SORL Auto Parts, Inc. - FORM 10-Q/A

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EX-31.2 - SORL Auto Parts, Inc.	v203152_ex31-2.htm
EX-31.1 - SORL Auto Parts, Inc.	v203152_ex31-1.htm
EX-32.1 - SORL Auto Parts, Inc.	v203152_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A
Amendment No. 1 to

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2010

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

For the transition period from _________ to _________

Commission file number 000-11991

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

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

No. 1169 Yumeng Road

Ruian Economic Development District

Ruian City, Zhejiang Province

People’s Republic Of China

(Address of principal executive offices)

86-577-6581-7720

(Registrant’s telephone number)

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

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 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 October 30, 2010 there were 19,304,921 shares of Common Stock outstanding

SORL AUTO PARTS, INC.

FORM 10-Q/A
Amendment No. 1

For the Quarter Ended September 30, 2010

INDEX

		Page

PART I.	FINANCIAL INFORMATION (Unaudited)	1

Item 1.	Financial Statements:	1

	Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009	1

	Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2010 and 2009	2

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended September 30, 2010 and 2009	3

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	4

	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33


PART II.	OTHER INFORMATION	34


Item 6.	Exhibits	34

SIGNATURES		34

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2010 and December 31, 2009

		September 30, 2010				December 31, 2009 *
		(Unaudited)
Assets
Current Assets
Cash and Cash Equivalents	US$		2,244,711		US$		10,255,259
Accounts Receivable, Net of Provision			52,341,726				47,753,974
Notes Receivable			17,722,265				13,083,691
Inventory			27,970,237				23,943,279
Prepayments			9,558,419				7,558,140
Deferred tax assets			526,631				220,577
Other current assets			4,041,842				5,226,713
Total Current Assets			114,405,831				108,041,633
Fixed Assets
Property, Plant and Equipment			62,154,174				49,713,952
Less: Accumulated Depreciation			(21,289,024	)			(17,983,124	)
Property, Plant and Equipment, Net			40,865,150				31,730,828

Leasehold Improvements in Progress			437,161				477,681

Land Use Rights, Net			14,215,350				14,198,392

Other Assets
Deferred compensation cost-stock options			-				-
Intangible Assets			164,561				161,499
Less: Accumulated Amortization			(67,123	)			(54,380	)
Intangible Assets, Net			97,438				107,119
Total Other Assets			97,438				107,119
Total Assets	US$		170,020,930		US$		154,555,653

Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable, including $5,322 and $1,985,291 due to related parties at September 30, 2010 and December 31, 2009, respectively.	US$		6,325,153		US$		9,724,715
Deposit Received from Customers			5,110,219				3,670,369
Short term bank loans			9,383,510				-
Income tax payable			1,258,771				551,900
Accrued Expenses			5,717,555				4,206,297
Other Current Liabilities, including $107,845 and $200,762 from related parties at September 30, 2010 and December 31, 2009, respectively.			2,283,609				585,176
Total Current Liabilities			30,078,817				18,738,457

Non-Current Liabilities

Deferred tax liabilities			156,895				115,481
Total Liabilities			30,235,712				18,853,938


Stockholders' Equity

Preferred Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as of September 30, 2010 and December 31, 2009			-				-
Common Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 18,304,921 issued and outstanding as of September 30, 2010 and December 31, 2009			38,609				36,609
Additional Paid In Capital			42,199,014				55,268,604
Reserves			6,051,748				4,554,601
Accumulated other comprehensive income			13,273,727				10,939,703
Retained Earnings			64,448,912				51,390,409
Total SORL Auto Parts, Inc. stockholders' equity			126,012,010				122,189,926
Noncontrolling Interest In Subsidiaries			13,773,208				13,511,789
Total Equity			139,785,218				135,701,715
Total Liabilities and Stockholders' Equity	US$		170,020,930		US$		154,555,653

The accompanying notes are an integral part of these financial statements

* 12/31/09 Consolidated Balance Sheet has been adjusted for the acquisition of a business line under common control in the current period. Refer to Note AD for details.

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income(Unaudited)
Three Months and Nine Months Ended September 30, 2010

		Three Months Ended September 30,							Nine Months Ended September 30,
		2010			2009				2010			2009

Sales	US$		50,806,384			38,719,508		US$		144,593,338			95,110,334
Include: sales to related parties			364,669			181,873				982,266			383,484
Cost of Sales			36,279,785			27,751,213				102,081,674			67,251,392

Gross Profit			14,526,599			10,968,295				42,511,664			27,858,942

Expenses:
Selling and Distribution Expenses			3,299,914			2,783,780				9,341,056			7,187,413
General and Administrative Expenses			2,950,120			2,149,066				9,789,218			6,740,521
Research and Development Expenses			1,773,044			624,461				5,326,598			2,545,689
Financial Expenses			357,984			60,492				775,385			166,093

Total Expenses			8,381,062			5,617,799				25,232,257			16,639,716

Operating Income			6,145,537			5,350,496				17,279,407			11,219,226


Other Income			366,308			163,776				649,227			410,074
Non-Operating Expenses			(68,318	)		(61,226	)			(133,215	)		(84,506	)

Income Before Provision for Income Taxes			6,443,527			5,453,046				17,795,419			11,544,794

Provision for Income Taxes			962,210			802,124				1,780,492			2,140,055


Net Income	US$		5,481,317			4,650,922		US$		16,014,927			9,404,739

Other Comprehensive Income - Foreign Currency Translation Adjustment			1,816,535			45,431				2,593,662			86,688

Total Comprehensive Income			7,297,852			4,696,353				18,608,589			9,491,427

Less:
Net income attributable to Noncontrolling Interest In Subsidiaries			501,616			465,092				1,459,277			941,468

Other Comprehensive Income Attributable to Non-controlling Interest's Share			181,654			4,543				259,638			8,669

Total Comprehensive Income Attributable to Non-controlling Interest's Share			683,270			469,635				1,718,915			950,137

Net Income Attributable to Stockholders			4,979,701			4,185,830				14,555,650			8,463,271

Other Comprehensive Income Attributable to Stockholders			1,634,881			40,888				2,334,024			78,019

Total Comprehensive Income Attributable to Stockholders			6,614,582			4,226,718				16,889,674			8,541,290

Weighted average common share - Basic			19,304,921			18,279,254				19,162,064			18,279,254

Weighted average common share - Diluted			19,304,921			18,279,254				19,162,064			18,279,254

EPS - Basic			0.26			0.23				0.76			0.46

EPS - Diluted			0.26			0.23				0.76			0.46

The accompanying notes are an integral part of these financial statements

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30,2010

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Cash Flows from Operating Activities
Net Income		4,979,701			4,185,830			14,555,650			8,463,271
Adjustments to reconcile net income (loss) to net cash from operating activities:
Noncontrolling Interest In Subsidiaries		501,616			465,092			1,459,277			941,468
Bad Debt Expense		―			(450,102	)		888,295			2,823
Depreciation and Amortization		1,283,642			1,083,920			3,750,717			3,204,199
Stock-Based Compensation Expense		―			―			―			9,935
Loss on disposal of Fixed Assets		―			1,734			―			11,832
Changes in Assets and Liabilities:
Account Receivables		(387,028	)		(2,334,276	)		(4,440,601	)		(8,176,548	)
Notes Receivables		8,947,788			(3,146,091	)		(4,229,708	)		(3,727,096	)
Other Currents Assets		6,276,474			507,782			2,564,064			2,309,133
Inventory		(2,133,243	)		289,451			(3,485,655	)		5,009,918
Prepayments		(895,451	)		(4,513,075	)		(1,845,453	)		(5,066,567	)
Deferred tax assets		(47,649	)		161,398			(298,504	)		(180,676	)
Deferred assets		-			-			-			(465,484	)
Accounts Payable and Notes Payable		(1,050,966	)		1,204,723			(3,660,704	)		2,066,273
Income Tax Payable		5,513			1,281,330			686,379			2,704,200
Deposits Received from Customers		569,885			(249,718	)		1,350,813			(112,459	)
Other Current Liabilities and Accrued Expenses		1,257,722			(775,421	)		1,665,721			(434,702	)
Deferred tax liabilities		12,988			21,378			38,689			64,108
Net Cash Flows from Operating Activities		19,320,992			(2,266,045	)		8,998,980			6,623,628

