SORL Auto Parts Inc (Form: S-1, Received: 08/31/2006 14:49:52)

As filed with the Securities and Exchange Commission on August 31, 2006

File No. 333-______

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

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

Delaware		30-009124

(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

No. 1169 Yumeng Road

Ruian Economic Development District

Ruian City, Zhejiang Province 325200

People’s Republic of China

86-577-6581-7720

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Xiao Ping Zhang

Chief Executive Officer

No. 1169 Yumeng Road

Ruian Economic Development District

Ruian City, Zhejiang Province 325200

People’s Republic of China

86-577-6560-9898

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

David Ficksman, Esq.
Troy & Gould
1801 Century Park East, Suite 1600
Los Angeles, CA 90067
(310) 789-1290

Douglas Ellenoff, Esq.
Brian Daughney, Esq.
Sarah Williams, Esq.
Ellenoff Grossman & Schole LLP
370 Lexington Avenue
New York, New York 10017
(212) 370-7889

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, check the following box. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

Title Of Each Class Of Securities To Be Registered(1)

Proposed Maximum
Aggregate
Offering Price(1)(2)

Amount Of
Registration Fee

Common Stock, $.002 par value

34,500,000

3,691.50


	(1)	Estimated solely for purposes of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended (the “Act”).
	(2)	Includes shares that may be purchased by the underwriters pursuant to an over-allotment option.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST __, 2006

PRELIMINARY PROSPECTUS

______________ Shares

SORL AUTO PARTS, INC.

Common Stock

We are offering _________ shares of our common stock.

Our common stock is quoted on the Nasdaq Capital Market under the symbol “SORL.” On August 28, 2006, the last reported sale price of our common stock was $6.99 per share.

Investing in our common stock involves risks. Before buying any shares, you should read the discussion of material risks in investing in our common stock. See “Risk Factors” beginning on page 7 of this prospectus.

	Per Share		Total

Public offering price	$	________	$	________
Underwriting discounts and commissions	$	________	$	________
Proceeds, before expenses, to us	$	________	$	________

The underwriters may also purchase up to an additional _______ shares from us at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $_____, and our total proceeds, before expenses, will be $________.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this preliminary prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on ____________, 2006.

______________________________________

MAXIM GROUP LLC CHARDAN CAPITAL MARKETS, LLC

______________________________________

The date of this prospectus is ____________________, 2006.

You should only rely on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

TABLE OF CONTENTS

		Page

PROSPECTUS SUMMARY		1
RISK FACTORS		8
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		23
USE OF PROCEEDS		24
DIVIDEND POLICY		25
PRICE RANGE OF COMMON STOCK		26
CAPITALIZATION		27
DILUTION		28
SELECTED FINANCIAL DATA		29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		31
BUSINESS		51
MANAGEMENT		64
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		70
PRINCIPAL STOCKHOLDERS		71
DESCRIPTION OF CAPITAL STOCK		72
SHARES ELIGIBLE FOR FUTURE SALE		74
UNDERWRITING		76
VALIDITY OF COMMON STOCK		78
EXPERTS		78
WHERE YOU CAN FIND MORE INFORMATION		79
INDEX TO FINANCIAL STATEMENTS		F-1

PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and may contain all of the information that is important to you. This prospectus includes information about the shares of common stock we are offering as well as information regarding our business and detailed financial data. You should read this prospectus and the registration statement of which this prospectus is part in their entirety, especially the risks of investing in our common stock which we discuss under “Risk Factors,” and our financial statements and related notes beginning on page F-1.

Unless the context requires otherwise, the words “SORL,” “we,” “us,” “our” and “our company” refer to SORL Auto Parts, Inc. and its wholly owned Hong Kong subsidiary, as well as our joint venture company based in China. Our sole operations are through the joint venture entity.

You should read the entire prospectus carefully before deciding to invest in shares of our common stock.

Overview

We are engaged in the business of manufacturing in China and distributing automotive parts globally with a focus on air brake valves and related components for commercial vehicles weighing more than three tons, such as trucks and buses. We are the largest commercial vehicle air brake system manufacturer in China, with 21% of the Chinese domestic market share, producing 40 categories of brake valves with over 800 different specifications which are distributed under the trademark “SORL”. Our main products include spring brake chambers, clutch servos, air dryers, and main valves and manual valves, which are widely used in the brake systems for various types of commercial vehicles, mostly vehicles such as trucks and buses weighing over three tons. We are based in Wenzhou, China, the largest hub of automotive parts manufacturing in China, with approximately 1,400 registered auto parts manufacturing companies. Our operations are primarily through a sino foreign joint venture operating under the name Ruili Group Ruian Auto Parts Co. Ltd, of which we own 90%.

For the fiscal year ended December 31, 2005, we derived approximately $40.8 million or 64% of our revenue from sales in the domestic China market and approximately $23.4 million or 36% from international sales. During the quarter ended June 30, 2006, we derived approximately $11.2 million or 56% of our revenue from sales in the domestic China market and approximately $8.9 million or 44% from international sales.

Market

China’s domestic automotive parts market was approximately $46.3 billion in 2004, while worldwide sales of Chinese automotive parts reached $55 billion. Worldwide sales of Chinese manufactured automotive parts is expected to reach $187.5 billion by 2010. It is expected that Chinese vehicle and parts sales in the international market will grow from $8.7 billion in 2004 to $100 billion in 2010 or at an annual growth rate of 50%.

Annual sales of heavy duty trucks in the China domestic market have grown at a compounded annual growth rate (“CAGR”) of 51% from 2000 to 2005, driven by China’s rapid economic growth and construction activities, particularly for infrastructure projects. It is estimated that market demand will continue to grow at an annual rate of 20% from 2006 to 2010 reaching 500, 000 units per year. Support from the Chinese government to domestic manufacturers has created a significant barrier to entry for foreign manufacturers in China. Moreover, imported trucks are viewed as not as durable as local models in China due to the harsh road conditions and the lack of proper maintenance and repair resources. China’s automotive parts market is highly fragmented with over 4,700 registered automotive component manufacturers.

Competitive Strengths:

We believe that our competitive strengths have enabled us to meet the needs of our customers and become the largest commercial vehicle air brake valves manufacturer in China. We also believe our strengths will continue to help us grow in the automotive parts industry both internationally and in China. Our principal strengths include the following:

	•	BRAND NAME. As the largest commercial vehicle air brake valves manufacturer in China, our “SORL” brand is widely known in China. According to a 2006 industry survey of distributors and customers sponsored by Huicong Information Construction Co., Ltd., SORL is ranked as one of the top 10 most recognized brand names in the automotive parts industry in China.

	•	PRODUCT DEVELOPMENT, MANUFACTURING AND TECHNOLOGICAL CAPABILITIES. Through our international sales centers in the US, Australia and the Middle East, we are able to promptly collect information about current trends in automotive technologies, which information is then applied to our new product development. In addition, our strict implementation of international standards in the development process greatly improves new product quality. We view technological innovation and leadership as the critical means to enhance our core competence. We own a technology center, including a laboratory specializing in the research of automotive brake controlling technologies and development of air brake system products. Currently, we have 15 production/assembly lines, and state-of-the-art testing facilities in a 270,000 square foot production space. With the proceeds of this offering, we plan on building an additional facility with 645,856 square feet.

	•	STRONG DISTRIBUTION NETWORK. We have established a sales network of 27 authorized distributors covering seven regions of China, who in turn channel “SORL” products through over 800 sub-distributors throughout China. Outside of China, we have three authorized sales centers in Australia, the United Arab Emirates, and the US. Internationally, we intend to gain market share by offering customers superior performance-cost advantage, quick adaptation to local markets and a diversified product portfolio.

	•	MANAGEMENT. We have assembled a management team with significant experience in the manufacture and distribution of automotive parts, as well as long standing relationships with the local OEM truck manufacturers. Our Chief Executive Officer is the President of the Wenzhou Auto Parts Association, one of the leading automotive parts trade associations in China, and Vice-President of the China Federation of Industry and Commerce Auto and Motorbike Parts Chamber of Commerce.

Business Strategy

Our strategic plan is to enhance our core competences, continue to grow at a steady rate and increase our market share both in China and internationally through the following:

	•	EXPAND PRODUCTION FACILITIES TO MEET FURTHER DEMAND. Anticipating the increasing demand for our products, with the proceeds from this offering, we plan to build an additional manufacturing facility of 645,856 square feet (more than double the size of our existing facility) and procure new equipment.

	•	INVEST IN THE NEXT GENERATION VALVE TECHNOLOGY. We plan to invest in the next generation of valve technology such as electronic air brake valves. We are undergoing the final testing for a newly developed clutch servo, which we expect to be placed in mass production in 2006. We are also in the process of developing new products such as automatic slack adjusters, loading sense proportion valves and a new type of foot brake valve. We believe all of these products have significant market potential.

	•	FURTHER EXPAND IN THE INTERNATIONAL MARKET. During 2005, we achieved approximately 83% growth in export sales, which accounted for 36% of our gross sales. Export sales continued to grow by approximately 45.2% for the three months ended March 31, 2006, accounting for 31% of total sales revenue for the quarter, as compared to 29% for the same period of 2005. We believe our products are becoming increasingly more competitive based on price and quality in the international market. We plan to set up additional authorized sales distributors internationally in key markets. We also plan to actively seek strategic partnerships with international distributors and manufacturers. In addition, we have recently begun selling products to our first international OEM customer, TATA, the largest automobile manufacturer in India.

	•	IMPLEMENT THE BRAND STRATEGY. We plan to focus our efforts on promotion of the “SORL” brand name by emphasizing technological innovation.

	•	EXPAND THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS. We are exploring opportunities to create long-term growth through new joint ventures and acquisitions of other automotive parts manufacturers in China and of automotive parts distributors or repair factories with established sales networks outside of China. We will seek synergistic acquisition targets which can be integrated into our product manufacturing and corporate management, or companies that have strong joint-venture partners that would become major customers.

	•	FOCUS ON QUALITY CONTROL AND COST REDUCTION. We believe that many of our products offer higher quality compared with our competitors in the commercial vehicle air brake valve market in China, and a superior performance-cost advantage in the international market. We have been able to grow our sales at more than 30% per year for the past three years. To sustain this competitive advantage and at the same time obtain higher profit margins, we plan, based on our efficient manufacturing base in China, to continue focusing on quality control and cost reduction, including, for example, reduction in spoilage and improvement in manufacturing techniques.

Risks

Our business is subject to a number of risks, which you should be aware of before making an investment decision. These risks are discussed more fully in “Risk Factors.”

Corporate History and Related Information

We were incorporated in Delaware in March 1982 under the name Enchanted Village Inc. In May 2004, pursuant to the terms of a Share Exchange Agreement , we acquired all of the issued and outstanding equity interests of Fairford Holdings Limited, a Hong Kong entity. For accounting purposes, the transaction was deemed a reverse acquisition because the shareholders of Fairford became the owners of a majority of our shares. At the time of the transaction, Fairford owned a 90% interest in our sino-foreign joint venture. Fairford is now our wholly owned subsidiary, and the sino foreign joint venture operates under the name Ruili Group Ruian Auto Parts Co. Ltd. In July 2004, we changed our name to SORL Auto Parts, Inc. and also effected a one for fifteen reverse stock split. Our principal executive offices are located at No. 1169 Yumeng Road, Ruian City, Zhejiang Province, China 325200 and our telephone number is (86) 577-6581-7720. The address of our website is www.sorl.cn. The information provided on our website is not to be deemed incorporated by reference into this prospectus.

The Offering

Common stock we are offering	_______________ shares

Common stock to be outstanding after this offering	_______________ shares

Use of proceeds	We estimate that the net proceeds from the shares of common stock we are offering will be approximately $_____ million, after deducting estimated net underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering to fund capital expenditures (including construction of a new plant and equipment purchases) to expand our research and development efforts relating to new products, to build out our international sales network, and for working capital and other general corporate purposes, including for possible strategic alliances or acquisitions.

Dividend policy	We do not have any present plan to pay any cash dividends on our shares of common stock in the foreseeable future.

Risk Factors	See “Risk Factors” for a discussion of the factors you should consider before deciding to invest in our securities

Nasdaq Capital Market symbol	SORL

The number of shares of common stock to be outstanding after the closing of the offering is based on 13,346,555 shares of common stock outstanding as of July 31, 2006 and excludes (a) 60,000 shares issuable upon the exercise of outstanding stock options and an additional 1,590,500 shares of common stock reserved for future stock option grants and awards under our 2005 Stock Compensation Plan, and (b) 100,000 shares issuable upon exercise of outstanding warrants issued in January 2006 to Maxim Group LLC and Chardan Capital Markets, LLC in connection with an agreement to provide to us general financial advisory and investment banking services.

Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.

Conventions that Apply to this Prospectus

Unless otherwise indicated, references in this prospectus to:

	•	“China” or the “PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan;

	•	“Nasdaq” is to the Nasdaq National Stock Market, Inc.;

	•	“RMB” are to Renminbi, the legal currency of China;

	•	“shares” are to our shares of common stock, with par value $0.002 per share;

	•	“U.S. GAAP” are to generally accepted accounting principles in the United States;

	•	“$” are to U.S. dollars, the legal currency of the United States; and

	•	“SORL”, “we”, “us”, “our” and “our company” are to our predecessor, Enchanted Village, Inc. for the periods prior to May 10, 2004, SORL Auto Parts, Inc. and its subsidiaries, including our PRC joint venture company.

	•	“OEM” refers to original equipment manufacturers, principally manufacturers of commercial vehicles weighing more than three tons, such as trucks and buses.

	•	“Ruili Group” refers to Ruili Group Co. Ltd., a company related to us because of the ownership interest of Xiao Ping Zhang and Xiao Feng Zhang, our principal stockholders and executive officers.

	•	“Joint Venture” refers to Ruili Group Ruian Auto Parts Co. Ltd., a Sino-foreign joint venture, established under the laws of the PRC of which we own a 90% interest.

Unless otherwise indicated, all information in this prospectus:

	•	assumes that the underwriters do not exercise their option to purchase up to ______________ additional shares of our common stock to cover over-allotments, if any; and

	•	gives effect to the one-for-fifteen reverse stock split of our common stock completed in July, 2004.

Summary Financial Data

The following table sets forth certain of our financial data. We derived the summary financial data for the years ended December 31, 2003, 2004 and 2005 from our audited financial statements included elsewhere in this prospectus. We derived the summary financial data for the six months ended June 30, 2005 and 2006 from our unaudited interim financial statements included elsewhere in this prospectus. You should read these data together with our financial statements and related notes included elsewhere in this prospectus and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Consolidated Statements of Operations Data

	Years Ended December 31,							Six Months Ended June 30,

	2003			2004		2005		2005		2006

	(rounded)							(unaudited)		(unaudited)
Revenue		33,121,000			46,815,037		64,182,544		29,440,016		39,536,586
Cost of goods sold		26,263,000			35,904,232		49,865,235		22,857,952		30,501,484

Gross Profit		6,858,000			10,910,805		14,317,309		6,582,064		9,035,102
Operating Expenses
Selling and Distribution Expenses		1,610,000			2,737,652		3,919,996		1,881,755		2,244,458
General and Administrative Expenses		1,547,000			2,489,604		4,169,460		1,206,293		1,183,251
Financial Expenses		292,000			287,433		688,811		186,800		507,447

Total Operating Expenses		3,449,000			5,514,689		8,778,267		3,274,848		3,935,156
Operating Income		3,409,000			5,396,116		5,539,042		3,307,216		5,099,946
Other Income		435,000			—		52,592		—		68,696
Non-Operating Expenses		—			55,067		92,067		75,626		156,725

Income Before Provision for Income Taxes		3,844,000			5,341,049		5,499,567		3,231,590		5,011,917
Provision for Income Taxes		546,000			—		—		—		587,505

Income from Continuing Operations		3,298,000			5,341,049		5,499,567		—		—
Loss from Discontinued Operations		2,148,000			—		—		—		—
Minority Interest		—			534,105		549,957		323,159		442,441

Net Income Attributable to Shareholders		1,150,000			4,806,944		4,949,610		2,908,431		3,981,971

Earnings Per Share from Continuing Operations
Basic		0.25			0.37		0.37		0.22		0.30
Diluted		0.25			0.37		0.37		0.22		0.30
Earnings Per Share from Discontinued Operations
Basic		(0.17	)		—		—		—		—
Diluted		(0.17	)		—		—		—		—
Shares used in per share calculation
Basic		12,953,720			13,165,241		13,302,763		13,287,055		13,346,555
diluted		12,953,720			13,165,241		13,302,763		13,287,055		13,355,426

	As of December 31, 2005			As of June 30, 2006

	Actual		As adjusted	Actual		As adjusted

Balance Sheet Data:
Cash and cash equivalents	$	961,131		$	2,221,050
Working capital	$	10,571,086		$	14,951,191
Total assets	$	39,300,626		$	43,793,870
Total stockholders’ equity	$	15,984,358		$	20,612,297

The table above presents summary balance sheet data on an actual basis, and on an as adjusted basis. The as adjusted balance sheet data reflects the balance sheet data adjusted for the receipt of the estimated net proceeds from the sale of _________ shares of our common stock at the assumed public offering price of $____ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us estimated at $ _____.

RISK FACTORS

Risks Related to Our Business

You should carefully consider the risks described below, in conjunction with other information and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. You should pay particular attention to the fact that we conduct substantially all of our operations in China and are governed by a legal and regulatory environment that in some respects differ significantly from the environment that may prevail in other countries that you may be familiar with. Our business, financial condition or operating results could be affected materially and adversely by any or all of these risks. The trading price of our common stock could decline due to any or all of these risks, and you may lose all or part of your investment. An investment in our common stock consequently involves a high degree of risk that you should be aware of.

Our ability to effectively implement our business strategy depends upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced management and other key personnel and we cannot assure that we will be able to hire or retain such employees.

We must attract recruit and retain a sizeable workforce of technically competent employees. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced management and other key personnel. These individuals are difficult to find in China and as the economy in China expands, there is increasing competition for skilled workers.. We cannot assure that we will be able to find, hire or retain such employees, or even if we are able to so hire such employees, that the financial costs therefrom will not adversely affect our net income.

Certain of our officers and directors have existing responsibilities to other businesses in addition to our company and as a result, conflicts of interest between us and the other activities of those persons may occur from time to time.

Certain persons serving as our officers and directors have existing responsibilities and, in the future, may have additional responsibilities, to provide management and services to other entities in addition to us. In particular, Mr. Xiao Ping Zhang, our Chief Executive Officer, and Mr. Xiao Feng Zhang, our Chief Operating Officer, are officers and principal stockholders of Ruili Group Co. Ltd. which is engaged in the development, production and sale of various kinds of automotive parts as well as operating a hotel property and investing in the development of real property in China. The management of our joint venture is shared with the Ruili Group and therefore there may exist conflicts of interest between us and the Ruili Group in connection with its operation. Our joint venture agreement provides that the Board of Directors of the Joint Venture is comprised of three persons, two of whom are appointed by us. However, at the present time our two senior executives, Messrs. Xiao Ping Zhang and Xiao Feng Zhang are the founders and employed at the Ruili Group. Therefore, the Ruili Group exercises considerable control over the Joint Venture. There can be no assurance that in the event of a conflict between us and the Ruili Group that the operations of the Joint Venture and out interests in the Joint Venture will not be adversely affected, or that our Company's interests will always be fairly represented. The Ruili Group also provides certain services to the Company in the form of bank guaranties, licensing of certain technology, and is the landlord of our existing factory and warehouse space. The Ruili Group also sells to us certain non-valve products which allows us to fill out our product lines which in 2005 represented approximately 25% of our sales. As a result, conflicts of interest between us and the other activities of those persons may occur from time to time. We will attempt to resolve any such conflicts of interest in our favor but we cannot assure that such conflicts will always be so resolved. Our officers and directors are accountable to us and our shareholders as fiduciaries, which requires that such officers and directors exercise good faith and integrity in handling our affairs. However, the existing responsibilities limit the amount of time such officers and directors can spend on our affairs.

We are and will continue to be under downward pricing pressures on our products from our customers and competitors.

We face continuing downward pricing pressure from our customers and competitors, especially in the sales of replacement parts. To retain our existing customers and gain new ones, we must continue to keep our unit prices low. In view of our need to maintain low prices on our products, our growth, profit margins and net income will suffer if we cannot effectively continue to control our manufacturing and other costs.

Our contracts with our customers are generally short-term and do not require the purchase of a minimum amount.

Our customers generally do not provide us with firm, long-term volume purchase commitments. Although we enter into manufacturing contracts with certain of our customers who have continuing demand for a certain product, these contracts state terms such as payment method, payment period, quality standards and inspection and similar matters rather than provide firm, long-term commitments to purchase products from us. As a result of the absence of long term contracts, we could have periods during which we have no or only limited orders for our products, but will continue to have to pay the costs to maintain our work force and our manufacturing facilities and to service our indebtedness without the benefit of current revenues.

We consistently face short lead times for delivery of products to customers. Failure to meet delivery deadlines in our production agreements could result in the loss of customers and damage to our reputation and goodwill.

We enter into production agreements with our customers prior to commencing production, which reduces our risk of cancellations. However, these production agreements typically contain short lead times for delivery of products, leading to production schedules that can strain our resources and reduce our profit margins on the products produced. Although we have increased our manufacturing capacity, we may lack sufficient capacity at any given time to meet all of our customers’ demands if they exceed the production capacity of levels. We strive for rapid response to customer demand, which can lead to reduced purchasing efficiency and increased material costs. If we are unable to sufficiently meet our customers’ demands, we may lose our customers. Moreover, failure to meet customer demands may damage our reputation and goodwill.

Because of the short lead times in our production agreements, we may not be able to accurately or effectively plan our production or supply needs.

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements, personnel needs, and other resource requirements, based on our production agreements with our customers. Short lead times of our customers’ commitments to their own customers and the possibility of rapid changes in demand for their products reduce our ability to estimate accurately the future requirements of those customers for our products. Because many of our costs and operating expenses are fixed, a reduction in customer demand can harm our gross margins and operating results. We may also occasionally acquire raw materials without having customer orders based on a customer’s forecast or in anticipation of an order and to secure more favorable pricing, delivery or credit terms in view of the short lead times we often have under our customers’ orders. These purchases can expose us to losses from inventory carrying costs or inventory obsolescence.

Our operations depend highly on Messrs. Xiao Ping Zhang, our Chief Executive Officer and Xiao Feng Zhang, our Chief Operating Officer and a small number of other executives.

The success of operations depends greatly on a small number of key managers, including Messrs. Xiao Ping Zhang and Xiao Feng Zhang. The loss of the services of either Mr. Zhang, or any of the other senior executives could adversely affect our ability to conduct our business. Although we believe we would be able to find other managers to replace any of these managers, the search for such managers and the integration of such managers into our business will inevitably occur only over an extended period of time. During that time the lack of senior leadership could affect adversely our sales and manufacturing, as well as our research and development efforts.

We may not be able to effectively respond to rapid growth in demand for our products and of our manufacturing operations.

If we continue to be successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products to customers on a timely basis at a reasonable cost to those customers. Meeting such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we produce products. Such demands would require more capital and working capital than we currently have available.

We extend relatively long payment terms for accounts receivable.

As is customary in China, we currently extend relatively long payment terms to certain of our China based customers (generally 90-180 days for our OEM customers and 60-90 days for our aftermarket customers. We have also extended these time frames to one year or more on occassion. As a result of the size of many of our orders, these extended terms adversely affect our cash flow and our ability to fund our operations out of our operating cash flow. In addition, although we attempt to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts. The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.

Our customers often place large orders for products, requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products into their products and sell them in a timely fashion, for example, due to excess inventories, sales slowdowns or other issues, they may not pay us in a timely fashion, even on our extended terms. This failure to pay timely may defer or delay further product orders from us, which may adversely affect our cash flows, sales or income in subsequent periods.

We may not be able to finance the development of new products.

Our future operating results will depend to a significant extent on our ability to continue to provide new products that compare favorably on the basis of cost and performance with the products of our competitors. Some of our competitors have design and manufacturing capabilities and technologies that compete well with our products, particularly in markets outside of China. We are currently conducting research and development on a number of new products, activities requiring a substantial outlay of capital. To remain competitive, we must continue to incur significant costs in product development, equipment, facilities and invest in research and development of new products. These costs may increase, resulting in greater fixed costs and operating expenses. All of these factors create pressures on our working capital and ability to fund our current and future manufacturing activities and the expansion of our business.

We receive a significant portion of our revenues from a small number of customers.

Although no customer individually accounted for more than 6% of our revenues for the fiscal year ended December 31, 2005, our three largest customers accounted for approximately 16% and 32% of our revenues in 2005 and 2004, respectively. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops purchasing our products.

Our business depends on our ability to protect our intellectual property effectively.

The success of our business depends in substantial measure on the legal protection of proprietary rights in technology we hold. We hold only one patent in China, have a license in two other patents and have filed applications in China for an additional nine patents. We claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes. We protect our proprietary rights in our products and operations through contractual obligations, including nondisclosure agreements. If these contractual measures fail to protect our proprietary rights, any advantage those proprietary rights provided to us would be negated. Monitoring infringement of intellectual property rights is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property and know-how, particularly in China and other countries in which the laws may not protect our proprietary rights as fully as the laws of the United States. Accordingly, other parties, including competitors, may duplicate our products using our proprietary technologies. Pursuing legal remedies against persons infringing our patents or otherwise improperly using our proprietary information is a costly and time consuming process that would divert management’s attention and other resources from the conduct of our other business, and could cause delays and other problems with the marketing and sales of our products, as well as delays in deliveries.

We face risks associated with future investments or acquisitions.

An important component of our growth strategy is to invest in or acquire companies such as other automotive parts manufacturers and distribution companies. We may be unable to identify suitable investment or acquisition candidates or to make these investments or acquisitions on a commercially reasonable basis, if at all. If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction.

Integrating an acquired company is complex, distracting and time consuming, as well as a potentially expensive process. The successful integration of an acquisition would require us to:

	•	integrate and retain key management, sales, research and development, and other personnel;

	•	incorporate the acquired products or capabilities into our offerings both from an engineering and sales and marketing perspective;

	•	coordinate research and development efforts;

	•	integrate and support pre-existing supplier, distribution and customer relationships; and

	•	consolidate duplicate facilities and functions and combine back office accounting, order processing and support functions.

The geographic distance between the companies, the complexity of the technologies and operations being integrated and the disparate corporate cultures being combined may increase the difficulties of combining an acquired company. Acquired businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems. Management’s focus on integrating operations may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts.

With the automobile parts markets being highly competitive and many of our competitors having greater resources than we do, we may not be able to compete successfully.

The automobile parts industry is a highly competitive business. Criteria for the Company’s customers and potential customers include:

	•	Quality;

	•	Price/cost competitiveness;

	•	Product performance;

	•	Reliability and timeliness of delivery;

	•	New product and technology development capability;

	•	Degree of global and local presence;

	•	Effectiveness of customer service; and

	•	Overall management capability.

Depending on the particular product market (OEM or aftermarket) and geographic market, the number of our competitors varies significantly. Many of our competitors have substantially greater revenues and financial resources than we do, as well as stronger brand names, consumer recognition, business relationships with vehicle manufacturers, and geographic presence than we have, especially where we intend to enter a new geographic market. We may not be able to compete favorably and increased competition may substantially harm our business, business prospects and results of operations.

Internationally, we face different market dynamics and competition. We may not be as successful as our competitors in generating revenues in international markets due to the lack of recognition of our brands, products or other factors. Developing product recognition overseas is expensive and time-consuming and our international expansion efforts may be more costly and less profitable than we expect. If we are not able to execute our business expansion in our target markets, our sales could decline, our margins could be negatively impacted and we could lose market share, any of which could materially harm our business, results of operations and profitability.

A disruption at our sole manufacturing site would significantly interrupt our production capabilities, which could have drastic consequences to us, including threatening our financial viability.

We currently manufacture all of our products at our sole commercial manufacturing facility, which is located near Ruian City, Wenzhou, Zhejiang Province, People’s Republic of China. Accordingly, we face risks inherent in operating a single manufacturing facility, since any disruption, such as a fire, or natural disaster, could significantly interrupt our manufacturing capability. We currently do not have alternative production plans in place or disaster-recovery facilities available. In case of a disruption, we will have to establish alternative manufacturing sources. This would require substantial capital on our part, which we may not be able to obtain on commercially acceptable terms or at all. Additionally, we would likely experience months or years of production delays as we build or locate replacement facilities and seek and obtain necessary regulatory approvals. If this occurs, we will be unable to satisfy customer orders on a timely basis, if at all. Also, operating any new facilities may be more expensive than operating our current facility. For these reasons, a significant disruptive event at our manufacturing facility could have drastic consequences on us, including threatening our financial viability.

As described below, we are currently planning to establish a second manufacturing facility, also to be located in China. Even with both facilities operational, we would still be subject to a significant risk of disruption if either facility experiences a disruption.

If we are unable to expand our manufacturing capacity as planned, we may be unable to satisfy demand for our products.

We believe we will have to expand our manufacturing capacity to meet anticipated demand for our products. We are currently planning to construct a new facility in Ruian City, approximately five miles from our existing facility, to meet our manufacturing demands. A significant portion of the net proceeds of this offering (approximately 58%) will be used to construct such additional facility to manufacture our products in anticipation of future revenues which we are seeking to achieve as a result of our international marketing initiatives. While we believe that our new facility will be completed in approximately one year, we may not be able to complete the construction of this facility within our anticipated time frame or budget. If we cannot complete the planned construction, in a timely manner, our ability to meet demand for our products would be adversely affected.

The cyclical nature of commercial vehicle production and sales could result in a reduction in automotive sales, which could adversely affect our business and results of operations.

Our sales to OEMs rely on automotive commercial vehicle production and sales by our customers, which are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences. They also can be affected by government policies, labor relations issues, regulatory requirements, and other factors. In addition, in the last two years, the price of commercial vehicles in China has generally declined. As a result, the volume of commercial vehicle production in China has fluctuated from year to year, which give rise to fluctuations in the demand for our products. Any significant economic decline that results in a reduction in commercial vehicle production and sales by our customers would have a material adverse effect on our results of operations.

Increasing costs for manufactured components and raw materials may adversely affect our profitability.

We use a broad range of manufactured components and raw materials in our products, including castings, electronic components, finished sub-components, molded plastic parts, fabricated metal, aluminum and steel, and resins. Because it may be difficult to pass increased prices for these items on to our customers, a significant increase in the prices of our components and materials could materially increase our operating costs and adversely affect our profit margins and profitability.

Longer product life of parts may reduce aftermarket demand for some of our products.

In 2005, approximately 68% of our sales were to the aftermarket. The average useful life of original equipment parts has been steadily increasing in recent years due to improved quality and innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. Additional increases in the average useful life of automotive parts are likely to adversely affect the demand for our aftermarket products.

We may be subject to product liability and warranty and recall claims, which may increase the costs of doing business and adversely affect our financial condition and liquidity.

We face an inherent business risk of exposure to product liability and warranty claims if our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. We have not obtained product liability insurance and therefore may be exposed to potential liability without any insurance. We cannot ensure you that we will not incur significant costs to defend these claims or that we will not experience any product liability losses in the future. In addition, if any of our designed products are or are alleged to be defective, we may be required to participate in a recall of such products. We cannot assure you that the future costs associated with providing product warranties and/or bearing the cost of repair or replacement of our products will not have an adverse effect on our results of operations..

We are subject to environmental and safety regulations, which may increase our compliance costs and may adversely affect our results of operation.

We are subject to the requirements of environmental and occupational safety and health laws and regulations in China and other countries where we sell our products. To the extent that we expect to expand our operations into other geographic areas, we will become subject to such laws and regulations of those countries as well. We cannot provide assurance that we have been or will be at all times in full compliance with all of these requirements, or that we will not incur material costs or liabilities in connection with these requirements. Additionally, these regulations may change in a manner that could have a material adverse effect on our business, results of operations and financial condition. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a material expense of doing business.

Non-performance by our suppliers may adversely affect our operations by delaying delivery or causing delivery failures, which may negatively affect demand, sales and profitability.

We purchase various types of equipment, raw materials and manufactured component parts from our suppliers. We would be materially and adversely affected by the failure of our suppliers to perform as expected. We could experience delivery delays or failures caused by production issues or delivery of non-conforming products if our suppliers failed to perform, and we also face these risks in the event any of our suppliers becomes insolvent or bankrupt.

Our commercial viability depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.

In the event that our technologies infringe or violate the patent or other proprietary rights of third parties, we may be prevented from pursuing product development, manufacturing or commercialization of our products that utilize such technologies. There may be patents held by others of which we are unaware that contain claims that our products or operations infringe. In addition, given the complexities and uncertainties of patent laws, there may be patents of which we know that we may ultimately be held to infringe, particularly if the claims of the patent are determined to be broader than we believe them to be. As a result, avoiding patent infringement may be difficult.

If a third party claims that we infringe its patents, any of the following may occur:

	•	we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent;

	•	a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms or at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; and

	•	we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

In addition, employees, consultants, contractors and others may use the trade secret information of others in their work for us or disclose our trade secret information to others. Either of these events could lead to disputes over the ownership of inventions derived from that information or expose us to potential damages or other penalties. If any of these events occurs, our business will suffer and the market price of our common stock will likely decline.

Our international expansion plans subject us to risks inherent in doing business internationally.

Our long-term business strategy relies on the expansion of our international sales outside China by targeting markets, such as Europe and the United States. Risks affecting our international expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, , international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm our international expansion efforts, which could in turn materially and adversely affect our business, operating results and financial condition.

If we cannot continue to satisfy the Nasdaq Capital Market’s listing maintenance requirements and other Nasdaq rules, our commons stock could be delisted, which could negatively affect the price of our ordinary shares and your ability to sell them.

In order to maintain listing on the Nasdaq Capital Market, we will be required to comply with Nasdaq rules which include rules regarding minimum shareholders’ equity, minimum share price, and certain corporate governance requirements. We may not be able to continue to satisfy the listing maintenance requirements of the Nasdaq Capital Market and other applicable Nasdaq rules. If we are unable to satisfy the Nasdaq criteria for maintaining listing, our common stock could be subject to delisting. If our common stock is delisted, trading, if any, of our common stock would thereafter be conducted in the over-the-counter market, in the so-called “pink sheets” or on the National Association of Securities Dealers, Inc.’s “electronic bulletin board.” As a consequence of any such delisting, our share price could be negatively affected and our stockholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of, our common stock.

We do not intend to pay dividends on shares of our common stock in the foreseeable future.

We have never paid cash dividends on our common stock. Our current Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Instead, we intend to retain future earnings for reinvestment in our business and/or to fund future acquisitions. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. Under PRC law, our PRC joint venture is required to set aside a portion of its net income each year to fund designated statutory reserve funds.

Risks Related to Doing Business in China

We operate from facilities that are located in China. Our principal operating subsidiary , Ruili Group Ruian Auto Parts Co., Ltd., is a sino-foreign joint venture organized under the laws of the PRC.

Changes in China’s political and economic policies and conditions could cause a substantial decline in the demand for our products and services

Historically, we have derived a substantial portion of our revenues from China. We anticipate that China will continue to be our primary production and an important sales base in the near future and currently almost all of our assets are located in China. While the PRC government has pursued economic reforms to transform its economy from a planned economy to a market-oriented economy since 1978, a large part of the PRC economy is still being operated under varying degrees of control by the PRC government. By imposing industrial policies and other economic measures, such as restrictions on lending to certain sectors of the economy, control of foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the development of the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to be refined and improved. Other political, economic and social factors may also lead to further adjustments of the PRC reform measures. This refining and adjustment process may not necessarily have a positive effect on our operations and our future business development. For example, the PRC government has in the past implemented a number of measures intended to slow down certain segments of the PRC economy that the government believed to be overheating, including placing additional limitation on the ability of commercial banks to make loans by raising bank reserve-against-deposit rates. In 2005, this restrictive policy on loans had the effect of decreasing infrastructure projects resulting in a decrease in demand for heavy trucks, thus adversely impacting our product sales to our OEM Customers. Because of the negative impact of the Chinese government policies on the truck manufacturers, we also were required to extend our normal credit terms to certain of these manufacturers. Our operating results may be materially and adversely affected by changes in the PRC economic and social conditions and by changes in the policies of the PRC government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional restrictions on currency conversion.

Changes in foreign exchange regulation in China may affect our ability to pay dividends in foreign currencies

Currently, RMB is not a freely convertible currency and the restrictions on currency exchanges in China may limit our ability to use revenues generated in RMB to fund our business activities outside China or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade-and service-related foreign exchange transactions, foreign debt service and payment of dividends. In accordance with the existing foreign exchange regulations in China, our PRC joint venture may pay dividends in foreign currencies, without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our RMB-denominated earnings into foreign currencies. If this occurs, our PRC joint venture may not be able to pay us dividends in foreign currency without prior approval from SAFE. In addition, conversion of RMB for most capital account items, including direct investments, is still subject to government approval in China and companies are required to open and maintain separate foreign exchange accounts for capital account items.

Fluctuation in the value of RMB could adversely affect the value of, and dividends payable on, our shares in foreign currency terms

The value of RMB is subject to changes in PRC government policies and depends to a large extent on China’s domestic and international economic, financial and political developments, as well as the currency’s supply and demand in the local market. For over a decade from 1994, the conversion of RMB into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates on the world financial markets. The official exchange rate for the conversion of RMB into U.S. dollars remained stable until RMB was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, RMB will be permitted to fluctuate within a band against a basket of foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of Renminbi against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy, which could result in a further and more significant appreciation in the value of RMB against the U.S. dollar. Further revaluations of RMB against the U.S. dollar may also occur in the future.

The uncertain legal environment in China could limit the legal protections available to you

The PRC legal system is a civil law system based on written statutes. Unlike the common-law system, the civil law system is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Our PRC joint venture is a Sino-foreign joint venture and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to foreign-invested enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes of existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of those laws, regulations and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including you. For example, it is not clear if a PRC court would enforce in China a foreign court decision brought by you against us in shareholders’ derivative actions.

Moreover, the enforceability of contracts in China, especially with governmental entities, is relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations, we might not have adequate remedies. Such uncertainties or inability to enforce our contracts could materially and adversely affect our revenues and earnings.

Our primary source of funds for dividend and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties as well as the practice of such subsidiary in declaring dividends, and our ability to pay dividends or make other distributions to our shareholders is negatively affected by those restrictions, uncertainties and dividend practices

We conduct our core business operations through our PRC joint venture. As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from our PRC joint venture. Under current PRC law, our PRC joint venture is regarded as a foreign invested enterprise in China. Although dividends paid by foreign invested enterprises are not subject to any PRC corporate withholding tax, PRC law permits payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. Under PRC law, our PRC joint venture is required to set aside 10% of its net income each year to fund designated statutory reserve fund until such funds reach 50% of registered share capital. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds for dividend payments is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders although we do not presently anticipate paying any dividends. Moreover, any transfer of funds from us to our PRC joint venture, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and our PRC joint venture could restrict our ability to act in response to changing market conditions. Additionally to date, our PRC Joint Venture has not distributed any profits and does not anticipate doing so for the near term.

PRC economic reform policies or nationalization could result in a total investment loss in our common stock.

Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

Although the Chinese government owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:

	•	We will be able to capitalize on economic reforms;

	•	The Chinese government will continue its pursuit of economic reform policies;

	•	The economic policies, even if pursued, will be successful;

	•	Economic policies will not be significantly altered from time to time; and

	•	Business operations in China will not become subject to the risk of nationalization.

Over the last few years, China’s economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measure to curb this excessively expansive economy. These measures have included restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austere measures alone may not succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measure to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. These measures may adversely affect our operations. For example, we believe that certain macroeconomic measures adopted by the Chinese government negatively impacted the demand for trucks in 2005, thus decreasing the demand from Chinese truck manufacturers for our products.

There can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions. A material change in reforms on economic policy could cause instability or other harmful results.

Because our principal operating company is organized under the laws of China, and substantially all of our assets are located in China, you may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on U.S. or other foreign law against our management and us.

Our joint venture operating company is incorporated under the laws of China and substantially all of our assets are located in China. In addition, all of our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon certain directors or executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries. As a result, recognition and enforcement in China of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in China against us, our directors, managers, or executive officers only if the actions are not required to be arbitrated by Chinese law and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a Chinese court may award civil liability, including monetary damages.

Any occurrence of serious infectious diseases, such as recurrence of severe acute respiratory syndrome (SARS) causing widespread public health problems, could adversely affect our business and results of operations.

A renewed outbreak of SARS or other widespread public health problems in China, where a substantial portion of our revenue is derived, and in Ruian City, where our operations are headquartered, could have a negative effect on our operations. Our operations may be impacted by a number of public health-related factors, including the following:

	•	quarantines or closures of our factories or subsidiaries which would severely disrupt its operations;

	•	the sickness or death of the key officers and employees; and

	•	general slowdown in the Chinese economy resulting from an outbreak.

