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, 2012
|- | ------------------------------------------------------------------------------------------------------------------------------



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

For the transition period from _________
to _________



Commission file number 000-11991



SORL AUTO PARTS, INC.

(Exact name of registrant as specified in
its charter)



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

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  ̈

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).

Yes  xNo  ̈



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

|Large Accelerated Filer  ̈ | Accelerated Filer  ̈ | Non-Accelerated Filer  ̈ | Smaller Reporting Company x
|------------------------- | ------------------- | ----------------------- | ---------------------------



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

Yes  ̈ No
x



APPLICABLE ONLY TO CORPORATE ISSUERS



Indicate the number of shares outstanding
of each of the issuer classes of common stock, as of the latest practicable date:

As of August 10, 2012 there were
19,304,921 shares of Common Stock outstanding











SORL AUTO PARTS, INC.

FORM 10-Q

For the Quarter Ended June 30, 2012



INDEX



|           |                                                                                                                                  | Page
|---------- | -------------------------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                                  |     
|PART I.    | FINANCIAL INFORMATION (Unaudited)                                                                                                | 1   
|           |                                                                                                                                  |     
|Item 1.    | Financial Statements:                                                                                                            | 1   
|           |                                                                                                                                  |     
|           | Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011                                      | 2   
|           |                                                                                                                                  |     
|           | Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Six Months Ended June 30, 2012 and 2011 | 3   
|           |                                                                                                                                  |     
|           | Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2012 and 2011                      | 4   
|           |                                                                                                                                  |     
|           | Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Six months ended June 30, 2012 and 2011            | 5   
|           |                                                                                                                                  |     
|           | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                                             | 6   
|           |                                                                                                                                  |     
|Item 2.    | Management’s Discussion and Analysis or Financial Condition and Results of Operations                                            | 19  
|           |                                                                                                                                  |     
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                                                       | 28  
|           |                                                                                                                                  |     
|Item 4.    | Controls and Procedures                                                                                                          | 28  
|           |                                                                                                                                  |     
|PART II.   | OTHER INFORMATION                                                                                                                | 29  
|           |                                                                                                                                  |     
|Item 1.    | Legal Proceedings.                                                                                                               | 29  
|           |                                                                                                                                  |     
|Item 1A.   | Risk Factors.                                                                                                                    | 29  
|           |                                                                                                                                  |     
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds.                                                                     | 29  
|           |                                                                                                                                  |     
|Item 3.    | Defaults Upon Senior Securities.                                                                                                 | 29  
|           |                                                                                                                                  |     
|Item 4.    | Mine Safety Disclosures.                                                                                                         | 29  
|           |                                                                                                                                  |     
|Item 5.    | Other Information.                                                                                                               | 29  
|           |                                                                                                                                  |     
|Item 6.    | Exhibits                                                                                                                         | 29  
|           |                                                                                                                                  |     
|SIGNATURES | 30                                                                                                                              



1







SORL Auto Parts, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2012 and December
31, 2011



|                                                                                                                                                   |  | June 30, 2012 |             |   | December 31, 2011 |    
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | ---
|                                                                                                                                                   |  | (Unaudited)   |             |   |                   |    
|Assets                                                                                                                                             |  |               |             |   |                   |    
|Current Assets                                                                                                                                     |  |               |             |   |                   |    
|Cash and Cash Equivalents                                                                                                                          |  | US$           | 21,349,583  |   |                   | US$
|Accounts Receivable, Net of Provision                                                                                                              |  |               | 69,124,181  |   |                   |    
|Bank acceptance notes from customers                                                                                                               |  |               | 11,691,305  |   |                   |    
|Inventory                                                                                                                                          |  |               | 54,863,701  |   |                   |    
|Prepayments                                                                                                                                        |  |               | 7,145,345   |   |                   |    
|Other current assets                                                                                                                               |  |               | 2,022,219   |   |                   |    
|Deferred tax assets                                                                                                                                |  |               | 792,496     |   |                   |    
|Total Current Assets                                                                                                                               |  |               | 166,988,830 |   |                   |    
|Fixed Assets                                                                                                                                       |  |               |             |   |                   |    
|Machinery                                                                                                                                          |  |               | 51,338,974  |   |                   |    
|Molds                                                                                                                                              |  |               | 1,379,570   |   |                   |    
|Office equipment                                                                                                                                   |  |               | 1,507,432   |   |                   |    
|Vehicle                                                                                                                                            |  |               | 1,977,931   |   |                   |    
|Building                                                                                                                                           |  |               | 8,854,995   |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Machinery held under capital lease                                                                                                                 |  |               | 18,097,156  |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Construction in progress                                                                                                                           |  |               | 153,336     |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Less: Accumulated Depreciation                                                                                                                     |  |               | (34,309,286 | ) |                   |    
|Property, Plant and Equipment, Net                                                                                                                 |  |               | 49,000,108  |   |                   |    
|Leasehold Improvements in Progress                                                                                                                 |  |               | 366,912     |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Land Use Rights, Net                                                                                                                               |  |               | 14,870,156  |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Other Non-Current Assets                                                                                                                           |  |               |             |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Intangible Assets                                                                                                                                  |  |               | 175,203     |   |                   |    
|Less: Accumulated Amortization                                                                                                                     |  |               | (100,226    | ) |                   |    
|Intangible Assets, Net                                                                                                                             |  |               | 74,977      |   |                   |    
|Security Deposits On Lease Agreement                                                                                                               |  |               | 1,872,757   |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Other assets                                                                                                                                       |  |               | 9,046       |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Total Other Non-Current Assets                                                                                                                     |  |               | 1,956,780   |   |                   |    
|Total Assets                                                                                                                                       |  | US$           | 233,182,786 |   |                   | US$
|                                                                                                                                                   |  |               |             |   |                   |    
|Liabilities and Shareholders' Equity                                                                                                               |  |               |             |   |                   |    
|Current Liabilities                                                                                                                                |  |               |             |   |                   |    
|Accounts Payable, including $50,495 and $524,148 due to related parties at June 30, 2012 and December 31, 2011, respectively.                      |  | US$           | 10,418,339  |   |                   | US$
|Bank acceptance notes to vendors                                                                                                                   |  |               | 3,320,211   |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Deposit Received from Customers                                                                                                                    |  |               | 5,012,252   |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Short term bank loans                                                                                                                              |  |               | 12,080,097  |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Income tax payable                                                                                                                                 |  |               | 1,240,240   |   |                   |    
|Accrued Expenses                                                                                                                                   |  |               | 9,660,623   |   |                   |    
|Current Portion Of Capital Lease Obligations                                                                                                       |  |               | 2,389,159   |   |                   |    
|Other Current Liabilities, including $118,659 and $143,950 due to related parties at June 30, 2012 and December 31, 2011, respectively.            |  |               | 241,852     |   |                   |    
|Total Current Liabilities                                                                                                                          |  |               | 44,362,773  |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Non-Current Liabilities                                                                                                                            |  |               |             |   |                   |    
|Non-Current Portion Of Capital Lease Obligations                                                                                                   |  |               | 9,211,306   |   |                   |    
|Deferred tax liabilities                                                                                                                           |  |               | 263,192     |   |                   |    
|Total Non-Current Liabilities                                                                                                                      |  |               | 9,474,498   |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Total Liabilities                                                                                                                                  |  | US$           | 53,837,271  |   |                   | US$
|                                                                                                                                                   |  |               |             |   |                   |    
|Stockholders' Equity                                                                                                                               |  |               |             |   |                   |    
|                                                                                                                                                   |  |               |             |   |                   |    
|Preferred Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as of June 30, 2012 and December 31, 2011                        |  |               | -           |   |                   |    
|Common Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 19,304,921 issued and outstanding as of June 30, 2012 and December 31, 2011 |  |               | 38,609      |   |                   |    
|Additional Paid In Capital                                                                                                                         |  |               | 42,199,014  |   |                   |    
|Reserves                                                                                                                                           |  |               | 8,919,810   |   |                   |    
|Accumulated other comprehensive income                                                                                                             |  |               | 21,359,374  |   |                   |    
|Retained Earnings                                                                                                                                  |  |               | 89,395,858  |   |                   |    
|Total SORL Auto Parts, Inc. stockholders' equity                                                                                                   |  |               | 161,912,665 |   |                   |    
|Noncontrolling Interest In Subsidiaries                                                                                                            |  |               | 17,432,850  |   |                   |    
|Total Equity                                                                                                                                       |  |               | 179,345,515 |   |                   |    
|Total Liabilities and Stockholders' Equity                                                                                                         |  | US$           | 233,182,786 |   |                   | US$



The accompanying notes are an integral
part of these financial statements



2







SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of
Income and Comprehensive Income

