~~Table of Contents~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT ~~UNDER~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~for the quarterly period ended June 30, 2008~~

For the quarterly period ended September 30, 2008

o	TRANSITION REPORT ~~UNDER~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
	OF 1934

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, Zip: 325200

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, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company x

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

Yes o No x

~~APPLICABLE ONLY TO CORPORATE ISSUERS~~

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

As of ~~June~~September 30, 2008 there were 18,279,254 shares of ~~Common Stock outstanding~~the Company’scommon stock, par value $0.002 per share, outstanding.

~~Table of Contents~~

SORL AUTO PARTS, INC.

FORM 10-Q

For the Quarter Ended ~~June~~September 30, 2008

INDEX

		Page

PART I.	FINANCIAL INFORMATION (Unaudited)	1

Item 1.	Financial Statements:	1

	~~Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007 (Audited)~~	1

	Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007 (Audited)	2

	Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Three Months and ~~Six Months~~Nine months Ended ~~June~~September 30, 2008 and 2007	23

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months and ~~Six Months~~Nine months Ended ~~June~~September 30, 2008 and 2007	34

	Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three months and ~~Six Months~~Nine months Ended ~~June~~September 30, 2008 and 2007	45

	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis or Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

~~Item 4T.~~	~~Controls and Procedures~~	26

~~PART II.~~	~~OTHER INFORMATION~~	26

Item 4T.	Controls and Procedures	27

PART II.	OTHER INFORMATION	27

Item 4.	Submission of Matters To a Vote of Security Holders	27

Item 6.	Exhibits	2628

SIGNATURES	28	29

~~- i -~~

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

~~SORL Auto Parts, Inc. and Subsidiaries~~
~~Consolidated Balance Sheets~~
~~June 30, 2008 (unaudited) and December 31, 2007~~

Jun 30, 2008

December 31, 2007

(Unaudited)

(Audited)

Assets

Current Assets

Cash and Cash Equivalents US$
4,481,177
US$
4,340,211

Accounts Receivable, Net of Provision 38,862,983 30,586,239
Notes Receivable 12,805,169 9,410,385
Inventory 13,531,271 8,220,373
Prepayments 3,309,421 1,336,212
Other Current Assets 2,259,417 4,275,294
Total Current Assets
75,249,438 58,168,714
Fixed Assets

Property, Plant and Equipment 30,828,160 27,889,182
Less: Accumulated Depreciation (7,676,656 ) (6,094,229 )
Property, Plant and Equipment, Net 23,151,504 21,794,953

Land Use Rights, Net
14,627,491 13,889,705

Other Assets

Deferred Compensation Cost-Stock options 39,753 69,571
Intangible Assets 160,770 76,150
Less: Accumulated Amortization (31,250 ) (25,116 )
Intangible Assets, Net 129,520 51,034
Total Other Assets 169,273 120,605
Total Assets
US$
113,197,706
US$
93,973,977

Liabilities and Shareholders' Equity

Current Liabilities

Accounts Payable and Notes Payable
8,013,208

5,305,172

Deposit Received from Customers 3,557,350 2,079,946
Short Term Bank Loans 1,990,622 3,370,328
Income Tax Payable 732,316 373,769
Accrued Expenses 3,234,970 1,859,938
Other Current Liabilities 487,979 463,563
Total Current Liabilities
18,016,445 13,452,716
Minority Interest
9,493,164 8,024,152
Shareholders' Equity

Common Stock - $0.002 Par Value; 50,000,000 authorized,
18,279,254 Issued and Outstanding as of
June 30, 2008 and December 31, 2007 respectively 36,558 36,558
Additional Paid In Capital 37,498,452 37,498,452
Reserves 2,661,841 1,882,979
Accumulated Other Comprehensive Income 10,355,764 5,432,189
Retained Earnings 35,135,482 27,646,931
85,688,097 72,497,109
Total Liabilities and Shareholders' Equity
US$
113,197,706
US$
93,973,977

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

~~- 1 -~~

~~Table of Contents~~

SORL Auto Parts, Inc. and Subsidiaries

~~SORL Auto Parts, Inc. and Subsidiaries~~Condensed Consolidated Balance Sheets

~~Consolidated Statements of Income and Comprehensive Income (unaudited)~~

~~For The Three Months and Six Months Ended June 30, 2008 and 2007~~

September 30, 2008(unaudited) and December 31, 2007

Three Months Ended June 30,

Six Months Ended June 30,

2008

2007

2008

2007

Sales US$ 42,186,119 29,189,572 72,844,561 53,606,561

Cost of Sales 30,776,773 22,829,287 52,793,354 41,555,339

Gross Profit 11,409,346 6,360,285 20,051,207 12,051,222

Expenses:
Selling and Distribution Expenses 2,771,803 1,331,643 4,611,078 2,515,290
General and Administrative Expenses 2,718,217 1,027,436 4,694,418 2,720,623
Financial Expenses 383,320 114,268 752,996 257,436
Total Expenses 5,873,340 2,473,347 10,058,492 5,493,349

Operating Income 5,536,006 3,886,938 9,992,715 6,557,873

Other Income 222,762 351,932 333,840 384,272
Non-Operating Expenses (175,785 ) (80,550 ) (254,963 ) (84,639 )

Income (Loss) Before Provision for Income Taxes 5,582,983 4,158,320 10,071,592 6,857,506

Provision for Income Taxes 318,757 (422,721 ) 882,231 (60,256 )

Net Income Before Minority Interest
& Other Comprehensive Income US$ 5,264,226 4,581,041 9,189,361 6,917,762

Minority Interest 527,929 461,930 921,948 697,119

Net Income Attributable to Shareholders 4,736,297 4,119,111 8,267,413 6,220,643

Foreign Currency Translation Adjustment 2,110,749 1,075,648 5,470,639 1,697,589

Minority Interest's Share 211,075 107,565 547,064 169,759

Comprehensive Income (Loss) 6,635,971 5,087,194 13,190,988 7,748,473

Weighted average common share - Basic 18,279,254 18,275,126 18,279,254 18,275,126

Weighted average common share - Diluted 18,287,764 18,322,260 18,288,958 18,328,526

EPS - Basic 0.26 0.23 0.45 0.34

EPS - Diluted 0.26 0.22 0.45 0.34

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Assets
Current Assets
Cash and Cash Equivalents	US$	5,950,987		US$	4,340,211
Accounts Receivable, Net of Provision		36,210,887			30,586,239
Notes Receivable		6,809,907			9,410,385
Inventory		20,831,986			8,220,373
Prepayments		2,730,862			1,336,212
Other Current Assets		3,614,446			4,275,294
Total Current Assets		76,149,075			58,168,714
Fixed Assets
Property, Plant and Equipment		32,545,735			27,889,182
Less: Accumulated Depreciation		(8,325,938	)		(6,094,229	)
Property, Plant and Equipment, Net		24,219,797			21,794,953

Land Use Rights, Net		14,632,351			13,889,705

Other Assets
Deferred Compensation Cost-Stock Options		24,844			69,571
Intangible Assets		161,733			76,150
Less: Accumulated Amortization		(35,274	)		(25,116	)
Intangible Assets, Net		126,459			51,034
Other Non-current Assets		-			-
Total Other Assets		151,303			120,605
Total Assets	US$	115,152,526		US$	93,973,977

Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable and Notes Payable	US$	5,093,924		US$	5,305,172
Deposit Received from Customers		5,538,253			2,079,946
Short Term Bank Loans		2,002,533			3,370,328
Income Tax Payable		491,587			373,769
Accrued Expenses		3,233,396			1,859,938
Other Current Liabilities		429,628			463,563
Total Current Liabilities		16,789,321			13,452,716
Minority Interest		9,812,875			8,024,152
Shareholders' Equity
Common Stock - $0.002 Par Value; 50,000,000 Authorized,
18,279,254 - Issued and Outstanding as of
June 30, 2008 and December 31, 2007 respectively		36,558			36,558
Additional Paid In Capital		37,498,452			37,498,452
Reserves		2,897,555			1,882,979
Accumulated Other Comprehensive Income		10,876,022			5,432,189
Retained Earnings		37,241,743			27,646,931
		88,550,330			72,497,109
Total Liabilities and Shareholders' Equity	US$	115,152,526		US$	93,973,977

The accompanying notes are an integral part of these financial statements

- 2 -

~~Table of Contents~~

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

~~Consolidated Statements of Cash Flows (unaudited)~~

~~For The Three Months and Six Months Ended June~~SORL Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income(unaudited)

For The Three Months and Nine Months Ended on September 30, 2008 and 2007

Three Months Ended June 30,

Six Months Ended June 30,

2008

2007

2008

2007

Cash Flows from Operating Activities
Net Income US$ 4,736,297 4,119,111 8,267,413 6,220,643
Adjustments to reconcile net income (loss) to net cash from operating activities:
Minority Interest 527,929 461,930 921,948 697,119
Bad Debt Expense 10,450 (234,154 ) 21,282 187,176
Depreciation and Amortization 674,504 370,097 1,329,059 710,394
Stock-Based Compensation Expense 14,909 38,110 29,818 53,019
Loss on disposal of Fixed Assets 2,519 2,519 1,108
Changes in Assets and Liabilities:
Account Receivables (2,142,593 ) (2,100,597 ) (6,092,371 ) (4,634,961 )
Notes Receivables (2,102,462 ) (1,237,625 ) (2,731,319 ) (5,615,402 )
Other Currents Assets (165,931 ) (680,963 ) 2,181,644 (912,057 )
Inventory (2,164,427 ) (2,426,343 ) (4,642,399 ) (2,694,515 )
Prepayments (712,009 ) 1,413,829 (1,828,836 ) 3,332,649
Accounts Payable and Notes Payable 418,290 2,060,032 2,276,580 991,030
Income Tax Payable 218,643 64,855 358,547 72,614
Deposits Received from Customers 828,703 (4,080 ) 1,311,351 282,352
Other Current Liabilities and Accrued Expenses 1,220,975 (255,848 ) 1,203,937 (385,245 )
Net Cash Flows from Operating Activities 1,365,797 1,588,354 2,609,173 (1,694,076 )

Cash Flows from Investing Activities
Acquisition of Property and Equipment (552,037 ) (3,271,641 ) (1,109,428 ) (5,335,361 )
Investment in Intangible Assets (78,109 ) — (78,737 ) (19,915 )
Net Cash Flows from Investing Activities (630,146 ) (3,271,641 ) (1,188,165 ) (5,355,276 )

Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans 930,359 1,492,936 (1,502,107 ) 1,492,936

