---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|                                                        |   |                                                                                        
|------------------------------------------------------- | - | ---------------------------------------------------------------------------------------
|(Mark One)                                             
|                                                        | x | QUARTERLY   REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES     EXCHANGE ACT OF 1934
|                                                        |   |                                                                                        
|For the quarterly period ended March 31, 2006          
|                                                        |   |                                                                                        
|                                                        | o | TRANSITION   REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT                      
|                                                        |   |                                                                                        
|For the transition period from __________ to __________
|                                                        |   |                                                                                        
|Commission file number 000-11991                       

|SORL AUTO   PARTS, INC.                                 
|--------------------------------------------------------
|                                                        
|(Exact name   of registrant as specified in its charter)

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

|No. 1169 Yumeng Road                      
|------------------------------------------
|Ruian Economic Development District       
|Ruian City, Zhejiang Province             
|Peoples Republic Of China                
|                                          
|(Address of   principal executive offices)
|                                          
|86-577-6581-7720                          
|                                          
|(Registrants   telephone number)         
|                                          

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

|Yes
x | No
o
|----- | ----

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

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

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

|Yes
o | No
x
|----- | ----

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of April 30, 2006 there were 13,346,555 shares of Common Stock outstanding

---



INDEX

|           |                                                                                         | Page    Number
|---------- | --------------------------------------------------------------------------------------- | --------------
|           |                                                                                         |               
|PART I.    | FINANCIAL INFORMATION (unaudited)                                                       |               
|           |                                                                                         |               
|Item 1.    | Financial Statements:                                                                   | 1             
|           |                                                                                         |               
|           | Consolidated Balance Sheets                                                             | 1             
|           |                                                                                         |               
|           | Consolidated Statements of Operations for and Comprehensive Income                      | 2             
|           |                                                                                         |               
|           | Consolidated Statements of Cash Flows                                                   | 4             
|           |                                                                                         |               
|           | Notes to the Condensed Financial Statements                                             | 5             
|           |                                                                                         |               
|Item 2.    | Managements Discussion and Analysis of Financial Condition and Results   of Operations | 10            
|           |                                                                                         |               
|Item 4.    | Controls and Procedures                                                                 | 18            
|           |                                                                                         |               
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                              | 17            
|           |                                                                                         |               
|PART II.   | OTHER INFORMATION                                                                       |               
|           |                                                                                         |               
|Item 1.    | Legal Proceedings                                                                       | 18            
|           |                                                                                         |               
|Item 1A.   | Risk Factors                                                                            | 18            
|           |                                                                                         |               
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                             | 18            
|           |                                                                                         |               
|Item 3.    | Defaults Upon Senior Securities                                                         | 18            
|           |                                                                                         |               
|Item 4.    | Submission Of Maters To a Vote of Security Holders                                      | 18            
|           |                                                                                         |               
|Item 5.    | Other Information                                                                       | 18            
|           |                                                                                         |               
|Item 6.    | Exhibits                                                                                | 19            
|           |                                                                                         |               
|SIGNATURES | 20                                                                                     

- i -

---



PART I FINANCIAL INFORMATION

Item 1.    Financial Statements

SORL AUTO PARTS, INC. AND SUBSIDIARIES Ruian City, ZheJiang Province, China

|TABLE OF CONTENTS                                                          |     
|-------------------------------------------------------------------------- | ----
|                                                                           |     
|Condensed Consolidated Balance Sheets                                      | 1   
|                                                                           |     
|Condensed Consolidated Statements of Operations and Comprehensive   Income | 2   
|                                                                           |     
|Condensed Consolidated Statements of Stockholders Equity                  | 3   
|                                                                           |     
|Condensed Consolidated Statements of Cash Flows                            | 4   
|                                                                           |     
|Notes to Condensed Consolidated Financial Statements                       | 5-11
|                                                                           |     

