3
              M
              
              23
              %
              $
              10.8
              M
              
              27
              %Total
              
              $
              53.6
              M
              
              100
              %
              $
              39.5
              M
              
              100
              %




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




Net
      sales were $53,606,561 and $39,536,586 for the six months ended June 30, 2007
      and 2006, respectively. Net sales for the six months ended June 30, 2007
      increased by $14.1 million or 35.7% to $53.6 million, compared with the same
      period of 2006. The increase in sales was mainly from the China OEM market
      and
      international market. This increase was the result of the Company’s efforts
      to develop more customers and penetrate these market segments.




A
      breakdown of net sales revenue for our three market segments, domestic OEM,
      domestic aftermarket and the international market, for six months ended June
      30,
      2007 and 2006 is as follows:




**Six
                  Months**
              
              
              
              **Six
                  Months****ended**
              
              
              
              **ended****30-Jun-07**
              
              **%**
              
              **30-Jun-06**
              
              **%****(U.S.
                  dollars in million)**China
                  OEM market
              
              $
              20.9
              
              
              39
              %
              $
              11.8
              
              
              30
              %China
                  Aftermarket
              
              $
              13.4
              
              
              25
              %
              $
              12.7
              
              
              32
              %International
                  market
              
              $
              19.3
              
              
              36
              %
              $
              15
              
              
              38
              %Total
              
              $
              53.6
              
              
              100
              %
              $
              39.5
              
              
              100
              %





In
      the first half of 2007, the Chinese heavy-duty truck OEM market experienced
      a
      high growth.  In
      response to this growth, the Joint Venture installed new equipment to increase
      production capacity and to meet the growing demand. In addition, the
      Joint Venture took advantage of its established relationship with major OEM
      customers and continued with new product R&D while enhancing unit production
      efficiency, lowering the product defect ratio and shortening the overall
      logistic cycle The Joint Venture further expanded its OEM market share in the
      second quarter of 2007.The Joint Venture’s sales to the OEM market increased by
      approximately $9.1 million or 77.1% for the six months ended June 30, 2007,
      as
      compared to the six months ended June 30, 2006.




As
      of June
      30 ,
      2007, the Joint Venture has 28 authorized distributors covering nearly all
      regions in China, who in turn sell our products to over 800 sub-distributors. Based
      on the well established networks as well as increased production capacity, the
      sales for the domestic aftermarket slightly increased by $0.7 million for
      the six months ended June 30, 2007, as compared to the six months ended June 30, 2006.




Export
      sales grew by $4.3 million or approximately 28.7% for the six months ended
      June
      30, 2007, as compared to $15 million for the same period of 2006. This
      increase reflects our continued focus on customer service, strong execution,
      introduction of new products, increased productivity of our expanded contract
      sales force, more efficient targeted marketing spending on our catalogs, web
      sites and international trade shows as well as the continued success of our
      customer acquisition and retention efforts resulting from improved service
      levels in this market segment.




**COST
      OF SALES**




Cost
      of sales for the six months ended June 30, 2007 increased to $41.6 million
      from
      $30.5 million for the same period of 2006, an $11.1 million or 36.4% increase
      which was consistent with the increase in revenue.




**GROSS
      PROFIT**




For
      the six months ended June 30, 2006, gross profit was $12,051,222, as compared
      to
      $9,035,102 for the same period of 2006, an increase of $3,016,120 or 33.4%.
      Gross margin was 22.5% for the six months ended June 30, 2007, a decrease of
      0.4% from 22.9% for the same period of 2006. The
      decrease was mainly due to the appreciation of RMB, Chinese currency, against
      the U.S. dollar which negatively impacted the profit margin for our export
      sales.




In
      view of the increase of primary raw materials price and the negative impact
      associated with the appreciation of RMB against the U.S. dollar, during the
      six
      months ended June 30, 2007, the Joint Venture took various measures to lower
      the
      cost per product, to be sure that the increases cannot be passed onto the
      customers. Those measures included selecting the suppliers which are physically
      close to the Joint Venture to reduce the cost of transportation; reducing
      inventories of raw material in excess of those required to meet production
      when
      the market price is volatile; having short-term pricing agreements with some
      of
      our suppliers that reduce our exposure to raw materials price increases; and
      optimizing production techniques to reduce raw material consumption. In the
      remaining six months of 2007, the Joint Venture plans to improve gross margin
      by
      economies of scale, shift of products mix and the introduction of new valve
      products with higher profit margins.