Net Cash flows from Financing Activities 930,359 1,492,936 (1,502,107 ) 1,492,936

Effects on changes in foreign exchange rate 82,357 89,213 222,065 170,257

Net Change in Cash and Cash Equivalents 1,748,367 (101,138 ) 140,966 (5,386,159 )

Cash and Cash Equivalents- Beginning of the year 2,732,810 5,852,480 4,340,211 11,137,501

Cash and cash Equivalents - End of the period US$ 4,481,177 5,751,342 4,481,177 5,751,342

Supplemental Cash Flow Disclosures:
Interest Paid 77,081 12,914 103,125 12,914
Tax Paid 505,146 495,257 2,388,521 853,436

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007

Sales	US$	32,967,579			29,703,227			105,812,140			83,309,788

Cost of Sales		24,550,613			23,064,724			77,343,967			64,620,063

Gross Profit		8,416,966			6,638,503			28,468,173			18,689,725

Expenses:
Selling and Distribution Expenses		2,261,143			1,928,763			6,872,221			4,444,053
General and Administrative Expenses		3,018,390			1,682,071			7,712,808			4,402,694
Financial Expenses		221,694			349,056			974,690			606,492

Total Expenses		5,501,227			3,959,890			15,559,719			9,453,239

Operating Income		2,915,739			2,678,613			12,908,454			9,236,486


Other Income		276,752			118,334			610,592			502,606
Non-Operating Expenses		(119,677	)		(10,357	)		(374,640	)		(94,996	)

Income (Loss) Before Provision for Income Taxes		3,072,814			2,786,590			13,144,406			9,644,096

Provision for Income Taxes		468,935			434,139			1,351,166			373,883

Net Income Before Minority Interest
& Other Comprehensive Income	US$	2,603,879			2,352,451			11,793,240			9,270,213

Minority Interest		261,904			239,867			1,183,852			936,986

Net Income Attributable to Shareholders		2,341,975			2,112,584			10,609,388			8,333,227

Foreign Currency Translation Adjustment		578,065			1,025,919			6,048,704			2,723,508

Minority Interest's Share		(57,807	)		(102,592	)		(604,871	)		(272,351	)

Comprehensive Income (Loss)		2,862,233			3,035,911			16,053,221			10,784,384


Weighted average common share – Basic		18,279,254			18,278,805			18,279,254			18,276,366

Weighted average common share – Diluted		18,283,011			18,312,574			18,287,094			18,323,125

EPS - Basic		0.13			0.12			0.58			0.46

EPS – Diluted		0.13			0.12			0.58			0.45

The accompanying notes are an integral part of these financial statements

- 3 -

~~Table of Contents~~

SORL Auto Parts, Inc. and Subsidiaries
~~Consolidated Statements of Changes in Shareholders' Equity~~


~~Three Months Ended June 30, 2008 and 2007~~

Number

Common

Additional

Reserves

Retained

Accumu. Other

of Share

Stock

Paid-in

Earnings

Comprehensive

Shareholders'

Minority


Capital

(Deficit)

Income

Equity

Interest

Beginning Balance - April 1, 2007

18,275,126

36,550

37,444,051

1,008,786

19,878,625

1,662,216

60,030,228

6,633,940

Net Income — — — — 4,119,111 — 4,119,111 461,930

Other Comprehensive Income — — — — — 968,083 968,083 107,565

Transfer to reserve — — — 415,737 (415,737 ) — — —

4,128 options issued — — 23,201     — — 23,201 —
Ending Balance - June 30, 2007

18,275,126

36,550

37,467,252

1,424,523

23,581,999

2,630,299

65,140,623

7,203,435

Beginning Balance - April 1, 2008

18,279,254

36,558

37,498,452

2,237,597

30,823,429

8,456,090

79,052,126

8,754,160

Net Income — — — — 4,736,297 — 4,736,297 527,929

Other Comprehensive Income — — — — — 1,899,674 1,899,674 211,075

Transfer to reserve — — — 424,244 (424,244 ) — — —

— — —
—
— — — —
Ending Balance - June 30, 2008

18,279,254

36,558

37,498,452

2,661,841

35,135,482

10,355,764

85,688,097

9,493,164

Condensed Consolidated Statements of Cash Flows(unaudited)

For The Three Months and Nine Months Ended on September 30, 2008 and 2007

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007

Cash Flows from Operating Activities
Net Income	US$	2,341,975			2,112,584			10,609,388			8,333,227
Adjustments to reconcile net income (loss) to net cash from operating activities:
Minority Interest		261,904			239,867			1,183,852			936,986
Bad Debt Expense		666,231			(163,553	)		687,513			23,623
Depreciation and Amortization		695,872			447,548			2,024,931			1,157,942
Stock-Based Compensation Expense		14,909			46,117			44,727			99,136
Loss on disposal of Fixed Assets		23,176			(1,870	)		25,695			(762	)
Changes in Assets and Liabilities:
Account Receivables		2,220,955			1,198,001			(3,871,416	)		(3,436,960	)
Notes Receivables		6,053,775			3,449,736			3,322,456			(2,165,666	)
Other Currents Assets		(1,347,718	)		(238,235	)		833,926			(1,150,292	)
Inventory		(7,198,208	)		(1,339,563	)		(11,840,607	)		(4,034,078	)
Prepayments		596,577			45,087			(1,232,259	)		3,377,736
Accounts Payable and Notes Payable		(2,958,382	)		(252,806	)		(681,802	)		738,224
Income Tax Payable		(240,729	)		774,165			117,818			358,547
Deposits Received from Customers		1,953,771			56,601			3,265,122			338,953
Other Current Liabilities and Accrued Expenses		(85,437	)		(459,064	)		1,118,500			(356,077	)

Net Cash Flows from Operating Activities		2,998,671			5,914,615			5,607,844			4,220,539

Cash Flows from Investing Activities
Acquisition of Property and Equipment		(1,559,786	)		(5,521,198	)		(2,669,214	)		(10,856,559	)
Acquisition of Land Use Rights		-			(7,377,271	)		-			(7,377,271	)
Investment in Intangible Assets		-			(5,818	)		(78,737	)		(25,733	)

Net Cash Flows from Investing Activities		(1,559,786	)		(12,904,287	)		(2,747,951	)		(18,259,563	)

Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans		-			3,159,176			(1,502,107	)		4,652,112

Net Cash flows from Financing Activities		-			3,159,176			(1,502,107	)		4,652,112

Effects on changes in foreign exchange rate		30,925			51,979			252,990			222,236

Net Change in Cash and Cash Equivalents		1,469,810			(3,778,517	)		1,610,776			(9,164,676	)

Cash and Cash Equivalents- Beginning of the year		4,481,177			5,751,342			4,340,211			11,137,501

Cash and cash Equivalents - End of the year	US$	5,950,987			1,972,825			5,950,987			1,972,825


Supplemental Cash Flow Disclosures:
Interest Paid		33,564			105,363			136,689			118,277
Tax Paid		512,562			331,779			2,901,083			1,185,215

~~- 4 -~~

~~Table of Contents~~

~~Six Months Ended June 30, 2008 and 2007~~

Number

Common

Additional

Reserves

Retained

Accumu. Other

of Share

Stock

Paid-in

Earnings

Comprehensive

Shareholders'

Minority

Capital

(Deficit)

Income

Equity

Interest

Beginning Balance - January 1, 2007

18,275,126

36,550

37,444,051

797,116

17,988,763

1,102,469

57,368,949

6,336,557

Net Income — — — — 6,220,643 6,220,643 697,119

Other Comprehensive Income — — — — — 1,527,830 1,527,830 169,759

Transfer to reserve — — — 627,407 (627,407 ) — — —

4,128 options issued — — 23,201 — — — 23,201 —
Ending Balance - June 30, 2007

18,275,126

36,550

37,467,252

1,424,523

23,581,999

2,630,299

65,140,623

7,203,435

Beginning Balance - January 1, 2008

18,279,254

36,558

37,498,452

1,882,979

27,646,931

5,432,189

72,497,109

8,024,152

��
Net Income — — — — 8,267,413 8,267,413 921,948

Other Comprehensive Income — — — — — 4,923,575 4,923,575 547,064

Transfer to reserve — — — 778,862 (778,862 ) — — —

4,128 options issued — — — — — — — —
Ending Balance - June 30, 2008

18,279,254

36,558

37,498,452

2,661,841

35,135,482

10,355,764

85,688,097

9,493,164

The accompanying notes are an integral part of these financial statements

~~- 5 -~~4

~~Table of Contents~~

Condensed Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended September 30, 2008 and 2007
	Number		Common		Additional		Reserves		Retained			Accumu. Other
	of Share		Stock		Paid-in				Earnings			Comprehensive		Shareholders'		Minority
					Capital				(Deficit)			Income		Equity		Interest
Beginning Balance - July 1, 2007		18,275,126		36,550		37,467,252		1,424,523		23,581,999			2,630,299		65,140,623		7,203,435

Net Income		-		-		-		-		2,112,584			-		2,112,584		239,867

Other Comprehensive Income		-		-		-		-		-			923,327		923,327		102,592

Transfer to reserve		-		-		-		215,880		(215,880	)		-		-		-

Common Stock issued to previous employees		4,128.00		8.00		31,200				-			-		31,208		-

*Ending Balance - September 30, 2007*		18,279,254		36,558		37,498,452		1,640,403		25,478,703			3,553,626		68,207,742		7,545,894

Beginning Balance - July 1, 2008		18,279,254		36,558		37,498,452		2,661,841		35,135,482			10,355,764		85,688,097		9,493,164

Net Income		-		-		-		-		2,341,975			-		2,341,975		261,904

Other Comprehensive Income		-		-		-		-		-			520,258		520,258		57,807

Transfer to reserve		-		-		-		235,714		(235,714	)		-		-		-

*Ending Balance - September 30, 2008*		18,279,254		36,558		37,498,452		2,897,555		37,241,743			10,876,022		88,550,330		9,812,875

Nine Months Ended September 30, 2008 and 2007

	Number		Common		Additional		Reserves		Retained			Accumu. Other
	of Share		Stock		Paid-in				Earnings			Comprehensive		Shareholders'		Minority
					Capital				(Deficit)			Income		Equity		Interest
Beginning Balance - January 1, 2007		18,275,126		36,550		37,444,051		797,116		17,988,763			1,102,469		57,368,949		6,336,557

Net Income		-		-		-		-		8,333,227			-		8,333,227		936,986

Other Comprehensive Income		-		-		-		-		-			2,451,157		2,451,157		272,351

Transfer to reserve		-		-		-		843,287		(843,287	)		-		-		-

4,128 options issued		-		-		23,201		-		-			-		23,201		-

Common Stock issued to previous employees		4,128.00		8.00		31,200		-		-			-		31,208

*Ending Balance - September 30, 2007*		18,279,254		36,558		37,498,452		1,640,403		25,478,703			3,553,626		68,207,742		7,545,894

Beginning Balance - January 1, 2008		18,279,254		36,558		37,498,452		1,882,979		27,646,931			5,432,189		72,497,109		8,024,152

Net Income		-		-		-		-		10,609,388			-		10,609,388		1,183,852

Other Comprehensive Income		-		-		-		-		-			5,443,833		5,443,833		604,871

Transfer to reserve		-		-		-		1,014,576		(1,014,576	)		-		-		-

*Ending Balance - September 30, 2008*		18,279,254		36,558		37,498,452		2,897,555		37,241,743			10,876,022		88,550,330		9,812,875

The accompanying notes are an integral part of these financial statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - DESCRIPTION OF BUSINESS

SORL Auto Parts, Inc. (the “Company”) is principally engaged in the manufacture and distribution of automotive air brake valves and related components for commercial vehicles weighing more than three tons, such as trucks and buses, through its 90% ownership of Ruili Group Ruian Auto Parts Company Limited (the “Joint Venture”) in the People’s Republic of China (“PRC” or “China”). The Company distributes products both in China and internationally under the SORL trademarks. The Company’s product range includes approximately 40 categories of brake valves with over 1000 different specifications.