---



SORL AUTO PARTS, INC. AND SUBIDIARIES Ruian City, ZheJiang Province, China

CONSOLIDATED BALANCE SHEETS

|                                                                                                                          |  | March 31,    2006 |            | December   31, 2005 | 
|------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ------------------- | 
|                                                                                                                          |  |                   |            |                     | 
|                                                                                                                          |  | (Unaudited)       |            | (Audited)           | 
|ASSETS                                                                                                                    |  |                   |            |                     | 
|Current Assets                                                                                                            |  |                   |            |                     | 
|Cash and cash equivalents                                                                                                 |  |                   | 1,153,781  |                     | 
|Account receivables, net of   provision                                                                                   |  |                   | 28,673,136 |                     | 
|Notes receivables                                                                                                         |  |                   | 2,156,920  |                     | 
|Inventory                                                                                                                 |  |                   | 1,134,773  |                     | 
|Prepayments                                                                                                               |  |                   | 1,321,678  |                     | 
|Other current assets                                                                                                      |  |                   | 510,474    |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Total Current Assets                                                                                                      |  |                   | 34,950,762 |                     | 
|Fixed   Assets                                                                                                            |  |                   |            |                     | 
|Property, plant and   equipment                                                                                           |  |                   | 10,423,487 |                     | 
|Less: Accumulated   depreciation                                                                                          |  |                   | (3,287,358 | )                   | 
|                                                                                                                          |  |                   |            |                     | 
|Fixed Assets, Net                                                                                                         |  |                   | 7,136,129  |                     | 
|Construction in progress                                                                                                  |  |                   | 88,276     |                     | 
|Other   Assets                                                                                                            |  |                   |            |                     | 
|Deferred compensation   cost-stock options                                                                                |  |                   | 173,934    |                     | 
|Intangible assets                                                                                                         |  |                   | 44,590     |                     | 
|Less: Accumulated   amortization                                                                                          |  |                   | (13,790    | )                   | 
|                                                                                                                          |  |                   |            |                     | 
|Intangible   Assets, Net                                                                                                  |  |                   | 30,800     |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Total Other Assets                                                                                                        |  |                   | 204,734    |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Total   Assets                                                                                                            |  |                   | 42,379,901 |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Liabilities   and Shareholders Equity                                                                                    |  |                   |            |                     | 
|Current   Liabilities                                                                                                     |  |                   |            |                     | 
|Accounts payable                                                                                                          |  |                   | 5,349,133  |                     | 
|Deposit received from   customers                                                                                         |  |                   | 1,081,277  |                     | 
|Short term bank loans                                                                                                     |  |                   | 14,511,114 |                     | 
|Accrued expenses                                                                                                          |  |                   | 517,859    |                     | 
|Other current liabilities                                                                                                 |  |                   | 1,112,782  |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Total Current Liabilities                                                                                                 |  |                   | 22,572,165 |                     | 
|Minority   Interest                                                                                                       |  |                   | 1,926,684  |                     | 
|Shareholders   Equity                                                                                                    |  |                   |            |                     | 
|Common stock, $0.002 par   value, 50,000,000 authorized, 13,346,555 issued and outstanding at 03/31/2006   and 12/31/2005 |  |                   | 26,693     |                     | 
|Paid in capital                                                                                                           |  |                   | 4,623,022  |                     | 
|Accumulated other   comprehensive income (loss)                                                                           |  |                   | 451,028    |                     | 
|Retained earnings                                                                                                         |  |                   | 12,780,309 |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Total Current Liabilities                                                                                                 |  |                   | 17,881,052 |                     | 
|                                                                                                                          |  |                   |            |                     | 
|Total   Liabilities and Shareholders Equity                                                                              |  |                   | 42,379,901 |                     | 
|                                                                                                                          |  |                   |            |                     | 

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

1

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SORL AUTO PARTS, INC. AND SUBIDIARIES Ruian City, ZheJiang Province, China

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

|                                               |  | For the   three months ended   March 31, |           
|---------------------------------------------- |  | ---------------------------------------- | ----------
|                                               |  |                                          |           
|                                               |  | 2006                                     |           
|                                               |  |                                          |           
|Sales                                          |  | $                                        | 19,419,584
|Cost of Sales                                  |  |                                          | 15,023,826
|                                               |  |                                          |           
|Gross Profit                                   |  |                                          | 4,395,758 
|Operating Expenses                             |  |                                          |           
|Selling   and Distribution Expenses            |  |                                          | 868,016   
|General and Administrative   Expenses          |  |                                          | 1,096,962 
|                                               |  |                                          |           
|Total Operating Expenses                       |  |                                          | 1,964,978 
|                                               |  |                                          |           
|Operating Income                               |  |                                          | 2,430,780 
|Financial Expenses                             |  |                                          | 265,547   
|Non-Operating Expenses                         |  |                                          | 89,675    
|                                               |  |                                          |           
|Net Income   Before Provision for Income Taxes |  |                                          | 2,075,558 
|Provision   for Income Taxes                   |  |                                          | 293,608   
|                                               |  |                                          |           
|Net Income   Before Minority Interest          |  |                                          | 1,781,950 
|Minority Interest                              |  |                                          | 178,195   
|                                               |  |                                          |           
|Net Income Attributable to Shareholders        |  | $                                        | 1,603,755 
|Other Comprehensive Income                     |  |                                          |           
|Foreign Currency   Translation Adjustment      |  |                                          | 126,705   
|Minority Interests Share                      |  |                                          | 12,671    
|                                               |  |                                          |           
|Comprehensive Income                           |  | $                                        | 1,717,789 
|Weighted average common   share - Basic        |  |                                          | 13,346,555
|Weighted average common   share - Diluted      |  |                                          | 13,347,123
|Earnings Per Share - Basic                     |  | $                                        | 0.12      
|Earnings   Per Share - Diluted                 |  | $                                        | 0.12      

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

2

---



SORL AUTO PARTS, INC. AND  SUBIDIARIES Ruian City, ZheJiang Province, China

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE PERIOD FROM DECEMBER 31, 2004 THROUGH MARCH 31, 2006.

|                                                |  | Number of    Common    Shares |            | Common    Stock |   | Additional      Paid-In Capital |  | Retained    Earnings |           | Accumulated      Other    Comprehensive    Income |   | Total    Stockholders    Equity |  | Minority    Interest |        
|----------------------------------------------- |  | ----------------------------- | ---------- | --------------- | - | ------------------------------- |  | -------------------- | --------- | ------------------------------------------------- | - | -------------------------------- |  | -------------------- | -------
|                                                |  |                               |            |                 |   |                                 |  |                      |           |                                                   |   |                                  |  |                      |        
|Beginning Balance - Dec 31, 2004                |  |                               | 13,282,253 |                 | $ | 26,565                          |  | $                    | 4,082,246 |                                                   | $ | 6,226,944                        |  |                      |       
|Commom Stock - Adjustment for fractional shares |  |                               | 3,614      |                 |   | 7                               |  |                      | -7        |                                                   |   |                                 |  |                      |       
|Net Income                                      |  |                               |           |                 |   |                                |  |                      |          |                                                   |   | 1,501,870                        |  |                      |       
|                                                |  |                               |            |                 |   |                                 |  |                      |           |                                                   |   |                                  |  |                      |        
|Ending Balance - Mar 31, 2005                   |  |                               | 13,285,867 |                 | $ | 26,572                          |  | $                    | 4,082,239 |                                                   | $ | 7,728,814                        |  |                      |       
|                                                |  |                               |            |                 |   |                                 |  |                      |           |                                                   |   |                                  |  |                      |        
|Beginning Balance - Dec 31, 2005                |  |                               | 13,346,555 |                 | $ | 26,693                          |  | $                    | 4,444,118 |                                                   | $ | 11,176,554                       |  | $                    | 336,993
|Net Income                                      |  |                               |           |                 |   |                                |  |                      |          |                                                   |   | 1,603,755                        |  |                      |       
|Other Comprehensive Income   (Loss)             |  |                               |           |                 |   |                                |  |                      |          |                                                   |   |                                 |  |                      | 114,035
|Paid In Capital   Contributions                 |  |                               |           |                 |   |                                |  |                      | 178,904   |                                                   |   |                                 |  |                      |       
|                                                |  |                               |            |                 |   |                                 |  |                      |           |                                                   |   |                                  |  |                      |        
|Ending Balance - Mar 31, 2006                   |  |                               | 13,346,555 |                 | $ | 26,693                          |  | $                    | 4,623,022 |                                                   | $ | 12,780,309                       |  | $                    | 451,028
|                                                |  |                               |            |                 |   |                                 |  |                      |           |                                                   |   |                                  |  |                      |        

