UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K




(Mark
One)




S
            ANNUAL REPORT UNDER SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934




For the
fiscal year ended June 30, 2009





£
            TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934




For the
transition period from _____________ to____________





Commission
file number: 000-51972





SHENGKAI
INNOVATIONS, INC.


(Exact
name of registrant as specified in its charter)





Florida
                      
                      11-3737500(State
      or other jurisdiction of
                        incorporation
      or organization)
                      
                      (I.R.S.
      Employer identification No.)No. 27, Wang Gang Road,
                        Jin Nan (Shuang Gang) Economic and Technology Development
                        Area
                        Tianjin, People’s Republic of China
                      
                      300350(Address
      of principal executive offices)
                      
                      (Zip
      Code)





Registrant’s
telephone number, including area code + (86)
22-2858-8899




Securities
registered under Section 12(b) of the Exchange Act:




Title
      of each class
              
              Name
      of each exchange on which registeredN/A
              
              N/A




Securities
registered pursuant to section 12(g) of the Act




Common Stock, par value
$0.001 per share




(Title of
Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈Yes   xNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.


xYes    ̈No


Note – Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.                   
xYes  
 ̈No




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


£Yes   £No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.o





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





Large
      accelerated filer£
              Accelerated
      filer£Non-accelerated
      filer£(Do not
      check if a smaller reporting company)
              Smaller
      reporting company x





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


£Yes   xNo





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.





Note – If a determination as
to whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.




The
aggregate market value of the voting and non-voting common stock of the issuer
held by non-affiliates was approximately $18,096,000 based upon the closing
price of the common stock as quoted by Nasdaq OTC Bulletin Board on August 31,
2009.




APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:




Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.                                                                                                                                                                  
£Yes   £No





(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)




Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.




As of
August 31, 2009, there were 22,112,500 issued and outstanding shares of the
issuer’s common stock.




DOCUMENTS
INCORPORATED BY REFERENCE




List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g. Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g. annual report to security holders
for fiscal years ended December 24, 1980).







FORWARD
LOOKING STATEMENTS




This
Annual Report on Form 10-K contains forward-looking statements regarding our
business, financial condition, results of operations and prospects. Words such
as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not deemed to represent an
all-inclusive means of identifying forward-looking statements as denoted in this
Annual Report on Form 10-K. Additionally, statements concerning future matters
are forward-looking statements.




Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the headings “Risks Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” You
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the SEC. The SEC maintains a website (www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including us. You can also read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.




We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K, except as required by law. Readers are urged to
carefully review and consider the various disclosures made throughout the
entirety of this Annual Report, which are designed to advise interested parties
of the risks and factors that may affect our business, financial condition,
results of operations and prospects.





Currency,
exchange rate, and “China” and other references





Unless
otherwise noted, all currency figures in this filing are in U.S. dollars.
References to "yuan" or "RMB" are to the Chinese yuan, which is also known as
the renminbi. According to the currency exchange website www.xe.com, on August
19, 2009, $1.00 was equivalent to 6.835 yuan.





References
to “PRC” and “China” are to the People’s Republic of China.





References
to “Shengkai” are to Tianjin Shengkai Industrial Technology Development Co.
Ltd., a PRC company that we control.





Unless
otherwise specified or required by context, references to “Southern Sauce
Company, Inc.,” “we,” “the Company”, “our” and “us” refer collectively to (i)
Shengkai Innovations, Inc. (formerly known as “Southern Sauce Company, Inc.”),
(ii) the subsidiaries of the Company, Shen Kun International Limited, a British
Virgin Islands limited liability company (“Shen Kun”) and Sheng Kai (Tianjin)
Ceramic Valves Co., Ltd., a wholly foreign-owned enterprise under the laws of
the PRC (“SK Ceramic Valves”), and (iii) Shengkai.




References
to the “Bulletin Board,” the “OTCBB” or the “OTC Bulletin Board” are to the
Over-the-Counter Bulletin Board, a securities quotation service, which is
accessible at the website www.otcbb.com.





References
to Shengkai’s “registered capital” are to the equity of Shengkai, which under
PRC law is measured not in terms of shares owned but in terms of the amount of
capital that has been contributed to a company by a particular shareholder or
all shareholders. The portion of a limited liability company’s total capital
contributed by a particular shareholder represents that shareholder’s ownership
of the company, and the total amount of capital contributed by all shareholders
is the company’s total equity. Capital contributions are made to a company by
deposits into a dedicated account in the company’s name, which the company may
access in order to meet its financial needs. When a company’s accountant
certifies to PRC authorities that a capital contribution has been made and the
company has received the necessary government permission to increase its
contributed capital, the capital contribution is registered with regulatory
authorities and becomes a part of the company’s “registered
capital.”


2


SHENGKAI
INNOVATIONS, INC.


FORM
10-K


For
the Fiscal Year Ended June 30, 2009





TABLE OF
CONTENTS





PAGEPART
      IItem
      1.
                  
                  Business
                  
                  4Item
      1A.
                  
                  Risk
      Factors
                  
                  22Item
      1B.
                  
                  Unresolved
      Staff Comments
                  
                  31Item
      2.
                  
                  Properties
                  
                  31Item
      3.
                  
                  Legal
      Proceedings
                  
                  32Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  32PART IIItem
      5.
                  
                  Market
      for Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities
                  
                  32Item
      6.
                  
                  Selected
      Financial Data
                  
                  34Item
      7.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  34Item
      7A.
                  
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  40Item
      8.
                  
                  Financial
      Statements and Supplementary Data
                  
                  40Item
      9.
                  
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
                  
                  42Item
      9A(T).
                  
                  Controls
      and Procedures
                  
                  42Item
      9B.
                  
                  Other
      Information
                  
                  43PART IIIItem
      10.
                  
                  Directors,
      Executive Officers and Corporate Governance
                  
                  44Item
      11.
                  
                  Executive
      Compensation
                  
                  46Item
      12.
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
                  
                  47Item
      13.
                  
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  49Item
      14.
                  
                  Principal
      Accountant Fees and Services
                  
                  50PART IVItem
      15.
                  
                  Exhibits
      and Financial Statement Schedules
                  
                  51Signatures
                  
                  53




3




PART
I




Item 1.   Business.




Corporate
History and Structure





We were
incorporated in Florida under the name Southern Sauce Company, Inc. on December
8, 2004.  Our initial business plan was to establish a successful specialty
food business based on proprietary recipes for barbecue sauces and other
condiments for the retail market.





By a
Stock Purchase and Sale Agreement dated February 14, 2008, we experienced a
change in control whereby Vision Opportunity China LP and a number of other
investors acquired an aggregate of 2,575,000 shares of common stock from former
shareholders for a purchase price of $635,000. Upon this change in control, our
board of directors determined that the implementation of our business plan prior
to the change in control was no longer financially feasible, and we adopted an
acquisition strategy focused on pursuing growth by acquiring undervalued
businesses with a history of operating revenues. We utilized several criteria to
evaluate prospective acquisitions, including whether the business to be acquired
(1) was an established business with viable services or products, (2) had an
experienced and qualified management team, (3) had room for growth and/or
expansion into other markets, (4) was accretive to earnings, (5) offered the
opportunity to achieve and/or enhance profitability, and (6) increased
shareholder value.





Our board
of directors approved the Merger Agreement and Plan of Reorganization on May 30,
2008, and we entered into the Merger Agreement and Plan of Reorganization with
Shen Kun and all of the Shen Kun shareholders on June 9, 2008 as part of the
reverse merger transaction described in further detail below.





Immediately
following the reverse merger transaction, our corporate structure was as
follows:








Shen Kun
was incorporated under the laws of the British Virgin Islands on November 7,
2007, and Shen Kun formed SK Ceramic Valves as a wholly foreign-owned enterprise
under the laws of the PRC on April 9, 2008.


4





Shengkai,
our operating entity, was organized under the laws of the PRC in June 1994 under
the name Tianjin Shengkai Industrial Technology Development Company. Shengkai’s
business was formerly operated as a collective-owned enterprise. The business
was reorganized under the laws of the PRC as a limited liability company under
its current name, Tianjin Shengkai Industrial Technology Development Co., Ltd.
in April 1999.




Under the
laws of the PRC, certain restrictions are placed on round
trip investments, which are defined under PRC law as an acquisition of a
PRC entity by an offshore special purpose vehicle owned by one or more PRC
residents. As a result, SK Ceramic Valves entered into a series of agreements
with Shengkai which we believe give us effective control over the business of
Shengkai, the entity through which we now operate our business. These agreements
are described above in the section entitled “Contractual Agreements with
Shengkai.”





Our
executive offices are located at No. 27, Wang Gang Road, Jin Nan (Shuang Gang)
Economic and Technology Development Area, Tianjin, PRC 300350, and our telephone
number is (86) 22-2859-8899. Our website is www.shengkai.com. Information on our
website or any other website is not a part of this report.





Reverse
Merger and Private Placements





In June
and July 2008, we consummated a number of related transactions through which we
acquired control of Shengkai, a PRC-based company and consummated two private
placements for gross proceeds of $15 million and $5 million, respectively (the
“Private Placements”).





We
acquired control of Shengkai through two separate transactions: (i) a
restructuring transaction which granted control of Shengkai to another PRC
entity, SK Ceramic Valves, and (ii) a reverse merger transaction transferring
control of SK Ceramic Valves to the Company. We refer to the restructuring
transaction and the reverse merger transaction together as the “Reverse
Merger.”





Restructuring Transaction:
Under the laws of the PRC, certain restrictions are placed on round
trip investments, which are defined under PRC law as an acquisition of a
PRC entity by an offshore special purpose vehicle owned by one or more PRC
residents. As a result, SK Ceramic Valves entered into a series of agreements
with Shengkai which we believe give us effective control over the business of
Shengkai.





Reverse Merger Transaction:
 In the reverse merger transaction, through our wholly-owned subsidiary
Shen Kun Acquisition Sub Limited, we acquired control of Shen Kun, a British
Virgin islands company and the parent company of SK Ceramic Valves, by issuing
to the Shen Kun Shareholders 20,550,000 shares of our common stock, as
consideration for all of the outstanding capital stock of Shen Kun.





Private Placements : In
connection with the reverse merger transaction, on June 11, 2008 we sold to
Vision Opportunity China LP Units (the “Units”) for aggregate gross proceeds of
$15,000,000, at a price of $2.5357 per Unit (the “June 2008 Financing”). Each
Unit consists of one share of the Company’s Series A Convertible Preferred
Stock, par value $0.001 per share (the “Preferred Shares”), convertible into one
share of common stock, par value $0.001 per share (the “common stock”), and one
Series A Warrant to purchase common stock equal to 120% of the number of shares
of common stock issuable upon conversion of the Preferred Shares
(“Warrant”).





Additionally,
on July 18, 2008, we sold Units to Blue Ridge Investments, LLC for aggregate
gross proceeds of $5,000,000, at a price of $2.5357 per Unit (the “July 2008
Financing”). Each Unit consists of one Preferred Share, convertible into one
share of common stock, and one Warrant to purchase common stock equal to 120% of
the number of shares of common stock issuable upon conversion of the Preferred
Shares.





A
detailed description of the agreements entered into in connection with the
Reverse Merger and Private Placements is provided below.





PRC
Restructuring





The PRC
restructuring transaction was effected by the execution of five agreements
between SK Ceramic Valves, on the one hand, and Shengkai (and in some cases the
shareholders of Shengkai), on the other hand (the “PRC Restructuring
Agreements”). Under the laws of the PRC, certain restrictions are placed
on round trip investments, which are defined under PRC law as an
acquisition of a PRC entity by an offshore special purpose vehicle owned by one
or more PRC residents. To comply with these restrictions, in conjunction with
the reverse acquisition, we (via our wholly-owned subsidiary, SK Ceramic Valves)
entered into and consummated certain contractual arrangements with Shengkai and
their respective shareholders pursuant to which we provide these companies with
technology consulting and management services. Through these contractual
arrangements, we have the ability to substantially influence these companies’
daily operations and financial affairs, appoint their senior executives and
approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which enable us to control Shengkai and operate our
business in the PRC through Shengkai, we are considered the primary beneficiary
of Shengkai.


5





On May
30, 2008, we entered into the following contractual arrangements, each of which
are enforceable and valid in accordance with the laws of the PRC:





Consigned Management
Agreement





The
Consigned Management Agreement, among SK Ceramic Valves, Shengkai, and all of
the shareholders of Shengkai, provides that SK Ceramic Valves will provide
financial, business, technical and human resources management services to
Shengkai that will enable SK Ceramic Valves to control Shengkai’s operations,
assets and cash flow, and in exchange, Shengkai will pay a management fee to SK
Ceramic Valves equal to 2% of Shengkai’s annual revenue. The management fee for
each year is due by January 31 of the following year. The term of the agreement
is until SK Ceramic Valves acquires all of the equity or assets of
Shengkai.





Technology
Service Agreement





The
Technology Service Agreement, among SK Ceramic Valves, Shengkai, and all of the
shareholders of Shengkai, provides that SK Ceramic Valves will provide
technology services, including the selection and maintenance of Shengkai’s
computer hardware and software systems and training of Shengkai employees in the
use of those systems. SK Ceramic Valves will also provide research and
development into new formulations of ceramics and methods that will increase the
toughness and machinability of ceramics, raise manufacturing ceramic materials
burn rate and lower sintering temperature, and lower production costs. The
agreement also provides that SK Ceramic Valves will train Shengkai’s staff to
increase productive use of the new equipments and increase Shengkai’s overall
production capacity.





As
consideration for such services, Shengkai will pay a technology service fee to
SK Ceramic Valves equal to 1% of Shengkai’s annual revenue. The technology
service fee for each year is due by January 31 of the following year. The term
of the agreement is until SK Ceramic Valves acquires all of the equity or assets
of Shengkai.




Loan Agreement





The Loan
Agreement, among SK Ceramic Valves and all of the shareholders of Shengkai,
provides that SK Ceramic Valves will make a loan in the aggregate principal
amount of RMB49,000,000 (approximately $7,153,702) to the shareholders of
Shengkai, each shareholder receiving a share of the loan proceeds proportional
to its shareholding in Shengkai, and in exchange each shareholder agreed (i) to
contribute all of its proceeds from the loan to the registered capital of
Shengkai in order to increase the registered capital of Shengkai, (ii) to cause
Shengkai to complete the process of registering the increase in its registered
capital with PRC regulatory authorities within 30 days after receiving the loan,
and (iii) to pledge their equity to SK Ceramic Valves under the Equity Pledge
Agreement described below.




The loan
is repayable at the option of SK Ceramic Valves either in cash or by transfer of
Shengkai equity or all of its assets to SK Ceramic Valves. The loan does not
bear interest, except that if (x) SK Ceramic Valves is able to purchase the
equity or assets of Shengkai, and (y) the lowest allowable purchase price for
that equity or those assets under PRC law is greater than the principal amount
of the loan, then, insofar as it is allowable under PRC law, interest will be
deemed to have accrued on the loan in an amount equal to the difference between
the lowest allowable purchase price for Shengkai and the principal amount of the
loan. The effect of this interest provision is that, if and when permitted under
PRC law, SK Ceramic Valves may acquire all of the equity or assets of Shengkai
by forgiving the loan, without making any further payment.





If the
principal amount of the loan is greater than the lowest allowable purchase price
for the equity or assets of Shengkai under PRC law, then even though one might
expect that SK Ceramic Valves would be entitled to receive the difference
between those two amounts in repayment of the loan, Shengkai is not obligated to
make such a payment. The effect of this provision is that (insofar as allowable
under PRC law) Shengkai may satisfy its repayment obligations under the loan by
transferring all of its equity or assets to SK Ceramic Valves, without making
any further payment.





The Loan
Agreement also contains agreements from the shareholders of Shengkai that during
the term of the agreement, they will elect as directors of Shengkai only
candidates nominated by SK Ceramic Valves, and they will use their best efforts
to ensure that Shengkai does not take certain actions without the prior written
consent of SK Ceramic Valves, including (i) supplementing or amending its
articles of association or bylaws, (ii) changing its registered capital or
shareholding structure, (iii) transferring, mortgaging or disposing of any
interests in its assets or income, or encumbering its assets or income in a way
that would affect SK Ceramic Valves’ security interest, (iv) incurring or
guaranteeing any debts not incurred in its normal business operations, (v)
entering into any material contract (exceeding RMB 3,000,000, or approximately
$439,741, in value), unless it is necessary for the company’s normal business
operations; (vi) providing any loan or guarantee to any third party; (vii)
acquiring or consolidating with any third party, or investing in any third
party; and (viii) distributing any dividends to the shareholders in any manner.
In addition, the Loan Agreement provides that at SK Ceramic Valves’ request,
Shengkai will promptly distribute all distributable dividends to the
shareholders of Shengkai.





The funds
that SK Ceramic Valves used to make the loan came from the proceeds received by
us, its indirect parent company, in the Private Placements described in further
detail below.


6





Exclusive Purchase Option
Agreement





The
Exclusive Purchase Option Agreement, among SK Ceramic Valves, Shengkai, and all
of the shareholders of Shengkai, provides that Shengkai will grant SK Ceramic
Valves an irrevocable and exclusive right to purchase all or part of Shengkai’s
assets, and the shareholders of Shengkai will grant SK Ceramic Valves an
irrevocable and exclusive right to purchase all or part of their equity
interests in Shengkai. Either right may be exercised by SK Ceramic Valves in its
sole discretion at any time that the exercise would be permissible under PRC
law, and the purchase price for SK Ceramic Valves’ acquisition of equity or
assets will be the lowest price permissible under PRC law. Shengkai and its
shareholders are required to execute purchase agreements and related
documentation within 30 days of receiving notice from SK Ceramic Valves that it
intends to exercise its right to purchase.




The
Exclusive Purchase Option Agreement contains agreements from Shengkai and its
shareholders that they will refrain from taking actions, such as voting to
dissolve or declaring dividends, that could impair SK Ceramic Valves’ security
interest in the equity of Shengkai or reduce its value. These agreements are
substantially the same as those contained in the Loan Agreement described
above.





The
agreement will remain effective until SK Ceramic Valves or its designees have
acquired 100% of the equity interests of Shengkai or substantially all of the
assets of Shengkai. The exclusive purchase options were granted under the
agreement on May 30, 2008.





Equity
Pledge Agreement





The
Equity Pledge Agreement, among SK Ceramic Valves, Shengkai, and all of the
shareholders of Shengkai, provides that the shareholders of Shengkai will pledge
all of their equity interests in Shengkai to SK Ceramic Valves as a guarantee of
the performance of the shareholders’ obligations and Shengkai’s obligations
under each of the other PRC restructuring agreements. The Equity Pledge
Agreement contains promises from Shengkai and its shareholders that they will
refrain from taking actions, such as voting to dissolve or declaring dividends,
that could impair SK Ceramic Valves’ security interest in the equity of Shengkai
or reduce its value. These promises are substantially the same as those
contained in the Loan Agreement described above.





Under the
Equity Pledge Agreement, the shareholders of Shengkai have also agreed (i) to
cause Shengkai to have the pledge recorded at the appropriate office of the PRC
Bureau of Industry and Commerce, (ii) to deliver any dividends received from
Shengkai during the term of the agreement into an escrow account under the
supervision of SK Ceramic Valves, and (iii) to deliver Shengkai’s official
shareholder registry and certificate of equity contribution to SK Ceramic
Valves. Additionally, on July 3, 2008, a Supplementary Agreement to the
Equity Pledge was executed to authorize SK Ceramic Valves to fully and
completely represent all shareholders of Shengkai to exercise their
shareholder's rights in Shengkai, including shareholders’ voting rights at
shareholder meetings.




Completion of the PRC
Restructuring





The PRC
Restructuring Agreements were executed on May 30, 2008. However, SK Ceramic
Valves is required under the agreements to complete additional post-closing
steps required in order to maintain its good standing under PRC law. These steps
include SK Ceramic Valves making required regulatory filings and giving proof to
regulatory authorities that it has received the required portion of its
registered capital as of the deadline required under PRC law. Specifically, SK
Ceramic Valves must receive 15% of its total registered capital of $15 million
by July 9, 2008, and the remaining $12.75 million by April 9, 2010, in order to
maintain the validity of its business license and its certificate of approval to
exist as a wholly foreign-owned entity in the PRC issued by the Tianjin
Municipal Government and the Tianjin Administration for Industry and Commerce,
respectively. This license and approval would become invalid and be immediately
cancelled if SK Ceramic Valves were to fail to make timely payment of the first
installment of its registered capital, in which case we could cease to have any
claim to control Shengkai under PRC law.





As of
June 30, 2009, 100% of the registered capital of SK Ceramic Valves had been
contributed in accordance with the PRC restructuring agreements.




As a
result of the consummation of the PRC Restructuring Agreements above, the
contributions of Shengkai’s registered capital, and therefore the ownership of
Shengkai, took the form represented in the table below:





Name of Shareholder
                  
                  Amount of Contribution
                    (RMB)
                  
                  
                  Percent of Capital
                    ContributionWang Chen
                  
                  
                  45,689,600
                  
                  
                  
                  71.39Guo
      Wei
                  
                  
                  8,531,200
                  
                  
                  
                  13.33Zhao
      Yanqiu
                  
                  
                  4,192,000
                  
                  
                  
                  6.55Ji
      Haihong
                  
                  
                  4,192,000
                  
                  
                  
                  6.55Zhang
      Ying
                  
                  
                  307,200
                  
                  
                  
                  0.48Miao
      Yang
                  
                  
                  307,200
                  
                  
                  
                  0.48Chen
      Fang
                  
                  
                  307,200
                  
                  
                  
                  0.48Wu
      Yanping
                  
                  
                  236,800
                  
                  
                  
                  0.37Liu
      Naifan
                  
                  
                  236,800
                  
                  
                  
                  0.37Total
                  
                  RMB
      64,000,000
                  
                  
                  
                  100
                  %




7


Reverse Merger
Transaction





On June
9, 2008, through our wholly-owned subsidiary Shen Kun Acquisition Sub Limited,
we entered into a Merger Agreement and Plan of Reorganization with (i) Shen Kun,
(ii) the owners of all of the outstanding voting stock of Shen Kun, and (iii)
our then-controlling shareholders, Vision Opportunity China LP, Castle Bison,
Inc., Martin Sumichrast, and Ralph Olson. The Shen Kun shareholders with whom we
consummated the merger included (i) the majority holder, Long Sunny Limited, a
British Virgin Islands company (which owned 84.72% of Shen Kun’s common stock),
a majority of the stock of which may be acquired in the future by our Chief
Executive Officer, Mr. Wang Chen, pursuant to a call option held by Mr. Wang,
(ii) five individual minority shareholders: Mr. Miao Yang, Ms. Zhang Ying, Ms.
Chen Fang, Mr. Wu Yanping, Mr. Liu Naifan (who collectively owned 2.18% of Shen
Kun’s common stock), and (iii) two entity minority shareholders, Groom Profit
Holdings Limited, a British Virgin Islands company (solely owned by Ms. Zhao
Yanqiu), and Right Idea Holdings Limited, a British Virgin Islands company
(solely owned by Ms. Ji Haihong) (who each owned 6.55% of Shen Kun’s common
stock, respectively).





Under the
terms of the Merger Agreement and Plan of Reorganization, we acquired control of
Shen Kun, a British Virgin Islands company and the parent company of SK Ceramic
Valves, a wholly foreign-owned entity organized under the laws of the PRC, by
issuing 20,550,000 shares of common stock to the Shen Kun shareholders as merger
consideration for 100% of the common stock of Shen Kun. Immediately after the
closing of the Merger Agreement and Plan of Reorganization, we had a total of
22,112,500 shares of common stock outstanding, with the Shen Kun shareholders
(and their assignees) owning approximately 92.9% of our outstanding common stock
on a non-diluted basis. Shen Kun Acquisition Sub Limited was dissolved and Shen
Kun, the surviving entity, became our wholly-owned subsidiary.




Private Placement (June 2008
Financing)





In
connection with the consummation of the Reverse Merger Transaction, on June 11,
2008 we consummated a financing for the sale of Units for the
aggregate gross proceeds of $15,000,000, at a price of $2.5357 per Unit
(“the June 2008 Financing”). Each Unit consists of one share of the Company’s
Preferred Shares, convertible into one share of common stock, and one Warrant
equal to 120% of the number of shares of common stock issuable upon conversion
of the Preferred Shares. The description of other material terms and conditions
of the June 2008 Financing are set forth below.





Securities
Purchase Agreement





In
connection with the reverse merger transaction, on June 10, 2008 we entered into
and on June 11, 2008 consummated a Securities Purchase Agreement (the “June 2008
Purchase Agreement”) with certain Purchasers, namely Vision Opportunity China
LP, for the sale of Units at an aggregate purchase price of $15,000,000, each
unit consisting of one Preferred Share and one Warrant with an exercise price of
$3.52 per share, exercisable for a period of five years from the closing
date.





On June
11, 2008, the aggregate purchase price paid for the Units was $15,000,000 (the
“First Closing”). Pursuant to the June 2008 Purchase Agreement, on or before
June 30, 2008, we had the option to sell in a second closing an additional
number of Units for an aggregate price that was the difference between the gross
proceeds from the First Closing and $20,000,000 (the “Second
Closing”).





Each
Preferred Share is convertible, at the option of the holder, into one share of
our common stock, subject to certain limitations, conditions and anti-dilutive
adjustments, and to a 9.9% limitation on beneficial ownership of stock. As such,
the Preferred Shares are convertible into an aggregate of 5,915,526 shares of
our common stock.





The
Warrants are exercisable in the aggregate for up to 7,098,632 shares of our
common stock, or 120% of the total number of shares of common stock issuable
upon conversion of the Preferred Shares purchased by each Purchaser, subject to
a 9.9% limitation on beneficial ownership of common stock. The Warrants are
exercisable for a term of five years from June 10, 2008 and may be exercised at
any time after 18 months following June 10, 2008 if we do not have an effective
registration statement to cover the common stock underlying the
Warrants.





On
September 16, 2007, Shengkai entered into a Financial Consulting Agreement (the
“Mass Harmony Agreement”) with Mass Harmony Asset Management Limited (“Mass
Harmony”). Pursuant to the Mass Harmony Agreement, Mass Harmony received an
aggregate of 450,000 shares of common stock and 5% of the gross proceeds of the
June 2008 Financing in Warrants, equivalent to warrants exercisable in the
aggregate of up to 213,068 shares of our common stock. The services provided by
Mass Harmony under the Mass Harmony Agreement include performing initial due
diligence on Shengkai, preparing Shengkai’s business plan, and assisting in the
corporate restructuring and financial documentation.


8




Pursuant
to the Second Amendment to the June 2008 Purchase Agreement dated as of July 31,
2008, we are required to list and trade our shares of common stock on the Nasdaq
Capital Market, the Nasdaq Global Market, the American Stock Exchange or any
successor market thereto within eighteen (18) months of the First
Closing, or our principal shareholder, Li Shaoqing (the “Principal
Shareholder”), will be required to deliver to Vision Opportunity China LP an
aggregate of 750,000 shares of common stock.