Any of the foregoing events or other unforeseen consequences of public health problems could result in reduction in net sales of our products.

Because it is likely that China will adopt additional environmental regulations and additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our products or restricting disposal of any waste will increase our operating costs.

National, provincial and local laws impose various environmental controls on the manufacture of automotive parts and/or of certain materials used in the manufacture of automotive parts. Although we believe that our operations are in substantial compliance with current environmental regulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. In addition, China is experiencing substantial problems with environmental pollution. Accordingly, it is likely that the national, provincial and local governmental agencies will adopt stricter pollution controls. Any such regulation relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our products or restricting disposal of any waste will increase our operating costs.

Risks Related to Our Common Stock

The market price for our common stock may be volatile which could result in a complete loss of your investment.

The market price for our common stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:

	•	actual or anticipated fluctuations in our quarterly operating results,

	•	announcements of new products by us or our competitors,

	•	changes in financial estimates by securities analysts,

	•	conditions in the automotive market,

	•	changes in the economic performance or market valuations of other companies involved in the production of automotive parts,

	•	announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments,

	•	additions or departures of key personnel, or

	•	potential litigation.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

We may issue additional shares of our capital stock to raise additional cash for working capital. If we issue additional shares of our capital stock, our stockholders will experience dilution in their respective percentage ownership in us.

We may seek to further expand our operations and therefore we may issue additional shares of our capital stock to raise additional cash for working capital. If we issue additional shares of our capital stock, our stockholders will experience dilution in their respective percentage ownership in us.

A large portion of our common stock is controlled by a small number of stockholders and as a result, these stockholders are able to influence the outcome of stockholder votes on various matters.

A large portion of our common stock is held by a small number of stockholders. Mr. Xiao Ping Zhang, our Company’s Chief Executive Officer, and his brother, Xiao Feng Zhang, our Chief Operating Officer, hold approximately 68% and 8.5%, respectively of the Company’s common stock. As a result, these stockholders are able to control the outcome of stockholder votes on various matters, including the election of directors and other corporate transactions including business combinations.

The occurrence of sales of a large number of shares of our common stock, or the perception that these sales could occur, may affect our stock price and could impair our ability to obtain capital through an offering of equity securities. This will have an adverse affect on the business by restricting access to working capital to fund growth and operations. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock.

We are responsible for the indemnification of our officers and directors which could result in substantial expenditures, which we may be unable to recoup.

Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.

Compliance with the Sarbanes-Oxley act could cost hundreds of thousands of dollars, require additional personnel and require hundreds of man hours of effort, and there can be no assurance that we will have the personnel, financial resources or expertise to comply with these regulations.

The US Public Company Accounting Reform and Investor Protection Act of 2002, better known as Sarbanes-Oxley, is the most sweeping legislation to affect publicly traded companies in 70 years. Sarbanes-Oxley created a set of complex and burdensome regulations. Compliance with such regulations requires hundreds of thousands of dollars, additional personnel and hundreds of man hours of effort. There can be no assurance that we will have the personnel, financial resources or expertise to comply with these regulations.

Risks Related to This Offering

Our stock price has been and may continue to be volatile and your investment in our common stock could suffer a decline in value.

We completed the reverse acquisition in May 2004. Since the reverse acquisition, the price of our common stock has ranged from a low of $2.75 to a high of $13.50 per share. Some specific factors that may have a significant effect on our common stock market price include:

	•	announcements concerning our commercial launch timing, product development programs;

	•	conditions or trends in the automotive industries;

	•	fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;

	•	changes in, or our failure to meet or exceed, investors’ and securities analysts’ expectations;

	•	announcements of technological innovations or new commercial products by us or our competitors;

	•	actual or anticipated fluctuations in our competitors’ quarterly or annual operating results;

	•	sales of large blocks of our common stock, including sales by our executive officers, directors or venture capital investors;

	•	our entering into licenses, strategic partnerships and similar arrangements, or the termination of such arrangements;

	•	acquisition of products or businesses by us or our competitors;

	•	litigation or government inquiries, whether or not meritorious; and

	•	economic and political factors, including wars, terrorism and political unrest.

A more active trading market for our common stock may not develop, which could make it more difficult for investors in our common stock to sell large blocks of our common stock.

Prior to and subsequent to our 2004 reverse acquisition, there has been a very limited public market for our common stock. An active trading market for our shares may never develop or be sustained. As a result, investors may be unable to sell large blocks of our common stock and therefore may have limited liquidity opportunities.

This offering will cause dilution in net tangible book value.

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value of $______ per share (based upon an assumed public offering price of $______ per share). Additional dilution is likely to occur upon the exercise of options or warrants granted by us. To the extent we raise additional capital by issuing equity securities, our stockholders may experience additional substantial dilution.

Future sales of currently restricted shares could cause the market price of our common stock to drop significantly, even if our business is doing well.

In connection with this offering, our executive officers, directors and certain of our stockholders have agreed not to sell an aggregate of 11,359,403 shares of common stock owned by them for a period of nine months from the date of this prospectus, _____________________, 2006. As these resale restrictions lapse, sales of a substantial number of these shares in the public market could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

We have broad discretion in how we use the net proceeds of this offering, and we may not use these proceeds effectively or in ways with which you agree.

Our Management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase the market price of our common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these terms or other comparable terminology. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from those anticipated by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

	•	the availability and cost of products from our suppliers;

	•	changes in end-user demand for the products manufactured and sold by our OEM customers;

	•	general and cyclical economic and business conditions, domestic or foreign, and, in particular, those in China’s automobile industry;

	•	changes in our pricing policies or the pricing policies of our competitors or suppliers;

	•	our ability to compete effectively with our current and future competitors;

	•	our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers;

	•	our implementation of stock-based compensation plans;

	•	changes in the favorable tax incentives enjoyed by our PRC joint venture company;

	•	foreign currency exchange rates fluctuations;

	•	adverse changes in the securities markets; and

	•	legislative or regulatory changes in China.

We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

USE OF PROCEEDS

We expect to receive approximately $____ million in net proceeds from the sale of _________ shares of common stock offered by us in this offering (approximately $____ million if the underwriters exercise their over-allotment option in full), based on an assumed offering price of $____ per share, after deducting the underwriting discounts and commissions and estimated offering expenses ($ _____) payable by us.

We currently expect to use the net proceeds of this offering, as follows:

	Without Over-Allotment Option		Over-Allotment Option Exercised

Gross proceeds
New Plant Construction	$	15,000,000
Equipment Purchases for expansion of existing product lines and production of new products	$	4,000,000
New Product Development	$	1,500,000
International Expansion of Sales Force including the establishment of sales offices, training of personnel, trade show participation and retaining of consultants	$	2,000,000
Working Capital	$	3,800,000
Offering expenses
Underwriting discount
Legal fees and expenses
Printing and engraving expenses
Accounting fees and expenses
SEC registration fee
Miscellaneous expenses

Total

The amount and timing of our actual expenditures may vary significantly depending on numerous factors, such as the progress of our product development and regulatory requirements and the amount of cash used by our operations. Working capital may include funds for strategic initiatives such as the acquisition or license of other products or product candidates. We have no present agreements regarding any material strategic initiatives. Accordingly, we will retain broad discretion over the use of net proceeds of this offering. Pending the use of net proceeds, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors. Additionally, amounts available for dividends are dependent on the profits available for distribution from our PRC joint venture. Under current PRC law, our PRC joint venture is regarded as a foreign invested enterprise in China. Although dividends paid by foreign invested enterprises are not subject to any PRC corporate withholding tax, PRC law permits payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. Under PRC law, our PRC joint venture is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds for dividend payments is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders although we do not presently anticipate paying any dividends. Moreover, any transfer of funds from us to our PRC joint venture, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and our PRC joint venture could restrict our ability to act in response to changing market conditions. Additionally to date, our PRC Joint Venture has not distributed any profits and does not anticipate doing so for the near term.

PRICE RANGE OF COMMON STOCK

Our common stock has been quoted on The Nasdaq Capital Market under the symbol SORL since April 18th, 2006. Prior to April 18th, 2006, our common stock was trading on the OTC Bulletin Board. The following table shows the high and low per share prices of our common stock for the periods indicated.

QUARTER ENDED	HIGH		LOW

2004
March 31		6.00		3.00
June 30		4.80		3.75
September 30		13.50		4.80
December 31		6.50		6.00
2005
March 31		8.00		6.50
June 30		7.00		2.75
September 30		6.75		5.25
December 31		6.60		5.00
2006
March 31		5.95		4.16
June 30		9.70		5.65

On August 28, 2006, the closing price of our Common stock was $6.99.

CAPITALIZATION

The following table shows as of June 30, 2006:

	•	our actual capitalization; and

	•	on a pro forma as adjusted basis to reflect the sale of _________ shares of common stock in this offering and the receipt of estimated net proceeds of approximately $____ million from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

	As of June 30, 2006

	Actual		As adjusted

	(unaudited) (in thousands of US dollars, except that share and per share data)
Preferred stock, $0.001 par value: 10,000,000 shares authorized, no shares issued and outstanding		—
Common stock, $0.002 par value: 50,000,000 shares authorized, 13,346,555 shares issued and outstanding, actual; 50,000,000 shares authorized, ___________________ shares issued and outstanding, as adjusted		27
Additional paid-in capital		4,922
Total stockholders’ equity		20,612

The table above excludes (a) 60,000 shares issuable upon exercise of outstanding stock options and an additional 1,590,500 shares of common stock reserved as of June 30, 2006 for future stock option grants and purchases under our 2005 Stock Compensation Plan, and (b) 100,000 shares issuable upon exercise of warrants issued to Maxim Group LLC and Chardan Capital Markets, LLC in connection with an agreement to provide to us general financial advisory and investment banking services.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our historical net tangible book value as of March 31, 2006 was an approximately $___________ per share of common stock. Net tangible book value per share is equal to our total tangible assets less total liabilities, divided by the number of shares of shares of common stock outstanding.

Dilution in pro forma as adjusted net tangible book value per share represents the difference between the amount per share paid by purchasers of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering. After giving effect to our sale of ______________________ shares of common stock in this offering at an assumed price of $_________ per share and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2006 would have been approximately $_______ million or $__________ per share. The amount represents an immediate increase in pro forma as adjusted net tangible book value of $________ per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $________ per share to purchasers in this offering. The following table illustrates this per share dilution:

The following table illustrates the per share dilution to the new investors:

Assumed public offering price per share		$_____
Historical net tangible book value per share as of June 30, 2006	$_____
Increase in pro forma net tangible book value per share attributable to new investors	______
Pro forma as adjusted net tangible book value per share after this offering		_______
Dilution per share to new investors in this offering		$_____

The foregoing discussion and tables assume no exercise of the underwriters’ over-allotment option and excludes(a) 60,000 shares issuable upon exercise of stock options and 1,590,500 shares of common stock reserved as of June 30, 2006 for future stock grants and purchases under our 2005 Stock Compensation Plan, and (b) 100,000 shares issuable upon exercise of warrants issued to Maxim Group LLC and Chardan Capital Markets, LLC in connection with an agreement to provide to us general financial advisory and investment banking services.

SELECTED FINANCIAL DATA

The statements of operations data for the years ended December 31, 2003, 2004 and 2005 and the balance sheet data as of December 31, 2004 and 2005 are derived from our audited financial statements included elsewhere in this prospectus. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

	Years Ended December 31,											Six Months Ended June 30,

(in thousands, of US dollars except per share data)	2005		2004		2003			2002		2001		2005		2006

													(unaudited)		(unaudited)
RESULTS OF OPERATIONS
Revenues		64,183		46,815		33,121			24,250		14,284		29,440		39,537
Income from continuing operations before income tax provision		5,500		5,341		3,844			1,807		716		3,232		5,012
Income tax provision		—		—		546			—		—		—		588
Income from continuing operations		5,500		5,341		3,298			1,807		716		3,232		4,424
Loss from discontinued operations		—		—		2,148			—		—		—		—

Net income		4,950		4,807		1,150			1,626		644		2,908		3,982

Earnings per share from Continuing Operations
Basic		0.37		0.37		0.25			0.12		0.04		0.22		0.30
Diluted		0.37		0.37		0.25			0.12		0.04		0.22		0.30
Earnings per share from Discontinued Operations
Basic		—		—		(0.17	)		—		—		—		—
Diluted		—		—		(0.17	)		—		—		—		—
FINANCIAL POSITION
Cash, cash equivalents and restricted cash		961		730		—			—		—		317		2,221
Total assets		39,301		22,520		92,558			7,852		4,887		30,789		43,793
Long term debt, net of current portion		—		—		1,208			605		605		—		—

Notes to Consolidated Selected Financial Data

REORGANIZATION

In March 2004, pursuant to a Joint Venture Agreement between the Ruili Group Co., Ltd., a PRC corporation (“Ruili Group”), and Fairford Holdings, Inc., a Hong Kong company, the parties formed a sino-foreign joint venture under the name Ruili Group Ruian Auto Parts Co. Ltd., of which Fairford owned 90% and the Ruili Group owned 10%. The shareholders and their respective equity interests in Fairford and the Ruili Group were identical. In connection with its formation, the Joint Venture acquired the business segment of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”). This was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade receivables, inventories, plant and machinery, and the assumption of short and long term borrowings for a purchase price of $6,390,000. Fairford then transferred these assets and liabilities to the Joint Venture as consideration for its 90% ownership interest of the Joint Venture. The Ruili Group transferred inventory as its capital contribution for its 10% interest in the Joint Venture. The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the assets and liabilities of the Transferred Business. Certain historical information of the Transferred Business is based on the operation of the Transferred Business when it was owned by the Ruili Group.

In May 2004, pursuant to the terms of a Share Exchange Agreement dated as of April 4, 2004, among the Company, Keating Reverse Merger Fund, LLC, Xiao Ping Zhang, Xiao Feng Zhang and Shuping Chi (collectively, the “Sellers”), and Fairford, the Company acquired from the Sellers all of the issued and outstanding equity interests of Fairford. As consideration for the Fairford Shares, the Company issued 1,000,000 shares of its Series A Convertible Preferred Stock, which were convertible into an aggregate of the 194,305,800 shares of common stock. The consideration for the acquisition was determined through arms length negotiations between the management and the Fairford sellers. As a result of the acquisition, the Fairford sellers acquired approximately 97.5% of the Company’s common stock on an as converted basis.

Subsequent to the transfer and reorganization that occurred in March, 2004, the Company began presenting its financial statements as that of the successor company, being only those assets, liabilities, results of operations, and cash flows relating to the Transferred Business. Prior periods were restated to reflect comparable prior period results of the Transferred Business.

The financial statements for the years ended December 31, 2004 and 2005 have been prepared to present the financial position, results of operations and cash flows of the continuing business of SORL Auto Parts, Inc (the successor’s financial statements). The financial statements reflect the accounts of the “transferred business” (as described in the preceding paragraphs titled “REORGANIZATION”), from the Ruili Group to the Joint Venture.

The financial statements for the year ended December 31, 2003 have been restated to present the financial position, results of operations and cash flows for the transferred business to provide comparative financial information to that of fiscal 2004. The financial statements have been restated to remove the assets, liabilities and results of operations related to “non-transferred business” as described in the preceding paragraphs titled “REORGANIZATION”. The assets, liabilities and results of operations of the “non-transferred business” have been presented as discontinued operations in the accompanying financial statements. These transactions have been accounted for as a reverse spin-off in according with EITF 02-11, Accounting for Reverse Spin-offs Followed by a Recapitalization.

(A)	Selected Financial Data for the years ended 2005 and 2004 represent the actual financial amounts for SORL Auto Parts, Inc. (The transferred business).

	All information for the years 2003, 2002 and 2001 that is presented has been adjusted to give effect to the reorganization discussed above and represents the selected financial data of the transferred business on a proforma basis. That is to say that revenues, income from continuing operations, income tax benefit, earnings per share basic and diluted, cash, total assets and debt have been presented as if SORL Auto Parts (the transferred business) had been operating as a an individual entity prior to the reorganization which occurred during 2004.

(B)	Earnings per share represents the income from the transferred business for the years ended 2005 and 2004 based upon the actual net income of SORL Auto Parts divided by the weighted average common shares outstanding computed under the basic and fully diluted methods.

	Earnings per share for the year ended 2003 has been presented giving retroactive effect to the 194,305,800 shares issued in connection with share exchange discussed above together with the subsequent stock split of 15 for 1. Earnings per share is based on net income of $1,150,000. Earnings per share from continuing operations (basic and diluted) would have resulted in $.25 per share while earnings per share from discontinued operations would have yielded $(.17) (negative) per share.

	Earnings per share for the years ended 2002 and 2003 have been computed based upon the proforma net income from SORL Auto Parts, Inc. (the transferred business) divided by the weighted average common shares outstanding (basic and diluted) after giving retroactive effect to the 194,305,800 shares issued in connection with share exchange discussed above together with the subsequent stock split of 15 for 1.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

OVERVIEW

On May 10, 2004, we acquired all of the issued and outstanding equity interests of Fairford Holdings Limited, a Hong Kong limited liability company. Until we acquired Fairford, we had only nominal assets and liabilities and no business operations. Although Fairford became a wholly owned subsidiary following the acquisition, because the acquisition resulted in a change of control, the acquisition was recorded as a “reverse merger” whereby Fairford is considered to be the accounting acquirer. As such, the following results of operations are those of Fairford.

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

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

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

As a result of the foregoing, through Fairford’s 90% interest in the Joint Venture, we manufacture and distribute automotive air brake valves and related components in China and internationally for use primarily in vehicles weighing over three tons, such as trucks and buses.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

ACCOUNTING METHOD

We use the accrual method of accounting which recognizes revenues when earned and expenses when incurred. Our financial statements are prepared on a calendar year basis.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

INVENTORIES

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

INCOME TAXES

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

Under a Tax Holiday in PRC, we were granted an exemption from income taxes for two years commencing from the first cumulative profit-making year and a 50% reduction in the income tax rates for the following three years. The fiscal year ended December 31, 2004 was the first accumulative profit-making year. We are entitled to a 50% income tax reduction from the applicable rate in the fiscal years ended December 31, 2006, 2007 and 2008. The current applicable income tax rate is 26.4% in Ruian City which is located in the coastal economic development zone. If we had paid taxes at the normal rate for the year ended December 31, 2005, our net income would have decreased by $1,306,697 to $3,642,913.

REVENUE RECOGNITION

In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue is recognized when merchandise is shipped and title passes to the customer and collectibility is reasonably assured. Revenues consist of the invoice value of the sale of goods and services net of value added tax, rebates and discounts. Until August 31, 2005, we were subject to a surtax for an Education Tax imposed by the Chinese local government at the rate of 4% of the value added tax, which was recorded as a deduction from gross sales.

We recognize revenue for shipping and handling costs to customers. Shipping and handling expenses incurred by us are included in selling and administrative expenses in the accompanying consolidated statements of income.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of accounts receivable. We perform ongoing credit evaluations with respect to the financial condition of the account debtors, but do not require collateral. In order to determine the value of our accounts receivable, we record a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable.

OPERATING RESULTS

(1) Results of operations for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005.

SALES

	Three Months ended June 30, 2006					Three Months ended June 30, 2005

Air brake valves & related components	$	15.1	M	75	%	$	11.4	M	77	%
Non-valve products	$	5.0	M	25	%	$	3.5	M	23	%
Total	$	20.1	M	100	%	$	14.9	M	100	%

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

Net sales were $20,117,002 and $14,924,151 for the three months ended June 30, 2006 and 2005, respectively. Net sales for the three months ended June 30, 2006 increased by $5.2 million or 34.8% to $20.1 million, compared with the same period of 2005. The increase in sales was mainly from the international market. This increase was a result of the Company’s efforts to develop more customers and penetrate these market segments.

A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for the three months ended June 30, 2006 and 2005 is as follows:

	Three Months ended June 30, 2006		%			Three Months ended June 30, 2005		%

	(U.S. dollars in million)
China OEM market	$	6.0		30	%	$	5.1		34	%
China Aftermarket	$	5.2		26	%	$	4.7		32	%
International market	$	8.9		44	%	$	5.1		34	%

Total	$	20.1		100	%	$	14.9		100	%

The sluggish Chinese heavy duty truck market has been gradually restoring. The sales for the OEM market increased $0.9 million or 17.6% for the three months ended June 30, 2006, as compared to the same period of 2005. The Company’s strategy is to introduce more innovative products to meet the OEM customers’ needs.

Currently SORL has 27 authorized distributors covering nearly all regions in China, who in turn sell our products to over 800 sub-distributors. Based on the well established and continuously improving sales networks, SORL achieved total revenue of $5.2 million in domestic aftermarket sales for the three months ended June 30, 2006, an increase of $0.5 million, or 10.6% as compared to the same period of last year.

Export sales grew by $3.8 million or approximately 74.5% for the three months ended June 30, 2006, as compared to $5.1 million for the same period of 2005. This increase reflects our continued focus on customer service, strong execution, introduction of new products, increased productivity of our expanded contract sales force, more efficient targeted marketing spending on our catalogs, web sites and international trade shows as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in these market segments. Additionally, the Company has been able to offer a much wider product line including non-valve products which are outsourced from the Ruili Group. Such outsourced non-valve products include power steering pumps and other pumps, automobile electrical components and auto meters.

COST OF SALES

Cost of sales for the three months ended June 30, 2006 increased to $15.5 million from $ 11.6 million for the same period of 2005, a $3.9 million or 33.9 % increase which was consistent with the increase in revenues.

GROSS PROFIT

For the three months ended June 30, 2006, gross profit was $4,639,344, as compared to $3,362,372 for the same period of 2005, an increase of $1,276,972 or 38.0%. Gross margin was 23.1% for the three months ended June 30, 2006, an increase of 0.6% from 22.5% for the same period of 2005.

The approximately 3.4% appreciation of RMB against the U.S. dollar (USD) had certain negative impact on gross margin. About 44% of total revenue for the three months ended June 30, 2006 was denominated in USD, while nearly all costs were denominated in RMB. The impact from the appreciation of the RMB was approximately 1.1% on Gross Margin.

We purchase various components and raw materials for use in our manufacturing processes. The principal raw materials we purchased are aluminum and steel. For the three months ended June 30, 2006, the market price of steel remained relatively stable, but the market price of aluminum increased $425 per ton or 24.3% as compared to the same period of 2005. The rising price of materials had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers. This negatively impacted our gross margin by approximately $0.49 million in the second quarter of 2006.

Those negative impacts on Gross Margin were largely offset by economies of scale, shift of sales mix and consistent efforts in production technique optimization. In 2006, we took several steps to mitigate the adverse impact from the increase in raw material cost. For example, from April 2006, we used substitute material of lower cost in our production while maintaining the same quality level of products, thereby reducing material costs by approximately $0.48 million for the three months ended June 30, 2006. Meanwhile, we replaced the machining approach with a molding process, thereby reducing processing steps and materials consumption and increasing productivity. Furthermore, we shifted the product mix and introduced valve products with higher profit margins. In addition, in the process of removing impurities from liquid aluminum, historically we have used the high-temperature method. The adoption of a new technique of using a low-temperature method helped save power consumption.

SELLING EXPENSES

Selling expenses were $1,376,442 for the three months ended June 30, 2006, as compared to $954,666 for the same period of 2005, an increase of $421,776 or 44.2%. The increase was mainly due to the effect of the following factors:

(1) Decreased transportation expenses. The Company recorded $150,644 of transportation expenses for the three months ended June 30, 2006, as compared to $221,601 for the same period of 2005, a decrease of $70,957 or 32%, partially because of the reduced shipping costs due to the intense competition in the Chinese transportation industry, and partially because of the Company’s selling on ex-works terms to some domestic customers, as well as the efforts to optimize its shipping management and the increase in international sales which are generally made on FOB basis. In the circumstances of rising material costs, while it was difficult to pass such increased costs to customers by raising selling prices, the Company managed to require certain buyers to assume the shipping expenses for their own accounts.

(2) Increased product warranty expenses. The Company recorded $707,535 of product warranty expenses for the three months ended June 30, 2006, as compared to $126,988 for the same period of 2005, an increase of $580,547, mainly attributed to a specific “3-R Warranties” service charge (for repair, replacement and refund) paid to an OEM customer. Due to miscommunication of certain technical parameters for the products, the Company bore the responsibility and reached an agreement with the customer for a one-time indemnification to cover its remedial expenses.. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $ 86,289 for the three months ended June 30, 2006, as compared to $652,039 for the same period of 2005, a decrease of $ 565,750 or 86.8%. The decrease was mainly due to such factors as below: The stock-based compensation expenses increased by $164,435, and there was no comparable expense in the prior year since the options were issued in 2006. The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary and welfare, travel expenses, supplies and utilities totaling $82,911 as compared to the same period of 2005. The R&D expense, which is included in general and administrative expenses, increased by $ 145,178 as compared to the same period of 2005, as discussed below. The aforementioned increases were largely offset by the reversing of bad debt provision of $ 943,325, which was mainly due to the collection of a significant portion of account receivables with aging over one year during the six months ended June 30, 2006. In 2005, the Company temporarily extended credit terms to certain OEM customers and aftermarket distributors as our then domestic market strategy. On the other hand, the Company still provided allowances for bad debt consistent with our normal practices. During the three months ended June 30, 2006, those account receivables under the above mentioned extended term arrangements gradually matured and were collected, hence the reversing of bad debt provision.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense was $177,234 for the three months ended June 30, 2006, as compared to $24,708 for the same period of 2005, an increase of $152,526, as a result of the Company’s establishment of a team to develop new innovative products. This increase was primarily due to higher personnel-related costs resulting from an increase in employee headcount in our project team, material consumption and supplies and utilities as we strengthened our internal development efforts.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $252,001 for the three months ended June 30, 2006, compared with that of $200,653 for the same period of 2005, an increase of $51,348 or 25.6%, as a result of new investment in fixed assets, mainly production equipment and tools.

FINANCIAL EXPENSE

Financial expense for the three months ended June 30, 2006 increased by $115,552 to $241,900 from $126,348 for the same period of 2005. Financial expense consists mainly of interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $11.5 million as of June 30, 2006, an increase of $3.3 million from $8.2 million at the end of June 30, 2005. The funds were used for working capital purposes, as well as new equipment purchases, to support the anticipated increase in revenues in the third quarter of fiscal 2006.

Interest rates ranged between 5.220% and 5.580% per annum.

OTHER INCOME

Other income included $ 68,696 of subsidy income from local governments for the three months ended June 30, 2006. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.

INCOME TAX

There was no income tax expense for the fiscal year ended December 31, 2005 and 2004. As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% for the three years ended December 31, 2006, 2007, and 2008. Income taxes expense of $293,897 was recorded for the second quarter of 2006.

STOCK—BASED COMPENSATION

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

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

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

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the Joint Venture. Minority interest in income amounted to $ 264,246 and $156,285 for the three months ended June 30, 2006 and 2005, respectively.

NET INCOME

Net income for the three months ended June 30, 2006 increased by approximately $971,655, or 69%, to a net income of $2,378,216 from a net income of $1,406,561 for three months ended June 30, 2005 due to the factors discussed above (Sales, Cost of Sales, Gross Profit, Selling, General and Administrative Expenses, Research and Development Expense, Depreciation and Amortization, Financial Expense, Other Income, Income Tax and Stock-Based Compensation). Basic and diluted earnings per share was $0.18 and $0.11 for the three months ended June 30, 2006, and for the three months ended June 30, 2005, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - The Company’s operations generated cash of $4,514,845 for the three months ended June 30, 2006, as compared to a negative operating cash flow of $435,727 for the same period of 2005, primarily as a result of the following:

1. For the three months ended June 30, 2006, net income was $ 2,378,216 as compared to $1,406,561 for the same period of 2005, an increase of $ 971,655. The increase was primarily as a result of the increase in sales.

2. For the three months ended June 30, 2006, accounts receivable and trade related notes receivable decreased by $ 1,249,744 primarily due to the accelerating collection efforts for OEM customers.

3. During the three months ended June 30, 2006, inventory increased by $ 239,406, and account payables and notes payables increased by $ 2,191,393. These changes combined with the effects of the increase or decrease in other operating assets and liabilities resulted in an aggregate increase of cash inflows from operations by $ 1,082,625.

As of June 30, 2006, the Company had cash and cash equivalents of $2,221,050, as compared to cash and cash equivalents of $961,131 as of December 31, 2005. The Company had working capital of $ 14,951,191as of June 30, 2006, as compared to working capital of $10,571,086 as of December 31, 2005, reflecting current ratios of 1.71:1 and 1.49:1, respectively.

INVESTING - During the three months ended June 30, 2006, the Company expended net cash of $ 502,764 in investing activities, including $247,028 for acquisition of property and equipment to support the growth of business and $ 255,736 for investment in construction in progress. For the three months ended June 30, 2005, the Company utilized $785,524 in investing activities.

FINANCING –During the three months ended June 30, 2006, the Company received aggregate bank loans in the amount of $1,375,757 under its credit facilities, and the Company repaid $ 4,419,381 on its outstanding debt.

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

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

(2) Results of operations for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005.

SALES

	Six Months ended June 30, 2006					Six Months ended June 30, 2005

Air brake valves & related components	$	28.7	M	73	%	$	22.5	M	77	%
Non-valve products	$	10.8	M	27	%	$	6.9	M	23	%

Total	$	39.5	M	100	%	$	29.4	M	100	%

Net sales were $39,536,586 and $29,440,016 for the six months ended June 30, 2006 and 2005, respectively. Net sales for the six months ended June 30, 2006 increased by $10.1 million or 34.3% to $39.5 million, compared with the same period of 2005. The increase in sales was mainly from the international market. This increase was the result of the Company’s efforts to develop more customers and penetrate these market segments.

A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for six months ended June 30, 2006 and 2005 is as follows:

	Six Months ended June 30, 2006		%			Six Months ended June 30, 2005		%

	(U.S. dollars in million)
China OEM market	$	11.8		30	%	$	11.7		40	%
China Aftermarket	$	12.7		32	%	$	8.4		29	%
International market	$	15.0		38	%	$	9.3		31	%

Total	$	39.5		100	%	$	29.4		100	%

The sluggish Chinese heavy duty truck market has been gradually rebounding. The sales for the OEM market increased only $0.1 million or 0.9% for the six months ended June 30, 2006, as compared to the same period of 2005, mainly due to the decrease in sales by $ 0.8 million for the first quarter of 2006 as compared to the same period of 2005. The Company’s strategy is to introduce more innovative products to meet the OEM customers’ needs.

Currently SORL has 27 authorized distributors covering nearly all regions in China, who in turn sell our products to over 800 sub-distributors. Based on the well established and continuously improving sales networks, SORL achieved total revenue of $12.7 million in domestic aftermarket sales for the six months ended June 30, 2006, an increase of $4.3 million, or 51.2% as compared to the same period of last year.

Export sales grew by $5.7 million or approximately 61.3% for the six months ended June 30, 2006, as compared to $ 9.3 million for the same period of 2005. This increase reflects our continued focus on customer service, strong execution, introduction of new products, increased productivity of our expanded contract sales force, more efficient targeted marketing spending on our catalogs, web sites and international trade shows as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in these market segments. Additionally, the Company has been able to offer a much wider product line including non-valve products which are outsourced from the Ruili Group. Such outsourced non-valve products include power steering pumps and other pumps, automobile electrical components and auto meters.

COST OF SALES

Cost of sales for the six months ended June 30, 2006 increased to $30.5 million from $ 22.9 million for the same period of 2005, a $7.6 million or 33.4% increase which was consistent with the increase in revenue.

GROSS PROFIT

For the six months ended June 30, 2006, gross profit was $9,035,102, as compared to $6,582,064 for the same period of 2005, an increase of $2,453,038 or 37.3%. Gross margin was 22.9% for the six months ended June 30, 2006, an increase of 0.5% from 22.4% for the same period of 2005.

The approximately 3.4% appreciation of RMB against the U.S. dollar (USD) had certain negative impact on gross margin. About 38% of total revenue for the six months ended June 30, 2006 was denominated in USD, while nearly all costs were denominated in RMB.

We purchase various components and raw materials for use in our manufacturing processes. The principal raw materials we purchased are aluminum and steel. For the six months ended June 30, 2006, the market price of steel remained relatively stable, but the market price of aluminum increased $425 per ton or 24.3% as compared to the same period of 2005. The rising price of materials had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers.

Those negative impacts on Gross Margin were offset by economies of scale, shift of sales mix and consistent efforts in production technique optimization. In 2006, we took several steps to mitigate the adverse impact from the increase in raw material cost. For example, from April 2006, we used substitute material of lower cost in our production while maintaining the same quality level of products, thereby reducing material costs by approximately $0.48 million for the six months ended June 30, 2006. Meanwhile, we replaced the machining approach with a molding process, thereby reducing processing steps and materials consumption and increasing productivity. Furthermore, we shifted the product mix and introduced valve products with higher profit margins. In addition, in the process of removing impurities from liquid aluminum, historically we have used the high-temperature method. The adoption of a new technique of using a low-temperature method helped save power consumption.

SELLING EXPENSES

Selling expenses were $2,244,458 for the six months ended June 30, 2006, as compared to $ 1,881,755 for the same period of 2005, an increase of $ 362,703 or 19.3%. The increase was mainly due to the effect of the following factors:

(1) Decreased transportation expenses. The Company recorded $371,466 of transportation expenses for the six months ended June 30, 2006, as compared to $584,554 for the same period of 2005, a decrease of $213,088 or 36.5%, partially because of the reduced shipping costs due to the fierce competition in the transportation industry, and partially because of the Company’s selling on ex-works terms to some domestic customers, as well as the efforts to optimize its shipping management and the increase in international sales which are generally made on FOB basis. In the circumstances of rising material costs, while it was difficult to pass such increased costs to customers by raising selling prices, the Company managed to require certain buyers to assume the shipping expenses for their own accounts.

(2) Increased product warranty expenses. The Company recorded $883,540 of product warranty expenses for the six months ended June 30, 2006, as compared to $228,521 for the same period of 2005, an increase of $655,019, mainly attributed to a specific “3-R Warranties” service charge (for repair, replacement and refund) paid to an OEM customer. Due to miscommunication of certain technical parameters for the products, the Company bore the responsibility and reached an agreement with the customer for a one-time indemnification to cover its remedial expenses. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $1,183,251 for the six months ended June 30, 2006, as compared to $ 1,206,293 for the same period of 2005, a decrease of $ 23,042 or 1.91%.The decrease was mainly due to such factors as below: The stock-based compensation expenses increased $169,405, and there was no comparable expense in the prior year since the options were issued in 2006. The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary and welfare, travel expenses, supplies and utilities totaling $419,776 as compared to the same period of 2005. The R&D expense, which is included in general and administrative expenses, increased by $ 190,934 as compared to the same period of 2005, as we will discussed below. The aforementioned increases were largely offset by the reversing of bad debt provision during the second quarter of 2006, as discussed above in the section of results of operations for the three months ended June 30, 2006.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expense was $240,430 for the six months ended June 30, 2006, as compared to $49,496 for the same period of 2005, an increase of $190,934, as a result of the Company’s establishment of a team to develop new innovative products. This increase was primarily due to higher personnel-related costs resulting from an increase in employee headcount in our project team, material consumption and supplies and utilities as we strengthened our internal development efforts.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $516,995 for the six months ended June 30, 2006, compared with that of $ 392,657 for the same period of 2005, an increase of $124,338 or 31.7%, as a result of new investment in fixed assets, mainly production equipment and tools.

FINANCIAL EXPENSE

Financial expense for the six months ended June 30, 2006 increased by $ 320,647 to $ 507,447, from $186,800 for the same period of 2005. Financial expense consists mainly of interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $11.5 million as of June 30, 2006, an increase of $3.3 million from $8.2 million at the end of June 30, 2005. The funds were used for working capital purposes, as well as new equipment purchases, to support the anticipated increase in revenues in the third quarter of fiscal 2006.

Interest rates ranged between 5.220% and 5.580% per annum.

OTHER INCOME

Other income included $ 68,696 of subsidy income from local governments for the six months ended June 30, 2006. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.

INCOME TAX

There was no income tax expense for the fiscal year ended December 31, 2005 and 2004. As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% commencing the three years ended December 31, 2006, 2007, and 2008. Income taxes expense of $ 587,505 was recorded for the six months ended June 30, 2006.

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the Joint Venture. Minority interest in income amounted to $ 442,441 and $ 323,159 for the six months ended June 30, 2006 and 2005, respectively.

STOCK—BASED COMPENSATION

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

NET INCOME

Net income for the six months ended June 30, 2006 increased by approximately $1,073,540, or 37%, to a net income of $3,981,971 from a net income of $2,908,431 for six months ended June 30, 2005 due to the factors discussed above (Sales, Cost of Sales, Gross Profit, Selling, General and Administrative Expenses, Research and Development Expense, Depreciation and Amortization, Financial Expense, Other Income, Income Tax and Stock-Based Compensation). Basic and diluted earnings per share was $0.30 and $0.22 for the six months ended June 30, 2006, and for the six months ended June 30, 2005, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - The Company’s operations generated cash of $6,467,208 for the six months ended June 30, 2006, as compared to a negative operating cash flow of $ 2,684,291 for the same period of 2005, primarily as a result of the following:

1. For the six months ended June 30, 2006, net income was $3,981,971 as compared to $ 2,908,431 for the same period of 2005, an increase of $1,073,540. The increase was primarily as a result of the increases in sales.

2. During the six months ended June 30, 2006, the increase or decrease of various current operating assets and liabilities resulted in an aggregate increase of cash inflows from operations of $ 2,075,943.

As of June 30, 2006, the Company had cash and cash equivalents of $2,221,050, as compared to cash and cash equivalents of $961,131 as of December 31, 2005. The Company had working capital of $ 14,951,191 as of June 30, 2006, as compared to working capital of $10,571,086 as of December 31, 2005, reflecting current ratios of 1.71:1 and 1.49:1, respectively.

INVESTING - During the six months ended June 30, 2006, the Company expended net cash of $ 873,580 in investing activities, including $ 529,568 for acquisition of property and equipment to support the growth of business and $ 344,012 for investment in construction in progress. For the six months ended June 30, 2005, the Company utilized $ 1,072,227 in investing activities.

FINANCING – During the six months ended June 30, 2006, the Company received aggregate bank loans in the amount of $7,113,564 under its credit facilities, and the Company repaid $11,778,742 on its outstanding debt.

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

Year ended December 31, 2005 as compared to year ended December 31, 2004:

SALES

	2005				2004

Air brake valves & related components	$	47.9M	74.6	%	$	35.9M	76.70	%
Non-valve products	$	16.3M	25.4	%	$	10.9M	23.30	%

Total	$	64.2M	100	%	$	46.8M	100	%

Sales consist of air brake valves and related components manufactured by SORL and sold to domestic OEM and aftermarket customers as well as distribution of non-valve auto parts sourced from related parties.

Total net sales were $64,182,544 and $46,815,037 for the fiscal years ended on December 31, 2005 and 2004, respectively. Net sales in 2005 increased by $17.4 million or 37% to $64.2 million, compared with 2004, despite an approximately 36% decrease in the number of heavy duty trucks produced in China. The increase in sales was primarily due to the expansion in the international market and in China’s aftermarket as a result of improvement in our China sales network.

A breakdown of net sales revenue for our three market segments, domestic OEM market, domestic aftermarket and international market, in 2005 and 2004 were as follows:

	Years Ended December 31,

	2005		%			2004		%

	(U.S. dollars in million)
China OEM market	$	20.6		32	%	$	22.0		47	%
China Aftermarket	$	20.2		32	%	$	12.2		26	%
International market	$	23.4		36	%	$	12.6		27	%

Total	$	64.2		100	%	$	46.8		100	%

For 2005, China’s heavy duty trucks output decreased by 35.7% compared to that in 2004, in contrast to a 45% increase in 2004 from 2003, primarily due to the Chinese Government’s macroeconomic regulation policy for 2005. Notwithstanding the decrease in output, sales revenue for this market segment dropped relatively slightly by 6.4% from $22 million in 2004 to $20.6 million in 2005, principally because of the introduction of new products to satisfy the OEM customers’ requirements, and the granting of extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain market share and strengthen long term relationships.

Currently we have 27 authorized distributors covering nearly all regions in China, who in turn sell the products to over 800 sub-distributors. Based on our well established and continuously improving sales networks, we achieved total revenue of $20.2 million in domestic aftermarket sales, an increase of $8 million, or 65.7% from 2004. During the year, we adjusted our compensation plan for distributors to incentivize sales growth.

Export sales grew by approximately 83%, from $12.6 million in 2004 to $23.4 million in 2005. The increase in sales was attributable to the introduction of new products and greater focus on participation in international trade shows leading to increased awareness of our products. Additionally, we have been able to offer a more complete product line including non-valve products which are sourced from the Ruili Group. Such outsourced non-valve products include power steering pumps and other pumps, automobile electrical components and auto meters. These products accounted for approximately 20% of total export sales in both 2005 and 2004. With respect to the products sourced from the Ruili Group, we act as a distributor.