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

3

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SORL AUTO PARTS, INC. AND SUBIDIARIES Ruian City, ZheJiang Province, China

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                             |  | For the   three months ended March 31, |           
|---------------------------------------------------------------------------- |  | -------------------------------------- | ----------
|                                                                             |  |                                        |           
|                                                                             |  |                                        | 2006      
|                                                                             |  |                                        |           
|Cash Flows from Operating Activities                                         |  |                                        |           
|Net Income                                                                   |  | $                                      | 1,603,755 
|Adjustments to reconcile net income to net cash from   operating activities: |  |                                        |           
|Minority   Interest                                                          |  |                                        | 178,195   
|Bad   Debt Expense                                                           |  |                                        | 156,875   
|Depreciation   and Amortization                                              |  |                                        | 264,994   
|Stock-Based   Compensation Expense                                           |  |                                        | 4,970     
|Changes in Assets and Liabilities:                                           |  |                                        |           
|Accounts   Receivable                                                        |  |                                        | (3,490,237
|Other   Receivables                                                          |  |                                        | (462,357  
|Inventory                                                                    |  |                                        | 1,377,810 
|Prepayments                                                                  |  |                                        | 480,151   
|Account Payables                                                             |  |                                        | 1,863,146 
|Deposits   Received from Customers                                           |  |                                        | (242,808  
|Other   Payables and Accrued Expenses                                        |  |                                        | 886,686   
|                                                                             |  |                                        |           
|Net Cash Flows from Operating   Activities                                   |  |                                        | 2,621,180 
|                                                                             |  |                                        |           
|Cash Flows from Investing Activities                                         |  |                                        |           
|Acquisition of Property and   Equipment                                      |  |                                        | (282,540  
|Investment in Construction in Progress                                       |  |                                        | (88,276   
|Notes   Receivable                                                           |  |                                        | (668,816  
|                                                                             |  |                                        |           
|Net Cash Flows from Investing   Activities                                   |  |                                        | (1,039,632
|Cash Flows   from Financing Activities                                       |  |                                        |           
|Proceeds from (Repayment   of) Bank Loans                                    |  |                                        | (1,515,603
|                                                                             |  |                                        |           
|Net Cash Flows from Financing   Activities                                   |  |                                        | (1,515,603
|Effects on changes in foreign exchange rate                                  |  |                                        | 126,705   
|Net   Increase (Decrease) in Cash                                            |  |                                        | 192,650   
|Cash and Cash Equivalents -   Beginning of the period                        |  |                                        | 961,131   
|                                                                             |  |                                        |           
|Cash and Cash Equivalents - End of the period                                |  | $                                      | 1,153,781 
|                                                                             |  |                                        |           
|Supplemental Cash Flow Disclosures:                                          |  |                                        |           
|Interest   Paid                                                              |  | $                                      | 199,240   
|Tax Paid                                                                     |  | $                                      |          

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

4

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SORL AUTO PARTS, INC. AND SUBSIDIARIES Ruian City, ZheJiang Province, China

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A -          Description of Business

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

Note B -          Basis of Presentation

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

| | In March   2006, the Financial Accounting Standards Board (FASB) issued Statement of   Financial Accounting Standard (SFAS) No. 156, Accounting for Servicing of   Financial Assets  an amendment of FASB Statement No. 140 (SFAS 156).  SFAS 156 amends FASB Statement No. 140   with respect to the accounting for separately recognized servicing assets and   servicing liabilities.  SFAS 156   requires all separately recognized servicing assets and servicing liabilities   to be initially measured at fair value, if practical.  SFAS 156 is effective as of the beginning   of the first fiscal year that begins after September 15, 2006.  As such, the Company is required to adopt   these provisions at the beginning of the fiscal year ended December 31,   2007.  The Company is currently   evaluating the impact of SFAS 156 on its consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note D -          Related Party Transactions

| | The Company   continued to purchase non-valve automotive components, raw materials and   packaging materials from the Ruili Group Co., Ltd., which is the minority   shareholder of the Joint Venture, and also has the common controlling party,   i.e. the Zhang family.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                           
| | The   following related party transactions occurred for the first quarter ended   March 31, 2006 and 2005:                                                                                                                                                                