NOTE B - BASIS OF PRESENTATION

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

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

NOTE C - RECENTLY ISSUED FINANCIAL STANDARDS

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No.157-2, which deferred the effective date for certain portions of SFAS No.157 related to nonrecurring measurements of nonfinancial assets and liabilities. The provision of SFAS No.157 will be effective for the Company’s fiscal year 2009.

In The Company is currently evaluating the impact of SFAS No.157 on its consolidated financial statements but does not expect it to have a material effect.In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS No.115", which allows for the option to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The adoption of SFAS No. 159 ~~has~~is not ~~had~~expected to have a material impact on the Company's consolidated results of operations or financial position.

In December 2007, the FASB issued FASB 141(R), "Business Combinations" the objective of which is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.

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In December 2007, the FASB issued FASB 160 "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No.51" of which the objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way - as an entity in the consolidated financial statements. Moreover, Statement 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring that they be treated as equity transactions.

Both FASB 141(R) and FASB 160 are effective for fiscal years beginning after December 15, 2008. The Company does not believe that the adoption of these standards will have any impact on its financial statements.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 permits companies to continue to use the simplified method, under certain circumstances, in estimating the expected term of “plain vanilla” options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously stated that the Staff would not expect a company to use the simplified method for share option grants after December 31, 2007. Adoption of SAB 110 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments and Hedging Activities- an amendment of FASB statement No.133.SFAS No.161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No.161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008, with early application encouraged. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2009. The Company is currently evaluating the impact of SFAS No. 161 on its financial statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the impact of SFAS 162 on its consolidated financial statements but does not expect it to have a material effect.

Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60" (“SFAS 163”). SFAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 163 on its consolidated financial statements but does not expect it to have a material effect.

NOTE D - RELATED PARTY TRANSACTIONS

The Company continued to purchase non-valve automotive components and packaging materials from the Ruili Group Co., Ltd. The Ruili Group Co., ~~which~~Ltd., is the minority shareholder of the Joint Venture and ~~which~~is controlled by the Zhang family, who is also ~~has a common~~the controlling party ~~with~~of the ~~Company, the Zhang family.~~Company.

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~~Table of Contents~~

The following related party transactions are reported for the three months and ~~six~~nine months ended ~~June~~September 30, 2008 and 2007:

Three Months Ended June 30,

Six Months Ended June 30,

2008

2007

2008

2007

PURCHASES FROM:
Ruili Group Co., Ltd. $ 10,649,765 $ 7,300,184 $ 19,153,909 $ 12,678,779
Total $ 10,649,765 $ 7,300,184 $ 19,153,909 $ 12,678,779
　　　　
SALES TO:
Ruili Group Co., Ltd. $ 1,004,231 $ — $ 1,822,149 $ 914,683
Total $ 1,004,231 $ — $ 1,822,149 $ 914,683

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
PURCHASES PRODUCT AND PACKAGING MATERIAL FROM:
Ruili Group Co., Ltd.	$	9,295,010	$	7,577,793	$	28,448,919	$	20,256,572

Total	$	9,295,010	$	7,577,793	$	28,448,919	$	20,256,572


PURCHASES PLANT AND LAND USE RIGHTS FROM :
Ruili Group Co., Ltd.	$	—	$	20,237,525	$	—	$	20,237,525
	$	—	$	20,237,525	$	—	$	20,237,525


SALES TO:
Ruili Group Co., Ltd.	$	540,304	$	—	$	2,362,453	$	914,683

Total	$	540,304	$	—	$	2,362,453	$	914,683

1. The total purchases from Ruili Group during the three months ended ~~June~~September 30, 2008 consisted of ~~$10.3~~approximately $8.0 million of finished products ~~for~~of non-valve auto parts, $1.0 million of components for valve auto parts and ~~$ 0.3~~approximately $0.3 million of packaging materials. During the ~~six~~nine months ended ~~June~~September 30, 2008, the breakdown was ~~$16.3~~$24.3 million of finished products of non-valve auto parts, ~~$2.2~~$3.2 million of components for ~~non-valve~~valve auto parts and approximately ~~$0.6~~$0.9 million of packaging ~~materials~~materials.

2. On September 28, 2007, the Company purchased land rights, a manufacturing plant, and an office building from Ruili Group for an aggregate purchase price of approximately 152 million Renminbi (“RMB”) (approximately $20.2 million translated with an exchange rate of 7.5108 RMB to $1.00 at September 28, 2007). DTZ Debenham Tie Leung Ltd., an internationally recognized appraiser, appraised the total asset value at RMB154 million (approximately $20.5 million based on with an exchange rate of 7.5108 RMB to $1.00 at September 28, 2007). The purchase price was paid by the Company by transferring to Ruili Group the Company’s $9 million investment in an existing project that includes a construction-in-progress and prepayment of land use rights. The remaining balance of $11 million was paid by the cash generated from operations and a bank credit line.

June 30,

December 31,

2008

2007

ACCOUNTS PAYABLE
Ruili Group Co., Ltd. $ 3,453,244 $ 97,503
Total $ 3,453,244 $ 97,503

OTHER CURRENT ASSETS
Ruili Group Co., Ltd. $ — $ 1,761,007
Total $ — $ 1,761,007

	September 30,		December 31,
	2008		2007
ACCOUNTS PAYABLE
Ruili Group Co., Ltd.	$	—	$	97,503
Total	$	—	$	97,503

Prepayment
Ruili Group Co., Ltd.	$	905,913	$	—
Total	$	905,913	$	—

OTHER CURRENT ASSETS
Ruili Group Co., Ltd.	$	—	$	1,761,007
Total	$	—	$	1,761,007

NOTE E - ACCOUNTS RECEIVABLE

The changes in the allowance for doubtful accounts at ~~June~~September 30, 2008 and December 31, 2007 were summarized as follows:

	September 30,		December 31,
	2008		2007
Beginning balance	$	31,296	$	8,769
Add: Increase to allowance		657,235		19,218
Less: Accounts written off
Ending balance	$	688,531	$	27,987

June 30,

December 31,

2008

2007

Beginning balance $ 27,987 $ 8,769
Add: Increase to allowance 3,309 19,218
Less: Accounts written off
Ending balance $ 31,296 $ 27,987

	September 30,			December 31,
	2008			2007
Accounts receivable	$	36,899,418		$	30,614,226
Less: allowance for doubtful accounts		(688,531	)		(27,987	)
Account receivable balance, net	$	36,210,887		$	30,586,239

June 30,

December 31,

2008

2007

Accounts receivable $ 38,894,279 $ 30,614,226
Less: allowance for doubtful accounts 　(31,296 ) (27,987 )
Account receivable balance, net $ 38,862,983 $ 30,586,239

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~~Table of Contents~~

NOTE F - INVENTORIES

On ~~June~~September 30, 2008 and December 31, 2007, inventories consisted of the following:

		June 30,		December 31,	September 30,		December 31,
		2008		2007	2008		2007
Raw Material	$	3,419,860	$	2,354,637	$	4,282,310	$	2,354,637
Work in process		698,483		4,157,643		3,987,574		4,157,643
Finished Goods		9,412,928		1,708,093		12,562,102		1,708,093
Total Inventory	$	13,531,271	$	8,220,373	$	20,831,986	$	8,220,373

NOTE G - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following, on ~~June~~September 30, 2008 and December 31, 2007:

		June 30,			December 31,		September 30,			December 31,
		2008			2007		2008			2007
Machinery	$	20,150,149		$	18,118,125		$	21,736,946		$	18,118,125
Molds		1,271,005			1,193,488			1,278,611			1,193,488
Office equipment		486,988			358,163			561,119			358,163
Vehicle		973,256			757,311			974,746			757,311
Building		7,946,761			7,462,096			7,994,313			7,462,096
Construction In Progress
Sub-Total		30,828,160			27,889,182			32,545,734			27,889,182

Less: Accumulated depreciation		(7,676,656	)		(6,094,229	)		(8,325,938	)		(6,094,229	)

Fixed Assets, net	$	23,151,504		$	21,794,953		$	24,219,797		$	21,794,953

Depreciation expense charged to operations was ~~$1,164,736~~$1,774,361 and ~~$707,617~~$1,153,615 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

NOTE H- LAND USE RIGHTS

		June 30,		December 31,	September 30,		December 31,
		2008		2007	2008		2007
Cost:	$	14,874,021	$	13,966,870	$	14,963,026	$	13,966,870
Less: Accumulated amortization:		246,531		77,165		330,675		77,165
Land use rights, net	$	14,627,491	$	13,889,705	$	14,632,351	$	13,889,705

~~- 9 -~~10

~~Table of Contents~~

According to the law of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9 million on September 28, 2007. The Company has not yet obtained the land use right certificate in the Company’s name, from the Chinese government. The Company is in the process of applying to obtain the land use right certificate. Amortization expenses were ~~$159,934~~$242,356 for the ~~six~~nine months ended ~~June~~September 30, 2008.