Cash Flows from Investing Activities
Acquisition of Property and Equipment		(4,711,042	)		(960,135	)		(11,662,205	)		(1,925,637	)
Acquisition of the automotive parts business		(24,963,964	)		―			(24,963,964	)		―
Sales proceeds of disposal of fixed assets		―			―			―			36,692
Acquisition of Land Use Rights		―			―			―			―
Investment in Intangible Assets		―			―			―			―

Net Cash Flows from Investing Activities		(29,675,006	)		(960,135	)		(36,626,169	)		(1,888,945	)



Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans		4,795,871			―			9,279,449			―
Proceeds from Share Issuance		―			―			9,399,978			―
Capital contributed by Minority S/H		―			―			1,038,900			―

Net Cash flows from Financing Activities		4,795,871			―			19,718,327			―

Effects on changes in foreign exchange rate		(172,861	)		5,992			(101,686	)		11,972

Net Change in Cash and Cash Equivalents		(5,731,004	)		(3,220,188	)		(8,010,548	)		4,746,655

Cash and Cash Equivalents- Beginning of the year		7,975,715			15,762,830			10,255,259			7,795,987

Cash and cash Equivalents - End of the period		2,244,711			12,542,642			2,244,711			12,542,642

Supplemental Cash Flow Disclosures:
Interest Paid		298,277			―			298,277			13,736
Tax Paid		969,302			845,072			2,033,008			1,475,754

The accompanying notes are an integral part of these financial statements

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

For the Year Ended on December 31, 2009

	Number		Common		Additional			Reserves		Retained			Accumu. Other
	of Share		Stock		Paid-in					Earnings			Comprehensive		Shareholders'		Minority		Total Equity
					Capital					(Deficit)			Income		Equity		Interest
Beginning Balance - January 1, 2009		18,279,254		36,558		55,268,655			3,126,086		38,774,684			10,848,248		108,054,231		11,981,633		120,035,864


Net Income		-		-		-			-		14,044,240			-		14,044,240		1,519,921		15,564,161

Other Comprehensive Income(Loss)		-		-		-			-		-			91,455		91,455		10,183		101,638

Stock options exercised, net		25,667		51		(51	)		-		-			-		-		-		-

Capital contributed by Minority S/H				-		-			-		-			-		-		52		52

Transfer to reserve		-		-		-			1,428,515		(1,428,515	)		-		-		-		-

Ending Balance - December 31, 2009		18,304,921		36,609		55,268,604			4,554,601		51,390,409			10,939,703		122,189,926		13,511,789		135,701,715

The accompanying notes are an integral part of these financial statements

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Nine Months Ended September 30, 2010

	Number		Common		Additional			Reserves		Retained			Accumu. Other
	of Share		Stock		Paid-in					Earnings			Comprehensive		Shareholders'			Noncontrolling			Total Equity
					Capital					(Deficit)			Income		Equity			Interest
Beginning Balance - January 1, 2010		18,304,921		36,609		55,268,604			4,554,601		51,390,409			10,939,703		122,189,926			13,511,789			135,701,715

Net Income		-		-		-			-		14,555,650			-		14,555,650			1,459,277			16,014,927

Other Comprehensive Income(Loss)		-		-		-			-		-			2,334,024		2,334,024			259,638			2,593,662

Common stock issued in public offering		1,000,000		2,000		9,397,978			-		-			-		9,399,978			-			9,399,978

Capital contributed by Minority S/H		-		-		-			-		-			-		-			1,038,900			1,038,900

Acquisition of the automotive parts business of Ruili Group Co., Ltd.						(22,467,568	)		-		-			-		(22,467,568	)		(2,496,396	)		(24,963,964	)

Transfer to reserve		-		-		-			1,497,147		(1,497,147	)		-		-			-			-

Ending Balance - September 30, 2010		19,304,921		38,609		42,199,014			6,051,748		64,448,912			13,273,727		126,012,010			13,773,208			139,785,218

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

On November 11, 2009, the Company entered into a joint venture agreement with MGR, a Hong Kong-based global auto parts distribution specialist firm and a Taiwanese investor. The new joint venture was named SORL International Holding, Ltd. ("SIH"). SORL holds a 60% interest in the joint venture, MGR holds a 30% interest, and the Taiwanese investor holds a 10% interest. SIH is primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. Based in Hong Kong, SIH is expanding and establishing channels of distribution in international markets with SORL's primary products, including spring brake chambers, clutch servos, air dryers, relay valves and hand brake valves.

On February 8, 2010, the Company sold 1,000,000 shares of its common stock to selected institutional investors at a price of $10.00 per share pursuant to a registered direct offering. This transaction provided net proceeds of approximately $9.4 million. On March 9, 2010, through Fairford, SORL invested $9.349 million in its operating subsidiary, the Ruili Group Ruian Auto Parts Co., Ltd.(the “Joint Venture”) To maintain its 10% shareholding in the Joint Venture, the Ruili Group increased its capital investment by $1.039 million. Accordingly, SORL continues to hold a 90% controlling interest in the operating subsidiary.

On August 31, 2010, the Company, through Ruian, executed an Agreement to acquire the assets of the hydraulic brake, power steering, and automotive electrical operations of Ruili Group Co., Ltd. (the "Seller", a related party under common control). As a result of this acquisition, the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts. The purchase price was RMB 170 million, or approximately USD$25 million. The transaction was accounted for using book basis of assets acquired, consisting primarily of machinery and equipment, inventory, accounts receivable and patent rights, used or usable in connection with the segment of the auto parts business of Ruili Group Co., Ltd. The Company purchased the machinery and equipment, inventory, accounts receivable at $8.0 million, $8.0 million and $5.2 million, respectively. The Company did not acquire any of the assets of the Seller other than those in the segment of Seller's business described above. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in the additional paid-in capital of the Company.

The acquisition was accounted for as a transaction between the entities under common control because the CEO of the Company owns 63% of registered capital of Ruili Group Co., Ltd., and owns more than 50% of outstanding common stocks of SORL with his wife and brother. This results in the acquisition being accounted for using the historical costs of the financial statements of the Ruili Group Co., Ltd. The consolidated financial statements have been prepared as if the acquisition took place at the earliest time presented, that is, as of January 1, 2009. The assets purchase was deemed to be the acquisition of a business.

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 June 2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature: FASB Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”). FASB ASC 860-10-05 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. FASB ASC 860-10-05 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. As such, the Company was required to adopt this standard in January 2010. The adoption of FASB ASC 860-10-05 has not had a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued FASB ASC 810-10-05 (Prior authoritative literature: FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC 810-10-05 improves financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of prior authoritative literature FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in prior authoritative literature SFAS 166 and (2) constituent concerns about the application of certain key provisions of prior authoritative literature Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810-10-05 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. As such, the Company was required to adopt this standard in January 2010. The adoption of FASB ASC 810-10-05 has not had a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued revised authoritative guidance related to variable interest entities, which requires entities to perform a qualitative analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. The guidance also requires an ongoing reassessment of variable interests and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This guidance, which was reissued by the FASB in December 2009 as ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” amends ASC Topic 810, “Consolidation”, and became effective as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009 (January 1, 2010 for the Company). The adoption of this guidance has not had a significant impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Updated (ASU) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC 820, “Fair Value Measures and Disclosures.” ASU No. 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also require more detailed disclosure about the activity within Level 3 fair value measurements. The changes to the ASC as a result of this update are effective for annual and interim reporting periods beginning after December 15, 2009 (January 1, 2010 for the Company), except for the requirements related to Level 3 disclosures, which are effective for annual and interim reporting periods beginning after December 15, 2010 (January 1, 2011 for the Company). This guidance requires new disclosures only, and has had no impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic 855, Subsequent Events. The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. The adoption of this ASU update has no material impact on the Company’s financial statements.