COST OF SALES

Cost of sales for the fiscal year ended December 31, 2005 increased to $49.9 million from $35.9 million for the fiscal year ended December 31, 2004, or a 39% increase consistent with the increase in revenues. However, our gross margin decreased by approximately 1% from 23.3% in 2004 to 22.3%.

We purchase various components and raw materials for use in our manufacturing processes. The principal raw materials we purchase are aluminum and steel. The price of aluminum and steel increased significantly in 2004 compared to 2003, with aluminum prices continuing to increase in 2005. Steel prices peaked in March 2005 and then started to decrease until they reached levels lower than prices in effect during 2004. We expect that aluminum and steel prices will increase in 2006.

Our average purchase price (net of VAT) for steel materials (including stainless steel sheets) in 2005 was approximately $600 per ton, compared with $465 per ton on average in 2004, and $480 per ton at the end of 2005. The average purchase price (net of VAT) for aluminum ingot in 2005 was approximately $1,865 per ton, in contrast to the levels of $1,680 per ton on average in 2004, and $1,950 per ton at the end of 2005.

Total purchases of steel and aluminum materials in 2005 were 20,371 tons and 3,614 tons, respectively.

GROSS PROFIT

Gross profit for the fiscal year ended December 31, 2005 increased by $3.4 million or 31% to $14.3 million from $10.9 million for the fiscal year ended December 31, 2004, while gross margin decreased by approximately 1% from 23.3% in 2004 to 22.3%.

The approximately 2% appreciation of RMB against USD in late July 2005 had a certain negative impact on the gross margin, since in 2005, about 36% of total revenue was denominated in US Dollars, while nearly all costs were denominated in RMB. However, this impact was minimal as this resulted in an impact of approximately 0.3% on Gross Margin.

The materials price increases have had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers. This negatively impacted our gross margin by 1.2% in 2005, or approximately $0.8 million.

This negative impact on Gross Margin was largely offset by economies of scale and consistent efforts in production technique optimization. For example, in 2005, we replaced the machining approach with a molding process, thereby reducing processing steps and materials consumption and increasing hourly output. Meanwhile, in the process of removing impurities from liquid aluminum, historically we used the high-temperature method. The adoption of a new technique of using a low-temperature method helped save power consumption.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the fiscal year ended December 31, 2005 was $8.1 million or 12.6% of net sales compared to $5.2 million or 11.2% of net sales for the fiscal year ended December 31, 2004.

We incurred $3.9 million in selling and distribution expenses for 2005, a 43% increase from 2004. In addition to the increase in sales, the higher selling expenses were mainly attributable to our increased focus in international sales and marketing, including active participation in various trade shows and fairs, in an attempt to gather industry information, keep up with world market trends and acquaint and acquire more new customers.

General and administrative expenses for the fiscal year ended December 31, 2005 amounted to $4.2 million, increasing by 68% from 2004. The major increase came from the increase in the provision of bad debt expense of $0.85 million in 2005, since we had experienced prolonged account receivable cycles from some of our customers. The remaining general and administrative expenses as a percentage of sales decreased as compared to 2004 as most of these expenses are fixed in nature, and coupled with the increase in revenues, we experienced economies of scale.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $0.86 million for the fiscal year ended December 31, 2005, compared with depreciation and amortization expense of $0.55 million for the fiscal year ended December 31, 2004.

The increase in depreciation expense was primarily due to new investment in fixed assets, mainly production equipment and tools in 2005 for the amount of $2.6 million, to upgrade the processing techniques and increase output.

FINANCIAL EXPENSE

Financial expense for the fiscal year ended December 31, 2005 increased by $401,378 to $688,811 from $287, 433 for the fiscal year ended December 31, 2004. Financial expenses consist of mainly interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $16 million as of December 31, 2005, an increase of $11.2 million from $4.8 million at the end of 2004. The new drawdown of bank loans in 2005 was primarily for purpose of working capital use, as well as new equipment purchase, to support the sales growth.

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

INCOME TAX

There was no income tax expense for the fiscal year ended December 31, 2005 and 2004. As a result of the Joint Venture obtaining its Sino-foreign joint venture status in 2004, per applicable PRC tax regulations, we are exempted from PRC income tax in both 2004 and 2005.

MINORITY INTEREST

Minority interest represents a 10% non-controlling interest in the company. Minority interest in income amounted to US$549,957 and US$534,105 for the fiscal year ended December 31, 2005 and 2004, respectively.

FOURTH QUARTER ADJUSTMENT

During the fourth quarter of 2005, a significant adjustment in the amount of $794,000 was made to provide for potentially uncollectible accounts. That change was necessitated by the extension of temporary special credit terms to certain OEM customers in view of the difficult retail market such customers were experiencing in 2005. Those special credit terms extended payment arrangements for these customers for up to one year.

We evaluate our accounts receivable for impairment on potentially uncollectible accounts each reporting period. We generally write off any accounts we deem uncollectible during the period in which that determination is made. We also establish an allowance based upon the overall balances and the aging of the accounts receivable. The overall increase in accounts receivable resulted in an increase in the allowance for doubtful accounts based upon our policy.

NET INCOME

Net income for the fiscal year ended December 31, 2005 increased by approximately $142,666, to a net income of $4,949,610 from a net income of $4,806,944 for the fiscal year ended December 31, 2004 due to the factors discussed above (Cost of Sales, Gross Profit, Selling and Administrative Expenses, Depreciation and Amortization, Financial Expense, Income Tax and Fourth Quarter Adjustment). Earnings per share for basic and diluted for 2005 and 2004, was $0.37 per share.

Year ended December 31, 2004 compared to year ended December 31, 2003.

SALES

	2004				2003

Brake Valves	$	35.9M	76.7	%	$	25.4M	76.7	%
Non-Valve Products	$	10.9M	23.3	%	$	7.7M	23.3	%

Total	$	46.8M	100	%	$	33.1M	100	%

Sales for the year ended December 31, 2004 increased by $13,694,037 or 41.4% to $46,815,037 from $33,121,000 for the year ended December 31, 2003, primarily as a result of the increase in the volume of our products shipped. The total number of units of valves we shipped increased by 36.6%, from 2,572,000 units to 3,513,000 units between these two periods. The average price of our products per unit increased modestly from $9.88 per unit to $10.23 per unit.

Two factors contributed to the increase in the sales: (1) There was an increase in export sales by 105.1% from $6,143,016 to $12,601,492 between the two years and (2) There was an increase in domestic auto sales in China due to the increase in demand from the repair market and from OEM manufacturers. Total sales from the Chinese domestic market increased by 26.9% from $26,966,082 to $34,213,545 between these two years.

COST OF SALES

Cost of sales for the year ended December 31, 2004 increased to $35,904,232 from $26,263,000 for the year ended December 31, 2003. The increase in cost of sales was due to the increase in sales. Material costs for the year ended December 31, 2004 was $24,349,164 or 52.0% of sales compared to $18,406,876 or 55.6% of sales for the year ended December 31, 2003. Raw material prices for steel and aluminum increased approximately 20% from 2003 to 2004. This negatively impacted our gross margin by 4.8% for 2004. The decrease in material costs as a percentage of sales occurred because we have successfully implemented several measures to reduce cost, such as strengthening internal management, optimizing the production process and improving product structural design.

GROSS PROFIT

Gross profit for the year ended December 31, 2004 increased by $4,052,805 or 59.1 % to $10,910,805 from $6,858,000 for the year ended December 31, 2003. This improvement in gross profit was primarily due to the increase in the sales both in the domestic and international market. Gross margin improved slightly from 20.7% for the year ended December 31, 2003 to 23.3% for the year ended December 31, 2004. The improvement in the gross margin, despite the increase in the raw material pricing, was due to modest increase in the selling price, and better cost management, such as optimizing production process and better structural design of our products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31, 2004 was $5,227,256 or 11.2% of sales compared to $3,157,000 or 9.5% of sales for the year ended December 31, 2003. The increase in selling, general and administrative expenses as a percentage of sales was due primarily to the legal and accounting costs ($0.7M or 1.6% of sales) incurred in connection with the corporate restructuring and our public filings with the Securities Exchange Commission.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased by $1,243,739 to $554,261 during the year ended December 31, 2004 from $1,798,000 for year ended December 31, 2003. The decrease was primarily attributable to the fact that during 2003, we incurred depreciation expense in connection with the building owned by our predecessor. Starting in March 2004, we signed a rental agreement with the Ruili Group to rent a total of 271,713 square feet of factory and warehouse from the Ruili Group for ten years at an annual rental of US$439,000, resulting in rental expenses amounting to less than the depreciation expense.

FINANCIAL EXPENSE

Financial expense for the year ended December 31, 2004 decreased by $4,567 to $287,433 from $292,000 for the year ended December 31, 2003. The decrease in financial expense is due to the decrease in total debt.

OTHER INCOME

There was no other income for the year ended December 31, 2004. For the year ended December 31, 2003, the other income was $435,000. This was primarily due to the tax rebate and interest expense subsidy from the local government to the Joint Venture for its investments in upgrading its technology.

INCOME TAX

There was no income tax for the year ended December 31, 2004 compared with income tax of $546,000 for the year ended December 31, 2003. As a result of the Joint Venture obtaining its foreign joint-venture status in 2004, it is exempted from PRC income tax.

MINORITY INTEREST

Minority Interest represents a 10% non-controlling interest in the company. Minority Interest in income amounted to $534,105 and US$-0- for year ended December 31, 2004 and 2003, respectively.

NET INCOME

The net income for the year ended December 31, 2004 increased by $4,191,049, or 364.4% to a net income of $5,341,049 from a net income of US$1,150,000 for the year ended December 31, 2003 due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING – Our operations utilized cash resources of $7,356,277 for the fiscal year ended December 31, 2005, as compared to generating cash resources of $2,466,267 for the fiscal year ended December 31, 2004, primarily as a result of the following:

	•	For the year ended December 31, 2005, cash flow provided by sales was $7,631,346 as compared to $5,963,694 for the year ended December 31, 2004, an increase of $1,667,652. The increase was primarily as a result of the increase in sales.

	•	For the year ended December 31, 2005, account receivables increased by $13,590,206, primarily due to the temporary extension of credit terms to selected OEM customers as well as certain domestic aftermarket distributors as discussed above. Our Management believes this situation will be largely mitigated in 2006 through the strategic move of our sales focus from the domestic OEM market to the international markets, therefore providing us with the ability to restructure our OEM customer base by gradually phasing out customers with lower returns and higher credit risks. We temporarily extended credit terms to selected OEM customers and aftermarket distributors to strengthen our competitiveness in the Chinese domestic market. The approval of the credit term extension is centralized with our senior executives. Approval is granted to OEM customers based on evaluation of their financial strength, long term viability and track records. The OEM customers who generally obtain extended terms are large, state-owned auto manufacturers with satisfactory track records with us. In 2005, the Chinese Government’s macroeconomic control policy, which was designed to prevent a hyper expansionary economy, indirectly impacted China’s heavy duty truck market. Management believes the impact is temporary and will not impair the customers’ ability to participate in the overall high economic growth in China in the long run. We also temporarily extended credit terms to selected aftermarket distributors to support their financial needs for marketing activities in anticipating the aftermarket growth potentials. The authorized distributors sell only “SORL” products and have long term relationship with us. Management believes those receivables are collectible and under control. However, in accounting practice, management provides sufficient amount of allowance for doubtful accounts on a prudent basis.

	•	For the year ended December 31, 2005, inventory increased by $637,283. We maintain a low level of inventory with an inventory conversion period of approximately 19 days for 2005, the same as that for 2004, which largely reduced working capital requirements. Because of the strong demands for its products, we maintain less than one week of finished goods inventory. A low level of raw materials for approximately four to five days of production requirements are maintained in stock. Raw materials are readily available, given our access to different suppliers and efficient and timely delivery available. The majority of the WIP balances are incurred during later steps in manufacturing. We effectively adopt a “pull” system in our production.

	•	For the year ended December 31, 2005, account payables decreased by $970,989, or 20.5%, compared to the year ended December 31, 2004, mainly due to suppliers’ reluctance to extend long credit terms given the increased material prices. Prepayments at December 31, 2005 primarily represented advance payments for raw materials and equipment purchases. Prepayments as of December 31, 2005 increased by 28% to $1.8 million from $1.4 million as of December 31, 2004.

At December 31, 2005, we had cash and cash equivalents of $961,131, as compared to cash and cash equivalents of $729,875 at December 31, 2004. We had working capital of $10,571,086 at December 31, 2005, as compared to working capital of $6,092,799 at December 31, 2004, reflecting current ratios of 1.49:1 and 1.55:1, respectively.

INVESTING - During the fiscal year ended December 31, 2005, we expended net cash of $3,982,703 in the investing activities, including $2,623,151 for acquisition of property and equipment to support the growth of business, and $1,358,429 from the receipt of notes receivable from customers which were endorsed by the customers’ banks. For the fiscal year ended December 31, 2004, we utilized $768,310 in investing activities.

FINANCING – During the fiscal year ended December 31, 2005, we made new net drawdowns amounting to $11,195,799 from banks. We have established revolving credit facilities with Bank of China and China CITIC Bank in the aggregate amount of 140 million RMB (equivalent to approximately US$17.5 million). The maturity dates of advances under these facilities range from three months to one year with interest rates tied to the official rate set by the Chinese Central Bank. The facilities are guaranteed by the Ruili Group but are otherwise unsecured. During the fiscal year ended December 31, 2004, the Company repaid $968,082 of its outstanding debt. Net proceeds from bank loans were utilized primarily to cover the increasing working capital requirements in line with our rapid business growth including as well as cash requirements for new equipment acquisition given the growing demand for products and the limited production capacity of our existing equipment.

We primarily use bank borrowings to finance the increased accounts receivables resulting from the extended credit terms to the customers. We maintain good relationships with local banks. We have secured sufficient lines of credit to cover working capital requirements, and expect the ability to obtain higher credit lines in the event that receivables continue to increase.

Our management has taken a number of steps to restructure our customer base and phase out accounts which frequently fail to make prompt payments and bring lower returns in the long run, placing more efforts on receivables collection and continuing development of high profit margin new products, as well as adopting steps for further cost saving such as improving material utilization rate.

OFF-BALANCE SHEET ARRANGMENTS

At December 31, 2005, 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.

Contractual Obligations

A summary of the Company’s contractual Obligations at December 31, 2005 is as follows:

		Payments due by period

Contractual Obligations		Total		Less Than 1 Year		1 to 3 Years		3 to 5 Years		More Than 5 Years

Short-Term Debt Obligations	(A)	$	16,026,717		16,026,717		—		—		—
Capital Lease Obligations			—		—		—		—		—
Operating Lease Obligations	(B)		3,519,320		439,540		879,080		879,080		1,321,620
Other Long-Term Liabilities Reflected on the Company’s Balance Sheet Under GAAP			—		—		—		—		—

Total		$	19,546,037		16,466,257		879,080		879,080		1,321,620


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

	$10.25M	Guaranteed by Ruili Group Co., Ltd., a related party;
	$2.43M	Guaranteed by Ruili Group Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders;
	$3.35M	Guaranteed by Shenghuabo Group Co., Ltd., a non-related party.

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

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

BUSINESS

We develop, manufacture and distribute automotive air brake valves and related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket globally. Our main products include spring brake chambers, clutch servos, air dryers, main valves and manual valves, all of which are used in the brake systems for various types of commercial vehicles weighing more than three tons such as trucks and buses. We are located in Ruian City, Wenzhou, Zhejiang Province, People’s Republic of China. With approximately 1,400 auto parts manufacturers in the area, Wenzhou is recognized as the largest center of automotive parts manufacturing in China.

CHINA AUTOMOBILE AND AUTOMOTIVE PARTS INDUSTRY

The automobile industry is one of China’s key industries, contributing significantly to the growth of China’s economy. Mr. Changming Xu, head of Economic Consulting Center under the State Information Center, predicted that the continued growth of the Chinese economy will in turn result in the growth of the Chinese automotive industry for at least another decade. It is expected that, during the Eleventh “Five-Year Plan” period (2006 – 2010) adopted by the Chinese government, China’s GDP will maintain a high growth rate of at least 7% per annum. The China Machine Industry Institute indicates that in 2006 total automobile purchases in China will have a 10% share of the overall global consumption, an increase from 8.7% in 2005, and by 2010, total automobile output in China will reach 10 million units per annum compared to output of 5.1 million units in 2005. Industry experts estimate that by 2007 China will become the third largest country in automobile manufacturing and by 2020 the largest one in the world.

As for the commercial vehicles segment, for the five-year period between 1999 and 2004, the compounded annual growth rate (CAGR) for China’s truck sales was 16.75%. By the end of 2010, the output for all types of trucks in China is expected to reach 2.2 million units per annum compared with estimated production capacity of 1.6 million units in 2005. Output for heavy duty trucks by 2010 is expected to be 0.65 million units per annum, with CAGR anticipated between 10% and 15% during this period. This forecast is based on the prediction that the Chinese government will maintain its active fiscal policy, continue the development of western China and the restoration of the Northeastern China’s traditional industrial base, invest in infrastructure projects, and enforce the ban on overloading of trucks, all of which would boost demand for heavy duty trucks, as well as for medium trucks. However, in 2005, output of heavy duty trucks in China decreased by 37.4% compared to 2004 primarily due to the Chinese Government’s macroeconomic regulation policy for 2005.

In 2004, China’s automobile output and sales volume both reached their highest levels of 5 million units, increasing by 14.1% and 15.5%, respectively, compared to 2003 figures. In 2004, China’s total automotive parts market value was $55 billion, of which 40% was from the aftermarket. In 2005, China’s automobile output and sales volume was 5.78 million and 5.76 million units, increasing by 12.6% and 13.5%, respectively, compared to 2004. The 2005 automotive parts output in China reached $74 billion, of which $46 billion was for OEM’s. It is forecasted that the total China auto parts market value will reach $187.5 billion in 2010, of which $82.5 billion will be for sales to original equipment manufacturers (“OEM’s”).

The overall Chinese auto parts industry is highly fragmented. We predict that the future trends of China’s auto parts industry will be:

	•	Keeping pace with the rapid development of new automobile technologies.

	•	Meeting the requirements from increasingly demanding OEM customers, such as zero defects, and cost reduction.

	•	Partnering with OEM customers in the entire process from R&D to production, and from cost/ quality control to final delivery.

	•	Industry-wide restructuring through consolidation to form several large domestic firms capable of competing with international manufacturers.

PRODUCTS

Installed on the chassis, air brake valves include a collection of various air brake components using compressed air and functioning as the execution device for service braking and parking braking. Our product portfolio includes an extensive range of air brake valves covering forty categories and over eight hundred specifications which are widely used in commercial vehicles weighing over three tons, such as trucks and buses. Our customers include major OEMs in China such as FAW Group, including FAW Qingdao Automobile Works and FAW Jiefang Changchun Automobile Works and Dong Feng Group. With a market –oriented product development focus, we continue to design and develop products that are tailored to our customer’s needs. Our principal products are as follows:

	RL3530 Series Spring Brake Chamber – spring brake chambers are used in the execution of service, parking and emergency braking, In situations when a brake system malfunctions, this product can automatically provide emergency braking force. In 2005, we produced 700,000 units of spring brake chambers, the largest in China

	RL351 Series Air Dryer – Air dryers dry and purify compressed air. This new type of air dryer, combined with unloader valves and heating components, requires no separate installation of certain other components and has multiple functions and a compact structure. It also improves the reliability of the use of other air brake system components. Annual production of this series of products reached 150,000 units in 2005.

	Electric Control Exhaust Relay Valves – Electric control exhaust relay valves greatly shorten the length of pipeline between the air storing tank and the brake chamber, therefore they accelerate the speed to operate the brake system. They are widely used in different types of commercial vehicles.

	Clutch Boosters - We designed and developed clutch boosters, innovative clutch empowering devices, and hold a patent on it in China. They are used for controlling the performance of brake system clutches by means of a pneumatic-driven hydraulic operation. This product features simple structure, small size, high durability and improved effectiveness. We have an annual output of 500,000 units.

	Foot Brake Valves – A foot brake valve is a key device in service braking. Our annual output is approximately 200,000 units.

	Hand Brake Valves – A hand brake valve is an auxiliary device for parking brakes. Our annual output is about 200,000 units.

We have obtained ISO9001/QS9000/VDA6.1 System Certifications in 2001. We passed the ISO/TS 16949 System Certification tests conducted by the TUV CERT Certification Body of TUV Industrie Service GmbH in 2004, and its annual review in 2005. The ISO/TS 16949 System, a higher standard replacing the ISO9001/QS9000/VDA6.1 System, was enacted by the International Automotive Task Force and is recognized by major automobile manufacturers all over the world. As a result, we are qualified to sell our products worldwide.

MARKET AND CUSTOMERS

We are the largest commercial vehicle air brake system manufacturer in China. In general, our customers are divided into three groups: OEM’s in China, aftermarket distributors in China, and international aftermarket customers, accounting for approximately 32%, 32% and 36% of our annual sales in 2005, respectively. To date, we have not had any significant sales to OEM’s outside of the PRC.

OEM Market - We have established long term relationships with major automobile manufacturers in China. Our customers include thirty-nine (39) vehicle manufacturers including all the major truck manufacturers in China. Our valves are also widely used in air brake systems for buses. Typically, bus manufacturers purchase a chassis from truck chassis manufacturers which already have our air brake valves incorporated. In 2005, our three largest OEM customers represented 12.7% of our total sales.

The following table sets forth information regarding the output and market share of major heavy- duty truck manufacturers in China in 2005:

Automobile Manufacturers	FAW Qingdao Automobile Works	FAW Jiefang Changchun Automobile Works	Dongfeng Motor Corporation	Liuzhou Special Auto Manufacturing Co., Ltd	China Nat’l Heavy Duty Truck Group Co., Ltd

Heavy Duty Trucks Output	55,970		71,797	14,000	45,000
Market Share in China	23.7%		30%	5.9%	19%
% Valves Supplied by SORL	40%	22%	18%	50%	5%

The table below compares our largest five OEM customers in 2004 and 2005.

Ranking 2005	Ranking 2004	Customer	% of 2005 Sales	% of 2004 Sales

1	1	FAW Qingdao Automobile Works	5.07%	15.18%
2	2	First Auto Group Purchase Dept.	4.38%	5.6%
3	4	Dongfeng Axle Co., Ltd.	3.25%	2.8%
4	3	Liuzhou Special Auto Manufacturing Co. Ltd	3.04%	4.42%
5	7	Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works	2.65%	1.92%

Our principal OEM customers are:

FAW Qingdao Automobile Works: It is a subsidiary of FAW Group. Established in 1953, FAW is the largest automobile manufacturer in China. During the past 50 years, its product line has expanded from a single product for trucks to a full range of light, medium and heavy vehicles, sedans and buses, with output reaching 6.4 million units. FAW has established joint ventures with major international firms such as Volkswagen and Toyota, while expanding within China through a merger with Tianjin Automobile Industry (Group) Co., Ltd.

Dongfeng Axle Co. Ltd.: It is a subsidiary of Dongfeng Group. Established in 1969, Dongfeng ranks among the top three groups in China’s automotive industry. Its main products include commercial vehicles, passenger cars and automotive parts.

Beiqi Foton Motor Co., Ltd.: Headquartered in Chang Ping District, Beijing, Foton was founded in 1996. It is a state-owned holding company and has assets exceeding 5 billion RMB with 28,000 employees. As the largest auto manufacturer with a complete range of commercial vehicles in China, Foton sells under the brand names of Auman, AUV, View, Saga, Aumark, Ollin, Sup and Forland.

Aftermarket – China. Together with the Ruili Group, we have established a sales network of 27 authorized distributors covering a nationwide market which is divided into seven regions:

	•	Northeast Region (Harbin, Changchun, Shenyang)

	•	North Region (Beijing, Shijiazhuang, Datong, Tianjin)

	•	Northwest Region (Urumchi, Xi’an)

	•	Southwest Region (Chongqing, Liuzhou, Kunming, Chengdu)

	•	Central Region (Zhengzhou, Wuhan, Shiyan)

	•	East Region (Ji’nan, Qingdao, Hefei, Hangzhou, Nanchang, Quanzhou, Shanghai, Xuzhou)

	•	South Region (Guangzhou, Changsha)

The 27 distributors sell only “SORL” products (including products manufactured by the Ruili Group) and in turn channel the products through over 800 sub-distributors. In 2005, our share of the air brake valve aftermarket for China increased to approximately 25%, the largest share in the market, far ahead of our competitions.

International Market – We view the export market as our most important growth area. In 2005, we exported for the aftermarket to more than 60 countries with export sales accounting for 36% of our total revenue, an increase of 83% over 2004. We participate in international exhibitions such as Beijing and Shanghai International Auto Expo, China Export Commodities Fairs in Canton International Auto Parts Expo in Paris and Dubai, UAE, and the International Auto Expo in Frankfurt and in Las Vegas.

Top 7 International Customers

Ranking	Country	Distributors	% of 2004 Sales	% of 2005 Sales	Increase of sales YOY

1	United Arab Emirates	GOLDEN DRAGAN AUTO SPARE PARTS	4.74%	6.46%	87%
2	South Africa	MICO	1.25%	1.57%	72%
3	Canada	F.P.	0.87%	1.21%	93%
4	Taiwan, China	MITA	0.30%	0.94%	333%
5	South Africa	POLMO	0.47%	0.77%	125%
6	Spain	AIR-FREN	0.34%	0.66%	164%
7	USA	KTC	0.75%	0.61%	11%

With respect to sales of our products to OEM manufacturers outside of China, in 1995, we made our first sales which were to TATA of India, the largest automobile manufacturer in India. Although the sales to TATA were nominal in 2005, we expect a substantial increase in 2006 as we plan to open a sales and technical support office in India in 2006.

COMPETITION

The automotive parts industry in China is fragmented. There are many small manufacturers who mainly target the aftermarket. However, there are not many companies who have established nationwide aftermarket sales networks as well as close relationships with leading OEM manufacturers. We believe that the key success factors in the commercial vehicle air brake valves segment are product performance, cost competitiveness, reliability, timely delivery and efficient customer service.

	Domestic Competition – We have three major competitors in China as follows:

	•	China VIE Group: Its principal products are main valves and unloader/governors, with a majority supplied to OEM’s, such as Anhui Jianghuai Automobile Co., Ltd., and the remaining portion for aftermarket and export.

	•	China Shandong Weiming Automotive Products Co. Ltd.: This is a joint venture with WABCO of Germany, and mainly produces spring brake chambers, air dryers, and ABS, primarily supplying to truck and bus OEM’s such as FAW and North-Benz.

	•	Chongqing CAFF Automobile Braking and Steering Systems Co., Ltd.: Its main products are air dryers and main valves. Its principal customer is Chongqing Heavy Vehicle Group Co., Ltd.

	We believe we have the following advantages over our OEM competitors:

	Brand Name: As the largest commercial vehicle air brake valves manufacturer, the “SORL” brand is widely known in China.

	Research: We view technological innovation and leadership as the critical means to enhance our core competence. We operate our own technology department, including a laboratory specializing in the research of automotive brake controlling technologies and development of air brake system products. We believe that with our research capacity, we are better positioned to respond to our customers’ requirements.

	Product Development: Through our international sales offices in the US, Australia and the Middle East, we are able to promptly collect information about the current trends in automotive technologies, which in turn is applied to our new product development. In addition, IT application and strict implementation of ISO/TS16949 standards in the development process greatly shorten the development lead time and improve new product quality.

	Sales Networks: The Joint Venture has contracted with 27 authorized distributors covering 7 regions of China, who in turn channel “SORL” products through over 800 sub-distributors throughout China.

	Management Team: Our management team has been doing business with Chinese OEM manufacturers for approximately ten years, and has developed excellent relationships with these customers. As a result of these relationships, we are able to collaborate with our customers on new product development.

International Competition - In the international market, our largest competitors are WABCO and Knorr. Our low-pricing strategy has enabled us to erode their markets and we aim to increase our market share through brand awareness and quality enhancement.

Our competitive strengths in the rest of the international market, excluding WABCO and Knorr are:

	•	Competitive performance-cost ratio

	•	Quick adaptation to the local markets

	•	Diversified auto products.

“SORL” products enjoy a much lower production cost leveraging on the low labor costs in China. As a result of technology and manufacturing improvements, our products’ performance-cost advantage is increasing. Through our international sales channels in the US, Australia and Middle East, we have been able to respond to local market needs. In addition to our air brake valve products, to fully support existing export customers, we also distribute a wide range of non-valve products which are sourced from the Ruili Group. This reduces customers’ transaction costs.

SALES AND MARKETING

Our in-house sales and marketing team has forty-five (45)members, of whom twenty-two (22) are for domestic (PRC) sales and twenty-three (23) for international sales. Products are sold under the “SORL” trademark, which is licensed royalty free from the Ruili Group, which also uses the SORL trademark to market its own non-valve automotive products.

The commercial vehicle air brake valve market can be divided into 2 segments: OEM and aftermarket.

OEM Market – We sell our products to thirty nine (39) vehicle manufacturers, most of which we have established long-term relationships. Normally, annual sales contracts with key customers are signed at the beginning of the calendar year and are revised as needed.

For 2005, China’s heavy duty trucks output decreased by 35.7% compared to that in 2004, in contrast to a 45% increase in 2004 from 2003. This decrease was primarily due to the Chinese Government’s macroeconomic regulation policy for 2005 to cool down the Chinese economy in view of inflationary pressures. Despite the sluggish OEM market, our sales revenue for this market segment dropped relatively slightly by 6.6% from $22 million in 2004 to $20.5 million in 2005. We promptly took several measures in response to such market change. First, we increased our marketing efforts and developed new products to meet our OEM customers’ requirements. Second, we granted extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain market share and strengthen long term relationships. Third, we re-evaluated and restructured our customer base, and phased out certain problem accounts.

Aftermarket – Our products are also sold in the aftermarket for replacement purposes. With the rapid growth of commercial vehicles output in the past years and the increasing amount of used vehicles, demand for parts have become stronger. Currently we have 27 authorized distributors covering 7 regions in China as listed above. These distributors sell only the Joint Venture’s and the Ruili Group’s products under the “SORL” trademark to over 800 distributors. We provide product technical services to these distributors. We also conduct periodic performance evaluations, and reserve the right to terminate the distributorship of those with frequent delinquencies or poor sales records, and to replace them by other selected firms. For 2005, we achieved total revenue of $20.2 million in domestic aftermarket sales, an increase of 65.7% from 2004.

International Markets – Export expansion is the focus of our marketing strategy. We have signed agreements with three distributors in UAE, Australia and US. We also actively participate in international trade shows such as those held in Paris, Frankfurt, Dubai and Las Vegas. We have sold products to over sixty countries with annual sales growing from $12.6 million in 2004 to $23.3 million in 2005, an increase of 83% year over year.

DISTRIBUTION

We ship finished products directly to OEM customers. The products are distributed to aftermarket customers in China through a network of twenty-seven (27) authorized distributors, which also function as the distribution centers for their respective region. Shipments are delivered directly to international customers.

INTELLECTUAL PROPERTY

We currently employ forty-four (44) technical staff members, thirty-two (32) of whom hold Engineer or Senior Engineer qualifications. Among them, we have 2 staff members who conduct cooperative research on existing technologies, 28 who work on new product design and development, 4 involved in testing, 5 for MIS and 5 for on-site quality management.

In addition to our in-house R&D efforts, we have established cooperative arrangements with universities renowned for their research in the area of automotive engineering, as described below:

	•	Beijing Jiaotong University: Co-development of electronic control air brake valves and research for automotive master cable technology under contract.

	•	Tsinghua University E-Tech Technology Co., Ltd. and Zhejiang University: Contract for MIS projects, including the development of application software for product design innovation and production management;

	•	Huazhong University of Science and Technology: Discussion is underway for cooperation on computer aided manufacturing systems and applications in mold production.

Pursuant to the arrangements with these universities, we have priority rights to acquire the intellectual property which is developed. The financial arrangements as to amount and terms of payment vary depending on the type of project. Normally, we make an initial payment in the form of a research grant and then negotiate a payment upon development of the technology. In 2005, we made only nominal payments to these institutions.

We also consult with the technical staff of the Ruili Group from time to time on a no-cost basis . We collaborate with other industry research groups such as Changchun Automotive Research Institute of FAW Group and Dongfeng Automotive Research Institute of Dongfeng Group. In addition, we interact with our peers in the global market such as Knorr, WABCO and TRW.

Capitalizing on these resources, we have successfully developed innovative products and technologies such as a new type of clutch servo for automatic transmissions; a combined air dryer with build-in temperature-control device and unloader; and an inner-breath spring chamber which enables internal air circulation, thus reduces dirt collection.

New products under development include:

	•	Clutch Servo with Inductive Displacement Transducer: The special transducer triggers an automatic alarm before the clutch gets burned, and also prevents shifting of the transmission without separateness of the clutch, hence enabling harmonious shifting.

	•	Automatic Slack Adjuster: This product automatically adjusts the abrasion clearance between the brake shoe and the brake drum, hence keeping the clearance of different wheels within prescribed limits and ensuring the highest level balance of braking force among wheels.

	•	Loading Sensor Proportion Valve: This product automatically adjusts the input air pressure in the brake chamber in line with changes in load, hence matching braking strength with auto load.

	•	New Type of Foot Brake Valve: We have added an alarm switch and braking switch which give new features to the traditional foot brake valves.

We have a full range of processing equipment, such as machines for molding, die casting and cutting processes, necessary for the development of automotive components. We are also capable of making over 90% of the devices required for producing prototypes. In addition, we partner with Tsinghua University and Zhejiang University in developing application software for product design, which has greatly reduced our lead time.

Currently we hold one (1) patent, have license rights to two others, and have nine (9) applications for utility patents, all in China. The two licensed patents are for air brake valve related technologies owned by the Ruili Group on a royalty free basis, and will be transferred to us for $50,000 upon confirmation of completion of certain documentation procedures by the relevant Chinese government agency (expected to occur by September 30, 2006). We are also in the process of registering for patent protection in certain overseas markets.

Manufacturing Know-how : We have accumulated a substantial amount of manufacturing know-how in the industry in the past 20 years. For instance, our special formula for aluminum alloy acquired over years of repeated tests considerably improves the compactness of alloy, hence the strength of casting. We also have a proprietary “protection film” processing technique to enhance the sealability of products. We have taken numerous steps to protect our proprietary technologies. Specific staff is assigned to safe keep documents and filings. All our technical personnel are required to sign a confidentiality agreement with us.

Trademarks: Our principal trademark is “SORL” which we license on a non-exclusive royalty free basis from the Ruili Group. The license currently expires in 2012 and we have an agreement with the Ruili Group that the license will be extended if the trademark registration for the tradename is extended. The Ruili Group has obtained a registration for “SORL” with the World Intellectual Property Organization.

PRODUCTION

We operate fifteen (15) production / assembly lines, the largest commercial vehicle air brake valve products manufacturing base in China. The production process includes fixture, jig and die making, aluminum alloy die casting, metal sheet stamping, numerical control cutting, melding, numerical control processing, surface treatment, filming, rubber/plastic processing, final assembly and packaging. We possess state-of-the-art manufacturing and testing facilities purchased from US, Korea, Taiwan such as CNC processing centers, CNC lathes, casting, stamping and cutting machines, automatic spraying and electroplating lines, cleaning machines, automatic assembly lines and 3D COMERO and projectors.

We employ currently 1,138 production staff, most of whom are experienced and skilled workers and mechanics.

We lease an approximately 271,713 square feet plant building from Ruili Group as our production facility and warehouse.. The lease began in March 2004 and runs for a term of ten years. Annual rent is approximately $439,540 and continues at that rate for the remaining term. With the proceeds of this offering, we plan to build a new facility. We will continue to utilize our existing facility.

With the proceeds of this offering, we plan to construct a new production plant located approximately five miles from our existing facility which will have approximately 645,856 square feet of usable space for an aggregate cost of approximately $15 million. We also plan to purchase additional equipment for approximately $4 million including CNK lathes and processing machines for the new plant. We expect that this will increase our production capacity from 3,000,000 units to 5,500,000 units.

ENVIRONMENT

We have adopted ISO 14001 standards and are seeking certification of its environmental management system by an external third party organization.

We carry out staff training to enhance awareness of environment protection. We effect controls from the beginning to adopt environment friendly production, reducing or preventing pollution, as well as saving energy consumption and manufacturing costs. For example, intensity of noise is listed as one of the criteria in selection of new equipment; Waste water is stored, purified and recycled in the production process; and compressing machines are used in disposal of aluminum and steel scraps, thereby saving both storage space and power consumption.

RAW MATERIALS

We purchase various components and raw materials for use in its manufacturing processes. The principal raw materials are aluminum and steel.

Prices for aluminum and steel increased significantly in 2004. Aluminum price increases continued in 2005. Steel prices peaked in March 2005 and then started decreasing to a level lower than before 2004. However, experts predict that aluminum and steel prices will continue to climb slowly in 2006. The increases have had an adverse impact on gross profit, since some of the increases cannot be passed onto the customers. This negatively impacted our gross margin by 1.2% for 2005, or approximately $800,000. This adverse impact on gross margin was largely offset by economy of scale and improvements in production technique optimization.

We maintain relationships with over twenty material suppliers. The three largest suppliers are Shanghai Jinshi Materials Company Limited, Shanghai Lutie Metals Trading Company Limited and Wenzhou Yupeng Foreign Trade Company Limited, which in the aggregate accounted for 20.7% of all components and raw materials purchased in 2005. We manage our suppliers in strict accordance with the requirements of the TS16949 quality assurance system. We enter into warranty agreements and/or technology agreement with each qualified supplier. The quality inspection department controls the quality of purchased products by means of statistic analyses and periodic on-site evaluations and follow-ups.

When planning a purchase order, with such other terms as quality, delivery and credit terms being substantially the same, we compare prices quoted by different suppliers in an attempt to receive the lowest price. In order to secure a purchase price and subsequently a predictable cost of sales, we generally make a down payment to suppliers.

Normally, our annual purchase plan for raw materials, such as aluminum ingot and steel sheet, is determined at the beginning of the calendar year according to our OEM customer’s orders and our own forecast for the aftermarket and international sales. Such purchase plans with key suppliers can be revised quarterly. Our actual requirements are based on monthly production plans. We believe that this arrangement helps us avoid excess inventory when the actual orders from customers decrease or do not meet forecasts.

For raw materials other than steel and aluminum, we normally maintain from five to seven days of inventory at our warehouse and we expect to continue this practice.

All components and raw materials are available from numerous sources. We have not, in recent years, experienced any significant shortages of manufactured components or raw materials, and we normally do not carry such items in excess of what is reasonably required to meet our production needs.

The following is a table reflecting the top three suppliers in 2005.

	Company Name	% of Total Supplies by USD

1	Shanghai Jinishi Material Co., Ltd	10.34
2	ShangHai Lutie Metals Trading Co., Ltd	5.20
3.	Wenzhou Yupeng Foreign Trade Co., Ltd	5.16
	Combined	20.70

STRATEGIC PLAN

Our strategic plan is to enhance our core competencies, maintain steady business growth and increase our market share both in China and internationally through the following actions:

	•	FOCUS ON QUALITY CONTROL AND COST REDUCTION. We believe that our products offer higher quality in the commercial vehicle air brake valve market in China, and a superior performance-cost advantage in the international market, compared with those of our competitors. We have been able to grow at more than 30% per year in sales for the past three years and to maintain what management believes is a leading position in the industry. To sustain this competitive advantage and at the same time obtain higher profit margins, the Joint Venture plans to continue to focus on quality control and cost reduction, such as reduction in spoilage and improvement in manufacturing techniques.

	•	IMPLEMENT THE BRAND STRATEGY. We plan to focus efforts on promotion of the “SORL” brand name by emphasizing technological innovation.

	•	INVEST IN THE NEXT GENERATION VALVE TECHNOLOGY. We plan to invest in the next generation of valve technology such as electronic air brake valves, which we believe has significant market potential. For example, we are undergoing the final testing for a newly developed clutch servo with inductive displacement transducer, which we expect to be put into mass production in 2006. We are also in the process of developing new products such as automatic slack adjusters, loading sense proportion valves and a new type of foot brake valve, all of which we believe have considerable market potential.

	•	EXPAND PRODUCTION FACILITIES TO MEET FURTHER DEMANDS. Anticipating the increasing demands for our products, our management plans to acquire new facilities, procure new equipment, and increase our sales force.

	•	FURTHER EXPANSION IN THE INTERNATIONAL MARKET. During 2005, we achieved approximately 83% growth in export sales, which accounted for 36% of total sales. We are confident that our products are competitive in the international market, therefore, we plan to develop more authorized sales distributors overseas. We also plan to actively seek strategic partnerships with international distributors and manufacturers.