NOTE I - INTANGIBLE ASSETS

Intangible assets owned by the Company included patent technology and management software licenses. Gross intangible assets were ~~$ 160,770,~~$161,733, less accumulated amortization of ~~$31,250~~$35,274 for net intangible assets of ~~$ 129,520~~$126,459 as of ~~June~~September 30, 2008. Gross intangible assets were $76,150, less accumulated amortization of $25,116 for net intangible assets of $51,034 as of December 31, 2007. Amortization expenses were ~~$ 2,465~~$8,215 and ~~$2,775~~$4,325 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007 respectively. Future estimated amortization expense is as follows:

2008	2008	2009		2010			2011	2012		Thereafter		2009		2010		2011		2012		Thereafter
$	7,616	$	15,231	$	15,231	$	15,231	$	15,231	$	60,979
$ 3,791												$	15,231	$	15,231	$	15,231	$	15,231	$	64,715

NOTE J - PREPAYMENT

Prepayment consisted of the following as of ~~June~~September 30, 2008 and December 31, 2007:

		June 30,		December 31,	September 30,		December 31,
		2008		2007	2008		2007
Raw material suppliers	$	2,643,620	$	929,178	$	2,050,367	$	929,178
Equipment purchase		665,801		407,035		680,495		407,035
Total prepayment	$	3,309,421	$	1,336,212	$	2,730,862	$	1,336,212

NOTE K - BANK LOANS

Bank loans represented the following as of ~~June~~September 30, 2008 and December 31, 2007:

		June 30,			December 31,		September 30,			December 31,
		2008			2007		2008			2007
Secured	$	1,990,622		$	3,370,328		$	2,002,533		$	3,370,328
Less: Current portion	$	(1,990,622	)	$	(3,370,328	)	$	(2,002,533	)	$	(3,370,328	)
Non-current portion	$	—		$	—		$	—		$	—

NOTE L - ACCRUED EXPENSES

Accrued expenses consisted of the following as of ~~June~~September 30, 2008 and December 31, 2007:

June 30,

December 31,

2008

2007

Accrued payroll $ 971,493 $ 601,733
Other accrued expenses 2,263,477 1,258,205
Total accrued expenses $ 3,234,970 $ 1,859,938

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~~Table of Contents~~

	September 30,		December 31,
	2008		2007
Accrued payroll	$	958,938	$	601,733
Other accrued expenses		2,274,458		1,258,205
Total accrued expenses	$	3,233,396	$	1,859,938

NOTE M -– RESERVE

The reserve funds are comprised of the following:

		June 30,		December 31,	September 30,		December 31,
		2008		2007	2008		2007
Statutory surplus reserve fund	$	2,661,841	$	1,882,979	$	2,897,555	$	1,882,979
Total	$	2,661,841	$	1,882,979	$	2,897,555	$	1,882,979

Pursuant to the relevant laws and regulations of Sino-foreign joint venture enterprises, the profits of the Company's subsidiary, which are based on the subsidiary’s PRC statutory financial statements, are available for distribution in the form of cash dividends after they have satisfied all the PRC tax liabilities, provided for losses in previous years, and made appropriations to reserve funds, as determined at the discretion of the subsidiary’s board of directors in accordance with PRC accounting standards and regulations.

As stipulated by the relevant laws and regulations for enterprises operating in the PRC, the Company's Sino-foreign joint venture is required to make annual appropriations to the statutory surplus funds. In accordance with the relevant PRC regulations and the articles of association of the respective companies, the Joint Venture is required to allocate a certain percentage of its profits after taxation, as determined in accordance with PRC accounting standards applicable to the Company, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.

Net income as reported in the US GAAP financial statements differs from that as reported in the PRC statutory financial statements. Under the relevant laws and regulations in the PRC, the profits available for distribution are based on the statutory financial statements. If the Joint Venture has foreign currency available after meeting its operational needs, the Joint Venture may make its profit distributions in foreign currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval and convert such distributions at an authorized bank.

NOTE N - INCOME TAXES

The reconciliation of the effective income tax rate of the Joint Venture to the statutory income tax rate in the PRC for the ~~six~~nine months ended ~~June~~September 30, 2008 is as follows:

Statutory tax rate	25.0	%
Tax holidays and concessions	-12.5	%

Effective tax rate	12.5	%

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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 O - LEASES

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

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

	2008		2009		2010		2011		2012		Thereafter		2008		2009		2010		2011		2012		Thereafter
Buildings	$	140,082	$	280,163	$	280,163	$	280,163	$	67,975	$	—	$	69,832	$	280,163	$	280,163	$	280,163	$	67,975	$	—
Total	$	140,082	$	280,163	$	280,163	$	280,163	$	67,975	$	—	$	69,832	$	280,163	$	280,163	$	280,163	$	67,975	$	—

NOTE P - ADVERTISING COSTS

Advertising costs were ~~$ 4,261~~$4,261 and ~~$586~~$107,023 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

NOTE Q - RESEARCH AND DEVELOPMENT EXPENSE

Research and development costs are expensed as incurred and were ~~$1,736,962~~$2,458,859 and $ ~~553,672~~953,174 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

NOTE R - WARRANTY CLAIMS

Warranty claims were ~~$ 1,060,353~~$1,539, 396 and ~~$585,888~~$912,623 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. The movement of accrued warranty expenses for the ~~six~~nine months ended ~~June~~September 30, 2008 was as follows:

Beginning balance at Jan 01, 2008 $ 863,428
Accrued during the six months ended June 30, 2008: $ 1,060,353
Less: Actual Paid during the six months ended June 30, 2008: $ 706,863
Ending balance at June 30, 2008 $ 1,216,918

Beginning balance at Jan 01, 2008	$	863,428
Accrued during the nine months ended September 30, 2008:	$	1,539, 396
Less: Actual Paid during the nine months ended September 30, 2008:	$	1,172,880
Ending balance at September 30, 2008	$	1,229,944

NOTE S - STOCK COMPENSATION PLAN

　　　(1) The Company’s 2005 Stock Compensation Plan (the Plan) permits the grant of share options and shares to its employees for up to 1,700,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant.

　　　Pursuant to the Plan, the Company issued 60,000 options with an exercise price of $4.79 per share on March 1, 2006. In accordance with the vesting provisions of the grants, the options will become vested and exercisable under the following schedule.

Number of Shares	% of Shares Issued	Initial Vesting Date

60,000	100%	March 1, 2009

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


Dividend Yield		0.00	%		0.00	%
Expected Volatility		96.54	%		75.75	%
Risk-Free Interest Rate		4.59	%		4.59	%
Contractual Term		3 years			3 years
Stock Price at Date of Grant	$	4.79		$	4.79
Exercise Price	$	4.79		$	4.79

The amortization of deferred stock-based compensation for these equity arrangements was $ ~~29,818~~44,727 for the ~~six~~nine months ended ~~June~~September 30, 2008. As of ~~June~~September 30, 2008, there was ~~$ 39,753~~$24,844 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan. The cost is expected to be recognized over a period of ~~0.7~~0.4 years.

A summary of option activity under the Plan as of ~~June~~September 30, 2008 and changes during the ~~six~~nine months ended ~~June~~September 30, 2008 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

January 1, 2006		—	$	—		—	$	—		—	$	—		—	$	—
Granted		60,000		4.79		3 Years		—		60,000		4.79		3 Years		—
Exercised		—		—		—		—		—		—		—		—
Forfeited		—		—		—		—		—		—		—		—

Outstanding at June 30, 2008		60,000	$	4.79		0.7 Years	$	34,200
Outstanding at September 30, 2008										60,000	$	4.79		0.4 Years	$	—

Exercisable at June 30, 2008		—		—		—		—
Exercisable at September 30, 2008										—		—		—		—

~~(ii).~~(2) Subject to all the terms and provisions of the 2005 Stock Compensation Plan, on June 20, 2007, the Company granted to its previous senior manager of investor relations, David Ming He options to purchase 4,128 shares of its common stocks with an exercise price of $7.25 per share. The ~~option~~options became vested and exercisable immediately on the date thereof.

~~- 13 -~~

~~Table of Contents~~

Number of Shares	% of Shares Issued	Initial Vesting Date

4,128	100%	June 20, 2007

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


Dividend Yield		0.00	%		0.00	%
Expected Volatility		141.47	%		66.70	%
Risk-Free Interest Rate		5.14	%		5.14	%
Contractual Term		3 years			3 years
Stock Price at Date of Grant	$	7.09		$	7.09
Exercise Price	$	7.25		$	7.25

Total stock-based compensation expenses related to the 4,128 stock options granted amounted to $23,201. This amount is charged to ~~G&A~~general and administrative expenses during fiscal year 2007.

A summary of option activity under the Plan as of ~~June~~September 30, 2008 and changes during the ~~six~~nine months ended ~~June~~September 30, 2008 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

January 1, 2007		—	$	—		—	$	—		—	$	—		—	$	—
Granted		4,128	$	7.25		3 Years		—		4,128	$	7.25		3 Years		—
Exercised		—		—		—		—		—		—		—		—
Forfeited		—		—		—		—		—		—		—		—

Outstanding at June 30, 2008		4,128	$	7.25		2 Years	$	—
Outstanding at September 30, 2008										4,128	$	7.25		1.8 Years	$	—

Exercisable at June 30, 2008		4,128	$	7.25		2 Years	$	—
Exercisable at September 30, 2008										4,128	$	7.25		1.8 Years	$	—

~~(2)~~(3) On January 5, 2006, the Company issued 100,000 warrants which can purchase 100,000 shares of common stock for financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share. In accordance with the common stock purchase warrant agreement, the warrants became vested and exercisable immediately on the date thereof. The Company’s agreements with Maxim Group LLC and Chardan Capital Markets, LLC have been terminated.

Number of Shares	% of Shares Issued	Initial Vesting Date

100,000	100%	January 5, 2006

~~- 14 -~~

~~Table of Contents~~

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


Dividend Yield		0.00	%		0.00	%
Expected Volatility		95.01	%		77.62	%
Risk-Free Interest Rate		4.36	%		4.36	%
Contractual Term		4 years			4 years
Stock Price at Date of Grant	$	4.70		$	4.70
Exercise Price	$	6.25		$	6.25

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

A summary of option activity with respect to the warrants as of ~~June~~September 30, 2008 and changes during the ~~six~~nine months ended ~~June~~September 30, 2008 is as follows:

	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

January 1, 2006		—	$	—		—	$	—		—	$	—		—	$	—
Granted		100,000	$	6.25		4 Years		—		100,000	$	6.25		4 Years		—
Exercised		—		—		—		—		—		—		—		—
Forfeited		—		—		—		—		—		—		—		—

Outstanding at June 30, 2008		100,000	$	6.25		1.5 Years	$	—
Outstanding at September 30, 2008										100,000	$	6.25		1.3 Years	$	—

Exercisable at June 30, 2008		100,000	$	6.25		1.5 Years	$	—
Exercisable at September 30, 2008										100,000	$	6.25		1.3 Years	$	—

NOTE T- COMMITMENTS AND CONTINGENCIES

Information regarding land use rights and lease commitments is provided in Notes H and O.