The
Purchase Agreement also grants the following significant rights to Vision
Opportunity China LP and places the following significant restrictions and
obligations on us:




·
              Subsequent
      financing participation.For two years after the date on
      which the initial registration statement to be filed by the Company under
      the registration rights agreement described below is declared effective by
      the Securities and Exchange Commission (“SEC”), Purchasers who continue to
      hold Preferred Shares have the right to participate in any subsequent sale
      of securities by the Company in order to purchase up to its pro rata
      portion of the total amount of securities sold in the subsequent sale
      equal to the percentage of the total Preferred Shares issued in the June
      2008 Financing.
 
 ·
              Consent for
      asset sale.We may
      not sell all or a substantial portion of our assets, except to a
      subsidiary, without the consent of the holders of a majority of the
      then-outstanding Preferred
Shares.
 
 ·
              Chief
      Financial Officer/Vice President of Investor Relations. As soon as possible after the
      First Closing, we are required to use our best efforts to appoint an
      individual who is fluent in English and acceptable to Vision Opportunity
      China LP to serve as Chief Financial Officer and/or Vice President of
      Investor Relations.
 
 ·
              Investor
      relations fund.We
      must maintain an escrow account with $500,000 in connection with monies to
      be used for investor and public relations services. The escrow account was
      established through the Investor and Public Relations Escrow Agreement
      described below and was funded at the Closing. Out of this amount,
      $150,000 shall be released from escrow once we appoint a Chief Financial
      Officer or Vice President of Investor Relations. An additional $150,000
      will be released to us after we engage a new independent registered
      accounting firm that is listed as one of the top 20 firms by stock market
      client number as calculated by Hemscott Group Limited, a division of
      Morningstar, Inc.
 
 ·
              U.S.
      visitation.For as
      long as Vision Opportunity China LP holds at least 5% of
      the aggregate total number of shares of common stock and Shares (as
      defined in the Purchase Agreement) of the Company on a fully-diluted
      basis, the Company must provide for its management to visit the United
      States at least twice each year to meet with potential
      investors.




Securities
Escrow Agreement





On June
10, 2008 we entered into and on June 11, 2008 consummated a securities escrow
agreement with Vision Opportunity China LP, as representative of the Purchasers
under the June 2008 Purchase Agreement, the Principal Shareholder, and Loeb
& Loeb LLP, as escrow agent (the “Securities Escrow Agreement”). In the
Securities Escrow Agreement, as an inducement to the Purchasers to enter into
the June 2008 Purchase Agreement, the Principal Shareholder agreed to deliver an
aggregate of 5,915,526 shares of our common stock (the amount of common stock
underlying the Preferred Shares) (the “Vision Escrow Shares”) to the escrow
agent for the benefit of the Purchasers, and to forfeit some or all of those
shares to the Purchasers in the event we fail to achieve certain financial
performance thresholds for the 12-month periods ending June 30, 2008 and June
30, 2009.





Pursuant
to the Second Amendment to the June 2008 Purchase Agreement and the First
Amendment to the June 2008 Securities Escrow Agreement, both dated as of July
31, 2008, if we fail to list our common stock on the Nasdaq Capital Market,
Nasdaq Global Market, American Stock Exchange or any successor market thereto
within eighteen (18) months of June 10, 2008, 750,000 shares of common
stock owned by Principal Shareholder will be distributed to Vision Opportunity
China LP.





Investor
and Public Relations Escrow Agreement




On June
10, 2008 we entered into and on June 11, 2008 consummated an Investor and Public
Relations Agreement with Vision Opportunity China LP and Sichenzia Ross Friedman
Ference LLP, as escrow agent. Pursuant to the agreement, $500,000 of the
proceeds of the June 2008 Financing was deposited into an escrow account with
Sichenzia Ross Friedman LLP for use in investor and public relations services.
The escrow account was established through the Investor and Public Relations
Escrow Agreement described below and was funded at the closing. Out of this
amount, $150,000 shall be released from escrow once we appoint a Chief Financial
Officer or Vice President of Investor Relations. An additional $150,000 will be
released to us after we engage a new independent registered accounting firm that
is listed as one of the top 20 firms by stock market client number as calculated
by Hemscott Group Limited, a division of Morningstar, Inc.


9





Registration
Rights Agreement





On June
10, 2008 we entered into and on June 11, 2008 consummated a Registration Rights
Agreement with Vision Opportunity China LP (the “Vision RRA”), under which we
agreed to prepare and file with the SEC and maintain the effectiveness of a
“resale” registration statement pursuant to Rule 415 under the Securities Act
(“Rule 415”) providing for the resale of (i) all of the shares of common stock
issuable on conversion of the Preferred Shares, (ii) all of the shares of common
stock issuable upon exercise of the Warrants, (iii) 1,304,750 shares of common
stock held by certain shareholders before the Reverse Merger Transaction, (iv)
all of the Vision Escrow Shares delivered to Vision Opportunity China LP under
the Securities Escrow Agreement described above, and (v) all of the 750,000
shares of common stock that the Principal Shareholder will be required to
deliver to Vision Opportunity China LP in case the Company does not meet the
deadline for listing on a national securities exchange.




Under the
terms of the Vision RRA, we are required to have a registration statement filed
with the SEC within 45 days after the earlier of the date of the Second Closing
or June 30, 2008, and declared effective by the SEC not later than November 27,
2008.  We filed the registration statement on August 7, 2008, and it
was declared effective by the SEC on August 21, 2008.




We are
required to pay liquidated damages in an amount equal to 1 percent of Vision
Opportunity China LP’s initial acquisition of Preferred Shares pursuant to the
June 2008 Purchase Agreement for each month past the relevant deadline that the
registration statement is not filed or not declared effective, for any period
that we fail to keep the registration statement effective, or for any period
that we cause our common stock to be delisted from the OTC Bulletin Board, up to
a maximum of 10 percent of the purchase amount of the Units. The number of
shares of Preferred Shares issuable pursuant to the liquidated damages provision
is subject to reduction based on the maximum number of shares that can be
registered under Rule 415.





The
registration rights agreement also provides for additional demand registration
rights in the event that Vision Opportunity China LP is unable to register all
of the registrable securities in the initial registration statement and grants
holders of registrable securities customary piggy back rights during any time
when there is not an effective registration statement providing for the resale
of the registrable securities.





The terms
of the Vision RRA are subject to a registration rights agreement that was
consummated on June 11, 2008 by and between the Company and certain shareholders
pre-existing the reverse merger (the “Shareholder RRA”). Under the terms of the
Shareholder RRA, the Company granted registration rights to certain shareholders
existing prior to the reverse merger transaction, by which the shareholders were
granted registration rights for the registration of an aggregate
of 1,304,750 shares of common stock. The shareholders will be entitled
to cash liquidated damages in the amount equal to .75% of the value of each
shareholder’s registrable securities (using a value of $2.54 per share to
calculate the amount of such shareholder’s registrable securities) on the date
that it fails to register the securities under the terms of the agreement and
for each calendar month or portion thereof until the failure is cured, up to a
maximum amount of 10% of the value of the shareholder’s securities (using a
value of $2.54 per share to calculate the amount of such shareholder’s
registrable securities).





Lock-Up
Agreement





On the
Closing Date, we entered into an agreement with various shareholders of Long
Sunny Limited and members of Shengkai’s management under which, in order to
induce the Company and the Purchasers to enter into the June 2008 Financing,
each of the seven shareholders and managers listed below agreed that (i) they
will not sell or transfer any shares of our common stock held as of the Closing
Date until at least 12 months after the effective date of the initial
registration statement to be filed under the Vision RRA described above, and
(ii) for an additional 24 months after the end of that 12 month period, it will
not sell or transfer more than one-twelfth of its total shares of that common
stock during any one month.





The
shareholders subject to the Lock-Up Agreement are:





·
            Wang Chen, our
      CEO.


·
            Li
  Shaoqing


·
            Guo
  Wei


·
            Liu
    Xiaoqian


·
            He
  Li


·
            Ruan
    Xianqyi


·
            Li
  Juan





Private Placement (July 2008
Financing)





On July
18, 2008, we sold to Blue Ridge Investment, LLC, Units for aggregate gross
proceeds of $5,000,000, at a price of $2.5357 per Unit (the “July 2008
Financing”). As in the June 2008 Financing, each Unit consists of one Preferred
Share, convertible into one share of common stock, and one Warrant to purchase
common stock equal to 120% of the number of shares of common stock issuable upon
conversion of the Preferred Shares. The description of other material terms and
conditions of the July 2008 Financing are set forth below.


10


Securities
Purchase Agreement





On July
18, 2008, we entered into and consummated a Securities Purchase Agreement (the
“July 2008 Purchase Agreement”) with Blue Ridge Investments, LLC for the sale of
Units at an aggregate purchase price of $5,000,000, each unit consisting of one
Preferred Share and one Warrant with an exercise price of $3.52 per share,
exercisable for a period of five years from issuance.




Each
Preferred Share is convertible, at the option of the holder, into one share of
our common stock, subject to certain limitations, conditions and anti-dilutive
adjustments, and to a 9.9% limitation on beneficial ownership of stock. As such,
the Preferred Shares are convertible into an aggregate of 1,971,842 shares of
our common stock.





The
Warrants are exercisable in the aggregate for up to 2,366,211 shares of our
common stock, or 120% of the total number of shares of common stock issuable
upon conversion of the Preferred Shares purchased by each Purchaser, subject to
a 9.9% limitation on beneficial ownership of common stock. The Warrants are
exercisable for a term of five years from July 18, 2008 and may be exercised at
any time after 18 months following July 18, 2008 if we do not have an effective
registration statement to cover the common stock underlying the
Warrants.





Pursuant
to the Mass Harmony Agreement dated as of September 16, 2007, Mass Harmony also
received 5% of the gross proceeds of the July 2008 Financing in Warrants,
equivalent to warrants exercisable in the aggregate of up to 71,023 shares of
our common stock. The services provided by Mass Harmony under the Mass Harmony
Agreement include performing initial due diligence on Shengkai, preparing
Shengkai’s business plan, and assisting in the corporate restructuring and
financial documentation.




Pursuant
to the First Amendment to the July 2008 Purchase Agreement dated as of July 31,
2008, we are required to list and trade our shares of common stock on the Nasdaq
Capital Market, Nasdaq Global Market, American Stock Exchange or any successor
market thereto within eighteen (18) months of July 18, 2008, or the
Principal Shareholder, will be required to deliver to Blue Ridge Investments,
LLC an aggregate of 250,000 shares of common stock.




The July
2008 Purchase Agreement also grants the following significant rights to Blue
Ridge Investments, LLC and places the following significant restrictions and
obligations on us:





·
            Subsequent
      financing participation.For two years after the date on
      which the initial registration statement to be filed by the Company under
      the Registration Rights Agreement described below is declared effective by
      the Securities and Exchange Commission (“SEC”), if Blue Ridge Investments,
      LLC continues to hold Preferred Shares, it shall have the right to
      participate in any subsequent sale of securities by the Company in order
      to purchase up to its pro rata portion of the total amount of securities
      sold in the subsequent sale equal to the percentage of the total Preferred
      Shares issued in the July 2008
Financing.





·
            Consent for
      asset sale.We may
      not sell all or a substantial portion of our assets, except to a
      subsidiary, without the consent of the holders of a majority of the
      then-outstanding Preferred
Shares.





·
            Chief
      Financial Officer/Vice President of Investor Relations. As soon as possible after the
      Closing Date, we are required to use our best efforts to appoint an
      individual who is fluent in English and acceptable to Vision Opportunity
      China LP and to Blue Ridge Investments, LLC to serve as Chief Financial
      Officer and/or Vice President of Investor
  Relations.





·
            Investor
      relations fund.We
      must maintain an escrow account with $500,000 in connection with monies to
      be used for investor and public relations services. The escrow account was
      established through the Investor and Public Relations Escrow Agreement
      entered into by and between the Company, Vision Opportunity China LP and
      Sichenzia Ross Friedman Ference LLP, as escrow agent, dated as of June 10,
      2008 and was funded on June 11, 2008. Out of this amount, $150,000 shall
      be released from escrow once we appoint a Chief Financial Officer or Vice
      President of Investor Relations. An additional $150,000 will be released
      to us after we engage a new independent registered accounting firm that is
      listed as one of the top 20 firms by stock market client number as
      calculated by Hemscott Group Limited, a division of Morningstar,
      Inc.





·
            U.S.
      visitation.For as
      long as Vision Opportunity China LP or Blue Ridge Investments, LLC holds
      at least 5% of the aggregate total number of shares of common
      stock and Shares (as defined in the Purchase Agreement) of the
      Company on a fully-diluted basis, the Company must provide for its
      management to visit the United States at least 4 times each year to meet
      with potential
investors.


11


Securities
Escrow Agreement





On July
18, 2008, we consummated a securities escrow agreement with Blue Ridge
Investments, LLC, the Principal Shareholder, and Loeb & Loeb LLP, as escrow
agent (the “July 2008 Securities Escrow Agreement”). In the Securities Escrow
Agreement, as an inducement to Blue Ridge Investments, LLC to enter into the
July 2008 Purchase Agreement, the Principal Shareholder agreed to deliver an
aggregate of 1,971,842 shares of our common stock (the amount of common stock
underlying the Preferred Shares) (the “Blue Ridge Escrow Shares”) to the escrow
agent for the benefit of Blue Ridge Investments, LLC, and to forfeit some or all
of those shares to Blue Ridge Investments, LLC in the event we fail to achieve
certain financial performance thresholds for the 12-month periods ending June
30, 2008 (“2008”) and June 30, 2009 (“2009”).





Pursuant
to the First Amendment to the July 2008 Purchase Agreement and the First
Amendment to the July 2008 Securities Escrow Agreement, both dated as of July
31, 2008, if we fail to list our common stock on the Nasdaq Capital Market,
Nasdaq Global Market, American Stock Exchange or any successor market thereto
within 18 months of July 18, 2008, 250,000 shares of common stock owned by
Principal Shareholder will be distributed to Blue Ridge Investments,
LLC.




Registration
Rights Agreement





On July
18, 2008 we entered into and consummated a Registration Rights Agreement with
Blue Ridge Investments, LLC (the “Blue Ridge RRA”), under which we agreed to
prepare and file with the SEC and maintain the effectiveness of a “resale”
registration statement pursuant to Rule 415 under the Securities Act (“Rule
415”) providing for the resale of: (i) all of the shares of common stock
issuable on conversion of the Preferred Shares, (ii) all of the shares of common
stock issuable upon exercise of the Warrants, (iii) all of the Blue Ridge Escrow
Shares delivered to Blue Ridge Investments, LLC under the July 2008 Securities
Escrow Agreement described above, and (iv) all of the 250,000 shares of common
stock that the Principal Shareholder will be required to deliver to Blue Ridge
Investments, LLC in case the Company does not meet the deadline for listing on a
national securities exchange.




Under the
terms of the Blue Ridge RRA, we are required to have a registration statement
filed with the SEC within 45 days after the date of the Closing Date, or
September 1, 2008, and declared effective by the SEC not later than December 15,
2008.





We are
required to pay liquidated damages to Blue Ridge Investments, LLC in an amount
equal to 1% of Blue Ridge Investments, LLC initial acquisition of Preferred
Shares pursuant to the July 2008 Purchase Agreement for each month past the
relevant deadline that the registration statement is not filed or not declared
effective, for any period that we fail to keep the registration statement
effective, or for any period that we cause our common stock to be delisted from
the OTC Bulletin Board, up to a maximum of 10% of the purchase amount of the
Units. The number of shares of Preferred Shares issuable pursuant to the
liquidated damages provision is subject to reduction based on the maximum number
of shares that can be registered under Rule 415.





The
registration rights agreement also provides for additional demand registration
rights in the event that Vision Opportunity China LP unable to register all of
the registrable securities in the initial registration statement and grants
holders of registrable securities customary piggy back rights during any time
when there is not an effective registration statement providing for the resale
of the registrable securities.





The terms
of the Blue Ridge RRA are subject to the Vision RRA described in the section
entitled “Private Placement (June 2008 Financing)” above. Under the terms of the
Vision RRA, we granted registration rights to Vision Opportunity China LP on
similar terms as Blue Ridge under the Registration Rights Agreement, except that
we are required to file a registration statement within 45 days after June 30,
2008, and such registration statement must be declared effective by the SEC not
later than November 27, 2008.





The terms
of the Blue Ridge RRA are also subject to the Shareholder RRA. Under the terms
of the Shareholder RRA, the Company granted registration rights to certain
shareholders existing prior to the reverse merger transaction, by which the
shareholders were granted registration rights for the registration of an
aggregate of 1,304,750 shares of common stock, as described in more
detail in the section entitled “Private Placement (June 2008 Financing)”
above.





Subsidiaries





As a
result of the Reverse Merger, Shen Kun and SK Ceramic Values are our
wholly-owned subsidiaries. Shengkai, the entity through which we operate
our business, currently has no subsidiaries, either wholly-owned or
partially-owned.




Business
Overview




We
believe that Shengkai is the one of the few ceramic valve manufacturers in the
world with research and development, engineering, and production capacity for
structural ceramics and is the only valve manufacturer who is able to produce
large-sized ceramic valves with calibers of 150mm or more. Its product
categories include a broad range of valves in all industries that are sold
throughout China, to North America and other countries in the Asia-Pacific
region. Totaling over 300 customers, the company became a supplier of China
Petroleum & Chemical Corporation (“CPCC”) in 2005 and a member of the
PetroChina Co. Ltd. (“PetroChina”) supply network in 2006. Shengkai is currently
the only domestic ceramic valve manufacturer entering into the CPCC and
PetroChina supply system, after a six-year application process.


12





Shengkai
develops ceramic products with more than 730 types and specifications in 34
series, under nine categories. Of these, national patents have been obtained for
21 products. Shengkai’s product won the title of “National Key New Product” four
times from 1999-2003 and won a silver medal in the Shanghai International
Industry Fair in 2002. In 2003, Shengkai obtained API authentication allowing
export to North America and the Asia-Pacific region and CE authentication
allowing export to EU in 2003.





Presently,
the technology of other domestic and overseas industrial ceramic valves
manufacturers limits production to small-bore ball valves with pressure levels
below 2.5MPa. In contrast, Shengkai produces a variety of ceramics in every
category (gate valve, ball valve, back valve, adjustable valve, cut-off valve
and special valve) and produce more than 700 specifications that sustain a
maximum pressure level of 42MPa. The largest ceramic valve caliber produced by
Shengkai is 1,000mm. Currently, we believe that other manufacturers in the world
only produce ceramic ball valves and ceramic adjustable valves with 150mm
caliber or less.





Business
History




Shengkai
was established in June 1994 with registered capital of RMB310,000 and an
initial business scope covering the production and sales of spray mixtures and
ceramic valves. The stock ownership was jointly held by eight shareholders
including Wang Chen, the largest shareholder of the company.




In
October 1995, Shengkai increased its registered capital to RMB1 million through
capital and equity increase; Wang Chen contributed RMB810,000 and the remaining
shares were held by the other seven shareholders. In November 2000, the
registered capital increased to RMB15 million and the company’s business scope
was changed to the design, manufacturing and sales of ceramic valves,
manufacturing and sales of high-tech ceramic material, technical consultation
and service, and export of such products and related technologies.





Overview
of the Ceramic Valve Industry in China




At present, the world valve industry is in a position of stable
development. According to statistical data in “Industrial Valves: World Markets”
report published by the McIlvaine Company (the “McIlvaine Report”), as of 2008,
there are more than 50,000 valve manufacturers with valve sales volume reaching
$47
billion.Worldwide revenues for industrial valves are estimated to reach $56 billion in 2012.





Since
reforming and opening its markets, China’s valve industry has developed rapidly.
According to the data from China Mechanical Electrical Data Online, at the end
of November 2008, the number of Chinese valve manufacturers was up to over
6,000, representing 8% of the world’s total suppliers; more than 1000 of them
have sales of over RMB5 million. According to the statistical data by the China
Valve Industrial Association, gross industrial output value reached RMB114.74
billion in 2008, which increased 25.03% compared with the previous
year.





Market
dispersion is more pronounced in the valve industry than many other industries
and subjects to intense competition: according to a China Machinery Industry
Federation report, the top 15 of the world manufacturers had a sales volume less
than $8.93 billion in 2008 with a world market share of approximately 19%,;
according to statistical data in “ Valve Communication” published by the China
Valve Industrial Association, the top 10 Chinese valve industry manufacturers
only had a sales volume of RMB6.34 billion, with a Chinese market share of less
than 5.5 percent.




Operations
of Shengkai




Shengkai
designs, manufactures and distributes ceramic valves in 34 series under 9
categories, covering almost every general type of valve available for industrial
use in the world. Shengkai’s valve sizes range from 32mm to 1000mm and can
withstand pressure up to 42MPa. The company provides a series of services
related to industrial ceramic valves, including manufacture, installation and
maintenance of general industrial ceramic valves, as well as the design and
manufacture of various non-standard ceramic valves as required by customers’
special operating conditions.





Production
is comprised of three processes: ceramic piece production, machine-work of
ceramic and metal components, and assembly. Currently, the total area of the
production plant is 4,940 m2, with 67
sets of machine tools, of which 31 sets are for ceramics, and two sets of
digitally controlled machine tools. Ceramic valve output in fiscal year 2009 was
10,800 sets.





Ceramics
are friable and non-plastic and, given that to-date we believe that there is no
special equipment available for ceramic processing in the world, as such not
only can be difficult to process but also have a limited field of application.
Shengkai has overcome these disadvantages by applying the following features to
its products:


13





·
            adding zirconia to alumina
      ceramics to increase toughness and resistance to
      corrosion;


·
            successfully using Martensite
      transformation toughening technology to increase toughness and reduce
      deformability; and


·
            applying nano-sized powder
      technology to improve toughness and other
  features.


·
            altering existing metal
      processors so as to enable Shengkai to apply cold-working techniques to
      its ceramic products.





Shengkai
has developed a solid solution and agent that lowers firing temperature and
enhances the homogeneous dispersion of ceramic pulp, applying the theories of
solid solution, chemical dispersion and the rational sintering temperature
curve. This technology effectively controls the contraction ratio during the
ceramic sintering process to greatly improve the rate of finished products.
Currently, the rate of sintered finished goods of various calibers of Shengkai’s
valve products has reached over 90%, and firing temperatures for Shengkai’s
products are 80°C-120°C lower than the world standard in the
industry.





Shengkai
has also developed various joint technologies under various temperatures, so as
to solve problems that arise from the combination of ceramics and metal with
different coefficients of thermal expansion and to ensure that the valves
produced are leak-proof. Shengkai mainly selects ceramic material of partially
stabilized zirconia (PSZ), tetragonal zirconia polycrystal (TZP),
zirconia-toughened alumina (ZTA) and zirconia toughened mullite
(ZTM).




We
believe that Shengkai's ability to produce a comprehensive category of
high-quality ceramic products, together with its self-developed ceramic
processor, leak-proof valve sealing technology and strong technology development
capacity, distinguish it from its domestic and international
competitors.




Products




Shengkai
mainly produces industrial ceramic valves with calibers up to 1,000mm in various
types and in different combinations of ceramic and metal coefficients, depending
on their use. Ceramic valves perform significantly better than metal valves due
to higher wear resistance, corrosion resistance, high temperature resistance and
thermal shock resistance. We estimate that the average service life of our
ceramic valves are at least 20 times of that of comparably-sized metal valves
currently in the market.




Customers
and Suppliers




Customers





As
of June 30, 2009, the following material sales contracts were active and
still being fulfilled:





No.
                                              
                                              Name
                                              
                                              Object
                                              
                                              Amount(RMB)
                                              Date of
                                                Execution1
                                              
                                              Wuhan
      Hualin Technology Co., Ltd.
                                              
                                              Valves
                                              
                                              2,695,320
                                              
                                              05/18/20092
                                              
                                              Xiamen
      Sanye Electric Power Equipment Co., Ltd.
                                              
                                              Valves
                                              
                                              2,450,000
                                              
                                              06/05/20093
                                              
                                              Changchun
      Yuandong Huaji Co., Ltd.
                                              
                                              Valves
                                              
                                              2,283,030
                                              
                                              06/02/20094
                                              
                                              Jiangxi
      Xinghuo Machinery Company Changsha Branch
                                              
                                              Valves
                                              
                                              2,129,272
                                              
                                              06/04/20095
                                              
                                              Haerbin
      Qingfa Power-station Valves Co., Ltd.
                                              
                                              Valves
                                              
                                              2,064,970
                                              
                                              04/25/20096
                                              
                                              Zhejiang
      Lantian Qiushi Environmental-protection Group Co., Ltd.
                                              
                                              Valves
                                              
                                              1,796,330
                                              
                                              06/07/20097
                                              
                                              Changsha
      Kaigao Valve Whole Set Co., Ltd.
                                              
                                              Valves
                                              
                                              1,774,037
                                              
                                              05/27/20098
                                              
                                              Shandong
      Keneng Electric Power & Chemical Equipments Co., Ltd.
                                              
                                              Valves
                                              
                                              1,685,021
                                              
                                              04/28/20099
                                              
                                              Lanzhou
      High Pressure Valve Co., Ltd.
                                              
                                              Valves
                                              
                                              1,657,459
                                              
                                              05/21/200910
                                              
                                              Shanxi
      Chaogong Valve Electrical & Mechanical Equipment Co.,
    Ltd.
                                              
                                              Valves
                                              
                                              1,575,913
                                              
                                              05/20/2009





For the
year ended June 30, 2009, Shengkai’s top 10 customers were as
follows:




14


Major
customers and sales amount for the year ended 2009





Name
                    
                    Amount (RMB)Lanzhou
      High Pressure Valve Co., Ltd.
                    
                    
                    17,094,017.11Jiangxi
      Xinghuo Machinery Company Changsha Branch
                    
                    
                    14,110,848.77Jiangxi
      Hydropower Engineering Bureau
                    
                    
                    13,335,232.60Shanghai
      High & Medium Pressure Valves Co., Ltd Hunan Branch
                    
                    
                    13,241,741.26Hunan
      Yiyang Power Generating Co., Ltd.
                    
                    
                    10,513,373.94Changsha
      Kaigao Valve Whole Set Co., Ltd.
                    
                    
                    10,400,280.34Shijiazhuang
      Jinshi Chemical Fertilizer Co., Ltd.
                    
                    
                    9,247,359.84Hunan
      Yiyang No. 2 Power Generating Co., Ltd.
                    
                    
                    8,820,941.21Zhejiang
      Huanqiu Power Station Valve Co., Ltd Changchun Branch
                    
                    
                    8,743,075.64Shanghai
      High & Medium Pressure Valves Co., Ltd Changchun
Branch
                    
                    
                    8,657,266.67





For the
year ended June 30, 2008, Shengkai’s top 10 customers were as
follows:





Major
customers and sales amount for the year ended 2008





Name
                    
                    Amount (RMB)Datang
      Qitai River Power Generation Co., Ltd.
                    
                    
                    17,253,633.32Dezhou
      Power Plant under Huaneng Power International, Inc.
                    
                    
                    11,197,436.18Anhui
      Huainan Luoneng Power Generation Co., Ltd.
                    
                    
                    8,551,011.97Xinjiang
      Duzishan Petrochemical and Chemical Construction Co., Ltd.
                    