	•	EXPAND THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS. We are exploring opportunities to create long-term growth through new joint ventures with or acquisitions of other automotive parts manufacturers in China, and overseas automotive parts distributors or repair factories with established sales networks outside of China. We will seek synergistic acquisition targets whose manufacturing units and management can be easily integrated with ours, or those domestic companies with existing joint-venture partners overseas, which can bring in major customers to us.

DOING BUSINESS IN CHINA

CHINA’S ECONOMY

We believe that the most important factor in the Chinese automobile industry is the country’s rapid economic growth. According to China’s Statistics Bureau, China’s GDP growth rate for 2003, 2004 and 2005 was 9.3%, 9.5% and 9.4% respectively.

Looking forward, GDP growth in the PRC is forecasted to be between 8% and 9% in 2006. The year 2006 is the first year of Chinese government’s “Eleventh Five-Year Plan”, during which period China’s national economy is expected to maintain its high growth rate. Over the long term, China’s accession to the World Trade Organization (WTO) has accelerated the capital flow to China from other developed countries.

THE CHINESE LEGAL SYSTEM

As a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states of the United States. PRC accounting laws mandate accounting practices, which are not consistent with US Generally Accepted Accounting Principles. The China accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. The financial statements of the Joint Venture are prepared in accordance with PRC accounting laws and reconciled to US GAAP.

Foreign Invested Enterprises such as our Joint Venture are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.

ECONOMIC REFORM ISSUES

	•	We will be able to capitalize on economic reforms;

	•	The Chinese government will continue its pursuit of economic reform policies;

	•	The economic policies, even if pursued, will be successful;

	•	Economic policies will not be significantly altered from time to time; and

	•	Business operations in China will not become subject to the risk of nationalization.

To date reforms to China’s economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions. We point out that a change in the Chinese government’s macro-economic policies adopted to combat inflation has resulted in a slowdown of truck manufacturing which in turn has negatively impacted our sales to OEM’s.

EMPLOYEES AND EMPLOYMENT AGREEMENTS

We currently employ 1295 employees, all of whom are employed full time: 32 for quality control, 44 technical staff, 45 sales and marketing staff, 1138 production workers and 36 administrative staff. There are employment agreements with all of our employees whereby administrative staff workers agree to five years of employment and hourly workers agree to three years. Employment contracts with all employees comply with relevant laws and regulations of China.

The Joint Venture is subject to the Sino-foreign Equity Joint Venture Enterprise Labour Management Regulations. In compliance with those regulations, the Joint Venture’s management may hire and discharge employees and make other determinations with respect to wages, welfare, insurance and discipline of employees. The Joint Venture has, as required by law, established special funds for enterprise development, employee welfare and incentives, as well as a general reserve. In addition, the Joint Venture is required to provide its employees with facilities sufficient to enable the employees to carry out trade union activities.

DESCRIPTION OF THE JOINT VENTURE

General

The Joint Venture was established on January 17, 2004 pursuant to the terms of a Joint Venture Agreement with the Ruili Group. Below is a description of the material terms of the Joint Venture.

Management of the Joint Venture

Pursuant to the terms of the Joint Venture Agreement, the Board of Directors of the Joint Venture consists of three directors; we have the right to designate two members of the board and the Ruili Group has the right to designate one member and we have the authority to appoint the Chairman of the Board. The majority of the Board has decision-making authority with respect to operating matters. As a result, we maintain operating control over the Joint Venture. However, at this time, our two senior executives, Mssrs. Xiao Ping Zhang and Xiao Feng Zhang are the founders of the Ruili Group, and therefore there is limited independence between the two entities. The term of the Joint Venture will expire on March 4, 2019 although we anticipate that we will be able to extend such term. Extension of the agreement will be subject to negotiation with the Ruili Group and approval of the Chinese government.

Distribution of Profits

After provision for social welfare funds for employees and provision for taxation, the profits, if any, of the Joint Venture will be available for distribution to the parties in proportion to their respective capital contributions. Any such distributions must be authorized by the Joint Venture’s Board of Directors. To date, the Joint Venture has not distributed any profits and does not anticipate doing so for the near term.

Assignment of Ownership Interests

Any assignment of an interest in the Joint Venture must be approved by the Chinese government. The Chinese joint venture laws also provide for preemptive rights and the consent of the other joint venture party for any proposed assignments by one party to a third party.

Liquidation of the Joint Venture

Under the Chinese joint venture laws, the Joint Venture may be liquidated in certain limited circumstances, including expiration of the fifteen year term or any term of extension, the inability to continue operations due to severe losses, force majeure, or the failure of a party to honor its obligations under the joint venture agreement or the Articles Of Association in such a manner as to impair the operations of the joint venture. The Chinese joint venture laws provide that, upon liquidation, the net asset value (based on the prevailing market value of the assets) of a joint venture shall be distributed to the parties in proportion to their respective registered capital in the joint venture.

Dispute Resolution Process

In the event of a dispute between the parties to the Joint Venture, attempts will be made to resolve the dispute through friendly consultation or mediation. In the absence of a friendly resolution, the parties have agreed that the matter will be referred to the China International Economic and Trade Arbitration Commission in Beijing, whose decisions are final and enforceable in Chinese courts.

Expropriation Matters

The Chinese joint venture laws provide that China will not nationalize or requisition enterprises in which foreign funds have been invested. However, under special circumstances, when public interest requires, enterprises with foreign capital may be legally requisitioned and appropriate compensation will be made. “Public Interest” is not defined by law, and therefore is subject to governmental interpretation.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The following table sets forth our executive officers, directors and key employees, their ages and the positions they held as of June 21, 2006

Name	Age	Position

Xiao Ping Zhang	43	Chief Executive Officer and Chairman
Xiao Feng Zhang	39	Chief Operating Officers and Director
Zong Yun Zhou	51	Chief Financial Officer
Li Min Zhang	50	Director ⁽¹⁾
Zhi Zhong Wang	61	Director ^(1),(2)
Yi Guang Huo	64	Director ^(1),(2)
Jiang Hua Feng	40	Director ⁽²⁾
Jung Kang Chang	41	Director
Jason Zhang	42	Deputy General Manager
David Ming He	35	Senior Manager, Investor Relations
Keneath Chen	29	Senior Manager, Investor Relations


(1)	Member of Audit Committee

(2)	Member of Compensation Committee

All directors have a term of office expiring at the next annual general meeting, unless re-elected or earlier vacated in accordance with the Bylaws. All officers have a term of office lasting until their removal or replacement by the Board of Directors.

Executive Officers and Directors

XIAO PING ZHANG - CHAIRMAN OF THE BOARD OF DIRECTORS AND CEO

Xiao Ping Zhang has served as Chief Executive Officer and chairman of the board since our inception. He founded the Ruili Group, a company specializing in a variety of automotive parts and components, in 1987, and has served as chairman of the Ruili Group since then. In 2003, he was elected the President of the Wenzhou Auto Parts Association the largest automotive parts trade association in China with more than 1000 members, and Vice-President of the China Federation of Industry and Commerce Auto and Motorbike Parts Chamber of Commerce. Mr. Zhang is also a member of the Standing Committee of the People’s Congress in Rui’an City, Zhejiang, China. Mr. Zhang graduated from Zhejiang Radio and TV University in 1986 with a major in Industrial Management. He is the brother of Xiao Feng Zhang.

XIAO FENG ZHANG - CHIEF OPERATING OFFICER AND DIRECTOR

Xiao Feng Zhang has served as Chief Operating Officer and a member of the board of directors since our inception. He is responsible for sales and marketing. Mr. Zhang co-founded the Ruili Group with his brother, Mr. Xiao Ping Zhang, in 1987, and served as the General Manager of the Ruili Group until March 2004. Mr. Zhang received his diploma in economics from Shanghai Fudan University in 1994. He is the brother of Xiao Ping Zhang.

ZONG YUN ZHOU - CHIEF FINANCIAL OFFICER

Zong Yun Zhou has served as our CFO since our inception. Between April 2002 and May 2004, Ms. Zhou served as the Financial Controller of Shanghai Huhao Auto Parts Manufacturing Company Limited, a joint venture between the Ruili Group and Shanghai Automotive Industry Corporation. From January 1996 until April 2002, Ms. Zhou worked for the Auditing Department of Anhui Province, China, in charge of auditing state-owned companies in Anhui Province. Ms. Zhou is a Chinese Certified Public Accountant, and a member of the Institute of Internal Auditors (IIA). Ms. Zhou completed her undergraduate studies at Anhui University.

JUNG KANG CHANG - DIRECTOR

Jung Kang Chang has served as a member of our board of directors since our inception. He is also in charge of our international sales. From January 1998 to May 2004, Mr. Chang served as the General Manager of JieXiangHao Enterprise Company Limited based in Taipei, Taiwan. Before taking office as the General Manager, he was the sales engineer and sales manager with JieXiangHao in Taipei. Mr. Chang graduated from Taiwan Taoyuan Longhua Industry College.

LI MIN ZHANG – DIRECTOR

Dr. Li Min Zhang has served as a member of our board of directors since August 2004. He chairs the audit committee of our board. Dr. Zhang currently is a professor at Sun Yat-Sen University Management School in Guangdong, China, coaching PhD candidates with an accounting major. During 1994 and 1995, Dr. Zhang conducted academic research at the University of Illinois at Urbana-Champaign, and practiced at Mok & Chang CPAs in the United States. In 1986, he conducted academic research at the Office of Auditor General of Canada. Dr. Zhang currently also serves as vice chairman of the China Audit Society, and secretary of the China Association of Chief Financial Officers. He is a member of American Accounting Association. Also, Dr. Zhang is involved with the China CPA Society Auditing Principles Task Force and the China Audit Society Training Committee. Dr. Zhang earned his Ph.D. in Economics in January 1991.

ZHI ZHONG WANG – DIRECTOR

Zhi Zhong Wang has served as a member of our board of directors, as well as a member of both audit and compensation committees since August 2004. From 1980 until present, Mr. Wang has served as instructor and professor at Beijing Jiaotong University (formerly Northern Jiaotong University), Department of Electrical Engineering. Before 1980, he was an electrical engineer with the Science and Technology Institute of the Qiqihaer Railway Administration, Heilongjiang, China. Mr. Wang has led over twenty research projects such as novel pneumatic generator and streamer discharging, and corona power supply for desulphurization. His numerous publications include Research on the Novel AC Voltage Stabilized Power Supply in Power Electronics . Mr. Wang received his bachelor degree in electrical engineering from Northern Jiaotong University.

YI GUANG HUO – DIRECTOR

Yi Guang Huo has served as a member of our board of directors, as well as a member of the audit committee and chairman of the compensation committee under the board since August 2004. Mr. Huo has been engaged in scientific and technological work and has been responsible for various national key research projects, such as designing and conducting experiments for automotive products, drafting ministry standards and econo-technological policies, etc. He has been awarded the ministry-level First Prize for Technology Innovation. Mr. Huo has also served as President of China Federation of Industry and Commerce Auto & Motorbike Parts Chamber of Commerce, a board member and visiting professor of Wuhan University of Technology, and secretary of Society of Auto Engineering – China. Between 1995 and 1996, Mr. Huo conducted academic research as a visiting researcher at Tokyo University Economics Department. During 1987 and 1988, he studied Scientific Research and Management with the Japan Automobile Research Institute as well as Japanese automobile companies including Nissan, Hino, Isuzu and Mitsubishi. Mr. Huo earned his B.S. degree from Jilin University Automobile Department.

JIANG HUA FENG – DIRECTOR

Jiang Hua Feng has served as a member of our board of directors as well as a member of the compensation committee since August 2004. Since 1988, Mr. Feng has served as chief lawyer at Yuhai Law Firm, Rui’an, Zhejiang. Mr. Feng is a member of China Lawyers Association. He was elected People’s Congress representative for the Wenzhou area, Zhejiang. Mr. Feng received his bachelor degree in law from East China University of Politics and Law.

JASON ZHANG – DEPUTY GENERAL MANAGER

Jason Zhang joined us in May 2006 as Deputy General Manager, supervising our capital market operations and M&A strategies. Before joining us, Mr. Zhang served as the Managing Director of JPK Capital Inc., an investment company based in Shenzhen, China. From 1999 to 2001, he worked for Qiao Xing Group Corporation as the Manager of Capital Market Business Department. From 1996 to 1999, he served as the General Manager of Shenzhen Zhihui Finance Co., Ltd. 1994 till 1996, he served as the General Manager of the Underwriting Division of Shenzhen Non-Ferrous Metals Finance Co., Ltd. From 1992 to 1994, he served as the General Manager of the Investment Department of Shenzhen Lantern Fund Management Company. Mr. Zhang received his master degree in economics from Xiamen University.

DAVID MING HE, CFA, CPA – SENIOR MANAGER INVESTOR RELATIONS

David Ming He joined us in November 2004 as a Senior Manager in charge of investor relations and capital market strategies. Mr. He, who speaks fluent English, holds the designations of Chartered Financial Analyst and Illinois Certified Public Accountant. Between July 1994 and June 2001, he served as credit analyst and senior manager in corporate banking at Credit Agricole Indosuez (now Calyon) Shanghai Branch. Mr. He received his Bachelor’s degree in Economics from Shanghai Institute of Foreign Trade, China, and Master of Science degree in Accountancy and Master of Business Administration degree in Finance from University of Illinois at Urbana-Champaign, U.S.A.

KENEATH CHEN – SENIOR MANAGER INVESTOR RELATIONS

Keneath Chen joined us in May 2006, as a Senior Manager focusing on the investor relations. Before joining us, Mr. Chen served as Senior Vice President for JPK Capital Inc. From December 2002 to November 2004, he served as a Senior Associate with Investor Relations International, a PR firm based in Los Angeles, CA. From June 2000 to December 2002, he served as the PR Officer and Executive Board Secretary for Qiao Xing Universal Telephone, Inc. Mr. Chen received his bachelor degree from Guangdong University of Foreign Studies.

We believe that Messrs. Zhang, Wang, Huo and Feng are independent directors within the meaning of the rules of the Nasdaq Capital Market.

Committees of the Board of Directors

Audit Committee . The members of our audit committee are Professor Zhang and Messrs. Wang and Huo. Professor Zhang chairs the audit committee. Our audit committee assists our board of directors in its oversight of:

	•	the integrity of our financial statements;

	•	our independent auditors’ qualifications and independence; and

	•	the performance of our independent auditors.

The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors and for overseeing their work. All audit services and all non-audit services, other than de minimis non-audit services, to be provided to us by our independent auditors must be approved in advance by our audit committee. We believe that the composition of our audit committee meets the requirements for independence under the current Nasdaq Capital Market and SEC rules and regulations. We believe that the functioning of our audit committee complies with the applicable requirements of the Nasdaq National Market and SEC rules and regulations.

Compensation Committee . The members of our compensation committee are Messrs. Wang, Feng and Huo. Mr. Huo chairs the compensation committee. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. Specific responsibilities of our compensation committee include:

	•	reviewing and recommending approval of compensation of our executive officers;

	•	administering our stock incentive and employee stock purchase plans; and

	•	reviewing and making recommendations to our board with respect to incentive compensation and equity plans.

Director Compensation

Directors are reimbursed for travel, lodging and other reasonable out-of-pocket expenses incurred in attending meetings of our board of directors and for meetings of any committees of our board of directors on which they serve. Commencing January 1, 2006, our outside directors will annually receive cash compensation for attending board or committee meetings of $10,000 and three year options to receive 15,000 shares of common stock with an exercise price equal to the fair market value of the shares at the date of grant.

Compensation Committee Interlocks and Insider Participation

As noted above, the compensation committee of our board of directors consists of Messrs. Wang, Feng and Huo. None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board of directors or compensation committee.

Executive Compensation

The following table set forth information with respect to compensation paid by us to the Company’s Chief Executive Officer. No other executive officer received compensation in excess of $100,000 for the fiscal year ended December 31, 2005.

Summary Compensation Table

ANNUAL COMPENSATION

AWARDS

PAYOUTS

(A)

(B)

(C)

(D)

(E)

(F)

(G)

(H)

(I)

NAME AND PRINCIPAL POSITION

YEAR

SALARY
($)

BONUS
($)

OTHER ANNUAL COMPENSATION
($)

RESTRICTED STOCK AWARD(S) ($)

SECURITIES UNDERLYING OPTIONS/SARS
(#)

LTIP PAYOUTS
($)

ALL OTHER COMPENSATION
($)

Xiao Ping Zhang,

2005

50,000

—

CEO (1)

2004

50,000


(1)	Mr. Zhang is also employed by the Ruili Group which makes separate payments to him for his services to that company.

Stock Option Grant Exercises in 2005

None of our executive officers received any grants of options or other stock compensation during 2005. Additionally, none of our executive officers exercised any stock options or other rights to stock compensation in 2005.

Employment Agreements

The Company has entered into three employment agreements with both Messrs. Zhang and Ms. Zhou. The term of their employment with the Company is for a period of five years with an additional one year period unless the Company decides not to renew. Their compensation is subject to an annual review by the Compensation Committee of the Board of Directors. The agreements also set forth their respective duties and confidentiality responsibilities.

Severance and Change of Control Arrangements

There are no severance or change of control arrangements between the Company and our executive officers.

Equity Benefit Plans

2005 Stock Compensation Plan

Our 2005 Stock Compensation Plan was adopted by our board of directors in July 2005.

Share Reserve . We have reserved 1,700,000 shares for issuance under the 2005 Stock Compensation Plan of which options to purchase 60,000 shares have been granted and 49,500 shares have been awarded to date.

Administration . The Compensation Committee of our board of directors administers the 2005 Compensation Plan and has complete discretion to make all decisions relating to our 2005 Compensation Plan. Our compensation committee may also re-price outstanding options and modify outstanding awards in other ways.

Eligibility . Employees, non-employee members of our board of directors, advisors and consultants are eligible to participate in our 2005 Stock Compensation Plan.

Types of Awards . Our 2005 Stock Compensation Plan provides for awards of stock options to purchase shares of our common stock and awards of restricted shares of our common stock, stock appreciation rights and performance shares.

Change in Control . If we are merged or consolidated with another company, and such merger or consolidation results in a change in control, an award under the 2005 Stock Compensation Plan will be subject to the terms of the merger agreement, which may provide that the option continues, is assumed or substituted, fully vests or is settled for the full value of such option in cash, followed by the cancellation of such option.

Amendments or Termination . Our board of directors may amend, suspend or terminate the 2005 Stock Compensation Plan at any time. If our board amends the plan, it does not need to seek stockholder approval of the amendment unless required to comply with any applicable tax or regulatory environment. No award may be made under the 2005 Stock Compensation Plan after the tenth anniversary of the effective date of the Plan.

Options The Board may determine the number of shares covered by each option, the exercise price therefore, the conditions and limitations on the exercise and any restrictions on the shares issuable. Optionees may pay the exercise price by using cash, shares of common stock that the optionee already owns or, at the election of the Board, a promissory note, an immediate sale of the option shares through a broker designated by us , or other property.

Performance Shares . The Board may make performance share awards entitling recipients to acquire shares of Common Stock upon the attainment of specified performance goals.

Stock Appreciation Rights . A participant who exercises a stock appreciation right receives the increase in fair market value of our common stock over the fair market value on the date of grant.

Restricted Shares . Restricted shares may be awarded under the 2005 Stock Compensation Plan. Restricted shares vest at the times and payment terms therefor shall be determined by our compensation committee.

Adjustments . If there is a subdivision of our outstanding shares of common stock, a dividend declared in stock or a combination or consolidation of our outstanding shares of common stock into a lesser number of shares, corresponding adjustments will be automatically made in each of the following: (a) the number of shares of common stock available for future awards under the 2005 Stock Compensation Plan; (b) any limitation on the maximum number of shares of common stock that may be subject to awards in a fiscal year; (c) the number of shares of common stock covered by each outstanding option or stock appreciation right, as well as the exercise price under each such award; (d) the number of shares of common stock covered by the options to be granted under the automatic option grant program; or (e) the number of stock units included in any prior award that has not yet been settled.

Limitation of Liability and Indemnification of Officers and Directors

As permitted by Delaware law, we have adopted provisions in our certificate of incorporation and bylaws, that limit or eliminate the personal liability of our directors and officers to the fullest extent permitted by Delaware law, as it now exists or may in the future be amended, and against all expenses and liabilities reasonably incurred in connection with their service for or on behalf of SORL. In addition, the certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. We maintain liability insurance which insures our directors and officers against certain losses and which insures us against our obligations to indemnify our directors and officers. At present, we are not aware of any pending or threatened litigation or proceeding involving any of our directors, officer, employees or agents in which indemnification would be required or permitted. We believe provisions in our certificate of incorporation are necessary to attract and retain qualified persons as directors and officers.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Capital Stock Issuances in the Reverse Acquisition

Pursuant to the reverse acquisition, Mr. Xiao Ping Zhang, our Chief Executive Officer, and Mr. Xiao Feng Zhang, our Chief Operating Officer, received 9,087,527 shares and 1,135,938 shares, respectively, of our Common Stock representing 68.4% and 8.55% respectively, of our outstanding shares. Prior to the reverse acquisition with Fairford, these individuals controlled Fairford

Ruili Group

Mr. Xiao Ping Zhang and Mr. Xiao Feng Zhang are the principal shareholders of the Ruili Group which was the owner of the assets contributed to the Joint Venture in the reverse acquisition. We purchase non-valve automotive products and packaging material from the Ruili Group. In 2005, we purchased products from the Ruili Group representing approximately $16 million of our sales. We generate only a small profit on these sales, but our sales of these products represent an important marketing benefit as they enable us to fill out our product line and reduce our customers’ transaction costs. The Ruili Group also guarantees certain bank loans to the Joint Venture without fee and licenses two patents and the trademark “SORL” to the Joint Venture on a royalty free basis. Subject to the confirmation by the Chinese government of the completion of certain documentation (expected by September 30, 2006) the patents licensed will be assigned for $50,000. We also lease from the Ruili Group our production facility and warehouse consisting of approximately 271,000 square feet. The lease commenced in March 2004 and is for a term of ten years at an annual rental of approximately $439,540. The Company believes that the prices charged and rental payments are at least as favorable to the Joint Venture as would be obtained from a third party.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of June 21, 2006 and as adjusted to reflect the sale of the shares of common stock in this offering by:

	•	each person known by us to be the beneficial owner of more than 5% of any class of our voting securities;

	•	our named executive officers;

	•	each of our directors; and

	•	all executive officers and directors as a group.

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options and warrants that are currently exercisable within 60 days. Information with respect to beneficial ownership has been furnished to us by each, director, executive officer or 5% or more stockholder, as the case may be. Unless otherwise indicated, to our knowledge, each stockholder possesses sole voting and investment power over the shares listed, except for shares owned jointly with that person’s spouse.

This table lists applicable percentage ownership based on 13,346,555 shares of common stock outstanding as of July 31, 2006.

The address for each of the stockholders in the table is c/o of the Company.

NAME OF BENEFICIAL OWNER

AMOUNT AND NATURE BENEFICIAL OWNER

POSITION

PERCENT OF CLASS PRE-OFFERING

PERCENT OF CLASS POST-OFFERING

Xiao Ping Zhang

9,087,527

Chief Executive Officer and Chairman

68.1%

Xiao Feng Zhang

1,135,938

Chief Operating Officer and Director

8.5%

Zong Yun Zhou

—

Chief Financial Officer

Jung Kang Chang

—

Director

Zhang Li Min

—

Director

Wang Zhizhong

—

Director

Huo Yiguang

—

Director

Jianghua Feng

—

Director

Officers and Directors as a Group (8 persons)

10,223,465

76.6%

PRINCIPAL SHAREHOLDERS

Shu Ping Chi

1,135,938

8.5%

DESCRIPTION OF CAPITAL STOCK

We are authorized to issue 50,000,000 shares of common stock, $0.002 par value, and 5,000,000 shares of preferred stock, $.001 par value. The following description of our capital stock is not complete and is subject to and qualified in its entirety by our amended and restated certificate of incorporation and amended and restated bylaws and by the provisions of applicable Delaware law. Our amended and restated certificate of incorporation and amended and restated bylaws are included as exhibits to the registration statement of which this prospectus is a part.

Common Stock

As of July 31, 2006, we had 13,346,555 shares of common stock outstanding, held by approximately 515 stockholders of record as of such date. Upon the closing of this offering, there will be _______________________ shares of common stock outstanding, assuming no exercise of the underwriter’s over-allotment option or additional exercise of outstanding options.

The holders of common stock are each entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends that may be declared by the board of directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding preferred stock. Our common stock has no preemptive or conversion rights, other subscription rights, or redemption or sinking fund provisions. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon the closing of this offering will be fully paid and non-assessable.

Preferred Stock

Our board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding). Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of SORL and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock.

Registration Rights

We have not granted any rights to third parties to require us to register any shares of our capital stock except for piggy-back registration rights covering the resale of shares issuable upon exercise of warrants granted to the underwriters.

Delaware Anti-Takeover Law and Our Certificate of Incorporation and Bylaw Provisions

Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult our acquisition by a third party and the removal of our incumbent officers and directors. These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of SORL to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited acquisition proposal outweigh the disadvantages of discouraging such proposals because, among other things, negotiation could result in an improvement of their terms.

We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. In general, Section 203 prohibits a Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless:

	•	the board of directors approved the transaction in which such stockholder became an interested stockholder prior to the date the interested stockholder attained such status;

	•	upon consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, he or she owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers; or

	•	on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders.

A “business combination” generally includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. In general, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation’s voting stock.

Our certificate of incorporation and bylaws do not provide for the right of stockholders to act by written consent without a meeting or for cumulative voting in the election of directors. Our bylaws provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide timely notice in writing. Our bylaws also specify requirements as to the form and content of a stockholders’ notice. These provisions may delay or preclude stockholders from bringing matters before a meeting of stockholders or from making nominations for directors at a meeting of stockholders which could delay or deter takeover attempts or changes in management. In addition, our bylaws provide that special meetings of the stockholders can only be called by our Chairman of the Board, our Chief Executive Officer, or our board of directors.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company. The transfer agent’s address is 17 Battery Place, New York, New York 10004-1125.

Nasdaq Capital Market Quotation

Our common stock is quoted on the Nasdaq Capital Market under the trading symbol “SORL.”

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future.

Sales of Restricted Shares

Based on shares outstanding on July 31, 2006, upon the closing of this offering, we will have outstanding an aggregate of _____________________ shares of common stock, assuming no exercise of the underwriters’ over-allotment option and no exercise of options outstanding prior to the closing of this offering. Of these shares, the _______________________ shares sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, unless one of our existing stockholders or affiliates, as that term is defined in Rule 144 under the Securities Act, purchases such shares. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 144(k) of the Securities Act, which are summarized below. All of these restricted shares will be available for resale in the public market in reliance on Rules 144 and 144(k) at various times following effectiveness subject in some cases to volume and other limits and the terms of the lock-up agreements described below. The table below sets forth the approximate number of shares eligible for future sale based on our shares outstanding on July 31, 2006 and shares sold in this offering.

Days after Effective Date of this Prospectus	Approximate Additional Number of Shares Becoming Eligible for Future Sale	Comment

On effectiveness		Freely tradable shares sold in this offering and in our initial public offering; shares eligible for sale under Rule 144(k) that are not locked up

At various times after nine months following effectiveness	11,359,403	Lock-up released; shares eligible for sale under Rules 144 or 144(k)

Under Rule 144 as currently in effect a person who has beneficially owned restricted shares for at least one year and has complied with the requirements described below would be entitled to sell some of its shares within any three-month period. That number of shares cannot exceed the greater of one percent of the number of shares of our common stock then outstanding, which will equal approximately ___________________ shares immediately after the closing of this offering, or the average weekly trading volume of our common stock on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 reporting the sale. Sales under Rule 144 are also restricted by manner of sale provisions, notice requirements and the availability of current public information about our company. Rule 144 also provides that our affiliates who are selling shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares with the exception of the holding period requirement.

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Accordingly, unless otherwise restricted, these shares may be sold immediately upon the closing of this offering.

Options

We have filed a registration statement on Form S-8 under the Securities Act with the Securities and Exchange Commission to register all shares of our common stock which have been reserved for issuance under our 2005 Stock Compensation Plan. The registration statement is effective. Accordingly, shares covered by this registration statement are eligible for sale in the public market subject to Rule 144 volume limitations applicable to our affiliates, and upon the expiration or release from the terms of the lock-up agreements, to the extent applicable.

Lock-up Agreements

Our executive officers, directors and certain of our stockholders who hold in aggregate approximately 76.6% of our outstanding common stock as of July 31, 2006, have agreed, subject to specified exceptions, that without the prior written consent of Maxim Group LLC and Chardan Capital Markets, LLC, they will not sell or otherwise dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exchangeable or exercisable shares of our capital stock or any other rights to purchase or acquire our capital stock for a period of nine months from the effective date of the registration statement for this offering. Maxim Group LLC and Chardan Capital Markets, LLC, may, in their sole discretion, permit early release of shares subject to the lock-up agreements. In considering any request to release shares subject to a lock-up agreement, Maxim Group LLC and Chardan Capital Markets, LLC will consider the possible impact of the release of the shares on the trading price of the stock sold in the offering.

UNDERWRITING

We have entered into an underwriting agreement with the underwriters named below. Maxim Group LLC and Chardan Capital Markets, LLC are acting as representatives of the underwriters.

The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters’ obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below:

The underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances.

The shares should be ready for delivery on or about _____________________ against payment in immediately available funds. The underwriters are offering the shares subject to various conditions and may reject all or part of any order.

The representatives have advised us that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to other securities dealers at such price less a concession of $___ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $________ per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times.

We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of________________________ additional shares from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $_____________ million and the total proceeds to us will be $_________________ million. The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter’s initial amount reflected in the foregoing table.

The following table provides information regarding the amount of the discount to be paid to the underwriters by us:

We have also agreed to issue to the underwriters common stock purchase warrants to purchase a number of shares of our Common Stock equal to an aggregate of eight (8%) percent of the shares sold in the Offering (________ warrants). The warrant will have an exercise price equal to 125% of the offering price of the shares sold in the offering. The warrants are exercisable commencing one year after the effective date of the registration statement related to this offering, and will be exercisable for four (4) years thereafter. The underwriters’ warrants are not redeemable by the Company, and allow for “cashless” exercise. The underwriters warrants also provide for unlimited “piggyback” registration rights with respect to the underlying shares of Common Stock during the four (4) year period commencing one year after the effective date. There is no demand registration provisions for the underwriters’ warrants. Pursuant to the rules of the NASD, and in particular Rule 2710, the warrants (and underlying shares) issued to Maxim Group and Chardan Capital may not be sold, transferred, assigned, pledged, or hypothecated, or the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective disposition of the securities by any person for a period of one (1) year immediately following the date of delivery and payment for the shares offered provided, however, the warrants (and underlying shares) may be transferred to officers or directors of Maxim Group or Chardan Capital as long as the warrants (and underlying shares) remain subject to the lockup.

We estimate that our total expenses of the offering, excluding the underwriting discount, will be approximately $__________________. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

Maxim Group LLC and Chardan Capital Markets, LLC previously entered into a financial advisory and consulting agreement with us on January 5, 2006. Pursuant to the terms of that agreement, the representatives agreed to provide us with general financial advisory and investment banking services and Maxim Group and Chardan Capital were retained on an exclusive basis. The agreement provides for a term of 12 months, ending January 5, 2007. Maxim Group and Chardan Capital receive a total monthly fee of $5,000 for their services and received a total of 100,000 common stock purchase warrants. The warrants have a term of four (4) years (expiring on January 5, 2010) and an exercise price of $6.25 per share. The warrants provide for cashless exercise and for “piggyback registration rights”. These piggyback registration rights require us to include the shares underlying the warrants in any registration statement filed by us with the Securities and Exchange Commission so as to allow for resale under the Securities Act these shares by the holders. Maxim Group and Chardan have agreed, pursuant to the terms of the warrants, not to require that we include the underlying shares in the registration statement of which this prospectus forms a part. Pursuant to the rules of the NASD, and in particular Rule 2710, the warrants (and underlying shares) issued to Maxim Group and Chardan Capital may not be sold, transferred, assigned, pledged, or hypothecated, or the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective disposition of the securities by any person for a period of 180 days immediately following the effective date of the registration statement of which this prospectus forms a part; provided, however, the warrants (and underlying shares) may be transferred to officers or directors of Maxim Group or Chardan Capital as long as the warrants (and underlying shares) remain subject to the lockup.

Our executive officers, directors and certain stockholders, holding an aggregate of 10,223,465 shares of our common stock, have agreed to a nine month “lock-up” from the date of this prospectus of shares of common stock that they beneficially own. This means that, for a period of nine months following the date of this prospectus, such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of Maxim Group LLC and Chardan Capital Markets, LLC.

Rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules:

	•	Stabilizing transactions—The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum.

	•	Over-allotments and syndicate covering transactions—The underwriters may sell more shares of our common stock in connection with this offering than the number of shares that they have committed to purchase. This over-allotment creates a short position for the underwriters. This short sales position may involve either “covered” short sales or “naked” short sales. Covered short sales are short sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares in this offering described above. The underwriters may close out any covered short position either by exercising their over-allotment option or by purchasing shares in the open market. To determine how they will close the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market, as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are short sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that, in the open market after pricing, there may be downward pressure on the price of the shares that could adversely affect investors who purchase shares in this offering.

	•	Penalty bids—If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering.

	•	Passive market making—Market makers in the shares who are underwriters or prospective underwriters may make bids for or purchases of shares, subject to limitations, until the time, if ever, at which a stabilizing bid is made.

A prospectus in electronic format may be made available on a website maintained by one or more of the representatives of the underwriters and may also be made available on a website maintained by other underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives of the underwriters to underwriters that may make Internet distributions on the same basis as other allocations.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales or to stabilize the market price of our common stock may have the effect of raising or maintaining the market price of our common stock or preventing or mitigating a decline in the market price of our common stock. As a result, the price of the shares of our common stock may be higher than the price that might otherwise exist in the open market. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares.

Neither we nor the underwriters makes any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq Capital Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time.

VALIDITY OF COMMON STOCK

The validity of the shares of common stock to be issued in this offering will be passed upon for SORL by Troy & Gould Professional Corporation, Los Angeles, California. Certain legal matters relating to this offering will be passed upon for the underwriters by Ellenoff, Grossman & Schole LLP.

EXPERTS

Rotenberg and Co., LLP, independent registered public accounting firm, have audited our financial statements at December 31, 2004 and 2005, as set forth in their report. Clancy and Co, P.L.L.C, independent registered public accounting firm, have audited our financial statements at December 31, 2003, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on the reports of Rotenberg and Co., LLP’s and Clancy and Co., P.L.L.C, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549-1004. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov, which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC.

SORL AUTO PARTS, INC. AND SUBSIDIARIES:

Audited Financial Statements for the Years ended December 31, 2005, 2004 and 2003

Reports of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, 2005 and 2004	F-4

Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003	F-5

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003	F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003	F-7

Notes to Consolidated Financial Statements	F-8

Interim Financial Statements for the Six Month Periods ended June 30, 2006 and 2005

Condensed Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005 (Audited)	F-21

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2006 and 2005	F-22

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2006 and 2005	F-23

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three and Six Months Ended June 30, 2006 and 2005	F-24

Notes to the Condensed Consolidated Financial Statements (Unaudited)	F-25

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
SORL Auto Parts, Inc.
Ruian City, Zhejiang Province
People’s Republic of China

We have audited the accompanying consolidated balance sheets of SORL Auto Parts, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with The Public Company Accounting Oversight Board Standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described more fully in Note 20; the financial statements for the years ended December 31, 2005 and 2004 have been restated to present the cash flows from changes in notes receivable arising from trade customers as a component of operating cash flows rather than investing cash flows as previously reported.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SORL Auto Parts, Inc as of December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in conformity with generally accounting principles accepted in the United States of America.

/s/ Rotenberg and Co., LLP

ROTENBERG AND COMPANY, LLP
Rochester, New York
March 9, 2006 (Except for Note 20 as to which the date is August 10, 2006)

F - 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Ruili Group Corporation China

We have audited the accompanying statements of income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2003, of Ruili Group Corporation China, a People’s Republic of China limited liability company, (the “Company”). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2003, in conformity with generally accepted accounting principles in the United States of America.

/s/ Clancy and Co., P.L.L.C.

Clancy and Co., P.L.L.C.
Phoenix, Arizona
April 1, 2004

F - 3

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets

		December 31,

		2005			2004

Assets

Current Assets
Cash and cash equivalents	US$		961,131			729,875
Accounts receivable, net of allowance			25,339,774			12,595,905
Notes receivable			1,488,104			129,675
Inventory			2,512,583			1,875,300
Prepayments			1,801,829			1,404,710
Other current assets			48,115			393,300

Total Current Assets			32,151,536			17,128,765
Fixed Assets
Property, plant and equipment			10,140,947			7,517,796
Less: Accumulated depreciation			(3,024,281	)		(2,165,142	)

Fixed Assets, Net			7,116,666			5,352,654
Other Assets
Intangible assets			44,297			43,174
Less: Accumulated amortization			(11,873	)		(4,454	)

Intangible Assets, Net			32,424			38,720

Total Other Assets			32,424			38,720

Total Assets	US$		39,300,626			22,520,139

Liabilities and Shareholders’ Equity

Current Liabilities
Accounts payable and other payables	US$		3,746,666			4,717,655
Deposits received from customers			1,324,085			861,624
Short term bank loans			16,026,717			4,830,918
Accrued expenses			482,982			625,768

Total Liabilities			21,580,450			11,035,967
Minority Interest			1,735,818			1,148,417
Shareholders’ Equity
Common stock, $0.002 par value, 50,000,000 authorized, 13,346,555 and 13,282,253 issued and outstanding, respectively			26,693			26,565
Additional Paid-In capital			4,444,118			4,082,246
Accumulated other comprehensive income			336,993			—
Retained earnings			11,176,554			6,226,944

			15,984,358			10,335,755

Total Liabilities and Shareholders’ Equity	US$		39,300,626			22,520,139

F - 4

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Income

		Years Ended December 31,

		2005			2004			2003

									(rounded)
Sales	US$		64,182,544			46,815,037			33,121,000
Cost of Sales			49,865,235			35,904,232			26,263,000

Gross Profit			14,317,309			10,910,805			6,858,000
Expenses:
Selling and Distribution Expenses			3,919,996			2,737,652			1,610,000
General and Administrative Expenses			4,169,460			2,489,604			1,547,000
Financial Expenses			688,811			287,433			292,000

			8,778,267			5,514,689			3,449,000
Operating Income			5,539,042			5,396,116			3,409,000
Other Income			52,592			—			435,000
Non-Operating Expenses			(92,067	)		(55,067	)		—

Income Before Provision for Income Taxes			5,499,567			5,341,049			3,844,000
Provision for Income Taxes			—			—			546,000

Income From Continuing Operations			5,499,567			5,341,049			3,298,000
Loss From Discontinued Operations			—			—			2,148,000
Minority Interest			549,957			534,105			—

Net Income Attributable to Shareholders			4,949,610			4,806,944			1,150,000
Other Comprehensive Income
Foreign Currency Translation Adjustment			374,437			—			—
Minority Interest’s Share			37,444			—			—

Comprehensive Income (Loss)	US$		5,286,603			4,806,944			1,150,000

Earnings per Share From Continuing Operations
Basic		$	0.37		$	0.37		$	0.25
Diluted		$	0.37		$	0.37		$	0.25
Earnings per Share From Discontinued Operations
Basic		$	—		$	—		$	(0.17	)
Diluted		$	—		$	—		$	(0.17	)
Weighted average common shares - Basic			13,302,763			13,165,241			12,953,720
Weighted average common shares - Diluted			13,302,763			13,165,241			12,953,720

F - 5

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2005, 2004, and 2003

	Number of Shares		Common Stock		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income		Shareholders’ Equity			Minority Interest

Balance - January 1, 2003		12,953,720		25,908		17,122,092			270,000		—		17,418,000			—
Capital Contribution		—		—		9,736,000			—		—		9,736,000			—
Net Income		—		—		—			1,150,000				1,150,000			—

Balance - December 31, 2003		12,953,720		25,908		26,858,092			1,420,000		—		28,304,000			—
Corporate Reorganization:
Distribution of discontinued operations to shareholders		—		—		(22,775,189	)		—		—		(22,775,189	)		—
Acquisition of Enchanted Village		328,533		657		(657	)		—		—		—			—
Capital contributed by Minority Shareholder		—		—		—			—		—					614,312
Net Income		—		—		—			4,806,944		—		4,806,944			534,105

Balance - December 31, 2004		13,282,253		26,565		4,082,246			6,226,944		—		10,335,755			1,148,417
Adjustment for fractional shares		4802		9		(9	)		—		—		—
Common Stock issued to consultants		10,000		20		64,980			—		—		65,000			—
Common Stock issued to employees		49,500		99		296,901			—		—		297,000			—
Net Income		—		—		—			4,949,610		—		4,949,610			549,957
Other Comprehensive Income		—		—		—			—		336,993		336,993			37,444

Balance - December 31, 2005		13,346,555		26,693		4,444,118			11,176,554		336,993		15,984,358			1,735,818

F - 6

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

		Years Ended December 31,

		2005			2004			2003

		(As Restated)			(As Restated)			(Rounded)
Cash Flows from Operating Activities
Net Income	US$		4,949,610			4,806,944			1,150,000
Adjustments to reconcile net income to net cash flows from operating activities:
Minority Interest			549,957			534,105			12,000
Bad Debt Expense			846,337			68,384			—
Depreciation and Amortization			866,558			554,261			1,798,000
Stock compensation - employees			297,000			—			—
Stock compensation - financial advisory			65,000			—			—
Changes in Assets and Liabilities:
Accounts Receivable			(13,590,206	)		(9,507,289	)		(1,782,000	)
Other Receivable			345,184			(393,300	)		—
Notes Receivable			(1,358,429	)		(129,675	)		—
Inventory			(637,283	)		(38,300	)		726,000
Prepayments			(397,119	)		1,197,290			(2,602,000	)
Account Payables			(970,989	)		4,717,655			(12,000	)
Deposits Received from Customers			462,461			861,624			—
Accrued Expenses			(142,787	)		625,769			—
Net Working Capital from Discontinued Operations			—			(960,876	)		(11,630,000	)

			(8,714,706)			2,336,592			(12,340,000	)
Cash Flows from Investing Activities
Acquisition of Property and Equipment			(2,623,151	)		(593,488	)		(2,016,000	)
Investments in Intangible Assets			(1,123	)		(28,720	)		—
Investing activities - Discontinued operations			—			(16,427	)		(14,924,000	)

			(2,624,274)			(638,635	)		(16,940,000	)
Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans			11,195,799			(968,082	)		2,174,000
Financing Activities - Discontinued Operations			—			—			17,370,000
Capital Contribution - Owners			—			—			9,736,000

			11,195,799			(968,082	)		29,280,000
Effects on changes in foreign exchange rate			374,437			—			—
Net Change in Cash and Cash Equivalents			231,256			729,875			—
Cash and Cash Equivalents- Beginning of the year			729,875			—			—

Cash and cash Equivalents - End of the year	US$		961,131			729,875			—

Supplemental Cash Flow Disclosures:
Interest Paid		$	513,776		$	287,433		$	1,245,000

Income Taxes Paid		$	—		$	—		$	435,000

Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Common stock Issued in Exchange for Preferred Stock		$	—		$	25,908		$	—

Distribution of Discontinued Operations		$	—		$	(22,775,189	)	$	—

Common stock issued for advisory service		$	65,000		$	—		$	—

Common stock issued to key employees		$	297,000		$	—		$	—

F - 7

SORL AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -

DESCRIPTION OF BUSINESS

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

NOTE 2 -

REORGANIZATION

In March 2004, pursuant to a Joint Venture Agreement between the Ruili Group Co., Ltd., a PRC corporation (“Ruili Group”), and Fairford Holdings, Inc., a Hong Kong Company (“Fairford”), the parties formed a sino-foreign joint venture (the “Joint Venture”) under the name Ruili Group Ruian Auto Parts Co. Ltd., of which Fairford owned 90% and the Ruili Group owned 10%. The shareholders and their respective equity interests in Fairford and the Ruili Group were identical. In connection with its formation, the Joint Venture acquired the business segment of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”). This was accomplished by the transfer from the Ruili Group to Fairford of the rele vant assets and liabilities of the Transferred Business including trade receivables, inventories, plant and machinery, and the assumption of short and long term borrowings for a purchase price of $6,390,000. The consideration was based on a valuation provided by Ruian Ruiyang Assets Valuation Co., Ltd., an independent PRC valuation firm. Fairford then transferred these assets and liabilities to the Joint Venture as consideration for its 90% ownership interest of the Joint Venture. The Ruili Group transferred inventory as its capital contribution for its 10% interest in the Joint Venture. The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the assets and liabilities of the Transferred Business. Certain historical information of the Transferred Business is based on the operation of the Transferred Business when it was owned by the Ruili Group.