25




**SELLING
      EXPENSES**




Selling
      expenses were $2,515,290 for the six months ended June 30, 2007, as compared
      to
      $2,244,458 for the same period of 2006, an increase of $270,832 or 12.1%. Our
      product warranty expenses for the six months ended June 30, 2007 were $297,652
      less than the amount for the same period of 2006. The Company recorded $585,888
      of product warranty expenses for the six months ended June 30, 2007, but
      $883,540 for the same period of 2006. In the second quarter of 2006, there
      was
      one large amount of a one-time indemnification payment to an OEM customer,
      resulting from miscommunication in certain technical parameters for the products
      .But such situation has never incurred since then.




Packaging
      costs were $901,565 for the six months ended June 30, 2007, as compared to
      $482,818 for the same period of 2006, an increase of $418,747; and t ransportation
      expenses were $584,397 for the six months ended June 30, 2007, as compared to $371,466
      for the same period of 2006, an increase of $212,931.




**GENERAL
      AND ADMINISTRATIVE EXPENSES**




General
      and administrative expenses were $2,720,623 for the six months ended June 30,
      2006, as compared to $1,183,251 for the same period of 2006, an increase of
      $1,537,372.The increase was mainly due to the following factors:




(1)
      During the second quarter of 2006, the Joint Venture reversed bad debt provision
      resulting from collecting a significant portion of accounts receivable with
      aging over one year, as discussed above, which had been reflected as a reduction
      to general and administrative expenses. Compared with the negative $786,296
      of
      bad debt provision for the six month ended June 30, 2006, bad debt provision
      included in general and administrative expenses was $187,176 for the six months
      ended June 30, 2007, increasing by $973,470.




(2)The
      expansion of economic activities, facilities and workforce resulted in increased
      depreciation, office expenses, staff salary and welfare, travel expenses,
      supplies and utilities totaling $229,513 as compared to the same period of
      2006.




(3)
      R&D expense, which is included in general and administrative expenses,
      increased by $313,242 as compared to the same period of 2006, as discussed
      below.




26




(4)The
      stock-based compensation expenses decreased by $116,386 for the six months
      ended
      June 30, 2007, as compared to $169,405 for the same period of 2006.




*RESEARCH
      AND DEVELOPMENT EXPENSE*




Research
      and development expense was $553,672 for the six months ended June 30, 2006,
      as
      compared to $240,430 for the same period of 2005, an increase of $313,242,
      as a
      result of the Company’s investment in new R&D instrument purchase and
      establishment of a team to develop new innovative products .




*DEPRECIATION
      AND AMORTIZATION*




Depreciation
      and amortization expense increased to $710,394 for the six months ended June
      30,
      2007, compared to $516,995 for the same period of 2006, an increase of $193,399
      or 37.4%, as a result of new investment in fixed assets, mainly production
      equipment and tools.




**FINANCIAL
      EXPENSE**




Financial
      expense for the six months ended June 30, 2007 decreased by $250,011 to
      $257,436, from $507,447 for the same period of 2006, mostly caused by the
      decrease in interest expense. The decrease in interest expense was due to
      the lower outstanding debt balance during these months, which was approximately
      $1.5 million as of June 30, 2007, a decrease of $10 million from $11.5 million
      at the end of June 30, 2006. The funds were mainly used for new equipment
      import.




Interest
      rates ranged between 5.73750% and 6.15313% per annum.




**OTHER
      INCOME**




Other
      income was $384,272 for the six months ended June 30, 2007, as compared to
      $68,696 for the six months ended June 30, 2006, an increase of $315,576.The
      increase was mainly due to $265,738 of subsidy income from local governments
      for
      the six months ended June 30, 2007. These subsidies were provided to the Company
      as economic incentives to secure business commitments and no repayment by the
      Company is required.




**INCOME
      TAX**




There
      was no income tax expense for the fiscal year ended December 31, 2005 and 2004.
      As a result of the Joint Venture obtaining its sino-foreign joint venture status
      in 2004, in accordance with applicable PRC tax regulations, the Joint Venture
      was exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter,
      the
      Joint Venture is entitled to a tax concession of 50% of the applicable income
      tax rate of 26.4% commencing the three years ended December 31, 2006, 2007,
      and
      2008. In accordance with China's relevant regulations of income taxes, the
      Joint
      Venture has a benefit of a r efund
      of 40% of domestic equipment purchases from increased income taxes for the
      purchasing year over those of the previous year. During the second quarter
      ended
      June 30, 2007, the Joint Venture received an income tax benefit of $991,133
      for
      purchase of domestic equipment, which has been reflected as a reduction to
      current income tax expense. As a result, income tax expense was negative $60,256
      for the six months ended June 30, 2007 compared with $587,505 for the six months
      ended June 30, 2006, a decrease of $647,761.