NOTE D - RELATED PARTY TRANSACTIONS

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

The following related party transactions are reported for the three months and nine months ended September 30, 2010 and 2009:

	Three Months Ended September 30,				Nine Months Ended September 30,

	2010		2009		2010		2009

PURCHASES FROM:
Ruili Group Co., Ltd.	$	954,700	$	282,647	$	2,074,652	$	940,539

Total Purchases	$	954,700	$	282,647	$	2,074,652	$	940,539

SALES TO:
Ruili Group Co., Ltd.	$	364,669	$	181,873	$	982,266	$	383,484

Total Sales	$	364,669	$	181,873	$	982,266	$	383,484

On August 31, 2010, the Company through its 90%-owned subsidiary, Ruili Group Ruian Auto Parts Co., Ltd., completed the transaction of purchasing the segments of the automotive parts business of Ruili Group Co., Ltd. The purchase price was RMB 170 million, or approximately USD$25 million. The transaction was accounted for using book basis of assets acquired, consisting primarily of machinery and equipment, inventory, accounts receivable and patent rights, used or usable in connection with the segment of the auto parts business of Ruili Group Co., Ltd.

In addition, Ruian Auto Parts Co., Ltd purchased approximately $0.3 million of other automotive products and $0.7 million packaging materials from Ruili Group during the three months ended September 30, 2010. The breakdown was approximately $0.3 million of other automotive products and $1.8 million of packaging materials during the nine months ended September 30, 2010.

	September 30,		December 31,
	2010		2009

OTHER PAYABLES TO RELATED PARTIES
Ruili Group Co., Ltd.		107,845		200,762
Total		107,845		200,762
ACCOUNTS PAYABLE TO RELATED PARTIES
Ruili Group Co., Ltd.	$	5,322	$	1,985,291
Total	$	5,322	$	1,985,291

NOTE E - ACCOUNTS RECEIVABLE

The changes in the allowance for doubtful accounts at September 30, 2010 and December 31, 2009 were summarized as follows:

	September 30,			December 31,
	2010			2009
Beginning balance	$	57,823		$	24,997

Add: Increase to allowance	904,079			32,826
Less: Accounts written off		—			—
Ending balance	$	961,902		$	57,823

	September 30,			December 31,
	2010			2009
Accounts receivable	$	53,303,628		$	47,811,797
Less: allowance for doubtful accounts	(961,902		)	(57,823		)
Account receivable balance, net	$	52,341,726		$	47,753,974

NOTE F - INVENTORIES

On September 30, 2010 and December 31, 2009, inventories consisted of the following:

	September 30,		December 31,
	2010		2009
Raw Material	$	6,277,100	$	4,417,094
Work in process		3,767,626		4,573,934
Finished Goods	17,925,511		14,952,251
Total Inventory	$	27,970,237	$	23,943,279

NOTE G - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following, on September 30, 2010 and December 31, 2009:

	September 30,			December 31,
	2010			2009
Machinery	$	50,405,332		$	38,505,453
Molds		1,300,973			1,276,757
Office equipment		1,057,104			856,184
Vehicle		1,256,634			1,092,835
Building	8,134,131			7,982,723
Sub-Total	62,154,174			49,713,952

Less: Accumulated depreciation		21,289,024	)	(17,983,124)

Fixed Assets, net	$	40,865,150		$	31,730,828

Depreciation expense charged to operations was $3,440,262 and $2,874,780 for the nine months ended September 30, 2010 and 2009, respectively.

NOTE H- LEASEHOLD IMPROVEMENTS

	September 30,			December 31,
	2010			2009
Cost:	$	472,025		$	478,088
Less: Accumulated amortization:	( 34,864		)	(407		)
Leasehold Improvements In Progress, net	$	437,161		$	477,681

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

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

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

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

NOTE I- LAND USE RIGHTS

	September 30,		December 31,
	2010		2009
Cost:	$	15,224,724	$	14,941,331
Less: Accumulated amortization:	(1,009,374)		(742,939)
Land use rights, net	$	14,215,350	$	14,198,392

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. However, the Company has applied to obtain the land use right certificate. Amortization expenses were $248,901 and $247,466 for the nine months ended September 30, 2010 and 2009, respectively.

NOTE J - INTANGIBLE ASSETS

Intangible assets owned by the Company included patent technology and management software licenses. Gross intangible assets were $164,561, less accumulated amortization of $67,123 for net intangible assets of $97,438 as of September 30, 2010. Gross intangible assets were $161,499, less accumulated amortization of $54,380 for net intangible assets of $107,119 as of December 31, 2009. Amortization expenses were $11,552 and $11,485 for the nine months ended September 30, 2010 and 2009 respectively. Future estimated amortization expense is as follows:

2010				2011				2012				2013				2014				Thereafter
$	4,598			$	16,150			$	16,150			$	16,150			$	11,766			$	30,753

NOTE K - PREPAYMENT

Prepayment consisted of the following as of September 30, 2010 and December 31, 2009:

	September 30,		December 31,
	2010		2009
Raw material suppliers	$	6,879,629	$	3,059,449
Equipment purchase		2,678,790		4,498,691
Total prepayment	$	9,558,419	$	7,558,140

NOTE L - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES

Deferred tax assets consisted of the following as of September 30, 2010

	30-Sep-10		31-Dec-09
Deferred tax assets - current
Provision	$	143,515	$	7,917
Subsidiary's operating loss carryforwards		66,528		33,008
Warranty		451,158		260,295
Deferred tax assets		661,200		301,220
Valuation allowance		―		―
Net deferred tax assets - current	$	661,200	$	301,220

Deferred tax liabilities - current
Revenue (net off cost)	$	134,569	$	80,643
Deferred tax liabilities - current		134,569		80,643

Net deferred tax assets - current		526,631		220,577

Deferred tax liabilities - non-current
Land use right		156,895		115,481
Deferred tax liabilities - non-current		156,895		115,481

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

NOTE M - Bank Loans

Bank loans represented the following as of September 30, 2010 and December 31, 2009:

	September 30, 2010			December 31, 2009
Secured	$	9,383,510		$	—

Less: Current portion	$	(9,383,510	)	$	—

Non-current portion	$	—		$	—

These loans were from Agricultural Bank of China, to finance general working capital as well as new equipment acquisition. Guarantees were provided by Ruili Group Co., Ltd., a related party. The Company did not provide any sort of guarantee to any other parties. Interest rates for the loans ranged between 4.86% and 0.83% per annum. The maturity dates of the loans were March 16, 2011 and October 22, 2010, respectively.

NOTE N - ACCRUED EXPENSES

Accrued expenses consisted of the following as of September 30, 2010 and December 31, 2009:

	September 30,		December 31,
	2010		2009
Accrued payroll	$	1,858,239	$	1,536,980
Other accrued expenses		3,859,316		2,669,317
Total accrued expenses	$	5,717,555	$	4,206,297

NOTE O – RESERVE

The reserve funds are comprised of the following:

	September 30,		December 31,
	2010		2009
Statutory surplus reserve fund	$	6,051,748	$	4,554,601
Total	$	6,051,748	$	4,554,601

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

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

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

NOTE P - INCOME TAXES

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws. According to applicable tax laws regarding Sino-Foreign Joint Venture, the Joint Venture is exempted from income taxes in the PRC for the fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture is entitled to a 50% income tax deduction for the following three years ended December 31, 2006, 2007, and 2008. As a result of the Joint Venture obtaining its Sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% for the two years ended December 31, 2006 and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st January 2008, the China’s enterprises are generally subject to a PRC income tax rate of 25% and the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 25% for the year ended December 31, 2008.