- 5 -

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Note D -          Related Party Transactions-Continued

|                                             |  | Three   Months Ended    March 31, |          
|-------------------------------------------- |  | --------------------------------- | ---------
|                                             |  |                                   |          
|                                             |  |                                   | 2006     
|                                             |  |                                   |          
|PURCHASES FROM:                              |  |                                   |          
|Ruili Group Co., Ltd.                        |  | $                                 | 5,843,210
|Ruian Ruili Haizhiguan Auto   Part Co., Ltd. |  |                                   |         
|                                             |  |                                   |          
|Total Purchases                              |  | $                                 | 5,843,210
|                                             |  |                                   |          
|SALES TO:                                    |  |                                   |          
|Ruili Group Co., Ltd.                        |  | $                                 | 2,585,814
|                                             |  |                                   |          
|Total Sales                                  |  | $                                 | 2,585,814
|                                             |  |                                   |          

| | The total   purchases from Ruili Group during the first quarter ended March 31, 2006   consisted of $5.6 million finished products of non-valve auto parts and $0.2   million of packaging materials.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a)  |  |                                                    |  | (b)  |  | March 31,    2006 |         | (c) |      | (d) |      |  | December 31,2005 |          
|---- |  | -------------------------------------------------- |  | ---- |  | ----------------- | ------- | --- | ---- | --- | ---- |  | ---------------- | ---------
|     |  |                                                    |  |      |  |                   |         |     |      |     |      |  |                  |          
|(e)  |  | Accounts Payable and Other Payables                |  | (f)  |  |                   |         |     | (g)  |     | (h)  |  |                  |          
|(i)  |  | Shuping Chi                                        |  | (j)  |  | $                 |        |     | (k)  |     | (l)  |  | $                | 273,559  
|     |  |                                                    |  |      |  |                   |         |     |      |     |      |  |                  |          
|(m)  |  | Total Related Parties included in Accounts Payable |  | (n)  |  | $                 |        |     | (o)  |     | (p)  |  | $                | 273,559  
|     |  |                                                    |  |      |  |                   |         |     |      |     |      |  |                  |          
|(q)  |  | (r)                                                |  | (s)  |  |                   |         |     | (t)  |     |      |  |                  |          
|(u)  |  | Prepayment                                         |  | (v)  |  |                   |         |     | (w)  |     | (x)  |  |                  |          
|(y)  |  | Ruili Group Co., Ltd.                              |  | (z)  |  | $                 | 473,000 |     | (aa) |     | (bb) |  | $                | 1,060,193
|     |  |                                                    |  |      |  |                   |         |     |      |     |      |  |                  |          
|(cc) |  | Total prepayment                                   |  | (dd) |  | $                 | 473,000 |     | (ee) |     | (ff) |  | $                | 1,060,193
|     |  |                                                    |  |      |  |                   |         |     |      |     |      |  |                  |          

Note E -          Accounts Receivable

| | The changes in the allowance for doubtful accounts at March 31, 2006 and December 31, 2005 are summarized as follows:
| | ---------------------------------------------------------------------------------------------------------------------

|                           |  | March 31,2006 |           | December 31,2005 |  
|-------------------------- |  | ------------- | --------- | ---------------- | -
|                           |  |               |           |                  |  
|Beginning balance          |  | $             | 914,721   |                  | $
|Add: Increase to allowance |  |               | 156,875   |                  |  
|Less: Accounts written off |  |               |          |                  |  
|                           |  |               |           |                  |  
|Ending balance             |  | $             | 1,071,596 |                  | $
|                           |  |               |           |                  |  

- 6 -

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Note E -          Accounts Receivable-Continued

The companys receivables are summarized as follows:

|                                        |  | March 31, 2006 |  | December   31,   2005 |           
|--------------------------------------- |  | -------------- |  | --------------------- | ----------
|                                        |  |                |  |                       |           
|Accounts receivable                     |  | (rr)           |  | $                     | 29,744,732
|Less: allowance for   doubtful accounts |  | (ww)           |  |                       | 1,071,596 
|                                        |  |                |  |                       |           
|                                        |  |                |  |                       |           
|Account receivable balance,   net       |  | (ggg)          |  | $                     | 28,673,136
|                                        |  |                |  |                       |           

Note F -          Inventories

On March 31, 2006 and December 31, 2005, inventories consist of the following:

|                  |  | March 31,   2006 |           | December   31, 2005 |  
|----------------- |  | ---------------- | --------- | ------------------- | -
|                  |  |                  |           |                     |  
|Raw Material      |  | $                | 222,833   |                     | $
|Work in process   |  |                  | 398,869   |                     |  
|Finished Goods    |  |                  | 513,071   |                     |  
|                  |  |                  |           |                     |  
|Total   Inventory |  | $                | 1,134,773 |                     | $
|                  |  |                  |           |                     |  

Note G -          Property, Plant and Equipment

Property, plant and equipment consisted of the following, on March 31, 2006 and December 31, 2005:

|                                 |  | March 31,   2006 |            | December   31,   2005 |  
|-------------------------------- |  | ---------------- | ---------- | --------------------- | -
|                                 |  |                  |            |                       |  
|Machinery                        |  | $                | 8,967,719  |                       | $
|Moulds                           |  |                  | 1,087,434  |                       |  
|Office equipment                 |  |                  | 191,884    |                       |  
|Vehicle                          |  |                  | 176,450    |                       |  
|                                 |  |                  |            |                       |  
|Sub-Total                        |  |                  | 10,423,487 |                       |  
|Less: Accumulated   depreciation |  |                  | (3,287,358 | )                     |  
|                                 |  |                  |            |                       |  
|PPE, Net                         |  | $                | 7,136,129  |                       | $
|                                 |  |                  |            |                       |  

| | Depreciation   expense charged to operations was $263,077 and $190,225 for the first quarter   ended March 31, 2006 and 2005, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------