In May 2004, pursuant to the terms of a Share Exchange Agreement (the “Exchange Agreement”) dated as of April 4, 2004, among the Company, Keating Reverse Merger Fund, LLC, Xiao Ping Zhang, Xiao Feng Zhang and Shuping Chi (collectively, the “Sellers”); and Fairford, the Company acquired from the Sellers (the “Acquisition”) all of the issued and outstanding equity interests of Fairford (the “Fairford Shares”). As consideration for the Fairford Shares, the Company issued 1,000,000 shares of its Series A Convertible Preferred Stock, which were convertible into an aggregate of the 194,305,800 shares of common stock. The consideration for the Acquisition was determined through arms length negotiations between the management and the Fairford Sellers. As a result of the Acquisition, the Fairford Sellers acquired approximately 97.5% of the Company’s common stock on an as converted basis.

A current report on Form 8-K was filed on May 24, 2004 to present the financials of the predecessor company (Ruili Group) for the years ended December 31, 2003 and 2002. The historical financial statements filed with the 8-K reflected the assets and liabilities of both the Transferred Business and the non-transferred business.

F - 8

NOTE 3 -

BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS

The financial statements for the year ended December 31, 2005 and 2004 have been prepared to present the financial position, results of operations and cash flows of the continuing business of SORL Auto Parts, Inc (the successor’s financial statements). The financial statements reflect the accounts of the “transferred business” (as described in the preceding paragraphs titled “REORGANIZATION”), from the Ruili Group to the Joint Venture.

The financial statements for the year ended December 31, 2003 have been restated to present the financial position, results of operations and cash flows for the transferred business to provide comparative financial information to that of fiscal 2005 and2004. The financial statements have been restated to remove the assets, liabilities and results of operations related to “non-transferred business” as described in the preceding paragraphs titled “REORGANIZATION”. The assets, liabilities and results of operations of the “non-transferred business” have been presented as discontinued operations in the accompanying financial statements. These transactions have been accounted for as a reverse spin-off in according with EITF 02-11, Accounting for Reverse Spinoffs Followed by a Recapitalization.

NOTE 4 -

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING METHOD

The Company uses the accrual method of accounting for financial statement and tax return purposes.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of SORL Auto Parts, Inc. and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, deposits and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to their short maturities.

RELATED PARTY TRANSACTIONS

A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company’s policy is that all related party transactions must be in arm’s length.

F - 9

FINANCIAL RISK FACTORS AND FINANCIAL RISK MANAGEMENT

	The Company is exposed to the following risk factors:

	(i)	Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate credit history. The Company has two customers that respectively account for more than 5% of its total revenues for the period. The Company also has a concentration of credit risk due to geographic sales as a majority of its products are marketed and sold in the PRC.

	(ii)	Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and ability to close out market positions.

	(iii)	Interest rate risk - The interest rate and terms of repayments of short-term and long-term bank borrowings are approximately 5.58% per annum. The Company’s income and cash flows are substantially independent of changes in market interest rates. The Company has no significant interest-bearing assets. The Company’s policy is to maintain all of its borrowings in fixed rate instruments.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or net realizable value, with cost computed on a weighted-average basis. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The initial cost of the asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is provided using the straight-line method over the assets estimated useful life for periods ranging from five to ten years. Significant improvements and betterments are capitalized where it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance. Routine repairs and maintenance are expensed when incurred. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds less the carrying amount of the assets.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, such as property, plant and equipment and other non-current assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

F - 10

INTANGIBLE ASSETS

Intangible assets represent mainly the patent of technology, plus the computer software. Intangible assets are measured initially at cost. Intangible assets are recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less any impairment losses. Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives.

ACCOUNTS RECEIVABLES AND ALLOWANCE FOR BAD DEBTS

The Company presents accounts receivables, net of allowances for doubtful accounts and returns, to ensure accounts receivable are not overstated due to uncollectibility.

During fiscal years ended December 31, 2003 and 2004 the Company’s general policy regarding the extension of credit terms was that invoices were due within 45 - 60 days of shipment.

Beginning in 2005, in response to changing economic conditions in China, the Company has modified its collection policies. Certain individual customers or certain classes of customers may have custom payment arrangements based upon criteria set by management.

Accounts receivables generated from credit sales in 2005 have general credit terms of 90 days for domestic aftermarket customers. However, the Company has extended credit terms to certain customers for a period of 1 year or more. As of December 31, 2005 and 2004 no customers had balances that are due in more than 1 year and accordingly all accounts receivable have been classified as current in the accompanying statements.

The allowances are calculated based on detailed review of certain individual customer accounts, historical rates and an estimation of the overall economic conditions affecting the Company’s customer base. The Company reviews a customer’s credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company will write off the uncollectible receivables once the customers are bankrupt or there is a remote possibility that the Company will collect the outstanding balance. The write-off must be reported to the local tax authorities and get the official approval from them. To date, the Company has not written off any account receivable.

NOTES RECEIVABLE

Notes receivable are issued by some customers to pay certain outstanding receivable balances to the Company with specific payment terms and definitive due dates. Notes receivable do not bear interest.

F - 11

REVENUE RECOGNITION

Revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. Revenue consists of the invoice value for the sale of goods and services net of value-added tax (“VAT”), rebates and discounts and returns. The Company is subject to the Education Surtax (levied at 4% of net VAT payable) until August 31, 2005, which is recorded as deductions from gross sales. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales. Goods are generally only returnable if the product is defective.

INCOME TAXES

The Company accounts for income taxes under the provision of Statement of Financial Accounting Standards (“SFAS” No. 109), “Accounting for Income Taxes,” whereby deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary; to reduce deferred income tax assets to the amount expected to be realized.

FOREIGN CURRENCY TRANSLATION

The Company maintains its books and accounting records in Renminbi (“RMB”), the currency of the PRC, The Company’s functional currency is also RMB. The Company has adopted SFAS 52 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The shareholders’ equity accounts are translated at appropriate historical rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.

Foreign currency gains and losses, if any, are included in the Consolidated Statements of Income as a component of other comprehensive income.

STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R revises FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS 123R requires all public and non-public companies to measure and recognize compensation expense for all stock-based payments for services received at the grant-date fair value, with the cost recognized over the vesting period (or the requisite service period). The Company has adopted SFAS 123R as of January 1, 2006.

The Company expects the adoption of this standard to have a material effect on its final financial statements, as discussed in Note 18. The Company has adopted a stock compensation plan which authorizes the Company to issue up to 1,700,000 shares of common stock over a 10-year period. The issuance of stock or granting of options, warrants or other common stock equivalents will result in a change to income based upon grant date fair value which will be recognized over the vesting period.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development costs are classified as general and administrative expenses and are expensed as incurred.

F - 12

SHIPPING AND HANDLING COSTS

Shipping and handling cost are classified as selling expenses and are expensed as incurred. Shipping and handling costs amounted to approximately $1,150,000, $638,000, and $470,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

ADVERTISING COSTS

Advertising costs are classified as selling expenses and are expensed as incurred.

WARRANTY CLAIMS

The Company offers product warranties for certain products. Warranty claims are classified as selling expenses and are expensed as incurred. The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years.

PURCHASE DISCOUNTS

Purchase discounts, if applicable, are netted in the cost of goods sold.

LEASE COMMITMENTS

The Company has adopted SFAS No. 13, “Accounting for Leases”. If the lease terms meet one or all of the following four criteria, it will be classified as a capital lease, otherwise, it is an operating lease: (1) The lease transfers the title to the lessee at the end of the term; (2) the lease contains a bargain purchase option; (3) the lease term is equal to 75% of the estimated economic life of the leased property or more; (4) the present value of the minimum lease payment in the term equals or exceeds 90% of the fair value of the leased property. The current lease agreement with Ruili Group Co. Ltd. does not meet any of the above criteria, so it is classified and recorded as an operating lease.

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, and subsequently revised in December 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. FIN 46 does not have any impact on the financial position or results of operations of the Company.

In April 2003, the FASB issued SFAS No. 149, “Accounting for Amendment of statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is generally effective for contracts entered into or modified after June 30, 2003, and all provisions should be applied prospectively. This statement does not affect the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. This statement does not affect the Company.

F - 13

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs - an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The Company is currently evaluating the impact of SFAS 151 on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67” (“SFAS 152”). This statement amends FASB Statement No. 66 “Accounting for Sales of Real Estate” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). SFAS 152 also amends FASB Statement No. 67 “Accounting for Costs and Initial Rental operations of Real Estate Projects” to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The Company is currently evaluating the impact of SFAS 152 on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal quarter ended September 30, 2005. This statement has had no effect on the Company.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform and asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective for fiscal years that end after December 15, 2005. As such, the Company is required to adopt these provisions for the fiscal year ended December 31, 2005. This statement has had no effect on the Company.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. These requirements apply to all voluntary changes and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for fiscal years beginning after December 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The Company is currently evaluating the impact of SFAS 154 on its consolidated financial statements.

F - 14

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statement No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2007. The Company is currently evaluating the impact of SFAS 155 on its consolidated financial statements.

NOTE 5 -

RELATED PARTY TRANSACTIONS

The Company continued to purchase non-valve automotive components, raw materials and packaging materials from the Ruili Group Co., Ltd., which is the minority shareholder of the JV, and also has the common controlling party, i.e. the Zhang family; as well as some non-valve parts from Ruian Ruili Haizhiguan Auto Part Co., Ltd., a subsidiary of Ruili Group.

The following related party transactions occurred for the fiscal year ended December 31, 2005 and 2004:

	December 31,

	2005		2004

PURCHASES FROM:
Ruili Group Co., Ltd.	$	16,780,670	$	6,566,232
Ruian Ruili Haizhiguan Auto Part Co., Ltd.		283,024		555,927
Total Purchases	$	17,063,694	$	7,122,159

SALES TO:
Ruili Group Co., Ltd.	$	4,471,022		—
Total Sales	$	4,471,022		—

The total purchases from Ruili Group in 2005 consisted of $15.2 million finished products of non-valve auto parts, $0.3 million raw materials, and $1.2 million packaging materials.

ACCOUNTS PAYABLE AND OTHER PAYABLES
Ruili Group Co., Ltd.	$	1,060,193	$	2,239,054
Ruian Ruili Haizhiguan Auto Part Co., Ltd.		—		11,862
Xiaofeng Zhang, Board Director		—		265,701
Shuping Chi		273,559		—
Total Related Parties included in Accounts Payable		1,333,752		2,516,617

There were no related party transactions for the fiscal year ended December 31, 2003.

F - 15

NOTE 6 -

ACCOUNTS RECEIVABLE

The changes in the allowance for doubtful accounts at December 31, 2005 and 2004 are summarized as follows:

	2005		2004

Beginning balance	$	68,384	$	—
Add: Increase to allowance		846,337		68,384
Less: Accounts written off		—		—

Ending balance	$	914,721	$	68,384

The company’s receivables are summarized as follows:

	2005			2004

Balance before allowance	$	26,254,495		$	12,664,289
Less: Allowance for doubtful accounts		(914,721	)		(68,384	)

Account receivable balance, net	$	25,339,774		$	12,595,905

NOTE 7 -

INVENTORIES

On December 31, 2005 and 2004, inventories consist of the following:

	2005		2004

Raw Material	$	747,858	$	222,800
Work in process		1,057,740		966,170
Finished Goods		706,985		686,330

Total Inventory	$	2,512,583	$	1,875,300

NOTE 8 -

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following, on December 31, 2005, 2004 and 2003:

	2005			2004			2003

							(Rounded)
Machinery	$	8,706,639		$	6,361,447		$	5,864,000
Molds		1,080,291			1,015,016			1,012,000
Office equipment		185,088			42,755			—
Vehicle		169,529			98,578			51,000

Sub-Total		10,140,947			7,517,796			6,927,000
Less: Accumulated depreciation		(3,024,281	)		(2,165,142	)		(1,630,000	)

Fixed Assets, net	$	7,116,666		$	5,352,654		$	5,297,000

Depreciation expense charged to operations was $859,139, $535,620 and $1,798,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

NOTE 9 -

INTANGIBLE ASSETS

Gross intangible assets were $44,297, less accumulated amortization of $11,873 for net intangible assets of $32,424 as of December 31, 2005. Gross intangible assets were $43,174, less accumulated amortization of $4,454 for net intangible assets of $38,720 as of December 31, 2004 and 0 as of December 31, 2003. Amortization expenses were $7,419 and $4,454 for the fiscal years ended December 31, 2005 and 2004 respectively.

Future estimated amortization expense is as follows:

2006		2007		2008		2009		2010		Thereafter

$	5,076	$	3,617	$	3,617	$	3,617	$	3,617	$	12,880

F - 16

NOTE 10 -

PREPAYMENT

Prepayment consisted of the following as of December 31, 2005 and 2004:

	2005		2004

Raw material suppliers	$	1,584,193	$	1,372,000
Equipment purchase		217,637		32,710
Total prepayment	$	1,801,829	$	1,404,710

NOTE 11 -

ACCRUED EXPENSES

Accrued expenses consisted of the following as of December 31, 2005 and 2004:

	2005		2004

Accrued payroll	$	297,928	$	206,594
Accrued rent		—		365,842
Accrued legal		—		43,524
Other accrued expenses		185,054		9,808

Total accrued expenses	$	482,982	$	625,768

NOTE 12 -

BANK BORROWINGS

Bank borrowings represent the following as of December 31:

	2005		2004

Secured		16,026,717		4,830,918

Less: Current portion		16,026,717		4,830,918

Non-current portion		—		—

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

$10.25M	Guaranteed by Ruili Group Co., Ltd., a related party;

$2.43M	Guaranteed by Ruili Group Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders;

$3.35M	Guaranteed by Shenghuabo Group Co., Ltd., a non-related party.

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

F - 17

NOTE 13 -

INCOME TAXES

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

Had the Company not been entitled to the “tax holiday”, income tax expense computed for the years ended December 31, 2005 and 2004 would have been approximately $1,395,000 and $1,269,000 respectively.

Provision for income taxes consists of the following for the year ended December 31, 2003:

(In Thousands)

Income tax expense
Current year	$	444
Prior year		102
Total	$	546

The reconciliation of the applicable tax rate to the effective tax rate is as follows:

(In Thousands)

Expected PRC income tax charge at Statutory tax rate of 33% (i)		619
Non-taxable income (ii)		(201	)
Non-deductible expenses		26
Current year income tax expense	$	444

(i) The provision of PRC income tax is calculated based on the statutory rate of 33% in accordance with the relevant PRC income tax rules and regulations for all periods presented.

(ii) Non-taxable income represented a government grant for the Company’s investment in research and development of new products.

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

NOTE 14 -

LEASE

The Company has a lease agreement with Ruili Group Co., Ltd., a related party, for the rental of a manufacturing plant. The lease is for a ten year term ending in February 2014. Rent expense for the fiscal years ended December 31, 2005, 2004 and 2003, was $439,009, $439,009 and $365,840, respectively.

F - 18

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

2006		2007		2008		2009		2010		Thereafter		Total

$	439,540	$	439,540	$	439,540	$	439,540	$	439,540	$	1,321,620	$	3,519,320

NOTE 15 -

ADVERTISING COSTS

Advertising costs are expensed as incurred and are classified as selling expenses. Advertising costs were $19,622, $1,661 and $8,069 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively.

NOTE 16 -

RESEARCH AND DEVELOPMENT EXPENSES

Research and development costs are expensed as incurred and were $361,503, $79,962 and $55,784 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively.

NOTE 17 -

WARRANTY CLAIMS

Warranty claims were $778,763, $205,314 and $112,063 for the fiscal years ended on December 31, 2005, 2004 and 2003 respectively. The movement of accrued warranty expenses for fiscal year 2005 is as follows:

Accrued in 2005:	$	778,763
Less: Actual Paid in 2005:	$	(598,831	)
Ending balance at 2005:	$	179,932

NOTE 18 -

STOCK COMPENSATION PLAN

The Company established a stock compensation plan in October 2005 for the purpose of enhancing its ability to attract, retain and provide incentives to directors, officers, employees and independent contractors who are crucial to the future growth and success of the Company. The plan outlined that over the next ten years the Company will issue approximately 1,700,000 common shares to qualified directors, officers, employees and independent contractors. During 2005, the Company issued 49,500 shares of common stock to employees valued at $6 per share resulting in a change to income of $297,000. The value of the stock issued was determined by using the approximate quoted market price of the stock at the date of issuance. The above issuance did not result in any cash outflows to the Company.

Additionally, the Company issued 10,000 shares of common stock to consultants valued at $6.50 per share resulting in a charge to income of $65,000. During 2005, the value of the stock issued was determined by using the approximated quoted market price at the date of issuance. The above issuance did not result in any cash outflows to the Company.

No stock options, warrants or similar stock equivalent instruments were issued during 2005.

NOTE 19 -

SUBSEQUENT EVENT

On January 5, 2006, the Company signed the Financial Advisory Agreement with Maxim Group LLC (“Maxim”) and Chardan Capital Markets, LLC (“Chardan”) to provide general financial advisory and investment banking services to the Company on an exclusive basis for a period of twelve months.

F - 19

Effective February 2006, the Company shall pay to Maxim and Chardan (i) a monthly retainer of $5,000 at the beginning of each month for the term of this Agreement and (ii) issue to Maxim and Chardan a warrant (“Warrant”) to purchase 100,000 shares of the Company’s common stock.

Note 20 -

RESTATEMENT

The accompanying financial statements for the years ended December 31, 2005 and 2004 have been restated to present changes in cash flows from notes receivable arising from trade customers as a component of operating cash flows rather than investing cash flows as previously reported. The restatement affected the statements of cash flows only for 2005 and 2004. The restatement had no impact on income from continuing operations, net income, earnings per share (basic or diluted) or stockholders’ equity.

F - 20

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

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets

		June 30, 2006			December 31, 2005

		(Unaudited)			(Audited)
Assets
Current Assets
Cash and Cash Equivalents	US$		2,221,050	US$		961,131
Accounts Receivable, Net of Provision			29,368,553			25,339,774
Notes Receivable			1,155,537			1,488,104
Inventory			1,374,179			2,512,583
Prepayments			1,409,268			1,801,829
Other current assets			407,250			48,115

Total Current Assets			35,935,837			32,151,536
Fixed Assets
Property, Plant and Equipment			10,670,515			10,140,947
Less: Accumulated Depreciation			(3,494,385	)		(3,024,281	)

Property, Plant and Equipment, Net			7,176,130			7,116,666
Construction in progress			344,012			—
Other Assets
Deferred compensation cost-stock options			308,551			—
Intangible Assets			44,709			44,297
Less: Accumulated Amortization			(15,369	)		(11,873	)
Intangible Assets, Net			29,340			32,424

Total Other Assets			337,891			32,424

Total Assets	US$		43,793,870	US$		39,300,626

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts Payable and Notes Payable	US$		7,651,396	US$		3,746,666
Deposit Received from Customers			806,551			1,324,085
Short term bank loans			11,506,328			16,026,717
Accrued Expenses			595,968			482,982
Other Current Liabilities			424,403			—

Total Current Liabilities			20,984,646			21,580,450
Minority Interest			2,196,927			1,735,818
Shareholders’ Equity
Common Stock - $0.002 Par Value; 50,000,000 authorized, 13,346,555 issued and outstanding as of June 30, 2006 and December 31, 2005			26,693			26,693
Additional Paid In Capital			4,922,074			4,444,118
Accumulated other comprehensive income			505,005			336,993
Retained Earnings			15,158,525			11,176,554

			20,612,297			15,984,358

Total Liabilities and Shareholders’ Equity	US$		43,793,870	US$		39,300,626

The accompanying notes are an integral part of these financial statements

F - 21

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Unaudited)

		Three Months Ended June 30,						Six Months Ended June 30,

		2006			2005			2006			2005

Sales	US$		20,117,002			14,924,151	US$		39,536,586			29,440,016
Cost of Sales			15,477,658			11,561,779			30,501,484			22,857,952

Gross Profit			4,639,344			3,362,372			9,035,102			6,582,064
Operating Expenses
Selling and Distribution Expenses			1,376,442			954,666			2,244,458			1,881,755
General and Administrative Expenses			86,289			652,039			1,183,251			1,206,293

Total Operating Expenses			1,462,731			1,606,705			3,427,709			3,088,048
Operating Income			3,176,613			1,755,667			5,607,393			3,494,016
Financial Expenses			(241,900	)		(126,348	)		(507,447	)		(186,800	)
Other Income			68,696			—			68,696			—
Non-Operating Expenses			(67,050	)		(66,473	)		(156,725	)		(75,626	)

Income Before Provision for Income Taxes			2,936,359			1,562,846			5,011,917			3,231,590
Provision for Income Taxes			293,897			—			587,505			—

Net Income Before Minority Interest & Other Comprehensive Income	US$		2,642,462			1,562,846	US$		4,424,412			3,231,590

Minority Interest			264,246			156,285			442,441			323,159

Net Income Attributable to Shareholders			2,378,216			1,406,561			3,981,971			2,908,431

Foreign Currency Translation Adjustment			59,974			—			186,680			—
Minority Interest’s Share			(5,997	)		—			(18,668	)		—

Comprehensive Income			2,432,193			1,406,561			4,149,983			2,908,431

Weighted average common share - Basic			13,346,555			13,287,055			13,346,555			13,287,055
Weighted average common share - Diluted			13,359,861			13,287,055			13,355,426			13,287,055
EPS - Basic			0.18			0.11			0.30			0.22
EPS - Diluted			0.18			0.11			0.30			0.22

The accompanying notes are an integral part of these financial statements

F - 22

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)

	Three Months Ended June 30, 2006 and 2005

	Number of Share		Common Stock		Additional Paid-in Capital			Retained Earnings (Deficit)		Accumu. Other Comprehensive Income		Shareholdes’ Equity		Minority Interest

Beginning Balance - March 31, 2005		13,285,867		26,572		4,082,239			7,728,814		—		11,837,625		1,315,293
Common Stock – Adjustment for fractional shares		1,188		2		(2	)		—		—		—		—
Net Income		—		—		—			1,406,561		—		1,406,561		156,285
Other Comprehensive Income		—		—		—			—		—		—		—
Paid In Capital Contributions		—		—		—			—		—		—		—

*Ending Balance - June 30, 2005*		13,287,055		26,574		4,082,237			9,135,375		—		13,244,186		1,471,577

Beginning Balance - March 31, 2006		13,346,555		26,693		4,623,022			12,780,309		451,028		17,881,052		1,926,684
Net Income		—		—		—			2,378,216		—		2,378,216		264,246
Other Comprehensive Income		—		—		—			—		53,977		53,977		5,997
Paid In Capital Contributions		—		—		299,052			—		—		299,052		—

*Ending Balance - June 30, 2006*		13,346,555		26,693		4,922,074			15,158,525		505,005		20,612,297		2,196,927

	Six Months Ended June 30, 2006 and 2005

	Number of Share		Common Stock		Additional Paid-in Capital			Retained Earnings (Deficit)		Accumu. Other Comprehensive Income		Shareholders’ Equity		Minority Interest

Beginning Balance - December 31, 2004		13,282,253		26,565		4,082,246			6,226,944				10,335,755		1,148,418
Common Stock – Adjustment for fractional shares		4,802		9		(9	)		—		—		—		—
Net Income		—		—		—			2,908,431		—		2,908,431		323,159
Other Comprehensive Income		—		—		—			—		—		—		—
Paid In Capital Contributions		—		—		—			—		—		—		—

*Ending Balance - June 30, 2005*		13,287,055		26,574		4,082,237			9,135,375		—		13,244,186		1,471,577

Beginning Balance - December 31, 2005		13,346,555		26,693		4,444,118			11,176,554		336,993		15,984,358		1,735,818

Net Income		—		—		—			3,981,971		—		3,981,971		442,441
Other Comprehensive Income		—		—		—			—		168,012		168,012		18,668
Paid In Capital Contributions		—		—		477,956			—		—		477,956		—

*Ending Balance - June 30, 2006*		13,346,555		26,693		4,922,074			15,158,525		505,005		20,612,297		2,196,927

The accompanying notes are an integral part of these financial statements

F - 23

SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

		Three Months Ended June 30,						Six Months Ended June 30,

		2006			2005			2006			2005

Cash Flows from Operating Activities
Net Income	US$		2,378,216			1,406,561	US$		3,981,971			2,908,431
Adjustments to reconcile net income (loss) to net cash from operating activities:
Minority Interest			264,246			156,285			442,441			323,159
Bad Debt Expense			(943,325	)		—			(786,450	)		—
Depreciation and Amortization			252,001			200,653			516,995			392,657
Loss on disposal of Fixed Assets			66,903			—			66,903			—
Stock-Based Compensation Expense			164,435			—			169,405			—
Changes in Assets and Liabilities:
Account Receivables			248,361			(1,777,338	)		(3,241,876	)		(6,392,929	)
Notes Receivables			1,001,383			(170,336	)		332,567			(805,108	)
Other Currents Assets			103,224			(32,907	)		(359,133	)		330,558
Inventory			(239,406	)		(839,955	)		1,138,404			(729,095	)
Prepayments			(87,590	)		248,863			392,561			(405,756	)
Account Payables and Notes payable			2,191,393			657,116			4,054,538			384,023
Deposits Received from Customers			(274,726	)		(293,533	)		(517,534	)		638,244
Other Currents liability			(610,270	)		8,865			276,416			671,525

Net Cash Flows from Operating Activities			4,514,845			(435,727	)		6,467,208			(2,684,291	)
Cash Flows from Investing Activities
Acquisition of Property and Equipment			(247,028	)		(785,524	)		(529,568	)		(1,072,227	)
Investment in Construction in progress			(255,736	)		—			(344,012	)		—

Net Cash Flows from Investing Activities			(502,764	)		(785,524	)		(873,580	)		(1,072,227	)
Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans			(3,004,786	)		928,213			(4,520,388	)		3,343,672

Net Cash flows from Financing Activities			(3,004,786	)		928,213			(4,520,388	)		3,343,672
Effects on changes in foreign exchange rate			59,974			—			186,679			—
Net Increase (Decrease) in Cash			1,067,269			(293,037	)		1,259,919			(412,845	)
Cash - Beginning of the term			1,153,781			610,067			961,131			729,875

Cash - End of the term	US$		2,221,050			317,030	US$		2,221,050			317,030

Supplemental Cash Flow Disclosures:
Interest Paid			202,700			142,689			401,940			177,015
Tax Paid			763,973			167,325			805,590			277,733

The accompanying notes are an integral part of these financial statements

F - 24

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A -

Description of Business

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

Note B -

Basis of Presentation

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

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

Note C -

Recent Pronouncements

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

Note D -

Related Party Transactions

The Company continued to purchase non-valve automotive components, raw materials and packaging materials from the Ruili Group Co., Ltd., which is the minority shareholder of the Joint Venture, and also has the common controlling party, i.e. the Zhang family. The following related party transactions occurred for the three or six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,				Six Months Ended June 30,

	2006		2005		2006		2005

PURCHASES FROM:
Ruili Group Co., Ltd.	$	4,699,603	$	3,547,121	$	10,542,813	$	7,438,274
Ruian Ruili Haizhiguan Auto Part Co., Ltd.		—		154,351		—		279,745

Total	$	4,699,603	$	3,701,472	$	10,542,813	$	7,718,019

SALES TO:
Ruili Group Co., Ltd.	$	44,384		649,175	$	2,630,198		1,929,420

Total	$	44,384		649,175	$	2,630,198		1,929,420

F - 25

The total purchases from Ruili Group during the three months ended June 30, 2006 consisted of $ 4.5 million of finished products for non-valve auto parts and $0.2 million of packaging materials. During the six months ended June 30, 2006, the breakdown was $ 10.1 million and $ 0.4 million, respectively.

	June 30, 2006		December 31, 2005

ACCOUNTS PAYABLE AND OTHER PAYABLES
Ruili Group Co., Ltd.	$	1,982,441	$	—
Shuping Chi		—		273,559

Total		1,982,441		273,559

	June 30, 2006		December 31, 2005

Prepayment
Ruili Group Co., Ltd.	$	—	$	1,060,193

Total		—		1,060,193

Note E -

Accounts Receivable

The changes in the allowance for doubtful accounts at June 30, 2006 and December 31, 2005 are summarized as follows:

	June 30, 2006			December 31, 2005

Beginning balance	$	914,721		$	68,384
Add: Increase (Decrease) to allowance		(767,797	)		846,337
Less: Accounts written off		—			—

Ending balance	$	146,924		$	914,721

The company’s receivables are summarized as follows:

	June 30, 2006			December 31, 2005

Accounts receivable	$	29,515,477		$	26,254,495
Less: allowance for doubtful accounts		(146,924	)		(914,721	)

Account receivable balance, net	$	29,368,553		$	25,339,774

F - 26

Note F -

Inventories

On June 30, 2006 and December 31, 2005, inventories consisted of the following:

	June 30, 2006		December 31, 2005

Raw Material	$	540,861	$	747,858
Work in process		301,504		1,057,740
Finished Goods		531,814		706,985

Total Inventory	$	1,374,179	$	2,512,583

Note G -

Property, Plant and Equipment

Property, plant and equipment consisted of the following, on June 30, 2006 and December 31, 2005:

	June 30, 2006			December 31, 2005

Machinery	$	9,142,492		$	8,706,039
Moulds		1,090,343			1,080,291
Office equipment		201,023			185,088
Vehicle		236,657			169,529

Sub-Total		10,670,515			10,140,947
Less: Accumulated depreciation		(3,494,385	)		(3,024,281	)

PPE, Net	$	7,176,130		$	7,116,666

Depreciation expense charged to operations was $513,499 and $389,098 for the six months ended June 30, 2006 and 2005, respectively.

Note H -

Construction In Progress

Construction in progress included an investment of $ 344,012 for a warehouse as of June 30, 2006.

Note I -

Intangible Assets

Gross intangible assets were $44,709, less accumulated amortization of $15,369 for net intangible assets of $29,340 as of June 30, 2006. Gross intangible assets were $44,297, less accumulated amortization of $11,873 for net intangible assets of $32,424 as of December 31, 2005. Amortization expenses were $3,496 and $3,559 for the six months ended June 30, 2006 and 2005 respectively. Future estimated amortization expense is as follows:

F - 27

2006		2007		2008		2009		2010		Thereafter

$	1,580	$	3,617	$	3,617	$	3,617	$	3,617	$	12,880

Note J -

Prepayment

Prepayment consisted of the following as of June 30, 2006 and December 31, 2005:

	June 30, 2006		December 31, 2005

Raw material suppliers	$	1,045,002	$	1,584,192
Equipment purchase		364,266		217,637

Total prepayment	$	1,409,268	$	1,801,829

Note K -

Accrued Expenses

Accrued expenses consisted of the following as of June 30, 2006 and December 31, 2005:

	June 30, 2006		December 31, 2005

Accrued payroll	$	328,499	$	297,928
Accrued rent		—		—
Accrued legal		—		—
Other accrued expenses		267,469		185,054

Total accrued expenses	$	595,968	$	482,982

Note L -

Bank Loans

Bank loans represented the following as of June 30, 2006 and December 31, 2005:

	June 30, 2006			December 31, 2005

Secured	$	11,506,328		$	16,026,717

Less: Current portion	$	(11,506,328	)	$	(16,026,717	)

Non-current portion	$	—		$	—

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

$8.1M		Guaranteed by Ruili Group Co., Ltd., a related party;
$2.0M		Guaranteed by Ruili Group Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders;
$1.4M		Guaranteed by Shenghuabo Group Co., Ltd., a non-related party.

The Company did not provide any sort of guarantee to any other parties. Interest rates for the loans ranged between 5.220% and 5.580% per annum.

F - 28

Note M -

Income Taxes

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

The reconciliation of the effective income tax rate of the Joint Venture to the statutory income tax rate in the PRC for the six months ended June 30, 2006 is as follows:

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

Effective tax rate	13.2	%

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

Note N -

Lease

The Company has a lease agreement with Ruili Group Co., Ltd., a related party, for the rental of a manufacturing plant. The lease is for a ten year term ending in February 2014. Rent expenses for the six months ended June 30, 2006 and 2005, were $226,483 and $219,504 respectively.

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

2006		2007		2008		2009		2010		Thereafter

$	213,057	$	439,540	$	439,540	$	439,540	$	439,540	$	1,321,620

Note O -

Advertising Costs

Advertising costs are expensed as incurred and are classified as selling expenses. Advertising costs were $22,023 and $16,957 for the six months ended June 30, 2006 and 2005, respectively.

Note P -

Research and Development Expenses

Research and development costs are expensed as incurred and were $240,430 and $ 49,496 for the six months ended June 30, 2006 and 2005, respectively.

Note Q -

Warranty Claims

Warranty claims were $883,540 and $228,521 for the six months ended June 30, 2006 and 2005, respectively. The movement of accrued warranty expenses for the six months ended June 30, 2006 is as follows. Accrued warranty expenses are included in Accrued Expenses.

Beginning balance at January 01, 2006	$	179,932
Accrued during the six months ended June 30,2006:	$	883,540
Less: Actual Paid during the six months ended June 30,2006:	$	817,975

Ending balance at June 30, 2006:	$	245,497

F - 29

Note R -

Stock-Based Compensation

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

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

Number of Shares	% of Shares Issued	Initial Vesting Date

60,000	100%	March 1, 2009

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

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

Total deferred stock-based compensation expenses related to the 60,000 stock options granted within the six months ended June 30, 2006 amounted to $178,904. This amount is amortized over three years in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R). The amortization of deferred stock-based compensation for these equity arrangements was $14,909 and $ 19,879 respectively for the three months ended June 30, 2006 and the six months ended June 30, 2006. As of June 30, 2006, there was $159,025 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan. The cost is expected to be recognized over a period of 2.7 years.

A summary of option activity under the Plan as of June 30, 2006 and changes during the six months then ended is as follows:

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

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

Outstanding at June 30, 2006		60,000	$	4.79		2.7 Years	$	130,200

Exercisable at June 30, 2006		—		—		—		—

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

F - 30

Number of Shares	% of Shares Issued	Initial Vesting Date

100,000	100%	January 5, 2006

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

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

Total deferred stock-based compensation expenses related to the 100,000 warrants granted within the six months ended June 30, 2006 amounted to $299,052. This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R). The amortization of deferred stock-based compensation for these equity arrangements was $ 149,526 for the six months ended June 30, 2006. As of June 30, 2006, there was $149,526 of total unrecognized compensation cost related to the share-based compensation arrangements granted under the agreement. The cost is expected to be recognized over a period of six months.

A summary of warrant activity as of June 30, 2006 and changes during the six months then ended is as follows:

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

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

Outstanding at June 30, 2006		100,000	$	6.25		3.5 Years	$	71,000

Exercisable at June 30, 2006		100,000	$	6.25		3.5 Years	$	71,000

Note S -

Commitments and Contingencies

None.

F - 31

Note T -

Subsequent Event

None.

Until __________ __, 2006, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.

F - 32

SORL AUTO PARTS, INC.

PROSPECTUS

___________________________

_________ __, 2006

F - 33

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions) will be as follows:

SEC Registration Fee		$
NASD filing fee
Accounting fees and expenses
Printing and engraving expenses
Legal fees and expenses
Miscellaneous

Total		$

Item 14. Indemnification of Directors and Officers.

Our certificate of incorporation provides that all directors, officers, employees and agents of the registrant shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law.

Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below.

“Section 145. Indemnification of officers, directors, employees and agents; insurance.

(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

II - 1

(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.

(e) Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.

(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.

(h) For purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

II - 2

(i) For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.

(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).”

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

Paragraph B of Article Eighth of our certificate of incorporation provides:

“The Corporation, to the full extent permitted by Section 145 of the GCL, as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby.”

Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the Underwriters and the Underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act.

Item 15. Recent Sales of Unregistered Securities.

Not applicable.

II - 3

Item 16. Exhibits and Financial Statement Schedules.

(a) The following exhibits are filed as part of this Registration Statement:

Exhibit No.		Description

1.1		Form of Underwriting Agreement.

3.1		Certificate of Incorporation.(1)

3.2		By-laws.(1)

4.1		Form of Underwriters’ Common Stock Purchase Warrants

4.2		Specimen Common Stock Certificate.

5.1		Opinion of Troy & Gould*

10.1		Share Exchange Agreement and Plan of Reorganization.(2)

10.2		Joint Venture Agreement.(3)

10.3		Employment Agreement – Xiao Ping Zhang

10.4		Employment Agreement – Xiao Feng Zhang

10.5		Employment Agreement – Zong Yun Zhou

21		Subsidiaries

23.1		Consent of Rotenberg and Co. LLP.

23.2		Consent of Clancy and Co. P.L.L.C.

23.3		Consent of Troy & Gould (included in Exhibit 5.1)*

24		Power of Attorney (included on signature page of this Registration Statement).

* To be filed by amendment.