27




**MINORITY
      INTEREST**




Minority
      interest represents a 10% non-controlling interest in the Joint Venture.
      Minority interest in income amounted to $697,119 and $442,441 for the six months
      ended June 30, 2007 and 2006, respectively.




**STOCK—BASED
      COMPENSATION**




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




On
      March 1, 2006, the Board of Directors approved a total of 60,000 options to
      be
      issued to the four independent members of the Board of Directors. The
      contractual term of the options is three years. Total deferred stock-based
      compensation expenses related to stock options amounted to $178,904. This amount
      is amortized over the three year vesting period in a manner consistent with
      Financial Accounting Standards Board Interpretation No. 123R. The amortization
      of deferred stock-based compensation for these equity arrangements was $29,818
      for the six months ended June 30, 2007, as compared to $19,879 for the six
      months ended June 30, 2006.




On
      June 20, 2007, the
      Company entered into an arrangement with its previous senior manager of investor
      relations, David Ming He, relating to 4,128 share options on its stock with
      an
      exercise price of $7.25 per option. In accordance with the agreement, the option
      became vested and exercisable imme diately
      on the date thereof. Total deferred stock-based compensation expenses related
      to
      the 4,128 stock options granted amounted to $23,201. This amount was charged
      to
      G&A during six months ended June 30, 2007.




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




**FINANCIAL
      CONDITION**




**Liquidity
      and Capital Resources**




OPERATING
      - Net
      cash used in operating activities was $1,694,076 for
      the six months ended June 30, 2007, as compared to $6,467,208 of net cash provided by operating activities for
      the six months ended June 30, 2006 ,
      a decrease of $8,161,284.




28




Our
      primary cash flows from net income were realized through the sale of automotive
      parts. The timely collection of account receivables will improve our liquidity. Cash
      flows from accounts receivable and notes receivables decreased by approximately
      $7.3 million for the six months ended June 30, 2007 as compared with the same
      period of 2006, as a result of a high level of accounts receivable and notes
      receivables as of June 30, 2007. The increase of accounts receivable was
      primarily due to the increase of sales volumes. The ending balance of accounts receivables as of June 30, 2007 was consistent
      with the
      Joint
      Venture’s normal practice. During the first half of 2007 year, most of accounts receivable were collected by bank acceptance, hence the
      increase of notes receivables. .  In
      accordance with the increase of sales orders, the Company maintained a higher
      level of inventory to meet the requirements from OEM and overseas customers
      and
      required more raw materials to keep its production capacity. This resulted
      in a
      negative cash flow of approximately $ 2.7 million. Additionally, based on a good established relationship with suppliers, we have negotiated
      extended payment terms from them, reducing the working capital required. As
      a
      result, cash flows contributed from prepayments and account payables and notes payables
      totaled to approximately $4.3 million for the six months ended June 30,
      2007.





At
      June 30, 2007, the Company had cash and cash equivalents of $5,751,342 ,
      as compared to cash and cash equivalents of $11,137,501 at December 31,
      2006. The Company had working capital of $50,645,891 at June 30, 2007, as
      compared to working capital of $47,195,220 at December 31, 2006, reflecting
      current ratios of 6.10:1 and 7.58:1, respectively.




INVESTING
      - During the six months ended June 30, 2007, the Company expended net cash
      of
      $5,355,276 in investing activities, mainly including the funds for acquisition
      of new equipment to support the growth of business and financing construction
      in
      progress. For the six months ended June 30, 2006, the Company utilized
      $873,580 in investing activities.




FINANCING
      - Net cash provided by financing activities was $1,492,396 for the three months
      ended June 30, 2007 compared to $4,520,388 used in financing activities in
      the
      same period in 2006. During the six months ended June 30, 2006, the Joint
      Venture received aggregate bank loans in the amount of $7,113,564 under its
      credit facilities; the impact of these cash inflows was offset by repayments
      of
      $11,778,742 on its outstanding debt. The Joint Venture paid off all outstanding
      balance of the short term bank loans in prior to December 31,2006.During the
      six
      months ended June 30,2007,the cash inflows were mainly attributable to a
      $1,492,396 increase in proceeds from borrowing due to one new loan being secured
      for new equipment purchases .