- 7 -

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Note H -          Intangible Assets

| | Gross   intangible assets were $44,590, less accumulated amortization of $13,790 for   net intangible assets of $30,800 as of March 31, 2006.  Gross intangible assets were $44,297, less   accumulated amortization of $11,873 for net intangible assets of $32,424 as   of December 31, 2005. Amortization expenses were $1,916 and $1,780 for the   first quarter ended March 31, 2006 and 2005 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Future   estimated amortization expense is as follows:                                                                                                                                                                                                                                                                                                                                                          

| | 2006   |  |  | 2007   |  |  | 2008   |  |  | 2009   |  |  | 2010   |  |  | Thereafter | 
| | ------ |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ---------- | 
| |        |  |  |        |  |  |        |  |  |        |  |  |        |  |  |            | 
| | $5,076 |  |  | $3,617 |  |  | $3,617 |  |  | $3,617 |  |  | $3,617 |  |  | $12,880    | 

Note I -          Prepayment

Prepayment consisted of the following as of March 31, 2006 and December 31, 2005:

|                       |  | March 31,   2006 |           | December   31,   2005 |  
|---------------------- |  | ---------------- | --------- | --------------------- | -
|                       |  |                  |           |                       |  
|Raw material suppliers |  | $                | 1,168,456 |                       | $
|Equipment purchase     |  |                  | 153,222   |                       |  
|                       |  |                  |           |                       |  
|Total prepayment       |  | $                | 1,321,678 |                       | $
|                       |  |                  |           |                       |  

Note J -          Accrued Expenses

Accrued expenses consisted of the following as of March 31, 2006 and December 3, 2005:

|                       |  | March 31,   2006 |         | December   31,   2005 |  
|---------------------- |  | ---------------- | ------- | --------------------- | -
|                       |  |                  |         |                       |  
|Accrued payroll        |  | $                | 287,501 |                       | $
|Other accrued expenses |  |                  | 230,358 |                       |  
|                       |  |                  |         |                       |  
|Total accrued expenses |  | $                | 517,859 |                       | $
|                       |  |                  |         |                       |  

Note K -          Bank Borrowings

Bank borrowings represent the following as of March 31, 2006 and December 31, 2005:

|                      |  | March 31,   2006 |            | December   31,   2005 |  
|--------------------- |  | ---------------- | ---------- | --------------------- | -
|                      |  |                  |            |                       |  
|Secured               |  | $                | 14,511,114 |                       | $
|Less: Current portion |  |                  | 14,511,114 |                       |  
|                      |  |                  |            |                       |  
|Non-current portion   |  | $                |           |                       | $
|                      |  |                  |            |                       |  

| | These loans   were from two banks, Bank of China and CITIC Bank, to finance general working   capital as well as new equipment acquisition. Corporate or personal   guarantees are provided for those bank loans as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|$8.69M |  | Guaranteed   by Ruili Group Co., Ltd., a related party;                                                                             
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------
|$2.45M |  | Guaranteed   by Ruili Group Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms.   Shu Ping Chi, both principal shareholders;
|$3.37M |  | Guaranteed   by Shenghuabo Group Co., Ltd., a non-related party.                                                                    

| | The Company   does not provide any sort of guarantee to any other parties. Interest rates   for the loans ranged between 4.964% and 6.003% per annum.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

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Note L -          Income Taxes

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

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

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

Note M -          Leases

| | The Company   has a lease agreement with Ruili Group Co., Ltd., a related party, for the   rental of a manufacturing plant.  The   lease is for a ten year term ending in February 2014.  Rent expense for the first quarter ended   March 31, 2006 and 2005, was $109,752 and $109,752 respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                      
| | Future   minimum rental payments for the years ended December 31 are as follows:                                                                                                                                                                                                                     

| | 2006     |  |  | 2007     |  |  | 2008     |  |  | 2009     |  |  | 2010     |  |  | Thereafter | 
| | -------- |  |  | -------- |  |  | -------- |  |  | -------- |  |  | -------- |  |  | ---------- | 
| |          |  |  |          |  |  |          |  |  |          |  |  |          |  |  |            | 
| | $439,540 |  |  | $439,540 |  |  | $439,540 |  |  | $439,540 |  |  | $439,540 |  |  | $1,321,620 | 



Note N -          Advertising Costs

| | Advertising   costs are expensed as incurred and are classified as selling expenses.  Advertising costs were $3,819 and $4,275   for the first quarter ended March 31, 2006 and 2005, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note O -          Research and Development Expenses

| | Research and   development costs are expensed as incurred and were $63,196 and $24,788 for   the first quarter ended March 31, 2006 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Note P -          Warranty Claims

| | Warranty   claims were $228,335 and $101,533 for the first quarter ended March 31, 2006   and 2005, respectively. The movement of accrued warranty expenses or the   first quarter ended March 31, 2006 is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Beginning balance at   January 01, 2006               |  | $ | 179,932 | 
|----------------------------------------------------- |  | - | ------- | 
|Accrued during the first   quarter of 2006:           |  | $ | 176,005 | 
|Less: Actual Paid during   the first quarter of 2006: |  | $ | 127,602 | 
|                                                      |  |   |         | 
|Ending balance at March 31, 2006:                     |  | $ | 228,335 | 
|                                                      |  |   |         | 

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Note Q -          Stock Compensation Plan

| | The Company   established a stock compensation plan in October 2005 for the purpose of   enhancing its ability to attract, retain and provide incentives to directors,   officers, employees and independent contractors who are crucial to the future   growth and success of the Company.    1,700,000 common shares are reserved under the plan.                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | On March 1,   2006, the Board of the Company had approved a total of 60,000 options to be   issued to the four members of the Board of Directors as retention options.   The term of options granted is three years. Total deferred stock-based   compensation expenses related to stock options granted within the first   quarter ended March 31, 2006 amounted to $178,904. This amount is amortized   over three years in a manner consistent with Financial Accounting Standards   Board Interpretation No. 123R. The amortization of deferred stock-based   compensation for these equity arrangements was $4,970 for the three months   ended March 31, 2006.