~~- 15 -~~

~~Table of Contents~~

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

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

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

OVERVIEW

The Company manufactures and distributes automotive air brake valves and related components in China and internationally for use primarily in vehicles weighing over three tons, such as trucks and buses. There are forty categories of valves with over one thousand different specifications. Management believes that it is the largest manufacturer of automotive brake valves in China.

OUTLOOK

Looking to the future, management recognizes that the current condition of the global economy may present us with significant challenges to our financial condition and results of operations. The credit crisis that started in the US has spread throughout the global economy and now appears to be having an impact on the real economy. The US seems likely to experience negative economic growth over the coming year, and vehicle sales in the US have fallen off dramatically. We are seeing indications that similar trends will be felt throughout the global economy, including the automobile market of China. In September 2008, China recorded its lowest level of GDP growth in two years. We have made and are continuing to make adjustments to our business in response to the developing financial crisis. We are seeking to continue to develop the high potential market of buses and agricultural vehicles, to enhance productivity with regard to development and production of patented products and to expand our sales of systems, which have better margins than components. Meanwhile, we are also working to strengthen sales management and customer relations to help reduce risk. We will seek to consolidate our relationships with our best customers, stop selling to customers that pose significant credit risk, and develop new customers cautiously. We believe that a closer focus on risk management, cost control and improved internal management efficiency offers SORL its best opportunity to weather the anticipated market conditions and preserve profitability.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting ~~Policies”~~Policies and Estimates” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2007. There have been no material changes to the critical accounting policies and estimates since December 31, 2007.

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

Results of Operations

~~(1)~~

~~Results of operations for the three months ended June 30, 2008 as compared to the three months ended June~~(1) Results of operations for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.

SALES

	Three Months ended				Three Months ended				Three Months ended				Three Months ended
	30-Jun-08				30-Jun-07				30-Sep-08				30-Sep-07
	(U.S. dollars in millions)								(U.S. dollars in millions)
Air brake valves & related components	$	31.6	75	%	$	22.2	76	%	$	24.5	74	%	$	22.4	75	%
Non-valve products	$	10.5	25	%	$	7	24	%	$	8.5	26	%	$	7.3	25	%
Total	$	42.1	100	%	$	29.2	100	%	$	33.0	100	%	$	29.7	100	%

~~- 16 -~~

~~Table of Contents~~

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

Net sales were ~~$42,186,119~~$32,967,579 and $ ~~29,189,572~~29,703,227 for the three months ended ~~June~~September 30, 2008 and 2007, respectively. Compared with the same period of 2007, net sales for the three months ended ~~June~~September 30, 2008 increased by ~~$13.0~~$3.3 million, or ~~44.5%~~11.0%, to $ ~~42.2~~33.0 million. Although the impact of the U.S. financial crisis and weakening macroeconomic enlarged, the Company took efforts to reduce the impact and to maintain the increase of its sales. The increase in sales was a result of the increased demand for commercial vehicle parts in China and continued expansion of our export sales.

A breakdown of net sales revenue for these markets for the ~~second~~third quarter of the 2008 and 2007 fiscal years, respectively, is set forth below:

		Three Months				Three Months			Three Months				Three Months
		ended				ended			ended				ended
		30-Jun-08	%			30-Jun-07	%		30-Sep-08%				30-Sep-07%
	(U.S. dollars in millions)								(U.S. dollars in millions)
China OEM market	$	17.5	42	%	$	12	41	%	$	10.4	32	%	$	9.2	31	%
China Aftermarket	$	10.5	25	%	$	6.3	22	%	$	8.4	26	%	$	7.7	26	%
International market	$	14.1	33	%	$	10.9	37	%	$	14.1	42	%	$	12.8	43	%

Total	$	42.1	100	%	$	29.2	100	%	$	33.0	100	%	$	29.7	100	%

National transportation in China was heavily affected by significant snow storms in central and east China in the first two months of 2008, our OEM customers’ demands were sharply decreased in the first quarter. During the second quarter, ~~of 2008,~~ the national transportation system in China was recovering from the impact caused by the significant snow ~~storms occurred in the first two months of 2008.~~storms. With the approaching of implementation of the China III emission standard beginning July 1, 2008, the consumption of trucks equipped with China II engines was significantly spurred before the policy was enforced, which in turn boosted the output and sales volume of vehicles made in China. As a result, our Chinese OEM sales achieved ~~an approximately 45.8% year over year~~a strong growth ~~increasing from $12.0 million~~ in the second quarter of ~~2007 to $17.5 million.~~2008.

~~However, we take a conservative view on whether the increased consumption of trucks will continue in the coming two quarters. We think that~~Further, the additional costs required to achieve China III compliance will lead to higher vehicle prices, which will likely to discourage demand for various vehicles. ~~Further, during~~During the 2008 Beijing Olympic Games, ~~period,~~ our major customers, such as FAW Qiongdao, Beiqi Foton Zhucheng and Beiqi Foton Aumen ~~will halt~~halted production due to the traffic control in the regions around Beijing. Consequently, our ~~near-term~~ OEM sales in the third quarter of 2008 were sharply decreased compared to the second ~~half year might be cut back.~~quarter of 2008. However, our Chinese OEM sales achieved 13.0% growth, increasing from $9.2 million in the third quarter of 2007 to $10.4 million in the third quarter of 2008.

Due to our ~~well~~ established sales networks and our increased production capacity, the Company achieved total revenue of ~~$10.5~~$8.4 million in the Chinese aftermarket sales for the three months ended ~~June~~September 30, 2008, an increase of ~~$4.2~~$0.7 million, or ~~66.7%~~9.1% compared to the same period of last year.

Our export sales grew by $ ~~3.2~~1.3 million, or approximately ~~29.4%~~10.2%, to $14.1 million for the three months ended ~~June~~September 30, 2008, as compared to ~~$10.9~~$12.8 million for the same period of 2007. This increase reflects the introduction of new products, the improvement in technological support, the expansion of the contract sales force and the ~~implementation of a market plan focusing on the export market segment.~~

~~- 17 -~~

~~Table of Contents~~

attendance at more international trade shows.

COST OF SALES

Cost of sales for the three months ended ~~June~~September 30, 2008 increased to $ ~~30,776,773~~24,550,613 from $ ~~22,829,287~~23,064,724 for the same period of 2007, which was a $ ~~7,947,486~~1,485,889, or ~~34.8% increase, compared with~~6.4% increase. The Company experienced total sales growth of ~~44.5%~~11.0% for the period.

GROSS PROFIT

~~From $6,360,285 for the second quarter of 2007 to $11,409,346 for the second quarter of 2008, our~~Our gross profit grew by ~~79.4%~~26.8%, exceeding our revenue growth ~~rate.~~rate, from $6,638,503 for the third quarter of 2007 to $8,416,966 for the third quarter of 2008. Therefore, gross margin increased ~~5.2%~~3.2% for the three months ended ~~June~~September 30, 2008 to ~~27.0%~~25.5% from ~~21.8~~22.3 % for the same period of 2007.

The higher gross margin was the result of raising prices and cutting production costs. The Joint Venture continued to improve production methods in its manufacturing ~~process. This~~process, which has resulted in reducing the manufacturing cycle, reducing waste, and thereby reducing production cost. Also, favorable changes in product and market mix helped raise the average selling price of our products. For the Chinese OEM market, we have sold more system products as opposed to individual components. For the Chinese and the international aftermarkets, we have been able to pass part of our cost increases to the end users, largely due to an uptrend in the prices for truck parts from China. The successful expansion of our sales into the higher margin municipal bus market has also contributed to the gross margin improvement of the Joint Venture since the last quarter of 2007.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses were ~~$2,771,803~~$2,261,143 for the three months ended ~~June~~September 30, 2008, as compared to $ ~~1,331,643~~1,928,763 for the same period of 2007, which was an increase of $ ~~1,440,160~~332,380 or ~~108.1%~~17.2%.

Selling and distribution expenses include salaries and wages, transportation expense, packaging expense, warranty expense, expenses associated with traveling, advertising, promotions, trade shows and seminars, and other expenses. Selling and distribution expenses for the three months ended ~~June~~September 30, 2008 increased primarily due to ~~these~~the following factors:

(1)

Increased transportation ~~expense:~~expense for domestic and export sales: During the ~~second~~third quarter of 2008, transportation costs increased by ~~$601,609~~$132,201 as compared to ~~$ 335,397~~$552,453 for the same period of 2007. The increase in transportation expense was mainly due to increased sales and the rise in the transportation cost resulted from the increased price of oil and the ~~increased number of loads necessitated by the~~strict restrictions on overloading ~~control measures imposed~~implemented by the Chinese government since the third quarter of 2007.

(2)

Increased packaging expense: Packaging costs were ~~$737,920~~$658,168 for the three months ended ~~June~~September 30, 2008, which was an increase of ~~$274,166~~$173,629 as compared with the same period of 2007 ~~which~~and was consistent with the revenue growth. The increase in packaging expense was mainly due to the increased sales, the increased price of packing materials and the higher standard for packaging materials with the increased international sales in the third quarter of 2008.

(3)

Increased product warranty ~~expense.~~expense: The Company recorded ~~$612,994~~$479,042 of product warranty expenses for the three months ended ~~June~~September 30, 2008, as compared to $ ~~321,083~~326,735 for the three months ended ~~June~~September 30, 2007, which was an increase of ~~$291,911.~~$152,307. The increase was mainly due to increased sales.

~~- 18 -~~

~~Table of Contents~~

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $ ~~2,718,217~~3,018,390 for the three months ended ~~June~~September 30, 2008, as compared to $ ~~1,027,436~~1,682,071 for the same period of 2007, which was an increase of $ ~~1,690,781~~1,336,319, or ~~164.6 %~~79.4 %, mainly due to the following factors:

~~(1)~~

The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary, work insurance and welfare, travel expenses and other miscellaneous fees totaling an increase of $ 437,985(1)The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary, work insurance and welfare, travel expenses and other miscellaneous fees totaling an increase of $ 182,662 as compared to the same period of 2007.

(2)Research and development (“R&D”) expense, which is included in general and administrative expenses, increased by $340,395, as compared to $381,502 of R&D expense for the same period of 2007, as discussed below.