                    
                    7,653,468.38Zhenjiang
      Huanqiu Power Station Valve Co., Ltd. Changchun Branch
    Company
                    
                    
                    7,067,250.42Datang
      Chang Mountain Thermoelectricity Plant
                    
                    
                    6,709,399.98Hunan
      Yiyang No. 2 Power Generating Co., Ltd.
                    
                    
                    6,131,890.63Guodian
      Bengbu Power Plant
                    
                    
                    6,108,519.92Tianjin
      Chentang Thermoelectricity Co., Ltd.
                    
                    
                    5,781,399.08Beijing
      Guodian Longyuan Environmental Engineering Co., Ltd.
                    
                    
                    5,621,048.71




For the
year ended June 30, 2007, Shengkai’s top 10 customers were as
follows:





Major
customers and sales amount for the year ended June 30, 2007





Name
                    
                    Amount (RMB)Hunan
      Yiyang No. 2 Power Generating Co., Ltd.
                    
                    
                    8,795,854China
      Resources Power Hunan Co., Ltd.
                    
                    
                    4,524,498Guodian
      Quanzhou Generating Co., Ltd.
                    
                    
                    4,414,137Dezhou
      Power Plant under Huaneng Power International, Inc.
                    
                    
                    4,270,465Beijing
      Guodian Longyuan Environmental Engineering Co., Ltd.
                    
                    
                    2,645,406Zhenjiang
      Power Station Auxiliary Machinery Plant
                    
                    
                    4,648,453Qinghai
      Qiaotou Co., Ltd.
                    
                    
                    1,294,989Huadian
      Fujian Shaowu Power Generation Co, Ltd.
                    
                    
                    642,115Guodian
      Yongfu Generating Co., Ltd.
                    
                    
                    2,070,832Shanxi
      Lujin Wangqu Power Generation Co., Ltd.
                    
                    
                    185,203





Suppliers





For the
year ended June 30, 2009, Shengkai’s top 10 suppliers were as
follows:





Suppliers
and purchase amount for the year ended 2009





Name
                                
                                Amount (RMB)Jiangxi
      Yongle Trading Co., Ltd.
                                
                                
                                6,529,539.19Botou
      Alloy Casting Plant
                                
                                
                                5,987,987.71Cangzhou
      Changyuan Pipe Fittings Co., Ltd.
                                
                                
                                5,451,979.45Changzhou
      Lanfa Gm Equipment Co., Ltd.
                                
                                
                                5,387,391.30Foshan
      Nanhai Leju Commercial Storage Co., Ltd.
                                
                                
                                5,308,656.51Foshan
      Nanhai Steel Co., Ltd.
                                
                                
                                5,103,563.64Shanghai
      Hexi Electrical & Mechanical Equipment Co., Ltd.
                                
                                
                                5,065,455.95Tianjin
      Tuocheng Metal Products Co., Ltd.
                                
                                
                                3,432,254.86Tianjin
      Zhiliang Metal Forging Co., Ltd.
                                
                                
                                3,181,679.55Tianjin
      Dongrui Foundry Co., Ltd.
                                
                                
                                2,938,489.38


15


For the
year ended June 30, 2008, Shengkai’s top 10 suppliers were as
follows:





Suppliers
and purchase amount for the year ended 2008





Name
                    
                    Amount (RMB)Botou
      Alloy Casting Plant
                    
                    
                    9,164,139.73Tianjin
      Dongrui Foundry Co., Ltd.
                    
                    
                    6,801,853.11Tianjin
      Baili Ertong Machinery Co., Ltd.
                    
                    
                    4,122,075.62Nansuo
      Construct Plastic Produce (Shenzhen) Co., Ltd.
                    
                    
                    3,343,373.74Beijing
      Huasheng Weiye Industry Trade Company
                    
                    
                    2,873,239.50Tianjin
      Zhiliang Metal Forging Co., Ltd.
                    
                    
                    2,709,140.68Tianjin
      Jinwan’an Pneumatic Hydraulic Complete Equipment Co., Ltd.
                    
                    
                    2,438,064.95Tianjin
      Tiansha Haiyan Grinding Tools Manufacturing Co., Ltd.
                    
                    
                    2,041,233.64Beijing
      Zhongyuan Kaifa Hight Pressure Valve Co., Ltd.
                    
                    
                    2,009,471.76Shanghai
      Yuelong Material Co., Ltd.
                    
                    
                    1,863,865.19





For the
year ended June 30, 2007, Shengkai’s top 10 suppliers were as
follows:





Suppliers
and purchase amount for the year ended June 30, 2007





Name
                    
                    Amount (RMB)Beijing
      Huasheng Weiye Industry Trade Company
                    
                    
                    1,899,405.73Ouma
      Actuator (Tianjin) Co., Ltd.
                    
                    
                    2,354,136.74Shanghai
      Luoxun Automation Control Co., Ltd.
                    
                    
                    2,675,288.02Tianjin
      Tiansha Haiyan Grinding Tools Manufacturing Co., Ltd.
                    
                    
                    3,673,159.68Tianjin
      Zhiliang Metal Forging Co., Ltd.
                    
                    
                    3,806,381.42Tianjin
      Jinwan’an Pneumatic Hydraulic Complete Equipment Co., Ltd.
                    
                    
                    3,841,403.14No.
      11 Automation Instrumentation Plant under Shanghai Automation
      Instrumentation Co., Ltd.
                    
                    
                    4,333,211.96Tianjin
      Dongrui Foundry Co., Ltd.
                    
                    
                    5,401,076.62Tianjin
      Baili Ertong Machinery Co., Ltd.
                    
                    
                    6,673,921.80Botou
      Alloy Casting Plant
                    
                    
                    7,505,041.06





Marketing
and Sales





In 2009,
Shengkai spent RMB2,725,836.11 for marketing and sales efforts and in 2010 plans
to invest an additional RMB3,271,000. Such funding will be used to implement the
following strategies to achieve our sales objectives:





Targeted marketing : Two
market departments will be set up for domestic and overseas markets: Department
No. 1 is responsible for domestic marketing and engaging in direct sales for
regular customers and sales via agents for spot sales. Sales teams are divided
by geographical region. Currently, Shengkai has set up distribution offices in
Hunan, Jilin, Heilongjiang, Hebei, Jiangxi, Shandong, Hubei, Shanxi and Inner
Mongolia and continues to increase its sales force, enlarge investment in
marketing and increase sales volume. Department No. 2 engages in international
sales and utilizes foreign agents to conduct sales in international markets. We
have already obtained approval and authentication to export to Europe, North
America, and the Asia-Pacific region.





Sales training : Each member
of sales personnel in the company are trained in grass-roots production before
starting work, so as to become familiar with production flow and product
characteristics. The HR department has prepared a training plan aimed at sales
personnel to educate them in sales and product knowledge. To ensure the
professionalism of our employees, all of our sales personnel must pass an exam
following training before they may start work.


16




Value-added services :
Shengkai is working to enhance the quality of our before-sales, during sales and
after-sales service. Shengkai has developed before-sales technical design
service to achieve a perfect connection of product with customer
demand.





New industries : Shengkai aims
to increase sales to customers in the petrochemical and chemical and electric
power industry. Shengkai will also dedicate its energies to expanding our market
into new fields like environmental protection, metallurgy and ore mining. We
have gained the qualification of first-class supplier for PetroChina and CPCC
and have made inroads into the petrochemical industry. In the fiscal year 2009,
revenue was $39,297,235, with the power industry comprising approximately 75.2%
of revenue, and petrochemical and chemical, the aluminum, metallurgy and other
industries comprising approximately 20.2%,1.5%,1.7% and 1.4%, respectively..We
anticipate that in fiscal year 2010, the petrochemical industry will comprise
approximately 40% of Shengkai's revenue, and the power industries and other
industries will comprise 55% and 5% of Shengkai's revenue,
respectively.




Competition




Competitive
Environment




Currently,
the world ceramic valve industry is still in its infancy. Ceramic valves
represent a very small proportion in the industrial valve industry. According to
our estimates, sales volume for ceramic valves in China represented less than 1%
of the total volume for industrial valves in China in 2008.





Shengkai’s
main competitors are manufacturers of metal valves, which currently still
represent the majority market share in the valve market.  Although the unit
price of metal valves is typically cheaper than the unit price of ceramic
valves, ceramic valves are more durable than metal valves and as such are most
cost-effective than metal valves. Primary Chinese metal valve competitors
include Sufa Technology Industry Co., Ltd. CNNC, Neway Valve (Suzhou) Co., Ltd.,
Hunan Kefeng High-Pressure Valves Co., Ltd., and Lanzhou High-Pressure Valves
Co., Ltd.




Within
the ceramic valve industry, at present we estimate that we represent over 70% of
the Chinese market. The business of our primary ceramic valve competitors is
briefly described below:




Ceresist Inc. Primary
line of business: high quality ceramic ball valve and ceramic pipeline
manufacture. Single equipment is used for structural ceramics production,
resulting in few varieties, small caliber and high production cost of ceramic
valves. There is no branch in China so far.





Fujikin of America
Inc . Primary line of business: semiconductor material and ceramic
valves, particularly small ceramic adjustable ball valves. Fujikin specializes
in the manufacture of control devices for valves, but it relies primarily on
outsourcing for its ceramic valve cores. There is no branch in China so
far.





Shenzhen Nanbo Structure
Ceramics Co., Ltd. Primary line of business: series of high-quality
small-sized ceramic ball valves with ball, with favorable market share. Its
production mainly relies on imported ceramic equipment with single variety and
small caliber. The company conducts no research and development of ceramics and
does not have large-scale production capacity for ceramic valves.





Many of
our international competitors, in particular, have longer operating histories
and have more established relationships with customers and end users and are
engaged in major markets of general industrial products and cutting edge
technology fields. However, with respect to the niche market of ceramic valves
manufacture, presently U.S. valve manufacturers Ceresist and Fujikin have mature
production scales for ceramic valves, but they do not make industrial ceramics
development and ceramic valve production their main line of business, and they
rely on either single-use equipment or outsourcing for production of ceramic
components. In China, aside from Shengkai, there are fewer than 10 domestic
ceramic valve manufacturers, all of which have sales volumes below RMB5 million.
With the exception of Shenzhen Nanbo Structure Ceramics Co., Ltd., these
companies mainly depend on outsourcing for ceramic pieces.





Our
Competitive Advantages





At
present, we estimate that we represent over 70% of the market share in the
Chinese ceramic valve market. Given our early entry into the ceramic valve
market, we believe we enjoy a leading position in China because of our head
start in ceramic material technology and valve assembly.





Presently,
the technology of other domestic and overseas industrial ceramic valves
manfacturers limit production to small-bore ball valves with pressure levels
below 2.5MPa. In contrast, Shengkai produces a variety of ceramics in every
category (gate valve, ball valve, back valve, adjustable valve, cut-off valve
and special valve) and produce more than 730 specifications that sustain a
maximum pressure level of 42MPa. The largest ceramic valve caliber produced by
Shengkai is 1,000mm; currently, we believe that other manufacturers in the world
only produce ceramic ball valves and ceramic adjustable valves with 150mm
caliber or less. We believe that Shengkai's ability to produce a comprehensive
category of high-quality ceramic products, together with its self-developed
ceramic processor, leak-proof valve sealing technology and strong technology
development capacity, set it apart from its domestic and international
competitors.


17




The
company will further strengthen cooperation with colleges and universities, so
as to realize a better integration of practical experience of the company and
intellectual resources of the universities.





Our
Future Goals and Expansion Plans





We have
the following near-term goals for our company:





·
            Develop new
      technology for the industry. We plan to increase investment
      in technology development and continue conducting research on engineering
      structural ceramics that will advance the ceramic industrial valve
      market.


·
            Lower
      production costs. We
      plan to digitalize our machinery and streamline our valve production so as
      to lower the production cost of ceramic valves and hasten their
      substitution for metal
valves.


·
            Internationalization. We have started to gain brand
      awareness in the overseas valve market. We will keep expanding market
      share in the international market via well-known foreign agents, so as to
      enhance sales volume and profit in the international
      market.





We broke
ground for our new facility in March 2009. The new manufacturing plant will be
completed during the first quarter of calendar year 2010. Completion of our
headquarters building is estimated to be in the second quarter of calendar 2010.
At this time, management expects production at the new facility to begin late in
the second quarter of calendar year 2010. The new facility will increase
production capacity to 24,000 sets of valves. Construction funds for the new
manufacturing facility was obtained from two private placement transactions in
2008.





Raw
Materials and Equipment





Raw
materials required for valve production includes metal materials and ceramic
materials like aluminum oxide and zinc oxide; a large number of spare parts in
various specifications are also purchased during production. Our supply
contracts typically bear renewable one year terms. The company implements the
IO9001 quality system and as such is very strict with selection of equipment and
material suppliers. Purchased machinery or kiln equipment in addition to raw
materials are subsequently strictly inspected and examined by the quality
control department, so as to prevent unqualified products from being put into
the production flow.





Technology
Development





The
Company entered into an agreement with a technology development company to
purchase a computer system in improving the quality of ceramic valve production
(the “Computer System”) during the third quarter of 2007. The Company expected
the Computer System would be delivered within 2 years and the total costs were
$8,764,754 (RMB60,000,000). The Company further entered into a supplementary
agreement with the technology development company in February 2009 and reduced
the scale of the Computer System in the original contract. The contract cost was
reduced to $4,382,377(RMB 30,000,000) accordingly, which had already been fully
paid. The Computer System was delivered on June 25, 2009 in accordance with the
supplementary agreement.





Shengkai
focuses its technology development on those product areas that have
the highest demand, so as to expedite market share expansion of ceramic valves,
lower the risks of product development and promotion, and improve the company’s
input-output ratio. Shengkai has also increased investment in nano-ceramics
performance enhancement via nano technology, so as to continue to increase the
caliber, pressure and temperature scope of ceramic valves (and the displacement
of metal valves in the market).





Shengkai
is currently working to introduce a digital-control processing center that will
greatly enhance process precision and efficiency and will improve the overall
quality of Shengkai’s valves. We anticipate that digitalization will also reduce
the need for a larger workforce while increasing the specialization of our
workforce. We estimate that machinization will reduce labor costs for machine
work personnel by 50-60% and installation personnel costs by 30%, in roughly the
same proportion as productivity is expected to increase.





Intellectual
Property




Effective
on June 9, 2008, we assigned the trademark, “Kosher Magic Oy, That’s Good!,”
Serial No. 78793035, to Michael Jordan for due consideration in the amount of
$100.








18





Patents





We have
applied for and obtained nine patents in the PRC for the following
products:





UtilityUtility
                  Certificate
                  Models
                  
                  Application
                  AuthorizedNo.
                  Models
                  No.
                  No.
                  Designer
                  Date
                  Announcement
                  Owner1
                  High
      temperature and high Pressure ceramic check valves in power
      station
                  755441
                  ZL 200420029890.0
                  Wang Chen
                  10/10/2004
                  2/1/2006
                  Shengkai2
                  Preventing
      slag at the bottom of the wedge and abrasion-resistant ceramic slag-off
      valves
                  756887
                  ZL 200420029889.8
                  Wang Chen
                  10/10/2004
                  2/1/2006
                  Shengkai3
                  Anti-fouling
      ceramic seal discharge valves
                  746044
                  ZL 200420029887.9
                  Wang Chen
                  10/10/2004
                  12/7/2005
                  Shengkai4
                  Reciprocating
      sliding dual- plate ceramic sealing valves
                  756440
                  ZL 200420029886.4
                  Wang Chen
                  10/10/2004
                  2/1/2006
                  Shengkai5
                  New
      ceramic replica valves
                  740358
                  ZL 200420029885.X
                  Wang Chen
                  10/10/2004
                  11/9/2005
                  Shengkai6
                  External
      composite armor plate for tank
                  714858
                  ZL 2004 2 0029600.2
                  Wang Chen
                  8/24/2004
                  8/3/2005
                  Shengkai7
                  The
      new V-shaped channel spherical valves
                  7155047
                  ZL 2004 2 0029601.7
                  Wang Chen
                  8/3/2004
                  8/3/2005
                  Shengkai8
                  Cavitation
      and erosion-resistant high-pressure adjusting valves
                  715215
                  ZL 2004 2 0029602.1
                  Wang Chen
                  8/24/2004
                  8/3/2005
                  Shengkai9
                  New
      ceramic three links valves
                  715416
                  ZL 2004 2 0029603.6
                  Wang Chen
                  8/24/2004
                  8/3/2005
                  Shengkai10
                  Ceramic
      valves with purge devices
                  1151168
                  ZL 200820002560
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai11
                  Throttle
      ceramic valves
                  1166086
                  ZL 200820002561.5
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai12
                  Fast-opening
      ceramic adjusting valves
                  1170081
                  ZL 200820002565.3
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai13
                  Eccentric
      anti-seize abrasion-resistant spherical valves
                  1151170
                  ZL 200820002564.9
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai14
                  Spherical
      ceramic adjusting valves
                  1170082
                  ZL 200820002562.X
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai15
                  Ceramic
      butterfly valves
                  1173061
                  ZL 200820002563.4
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai16
                  Ceramic
      seal switching valves
                  1150678
                  ZL 200820002566.8
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai17
                  Fine-tuning
      ceramic adjusting valves
                  1150677
                  ZL 200820002567.2
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai18
                  Hemispherical
      ceramic adjusting valves
                  1173063
                  ZL 200820002559.8
                  Wang Chen
                  1/22/2008
                  2/1/2008
                  Shengkai




Shengkai
has entered into patent transfer agreements with Mr. Wang Chen for the following
products:




Name
                  
                  Patent No.
                  
                  Application Date
                  
                  Approval dateSealing
      device for heat, pressure and wear resistant valve
                  
                  ZL 98 2 190654
                  
                  September 24, 1998
                  
                  October 23, 1999High temperature, pressure, corrosion
      and wear resistant valve
                  
                  ZL 98 2 190662
                  
                  September 24, 1998
                  
                  September 11, 1999Wear
      resistant slab delivering gate valve
                  
                  ZL
      95 2 201240
                  
                  August
      24, 1995
                  
                  April
      27, 1996





Such
patent transfer agreements have not yet been registered with the State
Intellectual Property Office. Those patents have since
expired.




19




Trademarks
and Domain Names





Shengkai
has registered seven trademarks for “SK” and “Shengkai” with the Trademark
Bureau under the State of Administration for Industry & Commerce, all of
which are effective:




Trademark
                          
                          Certificate
                            No.
                          
                          Category
                          
                          Registrant
                          
                          Valid Term“SK”
                          
                          No.1717597
                          
                          No.6
      :metal valves (parts of non-machinery), metallic pipe fittings, metallic
      pipe reinforcement material, metallic pipes fittings of compressed air
      pipes, metallic pipes, metallic pipes of air conditioning equipment,
      metallic drip valves, metallic sleeve, conduits and pipes of central
      heating equipments, metallic pipes of central heating
                          
                          Shengkai
                          
                          2/21/2002
      to 2/20/2012No.4152529
                          
                          No.2:
      black clear lacquer, chinaware silver lacquer, platinum glaze for
      brightening ceramic materials, ceramic coating, white dye or paint,
      non-viscous chemical coating, within and external walls of bright
      water-soluble spray plastic, metal anti-rust formulations, metal used
      protection formulations, ceramic materials with paint, antirust
      oil
                          
                          Shengkai
                          
                          5/7/2007
      to 5/6/2017No.4152532
                          
                          No.20:
      non-metallic valves, non-metallic ball valves, plastic water pipe valves,
      plastic drip valves
                          
                          Shengkai
                          
                          5/7/2007
      to 5/6/2017No.4152527
                          
                          No.7:
        mud pumps for petroleum, power station boilers and auxiliary
      equipments, centrifugal pumps, pumps, valves, the flap valves, pressure
      valves and give up valves, hydraulic valves, control valves, engine
      nozzles, electrostatic industrial equipments, conveyor
                          
                          Shengkai
                          
                          10/14/2006
      to 10/13/2016No.4152528
                          
                          No.6:
        Armored plates, metallic valves (non-machinery parts), metallic
      ceramics, metallic drip valves, metallic pipes, metallic water pipes,
      metallic spray-head, metallic nozzles, metallic piping
    elbows
                          
                          Shengkai
                          
                          10/14/2006
      to 10/13/2016No.4152533
                          
                          No.11:
      slag of furnace automatic transmission installations, valves steam heating
      equipments, taps, plumbing plugs, sewer equipments, plumbing modulator
      switches, water equipments, air purification equipments and machinery, gas
      purification devices, ionizing air handling equipments, flues, flues in
      chimney, air filtration equipments
                          
                          Shengkai
                          
                          10/14/2006
      to
10/13/2016


20





Shengkai
has registered the following domain names:





Domain Name
                      
                      Owner
                      
                      Registration Date
                      
                      Expiration Date“Ceramicvalve.net”
                      
                      Shengkai
                      
                      4/13/2007
                      
                      4/13/2010
      (extended from 4/13/2009)“Shengkai.com”
                      
                      Shengkai
                      
                      N/A
                      
                      6/15/2010(extended
      from 6/15/2009)Shengkai
                      
                      4/13/2007
                      
                      4/13/2010
      (extended from 4/13/2009)Shengkai
                      
                      4/16/2007
                      
                      4/16/2010
      (extended from 4/16/2009)Shengkai
                      
                      4/13/2007
                      
                      4/13/2010
      (extended from 4/13/2009)Shengkai
                      
                      4/13/2007
                      
                      4/13/2010
      (extended from 4/13/2009)Shengkai
                      
                      4/13/2007
                      
                      4/13/2010
      (extended from 4/13/2009)Shengkai
                      
                      4/13/2007
                      
                      4/13/2010
      (extended from
4/13/2009)





Employees





As of
August 31, 2009, Shengkai had 147 employees, 83 of which possess a diploma over
junior college level, representing56.5% of the work force recruited. We
currently have 3 senior-level professionals and 10 mid-level professionals with
graduate degrees.





Employee
benefits include five state-mandated insurance plans:





·
            Old-age insurance: We withhold a
      portion of each employee’s average monthly salary from the prior year, as
      determined by the provincial government, generally 8%, and contribute an
      additional amount determined by law, up to approximately 20% of such
      average monthly salary.





·
            Medical insurance: We withhold
      approximately 2% of each employee’s average monthly salary from the prior
      year and contribute an additional amount totaling approximately 10% of
      such average monthly salary.





·
            Unemployment insurance: We
      withhold approximately 1% of each employee’s average monthly salary from
      the prior year, and contribute an additional amount totaling approximately
      2% of such average monthly
salary.





·
            Maternity insurance: We
      contribute an amount totaling approximately 0.8% of each employee’s
      average monthly salary from the prior
  year.





·
            Industrial injury insurance: we
      contribute an amount totaling approximately 0.5% of each employee’s
      average monthly salary from the prior
  year.





In the
year ended June 30, 2009, our average compensation per employee per month was
RMB3,800, or approximately $555. We also pay benefits in the form of social
security insurance fees for employees required such insurance under PRC
law.





We have a
system of human resource performance review and incentive policies that allows
personnel reviews to be carried out monthly or bi-monthly, depending on the
length of service.




Government
Regulation




We are subject to a wide range of regulation covering every aspect of our
business. The most significant of these regulations are set forth below. In each
case, we have passed the most recent required inspections and have received
appropriate and up-to-date licenses, certificates and authorizations, as set
forth in the next subsection of this 10-K.


21





Approvals,
Licenses and Certificates





We
require a number of approvals, licenses and certificates in order to operate our
business. Our principal approvals, licenses and certificates are set forth
below.




·
            Business License (No.
      120191000015144) reissued on August 17, 2009 by Tianjin Administration for
      Industry and Commerce.·
            Organization
      Code Certificate issued by Tianjin Quality Supervision and Inspection
      Bureau (code No. 23967678-2, and registration No. Zu Dai Guan
      120191-030551), the valid period of which is from October 19, 2006 to
      October 18, 2010. The company has passed the 2007 annual
      inspection.




·
            Taxation Registration Certificate
      (Jin Guo Shui Zi No. 120115239676782) issued by the Tianjin
      Economic-Technological Development Area Branch of the State Administration
      of Taxation on October 30,
2006.





·
            Taxation Registration Certificate
      (Jin Di Shui Zi No. 120115239676782) issued by the Tianjin
      Economic-Technological Development Area Branch of the Local Tax Bureau on
      October 26, 2006.





·
            Customs Declaration Registration
      Certificate for Consignees or Consignors of Import & Export of the PRC
      Customs (the Certificate code No.1207268124) issued by Tianjin Customs
      District of the PRC respectively on Aug 27, 2009 and July 31, 2001. The
      valid terms are respectively three
years.





·
            Registration Form for Operators
      of Foreign Trading (the code No. 00498476, and import & export
      enterprise code No.1200239676782) issued by Tianjin Commission of Commerce
      on December 5, 2007.





·
            Self-declaration Units
      Registration Certificate (the Certificate No. 1200604101) issued by
      Tianjin Entry-Exit Inspection and Quarantine Bureau on September 21,
      2006.





·
            High Technology Guidance
      Committee of Tianjin Economic & Technology Development Area and
      Tianjin Scientific Technology Committee issued the Certificates of High
      Technology Enterprise (No.2003-011 and No.0612007B5003) to Shengkai
      respectively on June 8, 2009, April 30, 2007 and June 16, 2006. The valid
      terms are respectively three
years.





·
            Manufacturer License of Special
      Equipment (TS2712014-2012) issued by Tianjin Bureau of Quality and
      Technical Supervision on October 5,
2008.





·
            The American Petroleum Institute
      issued to Shengkai Certificates of Authority to use the Official API
      Monogram (No.6D-0460) on June 9, 2006. The expiration date is December 09,
      2009.





·
            Quality Certificate
      (ISO9001:2000)(No.0170-2003-AQ-RGC-RvA) issued by Det Norske Veritas
      Certification B.V. on December 6, 2002. The expiration date is December 6,
      2011.





·
            CE (No.DGR-0036-QS-516-06) issued
      by TUV SUD Industrie Service GmbH on November 14, 2006. The expiration
      date is November 13, 2009.





Item
1A. Risk Factors.




An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this report before deciding to invest in our common stock.


22





Risks
Related to Our Business and Industry




Our
new organizational structure makes it difficult for us to evaluate our future
business prospects.




Prior to
May 30, 2008, our business was operated through Shengkai. Under the present
structure, although there is no change in personnel, we have agreements with
Shengkai pursuant to which we manage and derive the profit from Shengkai’s
business by providing the exclusive supporting services from SK Ceramic Valves
to Shengkai. It is possible that the change in our business structure may impair
our ability to operate our business.




Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may materially adversely affect
us.





In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and
Round-Trip Investment Through Special Purpose Companies by Residents Inside
China, generally referred to as Circular 75. The policy announced in this notice
required PRC residents to register with the relevant SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in May 2007 (known
as Notice 106), expanded the reach of Circular 75. In the case of an SPV which
was established, and which acquired a related domestic company or assets, before
the implementation date of Circular 75, a retroactive SAFE registration was
required to have been completed before March 31, 2006; this date was
subsequently extended indefinitely by Notice 106, which also required that the
registrant establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and regulations.
Failure to comply with the requirements of Circular 75, as applied by SAFE in
accordance with Notice 106, may result in fines and other penalties under PRC
laws for evasion of applicable foreign exchange restrictions. Any such failure
could also result in the SPV’s affiliates being impeded or prevented from
distributing their profits and the proceeds from any reduction in capital, share
transfer or liquidation to the SPV, or from engaging in other transfers of funds
into or out of China.