Note R -          Commitments and Contingencies

| | During the   first quarter ended March 31, 2006, the Company has contracted with WenZhou   Great Wall Structural Foundation Engineering Company, ZheJiang BaoDing   Structural Steelwork Engineering Co., Ltd .and ShangHai YueHai Architectural   Design Co., Ltd for the construction of a temporary plant, amounting to   $180,052.  During the first quarter   ended March 31, 2006, the Company had paid $88,276, and has an obligation   with the remaining $91,776 scheduled the date of completion.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note S -          Subsequent Event

| | On April 18,   2006, the company was approved to list its common shares on the NASDAQ   Capital Market and commence trading its shares on NASDAQ under the symbol   NASDAQ: SORL.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 2.     Managements Discussion And Analysis Of Financial Condition And Results Of Operations

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

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

OVERVIEW

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

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Fairford was organized in Hong Kong as a limited liability company on November 3, 2003.  Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co., Ltd., a Sino-foreign joint venture (the Joint Venture) established pursuant to the laws of the Peoples Republic of China (PRC or China).  The Joint Venture is a joint venture between Fairford and Ruili Group Co., Ltd.  (the Ruili Group).  In connection with its formation, effective January 19, 2004 the Joint Venture acquired the business of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the Transferred Business).  This was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade
receivables, inventories and machinery, and the assumption of short and long term borrowings, at a consideration of US$6,390,000.  The consideration was based on a valuation by an independent PRC valuation firm.  Fairford then contributed these assets and liabilities as a capital contribution for its 90% interest in the Joint Venture.  The Ruili Group also transferred inventory as its capital contribution for its 10% interest in the Joint Venture.  The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the relevant assets and liabilities of the Transferred Business.  Certain historical information of the Transferred Business is based on the operation of the Transferred Business when it was owned by the Ruili Group.

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

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

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

On a going forward basis, we are taking the following steps to improve our operating results:  We are restructuring our customer base to phase out those accounts which frequently fail to make prompt payments.  We are placing more effort on receivables collection.  We are continuing to develop higher profit margin new products.  We are adopting steps for further cost saving such as improving material utilization rates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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Accounting Method

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

Accounts Receivable and Allowance for Doubtful Accounts

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

Inventories

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

Income Taxes

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

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

Revenue Recognition

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

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

Concentration of Credit Risk

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

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Results of Operations

Three months ended March 31, 2006 as compared to three Months ended March 31, 2005:

SALES

|Sales                                   |  | Three   Months end 2006 |       | Three   Months end 2005 | 
|--------------------------------------- |  | ----------------------- | ----- | ----------------------- | 
|                                        |  |                         |       |                         | 
|Air brake valves & related   components |  | $                       | 13.6M |                         | 
|Non-valve products                      |  | $                       | 5.8M  |                         | 
|                                        |  |                         |       |                         | 
|Total                                   |  | $                       | 19.4M |                         | 

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

Net sales were $19,419,584 and $14,515,866 for the first quarter ended March 31, 2006 and 2005, respectively. Net sales for the three months ended 2006 increased by $4.9 million or 33.8% to $19.4 million, compared with the same period of 2005, despite a decrease in the production of heavy duty trucks in China.  The increase in sales was mainly from the aftermarket both internationally and within China.  This increase was a result of the Companys efforts to develop more customers and penetrate these market segments.

A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for the first quarter of 2006 and 2005 is as follows:

|                           |  | Three   Months ended March 31, 2006 |      | Three   Months ended    March 31, 2005 | 
|-------------------------- |  | ----------------------------------- | ---- | -------------------------------------- | 
|                           |  |                                     |      |                                        | 
|(U.S. Dollars in millions) |  |                                     |      |                                        | 
|China OEM market           |  | $                                   | 5.8  |                                        | 
|China Aftermarket          |  | $                                   | 7.5  |                                        | 
|International market       |  | $                                   | 6.1  |                                        | 
|                           |  |                                     |      |                                        | 
|Total                      |  | $                                   | 19.4 |                                        | 

Because of the Chinese Governments macroeconomic regulation policy, the Chinese heavy duty truck market has been sluggish since 2005.  This caused a decrease of the sales for the OEM market by $0.8 million or 12.1% for the first quarter of 2006, as compared to the same period of 2005.  However, the Companys sales to the OEM market in the first quarter of 2006 were higher than that in the fourth quarter of 2005, which had sales of $4.3 million.  The Companys strategy is to introduce more innovative products to meet the OEM customers needs, and to grant extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain and further penetrate this important market segment.

Currently SORL has 27 authorized distributors covering nearly all regions in China, who in turn sell our products to over 800 sub-distributors.  Based on the well established and continuously improving sales networks, SORL achieved total revenue of $7.5 million in domestic aftermarket sales for the first quarter ended March 31, 2006, an increase of $3.8 million, or 102.7% as compared to the same period of last year.

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Export sales grew by $1.9 million or approximately 45.2% for the three months ended March 31, 2006, as compared to $4.2 million for the same period of 2005.  The increase in sales was attributable to the introduction of new products and greater focus on participation in international trade shows leading to increased awareness of the Companys products.  Additionally, the Company has been able to offer a much wider product line including non-valve products which are outsourced from the Ruili Group.  Such outsourced non-valve products include power steering pumps and other pumps, automobile electrical components and auto meters.