(3)Because of the impact of the U.S. financial crisis and weakening international macroeconomic, the Company extended the payment term accordingly for accounts receivable for our international distributors. As a result, the Company recorded more allowance for doubtful accounts.

During the three months ended September 30, 2008, the bad debt provision was $666,231, as compared to negative $163,553 for the same period of 2007.

~~(2)~~

~~R&D expense, which is included in general and administrative expenses, increased by $936,867, as compared to $330,797 of R&D expense for the same period of 2007, as discussed below.~~

~~(3)~~

During the three months ended June 30, 2007, the reversal of the bad debt provision resulted in a negative $ 234,154 for bad debt provision, which was included in the General and Administrative expenses. Even though the bad debt provision recognized during the three months ended June 30, 2008 was $ 10,450, such number combined with the negative $234,154 number results in an increase of $244,604 in General and Administrative expenses.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product ~~development. Research~~development and ~~development expenses also include~~ third-party development costs. For the three months ended ~~June~~September 30, 2008, research and development expense was $ ~~1,267,664,~~721,897, as compared to $ ~~330,797~~381,502 for the same period of 2007, for an increase of $ ~~936,867, as~~340,395. The increase in R&D expenses was a result of the Company’s enhanced research and development activities on truck electronics.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to ~~$674,504~~$695,872 for the three months ended ~~June~~September 30, 2008, compared with that of $ ~~370,097~~447,548 for the same period of 2007, an increase of ~~$304,407.~~$ 248,324. The increase in depreciation and amortization expense was primarily due to the purchase of plant and land use rights, and additional production equipment in the second half of 2007.

FINANCIAL EXPENSE

Financial expense mainly consists of interest expense and exchange loss. The financial expense for the three months ended ~~June~~September 30, 2008 ~~increased~~decreased by ~~$269,052~~$127,362 to ~~$383,320~~$221,694 from $ ~~114,268~~349,056 for the same period of 2007, which was mainly attributed to ~~a $106,725 increase in exchange loss resulted from~~ the lower outstanding average debt balance during current period and accelerated appreciation of Chinese currency against the U.S. dollar. Management is studying alternative methods for managing the risks associated with currency translation, such as the diversification of currencies used in export sales.

OTHER INCOME

Other income ~~was $222,762~~increased $158,418 to $276,752 for the three months ended ~~June~~September 30, 2008, as compared to $ ~~351,932~~118,334 for the three months ended ~~June~~September 30, ~~2007, a decrease of $129,170.The decrease~~2007. The increase was mainly due to ~~a decrease in~~$ 183,149 of subsidy income from local governments for the three months ended ~~June~~September 30, 2008. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.

INCOME TAX

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 for the three years ended December 31, 2006, 2007, and 2008. With the new PRC Enterprise Income Tax Law, effective on 1st January 2008, the Company is generally subject to a PRC income tax rate of 12.5%. In accordance with China's relevant regulations of income taxes, the Joint Venture has a benefit of a refund of 40% of domestic equipment purchases from increased income taxes for the purchasing year over those of the previous year. ~~During~~Income tax expense of $468,935 and $434,139 was recorded for the ~~second~~third quarter ended ~~June~~September 30, 2007 and ~~2008, the Joint Venture received an income tax benefit of $991,133 and 384,342 for purchase of domestic equipment, respectively, which has been reflected as a reduction to current~~

~~- 19 -~~

~~Table of Contents~~

income tax expense. As a result, income tax expense was $318,757 for the second quarter ended June 30, 2008 compared with negative $422,721 for the second quarter ended June 30, 2007, an increase of $ 741,478.2006, respectively.

STOCK-BASED COMPENSATION

On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors. The contractual term of the options is three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904. This amount is amortized over the three-year vesting period in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R. The amortization of deferred stock-based compensation for these equity arrangements was both $14,909 for the three months ended ~~June~~September 30, 2008 and 2007.

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

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the Joint Venture. Minority interest in income amounted to ~~$527,929~~$261,904 and $ ~~461,930~~239,867 for the quarters ended ~~June~~September 30, 2008 and 2007, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - Net cash provided in operating activities was ~~$1,365,797~~$2, 998,671 for the three months ended ~~June~~September 30, 2008 compared with $ ~~1,588,354~~5,914,615 of net cash provided in operating activities in the same period in 2007, which was a decrease of ~~$222,557.~~$2,915,944.

~~During~~The decrease was mainly due to the ~~three months ended June 30, 2008, our higher sales revenue resulted in~~ increased cash outflow of operation activities, which was associated with inventory and accounts ~~receivable. At the same time,~~payable.

First, in accordance with the increase in sales orders during the three months ended September 30, 2008, the Company maintained a higher level of inventory to meet the ~~requirements~~demands of sales and production. Additionally, ~~China’s metal market experienced~~the Company established more distribution warehouses close to major OEM customers and ~~is still experiencing price increases, which has resulted~~maintained some stock in ~~an increase in our level~~those warehouses to ensure timely deliveries at the request of ~~prepayments for metal raw materials. These factors resulted in~~major OEM customers. Second, the decreased accounts payable led to an increased ~~use~~cash outflow of ~~cash~~about $2.7 million, mainly due to more payments in the third quarter of approximately $2.8 million for the three months ended June 30, 2008 as compared to the same period of 2007. The increased use of cash was partly offset by the higher levels of deposits received from customers and accrued expense.2008and these payments were on normal credit terms.

As of ~~June~~September 30, 2008, the Company had cash and cash equivalents of $ ~~4,481,177,~~5, 950,987 as compared to cash and cash equivalents of $4,340,211 as of December 31, 2007. The Company had working capital of ~~$57,232,993~~$ 59,359,754 as of ~~June~~September 30, 2008, as compared to working capital of 44,715,988 as of December 31, 2007, reflecting current ratios of ~~4.18:~~4.54:1 and 4.32:1, respectively.

INVESTING - During the three months ended ~~June~~September 30, 2008, the Company expended net cash of ~~$630,146~~$1,599,786 in investing activities ~~including $552,037~~ for acquisition of property and equipment to support the growth of the business. For the three months ended ~~June~~September 30, 2007, the Company utilized ~~$3,271,641~~$12,904,287 in investing ~~activities.~~activities, mainly for acquisition of a plant, land use rights and new equipments to support the growth of the business.

FINANCING - In the ~~second~~third quarter of 2007, the cash inflows were mainly attributable to a ~~$1,492,396~~$3,159,176 increase in proceeds from borrowing due to one new secured loan ~~being secured~~ for new equipment ~~purchases. During the second quarter ended June 30, 2008, the Company received new borrowing at $1,967,686~~purchases and ~~repaid $1,037,327of its outstanding debt.~~

~~- 20 -~~

~~Table of Contents~~

working capital.

~~Management of the Company~~The Company’s management has taken a number of steps to restructure its customer base and phase out accounts which had failed to make prompt payments. The Company also placed more emphasis on receivable collection. In addition, the Company maintains good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements for the foreseeable future.

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

Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rate and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. Because of the approximately 2.3 % appreciation of the RMB against the USD during the quarter ended on ~~June~~September 30, 2008, (i) we recorded an exchange loss of ~~$243,431~~$109,578 from export sales for which the payments to us were in USD, meanwhile, (ii) we also recorded a foreign currency translation adjustment of ~~$1,899,674~~$578,065 for the quarter, a positive number due to our functional currency in RMB and the appreciation of the RMB against the USD. The Company is ~~adopting~~taking steps such ~~steps~~ as the diversification of currencies used in export sales, and the negotiation of export ~~contract~~contracts with fixed exchange ~~rate.~~rates.

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

~~(2)~~

~~Results of operations for the six months ended June 30, 2008 as compared to the six months ended June~~( 2) Results of operations for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007.

SALES

	Six Months ended				Six Months ended				Nine months ended				Nine months ended
	30-Jun-08				30-Jun-07				30-Sep-08				30-Sep-07
	(U.S. dollars in millions)								(U.S. dollars in millions)
Air brake valves & related components	$	55.7	77	%	$	41.3	77	%	$	80.2	76	%	$	63.7	76	%
Non-valve products	$	17.1	23	%	$	12.3	23	%	$	25.6	24	%	$	19.6	24	%
Total	$	72.8	100	%	$	53.6	100	%	$	105.8	100	%	$	83.3	100	%

Net sales were $ ~~72,844,561~~105,812,140 and $ ~~53,606,561~~83,309,788 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. Compared with the same period of 2007, ~~Net~~net sales for the ~~six~~nine months ended ~~June~~September 30, 2008 increased by ~~$19.2~~$22.5 million, or ~~35.9%~~27.0%, to ~~$72.8~~$105.8 million. Although the impact of the U.S. financial crisis and weakening macroeconomic enlarged, the Company took efforts to reduce the impact and to maintain the increase of its sales. The increase in sales was a result of the increased demand for commercial vehicle parts in China and continued expansion of our export sales.

~~- 21 -~~

~~Table of Contents~~

A breakdown of net sales revenue for these markets for the ~~six~~nine months ended on ~~June~~September 30, 2008 and 2007, respectively, is set forth below:

		Six Months				Six Months			Nine months					Nine months
		ended				ended			ended					Ended
		30-Jun-08	%			30-Jun-07	%		30-Sep-08		%			30-Sep-07		%
		(U.S. dollars in million)							(U.S. dollars in million)
China OEM market	$	28.2	39	%	$	20.9	39	%	$	38.6		36	%	$	30.1		36	%
China Aftermarket	$	20.4	28	%	$	13.4	25	%	$	28.8		28	%	$	21.1		25	%
International market	$	24.2	33	%	$	19.3	36	%	$	38.3		36	%	$	32.1		39	%

Total	$	72.8	100	%	$	53.6	100	%	$	105.8		100	%	$	83.3		100	%

~~Although during the first two months of 2008,~~National transportation in China was heavily affected by significant snow storms in central and east China ~~our Chinese OEM sales achieved an approximately 34.9% year-over-year growth, increasing from $20.9 million~~ in the first ~~half year~~two months of ~~2007 to $28.2 million.~~2008, our OEM customers’ demands were sharply decreased in the first quarter. During the second quarter, the national transportation system in China was recovering from the impact caused by the significant snow storms. With the approaching of implementation of the China III emission standard beginning July 1, 2008, the consumption of trucks equipped with China II engines was significantly spurred before the policy was enforced, which in turn boosted the output and sales volume of vehicles made in China. As a result, our Chinese OEM sales achieved a strong growth in the second quarter of 2008.