We
believe we comply with the applicable regulations. Currently, Wang Chen, Guo
Wei, Zhao Yanqiu, Ji Haihong, Zhang Ying, Miao Yang, Wu Yanping and Liu Naifan
are PRC residents who, in accordance with Circular 75 and Notice 106, have each
completed registration with the Tianjin branch of SAFE for the foreign exchange
of overseas investment. We cannot however assure you that, if challenged by
government agencies, the structure of our organization has fully complied with
all applicable registrations or approvals required by Circular 75. Moreover,
because of uncertainty over how Circular 75 will be interpreted and implemented,
and how or whether SAFE will apply it to us, we cannot predict how it will
affect our business operations or future strategies. A failure by such PRC
resident beneficial holders or future PRC resident shareholders to comply with
Circular 75 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries’ ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.





Our principal shareholder has the
power to control our business.




Our
principal shareholder, Long Sunny Limited, owns approximately 78.69% of our
common stock as of August 31, 2009. As a result, Long Sunny Limited essentially
has the ability to elect all of our directors and to approve any action
requiring shareholder action, without the vote of any other
shareholders.




Because
we may require additional financing to expand our operations, our failure to
obtain necessary financing may impair our operations.





At June
30, 2009, we had working capital of approximately $40,990,996. Our capital
requirements in connection with the development of our business are significant.
During the quarter ended June 30, 2009, we spent approximately $18,487,843.76
for the purchase of raw materials and equipment, of which $175,703.62 was used
to purchase raw materials and $18,312,140.14 was used to purchase
equipment.




To the
extent that we require financing, the absence of an active public market for our
common stock, the terms of the Private Placements, and the number of outstanding
warrants and the exercise price and other terms on which we may issue common
stock upon exercise of the warrants may make it difficult for us to raise
additional equity capital if required for our present business or for any
planned expansion. We cannot assure you that we will be able to get additional
financing on any terms, and, if we are able to raise funds, it may be necessary
for us to sell our securities at a price which is at a significant discount from
the market price and on other terms which may be disadvantageous to us. In
connection with any such financing, we may be required to provide registration
rights to the investors and pay damages to the investor in the event that the
registration statement is not filed or declared effective by specified dates.
The price and terms of any financing which would be available to us could result
in both the issuance of a significant number of shares and significant downward
pressure on our stock price and could result in a reduction of the conversion
price of the Preferred Shares and Warrants. Further, since the investors in the
Private Placements have a right to participate in future financings, this right
may affect our ability to obtain financing from other sources.


23





Because
our products are marketed both in the domestic and international markets, we are
subject to both domestic and international competition.




Shengkai
faces two types of competitors: (i) manufacturers of metal valves, which
currently still represent the majority market share in the entire valve market,
competing with ceramic valves with its lower price; and (ii) Chinese and
international companies that are better known and have greater financial
resources than we have. Many of the international companies, in particular, have
longer operating histories and have more established relationships with
customers and end users. Three of our international competitors also may have a
greater ability to attract and retain users than we do because they are engaged
in major markets of general industrial products and cutting edge technology
fields. If our competitors are successful in providing similar or better valve
products or make their services easier to access, we could experience a decline
in demand for our products.




An
increase in the cost of raw materials will affect sales and
revenues.




Raw
materials required for valve production includes metal materials and ceramic
materials like aluminum oxide and zinc oxide; a large number of spare parts in
various specifications are also purchased during production. Any increase in the
prices of these raw materials will affect the price at which we can sell our
product. If we are not able to raise our prices to pass on increased costs, we
would be unable to maintain our margins.




Our
business and operations are experiencing rapid growth. If we fail to effectively
manage our growth, our business and operating results could be
harmed.




We have
experienced, and continue to experience, rapid growth in our operations, which
has placed, and will continue to place, significant demands on our management,
operational and financial infrastructure. If we do not effectively manage our
growth, the quality of our products and services could suffer, which could
negatively affect our operating results. To effectively manage this growth, we
will need to continue to improve our operational, financial and management
controls and our reporting systems and procedures. These systems enhancements
and improvements may require significant capital expenditures and management
resources. Failure to implement these improvements could hurt our ability to
manage our growth and our financial position.





Our
intellectual property rights are valuable, and any inability to protect them
could reduce the value of our products, services and brand.




Our
patents, trademarks, trade secrets, copyrights and other intellectual property
rights are important assets for us. Various events outside of our control pose a
threat to our intellectual property rights as well as to our products and
services. For example, effective intellectual property protection may not be
available in China and other countries in which our products are sold. Also, the
efforts we have taken to protect our proprietary rights may not be sufficient or
effective. Any significant impairment of our intellectual property rights could
harm our business or our ability to compete. Also, protecting our intellectual
property rights is costly and time consuming. Any increase in the unauthorized
use of our intellectual property could make it more expensive to do business and
harm our operating results.




Because we depend on third parties to market
our products in the international market, any problems encountered by these
third parties could affect our sales.




Although
the market for valve products is international, most of our products are sold to
companies in the PRC. We do not have any offices outside of the PRC, and we
depend on other companies to market our products in the international market. As
a result, we are dependent upon third parties, over which we have no control, to
develop and implement an international marketing effort. Any problems
encountered by these third parties, including potential violations of laws of
the PRC or other countries, may affect their ability to sell our products which
would, in turn, affect our net sales.




We
rely on highly skilled personnel and the continuing efforts of our executive
officers and, if we are unable to retain or motivate key personnel or hire
qualified personnel, our business may be severely disrupted if we lose their
services.




Our
performance largely depends on the talents and efforts of highly skilled
individuals and in particular, the technology and expertise held by our Chief
Executive Officer, Wang Chen. Our future success depends on our continuing
ability to identify, hire, develop, motivate and retain highly skilled personnel
for all areas of our organization. Our continued ability to compete effectively
depends on our ability to attract new technology developers and to retain and
motivate our existing contractors.





We do not
maintain key man life insurance on any of our executive officers. If one or more
of our executive officers are unable or unwilling to continue in their present
positions, we may not be able to replace them readily, if at all. Therefore, our
business may be severely disrupted, and we may incur additional expenses to
recruit and retain new officers. In addition, if any of our executives joins a
competitor or forms a competing company, we may lose some of our customers. Our
chief executive officer is a party to contractual agreements as described
elsewhere in this registration statement. However, if any disputes arise between
our executive officer and us, we cannot assure you, in light of uncertainties
associated with the PRC legal system, the extent to which any of these
agreements could be enforced in China, where some of our executive officers
reside and hold some of their assets.


24





Because we have inadequate insurance
coverage in the
PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.




We do not
presently maintain product liability insurance, and our property and equipment
insurance does not cover the full value of our property and equipment, which
leaves us with exposure in the event of loss or damage to our properties or
claims filed against us.





We
currently do not carry any product liability or other similar insurance. We
cannot assure you that we would not face liability in the event of the failure
of any of our products. This is particularly true given our plan to
significantly expand our sales into international markets, like the United
States, where product liability claims are more prevalent.





Except
for automobile insurance, we do not have other insurance such as business
liability or disruption insurance coverage for our operations in the
PRC.





We do not
maintain a reserve fund for warranty or defective products claims. Our costs
could substantially increase if we experience a significant number of warranty
claims. We have not established any reserve funds for potential warranty claims
since historically we have experienced few warranty claims for our products so
that the costs associated with our warranty claims have been low. If we
experience an increase in warranty claims or if our repair and replacement costs
associated with warranty claims increase significantly, it would have a material
adverse effect on our financial condition and results of
operations.





Certain
key technology for our business is uninsured and inaccessible in the absence of
key individuals.





The
“recipe” to our unique method for creating structural ceramic valves is held by
Wang Chen, our CEO, and his mother, Guo Chuanye. This technology is recorded but
is uninsured and inaccessible by anyone but Mr. Wang, Guo Chuanye, and our
director, Guo Wei. If either of these three key individuals were to lose the
ability to recall this technology, either through death or incapacity, we would
lose key technology that could have a material adverse effect on our financial
condition and results of operations.





Our
Chief Executive Officer controls us through his position and stock ownership and
his interests may differ from other shareholders.





Since the
exercise on August 5, 2009 of a call option agreement entered into on June 9,
2008 by and between Wang Chen and Li Shaoqing, our Chief Executive Officer, Mr.
Wang, beneficially owns 78.69% of our common stock through his 100% holding in
Long Sunny Limited. As a result, Mr. Wang will be able to influence the outcome
of shareholder votes on various matters, including the election of directors and
extraordinary corporate transactions such as business combinations. Mr. Wang’s
interests may differ from that of other shareholders.





Additionally,
Mr. Wang and our pending director, Guo Wei, are husband and wife and
as such their interests may not be independent from one another.





Our
operations may be adversely affected by the unilateral decisionmaking structure
of Shengkai, the entity through which we operate our business.





Mr. Wang
Chen currently serves as executive director of Shengkai. Shengkai’s Articles of
Association provides for its governance by an executive director, instead of a
board of directors, to be appointed by Shengkai’s shareholders. The PRC Company
Act permits PRC companies with a smaller number of shareholders or registered
capital to be governed by a sole executive director. Pursuant to Shengkai’s
Articles of Association, the executive director’s actions are overseen by a
supervisor, Guo Chuanji, who holds no interest in the company. Notwithstanding
such supervision, the governance of Shengkai by a single executive director
could result in inadequately vetted business decisions that could negatively
affect the performance of our operations.





We
rely on energy and transportation services or others in providing products and
services to our users, and any failure or interruption in the services and
products provided by these third parties could harm our ability to operate our
business and damage our reputation.




Our
systems are heavily reliant on the availability of electricity. If we were to
experience a major power outage, we would have to rely on back-up generators.
These back-up generators may not operate properly and their fuel supply could be
inadequate during a major power outage. This could result in a disruption of our
business.




If
we fail to obtain all required licenses, permits, or approval, we may be unable
to expand our operations.




Before we
can develop certain products, we must obtain a variety of approvals from local
and municipal governments. There no assurance that we will be able to obtain all
required licenses, permits, or approvals from government authorities. If we fail
to obtain all required licenses, permits or approvals, we may be unable to
expand our operations.


25




If
we make any acquisitions, they may disrupt or have a negative impact on our
business.




Although
we have no present plans for any acquisitions, in the event that we make
acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
affect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:




·
            the difficulty of integrating
      acquired products, services or
  operations;





·
            the potential disruption of the
      ongoing businesses and distraction of our management and the management of
      acquired companies;





·
            the difficulty of incorporating
      acquired rights or products into our existing
    business;





·
            difficulties in disposing of the
      excess or idle facilities of an acquired company or business and expenses
      in maintaining such
facilities;





·
            difficulties in maintaining
      uniform standards, controls, procedures and
    policies;





·
            the potential impairment of
      relationships with employees and customers as a result of any integration
      of new management personnel;





·
            the potential inability or
      failure to achieve additional sales and enhance our customer base through
      cross-marketing of the products to new and existing
      customers;





·
            the effect of any government
      regulations which relate to the business
  acquired;





·
            potential unknown liabilities
      associated with acquired businesses or product lines, or the need to spend
      significant amounts to retool, reposition or modify the marketing and
      sales of acquired products or the defense of any litigation, whether of
      not successful, resulting from actions of the acquired company prior to
      our acquisition.




Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks or other problems encountered in
connection with these acquisitions, many of which cannot be presently
identified, these risks and problems could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations.





We
may be required to pay liquidated damages if we do not register shares of common
stock issuable upon conversion of the Preferred Shares and Warrants issued in
the Private Placements or if we are not listed on a national exchange within a
specified time period.




The
registration rights agreement that we executed in connection with the June 2008
Financing requires us to file a registration statement with the SEC within 45
days after the earlier of the date of the Second Closing (as defined in the
section entitled “REVERSE MERGER AND PRIVATE PLACEMENTS” above) or June 30,
2008, and declared effective by the SEC not later than November 27, 2008. We are
required to pay liquidated damages to Vision Opportunity China LP in an amount
equal to 1 percent of its initial acquisition of Preferred Shares pursuant to
the June 2008 Purchase Agreement for each month passed the relevant deadline
that the registration statement is not filed or not declared effective, for any
period that we fail to keep the registration statement effective, or for any
period that we cause our stock to be delisted from the OTC Bulletin Board, up to
a maximum of 10 percent.





Pursuant
to the Second Amendment to the June 2008 Purchase Agreement and the First
Amendment to the June 2008 Securities Escrow Agreement, if we fail to use
commercially reasonable efforts to list our common stock on the Nasdaq Capital
Market, Nasdaq Global Select Market or Nasdaq Global Market, the American Stock
Exchange or any successor market thereto within 18 months of the First Closing
(as defined in the section entitled “REVERSE MERGER AND PRIVATE PLACEMENTS”
above), 750,000 shares of common stock owned by Principal Stockholder (as
defined in the Second Amendment to the June 2008 Purchase Agreement and the
First Amendment to the June 2008 Securities Escrow Agreement) will be
distributed to Vision Opportunity China LP.





Additionally,
the registration rights agreement that we executed in connection with the July
2008 Financing requires us to file a registration statement with the SEC within
45 days after July 18, 2008 and declared effective by the SEC not later than
December 15, 2008. Pursuant to the July 2008 Purchase Agreement, we are required
to pay liquidated damages to the investor in an amount equal to 1 percent of the
investor’s initial acquisition of Preferred Shares for each month past the
relevant deadline that the registration statement is not filed or not declared
effective, for any period that we fail to keep the registration statement
effective, or for any period that we cause our common stock to be delisted from
the OTC Bulletin Board, up to a maximum of 10 percent. The number of shares of
Preferred Shares issuable pursuant to the liquidated damages provision is
subject to reduction based on the maximum number of shares that can be
registered under Rule 415.


26





Pursuant
to the First Amendment to the July 2008 Purchase Agreement and the First
Amendment to the July 2008 Securities Escrow Agreement, if we fail to list our
common stock on the Nasdaq Capital Market, Nasdaq Global Market, American Stock
Exchange or any successor market thereto within 18 months of July 18, 2008,
250,000 shares of common stock owned by Principal Stockholder (as defined in the
Second Amendment to the July 2008 Purchase Agreement and the First Amendment to
the July 2008 Securities Escrow Agreement) will be distributed to Blue Ridge
Investments, LLC.





Because
the holders of our Warrants have cashless exercise rights, we may not receive
proceeds from the exercise of the outstanding warrants if the underlying shares
are not registered.




The
holders of our Warrants issued in the Private Placements have cashless exercise
rights, which provide them with the ability to receive common stock with a value
equal to the appreciation in the stock price over the exercise price of the
warrants being exercised. This right is not exercisable prior to December 10,
2009 (in the case of Warrants issued in connection with the June 2008 Financing)
or January 18, 2010 (in the case of Warrants issued in connection with the July
2008 Financing). Thereafter the right is only exercisable if the underlying
shares are not subject to an effective registration statement. To the extent
that the holders exercise the cashless exercise rights, we will not receive any
proceeds on exercise of warrants.




Risks
Related to Doing Business in China





Adverse changes in political
and economic policies of the Chinese government could have a material adverse
effect on the overall economic growth of China, which could reduce the demand
for our products and materially and adversely affect our competitive
position.




Our
business, financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The
Chinese economy differs from the economies of most developed countries in many
respects, including




·
            the amount of government
      involvement;





·
            the level of
      development;





·
            the growth
      rate;





·
            the control of foreign
      exchange; and





·
            the allocation of
      resources.




While the
Chinese economy has grown significantly in the past 20 years, the growth
has been uneven, both geographically and among various sectors of the economy.
The PRC government has implemented various measures to encourage economic
growth and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.




The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government
has implemented measures emphasizing the utilization of market forces for
economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the PRC
government. The continued control of these assets and other aspects of the
national economy by the Chinese government could materially and adversely
affect our business. The PRC government also exercises significant control
over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies. Efforts
by the PRC government to slow the pace of growth of the Chinese economy
could result in decreased capital expenditure by solar energy users, which in
turn could reduce demand for our products.




Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
renewable energy investments and expenditures in China, which in turn could lead
to a reduction in demand for our products and consequently have a material
adverse effect on our businesses.


27




Fluctuation in the value of the
Renminbi may have a material adverse effect on your investment.




The
change in value of the Renminbi against the U.S. dollar and other
currencies is affected by, among other things, changes in China’s political and
economic conditions. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the Renminbi to the U.S. dollar.
Under the new policy, the Renminbi is permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. This change in
policy has resulted in an appreciation of Renminbi against U.S. dollar,
which is continuing. While the international reaction to the Renminbi
revaluation has generally been positive, there remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the
Renminbi against the U.S. dollar. As a portion of our costs and expenses is
denominated in Renminbi, the revaluation in July 2005 and potential future
revaluation has and could further increase our costs. In addition, as we rely
entirely on dividends paid to us by our operating subsidiaries, any significant
revaluation of the Renminbi may have a material adverse effect on our revenues
and financial condition, and the value of, and any of our dividends payable on
our ordinary shares in foreign currency terms. For example, to the extent that
we need to convert U.S. dollars we receive from this offering into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we receive from the
conversion. Conversely, if we decide to convert our Renminbi into
U.S. dollars for the purpose of making payments for dividends on our
ordinary shares or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us.




Restrictions on currency exchange
may limit our ability to receive and use our revenues effectively.




All of
our revenues and most of our expenses are denominated in Renminbi. If our
revenues denominated in Renminbi increase or expenses denominated in Renminbi
decrease in the future, we may need to convert a portion of our revenues into
other currencies to meet our foreign currency obligations, including, among
others, payment of dividends declared, if any, in respect of our ordinary
shares. Under China’s existing foreign exchange regulations, we are able to pay
dividends in foreign currencies, without prior approval from the State
Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, we cannot assure you that that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for current account transactions.





Capital
outflow policies in the PRC may hamper our ability to remit income to the United
States.




The
People’s Republic of China has adopted currency and capital transfer
regulations. These regulations may require that we comply with complex
regulations for the movement of capital and as a result we may not be able to
remit all income earned and proceeds received in connection with our operations
or from the sale of our operating subsidiary to the U.S. or to our
shareholders.





Our
operations and assets in the PRC are subject to significant political and
economic uncertainties.




Government
policies are subject to rapid change and the PRC government may adopt policies
which have the effect of hindering private economic activity and greater
economic decentralization. There is no assurance that the PRC government will
not significantly alter its policies from time to time without notice in a
manner which reduces or eliminates any benefits from its present policies of
economic reform. In addition, a substantial portion of productive assets in
China remains government-owned. For instance, all lands are state owned and
leased to business entities or individuals through governmental granting of
state-owned land use rights. The granting process is typically based on
government policies at the time of granting, which could be lengthy and complex.
This process may adversely affect our business. The PRC government also
exercises significant control over China’s economic growth through the
allocation of resources, controlling payment of foreign currency and providing
preferential treatment to particular industries or companies. Uncertainties may
arise with changing of governmental policies and measures. In addition, changes
in laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency, the nationalization or other expropriation
of private enterprises, as well as adverse changes in the political, economic or
social conditions in China, could have a material adverse effect on our
business, results of operations and financial condition.




A
downturn in the economy of China may slow our growth and
profitability.




The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business.




Because
Chinese law governs almost all of our material agreements, we may not be able to
enforce our legal rights within China or elsewhere, which could result in a
significant loss of business, business opportunities, or capital.




Chinese
law governs almost all of our material agreements. We cannot assure you that we
will be able to enforce any of our material agreements or that remedies will be
available outside of China. The system of laws and the enforcement of existing
laws in China may not be as certain in implementation and interpretation as in
the United States. The inability to enforce or obtain a remedy under any of our
future agreements could result in a significant loss of business, business
opportunities or capital.


28




It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.




Substantially
all of our assets will be located in the PRC and our officers and our present
directors reside outside of the United States.  As a result, it may not be
possible for United States investors to enforce their legal rights, to effect
service of process upon our directors or officers or to enforce judgments of
United States courts predicated upon civil liabilities and criminal penalties of
our directors and officers under Federal securities laws. Moreover, we have been
advised that China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United States.
Further, it is unclear if extradition treaties now in effect between the United
States and China would permit effective enforcement of criminal penalties of the
Federal securities laws.




We
may have difficulty establishing adequate management, legal and financial
controls in China, which could impair our planning processes and make it
difficult to provide accurate reports of our operating
results.




China
historically has not followed Western style management and financial reporting
concepts and practices, and its access to modern banking, computer and other
control systems has been limited.  Although we will be required to
implement internal controls, we may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in China in these areas. As a
result of these factors, we may experience difficulty in establishing the
required controls and instituting business practices that meet Western
standards, making it difficult for management to forecast its needs and to
present the results of our operations accurately at all times. If we are unable
to establish the required controls, market makers may be reluctant to make a
market in our stock and investors may be reluctant to purchase our stock, which
would make it difficult for you to sell any shares of common stock that you may
own or acquire.




Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.




Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. As a result, in the event of a bank failure, we may not have access
to funds on deposit. Depending upon the amount of money we maintain in a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.




Imposition
of trade barriers and taxes may reduce our ability to do business
internationally, and the resulting loss of revenue could harm our profitability.




We may
experience barriers to conducting business and trade in our targeted emerging
markets in the form of delayed customs clearances, customs duties and tariffs.
In addition, we may be subject to repatriation taxes levied upon the exchange of
income from local currency into foreign currency, substantial taxes of profits,
revenues, assets and payroll, as well as value-added tax. The markets in
which we plan to operate may impose onerous and unpredictable duties, tariffs
and taxes on our business and products, and there can be no assurance that this
will not reduce the level of sales that we achieve in such markets, which would
reduce our revenues and profits.





Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.




We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.




Risks
Related to Ownership of our Common Stock




The
trading price for our common stock has been and may continue to be
volatile.




The
market price of our common stock has experienced fluctuations and may continue
to fluctuate significantly. The market price of our common shares may be
adversely affected by various factors, including enforcement of existing laws,
innovation and technological changes, the emergence of new competitors, the
perception of desirability of investing in Chinese companies, quarterly
variations in revenue and results of operations, speculation in the press or
analyst community and general market conditions or market conditions specific to
particular industries.




There
is a limited market for our common stock, which may make it difficult for you to
sell your stock.




Our
common stock trades on the OTCBB under the symbol “SKII.OB.” There is a limited
trading market for our common stock. Accordingly, there can be no assurance as
to the liquidity of any markets that may develop for our common stock, the
ability of holders of our common stock to sell our common stock, or the prices
at which holders may be able to sell our common stock.


29





The rights of the holders of
common stock may be impaired by the potential issuance of preferred
stock.




We have
been required to amend our articles of incorporation to provide for a class of
preferred stock. As a result, the board of directors may, without shareholder
approval, issue preferred stock with voting, dividend, conversion, liquidation
or other rights that could adversely affect the voting power and equity interest
of the holders of common stock. Preferred stock, which could be issued with the
right to more than one vote per share, could be utilized as a method of
discouraging, delaying or preventing a change of control. The possible impact on
takeover attempts could adversely affect the price of our common stock. Although
we have no present intention to issue any additional shares of preferred stock
or to create any new series of preferred stock and the certificate of
designation relating to the Preferred Shares restricts our ability to issue
additional series of preferred stock, we may issue such shares in the future.
Without the consent of the holders of 75% of the outstanding Preferred Shares,
we may not alter or change adversely the rights of the holders of the Preferred
Shares or increase the number of authorized shares of Preferred Shares, create a
class of stock which is senior to or on a parity with the Preferred Shares,
amend our articles of incorporation in breach of these provisions or agree to
any of the foregoing.




Our
shares are subject to the U.S. “Penny Stock” Rules and investors who
purchase our shares may have difficulty re-selling their shares as the liquidity
of the market for our shares may be adversely affected by the impact of the
“Penny Stock” Rules.




Our stock
is subject to U.S. "Penny Stock" rules, which may make the stock more difficult
to trade on the open market. Our common shares currently trade on the OTCBB. A
"penny stock" is generally defined by regulations of the U.S. Securities and
Exchange Commission ("SEC") as an equity security with a market price of less
than US$5.00 per share. However, an equity security with a market price under
US$5.00 will not be considered a penny stock if it fits within any of the
following exceptions:




(i)
            the equity security is listed on
      AMEX or a national securities
exchange;


(ii)
            the issuer of the equity security
      has been in continuous operation for less than three years, and either has
      (a) net tangible assets of at least US$5,000,000, or (b) average annual
      revenue of at least US$6,000,000;
or


(iii)
            the issuer of the equity security
      has been in continuous operation for more than three years, and has net
      tangible assets of at least
US$2,000,000.





Our
common stock does not currently fit into any of the above
exceptions.




If an
investor buys or sells a penny stock, SEC regulations require that the investor
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock is
currently subject to Rule 15g-9 of the Exchange Act, which relates to non-NASDAQ
and non-exchange listed securities. Under this rule, broker/dealers who
recommend our securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if their market price is at
least $5.00 per share.





Since our
common stock is currently deemed a penny stock, it will be subject to penny
stock regulations, which may reduce market liquidity of our common stock,
because they limit the broker/dealers' ability to trade, and a purchaser's
ability to sell, the stock in the secondary market.




The low
price of our common stock has a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock also limits our ability to raise additional capital by issuing additional
shares. There are several reasons for these effects. First, the internal
policies of certain institutional investors prohibit the purchase of low-priced
stocks. Second, many brokerage houses do not permit low-priced stocks to be used
as collateral for margin accounts or to be purchased on margin. Third, some
brokerage house policies and practices tend to discourage individual brokers
from dealing in low-priced stocks. Finally, broker's commissions on low-priced
stocks usually represent a higher percentage of the stock price than commissions
on higher priced stocks. As a result, our shareholders may pay transaction costs
that are a higher percentage of their total share value than if our share price
were substantially higher.




As
an issuer of “penny stock” the protection provided by the federal securities
laws relating to forward-looking statements does not apply to us and as a result
we could be subject to legal action.





Although
federal securities laws provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities laws,
this safe harbor is not available to issuers of penny stocks. As a result, if we
are a penny stock, we will not have the benefit of this safe harbor protection
in the event of any legal action based upon a claim that the material provided
by us contained a material misstatement of fact or was misleading in any
material respect because of our failure to include any statements necessary to
make the statements not misleading. Such an action could hurt our financial
condition.





For more
information about penny stocks, contact the Office of Filings, Information and
Consumer Services of the U.S. Securities and Exchange Commission, 100 F Street,
N.E., Washington, D.C. 20549, or by telephone at
1-800-732-0330.


30




The
issuance of shares through our stock compensation plans may dilute the value of
existing shareholders and may affect the market price of our stock.




Although
we do not have an option or other equity-based incentive plan at present, in the
future we may use stock options, stock grants and other equity-based incentives,
to provide motivation and compensation to our officers, employees and key
independent consultants. The award of any such incentives will result in an
immediate and potentially substantial dilution to our existing shareholders and
could result in a decline in the value of our stock price. The exercise of these
options and the sale of the underlying shares of common stock and the sale of
stock issued pursuant to stock grants may have an adverse effect upon the price
of our stock.





Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.




Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the compliance dates for non-accelerated filers,
as defined by the SEC. Accordingly, we believe that the annual assessment of our
internal controls requirement will apply to our annual report for the 2009
fiscal year and the attestation requirement of management's assessment by our
independent registered public accountants will first apply to our annual report
for the 2010 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.





The
issuance and sale of the common stock issuable upon conversion of the Preferred
Shares and exercise of the Warrants could result in a change of
control.




If we
issue all of the shares of common stock issuable upon conversion of the
Preferred Shares and exercise of the Warrants, the 17,636,301 shares of common
stock so issuable would constitute approximately 44.37% of our then outstanding
common stock. The percentage would increase to the extent that we are required
to issue any additional shares of common stock become upon conversion of the
Preferred Shares pursuant to the anti-dilution and adjustment provisions and
pursuant to the liquidated damages provisions of the registration rights
agreements executed in connection with the Private Placements. Any sale of all
or a significant percentage of those shares to a person or group could result in
a change of control.





Item
1B. Unresolved Staff Comments.




Not
Applicable.




Item 2.   Properties.




Our main
office and our manufacturing facilities are located in Tianjin, China, on a plot
of land approximately 10,023 square meters in size. We have been issued a Land
Use Right Certificate for the land until September 21, 2048 by the municipal
government of Tianjin, which may be renewed. We currently own and lease six
buildings on the property as listed below. We believe that our existing
facilities are well maintained and in good operating condition.





In
October 2008, we successfully won a bid on a 50-year land use right over a plot
of land approximately 43,566.3 square meters in size. The land is located in
Tianjin, China and the bid price is RMB12.6 million (approximately $1.8
million). The formal contract was signed with the government on Jan 23, 2009,
and we settled the bid price in full in March 2009.  The purpose of
the acquisition of land is to build a new plant to enable us to expand our
production capacity.  Such expansion of production capacity, once
completed, would substantially increase our capital expenditures.





Our land
use rights are set forth below:





Land
Use Rights through Grants from Land Management Authority





Plot A
              
              Plot BLand
      No.
              
              No.
      01-17-(3)-8
              
              No.
      1201104020180020001Land
      Use Right Certificate No.
              
              Jin
      Nan Dan Guo Yong (2001) Geng 2 Zi No.045
              
              Bao
      Dan Guo Yong (2009) No. 022User
      of the Land
              
              Shengkai
              
              ShengkaiLocation
              
              Wang
      Gang Road, Shuangang, Jinnan Economic & Technology Development Area,
      Tianjin
              
              Wang
      Gang Road, Shuangang, Jinnan Economic & Technology Development Area,
      TianjinUsage
              
              Commercial
      Services
              
              Commercial
      ServicesArea ( m2
      )
              
              10,023.0
              
              43,566.3Form
      of Acquisition
              
              Grant
      from related Land Management Authority
              
              Grant
      from related Land Management AuthorityExpiration
      Date
              
              September
      21, 2048
              
              January
      23, 2059Encumbrances
              
              N/A
              
              N/A


31





We
currently occupy the following buildings, as set forth below:





Owned
Premises





Part 1
                                
                                Part 2
                                
                                Part 3
                                
                                Part 4
                                
                                Part 5Certificate
      No.
                                No.
      120018246Owner
                                ShengkaiLocation
                                Wang
      Gang Road, Shuangang, Jinnan Economic& Technology Development Area,
      TianjinCategory
                                PrivateArea (m2)
                                931.06
                                
                                1192.90
                                
                                493.64
                                
                                824.74
                                
                                2691.41Usage
      of Design
                                Industry
                                
                                Industry
                                
                                Industry
                                
                                Industry
                                
                                IndustryStructure
                                Mixture
                                
                                Mixture
                                
                                Mixture
                                
                                Mixture
                                
                                MixtureEncumbrances
                                N/A
                                
                                N/A
                                
                                N/A
                                
                                N/A
                                
                                N/A





Leased
Premises





No.
                                    
                                    Lessor
                                    
                                    Location
                                    
                                    Term
                                    
                                    Rent per
                                      Year
                                      (RMB)1
                                    
                                    Tianjin Jinbin Nanhua Premises Purchasing Co., Ltd.
                                    
                                    Room324, 3/F, 1st Street, Tianjin Economic-Technological Development
      Area
                                    
                                    January
      12, 2008 to January 11, 2010
                                    
                                    $
                                    14,000




Item 3.   Legal Proceedings.




We
know of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.




Item 4.   Submission of Matters to a Vote of
Security Holders.




None.





PART
II




Item 5.   Market for Registrant’s Common
Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities.




Market
Information




Our common stock has been traded over-the-counter on the OTC Bulletin
Board since August 2006 under the designation SOSA.OB (previously SSAU.OB) and
since October 2008 under the designation “SKII.OB.” The market for the stock has
been relatively inactive. The range of high and low bid quotations for the
quarters of the last two years ended June 30, 2009 (adjusted for the 1-for-2
reverse split which occurred on April 15, 2008) is listed below. The quotations
are taken from the OTC Bulletin Board. They reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.


32





Calendar Quarter
                        
                        Low Bid
                        
                        High Bid2008
      First Quarter
                        
                        
                        1.00
                        
                        0.602008
      Second Quarter
                        
                        
                        1.00
                        
                        0.602008
      Third Quarter
                        
                        
                        2.00
                        
                        0.602008
      Fourth Quarter
                        
                        
                        2.75
                        
                        0.152009
      First Quarter
                        
                        
                        4.50
                        
                        1.752009
      Second Quarter
                        
                        
                        3.00
                        
                        1.052009
      Third Quarter
                        
                        
                        2.50
                        
                        1.272009
      Fourth Quarter
                        
                        
                        2.90
                        
                        1.85





As of
August 31, 2009, we had approximately 38 shareholders of record of our common
stock, including the shares held in street name by brokerage firms. The holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of shareholders. Holders of the common stock have no
preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock.





Dividends





We have
not paid dividends on our common stock and do not anticipate paying such
dividends in the foreseeable future. We will rely on dividends from SK Ceramic
Valves for our funds and PRC regulations may limit the amount of funds
distributed to us from SK Ceramic Valves, which will affect our ability to
declare any dividends.





Securities
authorized for issuance under equity compensation plans





As of the
date of this report, we do not have any securities authorized for issuance under
any equity compensation plans and we do not have any equity compensation
plans.





Penny
Stock Regulations





Our
shares of common stock are subject to the "penny stock" rules of the Securities
Exchange Act of 1934 and various rules under this Act. In general terms, "penny
stock" is defined as any equity security that has a market price less than $5.00
per share, subject to certain exceptions. The rules provide that any equity
security is considered to be a penny stock unless that security is registered
and traded on a national securities exchange meeting specified criteria set by
the SEC, issued by a registered investment company, and excluded from the
definition on the basis of price (at least $5.00 per share), or based on the
issuer's net tangible assets or revenues. In the last case, the issuer's net
tangible assets must exceed $3,000,000 if in continuous operation for at least
three years or $5,000,000 if in operation for less than three years, or the
issuer's average revenues for each of the past three years must exceed
$6,000,000.





Trading
in shares of penny stock is subject to additional sales practice requirements
for broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
individuals with assets in excess of $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse), and certain institutional
investors. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of the security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.





Recent
Sales of Unregistered Securities




On June
9, 2008, we issued an aggregate of 97,250 shares of our common stock to various
consultants and employees as compensation for services.





On June
9, 2008, we entered into the Merger Agreement and on June 11, 2008 consummated
the June 2008 Purchase Agreement, each as described in the section “REVERSE
MERGER AND PRIVATE PLACEMENTS - Private Placement (June 2008 Financing)”
above.





On July
18, 2008, we consummated the July 2008 Purchase Agreement, as described in the
section entitled “REVERSE MERGER AND PRIVATE PLACEMENTS - Private Placement
(July 2008 Financing)” above.




The
issuance of shares of common stock, Units, Preferred Shares and Warrants under
the Merger Agreement, the June 2008 Purchase Agreement and July 2008 Purchase
Agreement was exempt from registration pursuant to Section 4(2) of the
Securities Act based upon our compliance with Regulation D as promulgated by the
SEC under the Securities Act of 1933, as amended (the “Securities
Act”).


33





In
connection with the foregoing, we relied upon the exemption from securities
registration afforded by Rule 506 of Regulation D and/or Section 4(2) of the
Securities Act, and transfers of such shares were restricted by the Company in
accordance with the requirements of the Securities Act. All of the
above-referenced persons were provided with access to our Securities and
Exchange Commission filings.




Item 6.   Selected Financial
Data.





The
following selected statement of operations data contains statement of operations
data and balance sheet data of Shengkai, the entity through which we operate our
business, for the fiscal years ended June 30, 2009, 2008 and 2007. The statement
of operations data and balance sheet data were derived from the audited
financial statements. Such financial data should be read in conjunction with the
financial statements and the notes to the financial statements starting on page
F-1 and with the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” below.




Statements of Operation Data





Twelve months ended June 30,2009
                  
                  
                  2008
                  
                  
                  2007Net
      revenues
                  
                  $
                  39,297,235
                  
                  
                  $
                  32,355,693
                  
                  
                  $
                  23,124,748Cost
      of sales
                  
                  
                  (15,267,244
                  )
                  
                  
                  (13,211,608
                  )
                  
                  
                  (9,244,592
                  )Gross
      profit
                  
                  $
                  24,029,991
                  
                  
                  $
                  19,144,085
                  
                  
                  $
                  13,880,156Other
      income - disposal of property,plant and equipment
                  
                  
                  
                  
                  
                  
                  31,712
                  
                  
                  
                  -Other
      miscellaneous income
                  
                  $
                  112,758
                  
                  
                  $
                  -
                  
                  
                  $
                  -Operating
      expenses:Selling
                  
                  
                  (3,760,970
                  )
                  
                  
                  (2,951,888
                  )
                  
                  
                  (2,639,249
                  )General
      and administrative
                  
                  
                  (2,474,872
                  )
                  
                  
                  (1,973,331
                  )
                  
                  
                  (1,398,330
                  )Operating
      income
                  
                  $
                  17,906,907
                  
                  
                  $
                  14,250,578
                  
                  
                  $
                  9842,468Other
      income - government grant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  639Other
      income - tax refund
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  24,867Other
      expense - transaction costs for reverse merger
                  
                  
                  -
                  
                  
                  
                  (43,209
                  )
                  
                  
                  -Other
      expense
                  
                  
                  -
                  
                  
                  
                  (32
                  )
                  
                  
                  (109
                  )Interest
      income
                  
                  
                  193,149
                  
                  
                  
                  18,562
                  
                  
                  
                  8,831Interest
      expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20,174
                  )Income
      before income taxes
                  
                  $
                  18,100,056
                  
                  
                  $
                  14,225,899
                  
                  
                  $
                  9,856,631Income
      taxes
                  
                  
                  (4,522,362
                  )
                  
                  
                  (4,138,860
                  )
                  
                  
                  (3,284,829
                  )Net
      income
                  
                  $
                  13,577,694
                  
                  
                  $
                  10,087,039
                  
                  
                  $
                  6,571,802





Balance Sheet Data





As at June 30
                      
                      
                      As at June 30,2009
                      
                      
                      2008
                      
                      
                      2007Cash
      and cash equivalents
                      
                      $
                      38,988,958
                      
                      
                      $
                      21,313,484
                      
                      
                      $
                      1,691,476Working
      capital
                      
                      
                      40,990,996
                      
                      
                      
                      23,592,880
                      
                      
                      
                      11,515,991Total
      assets
                      
                      
                      60,253,034
                      
                      
                      
                      39,767,207
                      
                      
                      
                      23,268,830Total
      debts
                      
                      
                      4,746,447
                      
                      
                      
                      2,585,665
                      
                      
                      
                      2,852,863Total
      shareholders’ equity
                      
                      
                      55,506,587
                      
                      
                      
                      37,181,542
                      
                      
                      
                      20,415,967




Item 7.   Management’s Discussion and Analysis
of Financial Condition and Results of Operations




The
following discussion of the financial condition and results of operation of the
Company for the fiscal years ended June 30, 2009 and 2008 should be read in
conjunction with the selected financial data, the financial statements and the
notes to those statements that are included elsewhere in this registration
statement. Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and
Business sections in this registration statement. We use terms such as
“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions
to identify forward-looking statements.


34





General





Shengkai,
the entity through which we run our operations, is a prominent ceramic valve
manufacturer. We have more than 15 years of experience and possess a unique
method for creating ceramic valves.





We
believe that Shengkai is the one of the few ceramic valve manufacturers in the
world with research and development, engineering, and production capacity for
structural ceramics. Shengkai’s product categories include a broad range of
valves in all industries that are sold throughout China, to North America, and
other countries in the Asia-Pacific region. Totaling over 300 customers,
Shengkai became a supplier of the CPCC in 2005 and a member of the PetroChina
supply network in 2006, after a six-year application process.




Results
of Operations




Comparison
of the Years Ended June 30, 2009 and 2008




Item 7.   Management’s Discussion and Analysis
of Financial Condition and Results of Operations




The
following discussion of the financial condition and results of operation of the
Company for the fiscal years ended June 30, 2009 and 2008 should be read in
conjunction with the selected financial data, the financial statements and the
notes to those statements that are included elsewhere in this registration
statement. Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and
Business sections in this registration statement. We use terms such as
“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions
to identify forward-looking statements.





General





Shengkai,
the entity through which we run our operations, is a prominent ceramic valve
manufacturer. We have more than 15 years of experience and possess a unique
method for creating ceramic valves.





We
believe that Shengkai is the one of the few ceramic valve manufacturers in the
world with research and development, engineering, and production capacity for
structural ceramics. Shengkai’s product categories include a broad range of
valves in all industries that are sold throughout China, to North America, and
other countries in the Asia-Pacific region. Totaling over 300 customers,
Shengkai became a supplier of the CPCC in 2005 and a member of the PetroChina
supply network in 2006, after a six-year application process.




Results
of Operations




Comparison
of the Years Ended June 30, 2009 and 2008




Revenue





Revenue
for the fiscal year ended June 30, 2009 was $39,297,235, an increase of
$6,941,542 or 21.5% from $32,355,693 for the comparable period in
2008.  Approximately 95.3% of our source of revenue came from
customers in the electric power, petrochemical and chemical for the current
year. The electric power industry was still the most significant market to our
revenue, contributing approximately 75.2% of total revenue for the fiscal year
ended June 30, 2009. Revenue from the electric power industry was approximately
$29.5 million for the fiscal year ended June 30, 2009, an increase of
approximately $3.5 million or 13.5% from approximately $26.0 million for the
comparable period in 2008. The increase was primarily attributable to the
broadening of our customer base and increased orders from existing customers.
Revenue from the petrochemical and chemical industry, our biggest potential
market, was approximately $7.9 million for the fiscal year ended June 30, 2009,
an increase of approximately $5.5 million or 229.2% from approximately $2.4
million for the comparable period in 2008. The increase is primarily
attributable to our shift in targeting of and strengthening of marketing efforts
from the electric power industry to the petrochemical industry, our new sales
market. Revenue from other industries, including the aluminum and metallurgy
industries, was approximately $1.9 million for the fiscal year ended June 30,
2009, a decrease of approximately $2.1 million or 52.5% from approximately $4.0
million for the comparable period in 2008.


35





At
present we are still experiencing a deficiency of production capacity. A new
manufacturing facility and a headquarters’ building are under construction and
the manufacturing plant is estimated to be completed during the first quarter of
calendar year 2010. Completion of the Company’s headquarters’ building is
estimated to be in the second quarter of calendar year 2010.





Gross
Profit





Gross
profit for the fiscal year ended June 30, 2009 was $24,029,991, an increase of
$4,885,906 or 25.5% compared to $19,144,085 for the comparable period in
2008.  The gross profit margin for the fiscal year ended June 30, 2009
increased to 61.1% from 59.2% for the comparable period in 2008 since we
slightly adjusted upward our selling price during the year.





Selling
Expenses





Selling
expenses for the fiscal year ended June 30, 2009 was $3,760,970, an increase of
$809,082 or 27.4%, from $2,951,888 for the comparable period in 2008. Commission
paid to the agents for introducing business to us was approximately $3.1
million for the year ended June 30, 2009, an increase of approximately $0.5
million or 19.2% from approximately $2.6 million for the year ended June 30,
2008. This increase was primarily attributable to increase of sales revenues.
Another major selling expense was exhibition and seminar expense which was
$314,915 in the year ended June 30, 2009, an increase of $291,270 from $23,645
in the year ended June 30, 2008. This increase was mainly attributable to more
frequent attendance at exhibitions and domestic and overseas seminars as part of
our greater efforts to expand our market share.





General and Administrative
Expenses





General
and administrative expenses for the fiscal year ended June 30, 2009 were
$2,474,872, an increase of $501,541 or 25.4% compared to $1,973,331 for the
comparable period in 2008. The increase was primarily attributable to increases
in research and development expenses, from $126,172 to $559,491 over the
comparable periods of 2008 and 2009, an increase of $443,319 or 343.4%. Another
reason was an increase in the expenses related to the private placement
activities that occurred in June and July 2008.





Interest
expense




There was
no interest expense for the fiscal year ended June 30, 2009. No short or long
term loan was outstanding for the fiscal year ended June 30, 2009.





Income Tax
Expenses





Income
tax for the fiscal year ended June 30, 2009 was $4,522,362, an increase of
$383,502 or 9.3% from $4,138,860 for the comparable period in 2008. The
effective tax rates were 25% and 29% for the fiscal years ended June 30, 2009
and 2008 respectively. The PRC government decreased the income tax rate on
enterprises from 33% to 25% with effect from January 1, 2008. Therefore, 25% tax
rate was applied to the whole fiscal year of 2009 but only to a half year period
for the fiscal year of 2008.





Liquidity
and Capital Resources





Cash
and Cash Equivalent




Our cash
and cash equivalents as at the beginning of the fiscal year ended June 30, 2009
was $21,313,484 and increased to $38,988,958 by the end of the period, an
increase of $17,675,474 or 82.9%. The net change in cash and cash
equivalents represented a decrease of $1,946,534 or 9.9% from $19,622,008 for
the comparable period in 2008.




Net
cash provided by operating activities




Net cash
provided by operating activities was $15,889,016 for the fiscal year ended June
30, 2009, an increase of $5,988,231 or 60.5% from $9,900,785 for the comparable
period in 2008. Net income increased $3,490,655 or 34.6% to $13,577,694 for the
year ended June 30, 2009 from $10,087,039 for the comparable periods in 2008. In
addition, the net increase of cash from operating activities was also
attributable to an increase of notes payable and other payables over the
comparable periods.





Net
cash used in investing activities





Net cash
used in investing activities was $2,899,940 for the fiscal year ended June 30,
2009, compared to $4,817,565 for the fiscal year ended June 30, 2008, a decrease
of $1,917,625 or 39.8%. Cash was mainly invested in purchases of equipment and
intangible assets during the fiscal year ended June 30, 2009.


36





Net cash used in
financing activities





Net cash
provided by financing activities was $4,613,790 for the fiscal year ended June
30, 2009, a decrease of $9,111,210 from $13,725,000 for the fiscal year ended
June 30, 2008. The fund of 4,613,790 was raised from the second private
placement transaction in July 2008. For the comparable period of 2008,
$13,725,000 was raised from the first private placement transaction in June
2008.





Contractual
Obligations and Off-Balance Sheet Arrangements.




We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our financial position, results of operations, and cash flows.




The
following table summarizes our contractual obligations as of June 30, 2009, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




Totals
                                            
                                            
                                            Less Than
                                              1 Year
                                            
                                            
                                            1to3
                                              Years
                                            
                                            ThereafterCapital
      expenditures (1)
                                            
                                            $
                                            18,954,987
                                            
                                            
                                            $
                                            18,954,987
                                            
                                            
                                            $
                                            -




(1)
Capital expenditure is commitment for the construction of a new manufacturing
facility. See Note 15 - Commitment and Contingency in the notes to the financial
statements, included elsewhere in this report. The Company entered into certain
construction contracts for building a new manufacturing facility and a
headquarters’ building. The total amount of executed contracts was $19,269,804
of which $317,817 was paid as at the fiscal year ended June 30, 2009. The
construction of both the manufacturing facility and the headquarters’ building
is estimated to be completed during our next fiscal year.





Capital
expenditures




In
October 2008, we successfully won a bid on a land use right over a plot of land
approximately 43,566.3 square meters in size. The land is located in Tianjin,
China and the bid price is RMB12.6 million (approximately $1.8 million). The
formal contract was signed with the government on Jan 23, 2009, with the Company
due to pay the bid price in full by Mar 25, 2009. The land was purchased with
plans to construct corporate headquarters and to build a new manufacturing
facility to expand our production capacity.  Expenditures made under
related construction contracts totaled $19,269,804 (RMB131,897,951), of which
$314,817 (RMB2,154,851) was paid as at the year ended June 30, 2009. The balance
of $18,954,987 (RMB129,743,100) will be settled within one year.Such
expansion of production capacity, once completed, would substantially increase
our capital expenditures.





Trends





We are
not aware of any trends, events or uncertainties that have or are reasonably
likely to have a material impact on our short-term or long-term
liquidity.





Inflation





We
believe that inflation has not had a material or significant impact on our
revenue or our results of operations.





Contractual
Obligations and Off-Balance Sheet Arrangements.





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments.





The
Company originally had a capital commitment on purchase of a computer systems
and patent applications since the Company entered into an agreement with a
technology development company to purchase a computer system in improving the
quality of ceramic valve production (the “Computer System”) during the third
quarter of 2007. The Company expected the Computer System would be delivered
within 2 years and the total costs were $8,764,754 (RMB60,000,000). However, the
Company subsequently entered into a supplementary agreement with the technology
development company in February 2009 and reduced the scale of the Computer
System in the original contract. The contract cost was reduced to $4,382,377(RMB
30,000,000) accordingly, which had already been fully paid. The Computer System
was delivered on June 25, 2009 in accordance with the supplementary agreement.
See Note 15 – Commitments and Contingency in the notes to the financial
statements, included elsewhere in this report.


37





Critical
accounting policies and estimates




The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us 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 periods. Management makes these estimates using the best information
available at the time the estimates are made. However, actual results could
differ materially from those estimates (See Note 2 in the Notes to Financial
Statements).




Revenue
recognition





Net
revenue represents the invoiced value of goods sold recognized upon the delivery
of goods to customers, net of value added tax (“VAT”), after allowances for
returns and discounts and the value of services rendered. Revenue is recognized
when the following four criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed or determinable, and
collectability is reasonably assured.




Intangible
assets





Intangible
assets represent land use rights, patent rights and other assets (such as use of
software) in the PRC. Land use rights are carried at cost and amortized on a
straight-line basis over the period of rights of 50 years commencing from the
date of acquisition of equitable interest. Patent rights are carried at cost and
amortized on a straight-line basis over the period of rights of 10 years
commencing from the date of acquisition of equitable interest.





Foreign
currency translation





The
accompanying financial statements are presented in United States dollars. The
functional currency of Shengkai is the Renminbi (RMB). The financial statements
are translated into United States dollars from RMB at year-end exchange rates as
to assets and liabilities and average exchange rates as to revenues and
expenses. Capital accounts are translated at their historical exchange rates
when the capital transactions occurred.




New
Financial Accounting Pronouncements




In
September 2007, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
years.





In
September 2007, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108, the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods, based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2007. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2007 by recording correcting adjustments to the carrying values of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.





In
February 2007, FASB issued Statement of Financial Accounting Standards No.
(“SFAS”) 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”).
SFAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. Entities that elect the fair value option
will report unrealized gains and losses in earnings at each subsequent reporting
date. The fair value option may be elected on an instrument-by-instrument basis,
with a few exceptions. SFAS 159 also establishes presentation and disclosure
requirements to facilitate comparisons between entities that choose different
measurement attributes for similar assets and liabilities. The requirements of
SFAS 159 are effective for our fiscal year beginning on October 1,
2008.





In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (“SFAS”) No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ended December 31,
2009. The Company is currently evaluating the impact of SFAS 160 on its
consolidated financial statements but does not expect it to have a material
effect


38




In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (“SFAS”) No. 141(R), "Business Combinations”. SFAS
141(R) establishes principles and requirements for how the acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, an any noncontrolling interest in the acquiree, recognizes
and measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. As
such, the Company is required to adopt these provisions at the beginning of the
fiscal year ended December 31, 2009. The Company is currently evaluating the
impact of SFAS 141(R) on its consolidated financial statements but does not
expect it to have a material effect.





In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (“SFAS”) No. 161 “Disclosures about Derivative Instruments
and Hedging Activities”. SFAS 161 is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently evaluating the impact of SFAS 161 on its consolidated
financial statements but does not expect it to have a material
effect.




In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination
of  the Useful Life of Intangible Assets, which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. This Staff Position is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. Application of this FSP is not currently applicable to the Company
as the Company’s intangible assets consist of land used rights which has a fixed
useful life of 50 years.





In May
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60 (SFAS
163).  This statement clarifies accounting for financial guarantee
insurance contracts by insurance enterprises under FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises.  SFAS 163 is
effective for fiscal years and interim periods within those years, beginning
after December 15, 2008.  As the Company does not issue financial
guarantee insurance contracts, it does not expect the adoption of this standard
to have an effect on its financial position or results of
operations.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the
independent auditors, as the entity is responsible for selecting accounting
principles for financial statements that are presented in conformity with GAAP.
SFAS 162 is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards. SFAS 162 is not expected to have a material impact on the
Company’s financial statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.”  This
Statement sets forth: 1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; 2)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This Statement is effective for interim
and annual periods ending after June 15, 2009. The company adopted this
Statement in the quarter ended June 30, 2009. This Statement is not expected to
have a material impact on the Company’s consolidated financial
results.





In June
2009, the FASB issued SFAS No. 166 amends SFAS No. 140 by removing the exemption
from consolidation for Qualifying Special Purpose Entities (QSPEs). This
Statement also limits the circumstances in which a financial asset, or portion
of a financial asset, should be derecognized when the transferor has not
transferred the entire original financial asset to an entity that is not
consolidated with the transferor in the financial statements being presented
and/or when the transferor has continuing involvement with the transferred
financial asset. The adoption of this standard is not expected to have any
material impact on the Company’s Consolidated Financial Statements





In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB
Interpretation No. 46(R),” SFAS No. 167 amends FASB Interpretation 46(R) to
eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity and requires ongoing
qualitative reassessments of whether an enterprise is the primary beneficiary of
a variable interest entity. The adoption of this standard is not expected to
have any material impact on the Company’s Consolidated Financial
Statements.




39




In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162” (the Codification). The Codification,
which was launched on July 1, 2009, became the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. The Codification eliminates the GAAP hierarchy contained in
SFAS No. 162 and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.  The implementation of this Statement is not
expected to have change to the company’s Consolidated Financial
Statements.




The
management of the Company does not anticipate that the adoption of these
standards will have a material impact on these financial
statements.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk.





Not
Applicable.





Item 8.   Financial Statements and
Supplementary Data.


40





SHENGKAI INNOVATIONS,
INC.


(F/K/A SOUTHERN SAUCE
COMPANY, INC.)