Three Months and Six Months
Ended June 30, 2012 and 2011



|                                                                            |  | Three Month Ended  June 30, |            |   | Six Months Ended 
June 30, | 
|--------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | -------------------------- | 
|                                                                            |  | 2012                        |            |   | 2011                       | 
|                                                                            |  |                             |            |   |                            | 
|Sales                                                                       |  | US$                         | 52,092,172 |   |                            | 
|Include: sales to related parties                                           |  |                             | 393,384    |   |                            | 
|Cost of Sales                                                               |  |                             | 37,912,979 |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Gross Profit                                                                |  |                             | 14,179,193 |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Expenses:                                                                   |  |                             |            |   |                            | 
|Selling and Distribution Expenses                                           |  |                             | 3,523,498  |   |                            | 
|General and Administrative Expenses                                         |  |                             | 3,493,009  |   |                            | 
|Research and development expenses                                           |  |                             | 2,296,820  |   |                            | 
|Financial Expenses                                                          |  |                             | 532,722    |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Total Expenses                                                              |  |                             | 9,846,049  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Operating Income                                                            |  |                             | 4,333,144  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Other Income                                                                |  |                             | 412,975    |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Non-Operating Expenses                                                      |  |                             | (192,296   | ) |                            | 
|                                                                            |  |                             |            |   |                            | 
|Income (Loss) Before Provision for Income Taxes                             |  |                             | 4,553,823  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Provision for Income Taxes                                                  |  |                             | 1,279,762  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Net Income                                                                  |  | US$                         | 3,274,061  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Other Comprehensive Income - Foreign Currency Translation Adjustment        |  |                             | (873,696   | ) |                            | 
|                                                                            |  |                             |            |   |                            | 
|Total Comprehensive Income                                                  |  |                             | 2,400,365  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Less:                                                                       |  |                             |            |   |                            | 
|Net income attributable to Noncontrolling Interest In Subsidiaries          |  |                             | 278,034    |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Other Comprehensive Income Attributable to Non-controlling Interest's Share |  |                             | (86,950    | ) |                            | 
|                                                                            |  |                             |            |   |                            | 
|Total Comprehensive Income Attributable to Non-controlling Interest's Share |  |                             | 191,084    |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Net Income Attributable to Stockholders                                     |  | US$                         | 2,996,027  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Other Comprehensive Income Attributable to Stockholders                     |  |                             | (786,746   | ) |                            | 
|                                                                            |  |                             |            |   |                            | 
|Total Comprehensive Income Attributable to Stockholders                     |  | US$                         | 2,209,281  |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Weighted average common share – Basic                                       |  |                             | 19,304,921 |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|Weighted average common share – Diluted                                     |  |                             | 19,304,921 |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|EPS – Basic                                                                 |  |                             | 0.16       |   |                            | 
|                                                                            |  |                             |            |   |                            | 
|EPS – Diluted                                                               |  | US$                         | 0.16       |   |                            | 



The accompanying notes are an integral
part of these financial statements



3







SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of
Cash Flows

Six Months Ended June 30, 2012
and 2011



|                                                                                  |  | Six Months Ended June 30, |           
|--------------------------------------------------------------------------------- |  | ------------------------- | ----------
|                                                                                  |  | 2012                      |           
|                                                                                  |  |                           |           
|Cash Flows from Operating Activities                                              |  |                           |           
|Net Income                                                                        |  | US$                       | 5,330,016 
|Adjustments to reconcile net income (loss) to net cash from operating activities: |  |                           |           
|Noncontrolling Interest In Subsidiaries                                           |  |                           | 541,923   
|Bad Debt Expense                                                                  |  |                           | 27,775    
|Depreciation and Amortization                                                     |  |                           | 3,787,576 
|Loss on disposal of Fixed Assets                                                  |  |                           | 2,333     
|Changes in Assets and Liabilities:                                                |  |                           |           
|Account Receivables                                                               |  |                           | (3,517,570
|Bank acceptance notes from customers                                              |  |                           | 6,248,483 
|Other Currents Assets                                                             |  |                           | 2,420,536 
|Inventory                                                                         |  |                           | 1,308,149 
|Prepayments                                                                       |  |                           | (4,688,661
|Deferred tax assets                                                               |  |                           | (189,870  
|Accounts Payable and Bank acceptance notes to vendors                             |  |                           | (2,587,357
|Income Tax Payable                                                                |  |                           | 966,078   
|                                                                                  |  |                           |           
|Deposits Received from Customers                                                  |  |                           | (43,080   
|Other Current Liabilities and Accrued Expenses                                    |  |                           | 577,231   
|                                                                                  |  |                           |           
|Deferred tax liabilities                                                          |  |                           | 27,798    
|Net Cash Flows from Operating Activities                                          |  |                           | 10,211,360
|                                                                                  |  |                           |           
|Cash Flows from Investing Activities                                              |  |                           |           
|Acquisition of Property and Equipment                                             |  |                           | (415,296  
|                                                                                  |  |                           |           
|Sales proceeds of disposal of fixed assets                                        |  |                           | 3,096     
|                                                                                  |  |                           |           
|Leasehold Improvements in Progress                                                |  |                           | (31,069   
|                                                                                  |  |                           |           
|Net Cash Flows from Investing Activities                                          |  |                           | (443,269  
|                                                                                  |  |                           |           
|Cash Flows from Financing Activities                                              |  |                           |           
|Proceeds from (Repayment of) Bank Loans                                           |  |                           | (4,325,512
|                                                                                  |  |                           |           
|Repayment of capital lease                                                        |  |                           | (1,129,247
|                                                                                  |  |                           |           
|Net Cash flows from Financing Activities                                          |  |                           | (5,454,759
|                                                                                  |  |                           |           
|Effects on changes in foreign exchange rate                                       |  |                           | (80,441   
|                                                                                  |  |                           |           
|Net Change in Cash and Cash Equivalents                                           |  |                           | 4,232,891 
|                                                                                  |  |                           |           
|Cash and Cash Equivalents- Beginning of the year                                  |  |                           | 17,116,692
|                                                                                  |  |                           |           
|Cash and cash Equivalents - End of the period                                     |  | US$                       | 21,349,583
|                                                                                  |  |                           |           
|Supplemental Cash Flow Disclosures:                                               |  |                           |           
|Interest Paid                                                                     |  |                           | 690,117   
|Tax Paid                                                                          |  |                           | 1,489,636 



The accompanying notes are an integral
part of these financial statements



4









SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of
Changes in Stockholders' Equity

For The Six Months Ended on June 30,
2012 and 2011



|                                    |  |          |            |  |        |  |        | Additional |  |  |            |  |  | Retained  |           |  | Accumu. Other |  |            |               |  |  |                |   |  |        |            
|----------------------------------- |  | -------- | ---------- |  | ------ |  | ------ | ---------- |  |  | ---------- |  |  | --------- | --------- |  | ------------- |  | ---------- | ------------- |  |  | -------------- | - |  | ------ | -----------
|                                    |  | Number   |            |  | Common |  |        | Paid-in    |  |  |            |  |  | Earnings  |           |  | Comprehensive |  |            | Shareholders' |  |  | Noncontrolling |   |  | Total  |            
|                                    |  | of Share |            |  | Stock  |  |        | Capital    |  |  | Reserves   |  |  | (Deficit) |           |  | Income        |  |            | Equity        |  |  | Interest       |   |  | Equity |            
|Beginning Balance - January 1, 2012 |  |          | 19,304,921 |  |        |  | 38,609 |            |  |  | 42,199,014 |  |  |           | 8,375,392 |  |               |  | 84,610,260 |               |  |  | 21,910,957     |   |  |        | 157,134,232
|                                    |  |          |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |   |  |        |            
|Net Income                          |  |          |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  | 5,330,016  |               |  |  |                |   |  |        | 5,330,016  
|                                    |  |          |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |   |  |        |            
|Other Comprehensive Income(Loss)    |  |          |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  | (551,583       | ) |  |        | (551,583   
|                                    |  |          |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |   |  |        |            
|Transfer to reserve                 |  |          |            |  |        |  |        |            |  |  |            |  |  |           | 544,418   |  |               |  | (544,418   | )             |  |  |                |   |  |        | -          
|                                    |  |          |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |   |  |        |            
|Ending Balance - June 30, 2012      |  |          | 19,304,921 |  |        |  | 38,609 |            |  |  | 42,199,014 |  |  |           | 8,919,810 |  |               |  | 89,395,858 |               |  |  | 21,359,374     |   |  |        | 161,912,665



SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in
Stockholders' Equity

For The Six Months Ended on June 30,
2011



|                                    |  |           |            |  |        |  |        | Additional |  |  |            |  |  | Retained  |           |  | Accumu. Other |  |            |               |  |  |                |  |  |        |            
|----------------------------------- |  | --------- | ---------- |  | ------ |  | ------ | ---------- |  |  | ---------- |  |  | --------- | --------- |  | ------------- |  | ---------- | ------------- |  |  | -------------- |  |  | ------ | -----------
|                                    |  | Number    |            |  | Common |  |        | Paid-in    |  |  |            |  |  | Earnings  |           |  | Comprehensive |  |            | Shareholders' |  |  | Noncontrolling |  |  | Total  |            
|                                    |  | of Shares |            |  | Stock  |  |        | Capital    |  |  | Reserves   |  |  | (Deficit) |           |  | Income        |  |            | Equity        |  |  | Interest       |  |  | Equity |            
|Beginning Balance - January 1, 2011 |  |           | 19,304,921 |  |        |  | 38,609 |            |  |  | 42,199,014 |  |  |           | 6,641,547 |  |               |  | 69,672,286 |               |  |  | 14,731,607     |  |  |        | 133,283,063
|                                    |  |           |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |  |  |        |            
|Net Income                          |  |           |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  | 9,824,520  |               |  |  |                |  |  |        | 9,824,520  
|                                    |  |           |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |  |  |        |            
|Other Comprehensive Income(Loss)    |  |           |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  | 3,253,441      |  |  |        | 3,253,441  
|                                    |  |           |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |  |  |        |            
|Transfer to reserve                 |  |           |            |  |        |  |        |            |  |  |            |  |  |           | 994,830   |  |               |  | (994,830   | )             |  |  |                |  |  |        | -          
|                                    |  |           |            |  |        |  |        |            |  |  |            |  |  |           |           |  |               |  |            |               |  |  |                |  |  |        |            
|Ending Balance - June 30, 2011      |  |           | 19,304,921 |  |        |  | 38,609 |            |  |  | 42,199,014 |  |  |           | 7,636,377 |  |               |  | 78,501,976 |               |  |  | 17,985,048     |  |  |        | 146,361,024



The accompanying notes are an integral
part of these financial statements



5









NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS



NOTE A - DESCRIPTION OF BUSINESS



SORL Auto Parts, Inc.( “the
Company”) is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related
components, through its 90% ownership of Ruili Group Ruian Auto Parts Company Limited (“Ruian” or the
“Joint Venture”) in the People’s Republic of China (“PRC” or “China”) and 60%
ownership of SORL International Holding, Ltd. ("SIH") in Hong Kong. The Company distributes products both in China and
internationally under SORL trademarks. The Company’s products range in 65 categories and over 2000 different specifications.