~~However, we take a conservative view on whether the increased consumption of trucks will continue in the next two quarters. We think that~~Further, the additional costs required to achieve China III compliance will lead to higher vehicle prices, which will likely to discourage demand for various vehicles. ~~Further, during~~During the 2008 Beijing Olympic Games, ~~period,~~ our major customers, such as FAW Qiongdao, Beiqi Foton Zhucheng and Beiqi Foton Aumen ~~will halt~~halted production due to the traffic control in the regions around Beijing. Consequently, our ~~near-term~~ OEM sales in the third quarter of 2008 were sharply decreased compared to the second ~~half year might be cutback.~~quarter of 2008. However our Chinese OEM sales achieved 28.0% growth, increasing from $30.1 million in the third quarter of 2007 to $38.6 million in the third quarter of 2008.

Due to on our ~~well~~ established sales networks and our increased production capacity, the Company achieved total revenue of ~~$20.4~~$28.8 million in Chinese aftermarket sales for the ~~six~~nine months ended ~~June~~September 30, 2008, an increase of ~~$7.0~~$7.7 million, or ~~52.2%~~36.5% as compared to the same period of last year.

Our export sales grew by ~~$4.9~~$6.24 million, or approximately ~~25.4%~~19.4% to $38.3 million for the ~~six~~nine months ended ~~June~~September 30, 2008, as compared to ~~$19.3~~$32.1 million for the same period of 2007. This increase reflects the introduction of new products, the improvement in technological support, the expansion of the contract sales force and ~~the implementation of a market plan focusing on the export market segment.~~attendance at more international trade shows..

COST OF SALES

Cost of sales for the ~~six~~nine months ended ~~June~~September 30, 2008 increased to ~~$52,793,354~~$77,343,967 from $ ~~41,555,339~~64,620,063 for the same period of 2007, which was a ~~$11,238,015~~$12,723,904, or ~~27.0% increase, compared with~~19.7% increase. The Company experienced total sales growth of 35.9% for the period.

GROSS PROFIT

~~From $ 12,051,222~~Our gross profit grew by 52.3%, exceeding our revenue growth rate, from $18,689,725 for the ~~six~~nine months of 2007 to $ ~~20,051,207~~28,468,173 for the ~~six~~nine months of ~~2008, our gross profit grew by 66.4%, exceeding our revenue growth rate.~~2008. Therefore, gross margin increased ~~5.0%~~4.5% for the ~~six~~nine months ended ~~June~~September 30, 2008 to ~~27.5%~~26.9% from ~~22.5~~22.4 % for the same period of 2007.

~~- 22 -~~

~~Table of Contents~~

The higher gross margin was the result of raising prices and cutting production costs. The Joint Venture continued to improve production methods in its manufacturing ~~process. This~~process which has resulted in reducing the manufacturing cycle, reducing waste, and thereby reducing production cost. Also, favorable changes in product and market mix helped raise the average selling price of our products. For the Chinese OEM market, we have sold more system products as opposed to individual components. For the Chinese and the international aftermarkets, we have been able to pass part of our cost increases to the end users, largely due to an uptrend in the prices for truck parts from China. The successful expansion of our sales into the higher margin municipal bus market has also contributed to the gross margin improvement of the Joint Venture since the last quarter of 2007.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses were $ ~~4,611,078~~6,872,221 for the ~~six~~nine months ended ~~June~~September 30, 2008, as compared to $ ~~2,515,290~~4,444,053 for the same period of 2007, which was an increase of $ ~~2,095,788~~2,428,168 or ~~83.3%~~54.6%.

Selling and distribution expenses include salaries and wages, transportation expense, packaging expense, warranty expense, expenses associated with traveling, advertising, promotions, trade shows and seminars, and other expenses. Selling and distribution expenses for the ~~six~~nine months ended ~~June~~September 30, 2008 increased primarily due to ~~these~~the following factors:

(1)

Increased transportation ~~expense:~~expense for domestic and export sales: During the ~~six~~nine months of 2008, transportation costs increased by ~~$865,519~~$ 997,719 as compared to ~~$584,397~~$1,136,850 for the same period of 2007. The increase in transportation expense was mainly due to increased sales and the rise in the transportation cost resulted from the increased price of oil and the ~~increased number of loads necessitated by the~~strict restriction on overloading ~~control measures imposed~~implemented by the Chinese government since the third quarter of 2007.

(2)

Increased packaging expense: Packaging costs were ~~$1,311,023~~$1,969,191 for the ~~six~~nine months ended ~~June~~September 30, 2008, which was an increase of $ ~~409,458~~583,088 as compared with the same period of 2007 ~~which~~and was consistent with the revenue growth.

The increase in packaging expense was mainly due to the increased sales, the increased price of packing materials and the higher standard for packaging materials with the increased international sales in the third quarter of 2008.

(3)

Increased product warranty ~~expense.~~expense: The Company recorded ~~$1,060,353~~$1,539,396 of product warranty expenses for the ~~six~~nine months ended ~~June~~September 30, 2008, as compared to $ ~~585,888~~912,623 for the ~~six~~nine months ended ~~June~~September 30, 2007, an increase of ~~$474,465.~~$626,773. The increase was mainly due to increased sales.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $ ~~4,694,418~~7,712,808 for the ~~six~~nine months ended ~~June~~September 30, 2008, as compared to ~~$2,720,623~~$4,402,694 for the same period of 2007, which was an increase of $ ~~1,973,795~~3,310,114 or ~~72.6%~~75.2% mainly due to the following factors:

~~(1)~~

(1)The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary, work insurance and welfare, travel expenses and other miscellaneous fees totaling an increase of $922,286 as compared to the same period of 2007.

~~(2)~~

~~R&D expense, which is included in general and administrative expenses, increased by $1,096,616, as compared to $ 553,672 of R&D expense for the same period of 2007, as discussed below.~~

(2)Research and development (“R&D”) expense, which is included in general and administrative expenses, increased by $1,523,685, as compared to $935,174 of R&D expense for the same period of 2007, as discussed below.

(3)With the impact of the U.S. financial crisis and weakening international macroeconomic, the Company extended the payment term accordingly for accounts receivable for our international distributors. As a result, the Company recorded more allowance for doubtful accounts. During the nine months ended September 30, 2008, the bad debt provision was $ 687,513, as compared to $ 23,623 for the same period of 2007.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product ~~development. Research~~development and ~~development expenses also include~~ third-party development costs. For the ~~six~~nine months ended ~~June~~September 30, 2008, research and development expense was ~~$1,736,962,~~$2,458,859, as compared to $ ~~553,672~~935,174 for the same period of 2007, anfor increase of ~~$1,183,290, as~~$1,523,685. The increase in R&D expenses was a result of the Company’s enhanced research and development activities on truck electronics.

~~- 23 -~~

~~Table of Contents~~

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to ~~$1,329,059~~$2,024,931 for the ~~six~~nine months ended ~~June~~September 30, 2008, compared with that of ~~$710,394~~$1,157,942 for the same period of 2007, which was an increase of ~~$618,665.~~$ 866,989. The increase in depreciation and amortization expense was primarily due to the purchase of plant and land use rights, and additional production equipment in the second half of 2007.

FINANCIAL EXPENSE

Financial expense mainly consists of interest expense and exchange loss. The financial expense for the ~~six~~nine months ended ~~June~~September 30, 2008 increased by ~~$495,560~~$368,198 to ~~$752,996~~$974,690 from $ ~~257,436~~606,492 for the same period of ~~2007, which~~2007.The increased interest expense was mainly attributed to ~~a $302,884 increase in~~the higher outstanding average debt balance during current period, which was largely offset by exchange loss ~~resulted from the accelerated~~owing to accelerating appreciation of Chinese currency against the U.S. dollar. Management is studying alternative methods for managing the risks associated with currency translation, such as the diversification of currencies used in export sales.

OTHER INCOME

Other income was ~~$333,840~~$610,592 for the ~~six~~nine months ended ~~June~~September 30, 2008, as compared to $ ~~384,272~~502,606 for the ~~six~~nine months ended ~~June~~September 30, 2007, ~~a decrease~~which was an increase of ~~$50,432.~~$107,986. The ~~decrease~~increase was mainly due to ~~a decrease in subsidy income from local governments for~~ the ~~six months ended June 30, 2008.~~sales of raw material scraps.

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 for the three years ended December 31, 2006, 2007, and 2008. With the new PRC Enterprise Income Tax Law, effective on 1st January 2008, the Company is generally subject to a PRC income tax rate of 12.5%. In accordance with China's relevant regulations of income taxes, the Joint Venture has a benefit of a refund of 40% of domestic equipment purchases from increased income taxes for the purchasing year over those of the previous year. During the ~~second quarter~~nine months ended ~~June~~September 30, 2007 and 2008, the Joint Venture received an income tax benefit of $991,133 and 384,342 for purchase of domestic equipment, respectively, which has been reflected as a reduction to current income tax expense. As a result, income tax expense was ~~$882,231for~~$1,351,166 for the ~~six~~nine months ended ~~June~~September 30, 2008 compared with ~~negative $60,256~~$373,883 for the ~~six~~nine months ended ~~June~~September 30, 2007, an increase of ~~$942,487.~~$977,283.

STOCK-BASED COMPENSATION

On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors. The contractual term of the options is three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904. This amount is amortized over the three-year vesting period in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R. The amortization of deferred stock-based compensation for these equity arrangements was both $ ~~29,818~~44,727 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007.

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

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the Joint Venture. Minority interest in income amounted to ~~$921,948~~$1,183,852 and $ ~~697,119~~936,986 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

~~- 24 -~~

~~Table of Contents~~

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - Net cash provided in operating activities was ~~$ 2,609,173~~$5,607,844 for the ~~six~~nine months ended ~~June~~September 30, 2008 compared with $ ~~1,694,076~~4,220,539 of net cash ~~used~~provided in operating activities in the same period in 2007, for an increase of ~~$4,303,249.~~ $ 1,387,305.

During the ~~six~~nine months ended ~~June~~September 30, 2008, ~~our higher sales revenue resulted in increased accounts receivable. At~~ the ~~same time,~~main cash inflow was from notes receivables, deposits received from customers and other current assets and liability. Cash inflow was largely offset by the following factors:

First, in accordance with the increase in sales orders during the nine months ended September 30, 2008, the Company maintained a higher level of inventory to meet the ~~requirements~~demands of sales and production. Additionally, the Company established more distribution warehouses close to major OEM customers and maintained some stock in those warehouses to ensure timely deliveries at the request of major OEM customers. As a result, cash outflow increased by about $ 7.8 million owing to increased inventory. Second, China’s metal market ~~experienced and~~ is still experiencing price increases and more vendors were requiring us to pay in advance, which has resulted in an increase in our level of prepayments for metal raw materials. ~~These factors resulted in an~~Thus, cash outflow increased ~~use of cash of approximately $5.7~~by about $ 4.6 million ~~for the six months ended June 30, 2008 as compared~~owing to ~~the same period of 2007. The~~ increased ~~use of cash was offset by the higher levels of deposits received from customers, accrued expense, accounts payable and notes payable and other current assets and liability.~~prepayments.