Management
      of the Company has taken a number of steps to restructure its customer base
      and
      phase out accounts which had failed to make prompt payments, the Company also
      placed more emphasis on receivable collection. During the quarter, the Company
      continued to develop high profit margin new products, as well as adopting steps
      for further cost saving such as improving material utilization rate. While
      we
      believe that funds generated from operations and our revolving bank lines of
      credit will be sufficient to finance our working capital requirements for the
      foreseeable future, we continue our efforts to raise capital to finance further
      expansion of production, build our international sales networks in new markets,
      strengthen our R&D workforce, and supplement our working capital.




29




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





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




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




**ITEM
      4. CONTROLS AND PROCEDURES**





(a)
            Evaluation
                of Disclosure Controls and Procedures.




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





In
      conjunction with the close of the fiscal quarter and under the supervision
      of
      the Chief Executive Officer and Chief Financial Officer, the Company conducted
      an update, a review and an evaluation of the effectiveness of the Company’s
      disclosure controls and procedures. As defined in Rule 13a-15(e), it is the
      conclusion of the Company’s Chief Executive Officer and Chief Financial Officer,
      based upon an evaluation completed as of the end of the most recent fiscal
      quarter reported on herein, that the Company’s disclosure controls and
      procedures were effective.





(b)
            Changes
                in Internal Controls.




During
      the period covered by the Quarterly Report on Form 10-Q, there were no
      changes in our internal controls over financial reporting as defined in Rule
      13a-15(f) or in other factors that have materially affected, or are reasonably
      likely to materially affect, our internal controls over financial reporting.


30


**PART
      II**




**OTHER
      INFORMATION**




**ITEM
      1. LEGAL PROCEEDINGS**




None.




**ITEM
      1A. RISK FACTORS**




Not
      applicable.




**ITEM
      2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS**





On
      November 30, 2006, SORL completed its follow-on public offering of 4,285,714
      shares of common stock at $7.25 per share. Maxim Group LLC and Charton Capital
      Market, LLC acted as representatives of the underwriters. Gross proceeds were
      approximately $31.1 million. Net proceeds after approximately $2.2 million
      of
      underwriters’ commission and approximately $0.7 million of related offering
      expense were approximately $2.8 million. On December 13, 2006, Maxim Group
      LLC,
      the lead underwriter of follow-on offering, exercised the over-allotment option
      in full to purchase an additional 642,857 shares of common stock. After
      deduction of the underwriter’s discount of $0.3 million, approximately $4.3
      million was received by the Company. The aggregate net proceeds to the Company
      of this offering were approximately $32.5 million, which included $4.3 million
      as the result of the exercise of the over-allotment option.





As
      of
      December 31, 2006, the Company used approximately $22.7 million out of the
      net
      proceeds for working capital or new projects, including approximately $16.6
      million for temporary repayment of short-term bank loan and $6.1 million as
      capital expenditures for the purchase of the land use right from the Ruili
      Group
      (a related party) and for the construction of the new plant. The Company had
      reached agreement with a local bank to temporarily repay its outstanding
      obligations when it had sufficient cash in account before spending the funds
      according to its business plan.





During
      the first and second quarter of 2007, approximately $3.5 million, $2.1 million,
      and $0.6 million out of the net offering proceeds were used for new machinery
      purchase, construction of the new plant, and R&D efforts, respectively.
      Also, the Joint Venture began to re-enter a debt position with $1,492,396 short
      term bank loan occurring in the second quarter of 2007. Other than the payments
      to Ruili Group as mentioned above, none of the net offering proceeds were paid,
      directly or indirectly, to directors, officers and persons who beneficially
      own
      ten percent or more of our equity securities.





In
      subsequent periods, the remaining net offering proceeds will be invested in
      further construction of new plant, new machinery and equipment purchase, R&D
      efforts, international sales and marketing activities, as well as additional
      working capital requirements. In addition, to fund these financial requirements,
      the Company will not continue to use the net proceeds to repay short-term bank
      loans. The credit line available for the Company at the end of second fiscal
      quarter was $17.1 million USD.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




None.




31




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.





**ITEM
      5. OTHER INFORMATION**




None.




**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 2002.32.2
            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:
                August 10, 2007
            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)




32