CONTENTS
                    
                    PAGESINDEPENDENT
      AUDITOR’S REPORT
                    
                    F-1CONSOLIDATED
      BALANCE SHEETS
                    
                    F-2
      – F-3CONSOLIDATED
      STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME
                    
                    F-4CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                    
                    F-5CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                    
                    F-6
      – F-7CONSOLIDATED
      NOTES TO FINANCIAL STATEMENTS
                    
                    F-8
      – F-29


41


ALBERT
WONG & CO.


CERTIFIED
PUBLIC ACCOUNTANTS


7th
Floor, Nan Dao Commercial Building


359-361
Queen’s Road Central


Hong
Kong


Tel :
2851 7954


Fax: 2545
4086





ALBERT
WONG


B.Soc.,
Sc., LL.B., P.C.LL., Barrister-at-law, C.P.A.(Practising).





The Board
of Directors and Stockholders of


Shengkai
Innovations, Inc.


(F/K/A
Southern Sauce Company, Inc.)





Independent Auditor’s
Report





We have
audited the accompanying consolidated balance sheets of Shengkai Innovations,
Inc. (F/K/A Southern Sauce Company, Inc.) as of June 30, 2009 and 2008 and the
related consolidated statements of income, 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 audits.





We
conducted our audit in accordance with 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
audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Shengkai
Innovations, Inc. (F/K/A Southern Sauce Company, Inc.) as of June 30, 2009 and
2008 and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.





/s/
      Albert Wong & Co.Hong
      Kong, China
              
              Albert
      Wong & Co.August
      31, 2009
              
              Certified
      Public Accountants


F-1





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
BALANCE SHEETS


AS
AT JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





Note
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        38,988,958
                                                        
                                                        
                                                        $
                                                        21,313,484Pledged
      deposits
                                                        
                                                        
                                                        4
                                                        
                                                        
                                                        
                                                        940,488
                                                        
                                                        
                                                        
                                                        500,000Trade
      receivables
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        4,061,706
                                                        
                                                        
                                                        
                                                        3,596,318Notes
      receivable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        292,193
                                                        
                                                        
                                                        
                                                        8,732Other
      receivables
                                                        
                                                        
                                                        5
                                                        
                                                        
                                                        
                                                        22,979
                                                        
                                                        
                                                        
                                                        19,791Prepaid
      VAT
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        194,535
                                                        
                                                        
                                                        
                                                        -Deposits
      and prepaid expenses
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,543Advances
      to suppliers
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        328,785
                                                        
                                                        
                                                        
                                                        12,350Inventories
                                                        
                                                        
                                                        6
                                                        
                                                        
                                                        
                                                        907,799
                                                        
                                                        
                                                        
                                                        725,327Total
      current assets
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        45,737,443
                                                        
                                                        
                                                        $
                                                        26,178,545Plant
      and equipment, net
                                                        
                                                        
                                                        7
                                                        
                                                        
                                                        
                                                        5,173,269
                                                        
                                                        
                                                        
                                                        2,523,062Intangible
      assets, net
                                                        
                                                        
                                                        8
                                                        
                                                        
                                                        
                                                        9,342,322
                                                        
                                                        
                                                        
                                                        6,699,932Deposits
      on purchase of computer system
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,365,668TOTAL
      ASSETS
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        60,253,034
                                                        
                                                        
                                                        $
                                                        39,767,207LIABILITIES
      ANDSTOCKHOLDERS’
      EQUITYCurrent
      liabilitiesNotes
      payable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        984,561
                                                        
                                                        
                                                        $
                                                        -Accounts
      payable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,121,185
                                                        
                                                        
                                                        
                                                        938,483Advances
      from customers
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        242,986
                                                        
                                                        
                                                        
                                                        29,852Other
      payables
                                                        
                                                        
                                                        9
                                                        
                                                        
                                                        
                                                        794,754
                                                        
                                                        
                                                        
                                                        549,626Accruals
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        131,581
                                                        
                                                        
                                                        
                                                        116,673Income
      tax payable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,471,380
                                                        
                                                        
                                                        
                                                        951,031Total
      current liabilities
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        4,746,447
                                                        
                                                        
                                                        $
                                                        2,585,665TOTAL
      LIABILITIES
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        4,746,447
                                                        
                                                        
                                                        $
                                                        2,585,665Commitments
      and contingencies
                                                        
                                                        
                                                        15
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -





See
accompanying notes to consolidated financial statements





F-2




SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
BALANCE SHEETS (Continued)


AS
AT JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





Note
                                        
                                        
                                        2009
                                        
                                        
                                        2008(Restated)STOCKHOLDERS’
      EQUITYPreferred
      Stock – $0.001 par value 15,000,000 share authorized ; 7,887,368 and
      5,915,526 issued and outstanding as of June 30, 2009 and 2008
      respectively.
                                        
                                        
                                        10
                                        
                                        
                                        $
                                        7,887
                                        
                                        
                                        $
                                        5,916Common
      stock - $0.001 par value 50,000,000 shares authorized; 22,112,500 and
      20,550,000 shares issued and outstanding as of  June 30, 2009
      and 2008
                                        
                                        
                                        11
                                        
                                        
                                        
                                        22,113
                                        
                                        
                                        
                                        22,113Additional
      paid-in capital
                                        
                                        
                                        11
                                        
                                        
                                        
                                        30,666,631
                                        
                                        
                                        
                                        23,494,626Statutory
      reserves
                                        
                                        
                                        
                                        
                                        
                                        
                                        4,693,020
                                        
                                        
                                        
                                        2,875,066Retained
      earnings
                                        
                                        
                                        
                                        
                                        
                                        
                                        17,456,857
                                        
                                        
                                        
                                        8,257,303Accumulated
      other comprehensive income
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,660,079
                                        
                                        
                                        
                                        2,526,518$
                                        55,506,587
                                        
                                        
                                        $
                                        37,181,542TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                        
                                        
                                        
                                        
                                        
                                        $
                                        60,253,034
                                        
                                        
                                        $
                                        39,767,207





See
accompanying notes to consolidated financial statements


F-3





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





Note
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2008(Restated)Net
      revenues
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              39,297,235
                                                              
                                                              
                                                              $
                                                              32,355,693Cost
      of sales
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (15,267,244
                                                              )
                                                              
                                                              
                                                              (13,211,608
                                                              )Gross
      profit
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              24,029,991
                                                              
                                                              
                                                              $
                                                              19,144,085Other
      miscellaneous income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              112,758
                                                              
                                                              
                                                              
                                                              -Other
      income – disposal of property,plant
      and equipment
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              31,712Operating
      expenses:Selling
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (3,760,970
                                                              )
                                                              
                                                              
                                                              (2,951,888
                                                              )General
      and administrative
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (2,474,872
                                                              )
                                                              
                                                              
                                                              (1,973,331
                                                              )Operating
      income
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              17,906,907
                                                              
                                                              
                                                              $
                                                              14,250,578Other
      expense – transaction costs forreverse
merger
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (43,209
                                                              )Other
      expense
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (32
                                                              )Interest
      income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              193,149
                                                              
                                                              
                                                              
                                                              18,562Income
      before income taxes
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              18,100,056
                                                              
                                                              
                                                              $
                                                              14,225,899Income
      taxes
                                                              
                                                              
                                                              12
                                                              
                                                              
                                                              
                                                              (4,522,362
                                                              )
                                                              
                                                              
                                                              (4,138,860
                                                              )Net
      income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              13,577,694
                                                              
                                                              
                                                              $
                                                              10,087,039Foreign
      currency translation adjustment
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              133,561
                                                              
                                                              
                                                              
                                                              1,370,833Comprehensive
      income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              13,711,255
                                                              
                                                              
                                                              $
                                                              11,457,872Basic
      earnings per share
                                                              
                                                              
                                                              13
                                                              
                                                              
                                                              $
                                                              0.498
                                                              
                                                              
                                                              $
                                                              0.106Diluted
      earnings per share
                                                              
                                                              
                                                              13
                                                              
                                                              
                                                              $
                                                              0.367
                                                              
                                                              
                                                              $
                                                              0.084Basic
      weighted average share outstanding
                                                              
                                                              
                                                              13
                                                              
                                                              
                                                              
                                                              22,112,500
                                                              
                                                              
                                                              
                                                              22,112,500Diluted
      weighted average share outstanding
                                                              
                                                              
                                                              13
                                                              
                                                              
                                                              
                                                              29,999,868
                                                              
                                                              
                                                              
                                                              28,028,026





See
accompanying notes to consolidated financial statements


F-4





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’EQUITY


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





AccumulatedCommon
      stock
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Additional
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    otherNumber
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Preferred
                                                                    
                                                                    
                                                                    paid-in
                                                                    
                                                                    
                                                                    Statutory
                                                                    
                                                                    
                                                                    Retained
                                                                    
                                                                    
                                                                    comprehensiveof
      share
                                                                    
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    stock
                                                                    
                                                                    
                                                                    capital
                                                                    
                                                                    
                                                                    reserves
                                                                    
                                                                    
                                                                    earnings
                                                                    
                                                                    
                                                                    Income
                                                                    
                                                                    
                                                                    TotalBalance,
      July 1, 2007
                                                                    
                                                                    
                                                                    20,550,000
                                                                    
                                                                    
                                                                    $
                                                                    20,550
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    10,452,168
                                                                    
                                                                    
                                                                    $
                                                                    1,665,187
                                                                    
                                                                    
                                                                    $
                                                                    7,122,377
                                                                    
                                                                    
                                                                    $
                                                                    1,155,685
                                                                    
                                                                    
                                                                    $
                                                                    20,415,967Reduction
      of registered capital of a subsidiary (restated)
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (8,662,637
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (8,662,637
                                                                    )Net
      income
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    10,087,039
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    10,087,039Reverse
      acquisition (restated)
                                                                    
                                                                    
                                                                    1,562,500
                                                                    
                                                                    
                                                                    
                                                                    1,563
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    243,777
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    245,340Proceeds
      from sharesissued
      in privateplacement,
      net oftransaction
      costs of$1,275,000
      (restated)
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    5,916
                                                                    
                                                                    
                                                                    
                                                                    13,719,084
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    13,725,000Appropriations
      tostatutory
      reserves (restated)
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,209,879
                                                                    
                                                                    
                                                                    
                                                                    (1,209,879
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Dividends
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    7,742,234
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (7,742,234
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Foreign
      currencytranslation
      adjustment (restated)
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,370,833
                                                                    
                                                                    
                                                                    
                                                                    1,370,833Balance,
      June 30, 2008(restated)
                                                                    
                                                                    
                                                                    22,112,500
                                                                    
                                                                    
                                                                    $
                                                                    22,113
                                                                    
                                                                    
                                                                    $
                                                                    5,916
                                                                    
                                                                    
                                                                    $
                                                                    23,494,626
                                                                    
                                                                    
                                                                    $
                                                                    2,875,066
                                                                    
                                                                    
                                                                    $
                                                                    8,257,303
                                                                    
                                                                    
                                                                    $
                                                                    2,526,518
                                                                    
                                                                    
                                                                    $
                                                                    37,181,542Balance,
      July 1, 2008
                                                                    
                                                                    
                                                                    22,112,500
                                                                    
                                                                    
                                                                    $
                                                                    22,113
                                                                    
                                                                    
                                                                    $
                                                                    5,916
                                                                    
                                                                    
                                                                    $
                                                                    23,494,626
                                                                    
                                                                    
                                                                    $
                                                                    2,875,066
                                                                    
                                                                    
                                                                    $
                                                                    8,257,303
                                                                    
                                                                    
                                                                    $
                                                                    2,526,518
                                                                    
                                                                    
                                                                    $
                                                                    37,181,542Net
      income
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    13,577,694
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    13,577,694Proceeds
      from sharesissued
      in privateplacement,
      net oftransaction
      costs of$386,210
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,971
                                                                    
                                                                    
                                                                    
                                                                    4,611,819
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    4,613,790Appropriations
      tostatutory
      reserves
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,817,954
                                                                    
                                                                    
                                                                    
                                                                    (1,817,954
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Dividends
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    2,560,186
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (2,560,186
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Foreign
      currencytranslation
      adjustment
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    133,561
                                                                    
                                                                    
                                                                    
                                                                    133,561Balance,
      June 30, 2009
                                                                    
                                                                    
                                                                    22,112,500
                                                                    
                                                                    
                                                                    $
                                                                    22,113
                                                                    
                                                                    
                                                                    $
                                                                    7,887
                                                                    
                                                                    
                                                                    $
                                                                    30,666,631
                                                                    
                                                                    
                                                                    $
                                                                    4,693,020
                                                                    
                                                                    
                                                                    $
                                                                    17,456,857
                                                                    
                                                                    
                                                                    $
                                                                    2,660,079
                                                                    
                                                                    
                                                                    $
                                                                    55,506,587





See
accompanying notes to consolidated financial statements


F-5





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2009
                          
                          
                          2008Cash
      flows from operating activitiesNet
      income
                          
                          $
                          13,577,694
                          
                          
                          $
                          10,087,039Depreciation
                          
                          
                          172,185
                          
                          
                          
                          154,557Amortization
                          
                          
                          778,115
                          
                          
                          
                          719,171Gain
      on disposal of property, plant and equipment
                          
                          
                          -
                          
                          
                          
                          (31,712
                          )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Trade
      receivables
                          
                          
                          (450,979
                          )
                          
                          
                          (1,604,622
                          )Notes
      receivable
                          
                          
                          (283,286
                          )
                          
                          
                          (8,230
                          )Other
      receivables
                          
                          
                          (3,108
                          )
                          
                          
                          35,246Prepaid
      VAT
                          
                          
                          (194,439
                          )
                          
                          
                          -Deposits
      and prepaid expenses
                          
                          
                          639,067
                          
                          
                          
                          37,106Amounts
      due from directors and shareholders
                          
                          
                          -
                          
                          
                          
                          36,630Advances
      to suppliers
                          
                          
                          (316,230
                          )
                          
                          
                          179,708Inventories
                          
                          
                          (179,522
                          )
                          
                          
                          842,385Notes
      payable
                          
                          
                          984,074
                          
                          
                          
                          (34,602
                          )Accounts
      payable
                          
                          
                          178,912
                          
                          
                          
                          86,038Advances
      from customers
                          
                          
                          212,911
                          
                          
                          
                          (26,341
                          )Other
      payables
                          
                          
                          242,840
                          
                          
                          
                          (566,625
                          )Accruals
                          
                          
                          14,440
                          
                          
                          
                          (36,116
                          )Income
      tax payable
                          
                          
                          516,342
                          
                          
                          
                          31,153Net
      cash provided by operating activities
                          
                          $
                          15,889,016
                          
                          
                          $
                          9,900,785Cash
      flows from investing activitiesSales
      proceeds of property, plant and equipment
                          
                          $
                          -
                          
                          
                          $
                          68,581Purchase
      of property, plant and equipment
                          
                          
                          (564,609
                          )
                          
                          
                          (295,841
                          )Payment
      of intangible assets
                          
                          
                          (1,895,099
                          )
                          
                          
                          -Payment
      of deposits on computer system
                          
                          
                          -
                          
                          
                          
                          (4,114,871
                          )Increase
      in pledged deposits
                          
                          
                          (440,232
                          )
                          
                          
                          (475,434
                          )Net
      cash used in investing activities
                          
                          $
                          (2,899,940
                          )
                          
                          $
                          (4,817,565
                          )Cash
      flows from financing activitiesProceeds
      from stock issued, net of transaction costs of $1,275,000
                          
                          $
                          -
                          
                          
                          $
                          13,725,000Proceeds
      from stock issued, net of transaction costs of $386,210
                          
                          
                          4,613,790
                          
                          
                          
                          -Net
      cash provided by financing activities
                          
                          $
                          4,613,790
                          
                          
                          $
                          13,725,000





See
accompanying notes to consolidated financial statements


F-6





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2009
                          
                          
                          2008Net
      cash and cash equivalents sourced
                          
                          $
                          17,602,866
                          
                          
                          $
                          18,808,220Effect
      of foreign currency translation on cashand cash
      equivalents
                          
                          
                          72,608
                          
                          
                          
                          813,788Cash
      and cash equivalents–beginning of year
                          
                          
                          21,313,484
                          
                          
                          
                          1,691,476Cash
      and cash equivalents–end of year
                          
                          $
                          38,988,958
                          
                          
                          $
                          21,313,484Supplementary
      cash flow information:Interest
      received
                          
                          $
                          193,149
                          
                          
                          $
                          19,752Tax
      paid
                          
                          
                          4,088,651
                          
                          
                          
                          3,429,056




See
accompanying notes to consolidated financial statements


F-7


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





Shengkai
Innovations, Inc. (the Company) was incorporated in the State of Florida on
December 8, 2004. Prior to June 9, 2008 the company has only nominal operations
and assets. On October 23, 2008, the Company changed its name from Southern
Sauce Company, Inc. to Shengkai Innovations, Inc.





On June
9, 2008, the Company executed a reverse-merger with Shen Kun International
Limited (“Shen Kun”) by an exchange of shares whereby the Company issued
20,550,000   common shares at $0.001 par value in exchange for
all Shen Kun shares.





The
exchange transaction was accounted for as a reverse acquisition in accordance
with Statements of Financial Accounting Standards (“SFAS”) No. 141. “Business
Combinations”.For
financial reporting purposes, this transaction is classified as a
recapitalization of the Company and Shen Kun. The accompanying audited
consolidated financial statements were retroactively adjusted to reflect the
effects of the recapitalization of the financial statements of the Company and
the historical financial statements of Shen Kun. The 1,562,500 shares of
Shengkai Innovations, Inc. outstanding prior to this stock exchange transaction
were accounted for at the net book value at the time of the transaction, which
was a deficit of $62,206. The consolidated statements of income include the
results of operations of Tianjin Shengkai Industrial Technology Development Co.,
Ltd for the year ended June 30, 2009 and 2008.





Shen Kun
formed Sheng Kai (Tianjin) Ceramic Valves Co., Ltd. (“SK Ceramic Valves” or
“WFOE”), which entered into a series of agreements with Tianjin Shengkai
Industrial Technology Development Co., Ltd (“Shengkai”) including but not
limited to consigned management, technology service, loan, exclusive purchase
option, equity pledge, etc. The agreements were entered on May 30, 2008. As a
result of entering the abovementioned agreements, WFOE deem to control Shengkai
as a Variable Interest Entity as required by FASB Interpretation No. 46 (revised
MARCH 2003) Consolidated of Variable Interest Entities, and Interpretation of
ARB No. 51. In connection with the reverse merger transaction, on June 11, 2008
the Company sold 5,915,526 Units for aggregate gross proceeds of $15,000,000, at
a price of $2.5357 per Unit. Each Unit consists of one share of Southern Sauce
Series A Convertible Preferred Stock, par value $0.001 per share (the “Preferred
Shares”), convertible into one share of common stock, par value $0.001 per share
(the “common stock”), and one Series A Warrant to purchase common stock equal to
120% of the number of shares of common stock issuable upon conversion of the
Preferred Shares (“Warrant”). Additionally, on July 18, 2008, the Company sold
1,971,842 Units for aggregate gross proceeds of $5,000,000, at a price of
$2.5357 per Unit. Each Unit consists of one Preferred Share, convertible into
one share of common stock, par value $0.001 per share (the “common stock”), and
one Warrant to purchase common stock equal to 120% of the number of shares of
common stock issuable upon conversion of the Preferred Shares.





The
Company, through its subsidiaries and Shengkai, (hereinafter, collectively
referred to as “the Group”), is now in the business of manufacturing and selling
of ceramic valve.


F-8


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)
            Method
      of Accounting





The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes.  The financial statements
and notes are representations of management.  Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements.





(b)
            Principles
      of Consolidation





The
consolidated financial statements, which include the Company and its
subsidiaries, are complied in accordance with generally accepted accounting
principles in the United States of America. All significant inter-company
accounts and transactions have been eliminated. The consolidated financial
statements include 100% of assets, liabilities, and net income or loss of those
wholly-owned subsidiaries.





The
company owned the three subsidiaries since its reverse-merger on June 9, 2008.
The detailed identities of the consolidating subsidiaries would have been as
follows:





Name of Company
              
              Place of
                incorporation
              
              Attributable
                interestShen
      Kun International Limited
              
              British
      Virgin Islands
              
              100%Sheng
      Kai (Tianjin) Ceramic Valves Co., Ltd
              
              PRC
              
              100%*Tianjin
      Shengkai Industrial TechnologyDevelopment
      Co., Ltd
              
              PRC
              
              100%*Deemed
      variable interest entity member





(c)
            Use
      of estimates





The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America 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 periods.  Management makes these estimates using
the best information available at the time the estimates are made; however
actual results could differ materially from those estimates.


F-9


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(d)
            Economic
      and political risks





The
Group’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.





The
Group’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Group’s results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.





(e)
            Pledged
      deposits





Pledged
deposits represents deposits on account to secure notes payable and deposit for
investor relation or public relation affairs as at the year ended June 30, 2009
and 2008 respectively.





(f)
            Plant
      and equipment





Plant and
equipment are carried at cost less accumulated
depreciation.  Depreciation is provided over their estimated useful
lives, using the straight-line method. Estimated useful lives of the plant and
equipment are as follows:





Buildings
              20
      – 40 yearsMachinery
      and equipment
              3 –
      20 yearsOffice
      equipment
              3 –
      10 yearsMotor
      vehicles
              10
      years





The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.





(g)
            Intangible
      assets





Intangible
assets represent land use rights, patent rights and others in the
PRC.  Land use rights are carried at cost and amortized on a
straight-line basis over the period of rights of 50 years commencing from the
date of acquisition of equitable interest. Patent rights are carried at cost and
amortized on a straight-line basis over the period of rights of 10 years
commencing from the date of acquisition of equitable interest.  Others
are software costs which are carried at cost and amortized on a straight-line
basis over the period of 6 years.


F-10


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(h)
            Accounting
      for the impairment of long-lived
assets





The Group
periodically evaluates the carrying value of long-lived assets to be held and
used, including intangible assets subject to amortization, when events and
circumstances warrant such a review, pursuant to the guidelines established in
SFAS No. 144. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair market values are reduced for the cost to
dispose.





During
the reporting periods, there was no impairment loss.





(i)
            Inventories





Inventories
comprise merchandise purchased for resale and are stated at lower of cost and
net realizable value.  Cost of merchandise, representing the purchase
cost, is calculated on the weighted average basis.  Net realizable
value is the estimated selling price in the ordinary course of business less any
applicable selling expenses.





(j)
            Cash
      and cash equivalents





The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts in the PRC and Hong Kong. The Company does not maintain any bank
accounts in the United States of America.





2009
                                
                                
                                2008Cash
      on hand
                                
                                $
                                6,236
                                
                                
                                $
                                4,880Agricultural
      Bank of China
                                
                                
                                -
                                
                                
                                
                                421Bank
      of China
                                
                                
                                21,081
                                
                                
                                
                                12,888Industrial
      and Commercial Bank of China
                                
                                
                                750,757
                                
                                
                                
                                8,317,060Industrial
      Bank Co. Ltd.
                                
                                
                                2,962,345
                                
                                
                                
                                37,070Shanghai
      Pudong Development Bank
                                
                                
                                35,232,842
                                
                                
                                
                                12,939,316The
      Hong Kong and Shanghai BankingCorporation
      Limited
                                
                                
                                15,697
                                
                                
                                
                                1,849$
                                38,988,958
                                
                                
                                $
                                21,313,484


F-11


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(k)
            Revenue
      recognition





Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met:





-
Persuasive evidence of an arrangement exists;


-
Delivery has occurred or services have been rendered;


- The
seller’s price to the buyer is fixed or determinable, and


-
Collection is reasonably assured.





Net
revenue is recognized when customer takes delivery and acceptance of products,
the price is fixed or determinable as stated on sales contract, and the
collectability is reasonably assured.





(l)
            Costs
      of sales





Cost of
sales consists primarily of direct material costs, direct labor cost, direct
depreciation and related direct expenses attributable to the production of
products.  Written-down of inventory to lower of cost or market is
also reflected in cost of revenues.





(m)
            Advertising





The
Company expensed all advertising costs as incurred.  Advertising
expenses included in the selling expenses for the years ended June 30, 2009 and
2008 were $82,913 and $17,845 respectively.





(n)
            Research
      and development costs





The
Company expensed all research and development costs as
incurred.  Research and development expenses included in the general
and administrative expenses for the years ended June 30, 2009 and 2008 were
$559,097 and $126,172 respectively.





(o)
            Retirement
      benefit plans





The
employees of the Company are members of a state-managed retirement benefit plan
operated by the government of the PRC.  The Company is required to
contribute a specified percentage of payroll costs to the retirement benefit
scheme to fund the benefits.  The only obligation of the Company with
respect to the retirement benefit plan is to make the specified
contributions.





Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The retirement benefit expenses included in costs of sales for the
years ended June 30, 2009 and 2008 were nil and $288 respectively. The
retirement benefit expenses included in and the general and administrative
expenses for the years ended June 30, 2009 and 2008 were $130,574 and $16,521
respectively.


F-12





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(p)
            Income
      tax





The Group
accounts for income tax using an asset and liability approach and allows for
recognition of deferred tax benefits in future years.  Under the asset
and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.  A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before the Group is
able to realize their benefits, or that future realization is
uncertain.





(q)
            Foreign
      currency translation





The
accompanying financial statements are presented in United States dollars. SK
Ceramic Valves and Shengkai use its local currency, Renminbi (RMB), as its
functional currency. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the end of period exchange rates. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in stockholders’ equity. Transaction gains and losses that arise from
exchange rate fluctuations from transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.





The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.





The
exchange rates used to translate amounts in RMB into USD for the purposes of
preparing the consolidated financial statements were as follows:





June
      30, 2009Balance
      sheet
                              RMB
      6.84480 to US$1.00Statement
      of income and comprehensive income
                              RMB
      6.84819 to US$1.00June
      30, 2008Balance
      sheet
                              RMB
      6.87180 to US$1.00Statement
      of income and comprehensive income
                              RMB
      7.29063 to
US$1.00


The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions.  No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.


F-13


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(r)
            Cash
      and concentration of risk





Cash
includes cash on hand and demand deposits in bank accounts maintained within
PRC.  Total cash in the banks at June 30, 2009 and 2008 amounted to
$38,982,722 and $21,308,604 respectively. The Company has not experienced any
losses in such accounts and believes it is not exposed to significant financial
institution risks on its cash in bank accounts. Also see Note 3 for credit risk
details.





(s)
            Statutory
      reserves





As
stipulated by the PRC’s Company Law and as provided in the SK Ceramic Valves,
and Shengkai’s Articles of Association, SK Ceramic Valves, and Shengkai’s net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:





(i)
              Making
      up cumulative prior years’ losses, if
any;


(ii)
            Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered capital, which is restricted
      for set off against losses, expansion of production and operation or
      increase in registered
capital;


(iii)
            Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company's “Statutory common welfare fund”, which is
      restricted for capital expenditure for the collective benefits of the
      Company's employees; and


(iv)
            Allocations
      to the discretionary surplus reserve, if approved in the shareholders’
      general meeting.





On
December 31, 2003, Shengkai established a statutory surplus reserve as well as a
statutory common welfare fund and commenced to appropriate 10% and 5%,
respectively of the PRC net income after taxation to these reserves. The amounts
included in the statutory reserves were surplus reserve of $4,693,020 as at June
30, 2009.