Additionally, the Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture is eligible for additional preferential tax treatment. For the years 2007 and 2008, the Joint Venture entitled to an income tax exemption on all pre-tax income generated by the company above its pre-tax income generated in the fiscal year 2006. Thereafter, the Joint Venture will enjoy a 50% exemption from the effective income tax rate on any pre-tax income above its 2006 pre-tax income, to be recognized in the years 2009, 2010 and 2011. The above taxation exemption was superseded, because the Joint Venture has been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate of 15% for years 2009 through 2011. So, the Company’s effective income tax rate will be 15% for years 2009 through 2011.

The reconciliation of the effective income tax rate of the Joint Venture to the statutory income tax rate in the PRC for the third quarter of 2010 and 2009 is as follows:

	Sep-30-2010			Sep-30-2009
Statutory tax rate		25.0	%		25.0	%
Tax holidays and concessions		-10	%		-10	%

Effective tax rate		15	%		15	%

	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Computed income tax provision at the statutory rate	$	2,692,572		$	1,731,719
Tax refund		(903,699	)		(694,843	)
Deferred tax provision		(259,993	)		(116,568	)
Current period permanent differences and other reconciling items		251,612			1,219,747

Total income taxes	$	1,780,492		$	2,140,055

Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes Significant components of the Company’s net deferred tax assets and liabilities are approximately as follows at December 31,2009. No valuation allowance is deemed necessary. There currently is no tax benefit or burden recorded for the United States. The tax authority may examine the tax returns of the Company three years after the year ended. In the year of 2009, there were no penalties and interest, which generally are recorded in the general and administrative expenses or in the tax expenses. The provisions for income taxes for the nine months ended September 30, 2010 and 2009, respectively, are summarized as follows:

	Sep-30-2010			Sep-30-2009

Current	$	2,040,485		$	2,256,623
Deferred		(259,993	)		(116,568	)

Total	$	1,780,492		$	2,140,055

The Company adopted the provisions of FASB ASC 740-10 (Prior authoritative literature: FIN No. 48, Accounting for Uncertainty in Income Taxes), on January 1, 2007. As the result of the implementation of the FASB ASC 740-10, Accounting for Uncertainty in Income Taxes – In Interpretation of FASB ASC 740-10 (Prior authoritative literature: FASB Statement No. 109), the Company recognized no material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2007 and as of September 30, 2010 and 2009, the Company has no unrecognized tax benefits.

NOTE Q - Non-controlling interest in subsidiaries

Non-controlling interest in subsidiaries represents a 10% non-controlling interest, owned by the Company’s Joint Venture Partner, in the Chinese located Joint Venture, and a 40% non-controlling interest, owned by the Company’s Joint Venture Partners, in the Hong Kong located Joint Venture. Net income attributable to non-controlling interests in subsidiaries amounted to $1,459,277 and $941,468 for the nine months ended September 30, 2010 and 2009, respectively.

	Sep-30-2010			Sep-30-2009
10% non-controlling interest in Ruian	$	1,647,133		$	941,468
40% non-controlling interest in SIH	$	(187,856	)		―

Total	$	1,459,277			941,468

NOTE R - LEASES

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

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

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

In August 2010, a new a lease agreement was signed between the Joint Venture and Ruili Group Co., Ltd., the Joint Venture leased 32410 square meters manufacturing plant for its new purchased passenger vehicles brake systems business. The lease term is from September 2009 to August 2020.

All abovementioned leases are operating leases. Future minimum rental payments for the years ending December 31 are as follows:

	2010		2011		2012		2013		2014		Thereafter
Lease Commitments	$	305,683	$	1,140,666	$	910,180	$	841,897	$	841,897	$	4,404,811

Total	$	305,683	$	1,140,666	$	910,180	$	841,897	$	841,897	$	4,404,811

NOTE S - ADVERTISING COSTS

Advertising costs were $146,873 and $2,532 for the nine months ended September 30, 2010 and 2009, respectively.

NOTE T- RESEARCH AND DEVELOPMENT EXPENSE

Research and development costs are expensed as incurred and were $5,326,598 and $2,545,689 for the nine months ended September 30, 2010 and 2009, respectively.

NOTE U - WARRANTY CLAIMS

Warranty claims were $2,036,353 and $1,289,067 for the nine months ended September 30, 2010 and 2009, respectively. Warranty claims are classified as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the nine months ended September 30, 2010 was as follows:

Beginning balance at January 01, 2010	1,735,301
Aggregate reduction for payments made	(763,941	)
Aggregate increase for new warranties issued during current period	2,036,353
Aggregate changes in the liability related to pre-existing warranties (changes in estimate)	―
Ending balance at September 30, 2010:	3,007,713

NOTE V – SEGMENT INFORMATION

The Company produces brake systems and other related components (“commercial vehicles brake systems, etc.”) for different types of commercial vehicles. On August 31, 2010, the Company through its 90%-owned subsidiary, Ruili Group Ruian Auto Parts Co., Ltd., executed an Asset Purchase Agreement to acquire, and purchased, the segment of the passenger vehicle auto parts business (“passenger vehicles brake systems, etc.”) of Ruili Group Co., Ltd. As a result of this acquisition, the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts.

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

Net sales from our Chinese market of commercial vehicles brake systems, etc. were $32.8 million and $26.1 million for the three months ended September 30, 2010 and 2009, respectively. Net sales from international market of commercial vehicles brake systems, etc. were $11.8 million and $7.8 million for the three months ended September 30, 2010 and 2009, respectively.

Net sales from our Chinese market of passenger vehicles brake systems, etc. were $8.0 million and $7.8 million for the three months ended September 30, 2010 and 2009, respectively. Net sales from international market of passenger vehicles brake systems, etc. were $2.3 million and $0.9 million for the three months ended September 30, 2010 and 2009, respectively. Because of both $4.0 million elimination of inter-company sales for the three months ended September 30, 2010 and 2009, the consolidated sales were $50.8 million and $38.7 million for the three months ended September 30, 2010 and 2009, respectively.

Net sales from our Chinese market of commercial vehicles brake systems, etc. were $96.2 million and $63.1 million for the nine months ended September 30, 2010 and 2009, respectively. Net sales from international market of commercial vehicles brake systems, etc. were $32.3 million and $20.8 million for the nine months ended September 30, 2010 and 2009, respectively.

Net sales from our Chinese market of passenger vehicles brake systems, etc. were $26.6 million and $18.9 million for the nine months ended September 30, 2010 and 2009, respectively. Net sales from international market of passenger vehicles brake systems, etc. were $4.5 million and $3.4 million for the nine months ended September 30, 2010 and 2009, respectively. Because of $15.1 million and $11.2 million elimination of inter-company sales for the nine months ended September 30, 2010 and 2009, the consolidated sales were $144.6 million and $95.1 million for the nine months ended September 30, 2010 and 2009, respectively.

Net Income Attributable to Stockholders of commercial vehicles brake systems, etc. were $4.7 million and $3.8 million for the three months ended September 30, 2010 and 2009, respectively. Net Income Attributable to Stockholders of commercial vehicles brake systems, etc. were $13.2 million and $7.8 million for the nine months ended September 30, 2010 and 2009, respectively.

Net Income Attributable to Stockholders of passenger vehicles brake systems, etc. were $0.3 million and $0.4 million for the three months ended September 30, 2010 and 2009, respectively. Net Income Attributable to Stockholders of passenger vehicles brake systems, etc. were $1.3 million and $0.7 million for the nine months ended September 30, 2010 and 2009, respectively.

Total assets of commercial vehicles brake systems, etc. and passenger vehicles brake systems, etc. were $133.4 million and $21.2 million as of December 31, 2009, respectively.

The consolidated income before taxes was equal to the total of income before taxes of commercial vehicles brake systems, etc. and passenger vehicles brake systems, etc.

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

For the three months ended September 30, 2010, the Company’s three biggest customers were Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works which accounted for approximately 6.7%, 6.1% and 4.1% of total sales revenue, respectively. For the three months ended September 30, 2009, Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works accounted for approximately 8.6%, 8.2% and 5.5% of our total sales revenue, respectively.