NOTE B - BASIS OF PRESENTATION



The condensed consolidated
financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial
statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by
the rules and regulations of the United States Securities and Exchange Commission, although the Company believes that the disclosures
contained in this report are adequate to make the information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included
in the Company’s annual report on Form 10-K for the year ended December 31, 2011, and other reports filed with the SEC.



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



NOTE C- RECENTLY ISSUED FINANCIAL STANDARDS



In May 2011, the Financial
Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This
newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the
disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU
is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. The
adoption of this standard did not have a material impact on the Company’s consolidated financial statements.



In June 2011, the FASB
issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05).
This newly issued accounting standard: (1) eliminates the option to present the components of other comprehensive income as
part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement
of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face
of the financial statements from other comprehensive income to net income. The amendments in this ASU do not change the items that
must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income
nor do the amendments affect how earnings per share is calculated or presented.



6







In December 2011, the
FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the requirement within
ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive
income on the components of net income and other comprehensive income for all periods presented. During the deferral, entities
should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements
in effect prior to the issuance of ASU 2011-05. These ASUs are required to be applied retrospectively and are effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011. As these accounting standards do not change
the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified
to net income, the adoption of these standards did not have an impact on our consolidated financial statements.



In December 2011, the
FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). This newly
issued accounting standard requires an entity to disclose both gross and net information about instruments and transactions eligible
for offset in the statement of financial position as well as instruments and transactions executed under a master netting or similar
arrangement and was issued to enable users of financial statements to understand the effects or potential effects of those arrangements
on its financial position. This ASU is required to be applied retrospectively and is effective for fiscal years, and interim periods
within those years, beginning on or after January 1, 2013. As this accounting standard only requires enhanced disclosure,
the adoption of this standard is not expected to have an impact on our consolidated financial statements.



NOTE D - RELATED PARTY TRANSACTIONS



The Company continued
to purchase packaging materials from the Ruili Group Co., Ltd. The Ruili Group Co., Ltd., is the minority shareholder of Ruian
and is controlled by Mr. Xiao Ping Zhang and his family, who is the CEO and also the controlling party of the Company.



The following related
party transactions are reported for the three months and six months ended June 30, 2012 and 2011:



|                      |  | Three Months Ended  June 30, |           |  | Six Months Ended 
June 30, |  
|--------------------- |  | ---------------------------- | --------- |  | -------------------------- | -
|                      |  | 2012                         |           |  | 2011                       |  
|                      |  |                              |           |  |                            |  
|PURCHASES FROM:       |  |                              |           |  |                            |  
|Ruili Group Co., Ltd. |  | $                            | 1,517,619 |  |                            | $
|Total Purchases       |  | $                            | 1,517,619 |  |                            |  
|                      |  |                              |           |  |                            |  
|SALES TO:             |  |                              |           |  |                            |  
|Ruili Group Co., Ltd. |  | $                            | 393,384   |  |                            | $
|Total Sales           |  | $                            | 393,384   |  |                            | $



|                      |  | June 30, |         |  | December 31, |  
|--------------------- |  | -------- | ------- |  | ------------ | -
|                      |  | 2012     |         |  | 2011         |  
|                      |  |          |         |  |              |  
|ACCOUNTS PAYABLE      |  |          |         |  |              |  
|Ruili Group Co., Ltd. |  | $        | 50,495  |  |              | $
|Total                 |  | $        | 50,495  |  |              | $
|                      |  |          |         |  |              |  
|OTHER PAYABLES        |  |          |         |  |              |  
|MGR Hong Kong Limited |  | $        | 39,499  |  |              | $
|Ruili Group Co., Ltd. |  |          | 79,160  |  |              |  
|Total                 |  | $        | 118,659 |  |              | $



7







NOTE E - ACCOUNTS RECEIVABLE



No customer individually
accounted for more than 10% of our revenues or accounts receivable for the quarter ended June 30, 2012. The changes in the allowance
for doubtful accounts at June 30, 2012 and December 31, 2011 are summarized as follows:



|                           |  | June 30, |         |  | December 31, |  
|-------------------------- |  | -------- | ------- |  | ------------ | -
|                           |  | 2012     |         |  | 2011         |  
|Beginning balance          |  | $        | 892,455 |  |              | $
|Add: Increase to allowance |  |          | 24,269  |  |              |  
|Less: Accounts written off |  |          | —       |  |              |  
|Ending balance             |  | $        | 916,724 |  |              | $



|                                      |  | June 30, |            |   | December 31, |  
|------------------------------------- |  | -------- | ---------- | - | ------------ | -
|                                      |  | 2012     |            |   | 2011         |  
|Accounts receivable                   |  | $        | 70,040,905 |   |              | $
|Less: allowance for doubtful accounts |  |          | (916,724   | ) |              |  
|Account receivable balance, net       |  | $        | 69,124,181 |   |              | $



NOTE F - INVENTORIES



On June 30, 2012 and December 31, 2011, inventories
consisted of the following:



|                |  | June 30, |            |  | December 31, |  
|--------------- |  | -------- | ---------- |  | ------------ | -
|                |  | 2012     |            |  | 2011         |  
|Raw Material    |  | $        | 12,456,512 |  |              | $
|Work in process |  |          | 11,504,158 |  |              |  
|Finished Goods  |  |          | 30,903,031 |  |              |  
|Total Inventory |  | $        | 54,863,701 |  |              | $



8







NOTE G - PROPERTY, PLANT AND EQUIPMENT



Property, plant and equipment consisted of
the following, on June 30, 2012 and December 31, 2011:



|                                   |  | June 30, |             |   | December 31, |  
|---------------------------------- |  | -------- | ----------- | - | ------------ | -
|                                   |  | 2012     |             |   | 2011         |  
|Machinery                          |  | $        | 51,338,974  |   |              | $
|Molds                              |  |          | 1,379,570   |   |              |  
|Office equipment                   |  |          | 1,507,432   |   |              |  
|Vehicle                            |  |          | 1,977,931   |   |              |  
|                                   |  |          |             |   |              |  
|Building                           |  |          | 8,854,995   |   |              |  
|                                   |  |          |             |   |              |  
|Machinery held under capital lease |  |          | 18,097,156  |   |              |  
|                                   |  |          |             |   |              |  
|Construction in progress           |  |          | 153,336     |   |              |  
|                                   |  |          |             |   |              |  
|Sub-Total                          |  |          | 83,309,394  |   |              |  
|                                   |  |          |             |   |              |  
|Less: Accumulated depreciation     |  |          | (34,309,286 | ) |              |  
|                                   |  |          |             |   |              |  
|Fixed Assets, net                  |  | $        | 49,000,108  |   |              | $



Depreciation expense charged
to operations was $3,550,342 and $3,216,998 for the six months ended June 30, 2012 and 2011, respectively.



On September 13, 2011, the Company entered
an agreement with International Far Eastern Leasing Co., Ltd.(a first party) and sold and simultaneously leased back part of its
unencumbered manufacturing equipment, for a term of 60 months and an interest rate of 7.95%. The sale price of the manufacturing
equipment was $13,209,492. As related to this transaction, the Company put down a security deposit of $1,863,916 to be refunded
back to the Company after the end of the lease. In addition, the Company paid a fee of $641,484 to this first party accounted for
as financing expense in the accompanying condensed consolidated financial statements. The Company has an option, exercisable at
the end of the lease term, to repurchase the manufacturing equipment for $157. The transaction was accounted for as a financing
transaction and was recorded in the accompanying condensed consolidated financial statements as a capital lease.



NOTE H- LEASEHOLD IMPROVEMENTS



|                                        |  | June 30, |          |   | December 31, |  
|--------------------------------------- |  | -------- | -------- | - | ------------ | -
|                                        |  | 2012     |          |   | 2011         |  
|Cost:                                   |  | $        | 544,390  |   |              | $
|Less: Accumulated amortization:         |  |          | (177,478 | ) |              |  
|Leasehold Improvements In Progress, net |  | $        | 366,912  |   |              | $



By law and practice, when
improvements are made to real property and those improvements are permanently affixed to the property, the title to those improvements
automatically transfers to the owner of the property. The lessee’s interest in the improvements is not a direct ownership
interest but rather it is an intangible right to use and benefit from the improvements during the term of the lease. The leasehold
improvements are amortized over the lease term.



9







In May 2009, Ruian entered
into a lease agreement with Ruili Group Co., Ltd. for the lease of a manufacturing plant. This manufacturing plant was not
part of the assets acquired from Ruili Group Co., Ltd. The lease term is from June 2009 to May 2017.