(1)	Incorporated herein by reference from our Form 10-QSB filed with the Securities and Exchange Commission, File No. 000-11991 on May 28, 2003.

(2)	Incorporated herein by reference from our Form 8-K Current Report and amendment thereto as filed with the Securities and Exchange Commission, on May 24, 2004.

(3)	Incorporated herein by reference from our Form 10-K as filed with the Securities and Exchange Commission on March 27, 2006.

II - 4

Item 17. Undertakings.

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(d) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II - 5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Ruian City, Zhejiang Province, People’s Republic of China, on the 30 ^th day of August, 2006.

	SORL AUTO PARTS, INC.

	By:	/s/Xiao Ping Zhang

		Xiao Ping Zhang
		Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Xiao Ping Zhang his/her true and lawful attorney-in-fact, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments including post-effective amendments to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his/her substitute, each acting alone, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Name	Position	Date

/s/Xiao Ping Zhang	Chief Executive Officer, and Director	August 30, 2006

Xiao Ping Zhang

/s/Xiao Feng Zhang	Chief Operating Officer and Director	August 30, 2006

Xiao Feng Zhang

/s/Zong Yun Zhou	Chief Financial Officer	August 30, 2006
	(Principal Financial and Principal Accounting Officer)
Zong Yun Zhou

/s/Jung Kang Chang	Director	August 30, 2006

Jung Kang Chang

/s/Li Min Zhang	Director	August 30, 2006

Li Min Zhang

/s/ Zhi Zhong Wang	Director	August 30, 2006

Zhi Zhong Wang

/s/Yi Guang Huo	Director	August 30, 2006

Yi Guang Huo

/s/Jiang Hua Feng	Director	August 30, 2006

Jiang Hua Feng

II - 6

Exhibit 1.1

________________ Shares of Common Stock

SORL AUTO PARTS, INC.

UNDERWRITING AGREEMENT

_________, 2006

MAXIM GROUP LLC
405 Lexington Avenue
New York, NY 10174

CHARDAN CAPITAL MARKETS, LLC
17 State Street, Suite 2575
New York, NY 10004

As Representatives of the Underwriters
named on Schedule A hereto

Ladies and Gentlemen:

SORL Auto Parts, Inc., a corporation organized and existing under the laws of Delaware (the “ Company ”), confirms its agreement, subject to the terms and conditions set forth herein, with each of the underwriters listed on Exhibit A hereto (collectively, the “ Underwriters ”), for whom Maxim Group LLC and Chardan Capital Markets, LLC are acting as representatives (in such capacity, individually and collectively, the “ Representatives ”), to sell and issue to the Underwriters an aggregate of _________ shares (the “ Firm Shares ”) of its common stock, par value $0.002 per share (the “ Common Stock ”). The Shares are more fully described in the Registration Statement and Prospectus referred to below. The offering and sale of the Shares contemplated by this underwriting agreement (this “ Agreement ”) is referred to herein as the “ Offering .”

1.1 Firm Securities; OverAllotment Option .

(a) Purchase of Firm Shares . On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell, severally and not jointly, to the several Underwriters, an aggregate of _______________ Firm Shares of the Company at a purchase price (net of discounts and commissions) of $____ per Firm Shares. The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite their respective names on Schedule A attached hereto and made a part hereof at a purchase price (net of discounts and commissions) of $____ per Firm Shares. The Firm Shares are to be offered initially to the public (the “ Offering ”) at the offering price of $_____ per Firm Shares.

(b) Payment and Delivery . Delivery and payment for the Firm Shares shall be made at 10:00 A.M., New York time, on the third Business Day following the effective date (the “ Effective Date ”) of the Registration Statement (as defined in Section 2.1.1 hereof) (or the fourth Business Day following the Effective Date, if the Registration Statement is declared effective after 4:30 p.m.) or at such earlier time as shall be agreed upon by the Representative and the Company at the offices of the Representative or at such other place as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “ Closing Date .” Payment for the Firm Shares shall be made on the Closing Date at the Representative’s election by wire transfer in Federal (same day) funds or by certified or bank cashier’s check(s) in New York Clearing House funds. Any remaining proceeds (less commissions, expense allowance and actual expense payments or other fees payable pursuant to this Agreement) shall be paid to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the facilities of the Depository Trust Company (the “ DTC ”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two Business Days prior to the Closing Date. The Company will permit the Representative to examine and package the Firm Shares for delivery, at least one full Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all the Firm Shares. As used herein, the term “ Business Day ” shall mean any day other than a Saturday, Sunday or any day on which national banks in New York, New York are not open for business.

(c) Option Shares . For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Underwriters are hereby granted, severally and not jointly, an option to purchase up to an additional 15% of the number of Firm Shares to be offered by the Company in the Offering (the “ Over-allotment Option ”). Such additional _________ shares shall be identical in all respects to the Firm Shares and are hereinafter referred to as “ Option Shares .” The Firm Shares and the Option Shares are hereinafter collectively referred to as the “ Shares ”. The purchase price to be paid for the Option Shares (net of discounts and commissions) will be $___ per Option. The Option Shares are to be offered initially to the public at the offering price of $___ per Option.

(d) Exercise of Option . The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within 45 days after the Effective Date. The Underwriters will not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or facsimile transmission setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares, which will not be later than five Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of the Representative or at such other place as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the date and time of the closing for such Option Shares will be as set forth in the notice (hereinafter the “Option Closing Date”). Upon exercise of the Over-allotment Option, the Company will become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters will become obligated to purchase, the number of Option Shares specified in such notice.

(e) Payment and Delivery of Option Shares . Payment for the Option Shares shall be made on the Option Closing Date at the Representative’s election by wire transfer in Federal (same day) funds or by certified or bank cashier’s check(s) in New York Clearing House funds, by deposit of the sum of $____ per Option Shares upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the facilities of DTC) for the account of the Underwriters. The certificates representing the Option Shares to be delivered will be in such denominations and registered in such names as the Representative requests not less than two Business Days prior to the Closing Date or the Option Closing Date, as the case may be, and will be made available to the Representative for inspection, checking and packaging at the aforesaid office of the Company’s transfer agent or correspondent not less than one full Business Day prior to such Closing Date or Option Closing Date.

1.2 Representatives’ Purchase Warrant .

(a) Purchase Warrant . The Company hereby agrees to issue and sell to the Representatives (and/or their designees) on the Effective Date a common stock purchase warrant (“ Representative Purchase Warrant ”) for the purchase of an aggregate of ___________ [eight percent (8%) of the Firm Shares] shares of Common Stock (the “ Representative Shares ”) for an aggregate purchase price of $100. Each of the Representative Shares shall be identical to the Firm Shares. The Representative Purchase Warrant shall be exercisable, in whole or in part, commencing one year from the Effective Date and expiring on the five-year anniversary of the Effective Date at an initial exercise price per Representative Share of $_____, which is equal to [one hundred twenty five percent (125%)] of the public offering price of a Firm Share. The shares of Common Stock issued to the Representatives, the Representative Purchase Warrant and the shares of Common Stock issuable upon exercise of the Representative Purchase Warrant are hereinafter referred to collectively as the “ Representative’s Securities .” The Firm Shares, Option Shares and the Representative’s Securities are hereinafter referred to collectively as the “ Securities .”

(b) Additional Terms of Purchase Warrant . The Representative Purchase Warrant shall contain terms and provisions more fully described herein below and as set forth more particularly in the Representative’s Purchase Warrant to be executed by the Company and delivered to the Representatives on the Closing Date, including, but not limited to: (i) cashless exercise, (ii) customary anti-dilution provisions (to the extent permitted by NASD Rule 2710(f)(2)(H)(vi)) and (iii) prohibitions of mergers, consolidations or other reorganizations of or by the Company or the taking by the Company of other action during the five-year period following the effective date of the Registration Statement unless adequate provision is made to preserve, in substance, the rights and powers incidental to the Representative’s Purchase Warrant.

(c) Registration Rights of Purchaser’s Warrant . The Representative’s Purchase Warrant shall provide for unlimited “piggyback” registration rights for a period of four (4) years commencing one year after the Effective Date at the Company’s expense. The Representatives shall furnish to the Company all information with respect to the Representatives required under applicable securities regulations to accurately complete the registration statements contemplated herein. The Representatives agree that it shall only use the prospectuses provided by the Company to sell the shares covered by such registration statements and will immediately cease to use any prospectus furnished by the Company if the Company advises the Representatives that such prospectus may no longer be used due to a material misstatement or omission.

(d) Delivery and Payment . Delivery and payment for the Representative Purchase Warrant shall be made on the Closing Date. The Company shall deliver to the Underwriters, upon payment therefore, certificates for the Representative Purchase Warrant in the name or names and in such authorized denominations as the Representatives may request.

(e) Restrictions on Transfer of Purchase Warrant . Pursuant to NASD Rule 2710(g)(1) (and except as provided for in NASD Rule 2710(g)(2)), the Representative’s Purchase Warrant (including the securities thereunder) shall not be sold during the offering contemplated hereby, nor sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition thereof by any person for a period of one (1) year immediately following the Closing Date.

2. Representations and Warranties of the Company .

2.1 The Company represents, warrants and covenants to, and agrees with, each of the Underwriters that, as of the date hereof and as of the Closing Date:

(a) The Company has filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement on Form [S-1] (Registration No. _______), and amendments thereto, and related preliminary prospectuses for the registration under the Securities Act of 1933, as amended (the “ Securities Act ”), of the Shares which registration statement, as so amended (including post-effective amendments, if any), has been declared effective by the Commission and copies of which have heretofore been delivered to the Underwriters. The registration statement, as amended at the time it became effective, including the prospectus, financial statements, schedules, exhibits and other information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is hereinafter referred to as the “ Registration Statement .” If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act registering additional shares of Common Stock (a “ Rule 462(b) Registration Statement ”), then, unless otherwise specified, any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, which, if filed, becomes effective upon filing, no other document with respect to the Registration Statement has heretofore been filed with the Commission. All of the Shares have been registered under the Securities Act pursuant to the Registration Statement or, if any Rule 462(b) Registration Statement is filed, will be duly registered under the Securities Act with the filing of such Rule 462(b) Registration Statement. Based on communications from the Commission, no stop order suspending the effectiveness of either the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission. The Company, if required by the Securities Act and the rules and regulations of the Commission (the “ Rules and Regulations ”), proposes to file the Prospectus with the Commission pursuant to Rule 424(b) under the Securities Act (“ Rule 424(b) ”).

The prospectus, in the form in which it is to be filed with the Commission pursuant to Rule 424(b), or, if the prospectus is not to be filed with the Commission pursuant to Rule 424(b), the prospectus in the form included as part of the Registration Statement at the time the Registration Statement became effective, is hereinafter referred to as the “ Prospectus ,” except that if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the Offering which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b)), the term “Prospectus” shall also refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Underwriters for such use. Any preliminary prospectus or prospectus subject to completion included in the Registration Statement or filed with the Commission pursuant to Rule 424 under the Securities Act is hereafter called a “ Preliminary Prospectus .” Any reference herein to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the exhibits incorporated by reference therein pursuant to the Rules and Regulations on or before the effective date of the Registration Statement, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be. Any reference herein to the terms “amend”, “amendment” or “supplement” with respect to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include: (i) the filing of any document under the Securities Exchange Act of 1934, as amended, and together with the Rules and Regulations promulgated thereunder (the “ Exchange Act ”) after the effective date of the Registration Statement, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be, which is incorporated therein by reference, and (ii) any such document so filed. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a Preliminary Prospectus and the Prospectus, or any amendments or supplements to any of the foregoing shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“ EDGAR ”).

(b) At the time of the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b), when any supplement to or amendment of the Prospectus is filed with the Commission, when any document filed under the Exchange Act was or is filed and at the Closing Date (as hereinafter defined), if any, the Registration Statement and the Prospectus and any amendments thereof and supplements or exhibits thereto complied or will comply in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the Rules and Regulations, and did not and will not contain an untrue statement of a material fact and did not and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein: (i) in the case of the Registration Statement, not misleading, and (ii) in the case of the Prospectus or any related Preliminary Prospectus in light of the circumstances under which they were made, not misleading. When any Preliminary Prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) under the Securities Act) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the Rules and Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related Preliminary Prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for use therein. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the subsections of the “Underwriting” section of the Prospectus captioned “Nature of the Underwriting Commitment,” “Conduct of the Offering” and “Stabilization.”

(c) Rotenberg & Co. LLP, whose reports relating to the Company are included in the Registration Statement, are independent public accountants as required by the Securities Act, the Exchange Act and the Rules and Regulations.

(d) Subsequent to the respective dates as of which information is presented in the Registration Statement and the Prospectus, and except as disclosed in the Registration Statement and the Prospectus: (i) the Company has not declared, paid or made any dividends or other distributions of any kind on or in respect of its capital stock, and (ii) there has been no material adverse change (or, to the knowledge of the Company, any development which has a high probability of involving a material adverse change in the future), whether or not arising from transactions in the ordinary course of business, in or affecting: (A) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and each direct or indirect subsidiary or joint venture of the Company listed on Schedule B hereto (the “ Subsidiaries ”), taken as a whole; (B) the long-term debt or capital stock of the Company or any of its Subsidiaries; or (C) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Registration Statement or the Prospectus (a “ Material Adverse Change ”). Since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, neither the Company nor any Subsidiary has incurred or undertaken any liabilities or obligations, whether direct or indirect, liquidated or contingent, matured or unmatured, or entered into any transactions, including any acquisition or disposition of any business or asset, which are material to the Company and the Subsidiaries taken as a whole, except for liabilities, obligations and transactions which are disclosed in the Registration Statement and the Prospectus.

(e) As of the dates indicated in the Prospectus, the authorized, issued and outstanding shares of capital stock of the Company were as set forth in the Prospectus in the column headed “Actual” under the section thereof captioned “Capitalization” and, after giving effect to the Offering and the other transactions contemplated by this Agreement, the Registration Statement and the Prospectus, will be as set forth in the column headed “As Adjusted” in such section. After giving effect to the Offering, the other transactions contemplated by this Agreement, the Registration Statement and the Prospectus, the authorized, issued and outstanding shares of capital stock of the Company will be as set forth in the column headed “Pro Forma As Adjusted” in the section of the Prospectus captioned “Capitalization.”

All of the issued and outstanding shares of capital stock of the Company are fully paid and non-assessable and have been duly and validly authorized and issued, in compliance with all applicable state, federal and foreign securities laws and not in violation of or subject to any preemptive or similar right that does or will entitle any Person (as defined below), upon the issuance or sale of any security, to acquire from the Company or any Subsidiary any Relevant Security. As used herein, the term “ Relevant Security ” means any Common Stock or other security of the Company or any Subsidiary that is convertible into, or exercisable or exchangeable for Common Stock or equity securities, or that holds the right to acquire any Common Stock or equity securities of the Company or any Subsidiary or any other such Relevant Security, except for such rights as may have been fully satisfied or waived prior to the effectiveness of the Registration Statement. As used herein, the term “ Person ” means any foreign or domestic individual, corporation, trust, partnership, joint venture, limited liability company or other entity.

(f) The Shares have been duly and validly authorized and, when issued, delivered and paid for in accordance with this Agreement and as described in the Prospectus on the Closing Date, will be duly and validly issued, fully paid and non-assessable, will have been issued in compliance with all applicable state, federal and foreign securities laws and will not have been issued in violation of or subject to any preemptive or similar right that does or will entitle any Person to acquire any Relevant Security from the Company or any Subsidiary upon issuance or sale of Shares in the Offering. The shares of Common Stock representing the Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. Except as disclosed in the Registration Statement and the Prospectus, neither the Company nor any Subsidiary has outstanding warrants, options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, or any contracts or commitments to issue or sell, any Relevant Security.

(g) The Subsidiaries are the only subsidiaries of the Company within the meaning of Rule 405 under the Securities Act. Except for the Subsidiaries and as otherwise disclosed in the Registration Statement and the Prospectus, the Company holds no ownership or other interest, nominal or beneficial, direct or indirect, in any corporation, partnership, joint venture or other business entity. All of the issued and outstanding shares of capital stock of, or other ownership interests in, each Subsidiary have been duly and validly authorized and issued and are fully paid and non-assessable and are owned, directly or indirectly, by the Company, free and clear of any lien, charge, mortgage, pledge, security interest, claim, equity, trust or other encumbrance, preferential arrangement, defect or restriction of any kind whatsoever (any “Lien”). No director, officer or key employee of the Company named in the Prospectus holds any direct equity, debt or other pecuniary interest in any Subsidiary or any Person with whom the Company or any Subsidiary does business or is in privity of contract with, other than, in each case, indirectly through the ownership by such individuals of shares of Common Stock.

(h) Each of the Company and the Subsidiaries has been duly incorporated, formed or organized, and validly exists as a corporation, partnership or limited liability company in good standing under the laws of its jurisdiction of incorporation, formation or organization. Each of the Company and the Subsidiaries has all requisite power and authority to carry on its business as it is currently being conducted and as described in the Prospectus, and to own, lease and operate its respective properties.

Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation, partnership or limited liability company in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except, in each case, for those failures to be so qualified or in good standing which (individually and in the aggregate) could not reasonably be expected to have a material adverse effect on: (i) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and the Subsidiaries, taken as a whole; (ii) the long-term debt or capital stock of the Company or any Subsidiary; or (iii) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Registration Statement or the Prospectus (any such effect being a “ Material Adverse Effect ”).

(i) Neither the Company nor any Subsidiary: (i) is in violation of its certificate or articles of incorporation, by-laws, certificate of formation, limited liability company agreement, joint venture agreement, partnership agreement or other organizational documents, (ii) is in default under, and no event has occurred which, with notice or lapse of time or both, would constitute a default under or result in the creation or imposition of any Lien upon any of its property or assets pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (iii) is in violation in any respect of any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, foreign or domestic, except (in the case of clause (ii) above) for any lien, charge or encumbrance disclosed in the Registration Statement and the Prospectus.

(j) The Company, through its wholly owned Subsidiary, Fairford Holdings Limited, a Hong Kong registered entity (“Fairford”), owns 90% of the ownership and economic interests in a joint venture (“Joint Venture”) established under the laws of the Peoples Republic of China. The Joint Venture operates under the name “Ruili Group Ruian Auto Parts Co. LTD”. The Contract of Joint Venture dated as of January 19, 2004(“Joint Venture Agreement”) has been duly authorized and executed by Fairford, is in full force and effect and constitutes the legal and binding obligation of Fairford. The Company has no knowledge of, and has not received any oral or written notice of, any default under the Joint Venture Agreement and no proceedings have been discussed or initiated regarding the termination, amendment, liquidation or dissolution of the Joint Venture. The Joint Venture was established and operates in compliance with all laws and regulations of the Peoples Republic of China, including, without limitation, “ The Implementation Regulations of Sino-foreign Joint Ventures Law of Peoples of China ”. The sole other party to the Joint Venture Agreement and the sole owner of the remaining 10% ownership and economic interests in the Joint Venture is Ruili Group Co, LTD.

(k) The Company has full right, power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate each of the transactions contemplated by this Agreement. The Company has duly and validly authorized this Agreement and each of the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

(l) The execution, delivery, and performance of this Agreement and consummation of the transactions contemplated by this Agreement do not and, to the knowledge of the Company, will not: (i) conflict with, require consent under or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any Lien upon any property or assets of the Company or any Subsidiary pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement, instrument, franchise, license or permit to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or their respective properties, operations or assets may be bound or (ii) violate or conflict with any provision of the certificate or articles of incorporation, by-laws, certificate of formation, limited liability company agreement, partnership agreement or other organizational documents of the Company or any Subsidiary, or (iii) violate or conflict with any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, domestic or foreign.

(m) Each of the Company and the Subsidiaries has all material consents, approvals, authorizations, orders, registrations, qualifications, licenses, filings and permits of, with and from all judicial, regulatory and other legal or governmental agencies and bodies and all third parties, foreign and domestic (collectively, the “ Consents ”), to own, lease and operate its properties and conduct its business as it is now being conducted and as disclosed in the Registration Statement and the Prospectus, and each such Consent is valid and in full force and effect. Neither the Company nor any Subsidiary has received notice of any investigation or proceedings which results in or, if decided adversely to the Company or any Subsidiary, could reasonably be expected to result in, the revocation of, or imposition of a materially burdensome restriction on, any Consent. No Consent contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus.

(n) Each of the Company and the Subsidiaries is in compliance with all applicable laws, rules, regulations, ordinances, directives, judgments, decrees and orders, foreign and domestic. Neither the Company, nor any of its Affiliates (within the meaning of Rule 144 under the Securities Act) (“ Affiliates ”) has received any notice or other information from any regulatory or other legal or governmental agency relating to any default or potential decertification by the Company, or any of its Affiliates.

(o) No Consent of, with or from any judicial, regulatory or other legal or governmental agency or body or any third party, foreign or domestic is required for the execution, delivery and performance of this Agreement or consummation of each of the transactions contemplated by this Agreement, including the issuance, sale and delivery of the Shares to be issued, sold and delivered hereunder, except the registration under the Securities Act of the Shares, which has become effective, and such Consents as may be required under state securities or blue sky laws or the by-laws and rules of The NASDAQ Stock Market, Inc., including the NASDAQ Capital Market, where the Common Stock has been approved for listing (“ NASDAQ ”), the National Association of Securities Dealers, Inc. (the “ NASD ”) or NASD Regulation, Inc. in connection with the purchase and distribution of the Shares by the Underwriters, each of which has been obtained and is in full force and effect.

(p) Except as disclosed in the Registration Statement and the Prospectus, there is no judicial, regulatory, arbitral or other legal or governmental proceeding or other litigation or arbitration, domestic or foreign, pending to which the Company or any Subsidiary is a party or of which any property, operations or assets of the Company or any Subsidiary is the subject which, individually or in the aggregate, if determined adversely to the Company or any Subsidiary, could reasonably be expected to have a Material Adverse Effect. To the Company’s knowledge, no such proceeding, litigation or arbitration is threatened or contemplated; and the defense of all such proceedings, litigation and arbitration against or involving the Company or any Subsidiary could not reasonably be expected to have a Material Adverse Effect.

(q) The financial statements, including the notes thereto, and the supporting schedules included in the Registration Statement and the Prospectus present fairly the financial position as of the dates indicated and the cash flows and results of operations for the periods specified of the Company and its consolidated Subsidiaries. Except as otherwise stated in the Registration Statement and the Prospectus, said financial statements have been prepared in conformity with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement and the Prospectus present fairly the information required to be stated therein. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement. The other financial and statistical information included in the Registration Statement and the Prospectus present fairly the information included therein and have been prepared on a basis consistent with that of the financial statements that are included in the Registration Statement and the Prospectus and the books and records of the respective entities presented therein.

(r) There are no pro forma or as adjusted financial statements which are required to be included in the Registration Statement and the Prospectus in accordance with Regulation S-X which have not been included as so required. The pro forma and pro forma as adjusted financial information included in the Registration Statement and the Prospectus has been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Rules and Regulations and include all adjustments necessary to present fairly in accordance with generally accepted accounting principles the pro forma and as adjusted financial position of the respective entity or entities presented therein at the respective dates indicated and their cash flows and the results of operations for the respective periods specified. The assumptions used in preparing the pro forma and pro forma as adjusted financial information included in the Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein. The related pro forma and pro forma as adjusted adjustments give appropriate effect to those assumptions; and the pro forma and pro forma as adjusted financial information reflect the proper application of those adjustments to the corresponding historical financial statement amounts.

(s) The statistical, industry-related and market-related data included in the Registration Statement and the Prospectus are based on or derived from sources which the Company reasonably and in good faith believes are reliable and accurate, and such data agree with the sources from which they are derived.

(t) The Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and files reports with the Commission on the EDGAR System. The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and the outstanding shares of Common Stock are listed for quotation on the OTCBB and except for the agreement by the Company to have its shares of Common stock listed fro trading on the Nasdaq National Stock Market, the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or de-listing the Common Stock from the OTCBB, nor has the Company received any notification that the Commission or NASDAQ is contemplating terminating such registration or listing.

(u) The Company and the Subsidiaries maintain a system of internal accounting and other controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accounting for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(v) The Company’s Board of Directors has validly appointed an audit committee whose composition satisfies the requirements of Rule 4350(d)(2) of the Rules of the NASD (the “ NASD Rules ”) and the Board of Directors and/or audit committee has adopted a charter that satisfies the requirements of Rule 4350(d)(1) of the NASD Rules. The audit committee has reviewed the adequacy of its charter within the past twelve months. Neither the Board of Directors nor the audit committee has been informed, nor is any director of the Company aware, of: (i) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

(w) Neither the Company nor any of its Subsidiaries has violated: (i) the Bank Secrecy Act, as amended, (ii) the Money Laundering Control Act of 1986, as amended, (iii) the Foreign Corrupt Practices Act, or (iv) the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, and/or the rules and regulations promulgated under any such law, or any successor law, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect.

(x) Neither the Company nor any of its Affiliates has taken, directly or indirectly, any action which constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Shares.

(y) Neither the Company nor any of its Affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act or the Rules and Regulations with the offer and sale of the Shares pursuant to the Registration Statement. Except as disclosed in the Registration Statement, the Prospectus or in any public filings relating to the Company filed with the Commission, neither Company nor any of its Affiliates has sold or issued any Relevant Security during the six-month period preceding the date of the Prospectus, including but not limited to any sales pursuant to Rule 144A or Regulation D or S under the Securities Act, other than shares of Common Stock issued pursuant to employee benefit plans, qualified stock option plans or the employee compensation plans or pursuant to outstanding options, rights or warrants as described in the Registration Statement and the Prospectus.

(z) Except as disclosed in the Registration Statement and the Prospectus, no holder of any Relevant Security has any rights to require registration of any Relevant Security as part or on account of, or otherwise in connection with, the offer and sale of the Shares contemplated hereby, and any such rights so disclosed have either been fully complied with by the Company or effectively waived by the holders thereof, and any such waivers remain in full force and effect.

(aa) The documents, exhibits or other materials incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Securities Act, the Exchange Act and the Rules and Regulations, and, when read together with the other information in the Prospectus, do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

(bb) The conditions for use of Form [S-1] to register the Offering under the Securities Act, as set forth in the General Instructions to such Form, have been satisfied.

(cc) The Company is not and, at all times up to and including consummation of the transactions contemplated by this Agreement, and after giving effect to application of the net proceeds of the Offering, will not be, subject to registration as an “investment company” under the Investment Company Act of 1940, as amended, and is not and will not be an entity “controlled” by an “investment company” within the meaning of such act.

(dd) There are no contracts or other documents (including, without limitation, any voting agreement), which are required to be described in the Registration Statement and the Prospectus or filed as exhibits to the Registration Statement by the Securities Act, the Exchange Act or the Rules and Regulations and which have not been so described, filed or incorporated by reference.

(ee) No relationship, direct or indirect, exists between or among any of the Company or any Affiliate of the Company, on the one hand, and any director, officer, shareholder, customer or supplier of the Company or any affiliate of the Company, on the other hand, which is required by the Securities Act, the Exchange Act or the Rules and Regulations to be described in the Registration Statement or the Prospectus which is not so described and described as required.

There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members, except as disclosed in the Registration Statement and the Prospectus. The Company has not, in violation of the Sarbanes-Oxley Act of 2002 (“ Sarb-Ox ”), directly or indirectly, including through a Subsidiary (other than as permitted under the Sarb-Ox for depositary institutions), extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company.

(ff) The Company is in material compliance with the provisions of Sarb-Ox and the Rules and Regulations promulgated thereunder and related or similar rules and regulations promulgated by NASDAQ or any other governmental or self regulatory entity or agency, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect. Without limiting the generality of the foregoing: (i) all members of the Company’s board of directors who are required to be “independent” (as that term is defined under applicable laws, rules and regulations), including, without limitation, all members of the audit committee of the Company’s board of directors, meet the qualifications of independence as set forth under applicable laws, rules and regulations and (ii) the audit committee of the Company’s board of directors has at least one member who is an “audit committee financial expert” (as that term is defined under applicable laws, rules and regulations).

(gg) Except as disclosed in the Registration Statement and the Prospectus, there are no contracts, agreements or understandings between the Company and any Person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with the transactions contemplated by this Agreement or, to the Company’s knowledge, any arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, shareholders, partners, employees, Subsidiaries or Affiliates that may affect the Underwriters’ compensation as determined by the NASD.

(hh) The Company and each Subsidiary owns or leases all such properties as are necessary to the conduct of its business as presently operated and as proposed to be operated as described in the Registration and the Prospectus. The Company and the Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all Liens except such as are described in the Registration Statement and the Prospectus or such as do not (individually or in the aggregate) materially affect the business or prospects of the Company or any of the Subsidiaries. Any real property and buildings held under lease or sublease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material to, and do not interfere with, the use made and proposed to be made of such property and buildings by the Company and the Subsidiaries. Neither the Company nor any Subsidiary has received any notice of any claim adverse to its ownership of any real or personal property or of any claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or any Subsidiary.

(ii) The Company and each Subsidiary: (i) owns or possesses adequate right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, formulae, customer lists, and know-how and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures, “ Intellectual Property ”) necessary for the conduct of their respective businesses as being conducted and as described in the Registration Statement and Prospectus and (ii) have no knowledge that the conduct of their respective businesses do not or will not conflict with, and they have not received any notice of any claim of conflict with, any such right of others. To the Company’s knowledge, all material technical information developed by and belonging to the Company or any Subsidiary which has not been patented (including, without limitation, the Internet-based, proprietary referral system referred to in the Prospectus) has been kept confidential so as, among other things, all such information may be deemed proprietary to the Company. Except as set forth in the Registration Statement, the Prospectus or the Company Filings (as defined below), neither the Company nor any Subsidiary has granted or assigned to any other Person any right to sell the current products and services of the Company and its Subsidiaries or those products and services described in the Registration Statement and Prospectus. To the Company’s best knowledge, there is no infringement by third parties of any such Intellectual Property; there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s or any Subsidiary’s rights in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company or any Subsidiary infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim. As used herein, the term “ Company Filings ” means all of the Company’s filings with the Commission prior to the date hereof via EDGAR.

(jj) Each of the Company and the Subsidiaries has accurately prepared and timely filed all federal, state, foreign and other tax returns that are required to be filed by it and has paid or made provision for the payment of all taxes, assessments, governmental or other similar charges, including without limitation, all sales and use taxes and all taxes which the Company or any Subsidiary is obligated to withhold from amounts owing to employees, creditors and third parties, with respect to the periods covered by such tax returns (whether or not such amounts are shown as due on any tax return). No deficiency assessment with respect to a proposed adjustment of the Company’s or any Subsidiary’s federal, state, local or foreign taxes is pending or, to the Company’s knowledge, threatened. The accruals and reserves on the books and records of the Company and the Subsidiaries in respect of tax liabilities for any taxable period not finally determined are adequate to meet any assessments and related liabilities for any such period and, since the date of the Company’s most recent audited financial statements, the Company and the Subsidiaries have not incurred any liability for taxes other than in the ordinary course of its business. There is no tax lien, whether imposed by any federal, state, foreign or other taxing authority, outstanding against the assets, properties or business of the Company or any Subsidiary.

(kk) No labor disturbance by the employees of the Company or any Subsidiary currently exists or, to the Company’s knowledge, is likely to occur.

(ll) The Company and each Subsidiary have at all times operated their respective businesses in material compliance with all Environmental Laws, and no material expenditures are or will be required in order to comply therewith. Neither the Company nor any Subsidiary has received any notice or communication that relates to or alleges any actual or potential violation or failure to comply with any Environmental Laws that will result in a Material Adverse Effect. As used herein, the term “ Environmental Laws ” means all applicable laws and regulations, including any licensing, permits or reporting requirements, and any action by a Federal state or local government entity pertaining to the protection of the environment, protection of public health, protection of worker health and safety, or the handling of hazardous materials, including without limitation, the Clean Air Act, 42 U.S.C. § 7401, et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601, et seq., the Federal Water Pollution Control Act, 33 U.S.C. § 1321, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. § 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. § 690-1, et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601, et seq. or similar laws and regulations, to the extent applicable, under the Peoples Republic of China (“ PRC ”)

(mm) Except as set forth in the Registration Statement, the Prospectus or the Company Filings, neither the Company nor any Subsidiary is a party to an “employee benefit plan,” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 (“ ERISA ”) which: (i) is subject to any provision of ERISA and (ii) is or was at any time maintained, administered or contributed to by the Company or any Subsidiary and covers any employee or former employee of the Company or any Subsidiary or any ERISA Affiliate (as defined hereafter). These plans are referred to collectively herein as the “ Employee Plans .” For purposes of this Section, “ ERISA Affiliate ” of any person or entity means any other person or entity which, together with that person or entity, could be treated as a single employer under Section 414(m) of the Internal Revenue Code of 1986, as amended (the “ Code ”), or is an “affiliate,” whether or not incorporated, as defined in Section 407(d)(7) of ERISA, of the person or entity.

(nn) The Registration Statement and the Prospectus identify each employment, severance or other similar arrangement or policy and each material plan or arrangement providing for insurance coverage (including any self-insured arrangements), workers’ compensation, disability benefits, severance benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation, or post-retirement insurance, compensation or benefits which: (i) is not an Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by the Company or any Subsidiary or any of their respective ERISA Affiliates, and (iii) covers any employee or former employee of the Company or any Subsidiary or any of their respective ERISA Affiliates. These contracts, plans and arrangements are referred to collectively in this Agreement as the “ Benefit Arrangements .” Each Benefit Arrangement has been maintained in substantial compliance with its terms and with requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to that Benefit Arrangement.

(oo) Except as set forth in the Registration Statement, the Prospectus or the Company Filings, there is no liability in respect of post-retirement health and medical benefits for retired employees of the Company or any Subsidiary or any of their respective ERISA Affiliates other than medical benefits required to be continued under applicable law, determined using assumptions that are reasonable in the aggregate, over the fair market value of any fund, reserve or other assets segregated for the purpose of satisfying such liability (including for such purposes any fund established pursuant to Section 40 1(h) of the Code). With respect to any of the Company’s or any Subsidiaries’ Employee Plans which are “group health plans” under Section 4980B of the Code and Section 607(1) of ERISA, there has been material compliance with all requirements imposed there under such that the Company or any Subsidiary or their respective ERISA Affiliates have no (and will not incur any) loss, assessment, tax penalty, or other sanction with respect to any such plan.

(pp) Except: (i) as set forth in the Registration Statement, the Prospectus or the Company Filings or (ii) for the Company’s Controller and Chief Accounting Officer as of the Execution Date, neither the Company nor any Subsidiary is a party to or subject to any employment contract or arrangement providing for annual future compensation, or the opportunity to earn annual future compensation (whether through fixed salary, bonus, commission, options or otherwise) of more than $60,000 to any officer, consultant, director or employee.

(qq) The execution of this Agreement and consummation of the Offering does not constitute a triggering event under any Employee Plan or any other employment contract, whether or not legally enforceable, which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment (of severance pay or otherwise), acceleration, increase in vesting, or increase in benefits to any current or former participant, employee or director of the Company or any Subsidiary other than an event that is not material to the financial condition or business of the Company or any Subsidiary, either individually or taken as a whole.

(rr) No “prohibited transaction” (as defined in either Section 406 of the ERISA or Section 4975 of Code), “accumulated funding deficiency” (as defined in Section 302 of ERISA) or other event of the kind described in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan for which the Company or any Subsidiary would have any liability; each employee benefit plan of the Company or any Subsidiary is in compliance in all material respects with applicable law, including (without limitation) ERISA and the Code; the Company has not incurred and does not expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from any “pension plan”; and each employee benefit plan of the Company or any Subsidiary that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or by failure to act, which could cause the loss of such qualification.

(ss) Each of the Company and its Subsidiaries are in compliance in all material respects with all applicable laws administered by and regulations of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Small Business Administration (the “ SBA ”) or similar laws and regulations under the PRC and any state bank regulatory authority with jurisdiction over the Company or the Subsidiaries, as the case may be (collectively, the “ Bank Regulatory Authorities ”), the failure to comply with which would have a Material Adverse Effect.

Neither the Company nor the Subsidiary is a party to any written agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to an order or directive by, or is a recipient of any extraordinary supervisory letter from any Bank Regulatory Authority, specifically directed at the Company and the Subsidiary, which restricts materially the conduct of its business, or in any manner relates to its capital adequacy, its credit policies or its management, nor have any of them been advised in writing by any Bank Regulatory Authority that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter or similar submission, specifically directed at the Company and the Subsidiary.

(tt) Each of the Company and the Subsidiaries, are in compliance with the requirements of the insurance laws and regulations of their respective states of incorporation or organization and the insurance laws and regulations of other jurisdictions which are applicable to the Company or such Subsidiaries, and each have filed all notices, reports, documents or other information required to be filed thereunder, except where the failure to comply with such requirement could not reasonably be expected to have a Material Adverse Effect.

(uu) Neither the Company, any Subsidiary nor, to the Company’s knowledge, any of their respective employees or agents has at any time during the last five (5) years: (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other Person charged with similar public or quasi-public duties, other than payments that are not prohibited by the laws of the United States of any jurisdiction thereof.

(vv) The Company has not offered, or caused the Underwriters to offer, the Firm Shares to any Person or entity with the intention of unlawfully influencing: (i) a customer or supplier of the Company or any Subsidiary to alter the customer’s or supplier’s level or type of business with the Company or any Subsidiary or (ii) a journalist or publication to write or publish favorable information about the Company, any Subsidiary or its products or services.

(ww) The Company is in compliance with all applicable Chinese and other foreign and U.S. laws, rules, regulations, ordinances, directives, judgments, decrees and orders (including, without limitation, all securities and tax laws, rules and regulations of the Country of China), except for such non-compliance as would not have a Material Adverse Effect. As of the date hereof and as of the Closing Date, and except as contemplated by this Agreement, the Company does not operate within the jurisdiction of United States or any state or territory thereof in such a manner so as to subject the Company or its operations or businesses to registration as a foreign company doing business in any state within the United States or to any of the following laws in any material respect: (i) the Bank Secrecy Act, as amended, (ii) the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended, (iii) the Foreign Corrupt Practices Act of 1977, as amended, (iv) the Currency and Foreign Transactions Reporting Act of 1970, as amended, (v) the Employee Retirement Income Security Act of 1974, as amended, (vi) the rules and regulations promulgated under any such law, or any successor law, or any judgment, decree or order of any applicable administrative or judicial body relating to such law and (vii) any corresponding law, rule, regulation, ordinance, judgment, decree or order of any state or territory of the United States or any administrative or judicial body thereof.

(xx) The operations of the Company are and have been conducted at all times in compliance with applicable financial record keeping and reporting requirements and money laundering statutes of the PRC and, to the Company’s knowledge, all other jurisdictions to which the Company is subject, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

(yy) Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company (as such term is defined under Rule 144 under the Securities Act, an “ Affiliate ”) is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(zz) As used in this Agreement, references to matters being “ material ” with respect to the Company or its Subsidiaries shall mean a material event, change, condition, status or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, prospects, operations or results of operations of the Company or the applicable Subsidiaries, either individually or taken as a whole, as the context requires.

(aaa) As used in this Agreement, the term “ knowledge of the Company ” (or similar language) shall mean the knowledge of the officers and directors of the Company and the applicable Subsidiaries who are named in the Prospectus, with the assumption that such officers and directors shall have made reasonable and diligent inquiry of the matters presented (with reference to what is customary and prudent for the applicable individuals in connection with the discharge by the applicable individuals of their duties as officers, directors or managers of the Company or the applicable Subsidiaries).

Any certificate signed by or on behalf of the Company and delivered to the Underwriters or to Ellenoff Grossman & Schole LLP (“ Underwriters’ Counsel ”) shall be deemed to be a representation and warranty by the Company to each Underwriter listed on Schedule A hereto as to the matters covered thereby.

2.2 Free Writing Prospectus .

2.2.1 Neither: (i) any Issuer-Represented General Free Writing Prospectus(es) issued at or prior to the Time of Sale and the Statutory Prospectus, all considered together (collectively, the “ General Disclosure Package ”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus(es) (as defined below), when considered together with the General Disclosure Package, includes or included as of the Time of Sale any untrue statement of a material fact or omits or omitted as of the Time of Sale to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Statutory Prospectus included in the Registration Statement or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Representative specifically for use therein.

2.2.2 Each Issuer-Represented Free Writing Prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Securities or until any earlier date that the Company notified or notifies the Representative as described in the next sentence, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, any Statutory Prospectus or the Prospectus. If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, any Statutory Prospectus or the Prospectus relating to the Securities or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has notified or will notify promptly the Representative so that any use of such Issuer-Represented Free Writing Prospectus may cease until it is promptly amended or supplemented by the Company, at its own expense, to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Representative specifically for use therein.