For the Nine Months ended September 30, 2010, the Company’s three biggest customers were Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works which accounted for approximately 8.9%, 8.4% and 4.6% of total sales revenue, respectively. For the three months ended September 30, 2009, Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works accounted for approximately 9.6%, 6.5% and 3.6% of our total sales revenue, respectively.

NOTE W – PURCHASE DISCOUNT

Purchase discounts represent discounts received from vendors for purchasing raw materials. The Company did not receive any purchase discounts during the nine months ended September 30, 2010 and 2009.

NOTE X – SHIPPING AND HANDLING COSTS

Shipping and handling costs incurred by the Company are included in selling expenses in the accompanying consolidated statements of income. Shipping and handling costs were $2,471,534 and $1,543,344 for the nine month ended September 30, 2010 and 2009, respectively.

NOTE Y – STOCK COMPENSATION PLAN

The amortization of deferred stock-based compensation was $0 and $9,935 for the nine month ended September 30, 2010 and 2009, respectively. There were no employee stock options or warrants outstanding as of September 30, 2010.

NOTE Z- COMMITMENTS AND CONTINGENCIES

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

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

NOTE AA - OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2010, we do not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

NOTE AB – RECLASSIFICATION OF PRIOR YEAR FINANCIAL STATEMENTS

For the nine month ended September 30, 2010, the Company has reclassified Research and Development Expenses and Deferred Tax Assets/Liabilities to facilitate a year over year comparison with the same period of 2009.

NOTE AC – THE ACQUISITION AND COMBINATION OF OPERATIONS REPORTING

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

NOTE AD – BUSINESS ACQUISITION

On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased the assets of the hydraulic brake, power steering, and automotive electrical operations parts business of the Seller. Consideration paid amounted to RMB 170 million or approximately USD$25 million. The acquisition has been accounted for as a common control transaction at carrying amounts. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in the additional paid-in capital of the Company.

Consolidated Balance Sheets

December 31, 2009

					Acquired auto parts business			Combined
		December 31, 2009			December 31, 2009			December 31, 2009
		(Audited)			(Unaudited)
Assets
Current Assets
Cash and Cash Equivalents	US$		10,255,259			-			10,255,259
Accounts Receivable, Net of Provision			44,546,107			3,207,867			47,753,974
Notes Receivable			13,083,691			-			13,083,691
Inventory			18,760,724			5,182,555			23,943,279
Prepayments			7,558,140			-			7,558,140
Deferred tax assets			220,577			-			220,577
Other current assets			444,281			4,782,432			5,226,713
Total Current Assets			94,868,779			13,172,854			108,041,633
Fixed Assets
Property, Plant and Equipment			35,335,958			14,377,994			49,713,952
Less: Accumulated Depreciation			(11,608,920	)		(6,374,204	)		(17,983,124	)
Property, Plant and Equipment, Net			23,727,038			8,003,790			31,730,828

Leasehold Improvements in Progress			477,681			-			477,681

Land Use Rights, Net			14,198,392			-			14,198,392

Other Assets
Deferred compensation cost-stock options			-			-			-
Intangible Assets			161,499			-			161,499
Less: Accumulated Amortization			(54,380	)		-			(54,380	)
Intangible Assets, Net			107,119			-			107,119
Total Other Assets			107,119			-			107,119
Total Assets	US$		133,379,009			21,176,644			154,555,653

Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable	US$		9,724,715			-			9,724,715
Deposit Received from Customers			3,670,369			-			3,670,369
Short term bank loans			-			-
Income tax payable			551,900			-			551,900
Accrued Expenses			4,206,297			-			4,206,297
Other Current Liabilities			585,176			-			585,176
Total Current Liabilities			18,738,457			-			18,738,457

Non-Current Liabilities

Deferred tax liabilities			115,481			-			115,481
Total Liabilities			18,853,938			-			18,853,938


Stockholders' Equity

SORL Auto Parts, Inc. stockholders' equity			103,130,946			19,058,980			122,189,926
Noncontrolling Interest In Subsidiaries			11,394,125			2,117,664			13,511,789
Total Equity	US$		114,525,071			21,176,644			135,701,715
Total Liabilities and Stockholders' Equity	US$		133,379,009			21,176,644			154,555,653

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.

To facilitate the analysis our financial performance, we provide the comparison of the financial results excluding the business acquired from Ruilin Group with our previously quarterly filings. Please note that the financial results excluding the acquired business of Ruilin Group, as discussed below, including the financial result of the acquired business from September 1, 2010.

OVERVIEW

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2009.

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

Results of Operations

(1) Results of operations for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009.

SALES

	Three Months ended				Three Months ended
	30-Sept-10				30-Sept-09
	(U.S. dollars in millions)
Commercial vehicles brake systems, etc.	$	40.0	79	%	$	29.9	77	%
Passenger vehicles brake systems, etc.	$	10.8	21	%	$	8.8	23	%

Total	$	50.8	100	%	$	38.7	100	%

Sales consist of brake systems and other key safety-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 related parties.

Net sales were $50,806,384 and $38,719,508 for the three months ended September 30, 2010 and 2009, respectively, an increase of $12.1 million or 31.2%.

Net sales excluding acquired business of Ruili Group were $47,851,974 and $33,989,937 for the three months ended September 30, 2010 and 2009, respectively, an increase of $13.9 million or 40.8%.

A breakdown of net sales revenue for these markets for the third quarter of the 2010 and 2009 fiscal years, respectively, is set forth below:

	Three Months		Percent			Three Months		Percent
	ended		of			ended		of			Percentage
	30-Sep-10		Total Sales			30-Sep-09		Total Sales			Change
	(U.S. dollars in million)
China OEM market	$	27.0		53	%	$	20.6		53	%		31.1	%
China Aftermarket	$	9.8		19	%	$	9.4		24	%		4.3	%
International market	$	14.0		28	%	$	8.7	22%				60.9	%
Total	$	50.8		100	%	$	38.7		99	%

During the third quarter of 2010, we benefited from the robust growth of China’s economic and automobile industry. Further, we promoted our integrated system and modular supplies of air brake systems to our OEM customers and we increasingly focused on the light duty, bus and agricultural vehicle market in 2010. As a result of these positive factors, our sales to the Chinese OEM market increased by $6.4 million or 31.1%, to $27.0 million for the third quarter of 2010, compared to $20.6 million for the same period of 2009.

We achieved total revenue of $9.8 million in Chinese aftermarket sales for the three months ended September 30, 2010, a slight increase compared to $9.4 million for the same period of 2009. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive the increase in our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the nine months ended September 30, 2010. We will continue with our strategies to further optimize our sales network, to help further penetrate into new markets. Also, we will continue to focus on investing in new product development for both the OEM market and the aftermarket, as a means to increase our sales.

The third quarter is the second consecutive quarter of growth in the manufacture of commercial vehicles in all the regions of the world. With the recovery of global economy and customers' confidence in the growth of economy in 2010, our export sales increased by $5.3 million or 60.9%, to $14.0 million for the third quarter of 2010, as compared to $8.7 million for the same period of 2009.

Our sales to the Chinese OEM market excluding acquired business of Ruili Group were $25.0 million and $17.4 million for the three months ended September 30, 2010 and 2009, respectively, an increase of 43.7%.

Our Chinese aftermarket sales excluding acquired business of Ruili Group were $9.4 million and $8.7 million for the three months ended September 30, 2010 and 2009, respectively, an increase of 8.0%.

Our export sales excluding acquired business of Ruili Group were $13.4 million and $7.8 million for the three months ended September 30, 2010 and 2009, respectively, an increase of 71.8%.

COST OF SALES AND GROSS PROFIT

Cost of sales for the three months ended September 30, 2010 were $36,279,785 an increase of $8,528,572 or 30.7% from $27,751,213 for the same period last year. Our gross profit increased by 32.4% from $10,968,295 for the third quarter of 2009 to $14,526,599 for the third quarter of 2010.