In August 2009, SIH entered
into a lease agreement with MGR for the lease of an office with a five-year lease term.



In August
2010, a new a lease agreement was signed between Ruian and Ruili Group Co., Ltd., under which Ruian leased 32,410 square meters
manufacturing plant for its new purchased passenger vehicles brake systems business. The lease term is from September 2009 to August
2020.



NOTE I- LAND USE RIGHTS



|                                |  | June 30, |            |   | December 31, |  
|------------------------------- |  | -------- | ---------- | - | ------------ | -
|                                |  | 2012     |            |   | 2011         |  
|Cost:                           |  | $        | 16,614,187 |   |              | $
|Less: Accumulated amortization: |  |          | (1,744,031 | ) |              |  
|Land use rights, net            |  | $        | 14,870,156 |   |              | $



According to the law of
China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through
land use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately
$13.9 million on September 28, 2007. The Company has been negotiating with the government for a reduction in or exemption from
the tax being sought by the government in connection with the transfer of the land use rights, and pending resolution of that issue,
we have deferred accrual or payment of the tax. Due to the lack of resolution of that issue, the land use right certificate has
not been issued to the Company. We plan to conclude negotiations with the government and to obtain the land use rights certificate
as soon as practicable. Amortization expenses were $184,203 and $172,068 for the six months ended June 30, 2012 and 2011, respectively.



NOTE J - INTANGIBLE ASSETS



Intangible assets owned
by the Company included patent technology and management software licenses. Amortization expenses were $8,368 and $8,034 for the
six months ended June 30, 2012 and 2011 respectively. Future estimated amortization expense is as follows:



|2012 |       |  | 2013 |   |        | 2014 |  |   | 2015   |  |  | 2016 |        |  | Thereafter |  
|---- | ----- |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | ---------- | -
|$    | 8,375 |  |      | $ | 16,743 |      |  | $ | 13,574 |  |  | $    | 11,990 |  |            | $



NOTE K -  PREPAYMENT



Prepayment consisted of
the following as of June 30, 2012 and December 31, 2011:



|                       |  | June 30, |           |  | December 31, |  
|---------------------- |  | -------- | --------- |  | ------------ | -
|                       |  | 2012     |           |  | 2011         |  
|Raw material suppliers |  | $        | 5,603,255 |  |              | $
|Equipment purchase     |  |          | 1,542,090 |  |              |  
|Total prepayment       |  | $        | 7,145,345 |  |              | $



10







NOTE L - DEFERRED TAX ASSETS AND DEFERRED
TAX LIABILITIES



Deferred tax assets consisted
of the following as of June 30, 2012 and December 31, 2011 comprise the following:



|                                       |  | June 30, 2012 |         |  | December 31, 2011 | 
|-------------------------------------- |  | ------------- | ------- |  | ----------------- | 
|Deferred tax assets - current          |  |               |         |  |                   | 
|Provision                              |  |               | 136,692 |  |                   | 
|Revenue (net off cost)                 |  |               | 11,040  |  |                   | 
|Warranty                               |  |               | 644,764 |  |                   | 
|Deferred tax assets                    |  |               | 792,496 |  |                   | 
|Valuation allowance                    |  |               | ―       |  |                   | 
|Net deferred tax assets - current      |  |               | 792,496 |  |                   | 
|                                       |  |               |         |  |                   | 
|Deferred tax liabilities - current     |  |               |         |  |                   | 
|Revenue (net off cost)                 |  |               | ―       |  |                   | 
|Deferred tax liabilities - current     |  |               | ―       |  |                   | 
|                                       |  |               |         |  |                   | 
|Net deferred tax assets - current      |  |               | 792,496 |  |                   | 
|                                       |  |               |         |  |                   | 
|Deferred tax liabilities - non-current |  |               |         |  |                   | 
|Land use right                         |  |               | 263,192 |  |                   | 
|Deferred tax liabilities - non-current |  |               | 263,192 |  |                   | 



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



NOTE M –ACCEPTANCE NOTES TO VENDORS



Bank acceptance notes to vendors represent
accounts payable in the form of bills of exchange whose acceptances are guaranteed and settlements are handled by banks. From time
to time we receive bank acceptance notes payable to the Company from our customers, for goods we sell to those customers. If the
notes are not yet due and payable, we may exchange them at a bank in exchange for notes payable to our suppliers, and deliver those
notes to our vendors. In such cases, we pay a small service fee to the banks. The bank acceptance notes usually mature and are
payable to vendors by the banks in six months. The Company does not have to pay any interest to the banks on these notes. The vendors
would pay interest if they discounted the bank acceptance notes to vendors at the banks.



Bank acceptance notes to vendors were $3,320,211
and $5,589,678 as of June 30, 2012 and December 31, 2011, respectively. The Company has pledged
bank acceptance notes from customers of $3,320,211 to secure the bank acceptance notes to vendors granted by banks.



11







NOTE N -Bank
Loans



Bank loans represented
the following as of June 30, 2012 and December 31, 2011:



|                      |  | June 30, |             |   | December 31, |  
|--------------------- |  | -------- | ----------- | - | ------------ | -
|                      |  | 2012     |             |   | 2011         |  
|Secured               |  | $        | 12,080,097  |   |              | $
|Less: Current portion |  | $        | (12,080,097 | ) |              | $
|Non-current portion   |  | $        | —           |   |              | $



The Company obtained those
short-term loans from the Bank of China to finance general working capital as well as new equipment acquisition. The Company did
not provide any guarantee to any other parties. Interest rate for the loans ranged from 5.89% to 7.38% per annum. The maturity
dates of the loans ranged from July 16, 2012 to November 26, 2012.



Those short-term loans
were guaranteed by Ruili Group Co., Ltd., a related party of the Company, of which Mr. Xiao Ping Zhang and Ms. Shu Ping Chi are
both principal shareholders.



NOTE O - ACCRUED EXPENSES



Accrued expenses consisted of the following
as of June 30, 2012 and December 31, 2011:



|                          |  | June 30, |           |  | December 31, |  
|------------------------- |  | -------- | --------- |  | ------------ | -
|                          |  | 2012     |           |  | 2011         |  
|Accrued payroll           |  | $        | 1,671,726 |  |              | $
|Accrued warranty expenses |  |          | 4,298,427 |  |              |  
|Other accrued expenses    |  |          | 3,690,470 |  |              |  
|Total accrued expenses    |  | $        | 9,660,623 |  |              | $



NOTE P –CAPITAL LEASE OBLIGATIONS



|                                |  | June 30, |            |   | December 31, |  
|------------------------------- |  | -------- | ---------- | - | ------------ | -
|                                |  | 2012     |            |   | 2011         |  
|                                |  |          |            |   |              |  
|Total Capital Lease Obligations |  | $        | 11,600,465 |   |              | $
|                                |  |          |            |   |              |  
|Less: Current portion           |  | $        | (2,389,159 | ) |              | $
|Non-current portion             |  | $        | 9,211,306  |   |              | $





The capital lease obligation was under the
agreement with International Far Eastern Leasing Co., Ltd., which was disclosed in Note G, for a term of 60 months and an interest
rate of 7.95% per annum, payable monthly in arrears. International Far Eastern Leasing Co., Ltd. is the subsidiary of China Sinochem
Corporation (listed among the 2012 Fortune 500 company list by Fortune magazine). As related to this transaction, the Company made
a security deposit of $1,879,890 to be refunded back to the Company after the end of the lease.





12









NOTE Q – RESERVE



The reserve funds are comprised of the following:



|                               |  | June 30, |           |  | December 31, |  
|------------------------------ |  | -------- | --------- |  | ------------ | -
|                               |  | 2012     |           |  | 2011         |  
|Statutory surplus reserve fund |  | $        | 8,919,810 |  |              | $
|Total                          |  | $        | 8,919,810 |  |              | $



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, Ruian is required to make annual appropriations to the statutory surplus
funds. In accordance with the relevant PRC regulations and the articles of association of the respective companies, Ruian is required
to allocate a certain percentage of its profits after taxation, as determined in accordance with PRC accounting standards applicable
to the Company, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.



Net income as reported
in 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 Ruian has foreign currency available after meeting its operational needs, Ruian may make its profit distributions in foreign
currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval and convert such distributions
at an authorized bank. The reserve fund consists of retained earnings which have been allocated to the statutory reserve fund.



NOTE R - INCOME TAXES



Ruian 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.



The Company increased its
investment in Ruian as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's
Republic of China on Foreign-invested Enterprises and Foreign Enterprises, Ruian was eligible for additional preferential tax
treatment. For the years 2007 and 2008, Ruian was entitled to an income tax exemption on all pre-tax income generated by the
company above its pre-tax income generated in the fiscal year 2006. Thereafter, Ruian was entitled to a 50% exemption from
the effective income tax rate on any pre-tax income above its 2006 pre-tax income, to be recognized in the years 2009, 2010
and 2011. The above taxation exemption was superseded, because Ruian has been awarded the Chinese
government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So, the Company’s effective income tax rate
was 15% for years 2009 through 2011. For the quarter ended June 30, 2012, the effective income tax rate was 25%.
However, the Company is in the process of renewing its “High-Tech Enterprise” certificate, a certificate awarded
by the government of China for qualified enterprises with high and new technologies that are encouraged by the government. If
this renewal is successful, according to the China Corporate Income Tax Law, which came into effect on January 1, 2008, the
effective income tax rate for qualified high and new technology enterprises, such as the Company, may be reduced to 15% later
in 2012.