2.2.3 The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Public Securities other than any Preliminary Prospectus, the General Disclosure Package or the Prospectus or other materials permitted by the Act to be distributed by the Company. Unless the Company obtains the prior consent of the Representatives, and except as set forth on Exhibit D attached hereto, the Company has not made and will not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433 under the Act, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405 under the Act, required to be filed with the Commission. The Company has complied and will comply with the requirements of Rules 164 and 433 under the Act applicable to any Issuer-Represented Free Writing Prospectus as of its issue date and at all subsequent times through the completion of the public offer and sale of the Securities, including timely filing with the Commission where required, legending and record keeping. The Company has satisfied and will satisfy the conditions in Rule 433 under the Act to avoid a requirement to file with the Commission any electronic road show.

2.2.4 Free Writing Prospectus . Each Underwriter agrees that, unless it obtains the prior written consent of the Company, it will not make any offer relating to the Shares that would constitute an Issuer-Represented Free Writing Prospectus (as defined in Section 2.2 hereof) or that would otherwise (without taking into account any approval, authorization, use or reference thereto by the Company) constitute a “free writing prospectus” required to be filed by the Company with the Commission (as defined herein) or retained by the Company under Rule 433 of the Act (as defined herein); provided that the prior written consent of the Company hereto shall be deemed to have been given in respect of any Issuer-Represented General Free Writing Prospectuses (as defined in Section 2.2.5 hereof) referenced on Exhibit D attached hereto

2.2.5 Definitions . As used in this Agreement, the terms set forth below shall have the following meanings:

(i) “ Time of Sale ” means [____:00 [a.m.][p.m.]] (Eastern time) on the date of this Agreement.

(ii) “ Statutory Prospectus ” as of any time means the prospectus that is included in the Registration Statement immediately prior to that time. For purposes of this definition, information contained in a form of prospectus that is deemed retroactively to be a part of the Registration Statement pursuant to Rule 430A shall be considered to be included in the Statutory Prospectus as of the actual time that form of prospectus is filed with the Commission pursuant to Rule 424(b) under the Act.

(iii) “ Issuer-Represented Free Writing Prospectus ” means any “issuer free writing prospectus,” as defined in Rule 433 under the Act, relating to the Securities that (A) is required to be filed with the Commission by the Company, or (B) is exempt from filing pursuant to Rule 433(d)(5)(i) under the Act because it contains a description of the Securities or of the offering that does not reflect the final terms or pursuant to Rule 433(d)(8)(ii) because it is a “bona fide electronic road show,” as defined in Rule 433 of the Regulations which is made available without restriction, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g) under the Act.

(iv) “ Issuer-Represented General Free Writing Prospectus ” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors, as evidenced by its being specified on Exhibit D attached hereto.

(v) “ Issuer-Represented Limited-Use Free Writing Prospectus ” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 of the Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii), even though not required to be filed with the Commission.

3. Purchase, Sale and Delivery of the Shares .

(a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter and each Underwriter, severally and not jointly, agrees to purchase from the Company, at a purchase price per share of $____, the number of Firm Shares set forth opposite their respective names on Schedule A hereto together with any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof.

(b) Payment of the purchase price for, and delivery of certificates representing, the Firm Shares shall be made at the offices of the Underwriters’ Counsel, 370 Lexington Avenue, New York, New York 10017, or at such other place as shall be agreed upon by the Representatives and the Company, at 10:00 A.M., New York City time, on the third (3rd) or, as permitted under Rule 15c6-1 under the Exchange Act, fourth (4th) business day (unless postponed in accordance with the provisions of Section 10 hereof) following the date of the effectiveness of the Registration Statement, or such other time not later than ten (10) business days after such date as shall be agreed upon by the Representatives and the Company as permitted under Rule 15c6-1 under the Exchange Act (such time and date of payment and delivery being herein called the “ Closing Date ”). The closing of the payment of the purchase price for, and delivery of certificates representing, the Firm Shares is referred to herein as the “ Closing .”

(c) Payment of the purchase price for the Firm Shares shall be made by wire transfer in immediately available funds to or as directed by the Company upon delivery of certificates for the Firm Shares to the Representatives through the facilities of The Depository Trust Company for the respective accounts of the several Underwriters. Certificates for the Firm Shares shall be registered in such name or names and shall be in such denominations as the Representatives may request at least two (2) business days before the Closing Date. The Company will permit the Representatives to examine and package such certificates for delivery at least one (1) full business day prior to the Closing Date.

4. Offering . Upon authorization of the release of the Firm Shares by the Representatives, the Underwriters propose to offer the Shares for sale to the public upon the terms and conditions set forth in the Prospectus.

5. Covenants of the Company . The Company acknowledges, covenants and agrees with the Underwriters that:

(a) The Registration Statement and any amendments thereto have been declared effective, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) within the prescribed time period and will provide evidence satisfactory to the Representatives of such timely filing.

The Company will notify the Representatives immediately (and, if requested by the Representatives, will confirm such notice in writing): (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the Company’s intention to file or prepare any supplement or amendment to the Registration Statement or the Prospectus, (iv) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, including but not limited to Rule 462(b) under the Securities Act, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, it being understood that the Company shall make every effort to avoid the issuance of any such stop order, (vi) of the receipt of any comments from the Commission, and (vii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company will make every reasonable effort to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the prospectus required to be filed pursuant to Rule 424(b)) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement or file any document under the Exchange Act if such document would be deemed to be incorporated by reference into the Prospectus to which the Representatives shall object in writing after being timely furnished in advance a copy thereof. The Company will provide the Representatives with copies of all such amendments, filings and other documents a sufficient time prior to any filing or other publication thereof to permit the Representatives a reasonable opportunity to review and comment thereon.

(b) The Company shall comply with the Securities Act, the Exchange Act and all applicable Rules and Regulations to permit completion of the distribution as contemplated in this Agreement, the Registration Statement and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act, the Exchange Act and all applicable Rules and Regulations in connection with the sales of Shares, any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Underwriters or the Company, include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances existing at the time of delivery to the purchaser, not misleading, or if, to comply with the Securities Act, the Exchange Act or the Rules and Regulations, it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement, or to file any document which is an exhibit to the Registration Statement or the Prospectus or in any amendment thereof or supplement thereto, the Company will notify the Representatives promptly and prepare and file with the Commission, subject to Section 5(a) hereof, an appropriate amendment or supplement (in form and substance satisfactory to the Representatives) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible.

(c) The Company will promptly deliver to the Underwriters and Underwriters’ Counsel a signed copy of the Registration Statement, as initially filed and all amendments thereto, including all consents and exhibits filed therewith, and will maintain in the Company’s files manually signed copies of such documents for at least five (5) years after the date of filing thereof. The Company will promptly deliver to each of the Underwriters such number of copies of any Preliminary Prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, and all documents which are exhibits to the Registration Statement and Prospectus or any amendment thereof or supplement thereto, as the Underwriters may reasonably request. Prior to 10:00 A.M., New York time, on the business day next succeeding the date of this Agreement and from time to time thereafter, the Company will furnish the Underwriters with copies of the Prospectus in New York City in such quantities as the Underwriters may reasonably request.

(d) The Company consents to the use and delivery of the Preliminary Prospectus by the Underwriters in accordance with Rule 430 and Section 5(b) of the Securities Act.

(e) If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the Act by the earlier of: (i) 10:00 p.m., New York City time, on the date of this Agreement, and (ii) the time that confirmations are given or sent, as specified by Rule 462(b)(2).

(f) The Company will use its best efforts, in cooperation with the Representatives, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions, domestic or foreign, as the Representatives may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process.

(g) The Company will make generally available to its security holders and to the Underwriters as soon as practicable, but in any event not later than twelve (12) months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), an audited earnings statement of the Company and the Subsidiaries complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158).

(h) Except with respect to (i) securities of the Company which may be issued in connection with an acquisition of another entity (or the assets thereof) (ii) the issuance of securities of the Company intended to provide the Company with proceeds to acquire anther entity (or the assets thereof), or (iii) the issuance of securities at Fair Market Value (as defined below) under the Company’s stock option plans in effect from time to time, during the twelve (12) months following the Closing Date, the Company or any successor to the Company shall not undertake any public or private offerings of any equity securities of the Company (including equity-linked securities) without the written consent of the Representatives, which consent shall not be unreasonably withheld.

(i) For a period of 36 months from the Closing Date, (i) neither the Company nor Fairford Holdings, Inc. (“Fairford”) shall (A) sell, transfer or assign any interest in Ruili Group Ruian Auto Parts Co., LTd. (“joint Venture”) or (B) allow the Joint Venture or Fairford to dilute the ownership interest (economic and legal) of the Company in the Joint Venture and (ii) the Company shall not sell, transfer or assign any ownership interest (legal or economic) in Fairford. .

(j) Except with respect to (i) securities of the Company which may be issued in connection with an acquisition of another entity (or the assets thereof) (ii) the issuance of securities of the Company intended to provide the Company with proceeds to acquire anther entity (or the assets thereof),during the twelve (12) months following the Closing Date, without the consent of the Representatives which shall not be unreasonably withheld: (i) the Company will not file any registration statement relating to the offer or sale of any of the Company’s securities, , except Form S-8 filed with the Commission in connection with the Company’s Stock Option Plan.

(k) During the nine (9) month period following the Closing Date (the “ Lock-Up Period ”), without the consent of the Representatives, which consent shall not be unreasonably withheld, neither the Company, any holder in excess of 5.0% of the Common Stock of the Company (“ Affiliated Shareholders ”) nor any of the individuals listed on Schedule C hereto (such individuals, collectively with the Affiliated Shareholders, the “ Lock-Up Parties ”) will sell or otherwise dispose of any securities of the Company, whether publicly or in a private placement; provided, however, that the holders of options to purchase Common Stock shall be entitled to exercise their outstanding options, subject to a written agreement by the recipient of the lock-up terms contained in this Section 5(k).

The Company will deliver to the Representatives the agreements of Lock-Up Parties to the foregoing effect prior to the Closing Date, which agreements shall be substantially in the form attached hereto as Annex II .

For purposes of this Section 5, the term “ Fair Market Value ” shall mean the last sale price of the Common Stock, during normal operating hours, as reported on NASDAQ.

(l) During the twelve (12) month period following the Closing Date, without the consent of the Representatives, which consent shall not be unreasonably withheld, no holders of registration rights relating to securities of the Company will exercise any such registration rights. The Company will deliver to the Representatives the agreements of such holders of registration rights to the foregoing effect prior to the Closing Date in the form reasonably agreeable to the Representatives.

(m) For a period of one (1) year from the effective date of the Registration Statement, the Company, at its expense, shall provide the Representatives on a weekly basis with a copy of the Company’s weekly transfer sheets from the previous week and securities positions listings.

(n) For a period of two (2) years from the effective date of the Registration Statement, the Company, at its expense, shall obtain and keep current a listing in the Standard & Poor’s Corporation Records Services or the Moody’s Industrial Manual; provided that Moody’s OTC Industrial Manual is not sufficient for these purposes.

(o) During the period of three (3) years from the effective date of the Registration Statement, the Company will furnish to the Underwriters copies of all reports or other communications (financial or other) furnished to security holders or from time to time published or publicly disseminated by the Company, and will deliver to the Underwriters: (i) as soon as they are available, copies of any reports, financial statements and proxy or information statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as the Representatives may from time to time reasonably request (such financial information to be on a consolidated basis to the extent the accounts of the Company and the Subsidiaries are consolidated in reports furnished to its security holders generally or to the Commission).

(p) The Company will not issue press releases or engage in any other publicity, without the Representatives’ prior written consent, for a period ending at 5:00 p.m. Eastern time on the first business day following the thirtieth (30th) day following the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.

(q) Prior to the consummation of the Offering, the Company will engage or continue to engage (for no less than two (2) years from the date of the Closing Date) a financial public relations firm mutually acceptable to the Company and the Representatives. The Company further agrees to consult with the Representatives as is customary within the securities industry prior to distribution to third parties of any financial information, news releases, and/or other publicity regarding the Company, its business, or any terms of the proposed Offering, it being agreed that the Company shall give the Representatives no less than twelve (12) hours prior notice of any such distribution and a reasonable opportunity during or prior to such period to review the contents of the proposed distribution.

(r) The Company has or will retain Continental Stock Transfer & Trust Company as transfer agent for the Shares and shall continue to retain such transfer agent for a period of two (2) years following the Closing Date.

(s) The Company will apply the net proceeds from the sale of the Shares as set forth under the caption “Use of Proceeds” in the Prospectus. Without the written consent of the Representatives, no proceeds of the Offering will be used to pay outstanding loans from officers, directors or shareholders or to pay any accrued salaries or bonuses to any employees or former employees.

(t) The Company will use its best efforts to effect and maintain the listing of the Shares on Nasdaq Capital Market for at least three (3) years after the Closing Date.

(u) The Company, during the period when the Prospectus is required to be delivered under the Securities Act or the Exchange Act, will file all documents required to be filed with the Commission pursuant to the Securities Act, the Exchange Act and the Rules and Regulations within the time periods required thereby.

(v) The Company will use its best efforts to do and perform all things required to be done or performed under this Agreement by the Company prior to the Closing Date, and to satisfy all conditions precedent to the delivery of the Firm Shares.

(w) The Company will not take, and will cause its Affiliates not to take, directly or indirectly, any action which constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Shares.

(x) The Company shall cause to be prepared and delivered to the Representatives, at its expense, within one (1) business day from the effective date of this Agreement, an Electronic Prospectus to be used by the Underwriters in connection with the Offering. As used herein, the term “ Electronic Prospectus ” means a form of prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an electronic format, satisfactory to the Representatives, that may be transmitted electronically by the other Underwriters to offerees and purchasers of the Shares for at least the period during which a Prospectus relating to the Shares is required to be delivered under the Securities Act; (ii) it shall disclose the same information as the paper prospectus and prospectus filed pursuant to EDGAR, except to the extent that graphic and image material cannot be disseminated electronically, in which case such graphic and image material shall be replaced in the electronic prospectus with a fair and accurate narrative description or tabular representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format, satisfactory to the Representatives, that will allow recipients thereof to store and have continuously ready access to the prospectus at any future time, without charge to such recipients (other than any fee charged for subscription to the Internet as a whole and for on-line time). The Company hereby confirms that it has included or will include in the Prospectus filed pursuant to EDGAR or otherwise with the Commission and in the Registration Statement at the time it was declared effective an undertaking that, upon receipt of a request by an investor or his or her representative within the period when a prospectus relating to the Shares is required to be delivered under the Securities Act, the Company shall transmit or cause to be transmitted promptly, without charge, a paper copy of the Prospectus.

(y) The Company agrees that if the Shares are sold in accordance with the terms of this Underwriting Agreement, the Representatives shall have an irrevocable preferential right for a period of twelve (12) months from the date the Offering is completed to purchase for its account or to sell for the account of the Company, or any subsidiary of or successor to the Company or any of the Company’s stockholders owning at least ten percent (10%) of the capital stock of the Company (the “ Principal Stockholders ”), any securities of the Company or any such subsidiary or successor which the Company, any such subsidiary or successor or any of the Company’s Principal Stockholders may seek to sell through an underwriter, placement agent or broker-dealer whether pursuant to registration under the Act or otherwise. The Company, any such subsidiary or successor and the Company’s Principal Stockholders will consult the Representatives with regard to any such offering and will offer the Representatives the opportunity to purchase or sell any such securities on terms not more favorable to the Company, any such subsidiary or successor or any of the Company’s Principal Stockholders than it or they can secure elsewhere. If the Representatives fail to accept such offer within 10 business days after the mailing of a notice containing such offer by registered mail addressed to the Representatives (two (2) business days in the event the offer covers a sale under Rule 144), then the Representatives shall have no further claim or right with respect to the financing proposal contained in such notice. If, however, the terms of such proposal are subsequently modified in any material respect, the preferential right referred to herein shall apply to such modified proposal as if the original proposal had not been made. The Representatives ‘s failure to exercise its preferential right with respect to any particular proposal shall not affect its preferential rights relative to future proposals.

(z) The Company agrees that it will, upon completion of the Offering, appoint a designee of the Representatives (“ Designee ”) to its Board of Directors to serve as a director until the next annual meeting of stockholders of the Company (the “Next Annual Meeting”). The Company shall nominate the Designee for election at the Next Annual Meeting and shall use its best efforts (which shall include, but not be limited to, the solicitation of proxies, if necessary) to have the Designee elected to the Company’s Board of Directors for a period of two (2) years following the completion of the Offering. Such Designee shall be entitled to receive all compensation (including options) and expense reimbursement as provided to the other members of the Board of Directors from time to time. The Company shall indemnify and hold such Designee harmless against any and all claims, actions, damages, costs and expenses, and judgments arising solely out of the attendance and participation of such Designee at any such meeting described herein, and, if the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, it shall include such Designee as an insured under such policy.

(aa) The Company shall not take any action that would result in the Underwriters or the Company being required to file with the Commission pursuant to Rule 433(d) under the Act a Free Writing Prospectus prepared by or on behalf of the Underwriters that the Underwriters otherwise would not have been required to file.

(bb) The Company shall have filed with the Commission all Issuer-Represented Free Writing Prospectuses or other information required to be filed by the Company under the Act and the Regulations.

6. Consideration; Payment of Expenses .

(a) In consideration of the services to be provided for hereunder, the Company shall pay to the Underwriters or their respective designees their pro rata portion (based on the Shares purchased) of the following compensation:

(i) An underwriting discount of eight percent (8.0%); and

(ii) a non-accountable expense allowance equal to two percent (2.0%) of the gross proceeds of the Offering. The Company has heretofore paid a $75,000 advance to the Representatives, which shall be applied against the non-accountable expense allowance.

(b) The Representatives reserve the right to reduce any item of compensation or adjust the terms thereof as specified herein in the event that a determination shall be made by the NASD to the effect that the Underwriters’ aggregate compensation is in excess of NASD rules or that the terms thereof require adjustment.

(c) Whether or not the transactions contemplated by this Agreement, the Registration Statement and the Prospectus are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of its obligations hereunder, including the following:

(i) all expenses in connection with the preparation, printing, “edgarization” and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and any and all amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers;

(ii) the fees, disbursements and expenses of the Company’s counsel and accountants in connection with the registration of the Shares under the Securities Act and the Offering;

(iii) the cost of producing this Agreement and any agreement among Underwriters, blue sky survey, closing documents and other instruments, agreements or documents (including any compilations thereof) in connection with the Offering and the cost of five (5) bound volumes of such documents for the Representatives;

(iv) all expenses in connection with the qualification of the Shares for offering and sale under state or foreign securities or blue sky laws, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with any blue sky survey undertaken by such counsel;

(v) the filing fees incident to, and the fees and disbursements of Underwriters’ Counsel in connection with, securing any required review by the NASD of the terms of the Offering;

(vi) all fees and expenses in connection with listing the Shares on the Nasdaq National Stock Market;

(vii) all travel expenses of the Company’s officers and employees and any other expense of the Company incurred in connection with attending or hosting meetings with prospective purchasers of the Shares (“ Road Show Expenses ”);

(viii) any stock transfer taxes incurred in connection with this Agreement or the Offering

(ix) the cost of preparing stock certificates representing the Shares;

(x) the cost and charges of any transfer agent or registrar for the Shares; and

(xi) all other costs and expenses incident to the performance of the Company obligations hereunder which are not otherwise specifically provided for in this Section 6.

(d) In addition to the costs and expenses set forth in Section 6(c), the Company will be responsible for: (i) the cost of two (2) “tombstone” advertisements to be placed in appropriate daily or weekly periodicals of the Representatives’ choice (i.e., The Wall Street Journal and The New York Times); (ii) the cost of five (5) bound volumes of the Offering documents and eight (8) Offering commemorative lucite (or other reasonable form) memorabilia, both to be supplied to the Representatives.

(e) The Company shall issue a payment of $15,000 to Underwriters’ Counsel in consideration and upon commencement of “Blue Sky” services rendered if the Offering is commenced on the NASDAQ Capital Market, plus an additional $20,000 to such counsel at Closing; provided, however, in the event that the Offering is commenced on the NASDAQ National Market, the Company shall make a payment of only $5,000 to Underwriters’ Counsel at Closing for Blue Sky services. The Company shall also pay, in advance upon request, any state registration, qualification and filing fees, NASD filing fees incurred by the Representatives and accountable out-of-pocket disbursements in connection with such registration, qualification or filing.

(f) It is understood, however, that except as provided in this Section, and Sections 7, 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel. Notwithstanding anything to the contrary in this Section 6, in the event that this Agreement is terminated pursuant to Section 6 or 12(b) hereof, or subsequent to a Material Adverse Change, the Company will pay all accountable expenses of the Underwriters (including but not limited to fees and disbursements of counsel to the Underwriters) incurred in connection herewith.

7. Conditions of Underwriters’ Obligations . The obligations of the Underwriters to purchase and pay for the Firm Shares as provided herein shall be subject to: (i) the accuracy of the representations and warranties of the Company herein contained, as of the date hereof and as of the Closing Date (ii) the absence from any certificates, opinions, written statements or letters furnished to the Representatives or to Underwriters’ Counsel pursuant to this Section 7 of any misstatement or omission (iii) the performance by the Company of its obligations hereunder, and (iv) each of the following additional conditions. For purposes of this Section 7, the terms “Closing Date” and “Closing” shall refer to the Closing Date for the Firm Shares, and each of the foregoing and following conditions must be satisfied as of each Closing.

(a) The Registration Statement shall have become effective and all necessary regulatory or listing approvals shall have been received not later than 5:30 P.M., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to in writing by the Representatives. If the Company shall have elected to rely upon Rule 430A under the Securities Act, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with the terms hereof and a form of the Prospectus containing information relating to the description of the Shares and the method of distribution and similar matters shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period; and, at or prior to the Closing Date or the actual time of the Closing, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission.

(b) The Representatives shall have received the favorable written opinion of Troy & Gould, legal counsel for the Company, dated as of the Closing Date addressed to the Underwriters in the form attached hereto as Annex I. [may need to revise for China/Hong Kong based counsel]

(c) All proceedings taken in connection with the sale of the Firm Shares herein contemplated shall be satisfactory in form and substance to the Representatives and to Underwriters’ Counsel.

(d) The Representatives shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated as of the Closing Date to the effect that: (i) the condition set forth in subsection (a) of this Section 7 has been satisfied, (ii) as of the date hereof and as of the applicable Closing Date, the representations and warranties of the Company set forth in Sections 1 and 2 hereof are accurate, (iii) as of the applicable Closing Date, all agreements, conditions and obligations of the Company to be performed or complied with hereunder on or prior thereto have been duly performed or complied with, (iv) the Company and the Subsidiaries have not sustained any material loss or interference with their respective businesses, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, (v) no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings therefor have been initiated or threatened by the Commission, (vi) there are no pro forma or as adjusted financial statements that are required to be included or incorporated by reference in the Registration Statement and the Prospectus pursuant to the Rules and Regulations which are not so included or incorporated by reference and (vii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus there has not been any material adverse change or any development involving a prospective material adverse change, whether or not arising from transactions in the ordinary course of business, in or affecting (x) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and the Subsidiaries, taken as a whole; (y) the long-term debt or capital stock of the Company or any of its Subsidiaries; or (z) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Registration Statement and the Prospectus.

(e) On the date of this Agreement and on the Closing Date, the Representatives shall have received a “cold comfort” letter from Rotenberg & Co. LLP, independent public accountants for the Company, dated, respectively, as of the date of the date of delivery and addressed to the Underwriters and in form and substance satisfactory to the Representatives and Underwriters’ Counsel, confirming that they are independent certified public accountants with respect to the Company and its Subsidiaries within the meaning of the Securities Act and the Rules and Regulations, and stating, as of the date of delivery (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five (5) days prior to the date of such letter), the conclusions and findings of such firm with respect to the financial information and other matters relating to the Registration Statement covered by such letter.

(f) Subsequent to the execution and delivery of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been any change in the capital stock or long-term debt of the Company or any Subsidiary or any change or development involving a change, whether or not arising from transactions in the ordinary course of business, in the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and the Subsidiaries, taken as a whole, including but not limited to the occurrence of any fire, flood, storm, explosion, accident, act of war or terrorism or other calamity, the effect of which, in any such case described above, is, in the sole judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the Offering on the terms and in the manner contemplated in the Prospectus (exclusive of any supplement).

(g) The Representatives shall have received a lock-up agreement from each Lock-Up Party, duly executed by the applicable Lock-Up Party, in each case substantially in the form attached hereto as Annex II.

(h) The Representatives shall have received a duly executed management confirmation letter from the Company’s directors and officers relating to certain information appearing in the Registration Statement, which letter shall be in the form previously delivered to the Representatives in connection with the filing of the Preliminary Prospectus.

(i) The Shares shall have been approved for quotation on NASDAQ.

(j) The NASD shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.

(k) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date, prevent the issuance or sale of the Shares; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date, prevent the issuance or sale of the Shares.

(l) The Company shall have furnished the Underwriters and Underwriters’ Counsel with such other certificates, opinions or other documents as they may have reasonably requested.

If any of the conditions specified in this Section 7 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to the Representatives or to Underwriters’ Counsel pursuant to this Section 7 shall not be reasonably satisfactory in form and substance to the Representatives and to Underwriters’ Counsel, all obligations of the Underwriters hereunder may be cancelled by the Representatives at, or at any time prior to, the consummation of the Closing. Notice of such cancellation shall be given to the Company in writing, or by telephone. Any such telephone notice shall be confirmed promptly thereafter in writing.

8. Indemnification .

(a) The Company shall indemnify and hold harmless each Underwriter and each Person, if any, who controls each Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys’ fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact made by such party contained in the Registration Statement, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission made by such party to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however , that the Company will not be liable in any such case to the extent but only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives expressly for use therein. The parties agree that such information provided by or on behalf of any Underwriter through the Representatives consists solely of the material referred to in the subsections of the “Underwriting” section of the Prospectus captioned “Nature of the Underwriting Commitment”, “Pricing of Securities”, “Stabilization” and “Regulatory Restrictions on Purchase of Shares”. This indemnity agreement will be in addition to any liability, which the Company or any Selling Shareholder may otherwise have, including but not limited to other liability under this Agreement.

(b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys’ fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for use therein; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares to be purchased by such Underwriter hereunder. The parties agree that such information provided by or on behalf of any Underwriter through the Representatives consists solely of the material referred to in the last sentence of Section 1(b) hereof.

(c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of any claims or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the claim or the commencement thereof (but the failure so to notify an indemnifying party shall not relieve the indemnifying party from any liability which it may have under this Section 8 to the extent that it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability that such indemnifying party may have otherwise than on account of the indemnity agreement hereunder). In case any such claim or action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate, at its own expense in the defense of such action, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party; provided however, that counsel to the indemnifying party shall not (except with the written consent of the indemnified party) also be counsel to the indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, (iii) the indemnifying party does not diligently defend the action after assumption of the defense, or (iv) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. No indemnifying party shall, without the prior written consent of the indemnified parties, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened claim, investigation, action or proceeding in respect of which indemnity or contribution may be or could have been sought by an indemnified party under this Section 8 or Section 9 hereof (whether or not the indemnified party is an actual or potential party thereto), unless (x) such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such claim, investigation, action or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or any failure to act, by or on behalf of the indemnified party, and (y) the indemnifying party confirms in writing its indemnification obligations hereunder with respect to such settlement, compromise or judgment.

9. Contribution . In order to provide for contribution in circumstances in which the indemnification provided for in Section 8 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company, any contribution received by the Company from Persons, other than the Underwriters, who may also be liable for contribution, including Persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the Offering or, if such allocation is not permitted by applicable law, in such proportions as are appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company bears to (y) the underwriting discount or commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of each of the Company and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 9 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any judicial, regulatory or other legal or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9: (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the discounts and commissions applicable to the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each Person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of the immediately preceding sentence. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 9 or otherwise. The obligations of the Underwriters to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares to be purchased by each of the Underwriters hereunder and not joint.

10. Underwriter Default .

(a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares hereunder, and if the Firm Shares with respect to which such default relates (the “ Default Shares ”) do not (after giving effect to arrangements, if any, made by the Representatives pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares, each non-defaulting Underwriter, acting severally and not jointly, agrees to purchase from the Company that number of Default Shares that bears the same proportion of the total number of Default Shares then being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters, subject, however, to such adjustments to eliminate fractional shares as the Representatives in its sole discretion shall make.

(b) In the event that the aggregate number of Default Shares exceeds 10% of the number of Firm Shares, the Representatives may in their discretion arrange for themselves or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase the Default Shares on the terms contained herein. In the event that within five calendar days after such a default the Representatives do not arrange for the purchase of the Default Shares as provided in this Section 10, this Agreement shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Sections 5, 7, 8, 10 and 12(d)) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder.

(c) In the event that any Default Shares are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representatives or the Company shall have the right to postpone the Closing Date for a period, not exceeding five (5) business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the reasonable opinion of Underwriters’ Counsel, may thereby be made necessary or advisable. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 10 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares.

11. Survival of Representations and Agreements . All representations and warranties, covenants and agreements of the Company and the Underwriters contained in this Agreement or in certificates of officers of the Company or any Subsidiary submitted pursuant hereto, including the agreements contained in Section 6, the indemnity agreements contained in Section 8 and the contribution agreements contained in Section 9 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling Person thereof or by or on behalf of the Company, any of its officers and directors or any controlling Person thereof, and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Section 1 and 2 hereof and the covenants and agreements contained in Sections 5, 6, 8, 9, this Section 11 and Sections 15 and 16 hereof shall survive any termination of this Agreement, including termination pursuant to Section 10 or 12 hereof.

12. Effective Date of Agreement; Termination .

(a) This Agreement shall become effective upon the later of: (i) receipt by the Representatives and the Company of notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. Notwithstanding any termination of this Agreement, the provisions of this Section 12 and of Sections 1, 5, 7, 8 and 12 through 17, inclusive, shall remain in full force and effect at all times after the execution hereof.

(b) The Representatives shall have the right to terminate this Agreement at any time prior to the consummation of the Closing if: (i) any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the immediate future materially disrupt, the market for the Company’s securities or securities in general; or (ii) trading on the New York Stock Exchange, The NASDAQ National Market or the American Stock Exchange (“ AMEX ”) shall have been suspended or been made subject to material limitations, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange, The NASDAQ National Market or the AMEX or by order of the Commission or any other governmental authority having jurisdiction; or (iii) a banking moratorium has been declared by any state or federal authority or if any material disruption in commercial banking or securities settlement or clearance services shall have occurred; (iv) any downgrading shall have occurred in the Company’s corporate credit rating or the rating accorded the Company’s debt securities or trust preferred stock by any “nationally recognized statistical rating organization” (as defined for purposes of Rule 436(g) under the Securities Act) or if any such organization shall have been publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company’s debt securities; or (v) (A) there shall have occurred any outbreak or escalation of hostilities or acts of terrorism involving the United States or there is a declaration of a national emergency or war by the United States or (B) there shall have been any other calamity or crisis or any change in political, financial or economic conditions if the effect of any such event in (A) or (B), in the judgment of the Representatives, makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares on the terms and in the manner contemplated by the Prospectus.

(d) If this Agreement shall be terminated pursuant to any of the provisions hereof (other than pursuant to Section 10(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by the Representatives, reimburse the Underwriters for all out-of-pocket expenses (including the fees and expenses of their counsel), incurred by the Underwriters in connection herewith.

13. Notices . All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing, and:

(a) if sent to the Representatives or any Underwriter, shall be mailed, delivered, or faxed and confirmed in writing, to Maxim Group LLC, 405 Lexington Avenue, New York, New York 10174, Attention: Clifford A. Teller, Director of Investment Banking, and Chardan Capital Markets, LLC, 17 State Street, New York, New York 10004 Attention: Kerry S. Propper, Chief Executive Officer, , in each case, with a copy to Underwriters’ Counsel at Ellenoff Grossman & Schole LLP, 370 Lexington Avenue, 19th Floor, New York, New York, 10017, Attention: Douglas S. Ellenoff, Esq.; and

(b) if sent to the Company, shall be mailed, delivered, or faxed and confirmed in writing to the Company and its counsel at the addresses set forth in the Registration Statement, provided, however , that any notice to an Underwriter pursuant to Section 8 shall be delivered or sent by mail or facsimile transmission to such Underwriter at its address set forth in its acceptance facsimile to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such notices and other communications shall take effect at the time of receipt thereof.

14. Parties;Limitation of Relationship .

(a) This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Company and the controlling Persons, directors, officers, employees and agents referred to in Sections 7 and 8 hereof, and their respective successors and assigns, and no other Person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and said controlling Persons and their respective successors, officers, directors, heirs and legal representatives, and it is not for the benefit of any other Person. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters.

(b) The Company acknowledges and agrees that: (i) the sale and issuance of the Shares pursuant to this Agreement is an arm’s-length commercial transaction between the Company and the Underwriters; (ii) in connection therewith and with the process leading to the Offering, the Underwriters are acting solely as a principal and not the agent or fiduciary of the Company; (iii) no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the Offering contemplated hereby or the process leading thereto, including any negotiation related to the pricing of the Shares; and (iv) the Company has consulted its own legal and financial advisors to the extent it has deemed appropriate in connection with this Agreement and the Offering.

15. Governing Law . This Agreement shall be deemed to have been executed and delivered in New York and both this Agreement and the transactions contemplated hereby shall be governed as to validity, interpretation, construction, effect, and in all other respects by the laws of the State of New York, without regard to the conflicts of laws principals thereof (other than Section 5-1401 of The New York General Obligations Law). Each of the Underwriters and the Company: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement and/or the transactions contemplated hereby shall be instituted exclusively in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York, (b) waives any objection which it may have or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York in any such suit, action or proceeding. Each of the Underwriters and the Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding, and service of process upon the Underwriters mailed by certified mail to the Underwriters’ address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service process upon the Underwriter, in any such suit, action or proceeding. THE COMPANY (ON BEHALF OF ITSELF, THE SUBSIDIARIES AND, TO THE FULLEST EXTENT PERMITTED BY LAW, ON BEHALF OF ITS RESPECTIVE EQUITY HOLDERS AND CREDITORS) HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE REGISTRATION STATEMENT AND THE PROSPECTUS.

16. Entire Agreement . This Agreement, together with the schedule and exhibits attached hereto and as the same may be amended from time to time in accordance with the terms hereof, contains the entire agreement among the parties hereto relating to the subject matter hereof and there are no other or further agreements outstanding not specifically mentioned herein.

17. Severability . If any term or provision of this Agreement or the performance thereof shall be invalid or unenforceable to any extent, such invalidity or unenforceability shall not affect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be valid and enforced to the fullest extent permitted by law.

18. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. Delivery of a signed counterpart of this Agreement by facsimile transmission shall constitute valid and sufficient delivery thereof.

19. Headings . The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

20. Time is of the Essence . Time shall be of the essence of this Agreement. As used herein, the term “business day” shall mean any day when the Commission’s office in Washington, D.C. is open for business.

[Signature Pages Follow]

If the foregoing correctly sets forth your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us.

	Very truly yours,

	SORL AUTO PARTS, INC.


	By:

	Name:	Zhang Xiao Ping
	Title:	Chairman and Chief Executive Officer

[Signature Pages Continue]

Accepted by the Representatives, acting for themselves and as Representatives of the Underwriters named on Schedule A attached hereto, as of the date first written above:

	MAXIM GROUP LLC


	By:

	Name:	Clifford A. Teller
	Title:	Director of Investment Banking

	CHARDAN CAPITAL MARKETS, LLC


	By:

	Name:	Kerry S. Propper
	Title:	Chief Executive Officer

[End of Signature Pages to Underwriting Agreement]

SCHEDULE A

Underwriters

Underwriter	Total Number of Firm Shares to be Purchased	Over-Allotment Option Shares

Maxim Group LLC
Chardan Capital Markets, LLC
TOTAL

SCHEDULE B

Subsidiaries/Joint Ventures of the Company

SCHEDULE C

Lock-Up Parties

SCHEDULE D

Issuer-Represented General Free Writing Prospectuses

ANNEX I

Form of Opinion of Company Counsel

All capitalized terms used but not defined in this Annex I shall have the meanings ascribed to such terms in the Underwriting Agreement to which this Annex is attached.

1. Each of the Company and its Subsidiaries has been organized and validly exists as a corporation in good standing in accordance with and under the laws of its jurisdiction of incorporation, with full power and authority to own its properties and conduct its business as described in the Registration Statement and the Prospectus. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a Material Adverse Effect.

2. The Company has full right, power and authority to execute and deliver this Agreement and the Shares and to perform its obligations hereunder, and all corporate action required to be taken for the due and proper authorization, execution and delivery of this Agreement and the Shares and consummation of the transactions contemplated by Underwriting Agreement, the Registration Statement and the Prospectus and as described in the Registration Statement and the Prospectus have been duly and validly taken.

3. The Company has an authorized capitalization as set forth in the Registration Statement and the Prospectus. All of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are not in violation of or subject to any preemptive or, to such counsel’s knowledge, similar rights that entitle or will entitle any Person to acquire any Shares from the Company upon issuance or sale thereof.

4. The Shares to be delivered on the Closing Date have been duly and validly authorized and, when delivered in accordance with the Underwriting Agreement, will be duly and validly issued, fully paid and non-assessable and will not have been issued in violation of or subject to preemptive or, to such counsel’s knowledge, similar rights that entitle or will entitle any Person to acquire any Shares from the Company upon issuance or sale thereof.

5. Except has set forth in the Registration Statement and the Prospectus, all of the issued shares of capital stock of each Subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and owned directly or indirectly by the Company, free and clear of all Liens. The Common Stock and the Firm Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus.

6. All private offers and sales of securities prior to the date hereof by the Company or any Subsidiary have been validly exempt from registration under the Securities Act and have been properly filed or registered with all applicable state securities authorities pursuant to appropriate “blue sky” filings or otherwise.

7. Neither the Company nor any of its Affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act or the Rules and Regulations with the offer and sale of the Shares pursuant to the Registration Statement.

8. The Common Stock currently outstanding is quoted, and the Shares are duly authorized for quotation, on the NASDAQ Capital Market.

9. The Underwriting Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

10. To such counsel’s knowledge, and other than as set forth in the Prospectus, there are no judicial, regulatory or other legal or governmental proceedings pending to which the Company or any of its Subsidiaries is a party or of which any property of the Company or any of its Subsidiaries is the subject which, if determined adversely to the Company or any of its Subsidiaries, would individually or in the aggregate have a Material Adverse Effect; and, to such counsel’s knowledge, no such proceedings are threatened or contemplated.

11. The execution, delivery, and performance of the Underwriting Agreement and consummation of the transactions contemplated by Underwriting Agreement, the Registration Statement and the Prospectus do not and will not: (a) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or any other agreement, instrument, franchise, license or permit known to such counsel to which the Company or any of its Subsidiaries is a party or by which any of the Company or any of its Subsidiaries or their respective properties or assets may be bound or (b) violate or conflict with any provision of the certificate or articles of incorporation, by-laws or other governing documents of the Company or any of its Subsidiaries, or, to the best knowledge of such counsel, any judgment, decree, order, statute, rule or regulation of any court or any judicial, regulatory or other legal or governmental agency or body.

12. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any judicial, regulatory or other legal or governmental agency or body is required for the execution, delivery and performance of the Underwriting Agreement or consummation of the transactions contemplated by the Underwriting Agreement, the Registration Statement and the Prospectus, except for (1) such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion), (2) such as have been made or obtained under the Securities Act and (3) such as are required by the NASD.

13. The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and schedules and other financial data included or incorporated by reference therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Securities Act, the Exchange Act and the Rules and Regulations. The documents filed under the Exchange Act and incorporated by reference in the Registration Statement and the Prospectus or any amendment thereof or supplement thereto (other than the financial statements and schedules and other financial data included or incorporated by reference therein, as to which no opinion need be rendered) when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the Securities Act or the Exchange Act, as applicable, and the Rules and Regulations.

14. The statements under the captions “Description of Capital Stock” and “Underwriting” in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings.

15. The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Registration Statement and the Prospectus, will not be, an “investment company” as such term is defined in the Investment Company Act of 1940, as amended.

16. All members of the Company’s board of directors who are required to be “independent” (as that term is defined under applicable laws, rules and regulations), including, without limitation, all members of the audit committee of the Company’s board of directors, meet the qualifications of independence as set forth under applicable laws, rules and regulations.

17. The Registration Statement is effective under the Securities Act, and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings therefore have been initiated or threatened by the Commission and all filings required by Rule 424(b) and Rule 430A under the Securities Act have been made.

18. To the best knowledge of such counsel, no contract or agreement is required to be filed as an exhibit to the Registration Statement that is not so filed.

19. Neither the Company nor any of its Subsidiaries is in violation of its respective charter or by-laws and, to such counsel’s knowledge after due inquiry, neither the Company nor any of its Subsidiaries is in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its Subsidiaries, taken as a whole, to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or their respective property is bound.