Gross margin increased to 28.6% from 28.3% for the three months ended September 30, 2010 compared with 2009. We focused on increasing management efficiency, improving the technologies of our products, and improving our product portfolio. We believe that our continued expansion to the higher-profit new valve products will also help us to maintain or increase our gross profit margins.

Cost of sales excluding acquired business of Ruili Group for the three months ended September 30, 2010 were $34,477,077, an increase of $9,360,468 or 37.3% from $25,116,609 for the same period last year. Our gross profit increased by 50.7% from $8,873,328 for the third quarter of 2009 to $13,374,897 for the third quarter of 2010.

Gross margin excluding acquired business of Ruili Group increased to 28.0% from 26.1% for the three months ended September 30, 2010 compared with 2009.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses were $3,299,914 for the three months ended September 30, 2010, as compared to $2,783,780 for the same period of 2009, an increase of $516,134 or 18.5%.

The increase was mainly due to the increased transportation expense and accrued warranty expenses as a result of increased sales. As a percentage of sales revenue, selling expenses decreased to 6.5% for the three months ended September 30, 2010, as compared to 7.2% for the same period in 2009.

Selling and distribution expenses excluding acquired business of Ruili Group were $2,689,478 for the three months ended September 30, 2010, as compared to $2,131,054 for the same period of 2009, an increase of $558,424 or 26.2%.

As a percentage of sales revenue, selling expenses excluding acquired business of Ruili Group decreased to 5.6% for the three months ended September 30, 2010, as compared to 6.3% for the same period in 2009.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $2,950,120 for the three months ended September 30, 2010, as compared to $2,149,066 for the same period of 2009, an increase of $801,054 or 37.3%. The increase was mainly due to increased welfare costs for business expansion in the third quarter of 2010. During the three months ended September 30, 2009, we reversed a bad debt provision resulting from collecting a significant portion of accounts receivable, which had been reflected as a reduction to general and administrative expenses. As a percentage of sales revenue, general and administrative expenses increased to 5.8% for the three months ended September 30, 2010, as compared to 5.6% for the same period in 2009.

General and administrative expenses excluding acquired business of Ruili Group were $2,535,193 for the three months ended September 30, 2010, as compared to $1,393,971 for the same period of 2009, an increase of $1,141,222 or 81.9%. As a percentage of sales revenue, general and administrative expenses increased to 5.3% for the three months ended September 30, 2010, as compared to 4.1% for the same period in 2009.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the three months ended September 30, 2010, research and development expense was $1,773,044, as compared to $624,461 for the same period of 2009, an increase of $1,148,583. The Company will continue to invest in new product development, particularly in upgrading traditional valve products and in developing electronically controlled products.

For the three months ended September 30, 2010, research and development expense excluding acquired business of Ruili Group was $1,635,421, as compared to $410,397 for the same period of 2009.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $1,283,642 for the three months ended September 30, 2010, compared with that of $1,083,920 for the same period of 2009, an increase of $199,722. The increase in depreciation and amortization expense was primarily due to the purchase of production equipment.

FINANCIAL EXPENSE

Financial expense mainly consists of interest expense and exchange loss. The financial expense for the three months ended September 30, 2010 increased by $297,492 to $357,984 from $60,492 for the same period of 2009, which was mainly attributed to fluctuations in the exchange rate between U.S. dollars and RMB. Management is studying alternative methods for managing its risks associated with currency translation, such as the diversification of currencies used in export sales.

The financial expense excluding acquired business of Ruili Group for the three months ended September 30, 2010 increased by $311,087 to $348,303 from $37,216 for the same period of 2009.

OTHER INCOME

Other income was $366,308 for the three months ended September 30, 2010, as compared to $163,776 for the three months ended September 30, 2009, an increase of $202,532. The increase was mainly due to more subsidies received from local governments for the three months ended September 30, 2009. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.

Other income excluding acquired business of Ruili Group was $192,459 for the three months ended September 30, 2010, as compared to $121,567 for the three months ended September 30, 2009.

INCOME TAX

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws. According to applicable tax laws regarding Sino-Foreign Joint Ventures, the Joint Venture was exempt from income taxes in the PRC for each of the fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled to a 50% income tax deduction for each of the three years ended December 31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005, and entitled to a tax concession of 50% of the applicable income tax rate of 26.4% for the two years ended December 31, 2006 and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st January 2008, China’s enterprises are generally subject to a PRC income tax rate of 25% and the Joint Venture was entitled to a tax concession of 50% of the applicable income tax rate of 25% for the year ended December 31, 2008.

The Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in the fiscal year 2006. In 2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the applicable income tax rate of 25% on any pre-tax income above its 2006 pre-tax income. The above taxation exemption was superseded, because the Joint Venture has been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate of 15% for years 2009 through 2011. So, the effective income tax rate will be 15% for years 2009 through 2011.

During the three months ended September 30, 2010 and 2009, the Joint Venture received an income tax benefit of $0 and $694,843 in accordance with PRC preferential income tax policy regarding the purchase of domestically manufactured equipment, which is subject to assessment and approval from the local state tax bureau. Income tax expense of $962,210 and $802,124 was recorded for the quarters ended September 30, 2010 and 2009, respectively.

Income tax expense excluding acquired business of Ruili Group of $940,154 and $728,322 was recorded for the quarters ended September 30, 2010 and 2009, respectively.

STOCK-BASED COMPENSATION

On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors. The contractual term of the options was three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904. This amount was amortized over the three year vesting period in a manner consistent with FASB ASC 505-50. The amortization of deferred stock-based compensation for these equity arrangements were $0 and $0 for the three months ended September 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000 options had expired unexercised.

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 stock with an exercise price of $7.25 per share. In accordance with the agreement, the option became vested and exercisable immediately on the date thereof. Total deferred stock-based compensation expenses related to the 4,128 stock options granted amounted to $23,201. This amount was charged to General and administrative expenses during the fiscal year ended December 31, 2007. On November 13, 2009, David Ming He exercised the options on a cashless basis and received 460 shares of common stock, based on a formula provided for in the initial grant.

On January 5, 2006, the Company issued 100,000 warrants for financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share. In accordance with the common stock purchase warrant agreement, the warrants became vested and exercisable immediately on the date thereof. As set forth in the agreement, the Company had retained Maxim Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors and investment bankers for a period of twelve months from the date of January 5, 2006. The agreement has now expired. Total expense associated with the 100,000 warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was recognized during the fiscal year ended December 31, 2006.

On November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and 35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the warrants on a cashless basis on November 12, 2009 and received 6,609 shares of common stock, based on a formula provided for in the initial grant. Maxim Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000 warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11, 2009, respectively. OTA LLC exercised the warrants on a cashless basis on December 18, 2009 and received 18,598 shares of common stock, based on a formula provided for in the initial grant.

There were no options or warrants outstanding as of September 30, 2010.

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

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our Joint Venture Partners. Non-controlling interest in subsidiaries amounted to $501,616 and $465,092 for the third quarter ended September 30, 2010 and 2009, respectively.

Non-controlling interest in subsidiaries excluding acquired business of Ruili Group amounted to $489,118 and $423,271 for the third quarter ended September 30, 2010 and 2009, respectively.

NET INCOME ATTRIBUTABLE TO STOCKHOLDERS

The net income attributable to stockholders for the quarter ended September 30, 2010 increased by $793,871, to $4,979,701 from $4,185,830 for the quarter ended September 30, 2009 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the quarter ended September 30, 2010 and 2009, were $0.26 and $0.23 per share, respectively.

The net income attributable to stockholders excluding acquired business of Ruili Group for the quarter ended September 30, 2010 increased by $1,057,781, to $4,867,219 from $3,809,438 for the quarter ended September 30, 2009 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the quarter ended September 30, 2010 and 2009, were $0.25 and $0.21 per share, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - Net cash generated from operating activities was $19,320,992 for three months ended September 30, 2010 compared with negative $2,266,045 in the same period in 2009, an increase of $21,587,037, primarily due to the decreased cash outflow resulted by changes in notes receivable and prepayments. The decreases in notes receivable mainly due to the notes matured in the third quarter of 2010.