13







The reconciliation of the
effective income tax rate of Ruian to the statutory income tax rate in the PRC for the six months of 2012 and 2011 is as follows:



|                                                                            |  | Six months ended 
June 30, 2012 |        |   | Six months ended 
June 30, 2011 | 
|--------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------- | 
|US Statutory income tax rate                                                |  |                                 | 35.00  | % |                                 | 
|Valuation allowance recognized with respect to the loss in the US company   |  |                                 | -35.00 | % |                                 | 
|HK Statutory income tax rate                                                |  |                                 | 16.50  | % |                                 | 
|Valuation allowance recognized with respect to the loss in those HK company |  |                                 | -16.50 | % |                                 | 
|China Statutory income tax rate                                             |  |                                 | 25.00  | % |                                 | 
|China Statutory income exemption                                            |  |                                 | 0.00   | % |                                 | 
|Tax refund                                                                  |  |                                 | ―      |   |                                 | 
|Other items                                                                 |  |                                 | 3.13   | % |                                 | 
|                                                                            |  |                                 |        |   |                                 | 
|Effective tax rate                                                          |  |                                 | 28.13  | % |                                 | 



|                                                                 |  | Six months ended 
June 30, 2012 |           |   | Six months ended 
June 30, 2011 |  
|---------------------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------- | -
|Computed income tax provision at the statutory rate              |  | $                               | 2,086,965 |   |                                 | $
|Tax exemption                                                    |  |                                 | ―         |   |                                 |  
|Deferred tax provision                                           |  |                                 | (162,071  | ) |                                 |  
|Current period permanent differences and other reconciling items |  |                                 | 373,524   |   |                                 |  
|Total income taxes                                               |  | $                               | 2,298,418 |   |                                 | $



Income taxes are calculated
on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components
of the Company’s net deferred tax assets and liabilities are approximately as mentioned above on June 30, 2012. There currently
is no tax benefit recorded for the United States. The tax authority may examine the tax returns of the Company three years after
the year ended. In the year of 2012, there were known penalties in the amount of $40,000 related to tax years 2007 and 2008, which
the Company is in the process of settlement with the U.S. tax authority. The provisions for income taxes for the six months ended
June 30, 2012 and 2011, respectively, are summarized as follows:



14













|         |  | Six months ended June 30, 2012 |           |   | Six months ended June 30, 2011 |  
|-------- |  | ------------------------------ | --------- | - | ------------------------------ | -
|         |  |                                |           |   |                                |  
|Current  |  | $                              | 2,460,489 |   |                                | $
|Deferred |  |                                | (162,071  | ) |                                |  
|         |  |                                |           |   |                                |  
|Total    |  | $                              | 2,298,418 |   |                                | $



The Company adopted the
provisions of FASB ASC 740-10 (Prior authoritative literature: FIN No. 48, Accounting for Uncertainty in Income Taxes) on January
1, 2007. As the result of the implementation of the FASB ASC 740-10, Accounting for Uncertainty in Income Taxes – In Interpretation
of FASB ASC 740-10 (Prior authoritative literature: FASB Statement No. 109), the Company recognized no material adjustments to
unrecognized tax benefits. On the adoption date of January 1, 2007 and as of June 30, 2012 and December 31, 2011, the Company has
no unrecognized tax benefits.



NOTE S - Non-controlling interest in subsidiaries



Non-controlling interest
in subsidiaries represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling
interest, owned by the Company’s Joint Venture partners, in SIH. Net income attributable to non-controlling interests in
subsidiaries amounted to $541,923 and $1,022,207 for the six months ended June 30, 2012 and 2011,
respectively.



|                                      |  | June 30, 2012 |         |   | June 30, 2011 |  
|------------------------------------- |  | ------------- | ------- | - | ------------- | -
|10% non-controlling interest in Ruian |  | $             | 604,909 |   |               | $
|40% non-controlling interest in SIH   |  | $             | (62,986 | ) |               |  
|                                      |  |               |         |   |               |  
|Total                                 |  | $             | 541,923 |   |               |  



NOTE T - LEASES



In December 2006, Ruian entered into a lease
agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s
management personnel and staff, respectively. The lease term is from January 2007 to December 2011 for one of the apartment buildings
and from January 2007 to December 2012 for the other. In December 2011, a new lease agreement was signed for the lease of two apartment
buildings. The lease term is from January 2012 to December 2016.



In May 2009, Ruian entered into a lease
agreement with Ruili Group Co., Ltd. for the lease of a manufacturing plant. The lease term is from September 2009 to May 2017.



In August 2009, SIH entered into a lease
agreement with MGR for the lease of an office with a five-year lease term. The leasehold improvements are amortized over the lease
term.



In August 2010, a new a lease agreement
was signed between Ruian and Ruili Group Co., Ltd., under which Ruian leased 32,410 square meters manufacturing plant for its new
purchased passenger vehicles brake systems business. The lease term is from September 2009 to August 2020.



The lease expenses were $635,562 and $535,787
for the six months ended June 30, 2012 and June 30, 2011, respectively.



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



|                            |  | 2012 |         |  | 2013 |   |           | 2014 |  |   | 2015      |  |  | 2016 |           |  | Thereafter |  
|--------------------------- |  | ---- | ------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  | ---------- | -
|Operating Lease Commitments |  | $    | 575,686 |  |      | $ | 1,053,082 |      |  | $ | 1,053,082 |  |  | $    | 1,053,082 |  |            | $



15







NOTE U - ADVERTISING COSTS



Advertising costs were $125,125 and $105,967
for the six months ended June 30, 2012 and 2011, respectively.



NOTE V - RESEARCH AND DEVELOPMENT EXPENSE



Research and development
costs are expensed as incurred and were $3,563,976 and $4,177,608 for the six months ended June 30, 2012 and 2011, respectively.



NOTE W - WARRANTY CLAIMS



Warranty claims were $999,717
and $1,258,684 for the six months ended June 30, 2012 and 2011, respectively. Warranty claims are classified as accrued expenses
on the balance sheet. The movement of accrued warranty expenses for the six months ended June 30, 2012 was as follows:



|Beginning balance at January 01, 2012                              |  |  | 3,854,832 |  
|------------------------------------------------------------------ |  |  | --------- | -
|Aggregate reduction for payments made                              |  |  | (540,244  | )
|Aggregate increase for new warranties issued during current period |  |  | 999,717   |  
|Effect on changes in foreign exchange rate                         |  |  | (15,878   | )
|Ending balance at June 30, 2012:                                   |  |  | 4,298,427 |  



NOTE X – SEGMENT INFORMATION



The Company produces brake systems and other
related components (“commercial vehicles brake systems, etc.”) for different types of commercial vehicles. On
August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the passenger
vehicle auto parts business (passenger vehicles brake systems”) of Ruili Group Co., Ltd. As a result of this acquisition,
the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related
auto parts.



The Company has two operating segments:
commercial vehicles brake systems, etc. and passenger vehicles brake systems, etc.



All of the Company’s long-lived assets
are located in the PRC and Hong Kong. The Company and its subsidiaries do not have long-lived assets in the United States for the
reporting periods.



16







|                                                  |  | Six Months Ended June 30, |           
|------------------------------------------------- |  | ------------------------- | ----------
|                                                  |  | 2012                      |           
|                                                  |  |                           |           
|NET SALES TO EXTERNAL CUSTOMERS                   |  |                           |           
|                                                  |  |                           |           
|Commercial vehicles brake systems                 |  | $                         | 75,401,096
|Passenger vehicles brake systems                  |  |                           | 21,289,317
|                                                  |  |                           |           
|Net sales                                         |  | $                         | 96,690,413
|INTERSEGMENT SALES                                |  |                           |           
|                                                  |  |                           |           
|Commercial vehicles brake systems                 |  | $                         |           
|Passenger vehicles brake systems                  |  |                           | ―         
|                                                  |  |                           |           
|Intersegment sales                                |  | $                         | ―         
|GROSS PROFIT                                      |  |                           |           
|                                                  |  |                           |           
|Commercial vehicles brake systems                 |  | $                         | 21,068,947
|Passenger vehicles brake systems                  |  |                           | 5,326,543 
|All other                                         |  |                           |           
|Gross profit                                      |  | $                         | 26,395,490
|Selling and distribution expenses                 |  |                           | 6,694,400 
|                                                  |  |                           |           
|General and administrative expenses               |  |                           | 7,350,766 
|                                                  |  |                           |           
|Research and development expenses                 |  |                           | 3,563,976 
|Financial Expenses                                |  |                           | 1,127,619 
|Income (loss) from operations                     |  |                           | 7,658,729 
|Other income (expense), net                       |  |                           | 511,628   
|                                                  |  |                           |           
|Income (loss) before income tax expense (benefit) |  | $                         | 8,170,357 
|CAPITAL EXPENDITURE                               |  |                           |           
|                                                  |  |                           |           
|Commercial vehicles brake systems                 |  | $                         | 362,315   
|Passenger vehicles brake systems                  |  |                           | 80,954    
|                                                  |  |                           |           
|Total                                             |  | $                         | 443,269   
|                                                  |  |                           |           
|DEPRECIATION AND AMORTIZATION                     |  |                           |           
|                                                  |  |                           |           
|Commercial vehicles brake systems                 |  | $                         | 2,983,607 
|Passenger vehicles brake systems                  |  |                           | 803,969   
|                                                  |  |                           |           
|Total                                             |  | $                         | 3,787,576 



|                                  |  | June 30, 2012 |             |  | December 31, 2011 |  
|--------------------------------- |  | ------------- | ----------- |  | ----------------- | -
|                                  |  |               |             |  |                   |  
|TOTAL ASSETS                      |  |               |             |  |                   |  
|                                  |  |               |             |  |                   |  
|Commercial vehicles brake systems |  | $             | 181,840,547 |  |                   | $
|Passenger vehicles brake systems  |  |               | 51,342,239  |  |                   |  
|                                  |  |               |             |  |                   |  
|Total                             |  | $             | 233,182,786 |  |                   | $