As of ~~June~~September 30, 2008, the Company had cash and cash equivalents of $ ~~4,481,177,~~5,950,987 as compared to cash and cash equivalents of ~~$4,340,211as~~$4,340,211 as of December 31, 2007. The Company had working capital of ~~$57,232,993~~$ 59,359,754 as of ~~June~~September 30, 2008, as compared to working capital of 44,715,988 as of December 31, 2007, reflecting current ratios of ~~4.18:~~4.54:1 and 4.32:1, respectively.

INVESTING - During the ~~six~~nine months ended ~~June~~September 30, 2008, the Company expended net cash of ~~$1,188,165 in~~$ 2,747,951in investing activities ~~including $1,109,428~~ for acquisition of property and equipment to support the growth of the business. For the ~~six~~nine months ended ~~June~~September 30, 2007, the Company utilized $ ~~5,355,276~~18,259,563 in investing activities.

FINANCING - ~~Net cash used by financing activities was $1,502,107 for~~During the ~~six~~nine months ended ~~June 30, 2008 compared to $1,492,396 used in financing activities in the same period in 2007. During the six months ended June~~September 30, 2007, the cash inflows were mainly attributable to a ~~$1,492,396~~$4,644,122 increase in proceeds from borrowing due to ~~one new~~a short term bank loan being secured for new equipment ~~purchases.~~purchases and working capital requirements. During the ~~six~~nine months ended ~~June~~September 30, 2008, the ~~Joint Venture~~Company received aggregate bank loans in the amount of $1,967,686 under its credit facilities; ~~the impact of~~ these cash inflows was offset by repayments of $3,469,793 on its outstanding debt.

Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rate and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. Because of the approximately 6.1 % appreciation of the RMB against the USD during the ~~six~~nine months ended on ~~June~~September 30, 2008, (i) we recorded an exchange loss of ~~$583,978~~$693,556 from export sales for which the payments to us were in USD, meanwhile, (ii) we also recorded a foreign currency translation adjustment of ~~$4,923,575~~$6,048,704 for the ~~six-month~~nine-month period, a positive number due to our functional currency in RMB and the appreciation of the RMB against the USD. The Company is ~~adopting~~taking steps such ~~steps~~ as the diversification of currencies used in export sales, and the negotiation of export ~~contract~~contracts with fixed exchange ~~rate.~~rates.

~~- 25 -~~

~~Table of Contents~~

OFF-BALANCE SHEET AGREEMENTS

As of ~~June~~September 30, 2008, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information is not required for smaller reporting companies.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of ~~June~~September 30, 2008, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of ~~June~~September 30, 2008, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting during the fiscal quarter ended ~~June~~September 30, 2008 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

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

~~ITEM 6. EXHIBITS~~On September 9, 2008, the Company held its Annual Meeting of Stockholders. At the Meeting, the stockholders elected Xiao Ping Zhang, Xiao Feng Zhang, Jung Kang Chang, Li Min Zhang, Zhi Zhong Wang, Yi Guang Huo and Jiang Hua Feng as directors and ratified the appointment of Rotenberg & LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008. The following table sets forth the votes for, against and votes withheld with respect to each matter.

~~EXHIBIT NO.~~1.

~~DOCUMENT DESCRIPTION~~Election of Directors

	For		Withheld
Xiao Ping Zhang		15,870,854		97,381
Xiao Feng Zhang		15,870,554		97,681
Jung Kang Chang		15,870,604		97,631
Li Min Zhang		15,870,854		97,381
Zhi Zhong Wang		15,870,544		97,691
Yi Guang Huo		15,870,844		97,391
Jiang Hua Feng		15,836,738		131,497

~~3.1~~ ⁽¹⁾2.

~~Articles~~

Ratification of ~~Incorporation~~Auditors

~~3.2~~ ⁽¹⁾

~~Bylaws~~

For		Against			Abstain
15,922,732			30,493			15,010

~~- 26 -~~27

~~Table of Contents~~

ITEM 6. EXHIBITS

EXHIBIT NO.		DOCUMENT DESCRIPTION

3.1⁽¹⁾		Certificate of Incorporation, as amended

3.2⁽¹⁾		Amended and Restated Bylaws

4.1⁽²⁾		Form of Underwriters’ Common Stock Purchase Warrants


4.2⁽²⁾		Specimen Common Stock Certificate


31.1⁽³⁾⁽¹⁾		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.


31.2⁽³⁾⁽¹⁾		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.


32.1⁽⁴⁾⁽³⁾		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer).

(1)	filed herewith.

~~(1)~~

~~Incorporated herein by reference from the Registrant’s Form 10-QSB filed with the Securities and Exchange Commission on May 28, 2003.~~

(2)	Incorporated herein by reference from the Registrant’s Registration Statement on Form S-1, Commission File ~~No. 333-137019,~~No.333-137019, as filed with the Securities and Exchange Commission on August 31, 2006.

~~(3)~~

~~Filed herewith.~~

~~(4)~~(3)

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

~~- 27 -~~28

~~Table of Contents~~

SIGNATURES

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


Dated : ~~August 13,~~November 12, 2008	SORL AUTO PARTS, INC.

		By: /s/ Xiao Ping Zhang

	Name: Xiao Ping Zhang
	Title: Chief Executive Officer


		By: /s/ Zong Yun Zhou

Name: Zong Yun Zhou
	Title: Chief Financial Officer

EXHIBIT INDEX

EXHIBIT NO.		DOCUMENT DESCRIPTION

3.1⁽¹⁾		Certificate of Incorporation, as amended

3.2⁽¹⁾		Amended and Restated Bylaws

4.1⁽²⁾		Form of Underwriters’ Common Stock Purchase Warrants

4.2⁽²⁾		Specimen Common Stock Certificate

31.1⁽¹⁾		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

31.2⁽¹⁾		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

32.1⁽³⁾		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer).

(1)	filed herewith.

(2)	Incorporated herein by reference from the Registrant’s Registration Statement on Form S-1, Commission File No.333-137019, as filed with the Securities and Exchange Commission on August 31, 2006.

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

~~- 28 -~~30


	Jun 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Assets
Current Assets
Cash and Cash Equivalents	US$	4,481,177		US$	4,340,211
Accounts Receivable, Net of Provision		38,862,983			30,586,239
Notes Receivable		12,805,169			9,410,385
Inventory		13,531,271			8,220,373
Prepayments		3,309,421			1,336,212
Other Current Assets		2,259,417			4,275,294
Total Current Assets		75,249,438			58,168,714
Fixed Assets
Property, Plant and Equipment		30,828,160			27,889,182
Less: Accumulated Depreciation		(7,676,656	)		(6,094,229	)
Property, Plant and Equipment, Net		23,151,504			21,794,953

Land Use Rights, Net		14,627,491			13,889,705

Other Assets
Deferred Compensation Cost-Stock options		39,753			69,571
Intangible Assets		160,770			76,150
Less: Accumulated Amortization		(31,250	)		(25,116	)
Intangible Assets, Net		129,520			51,034
Total Other Assets		169,273			120,605
Total Assets	US$	113,197,706		US$	93,973,977

Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable and Notes Payable		8,013,208			5,305,172
Deposit Received from Customers		3,557,350			2,079,946
Short Term Bank Loans		1,990,622			3,370,328
Income Tax Payable		732,316			373,769
Accrued Expenses		3,234,970			1,859,938
Other Current Liabilities		487,979			463,563
Total Current Liabilities		18,016,445			13,452,716
Minority Interest		9,493,164			8,024,152
Shareholders' Equity
Common Stock - $0.002 Par Value; 50,000,000 authorized,
18,279,254 Issued and Outstanding as of
June 30, 2008 and December 31, 2007 respectively		36,558			36,558
Additional Paid In Capital		37,498,452			37,498,452
Reserves		2,661,841			1,882,979
Accumulated Other Comprehensive Income		10,355,764			5,432,189
Retained Earnings		35,135,482			27,646,931
		85,688,097			72,497,109
Total Liabilities and Shareholders' Equity	US$	113,197,706		US$	93,973,977

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007

Sales	US$	42,186,119			29,189,572			72,844,561			53,606,561

Cost of Sales		30,776,773			22,829,287			52,793,354			41,555,339

Gross Profit		11,409,346			6,360,285			20,051,207			12,051,222

Expenses:
Selling and Distribution Expenses		2,771,803			1,331,643			4,611,078			2,515,290
General and Administrative Expenses		2,718,217			1,027,436			4,694,418			2,720,623
Financial Expenses		383,320			114,268			752,996			257,436
Total Expenses		5,873,340			2,473,347			10,058,492			5,493,349

Operating Income		5,536,006			3,886,938			9,992,715			6,557,873

Other Income		222,762			351,932			333,840			384,272
Non-Operating Expenses		(175,785	)		(80,550	)		(254,963	)		(84,639	)

Income (Loss) Before Provision for Income Taxes		5,582,983			4,158,320			10,071,592			6,857,506

Provision for Income Taxes		318,757			(422,721	)		882,231			(60,256	)

Net Income Before Minority Interest
& Other Comprehensive Income	US$	5,264,226			4,581,041			9,189,361			6,917,762

Minority Interest		527,929			461,930			921,948			697,119

Net Income Attributable to Shareholders		4,736,297			4,119,111			8,267,413			6,220,643

Foreign Currency Translation Adjustment		2,110,749			1,075,648			5,470,639			1,697,589

Minority Interest's Share		211,075			107,565			547,064			169,759

Comprehensive Income (Loss)		6,635,971			5,087,194			13,190,988			7,748,473

Weighted average common share - Basic		18,279,254			18,275,126			18,279,254			18,275,126

Weighted average common share - Diluted		18,287,764			18,322,260			18,288,958			18,328,526

EPS - Basic		0.26			0.23			0.45			0.34

EPS - Diluted		0.26			0.22			0.45			0.34


Beginning balance at Jan 01, 2008	$	863,428
Accrued during the six months ended June 30, 2008:	$	1,060,353
Less: Actual Paid during the six months ended June 30, 2008:	$	706,863
Ending balance at June 30, 2008	$	1,216,918