At September 30, 2010, the Company had cash and cash equivalents of $2,244,711, as compared to cash and cash equivalents of $10,255,259 at December 31, 2009. The Company had working capital of $84,327,014 at September 30, 2010, as compared to working capital of $89,303,176 at December 31, 2009, reflecting current ratios of 3.8:1 and 5.77:1, respectively.

INVESTING - The Company expended more cash for investing activities in the third quarter of 2010 than in the third quarter of 2009. During the three months ended September 30, 2009, the Company expended net cash of $960,135 in investing activities. For the three months ended September 30, 2010, the Company utilized $29,675,006 in investing activities for acquisition of the segments of the automotive parts business of the Seller, discussed above, and new equipment to support the growth of our business.

FINANCING - During the third quarter ended September 30, 2010, after repaying loans the Company received aggregate bank loans in the amount of $4,795,871 under its credit facilities. The Company had no borrowings under its credit facilities during the quarter ended September 30, 2009.

Management of the Company has taken a number of steps to restructure its customer base and phase out accounts which had failed to make prompt payments. The Company also placed more emphasis on collection of accounts receivable from our customers. During the second quarter of 2010, the Company continued developing higher profit margin new products, and adopting steps for further cost saving such as improving material utilization rate. Meanwhile, the Company maintains good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements for the foreseeable future.

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

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

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

( 2) Results of operations for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009.

SALES

	Nine months ended				Nine months ended
	30-Sep-10				30-Sep-09
	(U.S. dollars in millions)
Commercial vehicles brake systems, etc.	$	112.4	78	%	$	71.9	76	%
Passenger vehicles brake systems, etc.	$	32.2	22	%	$	23.1	24	%

Total	$	144.6	100	%	$	95.0	100	%

Net sales were $144,593,338 and $95,110,334 for the nine months ended September 30, 2010 and 2009, respectively, an increase of $49.5 million or 52.0%.

Net sales excluding acquired business of Ruili Group were $131,854,257 and $83,973,887 for the nine months ended September 30, 2010 and 2009, respectively, an increase of $47.9 million or 57.0%.

A breakdown of net sales revenue for these markets for the nine months ended September 30, 2010 and 2009 fiscal years, respectively, is set forth below:

	Nine months		Percent			Nine months		Percent			Percentage
	ended		of			ended		of			Change
	30-Sep-10		Total Sales			30-Sep-09		Total Sales
	(U.S. dollars in million)
China OEM market	$	84.6		59	%	$	46.7		49	%		81.2	%
China Aftermarket	$	23.2		16	%	$	24.1		25	%		-3.7	%
International market	$	36.8		25	%	$	24.2		25	%		52.1	%
Total	$	144.6		100	%	$	95.0		99	%	%

During the nine months of 2010, we benefited from the robust growth of China’s economy and automobile industry. Further, we promoted our integrated system and modular supplies of air brake systems to our OEM customers and we increasingly focused on the light duty, bus and agricultural vehicle market in 2010. As a result of these positive factors, our sales to the Chinese OEM market increased by $37.9 million to $84.6 million for the nine months of 2010, compared to $46.7 million for the same period of 2009.

We achieved total revenue of $23.2 million in Chinese aftermarket sales for the nine months ended September 30, 2010, a slight decrease compared to $24.1 million for the same period of 2009. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive the increase in our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the nine months of 2010. We will continue with our strategies to further optimize our sales network, to help further penetrate into new markets. Also, we will continue to focus on investing in new product development for both the OEM market and the aftermarket, as a means to increase our sales.

In prior periods, the global financial crisis negatively affected our international customers and caused many world currencies to depreciate against the US dollar, while the lack of confidence in the growth of the world macro-economy caused our customers to decrease their inventories in order to lower their risk in the nine months of 2009. With the recovery of global economy and customers' confidence in the growth of economy in 2010, our export sales increased by $12.6 million or 52.1%, to $36.8 million for the nine months ended September 30, 2010, as compared to $24.2 million for the same period of 2009.

Our sales to the Chinese OEM market excluding acquired business of Ruili Group were $75.4 million and $40.7 million for the nine months ended September 30, 2010 and 2009, respectively, an increase of 85.3%.

Our Chinese aftermarket sales excluding acquired business of Ruili Group were $22.5 million and $22.4 million for the nine months ended September 30, 2010 and 2009, respectively, an increase of 0.4%.

Our export sales excluding acquired business of Ruili Group were $33.9 million and $20.8 million for the nine months ended September 30, 2010 and 2009, respectively, an increase of 63.0%.

COST OF SALES AND GROSS PROFIT

For the nine months ended September 30, 2010, cost of sales was $102,081,674, an increase of $34,830,282, or 51.8% from $67,251,392 for the same period last year. Our gross profit increased by 52.6% from $27,858,942 for the nine months ended September 30, 2009 to $42,511,664 for the nine months ended September 30, 2010.

Gross margin increased by 0.1% for the nine months ended September 30, 2010, to 29.4% from 29.3% for the same period of 2009. We focused on increasing management efficiency, improving the technologies of our products, and improving our product portfolio. We believe that our continued expansion to the higher-profit new valve products will also help us to maintain or increase our gross profit margins.

For the nine months ended September 30, 2010, cost of sales excluding acquired business of Ruili Group was $95,352,037, an increase of $34,185,804, or 55.9% from $61,166,233 for the same period last year. Our gross profit increased by 60.0% from $22,807,654 for the nine months ended September 30, 2009 to $36,502,220 for the nine months ended September 30, 2010.

Gross margin excluding acquired business of Ruili Group increased by 0.5% for the nine months ended September 30, 2010, to 27.7% from 27.2% for the same period of 2009.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses were $9,341,056 for the nine months ended September 30, 2010, as compared to $7,187,413 for the same period of 2009, an increase of $2,153,643 or 30.0%.

The increase was mainly due to the increased transportation expense and accrued warranty expenses as a result of increased sales. As a percentage of sales revenue, selling expenses decreased to 6.5% for the nine months ended September 30, 2010, as compared to 7.6% for the same period in 2009.

Selling and distribution expenses excluding acquired business of Ruili Group were $7,516,882 for the nine months ended September 30, 2010, as compared to $5,509,506 for the same period of 2009, an increase of $2,007,376 or 36.4%.

The increase was mainly due to the increased transportation expense and accrued warranty expenses as a result of increased sales. As a percentage of sales revenue, selling expenses decreased to 5.7% for the nine months ended September 30, 2010, as compared to 6.6% for the same period in 2009.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $9,789,218 for the nine months ended September 30, 2010, as compared to $6,740,521 for the same period of 2009, an increase of $3,048,697 or 45.2%.

The increase was mainly due to increased expenses for business expansion, consistent with the increase in revenues. As a percentage of sales revenue, general and administrative expenses decreased to 6.8% for the nine months ended September 30, 2010, as compared to 7.1% for the same period in 2009.

General and administrative expenses excluding acquired business of Ruili Group were $7,625,969 for the nine months ended September 30, 2010, as compared to $4,902,026 for the same period of 2009, an increase of $2,723,943 or 55.6%.

As a percentage of sales revenue, general and administrative expenses were 5.8% for the nine months ended September 30, 2010 and 2009.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the nine months ended September 30, 2010, research and development expense was $5,326,598, as compared to $2,545,689 for the same period of 2009, an increase of $2,780,909. The Company will continue to invest in new product development, particularly in upgrading traditional valve products and in developing electronically controlled products.

For the nine months ended September 30, 2010, research and development expense excluding acquired business of Ruili Group was $4,695,003, as compared to $1,968,155 for the same period of 2009, an increase of $2,726,848.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $3,750,717 for the nine months ended September 30, 2010, compared with that of $3,204,199 for the same period of 2009, an increase of $546,518. The increase in depreciation and amortization expense was primarily due to the purchase of production equipment.