17







|                                  |  | June 30, 2012 |            |  | December 31, 2011 |  
|--------------------------------- |  | ------------- | ---------- |  | ----------------- | -
|                                  |  |               |            |  |                   |  
|LONG LIVED ASSETS                 |  |               |            |  |                   |  
|                                  |  |               |            |  |                   |  
|Commercial vehicles brake systems |  | $             | 51,619,356 |  |                   | $
|Passenger vehicles brake systems  |  |               | 14,574,600 |  |                   |  
|                                  |  |               |            |  |                   |  
|Total                             |  | $             | 66,193,956 |  |                   | $



NOTE Y – PURCHASE DISCOUNT



Purchase discounts represent
discounts received from vendors for purchasing raw materials. The Company did not receive any purchase discounts during the six
months ended June 30, 2012 and 2011.



NOTE Z – SHIPPING AND HANDLING COSTS



Shipping and handling costs
incurred by the Company are included in selling expenses in the accompanying consolidated statements of income. Shipping and handling
costs were $2,286,100 and $2,286,605 for the six month ended June 30, 2012 and 2011, respectively.



NOTE AA – STOCK COMPENSATION PLAN



We had no stock-based compensation
expense during the six months ended June 30, 2012 and 2011, respectively. There were no employee stock options or warrants outstanding
as of June 30, 2012.



NOTE AB - COMMITMENTS AND CONTINGENCIES



(1)  According to the law of China,
the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land
use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9
million on September 28, 2007. The Company has not yet obtained the land use right certificate.

(2)  Information regarding lease
commitments is provided in Note T.



NOTE AC - OFF-BALANCE SHEET ARRANGEMENTS



On June 30, 2012, we did not have any material
commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance
sheet arrangements.



NOTE AD – THE ACQUISITION AND COMBINATION OF OPERATIONS
REPORTING



All of the allocations and estimates in
the Consolidated Financial Statements are based on assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the
business we acquired from the Seller had been operated as a part of the Company for periods prior to the combination/acquisition.



18









NOTE AE – SUBSEQUENT EVENTS



The Company has no significant
subsequent events from June 30, 2012 through the consolidated financial statements issue date of this report.



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 unaudited condensed consolidated financial statements, as well as information relating to
the plans of our current management. This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained
in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words
“believes,” “anticipates,” “may,” “will,” “should,” “expect,”
“intend,” “estimate,” “continue,” and similar expressions, or the negative thereof, or
comparable terminology, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties,
including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission
from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Undue reliance should
not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to update these
forward-looking statements.



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



OVERVIEW



The Company manufactures
and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers,
or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles,
such as trucks and buses, and in passenger vehicles. Management believes that it is the largest manufacturer of automotive brake
systems in China for commercial vehicles such as trucks and buses.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



For a summary of our accounting
policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2011.



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



19







Results of Operations



Results of operations for the three months ended June
30, 2012 as compared to the three months ended June 30, 2011.

SALES





|                                       |  | Three Months ended  30-Jun-12 |      |  | Three Months ended 30-Jun-11 | 
|-------------------------------------- |  | ----------------------------- | ---- |  | ---------------------------- | 
|                                       |  | (U.S.  dollars in
millions)   |     
|Commercial vehicle brake systems, etc. |  | $                             | 39.9 |  |                              | 
|Passenger vehicle brake systems, etc.  |  | $                             | 12.2 |  |                              | 
|                                       |  |                               |      |  |                              | 
|Total                                  |  | $                             | 52.1 |  |                              | 



Net sales were $52,092,172 and $61,106,892
for the three months ended June 30, 2012 and 2011, respectively, a decrease of $9.0 million or 14.8%.



The sales from commercial vehicle brake systems decreased
by $8.2 million or 17.0%, to $39.9 million for the second quarter of 2012, compared to $48.1 million for the same period of 2011.
Due to the slowdown of the commercial vehicle market in the second quarter of 2012, the sales from the OEM market decreased, which
impacted the sales of the commercial vehicle brake systems.



The sales from passenger vehicle brake systems
decreased by $0.7 million or 5.4%, to $12.2 million for the second quarter of 2012, compared to $12.9 million for the same period
of 2011.



A breakdown of net sales
revenue for these markets for the second quarter of the 2012 and 2011 fiscal years, respectively, is set forth below:





|                     |  | Three Months              |      |  | Percent     |  |       | Three Months |  |   | Percent     |  |  |            |      
|-------------------- |  | ------------------------- | ---- |  | ----------- |  | ----- | ------------ |  | - | ----------- |  |  | ---------- | -----
|                     |  | ended                     |      |  | of          |  |       | ended        |  |   | of          |  |  | Percentage |      
|                     |  | 30-Jun-12                 |      |  | Total Sales |  |       | 30-Jun-11    |  |   | Total Sales |  |  | Change     |      
|                     |  | (U.S. dollars in million) |      |  |             | 
|China OEM market     |  | $                         | 25.6 |  |             |  | 49.1  | %            |  | $ | 32.6        |  |  |            | 53.4 
|China Aftermarket    |  | $                         | 11.7 |  |             |  | 22.5  | %            |  | $ | 12.7        |  |  |            | 20.8 
|International market |  | $                         | 14.8 |  |             |  | 28.4  | %            |  | $ | 15.7        |  |  |            | 25.8 
|Total                |  | $                         | 52.1 |  |             |  | 100.0 | %            |  | $ | 61.0        |  |  |            | 100.0





Chinese
domestic economic policies and regulations  resulted in a low-growth environment for the automotive industry in the first
half of 2012, which caused the growth rate in vehicle sales  decline from     the comparable period of 2011. For the first
time in China’s industrialization and urbanization process, the growth rate of automotive vehicle sales declined over
the first six month periods in two consecutive years, 2011 and 2012. However, this low-growth development is also partially
a result of the significant increases in vehicle sales experienced in 2009 and 2010, and it is guiding the automotive
industry to develop at a more rational long-term rate. To prevent sales to the OEM market from deteriorating, the Company
enhanced its product line with a broader range of products through innovative new products as well as penetrating new market
segments, such as the bus and the light-duty vehicle markets. As a result, our sales to the Chinese OEM market decreased
by $7.0 million or 21.5%, to $25.6 million for the second quarter of 2012, compared to $32.6 million for the three month period ended June 30 of
2011.



20







Our sales to the
Chinese aftermarket decreased by $1.0 million or 7.9%, to $11.7 million for the second quarter of 2012, compared to
$12.7 million for the same period of 2011 due to overall slowdown in the auto parts market in China. The increased number of new
vehicle sales in China and the expiration of OEM warranties helped drive our aftermarket business. Sales of our new
model products, applicable to both OEM and aftermarket, also grew during the three months ended June 30, 2012. We will
continue with our strategies to further optimize our sales network and to help further penetrate into new markets.
Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in
the bus aftermarket.



Our export sales decreased
by $0.9 million or 5.7%, to $14.8 million for the second quarter of 2012, as compared to $15.7 million for the same period
of 2011. The debt crisis in Europe and the currency depreciation in some countries caused some of our customers to reduce their
inventories; also the instability of the situation in the Middle Eastern countries restricted the purchases of our customers from
us. We will take the following measures to ensure future growth in the international market:

(1) Enhance the Company brand image through
industry exhibitions.

(2) Maintenance of our customer base and market
position while penetrating new markets and capturing new customers.

(3) Building a stronger international marketing
network with the focus on exploring high-value foreign markets, and active marketing to the large automotive chain stores that
directly sell to end users.

(4) Further targeting the international OEM
market by actively supporting initiatives that promote our overseas sales.



COST OF SALES AND GROSS PROFIT



Cost of sales for the
three months ended June 30, 2012 were $37,912,979 a decrease of $6,611,533 or 14.8% from $44,524,512 for the three month
period ended June 30, 2011. Our gross profit decreased by 14.5% from $16,582,380 for the period of 2011 to $14,179,193
for the three month
period ended June 30, 2012.



Gross margin increased
to 27.2% from 27.1% for the three months ended June 30, 2012 compared with 2011. Gross margin is being affected by rising labor
expenses, the appreciation of the Chinese currency, and higher raw material prices. We intend to focus in 2012 on increasing production
efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our
gross profit margins.



Cost of sales
from commercial vehicle brake systems for the three months period ended June 30, 2012 were $29.0 million, a decrease of
$5.1 million or 15.0% from $34.1 million for the same period last year. The gross profit from commercial vehicle brake
systems decreased by 22.6% from $14.1 million for three month period ended June 30, 2011 to $10.9 million for the three
month period ended June 30, 2012. Gross margin from commercial vehicle brake systems decreased to 27.3% from 29.2% for the
three months period ended June 30, 2012 compared to the three month
period ended June 30, 2011. The decrease was mainly due to raising labor expenses, the
appreciation of the Chinese currency, and higher raw material prices.