COST OF SALES

Cost of sales for the first quarter ended March 31, 2006 increased to $15 million from $ 11.3 million for the same period of 2005, a $3.7 million or 33 % increase which was consistent with the increase in revenues.  Gross margin increased by approximately 0.46% from 22.2% in 2005 to 22.64%.

We purchase various components and raw materials for use in our manufacturing processes.  The principal raw materials we purchase are aluminum and steel.  For the three months ended March 31, 2006, the market price of aluminum and steel continued to increase.  Although we maintain a relatively low inventory of raw material and purchase it on favorable terms to decrease our production cost, the average goods cost per unit for the first quarter ended March 31,2006 increased $ 0.79 or 9.4% , as compared to the comparable quarter last year.

GROSS PROFIT

For the first quarter ended March 31, 2006, gross profit was $4,395,758, as compared to $3,219,692 for the first quarter ended March 31, 2005, an increase of $1,176,066 or 36.5%.  Gross margin was 22.64% for the first quarter ended March 31, 2006, an increase of 0.46% from 22.2% for the same period of 2005.

The approximately 3.2% appreciation of RMB against the U.S. dollar (USD) had a slight negative impact on gross margin.  About 31% of total revenue for the three months ended March 31,2006 was denominated in USD, while nearly all costs were denominated in RMB.  However, the impact from the appreciation of the RMD was relatively minimal (approximately 0.77% on Gross Margin).  However, the rising price of materials had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers.  This negatively impacted our gross margin by 4.2% in 2006, or approximately $0.34 million.

This negative impact on Gross Margin was largely offset by economies of scale, shift of sales mix and consistent efforts in production technique optimization.  In 2006, we shifted the product mix and introduced valve products with a higher profit margin.  The average selling price of valve products per unit increased $1.3 or 11%, as compared to the first quarter of last year.  The price increase contributed $1.25 million to gross profit and impacted gross margin by approximately 6.4%.  Furthermore, we took some other steps to mitigate the adverse impact from the increase in raw material cost.  For example, we replaced the machining approach with a molding process, thereby reducing processing steps and materials consumption and increasing hourly output.  Meanwhile, in the process of removing impurities from liquid aluminum, historically we have used the high-temperature
method.  The adoption of a new technique of using a low-temperature method helped save power consumption.

SELLING EXPENSES

Selling expenses were $868,016 for the three months ended March 31 2006, as compared to $927,089 for the same period of 2005, a decrease of $59,073 or 6.4%. The decrease in 2006 was mainly due to the net effect of the following factors:

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(1)     Decreased transportation expenses. The Company recorded $220,822 of transportation expenses for the three months ended March 31, 2006, as compared to $362,953 for the same period of 2005, a decrease of $142,131 or 39.2%, as a result of the increase in international sales which are generally made on an FOB basis.

(2)     Increased product warranty expenses. The Company recorded $176,005 of product warranty expenses for the three months ended March 31, 2006, as compared to $101,533 for the same period of 2005, an increase of $74,472 or 73.3%, because virtually all vehicle manufacturers required automotive parts suppliers to pay a 3-R Warranties service charge (for repair, replacement and refund) in an amount equal to one percent of the total amount of parts supplied. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $1,096,962 for the three months ended March 31, 2006, as compared to $ 554,254 for the same period of 2005, an increase of $542,708 or 97.9%. The major increase came from an increase in professional fees of $300,070 and bad debt expenses of $156,875.  The professional fees included audit and legal fees associated with SEC filings, directors fees and related consulting fees, stock transfer fees and other items associated with the costs of being a public entity.  The remaining general and administrative expenses as a percentage of sales decreased as compared to the same period of 2005 since most of these expenses are fixed in nature.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense was $63,196 in the first quarter of 2006, as compared to $24,788 for the same period of 2005, an increase of $38,408 or 155%, as a result of the Companys establishment of a team to develop new innovative products.  This increase was primarily due to higher personnel-related costs resulting from an increase in employee headcount in our project team as we strengthened our internal development efforts.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $264,994 for the first quarter ended March 31, 2006, compared with that of $192,004 for the same period of 2005, an increase of $72,990 or 38%, as a result of new investment in fixed assets, mainly production equipment and tools.

FINANCIAL EXPENSE

Financial expense for the first quarter ended March 31, 2006 increased by $205,095 to $265,547 from $60,452 for the same period of 2005.  Financial expense consists mainly of interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $14.5 million as of March 31, 2006, an increase of $7.3 million from $7.2 million at the end of March 31, 2005.  The funds were used for working capital purposes, as well as new equipment purchases, to support the anticipated increase in revenues in the second quarter of fiscal 2006.

Interest rates ranged between 4.964% and 6.003% per annum.

INCOME TAX

There was no income tax expense for the fiscal year ended December 31, 2005 and 2004.  As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005.  Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% commencing the three years ended December 31, 2006, 2007, and 2008. Income taxes expense of $293,608 was recorded for the first quarter of 2006.

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MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the Joint Venture.  Minority interest in income amounted to US$178,195 and US$166,875 for the first quarter ended March 31, 2006 and 2005, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - The Companys operations generated cash of $2,621,180 for the first quarter ended March 31, 2006, as compared to a negative operating cash flow of $1,613,792 for the same period of 2005, primarily as a result of the following:

1.          For the first quarter ended March 31, 2006, net income was $1,603,755 as compared to $1,501,870 for the same period of 2005, an increase of $101,885. The increase was primarily as a result of the increase in sales.