FINANCIAL EXPENSE

Financial expense mainly consists of interest expense and exchange loss. The financial expense for the nine months ended September 30, 2010 increased by $609,292 to $775,385 from $166,093 for the same period of 2009, which was mainly attributed to fluctuations in the exchange rate between U.S. dollars and RMB. Management is studying alternative methods for managing its risks associated with currency translation, such as the diversification of currencies used in export sales.

The financial expense excluding acquired business of Ruili Group for the nine months ended September 30, 2010 increased by $618,815 to $694,122 from $75,307 for the same period of 2009

OTHER INCOME

Other income was $649,227 for the nine months ended September 30, 2010, as compared to $410,074 for the nine months ended September 30, 2009, an increase of $239,153. The increase was mainly due to an increase in sales of raw material scraps for the nine months ended September 30, 2010.

Other income excluding acquired business of Ruili Group was $445,524 for the nine months ended September 30, 2010, as compared to $337,028 for the nine months ended September 30, 2009, an increase of $108,496.

INCOME TAX

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws. According to applicable tax laws regarding Sino-Foreign Joint Ventures, the Joint Venture was exempt from income taxes in the PRC for each of the fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled to a 50% income tax deduction for each of the three years ended December 31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005, and entitled to a tax concession of 50% of the applicable income tax rate of 26.4% for the two years ended December 31, 2006 and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st January 2008, China’s enterprises are generally subject to a PRC income tax rate of 25% and the Joint Venture was entitled to a tax concession of 50% of the applicable income tax rate of 25% for the year ended December 31, 2008.

During the nine months ended September 30, 2010 and 2009, the Joint Venture received an income tax benefit of $930,699 and $694,843 in accordance with PRC preferential income tax policy regarding the purchase of domestically manufactured equipment, which is subject to assessment and approval from the local state tax bureau. Income tax expense of $1,780,492 and $2,140,055 was recorded for the nine months ended September 30, 2010 and 2009, respectively.

Income tax expense excluding acquired business of Ruili Group of $1,555,696 and $2,000,413 was recorded for the nine months ended September 30, 2010 and 2009, respectively.

STOCK-BASED COMPENSATION

On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors. The contractual term of the options was three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904. This amount was amortized over the three year vesting period in a manner consistent with FASB ASC 505-50. The amortization of deferred stock-based compensation for these equity arrangements were $0 and $9,935 for the nine months ended September 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000 options had expired unexercised.

There were no options or warrants outstanding as of September 30, 2010.

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in the Chinese located Joint Venture and 40% non-controlling interest in the Hong Kong located Joint Venture, in each case held by our Joint Venture Partners. Net income attributable to non-controlling interest in subsidiaries amounted to $1,459,277 and $941,468 for the nine months ended September 30, 2010 and 2009, respectively.

Net income attributable to non-controlling interest in subsidiaries excluding acquired business of Ruili Group amounted to $1,331,893 and $862,337 for the nine months ended September 30, 2010 and 2009, respectively.

NET INCOME ATTRIBUTABLE TO STOCKHOLDERS

The net income attributable to stockholders for the nine months ended September 30, 2010 increased by $6,092,379, to $14,555,650 from $8,463,271 for the nine months ended September 30, 2009 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the nine months ended September 30, 2010 and 2009, were $0.76 and $0.46 per share, respectively.

The net income attributable to stockholders excluding acquired business of Ruili Group for the nine months ended September 30, 2010 increased by $5,658,100, to $13,409,196 from $7,751,096 for the nine months ended September 30, 2009 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the nine months ended September 30, 2010 and 2009, were $0.7 and $0.42 per share, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - Net cash generated from operating activities was $8,998,980 for nine months ended September 30, 2010 compared with $6,623,628 of net cash provided in operating activities in the same period in 2009, an increase of $2,375,352, primarily due to the increased cash flow resulted by changes in accounts receivable and prepayments.

INVESTING - During the nine months ended September 30, 2010, the Company expended net cash of $36,626,169 in investing activities, mainly for acquisition of the segments of the automotive parts business of Ruili Group Co., Ltd. and new equipment to support the growth of the business. For the nine months ended September 30, 2009, the Company utilized $1,888,945 in investing activities.

FINANCING - During the nine months ended September 30, 2010, after repaying loans the Company received aggregate bank loans in the amount of $9,279,449 under its credit facilities. During the nine months ended September 30, 2010, net cash provided by financing activities was primarily attributable to the net proceeds of our public offering of approximately $9,399,978. Additionally, another capital increase of $1,038,900 was contributed by Ruili Group to the Joint Venture. Net cash provided by financing activities was $19,718,327 for nine months ended September 30, 2010 compared with $0 in the same period in 2009. The Company had no borrowings under its credit facilities during the nine months ended September 30, 2009.

OFF-BALANCE SHEET AGREEMENTS

At September 30, 2010, we do not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

SUPPLEMENTAL FINANCIAL INFORMATION

To facilitate analysis of our financial performance, we provide below non-GAAP information relating to our financial results for the three and nine months ended September 30, 2010. The comparison presented below excludes results of the acquired business for all periods other than the month of September 2010. This information should be read together with our GAAP financial statements contained in Item 1 of this report as well as the discussion of our results set forth above in this Management’s Discussion and Analysis.

Statements of Income
Three Months and Nine Months Ended September 30, 2010 (Excluding Results of Acquired Business for All Periods other than the One Month Ended September 30, 2010)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009

Sales	US$		47,851,974			33,989,937			131,854,257			83,973,887
Cost of Sales			34,477,077			25,116,609			95,352,037			61,166,233

Gross Profit			13,374,897			8,873,328			36,502,220			22,807,654

Expenses:
Selling and Distribution Expenses			2,689,478			2,131,054			7,516,882			5,509,506
General and Administrative Expenses			2,535,193			1,393,971			7,625,969			4,902,026
Research and development expenses			1,635,421			410,397			4,695,003			1,968,155
Financial Expenses			348,303			37,216			694,122			75,307

Total Expenses			7,208,395			3,972,638			20,531,976			12,454,994

Operating Income			6,166,502			4,900,690			15,970,244			10,352,660


Other Income			192,459			121,567			445,524			337,028
Non-Operating Expenses			(62,470	)		(61,226	)		(118,983	)		(75,842	)

Income (Loss) Before Provision for Income Taxes			6,296,491			4,961,031			16,296,785			10,613,846

Provision for Income Taxes			940,154			728,322			1,555,696			2,000,413


Net Income	US$		5,356,337			4,232,709			14,741,089			8,613,433

Other Comprehensive Income - Foreign Currency Translation Adjustment			1,816,535			45,431			2,538,963			86,614

Total Comprehensive Income			7,172,872			4,278,140			17,280,052			8,700,047

Less:
Net income attributable to Noncontrolling Interest In Subsidiaries			489,118			423,271			1,331,893			862,337

Other Comprehensive Income Attributable to Non-controlling Interest's Share			181,654			4,543			254,168			8,662

Total Comprehensive Income Attributable to Non-controlling Interest's Share			670,772			427,814			1,586,061			870,999

Net Income Attributable to Stockholders			4,867,219			3,809,438			13,409,196			7,751,096

Other Comprehensive Income Attributable to Stockholders			1,634,881			40,888			2,284,795			77,952

Total Comprehensive Income Attributable to Stockholders			6,502,100			3,850,326			15,693,991			7,829,048

Weighted average common share - Basic			19,304,921			18,279,254			19,120,959			18,279,254

Weighted average common share - Diluted			19,304,921			18,279,254			19,120,959			18,279,254

EPS - Basic			0.25			0.21			0.70			0.42

EPS - Diluted			0.25			0.21			0.70			0.42

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

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

Changes in Internal Control over Financial Reporting:

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 6. EXHIBITS

(a)

Exhibits:

SIGNATURES

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

Dated : November 18, 2010	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 (Principal Financial Officer)

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

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

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.