20. Each of the Company and its Subsidiaries has such authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under applicable SBA Rules and Regulations and insurance regulations, as are necessary to own, lease, license and operate their respective properties and to conduct their respective businesses, except where the failure to have any such authorization or to make any such filing or notice would not, singly or in the aggregate, have a Material Adverse Effect. Each such authorization is valid and in full force and effect and each of the Company and its Subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto. To the best knowledge of such counsel, no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such authorization.

In addition to the foregoing legal opinions, the opinion letter of counsel shall contain the following statement (it being understood that such statement itself shall not constitute a legal opinion): “As counsel, we have participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, no facts have come to our attention which would lead us to believe that either the Registration Statement, at the time it became effective (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to the Closing Date, as of the date of such amendment, contained or incorporated by reference any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus (including the documents incorporated by reference therein), as of its date (or any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and schedules and other financial data included or incorporated by reference therein).”

When used in the legal opinion, the term “knowledge” shall mean the knowledge (after due investigation) of attorneys and paralegals of the Firm who have represented the Company and/or the Subsidiaries.

ANNEX II

Form of Lock-Up Agreement

_____________, 2006

MAXIM GROUP LLC
405 Lexington Avenue
New York, NY 10174

CHARDAN CAPITAL MARKETS, LLC
17 State Street, Suite 2575
New York, NY 10004

As Representatives of the Underwriters

Re: SORL Auto Parts, Inc. Lock-Up Agreement

Ladies and Gentlemen:

This letter agreement (this “ Agreement ”) relates to the proposed public offering (the “ Offering ”) by SORL Auto Parts, Inc, a Delaware corporation (the “ Company ”), of its Common Stock, $0.__ par value per share (the “ Stock ”). The Offering is governed by the certain Underwriting Agreement, dated as of _______________, 2006 (the “ Underwriting Agreement ”), by and among the Company, Chardan Capital Markets, LLC and Maxim Group LLC (the “ Representatives ”), as representatives of the several underwriters named therein.

In order to induce the Representatives to underwrite the Offering, the undersigned (on behalf of himself and his Permitted Transferees (as defined below)) hereby agrees that, without the prior written consent of the Representatives, which consent shall not be unreasonably withheld, during the period from the date hereof until nine (9) months from the date of the final prospectus for the Offering (the “ Lock-Up Period ”), the undersigned and his Permitted Transferees: (a) will not, directly or indirectly, offer, sell, agree to offer or sell, solicit offers to purchase, grant any call option or purchase any put option with respect to, pledge, borrow or otherwise dispose of any Relevant Security (as defined below), and (b) will not establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” with respect to any Relevant Security (in each case within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder), or otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, in whole or in part, any economic consequence of ownership of a Relevant Security, whether or not such transaction is to be settled by delivery of Relevant Securities, other securities, cash or other consideration. As used herein “ Relevant Security ” means any common stock or other security of the Company or any Subsidiary thereof that is convertible into, or exercisable or exchangeable for common stock or equity securities or that holds the right to acquire any common stock or equity securities of the Company or any Subsidiary or any other such Relevant Security, except for such rights as may have been fully satisfied or waived prior to the effectiveness of the Registration Statement.

Notwithstanding the foregoing, during the Lock-Up Period, the undersigned may transfer shares of Common Stock only for bona fide tax or estate planning purposes and solely to his spouse, brothers and sisters, lineal ascendants or descendants or trusts for the benefit of such individuals (the “ Permitted Transferees ”), it being agreed that: (A) such gifts or transfers of Common Stock shall not exceed ___________ shares of Common Stock for each such individual during the Lock-Up Period, and (B) that the shares of Common Stock gifted shall be valued at the Fair Market Value (as defined in the Underwriting Agreement) on the date of the gift or transfer. All Permitted Transferees will be subject to the terms hereof.

The undersigned hereby authorizes the Company during the Lock-Up Period to cause any transfer agent for the Relevant Securities to decline to transfer, and to note stop transfer restrictions on the stock register and other records relating to, Relevant Securities for which the undersigned is the record holder and, in the case of Relevant Securities for which the undersigned is the beneficial but not the record holder, agrees during the Lock-Up Period to cause the record holder to cause the relevant transfer agent to decline to transfer, and to note stop transfer restrictions on the stock register and other records relating to, such Relevant Securities.

The undersigned hereby further agrees that, without the prior written consent of the Representatives, which consent shall not be unreasonably withheld, during the Lock-Up Period the undersigned will not: (x) file or participate in the filing with the Securities and Exchange Commission of any registration statement, or circulate or participate in the circulation of any preliminary or final prospectus or other disclosure document with respect to any proposed offering or sale of a Relevant Security and (y) exercise any rights the undersigned may have to require registration with the Securities and Exchange Commission of any proposed offering or sale of a Relevant Security.

The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Agreement and that this Agreement constitutes the legal, valid and binding obligation of the undersigned, enforceable in accordance with its terms. Upon request, the undersigned will execute any additional documents necessary in connection with enforcement hereof. Any obligations of the undersigned shall be binding upon the successors and assigns of the undersigned from the date first above written.

This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of laws principles thereof. Delivery of a signed copy of this letter by facsimile transmission shall be effective as delivery of the original hereof.

	Very truly yours,


	By:


	Print Name:

Exhibit 4.1

THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED.

NOT EXERCISABLE PRIOR TO ___________, 2007. VOID AFTER 5:00 P.M. EASTERN TIME, _________, 2011.

WARRANT

For the Purchase of up to

_______ Shares of Common Stock

SORL AUTO PARTS, INC..
(A Delaware Corporation)

1. General Terms of Warrant .

THIS CERTIFIES THAT, in consideration of $100.00 duly paid by or on behalf of ____________________________ (“ Holder ”), as registered owner of this Warrant, to SORL AUTO PARTS, INC. ( the “ Company ”), Holder is entitled, at any time or from time to time at or after ____________ , 2007(“ Commencement Date ”), and at or before 5:00 p.m., New York time, ____________, 2011 (“ Expiration Date ”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to ________________________ (_________) shares of Common Stock of the Company, $.002 par value (“ Common Stock ”) during the period commencing one year and expiring five years from the effective date of the registration statement on Form S-1 (No. 333-____________) (“ Registration Statement ”) pursuant to which the Company has registered the shares of Common Stock (“ Effective Date ”). If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate the Warrant. This Warrant is initially exercisable at $_______ per share of Common Stock purchased (125% of the initial public offering price per share of Common Stock as reflected in the Registration Statement); provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Warrant, including the exercise price and the number of shares of Common Stock to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context.

2. Exercise .

2.1 Exercise Form . In order to exercise this Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Warrant and payment of the Exercise Price in cash or by certified check or official bank check for the shares of Common Stock being purchased. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

2.2 Legend . Each certificate for shares of Common Stock purchased under this Warrant shall bear a legend as follows unless such shares of Common Stock have been registered under the Securities Act of 1933, as amended:

“The shares of Common Stock represented by this certificate have not been registered under the Securities Act of 1933, as amended (“Act”) or applicable state law. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law.”

2.3 Conversion Right .

2.3.1 Determination of Amount . In lieu of the payment of the Exercise Price in the manner required by Section 2.1, the Holder shall have the right (but not the obligation) to convert any exercisable but unexercised portion of this Warrant into shares of Common Stock (“Conversion Right”) as follows. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Exercise Price in cash) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the “Value” (as defined below), at the close of trading on the next to last trading day immediately preceding the exercise of the Conversion Right, of the portion of the Warrant being converted by (y) the “Market Price” (as defined below). The “Value” of the portion of the Warrant being converted shall equal the remainder derived from subtracting (a) the Exercise Price multiplied by the number of shares of Common Stock underlying that portion of the Warrant being converted from (b) the Market Price of the Common Stock multiplied by the number of shares of Common Stock underlying that portion of the Warrant being converted. As used in this herein, the term “Market Price” at any date shall be deemed to be the last reported sale price of the Common Stock on such date, or, in case no such reported sale takes place on such day, the last reported sale price for the immediately preceding trading day, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or if any such exchange on which the Common Stock is listed is not its principal trading market, the last reported sale price as furnished by the NASD through the Nasdaq National Market or SmallCap Market, or, if applicable, the OTC Bulletin Board, or if the Common Stock is not listed or admitted to trading on any of the foregoing markets, or similar organization, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it.

2.3.2 Mechanics of Conversion . The Conversion Right may be exercised by the Holder on any business day on or after the Commencement Date and not later than the Expiration Date by delivering the Warrant with a duly executed exercise form attached hereto with the Conversion Right section completed to the Company, exercising the Conversion Right and specifying the total number of shares of Common Stock that the Holder will purchase pursuant to such Conversion Right.

3. Transfer .

3.1 General Restrictions . The registered Holder of this Warrant, by its acceptance hereof, agrees that it will not sell, transfer or assign or hypothecate this Warrant prior to the Commencement Date to anyone other than (i) an officer or partner of such Holder, (ii) an officer of either Maxim Group LLC or Chardon Capital Markets LLC, the underwriters of the public offering with respect to which this Warrant has been issued (“Underwriters”) or an officer or partner of any selected dealer in connection with the Company’s public offering with respect to which this Warrant has been issued, or (iii) any selected dealer. On and after the Commencement Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall immediately transfer this Warrant on the books of the Company and shall execute and deliver a new Warrant or Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of shares of Common Stock purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

3.2 Restrictions Imposed by the Act . This Warrant and the shares of Common Stock underlying this Warrant shall not be transferred unless and until (i) the Company has received the opinion of counsel for the Holder that this Warrant or the shares of Common Stock, as the case may be, may be transferred pursuant to an exemption from registration under the Act and applicable state law, the availability of which is established to the reasonable satisfaction of the Company, or (ii) a registration statement relating to such Warrant or shares of Common Stock, as the case may be, has been filed by the Company and declared effective by the Securities and Exchange Commission and compliance with applicable state law.

3.3 Restrictions Imposed by NASD Rules . This Warrant and the shares of Common Stock underlying this Warrant shall not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities of the securities for a period of 180 days immediately following the effectiveness of the Registration Statement transferred except in compliance with NASD Rule 2710.

4. New Warrants to be Issued .

4.1 Partial Exercise or Transfer . Subject to the restrictions in Section 3 hereof, this Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax, the Company shall cause to be delivered to the Holder without charge a new Warrant of like tenor to this Warrant in the name of the Holder evidencing the right of the Holder to purchase the aggregate number of shares of Common Stock purchasable hereunder as to which this Warrant has not been exercised or assigned.

4.2 Lost Certificate . Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and of reasonably satisfactory indemnification, the Company shall execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

5. Registration Rights .

5.1 Grant of Piggyback Right . The Holders of the Warrants shall have the right for a period of four (4) years commencing one year from the Effective Date, to have the Company include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, in the written determination of the Company’s managing underwriter or underwriters, if any, for such offering, the inclusion of the Registrable Securities, when added to the securities being registered by the Company or any other selling stockholder(s) other than the Holders, will exceed the maximum amount of the Company’s securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without materially and adversely affecting the entire offering, the Company shall nevertheless register all or any portion of the Registrable Securities required to be so registered but such Registrable Securities shall not be sold by the Holders until 90 days after the registration statement for such offering has become effective and provided further that, if any securities are registered for sale on behalf of other stockholders in such offering and such stockholders have not agreed to defer such sale until the expiration of such 90 day period, the number of securities to be sold by all stockholders in such public offering during such 90 day period shall be apportioned pro rata among all such selling stockholders, including all holders of the Registrable Securities, according to the total amount of securities of the Company owned by said selling stockholders, including all holders of the Registrable Securities. The right granted hereunder to the holder to have the Registrable Securities include shall be unlimited during the four (4) year period described above.

5.2 Terms . The Company shall bear all fees and expenses attendant to registering the Registrable Securities, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice, within twenty (20) days of the receipt of the Company’s notice of its intention to file a registration statement. The Company shall cause any registration statement filed pursuant to the above “piggyback” rights to remain effective for at least twelve (12) months from the date that the Holders of the Registrable Securities are first given the opportunity to sell all of such securities

5.3 General Terms .

5.3.1 Indemnification . The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5 of the Underwriting Agreement between the Underwriters and the Company, dated the Effective Date. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.

5.3.2 Exercise of Warrants . Nothing contained in this Warrant shall be construed as requiring the Holder(s) to exercise their Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof. This Warrant shall not be redeemable by the Company without the consent of the Holder.

5.3.3 Documents Delivered to Holders . The Company shall furnish to each Holder participating in any of the foregoing offerings and to each underwriter of any such offering, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon

reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. (“NASD”). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.

5.3.4 Underwriting Agreement . The Company shall enter into an underwriting agreement with the managing underwriter(s) selected by any Holders whose Registrable Securities are being registered pursuant to this Section 5, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their shares and their intended methods of distribution.

5.3.5 Documents to be Delivered by Holder(s) . Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling securityholders.

6. Adjustments .

6.1 Adjustments to Exercise Price and Number of Securities . The Exercise Price and the number of shares of Common Stock underlying the Warrant shall be subject to adjustment from time to time as hereinafter set forth:

6.1.1 Stock Dividends - Recapitalization, Reclassification, Split-Ups . If after the date hereof, and subject to the provisions of Section 6.2 below, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up, recapitalization or reclassification of shares of Common Stock or other similar event, then, on the effective date thereof, the number of shares of Common Stock issuable on exercise of the Warrant shall be increased in proportion to such increase in outstanding shares of Common Stock.

6.1.2 Aggregation of Shares . If after the date hereof, and subject to the provisions of Section 6.2, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, upon the effective date thereof, the number of shares of Common Stock issuable on exercise of the Warrant shall be decreased in proportion to such decrease in outstanding shares.

6.1.3 Adjustments in Exercise Price . Whenever the number of shares of Common Stock purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted (to the nearest cent) by multiplying such Exercise Price immediately prior to such adjustment by a fraction (x) the numerator of which shall be the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately prior to such adjustment, and (y) the denominator of which shall be the number of shares of Common Stock so purchasable immediately thereafter.

6.1.4 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding shares of Common Stock other than a change covered by Section 6.1.1 hereof or which solely affects the par value of such shares of Common Stock, or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or reorganization of the outstanding shares of Common Stock), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Warrant shall have the right thereafter (until the expiration of the right of exercise of this Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or other transfer, by a Holder of the number of shares of Common Stock of the Company obtainable upon exercise of this Warrant immediately prior to such event; and if any reclassification also results in a change in shares of Common Stock covered by Section 6.1.1, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The provisions of this Section 6.1.4 shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers.

6.1.5 Changes in Form of Warrant . This form of Warrant need not be changed because of any change pursuant to this Section, and Warrants issued after such change may state the same Exercise Price and the same number of shares of Common Stock as are stated in the Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Warrants reflecting a required or permissive change shall not be deemed to waive any rights to a prior adjustment or the computation thereof.

6.2 Elimination of Fractional Interests . The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise or transfer of the Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down to the nearest whole number of shares of Common Stock.

7. Reservation and Listing . The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon exercise of the Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid

and non-assessable and not subject to preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges (or, if applicable on Nasdaq) on which the Common Stock issued to the public in connection herewith are then listed and/or quoted.

8. Certain Notice Requirements .

8.1 Holder’s Right to Receive Notice . Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be.

8.2 Events Requiring Notice . The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed.

8.3 Notice of Change in Exercise Price . The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s President and Chief Financial Officer.

8.4 Transmittal of Notices . All notices, requests, consents and other communications under this Warrant shall be in writing and shall be deemed to have been duly made on the date of delivery if delivered personally or sent by overnight courier, with acknowledgement of receipt to the party to which notice is given, or on the fifth day after mailing if mailed to the party to whom notice is to be given, by registered or certified mail, return receipt requested, postage prepaid and properly addressed as follows: (i) if to the registered Holder of the Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to its principal executive office.

9. Miscellaneous .

9.1 Amendments . The Company and the Underwriters may from time to time supplement or amend this Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriters may deem necessary or desirable and which the Company and the Underwriters deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of the party against whom enforcement of the modification or amendment is sought.

9.2 Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Warrant.

9.3 Entire Agreement . This Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

9.4 Binding Effect . This Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Warrant or any provisions herein contained.

9.5 Governing Law; Submission to Jurisdiction . This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Warrant shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to _____________________, Attention: ____________. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder, by acceptance hereof, agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor.

9.6 Waiver, Etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer as of the ____________ day of _________________, 2006.

	SORL AUTO PARTS, INC.


	By:

	Name:

	Title:

Form to be used to exercise Warrant:

Sorl Auto Parts, Inc.

Date:_________________, 200__

The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase ____ shares of Common Stock of SORL AUTO PARTS, INC. and hereby makes payment of $____________ (at the rate of $ _________ per share of Common Stock) in payment of the Exercise Price pursuant thereto. Please issue the Common Stock as to which this Warrant is exercised in accordance with the instructions given below.

The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase _________ shares of Common Stock of SORL AUTO PARTS, INC. by surrender of the unexercised portion of the within Warrant (with a “Value” of $ _______ based on a “Market Price” of $ __________. Please issue the Common Stock as to which this Warrant is exercised in accordance with the instructions given below.

	Signature of Holder:


	Print Name:

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever.

INSTRUCTIONS FOR REGISTRATION OF SECURITIES

Name of Person (s) to whom shares to be issued:



Address of Person(s) Receiving shares:




Social Security Number/ Federal Employer ID Number Of Recipients:

Form to be used to assign Warrant:

ASSIGNMENT

(To be executed by the registered Holder to effect a transfer of the within Warrant):

FOR VALUE RECEIVED, __________________________________ does hereby sell, assign and transfer unto _______________________________________________ the right to purchase _______________________ shares of Common Stock of SORL AUTO PARTS, INC. (“Company”) evidenced by the within Warrant and does hereby authorize the Company to transfer such right on the books of the Company.

Dated: ___________________ , 200_

Signature of Holder:


Print Name:


Signature Guaranteed

NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.

Address of Person(s) Receiving shares:





Social Security Number/ Federal Employer ID Number Of Recipients:

Exhibit 4.2

Exhibit 4.2
continued

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM - as tenants in common	UNIT GIFT MIN ACT-	.................................Custodian..........................
TEN ENT - as tenants by the entireties		(Cust) (Minor)
JT TEN - as joint tenants with right of survivorship		under Uniform Gifts to Minors
and not as tenants in common		Act............................
		(State)

Additional abbreviations may also be used though not in the above list.

For Value Received, _______________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE


(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)





	Shares
of the stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

	Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

Dated _____________________


	NOTICE : THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.

THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER, UPON REQUEST AND WITHOUT CHARGE. A FULL STATEMENT OF THE DESIGNATIONS. RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES OF EACH CLASS AND SERIES AUTHORIZED TO BE ISSUED. SO FAR AS THE SAME HAVE BEEN DETERMINED. AND OF THE AUTHORITY, IF ANY, OF THE BOARD TO DIVIDE THE SHARES INTO CLASSES OR SERIES AND TO DETERMINE AND CHANGE THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF ANY CLASS OR SERIES. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION OR TO THE TRANSFER AGENT NAMED ON THIS CERTIFICATE.

THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF A NATIONAL OR REGIONAL OR OTHER RECOGNIZED STOCK EXCHANGE IN COFORMANCE WITH A SIGNATURE GUARANTEE MEDALLION PROGRAM.

STOCK MARKET INFORMATION
www.stockinformation.com	COLUMBIA FINANCIAL PRINTING CO, P.O. BOX 218, BETHPAGE, NY 11714

Exhibit 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is made, entered into by and between SORL Auto Parts, Inc., a Delaware corporation (the “Company”), and Xiao Ping Zhang (the “Executive”), effective as of May 1, 2006 (the “Effective Date”).

1. RECITALS.

WHEREAS, Executive is currently employed by the Company as its Chief Executive Officer;

WHEREAS, the Company desires to insure the continued employment of the Executive; and

WHEREAS, the Executive is willing to commit to a long-term agreement to serve the Company as its principal executive officer;

NOW, THEREFORE, the Company and the Executive desire to set forth in this Agreement the terms and conditions of the Executive’s employment with the Company.

2. EMPLOYMENT.

The Company hereby employs the Executive as Chief Executive Officer of the Company and the Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth, for a period of five years from the Effective Date. Following the expiration of the term of this Agreement, this Agreement shall continue thereafter for additional one year periods, unless the Board of Directors (the “Board”) votes not to renew and provides the Executive with written notice of the Company’s intention not to renew by no later than six months prior to the expiration of the initial term, or any subsequent one-year term, of this Agreement. Executive’s term of employment is hereinafter referred to as the “Term.”

3. DUTIES.

A. The Company hereby employs the Executive to perform the duties and responsibilities of Chief Executive Officer of the Company and to perform such other duties as the Board of the Company may from time to time reasonably designate. Throughout the term, Executive shall faithfully and diligently perform Executive’s duties in conformity with the directions of the Board and serve the Company to the best of Executive’s ability. Executive shall devote as much of Executive’s working time, attention and energies to the business and affairs of the Company as Executive determines, in his sole and absolute discretion, is appropriate, it being understood that Executive is also an executive of Ruili Group Co. Ltd. Executive shall also be a nominated as a member of the Board prior to each meeting of stockholders at which the Board of Directors is elected. Executive shall have the duties and responsibilities commonly incident to the position of a Chief Executive Officer. Additionally, Executive shall act as Chief Executive Officer of Ruili Group Ruian Auto Parts Co. Ltd., the Company’s principal operating subsidiary.

B. The Executive shall report only to the Board and at no time shall be required to report to management, irrespective of future job title or responsibilities.

4. COMPENSATION.

A. Salary and Bonus . The compensation of Executive including bonuses shall be determined from time to time by the Compensation Committee of the Company’s Board of Directors taking into account the performance of the Executive and the results of operations of the Company.

B. Reimbursements . During the Term upon presentation to the Company of written records thereof, the Company shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by him in connection with the Company’s business, including without limitation reasonable travel and entertainment expenses.

C. Cellular Telephone . During the Term, Executive shall be entitled to the use of a cellular telephone and the monthly access charge and any business-related charges shall be paid by the Company.

D. Vehicle . During the Term, Executive shall be entitled to the use of a company vehicle including gas and insurance paid to Executive in the form of a monthly allowance.

E. Computers and Internet . During the Term, Executive shall be entitled to the use of business appropriate computer equipment required by Executive to perform his duties including monthly access charges for the Internet and any business-related charges shall be paid by the Company.

F. Home Office . Because the Company is a public Company in the United States and its stock is listed on the NASDAQ Stock Market, the parties acknowledge that Executive shall be working from home late evenings and early mornings from time to time based on time zone differences. Accordingly, Executive shall be entitled to reimbursement for setting up a home office with appropriate telephone, communications, office and computer equipment for such purpose.

G. Employee Benefit Plans . The Executive shall be entitled to participate in all other employee benefit on terms commensurate with the benefits awarded management personnel of comparable status with the Company, including medical insurance.

5. TERMINATION.

A. Death or Disability . The Executive’s employment and this Agreement shall terminate automatically upon the Executive’s death. If the Company determines in good faith that Disability of the Executive has occurred (pursuant to the definition of Disability set forth below), it may give to the Executive written notice of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the day of receipt of such notice by the Executive. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from his duties with the Company on the basis provided in this Agreement for a period of 180 consecutive days due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or his legal representative.

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B. Cause . The Company may terminate this Agreement and the Executive’s employment for Cause. For purposes of this Agreement, “Cause” shall mean that the Executive has been convicted of: (1) an act of fraud upon or toward the Company; or (2) a felony.

6. SEVERANCE COMPENSATION

A. Death or Disability . If the Executive’s employment is terminated by reason of the Executive’s death or Disability, this Agreement shall terminate without further obligations to the Company or to the Executive or his legal representatives under this Agreement, other than, in the case of death, for payment of the Executive’s then salary by the Company for the remaining portion of the Term of to the extent not theretofore paid, which shall be paid to the Executive or his estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the date of termination, and in the case of Disability all earned and accrued but unpaid salary through the date of Disability.

B. Cause . If the Executive’s employment is terminated by the Company for Cause, this Agreement shall terminate without further obligation to the Company or to the Executive other than for the timely payment by the Company of earned and accrued salary of the Executive through the date of termination.

C. Termination Without Cause or With Good Reason . If the Executive is terminated for any reason other than for death, Disability or Cause, or if the Executive resigns with good reason (as that term is defined below), this Agreement shall terminate without further obligations to the Company or to the Executive under this Agreement, other than for payment of all salary by the Company owed for the remaining portion of the Term, which shall be paid in a lump sum within 30 days of the termination date.

For purposes of Section 6C., the Executive shall be deemed to have resigned “with good reason” if he does so as a result of the Company having done the following without the Executive’s express written consent: changed the Executive’s reporting responsibilities, changed his title as the Chief Executive Officer or changed the Executive’s duties, responsibilities, without obtaining Executive’s prior written consent.

7. CONFIDENTIAL INFORMATION.

A. Confidential Information . The Executive shall hold and keep confidential for the benefit of the Company all secret or confidential information, files, documents other media in which confidential information is contained, knowledge or data (collectively the “Confidential Information”) relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during his employment by the Company or any of its affiliated companies. Confidential Information does not include information that is already public knowledge at the time of disclosure (other than by acts by the Executive or his representatives in violation of this Agreement) or that is provided to the Executive by a third party without an obligation with the Company to maintain the confidentiality of such information. After termination of the Executive’s employment with the Company, he shall not, without the prior written consent of the Company, or as may otherwise be required by law or legal process, communicate or divulge any Confidential Information to anyone other than the Company and those designated by it.

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The Executive shall acknowledge that all confidential documents are and shall remain the sole and exclusive property of the Company regardless of who originally acquired the confidential documents. The Executive agrees to return to the Company promptly upon the expiration or termination of his employment or at any other time when requested by the Company, any and all property of the Company, including, but not limited to, all confidential documents and copies thereof in his possession or control.

8. CONFLICTING AGREEMENTS.

The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder is not in breach of or in conflict with any other agreement to which he is a party or is bound, and that he is not now subject to any covenants against competition or similar covenants which would affect the performance of his obligations hereunder.

9. OWNERSHIP OF INVENTIONS.

All ideas, inventions, trademarks, proprietary information, know-how, processes and other developments or improvements developed by the Executive, alone or with others, during the term of his employment, that are within the scope of the Company’s business operations or that relate to the Company’s work or projects, are the exclusive property of the Company.

In that regard, the Executive agrees to disclose promptly to the Company any and all inventions, discoveries, trademarks, proprietary information, know-how, processes or improvements, patentable or otherwise, that he may make from the beginning of his employment until the termination thereof, that relate to the business of Company, whether such is made solely or jointly with others. The Executive further agrees that, during the term of this Agreement, he will provide the Company with a reasonable level of assistance, at the Company’s sole option and expense, to obtain patents in the United States of America, the People’s Republic of China or elsewhere on any such ideas, inventions, trademarks and other developments, and agrees to execute all documents necessary to obtain such patents in the name of the Company.

The Executive’s obligations and covenants herein contained in this Section 9 shall continue in effect after the termination of his employment with respect to all and any inventions, discoveries and improvements made, or conceived by him during the term of the Executive’s employment, and said obligation shall be binding upon the Executive’s assigns, heirs, executors, administrators or other legal representatives.

10. SUCCESSORS.

A. This Agreement is personal to the Executive and shall not, without the prior written consent of the Company, be assignable by the Executive.

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B. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns and any such successor or assignee shall be deemed substituted for the Company under the terms of this Agreement for all purposes. As used herein, “successor” and “assignee” shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires the stock of the Company or to which the Company assigns this Agreement by operation of law or otherwise.

11. SPECIFIC PERFORMANCE.

The Executive is obligated, under Section 7 hereof, to protect the Confidential Information of the Company. Any loss resulting from a breach of the Executive’s obligations to protect the Confidential Information could not be reasonably or adequately compensated in damages in an action at law. Therefore, in addition to other remedies provided by law or this Agreement, the Company shall have the right to obtain injunctive relief, in the appropriate court, at any time, against the dissemination by the Executive of the Confidential Information, or the use of such information by the Executive in violation of Section 7 hereof.

12. WAIVER.

No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach.

13. MODIFICATION.

This Agreement may not be amended or modified other than by a written agreement executed by the Executive and the Board. Commencement or continuation of any custom, practice or usage by the Company shall not constitute a modification hereof or otherwise give rise to enforceable rights or create obligations of the Company.

14. SAVINGS CLAUSE.

If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.

15. GOVERNING LAW.

This Agreement shall be deemed to have been executed and delivered within the State of Delaware, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with, and governed by, the internal laws of the State of Delaware.

16. CONSTRUCTION.

Each party has cooperated in the drafting and preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party on the basis that the party was the drafter. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.

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17. ASSIGNABILITY.

Neither this Agreement nor any right or obligation hereunder is assignable in whole or in party, whether by operation of law or otherwise, by any party without the express written consent of the other parties and any such attempted assignment shall be void and unenforceable.

18. COMMUNICATIONS.

All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or if mailed by registered or certified mail, postage prepaid, addressed to the Executive at the address set forth on the signature page hereof, or addressed to the Company. Any party may change the address at which notice shall be given by written notice given in the above manner.

19. EXECUTION.

This Agreement is being executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Photographic copies of such signed counterparts may be used in lieu of the originals for any purpose.

20. LEGAL COUNSEL.

The Executive and the Company recognize that this is a legally binding contract and acknowledge and agree that they have each had the opportunity to consult with legal counsel of their choice.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SORL AUTO PARTS, INC.			EXECUTIVE:


By:

Name:			Xiao Ping Zhang
Title:

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Exhibit 10.4

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is made, entered into by and between SORL Auto Parts, Inc., a Delaware corporation (the “Company”), and Xiao Feng Zhang (the “Executive”), effective as of May 1, 2006 (the “Effective Date”).

1. RECITALS.

WHEREAS, Executive is currently employed by the Company as its Chief Operating Officer;

WHEREAS, the Company desires to insure the continued employment of the Executive; and

WHEREAS, the Executive is willing to commit to a long-term agreement to serve the Company as its Chief Operating Officer;

NOW, THEREFORE, the Company and the Executive desire to set forth in this Agreement the terms and conditions of the Executive’s employment with the Company.

2. EMPLOYMENT.

The Company hereby employs the Executive as Chief Operating Officer of the Company and the Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth, for a period of five years from the Effective Date. Following the expiration of the term of this Agreement, this Agreement shall continue thereafter for additional one year periods, unless the Company provides the Executive with written notice of the Company’s intention not to renew by no later than six months prior to the expiration of the initial term, or any subsequent one-year term, of this Agreement. Executive’s term of employment is hereinafter referred to as the “Term.”

3. DUTIES.

A. The Company hereby employs the Executive to perform the duties and responsibilities of Chief Operating Officer of the Company and to perform such other duties as the Chief Executive Officer may from time to time reasonably designate. Throughout the Term, Executive shall faithfully and diligently perform Executive’s duties in conformity with the directions of the Chief Executive Officer and serve the Company to the best of Executive’s ability. Executive shall devote as much of Executive’s working time, attention and energies to the business and affairs of the Company as Executive determines, in his sole and absolute discretion, is appropriate, it being understood that Executive is also an executive of Ruili Group Co. Ltd. Executive shall also be a nominated as a member of the Board prior to each meeting of stockholders at which the Board of Directors is elected. Executive shall have the duties and responsibilities commonly incident to the position of a Chief Operating Officer. Additionally, Executive shall act as Chief Operating Officer of Ruili Group Ruian Auto Parts Co. Ltd., the Company’s principal operating subsidiary.

B. The Executive shall report to the Chief Executive Officer.

4. COMPENSATION.

C. Cellular Telephone . During the Term, Executive shall be entitled to the use of a cellular telephone and the monthly access charge and any business-related charges shall be paid by the Company.

D. Vehicle . During the Term, Executive shall be entitled to the use of a company vehicle including gas and insurance paid to Executive in the form of a monthly allowance.

E. Computers and Internet . During the Term, Executive shall be entitled to the use of business appropriate computer equipment required by Executive to perform duties including monthly access charges for the Internet, and any business-related charges shall be paid by the Company.

5. TERMINATION.

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6. SEVERANCE COMPENSATION

7. CONFIDENTIAL INFORMATION.

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8. CONFLICTING AGREEMENTS.

9. OWNERSHIP OF INVENTIONS.

10. SUCCESSORS.

A. This Agreement is personal to the Executive and shall not, without the prior written consent of the Company, be assignable by the Executive.

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11. SPECIFIC PERFORMANCE.

12. WAIVER.

13. MODIFICATION.

14. SAVINGS CLAUSE.

15. GOVERNING LAW.

16. CONSTRUCTION.

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17. ASSIGNABILITY.

18. COMMUNICATIONS.

19. EXECUTION.

20. LEGAL COUNSEL.

The Executive and the Company recognize that this is a legally binding contract and acknowledge and agree that they have each had the opportunity to consult with legal counsel of their choice.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SORL AUTO PARTS, INC.			EXECUTIVE:


By:

Name:			Xiao Feng Zhang
Title:

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Exhibit 10.5

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is made, entered into by and between SORL Auto Parts, Inc., a Delaware corporation (the “Company”), and Zong Yun Zhou (the “Executive”), effective as of May 1, 2006 (the “Effective Date”).

1. RECITALS.

WHEREAS, Executive is currently employed by the Company as its Chief Financial Officer;

WHEREAS, the Company desires to insure the continued employment of the Executive; and

WHEREAS, the Executive is willing to commit to a long-term agreement to serve the Company;

NOW, THEREFORE, the Company and the Executive desire to set forth in this Agreement the terms and conditions of the Executive’s employment with the Company.

2. EMPLOYMENT.

The Company hereby employs the Executive as Chief Financial Officer of the Company and the Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth, for a period of five years from the Effective Date. Following the expiration of the term of this Agreement, this Agreement shall continue thereafter for additional one year periods, unless the Company provides Executive with written notice of the Company’s intention not to renew by no later than six months prior to the expiration of the initial term, or any subsequent one-year term, of this Agreement. Executive’s term of employment is hereinafter referred to as the “Term.”

3. DUTIES.

A. The Company hereby employs the Executive to perform the duties and responsibilities of Chief Financial Officer of the Company and to perform such other duties in addition to or in replacement of Executive’s duties as Chief Financial Officer as the Chief Executive Officer may from time to time reasonably designate. Throughout the Term, Executive shall faithfully and diligently perform Executive’s duties in conformity with the directions of the Chief Executive Officer and serve the Company to the best of Executive’s ability. Executive shall have the duties and responsibilities commonly incident to the position of a Chief Financial Officer or such other position as the Chief Executive Officer assigns to Executive. Additionally, Executive shall act as Chief Financial Officer or in such other accounting function for Ruili Group Ruian Auto Parts Co. Ltd., the Company’s principal operating subsidiary.

B. The Executive shall initially report to the Chief Executive Officer.

4. COMPENSATION.

B. Reimbursements . During the Term upon presentation to the Company of written records thereof, the Company shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by her in connection with the Company’s business, including without limitation reasonable travel and entertainment expenses.

C. Cellular Telephone . During the Term, Executive shall be entitled to the use of a cellular telephone and the monthly access charge and any business-related charges shall be paid by the Company.

D. Vehicle . During the Term, Executive shall be entitled to the use of a company vehicle including gas and insurance paid to Executive in the form of a monthly allowance.

5. TERMINATION.

A. Death or Disability . The Executive’s employment and this Agreement shall terminate automatically upon the Executive’s death. If the Company determines in good faith that Disability of the Executive has occurred (pursuant to the definition of Disability set forth below), it may give to the Executive written notice of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the day of receipt of such notice by the Executive. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from her duties with the Company on the basis provided in this Agreement for a period of 180 consecutive days due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or her legal representative.

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6. SEVERANCE COMPENSATION

A. Death or Disability . If the Executive’s employment is terminated by reason of the Executive’s death or Disability, this Agreement shall terminate without further obligations to the Company or to the Executive or her legal representatives under this Agreement, other than, in the case of death, for payment of the Executive’s then salary by the Company for the remaining portion of the Term of to the extent not theretofore paid, which shall be paid to the Executive or her estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the date of termination, and in the case of Disability all earned and accrued but unpaid salary through the date of Disability.

C. Termination Without Cause . If the Executive is terminated for any reason other than for death, Disability or Cause, this Agreement shall terminate without further obligations to the Company or to the Executive under this Agreement, other than for payment of all salary by the Company owed for the remaining portion of the Term, which shall be paid in a lump sum within 30 days of the termination date.

7. CONFIDENTIAL INFORMATION.

A. Confidential Information . The Executive shall hold and keep confidential for the benefit of the Company all secret or confidential information, files, documents other media in which confidential information is contained, knowledge or data (collectively the “Confidential Information”) relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during her employment by the Company or any of its affiliated companies. Confidential Information does not include information that is already public knowledge at the time of disclosure (other than by acts by the Executive or his representatives in violation of this Agreement) or that is provided to the Executive by a third party without an obligation with the Company to maintain the confidentiality of such information. After termination of the Executive’s employment with the Company, she shall not, without the prior written consent of the Company, or as may otherwise be required by law or legal process, communicate or divulge any Confidential Information to anyone other than the Company and those designated by it.

The Executive shall acknowledge that all confidential documents are and shall remain the sole and exclusive property of the Company regardless of who originally acquired the confidential documents. The Executive agrees to return to the Company promptly upon the expiration or termination of her employment or at any other time when requested by the Company, any and all property of the Company, including, but not limited to, all confidential documents and copies thereof in his possession or control.

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8. CONFLICTING AGREEMENTS.

The Executive hereby represents and warrants that the execution of this Agreement and the performance of her obligations hereunder is not in breach of or in conflict with any other agreement to which she is a party or is bound, and that she is not now subject to any covenants against competition or similar covenants which would affect the performance of his obligations hereunder.

9. OWNERSHIP OF INVENTIONS.

All ideas, inventions, trademarks, proprietary information, know-how, processes and other developments or improvements developed by the Executive, alone or with others, during the term of her employment, that are within the scope of the Company’s business operations or that relate to the Company’s work or projects, are the exclusive property of the Company.

In that regard, the Executive agrees to disclose promptly to the Company any and all inventions, discoveries, trademarks, proprietary information, know-how, processes or improvements, patentable or otherwise, that she may make from the beginning of her employment until the termination thereof, that relate to the business of Company, whether such is made solely or jointly with others. The Executive further agrees that, during the term of this Agreement, she will provide the Company with a reasonable level of assistance, at the Company’s sole option and expense, to obtain patents in the United States of America, the People’s Republic of China or elsewhere on any such ideas, inventions, trademarks and other developments, and agrees to execute all documents necessary to obtain such patents in the name of the Company.

The Executive’s obligations and covenants herein contained in this Section 9 shall continue in effect after the termination of her employment with respect to all and any inventions, discoveries and improvements made, or conceived by her during the term of the Executive’s employment, and said obligation shall be binding upon the Executive’s assigns, heirs, executors, administrators or other legal representatives.

10. SUCCESSORS.

A. This Agreement is personal to the Executive and shall not, without the prior written consent of the Company, be assignable by the Executive.

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11. SPECIFIC PERFORMANCE.

12. WAIVER.

13. MODIFICATION.

14. SAVINGS CLAUSE.

15. GOVERNING LAW.

16. CONSTRUCTION.

17. ASSIGNABILITY.

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18. COMMUNICATIONS.

19. EXECUTION.

20. LEGAL COUNSEL.

The Executive and the Company recognize that this is a legally binding contract and acknowledge and agree that they have each had the opportunity to consult with legal counsel of their choice.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SORL AUTO PARTS, INC.			EXECUTIVE:


By:

Name:			Zong Yun Zhou
Title:

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Exhibit 21

SUBSIDIARIES

Name	Jurisdiction of Organization		Ownership

Fairford Holdings Limited		Hong Kong		100	%
Ruili Group Ruian Auto Parts Co. Ltd.		People’s Republic of china		90	%

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM

SORL Auto Parts, Inc.
No. 1169 Yumeng Road
Ruian Economic Development Zone
Ruian City, Zhejiang Province
People’s Republic of China

We consent to the use in the Registration Statement on Form S-1 of our report dated March 9, 2006 expect for Note 20, as to which the date is August 10, 2006, relating to the audit of the consolidated financial statements and schedules of SORL Auto Parts, Inc. which appears in such Registration Statement. We also consent to the reference to us under the heading “Experts” in the Registration Statement.

/s/ ROTENBERG AND CO., LLP

Rochester, New York

August 30, 2006

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM

SORL Auto Parts, Inc.
No. 1169 Yumeng Road
Ruian Economic Development Zone
Ruian City, Zhejiang Province
People’s Republic of China

We consent to the use in the Registration Statement on Form S-1 of our report dated April 1, 2004 relating to the audit of the consolidated financial statements of Ruili Group Corporation China (now known as SORL Auto Parts, Inc.) for the year ended December 31, 2003, which appears in such Registration Statement. We also consent to the reference to us under the heading “Experts” in such Registration Statement.

/s/ Clancy and Co., P.L.L.C.

Scottsdale, AZ

August 30, 2006