2.          For the first quarter ended March 31, 2006, account receivables increased by $3,490,237 primarily due to temporary extension of credit terms to selected OEM customers which are state-owned and the largest automobile manufacturers in China. Management believes that the risk of uncollectibility for such receivables is low. Management further believes this situation will be mitigated gradually through the Companys strategic move of its sales focus from the domestic OEM market to international markets, thereby providing the Company with the ability to restructure its OEM customer base by gradually phasing out customers with lower return and higher credit risks. Receivables with aging over one year due from domestic aftermarket customers for the first quarter ended March 31, 2006, however, decreased by $968,784.

3.          For the first quarter ended by March 31, 2006, inventory decreased by $ 1,377,810.  The Company maintains a low level of inventory to reduce working capital requirements.  Because of the strong demand for its products, the Company maintains less than one week of finished goods inventory.  A low level of raw materials for approximately four to five days of production requirements are maintained.  Raw materials are readily available, given our access to different suppliers and efficient and timely delivery available.  The majority of the WIP balances are incurred during later steps in manufacturing.  The Company effectively adopts a pull system in its production.

4.          Because of the rise and volatility of raw material prices, the Company maintains relatively low levels of raw materials, so purchasing frequency is higher than before.  For the first quarter ended March 31, 2006, account payables increased by $1,863,146, or 53.4 %, compared to December 31, 2005, mainly due to bulk purchasing occurring near the end of the accounting period, but all within the payment cycle approved by the supplier.  Prepayments as of March 31, 2006 primarily represented advance payments for raw materials and equipment purchases. Prepayments as of March 31, 2006 decreased by 26.6% to $1.32 million from $1.80 million as of December 31, 2005.

At March 31, 2006, the Company had cash and cash equivalents of $1,153,781, as compared to cash and cash equivalents of $961,131 at December 31, 2005.  The Company had working capital of $ 12,378,597 at March 31, 2006, as compared to working capital of $10,571,086 at December 31, 2005, reflecting current ratios of 1.55:1 and 1.49:1, respectively.

INVESTING - During the first quarter ended March 31, 2006, the Company expended net cash of $ 1,039,632 in investing activities, including $370,816 for acquisition of property and equipment to support the growth of business, and $ 668,816 in the issuance of notes receivable.  For the first quarter ended March 31, 2005, the Company utilized $921,475 in investing activities.

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FINANCING During the first quarter ended March 31, 2006, the Company received aggregate advances under its credit facilities of $5,737,807, and the Company repaid $7,359,361 on its outstanding debt.

Management of the Company has taken a number of steps to restructure its customer base and phase out accounts which had failed to make prompt payments, the Company also placed more emphasis receivable collection.  During the quarter, the Company continue to develop high profit margin new products, as well as adopting steps for further cost saving such as improving material utilization rate.

While we believe that funds generated from operations and our bank revolving lines of credit will be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future, we continue our efforts to raise capital to finance further expansion of production, build our international sales networks in new markets, strengthen our R&D workforce, and supplement our working capital.

The Company has commitments under contracts for the construction of a temporary plant, amounting to $91,776 at March 31, 2006.

STOCKBASED COMPENSATION

On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors.  The term of the options is three years. Total deferred stock-based compensation expenses related to stock options granted within the first quarter ended March 31, 2006 amounted to $178,904.  This amount is amortized over three years in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R.  The amortization of deferred stock-based compensation for these equity arrangements was $4,970 for the three months ended March 31, 2006.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

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

With respect to foreign currency exchange rates, the approximately 3.2% appreciation or fluctuation of the RMB against the USD did not have a material adverse effect on the Companys operations, even though the Company has over one third of its total revenue denominated in USD.  This is because of the relatively small change and our ability to absorb such effect through cost saving approaches.  It is believed that further RMB appreciation against USD, if any, would be on a gradual basis with relatively small adjustments, so as to avoid a drastic impact on the Chinese economy as a whole.

As the Companys debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any material 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.

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Item 4.     Controls And Procedures

(a)          Evaluation of Disclosure Controls and Procedures.

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

In conjunction with the close of each fiscal quarter and under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company conducts an update, a review and an evaluation of the effectiveness of the Companys disclosure controls and procedures. It is the conclusion of the Companys Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that the Companys disclosure controls and procedures were effective.

(b)          Changes in Internal Controls.

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

PART II OTHER INFORMATION

|Item 1.           | Legal Proceedings.                                   
|----------------- | -----------------------------------------------------
|                  |                                                      
|None.             |                                                      
|                  |                                                      
|Item 1A.          | Risk Factors                                         
|                  |                                                      
|Not   applicable.
|                  |                                                      
|Item 2.           | Unregistered Sales of Securities and Use of Proceeds.
|                  |                                                      
|None.             |                                                      
|                  |                                                      
|Item 3.           | Defaults Upon Senior Securities.                     
|                  |                                                      
|None.             |                                                      
|                  |                                                      
|Item 4.           | Submission of Matters to a Vote of Security Holders. 
|                  |                                                      
|None.             |                                                      
|                  |                                                      
|Item 5.           | Other Information.                                   
|                  |                                                      
|None.             |                                                      

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|Item 6. | Exhibits.
|------- | ---------

| | (a) | Exhibits:
| | --- | ---------
| |     |          
| |     | 3.1      
| |     |          
| |     | 3.2      
| |     |          
| |     | 10.1     
| |     |          
| |     | 31.1     
| |     |          
| |     | 31.2     
| |     |          
| |     | 32.1     
| |     |          
| |     | 32.2     

|   
|---
|(1)
|   
|(2)
|   
|(3)

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SIGNATURES

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

|Dated: May   12, 2006 | SORL AUTO   PARTS, INC.
|--------------------- | -----------------------
|                      |                        
|                      |                        
|                      | By:                    
|                      |                        
|                      | Name:                  
|                      | Title:                 

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