(t)
            Comprehensive
      income





Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.  Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements.  The Company’s current component of other
comprehensive income is the foreign currency translation
adjustment.


F-14


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(u)
            Recent
      accounting pronouncements





In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (“SFAS”) No. 161 “Disclosures about Derivative Instruments
and Hedging Activities”. SFAS 161 is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. Effective
January 1, 2009, the Company adopted SFAS 161. The adoption did not have a
material effect on the financial statements.





In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60." Diversity
exists in practice in accounting for financial guarantee insurance contracts by
insurance enterprises under FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises. This results in inconsistencies in the recognition and
measurement of claim liabilities. This Statement requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Effective January 1, 2009, the Company adopted SFAS
163. The adoption did not have a material effect on the financial
statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.”  This
Statement sets forth: 1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; 2)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This Statement is effective for interim
and annual periods ending after June 15, 2009. The company adopted this
Statement in the quarter ended June 30, 2009. This Statement is not expected to
have a material impact on the Company’s consolidated financial
results.





In June
2009, the FASB issued SFAS No. 166 amends SFAS No. 140 by removing the exemption
from consolidation for Qualifying Special Purpose Entities (QSPEs). This
Statement also limits the circumstances in which a financial asset, or portion
of a financial asset, should be derecognized when the transferor has not
transferred the entire original financial asset to an entity that is not
consolidated with the transferor in the financial statements being presented
and/or when the transferor has continuing involvement with the transferred
financial asset. The adoption of this standard is not expected to have any
material impact on the Company’s Consolidated Financial
Statements


F-15


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





(u)
            Recent
      accounting pronouncements
(Continued)





In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB
Interpretation No. 46(R),” SFAS No. 167 amends FASB Interpretation 46(R) to
eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity and requires ongoing
qualitative reassessments of whether an enterprise is the primary beneficiary of
a variable interest entity. The adoption of this standard is not expected to
have any material impact on the Company’s Consolidated Financial
Statements.





In June
2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162” (the Codification). The Codification,
which was launched on July 1, 2009, became the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. The Codification eliminates the GAAP hierarchy contained in
SFAS No. 162 and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.  The implementation of this Statement is not
expected to have change to the company’s Consolidated Financial
Statements.


F-16


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





3.
            CONCENTRATIONS
      OF CREDIT RISK AND MAJOR CUSTOMERS





Financial
instruments which potentially expose the Group to concentrations of credit risk,
consists of cash and accounts receivable as of June 30, 2009, and 2008. The
Group performs ongoing evaluations of its cash position and credit evaluations
to ensure sound collections and minimize credit losses exposure.





As of
June 30, 2009, and 2008, almost all the Group’s bank deposits were conducted
with banks in the PRC where there is currently no rule or regulation mandated on
obligatory insurance of bank accounts. A minimal bank deposit was maintained
with the bank in Hong Kong.





For the
years ended June 30, 2009, and 2008, more than 99% of the Group’s sales were
generated from the PRC. In addition, nearly all accounts receivable as of June
30, 2009, and 2008, also arose in the PRC.





The
maximum amount of loss exposure due to credit risk that the Group would bear if
the counter parties of the financial instruments failed to perform represents
the carrying amount of each financial asset in the balance sheet.





Normally
the Group does not require collateral from customers or debtors.





For the
years ended June 30, 2009, and 2008, there was no customer who accounts for 10%
or more of the Group’s revenue.





Details
of customer account for 10% or more of the Group’s accounts receivable were as
follows:


Year ended June 30,2009
                    
                    
                    2008Customer
      A
                    
                    $
                    *
                    
                    
                    $
                    851,262Customer
      B
                    
                    
                    *
                    
                    
                    
                    772,723Customer
      C
                    
                    
                    -
                    
                    
                    
                    415,440Customer
      D
                    
                    
                    655,755
                    
                    
                    
                    -Customer
      E
                    
                    
                    438,067
                    
                    
                    
                    -Customer
      F
                    
                    
                    380,115
                    
                    
                    
                    *





*less than 10%





4.
            PLEDGED
      DEPOSITS





Pledged
deposits as at the year ended June 30, 2009 and 2008 were restricted cash kept
in purpose of investor relation or public relation affairs and to secure notes
payable respectively.


F-17


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





5.
            OTHER
      RECEIVABLES





2009
                              
                              
                              2008Disbursement
      and advances to employee
                              
                              $
                              12,268
                              
                              
                              $
                              -Tender
      deposits
                              
                              
                              10,227
                              
                              
                              $
                              10,623Sundry
                              
                              
                              484
                              
                              
                              $
                              9,168$
                              22,979
                              
                              
                              $
                              19,791





6.
            INVENTORIES





Inventories
comprise the followings:





2009
                              
                              
                              2008Finished
      goods
                              
                              $
                              236,574
                              
                              
                              $
                              298,411Work
      in process
                              
                              
                              49,607
                              
                              
                              
                              15,264Raw
      materials
                              
                              
                              621,618
                              
                              
                              
                              411,652$
                              907,799
                              
                              
                              $
                              725,327




F-18


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





7.
            PLANT
      AND EQUIPMENT, NET





2009
                                      
                                      
                                      2008At
      costBuildings
                                      
                                      $
                                      2,050,980
                                      
                                      
                                      $
                                      2,042,921Machinery
      and equipment
                                      
                                      
                                      3,056,646
                                      
                                      
                                      
                                      631,830Office
      equipment
                                      
                                      
                                      166,748
                                      
                                      
                                      
                                      135,637Motor
      vehicles
                                      
                                      
                                      416,163
                                      
                                      
                                      
                                      369,897$
                                      5,690,537
                                      
                                      
                                      $
                                      3,180,285Less:
      accumulated depreciation
                                      
                                      
                                      (832,085
                                      )
                                      
                                      
                                      (657,223
                                      )$
                                      4,858,452
                                      
                                      
                                      $
                                      2,523,062Construction
      in progress
                                      
                                      
                                      314,817
                                      
                                      
                                      
                                      -5,173,269
                                      
                                      
                                      
                                      2,523,062





Depreciation
expenses included in the cost of sales for the years ended June 30, 2009 and
2008 were $113,751 and $97,554 respectively; and in the general and
administrative expenses for the years ended June 30, 2009 and 2008 were $58,434
and $57,003 respectively.





Construction
in progress represents direct costs of construction incurred. Capitalization of
these costs ceases and the construction in progress is transferred to plant and
equipment when substantially all the activities necessary to prepare the assets
for their intended use are completed. No depreciation is provided until it is
completed and ready for intended use.  Capital commitments in respect
of these projects are $18,954,988 at June 30, 2009.


F-19


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





8.
              INTANGIBLE
      ASSETS, NET





2009
                                                    
                                                    
                                                    2008Land
      use rights, at cost
                                                    
                                                    $
                                                    2,788,369
                                                    
                                                    
                                                    $
                                                    888,825Less:
      accumulated amortization
                                                    
                                                    
                                                    (302,714
                                                    )
                                                    
                                                    
                                                    (283,748
                                                    )2,485,655
                                                    
                                                    
                                                    
                                                    605,077Patent
      rights, at costs
                                                    
                                                    
                                                    8,949,335
                                                    
                                                    
                                                    
                                                    7,421,636Less:
      accumulated amortization
                                                    
                                                    
                                                    (2,098,012
                                                    )
                                                    
                                                    
                                                    (1,335,167
                                                    )6,851,323
                                                    
                                                    
                                                    
                                                    6,086,469Others,
      at costs
                                                    
                                                    
                                                    19,913
                                                    
                                                    
                                                    
                                                    19,835Less:
      accumulated amortization
                                                    
                                                    
                                                    (14,569
                                                    )
                                                    
                                                    
                                                    (11,449
                                                    )5,344
                                                    
                                                    
                                                    
                                                    8,386$
                                                    9,342,322
                                                    
                                                    
                                                    $
                                                    6,699,932





Amortization
expenses included in the general and administrative expenses for the years ended
June 30, 2009 and 2008 were $778,115 and $719,171 respectively.





9.
            OTHER
      PAYABLES





2009
                              
                              
                              2008Commission
      payables
                              
                              $
                              312,365
                              
                              
                              $
                              180,291Expense
      payables
                              
                              
                              12,389
                              
                              
                              
                              3,636Deposit
      for project
                              
                              
                              467,508
                              
                              
                              
                              -Sundry
      PRC taxes payables
                              
                              
                              -
                              
                              
                              
                              352,521Sundry
                              
                              
                              2,492
                              
                              
                              
                              13,178$
                              794,754
                              
                              
                              $
                              549,626




F-20


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





10.
            PREFERRED
      STOCK AND WARRANTS





On June
11, 2008, the Company sold 5,915,526 shares of Series A Preferred Stock and
various stock purchase warrants for cash consideration totaling $15 million
dollars (the “June 2008 Financing”). The exercise price, expiration date and
number of share eligible to be purchased with the warrants are summarized in the
following table:





Series
      of warrant
                    
                    Number
      of shares
                    
                    
                    Exercise
      price
                    
                    Contractual
      termSeries
      A
                    
                    
                    7,098,632
                    
                    
                    $
                    3.52
                    
                    5.0
      years


The
Series A preferred stock has liquidation rights senior to common stock and to
any other class or series of stock issued by the Company not designated as
ranking senior to or pari passu with the Series A Preferred Share.  In
the event of a liquidation of the Company, holders of Series A preferred stock
are entitled to receive a distribution equal to $2.5357 per share of Series A
preferred stock prior to any distribution to the holders of common stock or any
other stock that ranks junior to the Series A Preferred Shares. The Preferred
Shareholders are not entitled to dividends unless paid to Common Shareholders.
Any dividend paid will have the same record and payment date and terms as the
dividend payable to the Common Stock. The Series A preferred stock will
participate based on their respective as-if conversion rates if the Company
declares any dividends.  Holders of Series A Preferred Shares also
have voting rights required by applicable law and the relevant number of votes
shall be equal to the number of shares of Common Stock issuable upon conversion
of Series A Preferred Shares. At any time, the Preferred Stock is convertible
into 1 share of Common Stock adjusted from time to time to the Conversion Rate.
The Conversion Rate is computed as the Liquidation Preference Amount ($2.5357
per share) divided by the Conversion Price. The Conversion Price is initially
$2.5357 per share but can adjust for anti-dilution.





The
Warrants were issued at an exercise price of $3.52 per share. The exercise price
can adjust for dilutive events.  The Warrants are immediately
exercisable. However, if after exercise the holder would become a holder of
greater than 9.9% of common stock they cannot exercise without filing a waiver
with the company.  The waiver is required to be filed 61 days prior to
exercise and by filing the waiver the restriction is removed. (Since the company
is required to accept the waiver this restriction is not considered significant
in valuing the warrant.) The Warrants expire 5 years from the date of issuance.
The Warrants are freely transferable upon registration. The Warrants are subject
to the same Registration Rights Agreement as that of the Preferred Stock. If a
registration statement providing for the resale of the Common Stock issued upon
exercise of the Warrant is not declared effective after 180 days after the
issuance date, the Warrants can be cashless exercised. Also, the Warrants have
Buy-in Rights similar to those of the Preferred Stock.





The gross
proceeds of the transaction were $15 million. The proceeds from the transaction
were allocated to the Series A preferred stock, warrants and beneficial
conversion feature based on the relative fair value of the securities. The
Company evaluated whether a relative fair value approach or residual fair value
approach was more appropriate given the terms and accounting treatment related
to the financial instruments involved. Given that the Warrants will not be
classified as a liability, the relative fair value method was used. The Warrants
were first valued using the Black-Scholes valuation model. The Company valued
the Warrants at issuance at $1.84 per warrant with the following
assumptions:  common stock fair market value of $2.55, expected life
of 5 year, volatility of 100% and an interest rate of 4.5%.


F-21


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





11.
            PREFERRED
      STOCK AND WARRANTS (Continued)





The
Company recognized a beneficial conversion feature discount on the Series A
preferred stock at its intrinsic value, which was the fair value of the common
stock at the commitment date for the Series A preferred stock investment, less
the effective conversion price but limited to the $15 million of proceeds
received from the sale. The Company recognized the $7.8 million beneficial
conversion feature in the equity as a transfer from retained earnings to
additional paid in capital as dividends in the accompanying consolidated
financial statements on the date of issuance of the Series A preferred shares
since the Series A preferred shares were convertible at the issuance
date.





On July
18, 2008 the Company sold 1,971,842 shares of Series A Preferred Stock and
various stock purchase warrants for cash consideration totaling $5 million
dollars (the “July 2008 Financing”). The exercise price, expiration date and
number of share eligible to be purchased with the warrants are summarized in the
following table:





Series
      of warrant
                      
                      Number
      of shares
                      
                      
                      Exercise
      price
                      
                      Contractual
      termSeries
      A
                      
                      
                      2,366,211
                      
                      
                      $
                      3.52
                      
                      5.0
      years





The
Series A preferred stock has liquidation rights senior to common stock and to
any other class or series of stock issued by the Company not designated as
ranking senior to or pari passu with the Series A Preferred Share.  In
the event of a liquidation of the Company, holders of Series A preferred stock
are entitled to receive a distribution equal to $2.5357 per share of Series A
preferred stock prior to any distribution to the holders of common stock or any
other stock that ranks junior to the Series A Preferred Shares. The Preferred
Shareholders are not entitled to dividends unless paid to Common Shareholders.
Any dividend paid will have the same record and payment date and terms as the
dividend payable to the Common Stock. The Series A preferred stock will
participate based on their respective as-if conversion rates if the Company
declares any dividends.  Holders of Series A Preferred Shares also
have voting rights required by applicable law and the relevant number of votes
shall be equal to the number of shares of Common Stock issuable upon conversion
of Series A Preferred Shares. At any time, the Preferred Stock is convertible
into 1 share of Common Stock adjusted from time to time to the Conversion Rate.
The Conversion Rate is computed as the Liquidation Preference Amount ($2.5357
per share) divided by the Conversion Price. The Conversion Price is initially
$2.5357 per share but can adjust for anti-dilution.





The
Warrants were issued at an exercise price of $3.52 per share. The exercise price
can adjust for dilutive events.  The Warrants are immediately
exercisable. However, if after exercise the holder would become a holder of
greater than 9.9% of common stock they cannot exercise without filing a waiver
with the company.  The waiver is required to be filed 61 days prior to
exercise and by filing the waiver the restriction is removed. (Since the company
is required to accept the waiver this restriction is not considered significant
in valuing the warrant.) The Warrants expire 5 years from the date of issuance.
The Warrants are freely transferable upon registration. The Warrants are subject
to the same Registration Rights Agreement as that of the Preferred Stock. If a
registration statement providing for the resale of the Common Stock issued upon
exercise of the Warrant is not declared effective after 180 days after the
issuance date, the Warrants can be cashless exercised. Also, the Warrants have
Buy-in Rights similar to those of the Preferred Stock.


F-22


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





10.
            PREFERRED
      STOCK AND WARRANTS (Continued)





The gross
proceeds of the transaction were $5 million. The proceeds from the transaction
were allocated to the Series A preferred stock, warrants and beneficial
conversion feature based on the relative fair value of the securities. The
Company evaluated whether a relative fair value approach or residual fair value
approach was more appropriate given the terms and accounting treatment related
to the financial instruments involved. Given that the Warrants will not be
classified as a liability, the relative fair value method was used. The Warrants
were first valued using the Black-Scholes valuation model. The Company valued
the Warrants at issuance at $1.84 per warrant with the following
assumptions:  common stock fair market value of $2.55, expected life
of 5 year, volatility of 100% and an interest rate of 4.5%.





The
Company recognized a beneficial conversion feature discount on the Series A
preferred stock at its intrinsic value, which was the fair value of the common
stock at the commitment date for the Series A preferred stock investment, less
the effective conversion price but limited to the $5 million of proceeds
received from the sale. The Company recognized the $2.6 million beneficial
conversion feature in the equity as a transfer from retained earnings to
additional paid in capital as dividends in the accompanying consolidated
financial statements on the date of issuance of the Series A preferred shares
since the Series A preferred shares were convertible at the issuance
date.





In
connection with the June 2008 Financing and the July 2008 Financing, in the
event of the Company’s failure to timely convert, additional damages would
become due.  In the event the Company does not have sufficient shares
or is prohibited by law or regulation, then the holder can require cash
redemption. The redemption price would equal 130% of the Liquidation Preference
Amount plus additional amounts based on the difference between the bid prices on
the conversion date and the date the Company has sufficient shares. The holder
can also void the conversion or exercise its Buy-in Rights. The Buy-in-Rights
entitle the holder to be protected in the case that the Company is unable to
deliver the shares upon conversion while the holder has transacted to sell such
underlying shares to a third party. In addition, in the event of a merger,
consolidation or similar capital reorganization (prior to conversion) the
holders can request to be redeemed at 110% of liquidation value.





Further,
if the Company fails to obtain a listing on NASDAQ or the NYSE Amex Equities
(Formerly American Stock Exchange), then 1,000,000 shares of common stock of the
company will be given to the investors.  The company is accounting for
these penalties in accordance with FAS 5 - Accounting for Contingencies, whereby
the penalty will not be recorded as a liability until and if it is probable the
penalty will be incurred. No penalty has been recorded in the accompanying
consolidated financial statements for this instance.





11.
            CAPITALIZATION





As a
result of the Group’s reverse-merger on June 9, 2008, the Group’s capital
structure has been changed. The number of common stock was 22,112,500 after
reverse-merger. The common stock is $22,113 with paid-in capital $30,666,631 as
at the year ended June 30, 2009.


F-23


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





12.
            INCOME
      TAXES





(a)
            The
      Company is registered in the State of Florida whereas its subsidiary, Shen
      Kun being incorporated in the British Virgin Islands is not subject to any
      income tax and conducts all of its business through its PRC subsidiary, SK
      Ceramic Valves and VIE, Shengkai (see note
1).





SK
Ceramic Valves, and Shengkai, being registered in the PRC, are subject to PRC’s
Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income
Taxes (“EIT”) is generally imposed at 25% since January 1, 2008.





A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:





2009
                            
                            
                            2008U.S.
      statutory rate
                            
                            
                            34
                            %
                            
                            
                            34
                            %Foreign
      income not recognized in the U.S.
                            
                            
                            (34
                            )%
                            
                            
                            (34
                            )%PRC
      Enterprise Income Tax
                            
                            
                            25
                            %
                            
                            
                            25
                            %Provision
      for income tax
                            
                            
                            25
                            %
                            
                            
                            25
                            %





(b)
            The
      PRC Enterprise Income Tax rate was changed to 25% from 33% since January
      1, 2008. The effective tax rate for June 30, 2009 was 25% while 2008 was
      29% owing to the 33% tax rate was applicable to the first half fiscal year
      end of 2008.





Income
before income tax expenses of $18,100,056, and $14,225,899 for the years ended
June 30, 2009 and 2008 respectively, was attributed to subsidiaries with
operations in China. Income tax expense related to China income for the years
ended June 30, 2009, and 2008 are $4,522,362, and $4,138,860,
respectively.


F-24


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





13.
            EARNINGS
      PER SHARE





The
calculation of the basic and diluted earnings per share attributable to the
common stock holders is based on the following data:





Earnings:
                                                                      
                                                                      2009
                                                                      
                                                                      
                                                                      2008Net
      income for the year
                                                                      
                                                                      $
                                                                      13,577,694
                                                                      
                                                                      
                                                                      $
                                                                      10,087,039Non-Cash
      Dividends on convertible preferred stock
                                                                      
                                                                      
                                                                      (2,560,186
                                                                      )
                                                                      
                                                                      
                                                                      (7,742,234
                                                                      )Earnings
      for the purpose of basicearnings
      per share
                                                                      
                                                                      $
                                                                      11,017,508
                                                                      
                                                                      
                                                                      $
                                                                      2,344,805Effect
      of dilutive potential common stock
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Earnings
      for the purpose of dilutiveearnings
      per share
                                                                      
                                                                      $
                                                                      11,017,508
                                                                      
                                                                      
                                                                      $
                                                                      2,344,805Number
      of shares:Weighted
      average number of commonstock
      for the purpose of basic earningsper
      share
                                                                      
                                                                      
                                                                      22,112,500
                                                                      
                                                                      
                                                                      
                                                                      22,112,500Effect
      of dilutive potential common stock-
      conversion of convertible preferred stock
                                                                      
                                                                      
                                                                      7,887,368
                                                                      
                                                                      
                                                                      
                                                                      5,915,526Weighted
      average number of commonstock
      for the purpose of dilutive earningsper
      share
                                                                      
                                                                      
                                                                      29,999,868
                                                                      
                                                                      
                                                                      
                                                                      28,028,026Earnings
      per share:Basic
      earnings per share
                                                                      
                                                                      $
                                                                      0.498
                                                                      
                                                                      
                                                                      $
                                                                      0.106Dilutive
      earnings per share
                                                                      
                                                                      $
                                                                      0.367
                                                                      
                                                                      
                                                                      $
                                                                      0.084




F-25


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





14.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.  The
carrying amounts of financial assets and liabilities, such as cash and cash
equivalents, accounts receivable, other receivables, accounts payable, and other
payables, approximate their fair values because of the short maturity of these
instruments and market rates of interest available to the Group.




15.
            COMMITMENTS
      AND CONTINGENCY





A new
manufacturing facility and a headquarters’ building are under construction on a
plot of land in Tianjin, China which was obtained in October, 2008. Certain
construction contracts including the main superstructure were executed. The
total amount of executed contracts was $19,269,804 (RMB131,897,951) of which
$314,817 (RMB2,154,851) was paid as at the year ended June 30, 2009. The balance
of $18,954,987 (RMB129,743,100) will be settled within one year.




16.
            SEGMENT
      INFORMATION





The Group
is principally engaged in one segment of the manufacturing and selling of
ceramic valve in the PRC. Nearly all revenues are generated in the PRC and
nearly all identifiable assets of the Group are located in the PRC. Accordingly,
no segmental analysis is presented.


F-26


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





17.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL
STATEMENTS





In
November 2008, subsequent to the issuance of the Company’s financial statements
for the year ended June 30, 2008, the Company’s accountant discovered the
Additional Paid-in Capital and Comprehensive Income were not correctly stated.
After a detail analysis, some reallocation should be provided to restate the
stockholders’ equity and corresponding changes related to the allocation of
stockholders’ equity items and notes to consolidated financial statements. The
restatement affects periods from July 1, 2007 to June 30, 2008. The foregoing
restatement adjustments did not affect the Company’s Assets and Liabilities,
Revenue, Expenses and Net Income, and the Consolidated Statements of Cash Flows.
The effects of the restatements are shown in the following tables:





CONSOLIDATED
BALANCE SHEETS


Original
                                            
                                            
                                            RestatedJune
      30,ITEMS
                                            
                                            2008
                                            
                                            
                                            2008STOCKHOLDERS’
      EQUITYPreferred
      Stock – $0.001 par value 15,000,000 share authorized ;
                                                5,915,526
      and nil issued and outstanding as of June 30,2008
      and 2007 respectively.
                                            
                                            $
                                            7,342,358
                                            
                                            
                                            $
                                            5,916Common
      stock - $0.001 par value 50,000,000 shares authorized;
                                              22,112,500
      and 20,550,000 shares issued and outstanding as of  June 30,
      2008 and 2007
                                            
                                            
                                            22,113
                                            
                                            
                                            
                                            22,113Additional
      paid-in capital
                                            
                                            
                                            16,712,970
                                            
                                            
                                            
                                            23,494,626Statutory
      reserves
                                            
                                            
                                            3,217,565
                                            
                                            
                                            
                                            2,875,066Retained
      earnings
                                            
                                            
                                            7,914,804
                                            
                                            
                                            
                                            8,257,303Accumulated
      other comprehensiveIncome
                                            
                                            
                                            1,971,732
                                            
                                            
                                            
                                            2,526,518TOTAL
      STOCKHOLDERS’ EQUITY
                                            
                                            $
                                            37,181,542
                                            
                                            
                                            $
                                            37,181,542





As a
result of restatement of the consolidated balance sheet as of June 30, 2008,
total preferred stock decreased from $7,342,358 as originally reported, to
$5,916, a decrease of $7,336,442. The corresponding changes were increase of
$6,781,656 in additional paid-in capital and decrease of accumulated other
comprehensive income $554,786. The Statutory reserves decrease from $3,217,565
as originally reported, to $2,875,066, a decrease of $342,499. The corresponding
changes were increase of retained earnings $342,499. The total stockholders’
equity has no changes.


F-27


SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





20.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)




CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME








Original
                                        
                                        
                                        RestatedFor
      the year ended June 30,ITEMS
                                        
                                        2008
                                        
                                        
                                        2008Net
      income
                                        
                                        $
                                        10,087,039
                                        
                                        
                                        $
                                        10,087,039Foreign
      currency translation adjustment
                                        
                                        
                                        826,474
                                        
                                        
                                        
                                        1,370,833Comprehensive
      income
                                        
                                        $
                                        10,913,513
                                        
                                        
                                        $
                                        11,457,872





As a
result of restatement of consolidated income and comprehensive income for the
year ended June 30, 2008, comprehensive income increased from $10,913,513 as
originally reported, to $11,457,872, an increase of $544,359. The increase
comprehensive income was composed of increase $544,359 in foreign currency
translation adjustment.


F-28





SHENGKAI
INNOVATIONS, INC.


(F/K/A
SOUTHERN SAUCE COMPANY, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





17.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’EQUITY


Item
                              
                              Original
                              
                              
                              RestatedFor
      the year ended June 302008
                              
                              
                              2008Accumulated
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              AccumulatedAdditional
                              
                              
                              
                              
                              
                              
                              
                              
                              Other
                              
                              
                              
                              
                              
                              Additional
                              
                              
                              
                              
                              
                              
                              
                              
                              otherPreferred
                              
                              
                              Paid-in
                              
                              
                              Statutory
                              
                              
                              Retained
                              
                              
                              Comprehensive
                              
                              
                              Preferred
                              
                              
                              paid-in
                              
                              
                              Statutory
                              
                              
                              Retained
                              
                              
                              comprehensiveStock
                              
                              
                              capital
                              
                              
                              Reserves
                              
                              
                              earnings
                              
                              
                              Income
                              
                              
                              stock
                              
                              
                              capital
                              
                              
                              reserves
                              
                              
                              earnings
                              
                              
                              IncomeBalance,
      July 1,2007
                              
                              $
                              -
                              
                              
                              $
                              10,462,595
                              
                              
                              $
                              1,665,187
                              
                              
                              $
                              7,122,377
                              
                              
                              $
                              1,145,258
                              
                              
                              $
                              -
                              
                              
                              $
                              10,452,168
                              
                              
                              $
                              1,665,187
                              
                              
                              $
                              7,122,377
                              
                              
                              $
                              1,155,685Reduction
      of registered capital of a subsidiary
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (8,662,637
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10,087,039
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10,087,039
                              
                              
                              
                              -Reverse
      acquisition
                              
                              
                              -
                              
                              
                              
                              (132,267
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              243,777
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Proceeds
      from shares issued in private placement, net of  transaction costs of
      $1,275,000
                              
                              
                              7,342,358
                              
                              
                              
                              6,382,642
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,916
                              
                              
                              
                              13,719,084
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Appropriations
      to statutory reserves
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,552,378
                              
                              
                              
                              (1,552,378
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,209,879
                              
                              
                              
                              (1,209,879
                              )
                              
                              
                              -Dividends
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (7,742,234
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              7,742,234
                              
                              
                              
                              -
                              
                              
                              
                              (7,742,234
                              )
                              
                              
                              -Foreign
      currency translation adjustment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              826,474
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,370,833Balance,
      June 30,2008
                              
                              $
                              7,342,358
                              
                              
                              $
                              16,712,970
                              
                              
                              $
                              3,217,565
                              
                              
                              $
                              7,914,804
                              
                              
                              $
                              1,971,732
                              
                              
                              $
                              5,916
                              
                              
                              $
                              23,494,626
                              
                              
                              $
                              2,875,066
                              
                              
                              $
                              8,257,303
                              
                              
                              $
                              2,526,518


F-29





Item 9.   Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.