21









Cost of sales from
passenger vehicle brake systems for the three months period ended June 30, 2012 were $8.9 million, a decrease of $1.5 million
or 14.5% from $10.4 million for the three month period ended June 30, 2011. The gross profit from passenger vehicle brake
systems increased by 32.0% from $2.5 million for the three month period ended June 30, 2011 to $3.3 million for the three month period ended June 30, 2012.
Gross margin from passenger vehicle brake systems increased to 26.9% from 19.4% for the three months ended June 30, 2012,
as compared with 2011. The cost decrease was mainly due to the increase of production efficiency, the improvement of
the technologies of products, and the improvement of our product portfolio. Such decrease in cost helps us to maintain
or increase our gross profit margins.



SELLING AND DISTRIBUTION EXPENSES



Selling and distribution
expenses were $3,523,498 for the three months ended June 30, 2012, as compared to $3,459,526 for the three month period ended June 30, 2011, an increase
of $63,972 or 1.8%.



The increase was mainly
due to increased wages expense and travel expenses. As a percentage of sales revenue, selling expenses increased to 6.8% for
the three months ended June 30, 2012, as compared to 5.7% for the three month period ended June 30, 2011.



GENERAL AND ADMINISTRATIVE EXPENSES



General and
administrative expenses were $3,493,009 for the three months period ended June 30, 2012, as compared to $3,813,274 for the three month period ended June 30, 2011, a decrease
of $320,265 or 8.4%. The general and administrative expenses decreased as a result of decreased sales. The Company
incurred fewer expenses in relation to reduced sales. As a percentage of sales revenue, general and administrative
expenses increased to 6.7% for the three months period ended June 30, 2012, as compared to 6.2% for the three month
period ended June 30, 2011.



RESEARCH AND DEVELOPMENT EXPENSE



Research and
development expenses include payroll, employee benefits, and other headcount-related expenses associated with product
development. Research and development expenses also include third-party development costs. For the three months period ended
June 30, 2012, research and development expense was $2,296,820, as compared to $2,198,707 for the three month period ended June 30, 2011, an
increase of $98,113.



DEPRECIATION AND AMORTIZATION



Depreciation and
amortization expense increased to $1,847,984 for the three months period ended June 30, 2012, compared with that of
$1,743,079 for the three month period ended June 30, 2011, an increase of $104,905. The increase in depreciation and amortization expense was
primarily due to the addition of purchased production equipment.



FINANCIAL EXPENSE



Financial expense
mainly consists of interest expense, the financing expense associated with our capital lease transaction and exchange loss.
The financial expense for the three months period ended June 30, 2012, decreased by $340,124 to $532,722 from $872,846
for the three month period ended June 30, 2011, which was primarily due to lower interest rate.



OTHER INCOME



Other income
was $412,975 for the three months period ended June 30, 2012, as compared to $259,109 for the three months period ended June
30, 2011, an increase of $153,866. The increase was mainly due to an increase in sales of raw material scrap for the three
months period ended June 30, 2012.



22







INCOME TAX



The Joint Venture is registered
in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income
as reported in the PRC statutory financial. 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 taxable income as reported in the PRC statutory financial statements
in accordance with relevant income tax laws.



The Company
increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income
Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was
eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was
entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in
the fiscal year 2006. This tax exemption was superseded as a result of the Joint Venture having been awarded the Chinese
government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate was valid for three
years and provided for a reduced tax rate for years 2009 through 2011. Thus, our effective income tax rate was 15% for years
2009 through 2011. For the three-month  ended June 30, 2012, the effective income tax rate was 25%. However, the Company is in
the process of renewing its “High-Tech Enterprise” certificate. If this renewal is successful, the effective
income tax rate may be reduced to 15% later in 2012.



Income tax expense of $1,279,762
and $973,077 was recorded for the quarters ended June 30, 2012 and 2011, respectively.



STOCK-BASED COMPENSATION



There were no options
or warrants outstanding as of June 30, 2012.



Although the Company anticipates
that future issuances of stock awards could have a material impact on reported net income in future financial statements, we do
not expect them to have a material impact on future cash flows.



NET INCOME ATTRIBUTABLE TO NON-CONTROLLING
INTEREST IN SUBSIDIARIES



Non-controlling interest
in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by
our Joint Venture partners. Net income attributable to non-controlling interest in subsidiaries amounted to $278,034 and $522,072
for the second quarter ended June 30, 2012 and 2011, respectively.



NET INCOME ATTRIBUTABLE TO STOCKHOLDERS



The net
income attributable to stockholders for the three-month  period ended June 30, 2012, decreased by $1,974,170, to
$2,996,027 from $4,970,197 for the three-month  period  ended June 30, 2011 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the quarter ended June 30, 2012 and 2011, were $0.16 and $0.26 per share,
respectively.





23







Results of operations for the six months
ended June 30, 2012 as compared to the six months ended June 30, 2011.



SALES



|                                        |  | Six months ended  30-Jun-12 |      |  | Six months ended  30-Jun-11 | 
|--------------------------------------- |  | --------------------------- | ---- |  | --------------------------- | 
|                                        |  | (U.S.  dollars in
millions) |     
|Commercial vehicles brake systems, etc. |  | $                           | 75.4 |  |                             | 
|Passenger vehicles brake systems, etc.  |  | $                           | 21.3 |  |                             | 
|                                        |  |                             |      |  |                             | 
|Total                                   |  | $                           | 96.7 |  |                             | 



Net sales were $96,690,413
and $113,099,857 for the six months ended June 30, 2012 and 2011, respectively, a decrease of $16,409,444 million or 14.5%.



The sales
from commercial vehicle brake systems decreased by $13.8 million or 15.5%, to $75.4 million for the six month period
ended June 30, 2012, compared to $89.2 million for the same period of 2011. Due to the slowdown of the commercial vehicle
market in the six month period ended June 30, 2012, the sales from the OEM market decreased, which impacted the sales of the
commercial vehicle brake systems.



The sales from
passenger vehicle brake systems decreased by $2.5 million, or 10.5%, to $21.3 million for the six month period ended June 30,
2012, compared to $23.8 million for the six month period  ended June 30, 2011.



A breakdown of net sales revenues for China
OEM markets, China Aftermarket and International markets for the six months ended June 30, 2012 and 2011 fiscal years, respectively,
is set forth below:



|                     |  | Six months                |      |  | Percent     |  |       | Six months |  |   | Percent     |  |  | Percentage |      
|-------------------- |  | ------------------------- | ---- |  | ----------- |  | ----- | ---------- |  | - | ----------- |  |  | ---------- | -----
|                     |  | ended                     |      |  | of          |  |       | ended      |  |   | of          |  |  | Change     |      
|                     |  | 30-Jun-12                 |      |  | Total Sales |  |       | 30-Jun-11  |  |   | Total Sales |  |  |            |      
|                     |  | (U.S. dollars in million) |      |  |             | 
|China OEM market     |  | $                         | 51.4 |  |             |  | 53.2  | %          |  | $ | 64.6        |  |  |            | 57.2 
|China Aftermarket    |  | $                         | 21.5 |  |             |  | 22.2  | %          |  | $ | 21.3        |  |  |            | 18.8 
|International market |  | $                         | 23.8 |  |             |  | 24.6  | %          |  | $ | 27.1        |  |  |            | 24.1 
|Total                |  | $                         | 96.7 |  |             |  | 100.0 | %          |  | $ | 113.0       |  |  |            | 100.0



Chinese domestic
economic policies and regulations resulted in a low-growth environment for the automotive industry in the first half of 2012,
which caused the growth rate in vehicle sales to  decline from the comparable period of 2011. For the first time
in China’s industrialization and urbanization process, the growth rate of automotive vehicle sales  declined over
the first six month periods in two consecutive years, 2011 and 2012. However, this low-growth development is also partially
a result of the significant  increases in vehicle sales experienced in the 2009 and 2010 years, and it is guiding the
automotive industry to develop at a more rational long-term rate. To prevent sales to the OEM market from deteriorating
further, the Company enhanced its product line with a broader range of products through innovative new products as well as
penetrating new market segments such as the bus and the light-duty vehicle markets. As a result, our sales to the Chinese OEM
market decreased by $13.2 million or 20.4%, to $51.4 million for the first half year of 2012, compared to $64.6
million for the three-month period ended June 30,  2011.



24







Our sales to the Chinese aftermarket increased
by $0.2 million or 0.9%, to $21.5 million for the first half year of 2012, compared to $21.3 million for the first half year of
2011. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive the increase in our
aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the six months
ended June 30, 2012. We will continue with our strategies to further optimize our sales network and to help further penetrate into
new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion
in the bus aftermarket.



Our export sales decreased by $3.3
million or 12.2%, to $23.8 million for the six months of 2012, as compared to $27.1 million for the three month period
ended June 30,  2011. The debt crisis in Europe and the currency depreciation in some countries caused some of our
customers to reduce their inventories. Moreover, the instability of the political situation in the Middle Eastern countries
restricted the purchases of our customers from us. We will take the following measures to ensure future growth in the
international market:



(1) Enhance the Company brand image through
industry exhibitions;

(2) Maintain our customer base and market
position while penetrating new markets and capturing new customers;

(3) Build a stronger international marketing
network with the focus on exploring high-value foreign markets, and actively market to the large automotive chain stores that directly
sell to end users, and

(4) Further target the international OEM market
by actively support initiatives that promote our overseas sales.



COST OF SALES AND GROSS PROFIT



Cost of sales for
the six months period ended June 30, 2012 were $70,294,923, a decrease of $11,633,535 or 14.2% from $81,928,458 for the six
months period ended June 30,  2011. Our gross profit decreased by 15.3% from $31,171,399 for the six months period ended June
30, 2011 to $26,395,490 for the same period of 2012.



Gross
margin decreased to 27.3% from 27.6% for the six months period ended June 30, 2012, as compared with the six months period
ended June 30, 2011. Gross margin is being affected by rising labor expenses, the appreciation of the Chinese
currency, and higher raw material prices. We intend to focus in 2012 on increasing production efficiency, improving the
technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit
margins.



Cost of sales
from commercial vehicle brake systems for the six months period ended June 30, 2012 were $54.3 million, a decrease of
$10.2 million or 15.8% from $64.5 million for the six months period ended June 30, 2011. The gross profit from commercial
vehicle brake systems decreased by 15.0% from $24.8 million for the six months period ended June 30, 2011 to $21.1 for the
six months period
ended June 30, 2012. Gross margin from commercial vehicle brake systems increased to 27.9% from 27.8% for the six months
period ended June 30, 2012 compared with the same period of 2011. The increase is being affected by increasing production
efficiency, improving the technologies of products, and improving our product portfolio.



Cost of sales from
passenger vehicle brake systems for the six months period ended June 30, 2012 were $16.0 million, a decrease of $1.4 million
or 8.0% from $17.4 million for the six months period ended June 30, 2011. The gross profit from passenger vehicle brake
systems decreased by 17.2% from $6.4 for the six months period ended June 30, 2011 to $5.3 for the six months period ended
June 30, 2012. Gross margin from passenger vehicle brake systems decreased to 25.0% from 26.8% for the six months period
ended June 30, 2012, as compared with the six months period ended June 30, 2011. The cost decrease was mainly due to raising
labor expenses, the appreciation of the Chinese currency, and higher raw material prices.



25







SELLING AND DISTRIBUTION EXPENSES



Selling and distribution
expenses were $6,694,400 for the six months ended June 30, 2012, as compared to $6,528,754 for the same period of 2011, an increase
of $165,646 or 2.5%.



The increase was mainly
due to increased wages expense and travel expenses. As a percentage of sales revenue, selling expenses increased to 6.9% for
the six months ended June 30, 2012, as compared to 5.8% for the same period in 2011.



GENERAL AND ADMINISTRATIVE EXPENSES



General and administrative
expenses were $7,350,766 for the six months ended June 30, 2012, as compared to $6,679,722 for the same period of 2011, an increase
of $671,044 or 10.0%.



The increase was mainly
due to increases in labor expenses and expenses for business expansion. As a percentage of sales revenue, general and administrative
expenses increased to 7.6% for the six months ended June 30, 2012, as compared to 5.9% for the same period in 2011.



RESEARCH AND DEVELOPMENT EXPENSE



Research and development
expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research
and development expenses also include third-party development costs. For the six months ended June 30, 2012, research and development
expenses were $3,563,976, as compared to $4,177,608 for the same period of 2011, a decrease of $613,632.



DEPRECIATION AND AMORTIZATION



Depreciation and amortization
expenses increased to $3,787,576 for the six months ended June 30, 2012, compared with that of $3,431,967 for the same period of
2011, an increase of $355,609. The increase in depreciation and amortization expenses was primarily due to the purchase of production
equipment.



FINANCIAL EXPENSE





Financial expense mainly
consists of interest expenses and exchange losses. The financial expense for the six months ended June 30, 2012, decreased
by $312,579 to $1,127,619 from $1,440,198 for the same period of 2011, which was mainly due to lower interest rate.



OTHER INCOME



Other income was $764,820
for the six months ended June 30, 2012, as compared to $464,357 for the six months ended June 30, 2011, an increase of $300,463.
The increase was mainly due to an increase in sales of raw material scrap for the six months ended June 30, 2012.



INCOME TAX





The Joint Venture is registered
in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on taxable income
as reported in the PRC statutory financial statements in accordance with relevant income tax laws.



26







The Company increased
its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's
Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential
tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all
pre-tax income generated by the Company above its pre-tax income generated in the fiscal year 2006. This tax exemption was
superseded as a result of the Chinese government awarded "High-Tech Enterprise" designation to the Joint Venture.
The High-Tech Enterprise certificate is valid for three years and it provides the Joint Venture a reduced tax rate of 15% for years
2009 through 2011. Thus, our effective income tax rate is 15% for years 2009 through 2011. For the six months ended June 30, 2012,
the effective income tax rate is 25%. However, the Company is in the process of renewing its “High-Tech Enterprise”
certificate. If this renewal is successful, the effective income tax rate may be reduced to 15% in later 2012.



Income tax expenses of
$2,298,418 and $1,922,820 were recorded for the six months ended June 30, 2012 and 2011, respectively.



STOCK-BASED COMPENSATION





There were no options
or warrants outstanding as of June 30, 2012.



Although the Company anticipates
that future issuances of stock awards could have a material impact on reported net income in future financial statements, we do
not expect them to have a material impact on future cash flows.



NET INCOME ATTRIBUTABLE TO NON-CONTROLLING
INTEREST IN SUBSIDIARIES



Non-controlling interest
in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH. Each of the non-controlling
interest is held by our Joint Venture partners. Net income attributable to non-controlling interest in subsidiaries amounted to
$541,923 and $1,022,207 for the six months ended June 30, 2012 and 2011, respectively.



NET INCOME ATTRIBUTABLE TO STOCKHOLDERS



The net income
attributable to stockholders for the six months period ended June 30, 2012, decreased by $4,494,504, to
$5,330,016 from $9,824,520 for the six months ended June 30, 2011 due to the factors discussed above. Earnings per share, both basic and diluted, for the six months ended June 30, 2012 and 2011, were $0.28 and $0.51 per share,
respectively.



FINANCIAL CONDITION



Liquidity and Capital Resources

OPERATING - Net cash provided
by operating activities was $10,211,360 for the six months period ended June 30, 2012, a decrease of $339,812, as
compared with $10,551,172 of net cash provided in operating activities in the same period in 2011 Such decrease was primarily
due to increased cash inflow resulting from changes in accounts receivable which was offset by changes in accounts payable
and bank acceptance notes to vendors. Most accounts receivable of our OEM customers were converted into bank acceptance notes
from customers during the six months ended June 30, 2011.



At June 30, 2012, the Company had cash and
cash equivalents of $21,349,583, as compared to cash and cash equivalents of $17,116,692 at December 31, 2011. The Company had
working capital of $122,626,057 at June 30, 2012, as compared to working capital of $115,127,783 at December 31, 2011.



INVESTING - During the
six months period ended June 30, 2012, the Company expended net cash of $443,269 in investing activities. For the six
months period ended June 30, 2011, the Company utilized $4,855,872 in investing activities, mainly for acquisition of new
equipment to support the growth of the business.



27







FINANCING - During the six month
period ended June 30, 2012, the Company repaid  bank loans and a capital lease  in the aggregate amount of $5,454,759. Net
cash provided by financing activities was $1,532,234 for the six months ended June 30, 2011.



Management has taken
a number of steps to restructure the Company’s customer base and phase out accounts which failed to make prompt
payments. We also placed more emphasis on collection of accounts receivable from our customers. During 2012, to develop new
products that we believe will have a higher profit margin, and adopting steps for further cost saving such as improving the
material utilization rate. We maintain good relationships with local banks. We believe that our current cash, cash
equivalents, anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our
working capital requirements for the foreseeable future.



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



Assets and liabilities
of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts
are translated at historical exchange rate and their income and expenses items are translated using the average rate for the period.
Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. The Company is adopting such
steps as the diversification of currencies used in export sales, and the negotiation of export contracts with fixed exchange rates.



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



OFF-BALANCE SHEET AGREEMENTS



On June 30, 2012 we did not have any material
commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance
sheet arrangements.



According to the law of China, the government
owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9 million on September
28, 2007. The company has been negotiating with the government for a reduction in or exemption from the tax being sought by the
government in connection with the transfer of the land use rights, and pending resolution of that issue, we have deferred accrual
or payment of the tax. Due to the lack of resolution of that issue, the land use right certificate has not been issued to the Company.
We plan to conclude negotiations with the government and to obtain the land use rights certificate as soon as practicable.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



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



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures:



28







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



Changes in Internal Control over Financial Reporting:



There were no changes in the Company’s
internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.



PART II OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS.



None.



ITEM 1A. RISK FACTORS.



None.



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



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



None.



ITEM 4. MINE SAFETY DISCLOSURES.



Not applicable.



ITEM 5. OTHER INFORMATION.



None.



ITEM 6. EXHIBITS



|31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                            
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                   
|31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                            
|     |  |                                                                                                                                                                   
|32.1 |  | Certification of Principal Executive Officer and Principal
    Financial     Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C 1350) (1)



| | (1) | Furnished in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29







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 14, 2012 | SORL AUTO PARTS, INC.                                               
|                        |                                                                     
|                        | By:                                                                 
|                        | Name: Xiao Ping Zhang                                               
|                        | Title: Chief Executive Officer 
(Principal Executive Officer)       
|                        |                                                                     
|                        | By:                                                                 
|                        | Name: Zong Yun Zhou                                                 
|                        | Title: Chief Financial Officer
        (Principal Financial Officer)



30