On June
12, 2008, we dismissed Sherb & Co., LLP (“Sherb”), as our independent
registered public accounting firm. The reports of Sherb on our financial
statements for each of the past two fiscal years contained no adverse opinion or
a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except as that the reports of Sherb for
the fiscal years ended December 31, 2007 and 2006 indicated conditions which
raised substantial doubt about the Company's ability to continue as a going
concern. The decision to change independent accountants was approved by our
Board of Directors on June 9, 2008.




During
our two most recent fiscal years and through the date of this report, we have
had no disagreements with Sherb on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Sherb, would have caused
it to make reference to the subject matter of such disagreements in its report
on our financial statements for such periods.




During
our two most recent fiscal years and through the date of this registration
statement, there have been no reportable events as defined under Item
304(a)(1)(v) of Regulation S-K adopted by the SEC.




We
provided Sherb with a copy of this disclosure before its filing with the SEC. We
requested that Sherb provide us with a letter addressed to the SEC stating
whether or not it agrees with the above statements, and we received a letter
from Sherb stating that it agrees with the above statements.





New
Independent Accountants




Our Board
of Directors appointed Albert Wong & Co., CPA as our new independent
registered public accounting firm effective as of June 12, 2008. During the two
most recent fiscal years and through the date of our engagement, we did not
consult with Albert Wong & Co., CPA regarding either (1) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
or (2) any matter that was either the subject of a disagreement (as defined in
Regulation S-K Item 304(a)(1)(v)), during the two most recent fiscal
years.





Prior to
engaging Albert Wong & Co., CPA, Albert Wong & Co., CPA did not provide
our company with either written or oral advice that was an important factor
considered by our company in reaching a decision to change our independent
registered public accounting firm from Sherb to Albert Wong & Co.
CPA.





ITEM
9A (T) – CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports filed
under the Securities Exchange Act, is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms.
Disclosure controls are also designed with the objective of ensuring that this
information is accumulated and communicated to the Company's management,
including the Company's chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.




Based
upon their evaluation as of the end of the period covered by this report, the
Company's chief executive officer and chief financial officer concluded that,
the Company's disclosure controls and procedures are effective to ensure that
information required to be included in the Company's periodic SEC filings is
recorded, processed, summarized, and reported within the time periods specified
in the SEC rules and forms.





Management’s
Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal control system
was designed to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of published financial
statements.





The
Company’s management assessed the effectiveness of our internal control over
financial reporting as of June 30, 2009. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control—Integrated Framework. Based on its assessment the Company’s
management believes that, as of June 30, 2009, the Company’s internal control
over financial reporting is effective based on those criteria.


42





This
annual report does not include an attestation report of the Company’s registered
accounting firm regarding internal control over financial reporting. The
management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission.




Changes
in Internal Control over Financial Reporting





No
changes in the Company's internal control over financial reporting have come to
management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.





Limitations
on Controls





Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all error and fraud. Any
control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been
detected.




Item 9B.   Other
Information.





None.


43




PART
III





Item 10.   Directors, Executive Officers and
Corporate Governance




(a)
            Directors
      and Executive Officers of Shengkai Innovations,
  Inc




In
connection with the change in control of the Company as described in the
Schedule 14f-1 Information Statement filed with the SEC on June 10, 2008 John
Vogel resigned as our chief executive officer and we appointed Mr. Wang Chen as
our Chief Executive Officer and director. Effective on June 24, 2008, Mr. Vogel
resigned as a director of our Board and Ms. Guo was appointed as a new member of
our Board.





As such,
as of June 24, 2008, all of our officers and directors are residents of the
PRC.  As a result, it may be difficult for investors to effect service of
process within the United States upon any of them or to enforce court judgments
obtained against them in the United States courts.





The
following table sets forth certain information concerning our directors and
executive officers:




Directors and Executive Officers
                    
                    Position/Title
                    
                    AgeWang
      Chen
                    
                    Chief
      Executive Officer, Director
                    
                    45Guo
      Wei
                    
                    Director
                    
                    43





The
following is a summary of the biographical information of our
directors and officers:





Mr. Wang
Chen founded Shengkai in June 1994 and has been serving as Chief
Executive Officer and Chief Technology Officer of Shengkai since then. Prior to
founding Shengkai, he worked at Tianjin Dagang Power Plant from September 1987
to July 1992. Mr. Wang has an MBA from Renmin University of China. Mr. Wang is
husband to Ms. Guo Wei, whose information is described in more detail
below.





Ms. Guo
Wei has worked for Shengkai since 2005. She was appointed Chief Financial
Officer of Shengkai in January 2007. Prior to working at Shengkai, Ms. Guo
served as a purchasing specialist at Honeywell International Inc. (China) from
August 1998 through August 2005. Ms. Guo has advanced English communication and
translation skills and rich work experience in the field of joint ventures and
financial management. Ms. Guo is the wife of Mr. Wang Chen, whose information is
described in more detail above.





All of
our directors hold their positions on the board until our next annual meeting of
the shareholders and until their successors have been qualified after being
elected or appointed.  Officers serve at the discretion of the board of
directors.





Our
director, Guo Wei, is the wife of our director and Chief Executive Officer, Wang
Chen. There are no other family relationships among our directors and executive
officers. There is no arrangement or understanding between or among our
executive officers and directors pursuant to which any director or officer was
or is to be selected as a director or officer, and there is no arrangement, plan
or understanding as to whether non-management shareholders will exercise their
voting rights to continue to elect the current board of directors.





(b)
            Directors
      and Officers of Shengkai





Under
Shengkai’s Articles of Association and PRC law, Shengkai is managed by one
executive director instead of a board of directors. The executive director is
elected and appointed by the shareholders for a term of three years and can
be re-elected for consecutive terms.  The appointment and termination of
the CEO (sometimes called the General Manager) is determined by the executive
director.




In
accordance with Shengkai’s Articles of Association and PRC law, Shengkai’s
executive director is monitored by a supervisor, appointed by the shareholders
for a term of three years.


44





The
following table sets forth certain information as of the Closing Date concerning
the directors and executive officers of Shengkai:




Directors and Executive Officers
                    
                    Position/Title
                    
                    AgeWang
      Chen
                    
                    Chief
      Executive Officer, Chief Technology Officer, Executive
      Director
                    
                    45Guo
      Wei
                    
                    Chief
      Financial Officer
                    
                    43Guo
      Chuanji
                    
                    Supervisor
                    
                    79He
      Li
                    
                    Chief
      Operating Officer
                    
                    33Liu
      Xiaoqian
                    
                    Chief
      Marketing Officer
                    
                    30




The
following is a summary of the biographical information of those
directors and officers of Shengkai whose biographical information does not
appear above:





Mr. Liu
Xiaoqian joined Shengkai in July 2002 as a member of the sales staff and
was appointed Chief Marketing Officer in January 2007. Mr. Liu graduated in 2002
with a bachelor’s degree in chemical machinery.





Ms. He
Li  joined Shengkai in March 2006. She was appointed as Chief
Operating Officer in January 2007. She has experience in human resources
management and business administration. Prior to joining Shengkai, Ms. He served
as human resources manager of Wah Sang Gas (China) Investment Co., Ltd. from
December 2001 through March 2006. Ms. He has a bachelor’s degree in economic
management.




(c)
            Audit
      Committee Financial Expert




We have
not yet appointed an audit committee.  At the present time, we believe that
the members of Board of Directors are collectively capable of analyzing and
evaluating our financial statements and understanding internal controls and
procedures for financial reporting.  We do, however, recognize the
importance of good corporate governance and intend to appoint an audit committee
comprised entirely of independent directors, including at least one financial
expert, in the near future.





(d)
            Compensation
      Committee





We
do not presently have a compensation committee. Our board of directors
currently acts as our compensation committee.





(e)
            Nominating
      Committee





We
do not presently have a nominating committee. Our board of directors
currently acts as our nominating
committee.





(f)
            Compliance
      with Section 16(a) of Exchange Act





Section
16(a) of the Exchange Act requires our executive officers and directors and
persons who own more than 10% of a registered class of our equity securities to
file with the SEC initial statements of beneficial ownership, reports of changes
in ownership and annual reports concerning their ownership of our common stock
and other equity securities, on Form 3, 4 and 5 respectively. Executive
officers, directors and greater than 10% shareholders are required by the SEC
regulations to furnish our company with copies of all Section 16(a) reports they
file.





Based
solely on our review of the copies of such reports received by us and on written
representations by our officers and directors regarding their compliance with
the applicable reporting requirements under Section 16(a) of the Exchange Act,
we believe that, with respect to the fiscal year ended June 30, 2008, our
officers and directors, and all of the persons known to us to own more than 10%
of our common stock, filed all required reports on a timely basis, except that
Wang Chen and Li Shaoqing were late in filing Form 4s as related to Mr. Wang’s
exercise of his option to purchase all of Mr. Li’s shares of Long Sunny
Limited.


45


Item 11.   Executive
Compensation.





The
following is a summary of the compensation we paid to our Chief Executive
Officer and former Chief Executive Officers, John Vogel and Robert Jordan, for
the two years ended June 30, 2009 and 2008. No executive officer received
compensation in excess of $100,000 for any of those years.




Name and
                                    Principal
                                    Position
                                  
                                  Fiscal
                                    Year
                                  
                                  Salary
                                    ($)
                                  
                                  Bonus
                                    ($)
                                  
                                  Stock
                                    Awards
                                    ($)
                                  
                                  Option
                                    Awards
                                    ($)
                                  
                                  Non-equity
                                    Incentive Plan
                                    Compensation
                                    ($)
                                  
                                  Change in
                                    Pension
                                    Value and
                                    Nonqualified
                                    Deferred
                                    Compensation
                                    Earnings
                                    ($)
                                  
                                  All Other
                                    Compensation
                                    ($)
                                  
                                  Total
                                    ($)Wang
      Chen
                                  
                                  
                                  2009
                                  
                                  18,000
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  18,000(CEO)(1)
                                  
                                  
                                  2008
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-John
      Vogel
                                  
                                  
                                  2009
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-(former
      CEO(2)
                                  
                                  
                                  2008
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  11,100
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  11,100Robert
      Jordan
                                  
                                  
                                  2009
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-(former
      CEO)(3)
                                  
                                  
                                  2008
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-
                                  
                                  -0-
                                  
                                  
                                  -0-





(1)
            Wang
      Chen was appointed CEO and director of the Company on June 9,
      2008.(2)
            John
      Vogel was appointed CEO of the Company on March 19, 2008 and director on
      February 14, 2008 and resigned from the position of CEO effective June 9,
      2008. On June 9, 2008, Mr. Vogel received 6,000 shares of our common stock
      as consideration for services, and on June 9, 2008, the closing price for
      our common stock was $1.85.(3)
            Robert
      Jordan was appointed director and CEO of the Company in December 2004. He
      resigned from his position as director effective February 14, 2008 and
      from his position as CEO effective March 19, 2008.





The
following is a summary of the compensation paid by Shengkai to Wang Chen, its
Chief Executive Officer, and Guo Wei, its Chief Financial Officer, for the two
years ended June 30, 2009 and 2008, respectively. No other executive officer of
Shengkai received compensation in excess of $100,000 for any of those
years.





Name and Principal
                                          Position
                                        
                                        Fiscal
                                          Year
                                        
                                        Salary
                                          ($)
                                        
                                        Bonus
                                          ($)
                                        
                                        Stock
                                          Awards
                                          ($)
                                        
                                        Option
                                          Awards
                                          ($)
                                        
                                        Non-equity
                                          Incentive Plan
                                          Compensation
                                          ($)
                                        
                                        Change in
                                          Pension
                                          Value and
                                          Nonqualified
                                          Deferred
                                          Compensation
                                          Earnings
                                          ($)
                                        
                                        All Other
                                          Compensation
                                          ($)
                                        
                                        Total
                                          ($)Wang
      Chen (Chief Executive Officer ) (1)
                                        
                                        2009
                                        
                                        $
                                        18,000-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        $
                                        18,0002008
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-Guo
      Wei (Chief Financial Officer) (2)
                                        
                                        2009
                                        
                                        
                                        15,000
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        15,0002008
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        -0-
                                        
                                        
                                        -0-





(1)
            Wang
      Chen has been Chief Executive Officer of Shengkai since June 1994. He
      received $18,000 in the fiscal year ended June 30, 2009 and received no
      compensation in the fiscal year ended June 20,
  2008.





(2)
            Guo
      Wei was appointed Chief Financial Officer of Shengkai in January 2007. She
      received $15,000 in the fiscal year ended June 30, 2009 and received no
      compensation in the fiscal year ended June 30,
  2008.





Employment
Agreements





We have
no employment agreements with any of our executive officers, except for an
employment agreement entered into between Wang Chen and Shengkai effective as of
December 1, 2000 and a confidentiality and non-compete agreement effective as of
June 7, 2001. Pursuant to these agreements, Mr. Wang receives no set salary
compensation for his services as Chief Executive Officer of Shengkai, but
Shengkai provides for his government-mandated social security insurance fees and
certain dormitory expenses. In the event that Mr. Wang leaves his position at
Shengkai, he stands to receive a monthly confidentiality and noncompete payment
of RMB2,000 (approximately $293).


46





Compensation
Discussion and Analysis





We strive
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar
locations.





It is not
uncommon for PRC private companies in China to have base salaries as the sole
form of compensation. The base salary level is established and reviewed based on
the level of responsibilities, the experience and tenure of the individual and
the current and potential contributions of the individual. The base salary is
compared to the list of similar positions within comparable peer companies and
consideration is given to the executive’s relative experience in his or her
position.  Base salaries are reviewed periodically and at the time of
promotion or other changes in responsibilities.


We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be comparable to
the programs of our peer companies and aimed to retain and attract talented
individuals.





We will
also consider forming a compensation committee to oversee the compensation of
our named executive officers. The majority of the members of the compensation
committee would be independent directors.





Compensation
of Directors





As of the
date of this report, our directors have received no compensation for their
service on the board of directors. We plan to implement a compensation program
for our independent directors, as and when they are appointed, which we
anticipate will include such elements as an annual retainer, meeting attendance
fees and stock options. The details of that compensation program will be
negotiated with each independent director.




The
executive director for Shengkai is not compensated for his service as executive
director.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.





The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities by (i) any person or group owning more than
5% of any class of voting securities, (ii) each director, (iii) our chief
executive officer and president and (iv) all executive officers and directors as
a group as of August 31, 2009.





Amount and Nature of Beneficial Ownership (1)Name and Address of
                                              Beneficial Owner
                                            
                                            Common
                                              Stock
                                            
                                            Preferred
                                              Shares
                                              (2)(12)
                                            
                                            Warrants
                                              (3)(14)
                                            
                                            Total (4)
                                            
                                            Percentage of
                                              common
                                              stock (%)Owner of More than 5% of ClassVision
      Opportunity China LP
                                              520
      Madison Avenue, 12th Floor
                                              New
      York, NY 10022 (5)
                                            
                                            
                                            672,500
                                            
                                            5,915,526
                                            (12)
                                            7,098,632
                                            (12)
                                            13,686,658
                                            (12)
                                            9.9
                                            (12)%Hare
      & Co., as custodian for
                                              Blue
      Ridge Investments, LLC
                                              214
      N. Tryon Street
                                              Charlotte,
      NC 28255 (6)
                                            
                                            
                                            0
                                            
                                            1,971,842
                                            (12)
                                            2,366,211
                                            (12)
                                            4,338,053
                                            (12)
                                            9.9
                                            (12)%Long
      Sunny Limited (7)(8)
                                              P.O.
      Box 957
                                              Offshore
      Incorporations Centre
                                              Road
      Town, Tortola
                                              British
      Virgin Islands
                                            
                                            
                                            17,400,000
                                            
                                            0
                                            
                                            0
                                            
                                            17,400,000
                                            
                                            78.69
                                            %Li
      Shaoqing (8)
                                              c/o
      Long Sunny Limited
                                              P.O.
      Box 957
                                              Offshore
      Incorporations Centre
                                              Road
      Town, Tortola
                                              British
      Virgin Islands
                                            
                                            
                                            0
                                            
                                            0
                                            
                                            0
                                            
                                            0
                                            
                                            0
                                            %Directors
      and Executive Officers (9)Mr.
      Wang Chen (director and current CEO) (10)
                                            
                                            
                                            17,400,000
                                            
                                            0
                                            
                                            0
                                            
                                            17,400,000
                                            
                                            78.69
                                            %Ms.
      Guo Wei (director) (11)
                                            
                                            
                                            17,400,000
                                            
                                            0
                                            
                                            0
                                            
                                            17,400,000
                                            
                                            78.69
                                            %All
      Directors and Executive Officers (4 persons)
                                            
                                            
                                            17,400,000
                                            
                                            0
                                            
                                            0
                                            
                                            17,400,000
                                            
                                            78.69
                                            %


47


(1)
  In determining beneficial ownership of our common stock as of a given
date, the number of shares shown includes shares of common stock which may be
acquired on exercise of warrants or options or conversion of convertible
securities within 60 days of that date. In determining the percent of common
stock owned by a person or entity on August 31, 2009, (a) the numerator is the
number of shares of the class beneficially owned by such person or entity,
including shares which may be acquired within 60 days on exercise of warrants or
options and conversion of convertible securities, and (b) the denominator is the
sum of (i) the total shares of common stock outstanding on August 31, 2009
(22,112,500), and (ii) the total number of shares that the beneficial owner may
acquire upon conversion of the preferred and on exercise of the warrants and
options, subject to limitations on conversion and exercise as more fully
described in note 12 below. Unless otherwise stated, each beneficial owner has
sole power to vote and dispose of its shares.





(2)
  An aggregate of 7,887,368 Preferred Shares were issued in the Private
Placements, of which 5,915,926 shares were issued to Vision Opportunity China LP
in the June 2008 Financing and 1,971,842 shares were issued to Blue Ridge
Investments, LLC, in the July 2008 Financing. Each Preferred Share is initially
convertible, at the option of the holder, into one share of our common stock.
Accordingly, in total, as of June 21, 2008, all of the outstanding Preferred
Shares are convertible into a total of 7,887,368 shares of our common stock,
subject to a 9.9% limitation on beneficial ownership of common stock as more
fully described in note 12 below.





(3)
  The purchasers in the Private Placements have also been issued Warrants
to purchase up to a total of 9,464,843 shares of our common stock at $3.52 per
share (subject to a 9.9% limitation on beneficial ownership of common stock as
more fully described in note 12 below), of which 7,098,632 shares underlie the
Warrant issued to Vision Opportunity China LP in the June 2008 Financing and
2,366,211 shares underlie the Warrant issued to Blue Ridge Investments, LLC, in
the July 2008 Financing. The Warrants have a term of five years.





(4)
  As of August 31, 2009, we had outstanding (i) 22,112,500 shares of common
stock, (ii) 7,887,368 Preferred Shares, which were issued to purchasers in the
Private Placements, and (iii) Warrants to purchase an aggregate of 9,748,934
shares of common stock at $3.52 per share, including 9,464,843 shares
attributable to the purchasers and 284,091 shares attributable to Warrants
issued as consideration for consulting services pursuant to the Mass Harmony
Agreement described in more detail below.





(5)
  Vision Opportunity China LP acquired Preferred Shares convertible into
5,915,526 shares of common stock and Warrants to purchase up to 7,098,632 shares
of common stock (each subject to a 9.9% limitation on beneficial ownership of
common stock as more fully described in note 12 below) in the June 2008
Financing that closed on June 11, 2008. Vision Opportunity China LP also
owns 672,500 shares of our common stock, which it acquired from prior
holders on February 14, 2008.





(6)
  Blue Ridge Investments, LLC acquired Preferred Shares convertible into
1,971,842 shares of common stock and Warrants to purchase up to 2,366,211 shares
of common stock in the July 2008 Financing that closed on July 18, 2008. Blue
Ridge Investments, LLC’s ownership is subject to a 9.9% limitation on beneficial
ownership of common stock as more fully described in note 12 below.





(7)
  On June 9, 2008, we acquired Shen Kun in a Reverse Merger Transaction
with Long Sunny Limited and other Shen Kun Shareholders. In the Reverse Merger
Transaction, as merger consideration for the Shen Kun shares we received from
the Shen Kun Shareholders we issued and delivered to the Shen Kun Shareholders
20,550,000 of our newly-issued shares of common stock, of which Long Sunny
Limited received 17,400,000 shares.




(8)
  Prior to August 5, 2009, Long Sunny Limited was owned by Li Shaoqing and
Wang Chen. Their respective beneficial ownership in the Company was based upon
their respective interest in Long Sunny Limited.Since August 5, 2009, pursuant
to a call option agreement described in note 10 below, our CEO and director, Mr.
Wang Chen, became the beneficial owner of a majority of our stock held by Long
Sunny Limited.


48





(9)
  The address of each of the officers and directors named in the table is
No. 27, Wang Gang Road, Jin Nan (Shuang Gang) Economic and Technology
Development Area, Tianjin, People’s Republic of China 300350.





(10)
  Mr. Wang, our new director and CEO and the longstanding chairman and CEO
of Shengkai, beneficially owns 17,400,000 shares of our common stock through his
100% interest in our controlling shareholder, Long Sunny Limited.





Prior to
August 5, 2009, Mr. Wang beneficially owned 6,960,000 shares through his 40%
interest in Long Sunny Limited and 10,440,000 shares of our common stock
pursuant to an agreement that gave him the right to own 100% of Long Sunny
Limited, the controlling shareholder of our common stock. That agreement is a
call option agreement between Mr. Wang and Mr. Li Shaoqing, who previously held
60% of the stock of our controlling shareholder, Long Sunny Limited. Under the
agreement, Mr. Wang was granted an option to purchase all of Mr. Li’s stock in
Long Sunny Limited at an exercise price of $.01 or $.001 per share, in seven
installments over the course of approximately seven months, provided that
Shengkai, SK Ceramic Valves and Shen Kun generate a gross revenue of at least
RMB 1,500,000 per month during the period commencing June 1, 2008 through
December 31, 2008. As of August 5, 2009, Mr. Wang had exercised his option to
purchase all of Mr. Li’s stock in Long Sunny Limited, making Mr. Wang the 100%
owner of Long Sunny Limited and the indirect beneficial owner of a total of
17,400,000 shares of our common stock owned by Long Sunny
Limited.





(11)
  Guo Wei is a director as of June 24, 2008. Wang Chen and Ms. Guo are
husband and wife. Ms. Guo’s beneficial ownership in the Company is based upon
Mr. Wang’s respective interest in Long Sunny Limited.





(12)
  Pursuant to the terms of the Warrants and the certificate of designation
for the Preferred Shares, at no time may a purchaser of Preferred Shares or
Warrants convert or exercise such Purchaser’s Preferred Shares or Warrants into
shares of our common stock if the conversion or exercise would result in such
Purchaser beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) more than 9.9% of our then issued and
outstanding shares of common stock; provided, however, that upon a purchaser
providing us with sixty-one (61) days’ notice that such purchaser wishes to
waive the cap, then the cap will be of no force or effect with regard to all or
a portion of the preferred shares referenced in the waiver notice. The 9.9%
beneficial ownership limitation does not prevent a shareholder from selling some
of its holdings and then receiving additional shares. Accordingly, each
shareholder could exercise and sell more than 9.9% of our common stock without
ever at any one time holding more than this limit.





* Under 1
percent of the issued and outstanding shares as of August 31, 2009.





Item 13.   Certain Relationships and Related
Transactions, and Director Independence.




Set forth
below are the related party transactions since June 30, 2007, among the Company
and its shareholders, officers, and/or directors:





·
            Vision
      Opportunity China LP, which held approximately 43.4% of our outstanding
      common stock prior to consummation of the June 2008 Financing, had an
      interest in the June 2008 Financing for the following
    reasons:





·
            At
      the Closing of the June 2008 Financing, Vision Opportunity China LP
      received Preferred Shares convertible into approximately 5.9 million
      shares of our common stock, subject to a 9.9% limitation on
      beneficial ownership of common stock at a purchase price of
      $2.5357 per share and could stand to realize a profit if our common stock
      were later to have a market value of higher than $2.5357 per
      share.





·
            At
      the Closing of the June 2008 Financing, Vision Opportunity China LP also
      received warrants to purchase approximately 7.1 million shares of our
      common stock in the future, subject to a 9.9% limitation on beneficial
      ownership of common stock, at an exercise price of $3.52 per share.
      Solely for purposes of illustration, Vision Opportunity China LP could
      stand to realize a profit if our common stock were later to have a market
      value of higher than $3.52 per
share.


49





·
            As
      part of the June 2008 Financing, Vision Opportunity China LP received
      rights to have the common stock that is issuable to it upon conversion of
      its Preferred Shares registered under an effective registration statement
      filed by the Company with the SEC.





·
            Pursuant
      to the Mass Harmony Agreement dated September 16, 2007, Mass Harmony
      received an aggregate of RMB 500,000 (approximately $70,000), 1.5% of the
      issued and outstanding common stock of the Company after the Private
      Placements (including the common stock issuable upon conversion of the
      Preferred Shares), equivalent to 450,000 shares of common stock, and 5% of
      the gross proceeds of the Private Placements in Warrants, equivalent to
      Warrants to purchase an aggregate of 284,091 shares of common stock. The
      services provided by Mass Harmony under the Mass Harmony Agreement include
      performing initial due diligence on Shengkai, preparing Shengkai’s
      business plan, and assisting in the corporate restructuring and financial
      documentation.




·
            On
      June 9, 2008, we issued the following shares as compensation for
      services:




·
            5,000
      shares of our common stock to Sichenzia Ross Friedman Ference LLP, for
      legal services rendered.·
            71,250
      shares of our common stock to the Law Office of Raul Silvestre &
      Associates, APLC, for legal services rendered. Raul Silvestre owns Castle
      Bison, Inc., a shareholder of the Company.·
            6,000
      shares of our common stock to John Vogel, our director and former
      CEO.·
            15,000
      shares of our common stock to Robert Scherne, our former
      Controller.




·
            As
      of June 9, 2008, shareholders Castle Bison, Inc., the Law Offices of
      Raul Silvestre & Associates and Lomond International, Inc. agreed for
      due consideration, to forgive certain loans made to the Company in the
      aggregate amount of $47,000. Lomond International, Inc. is owned by Martin
      Sumichrast and Ralph Olson, two shareholders of the
    Company.





Except as
disclosed above, no executive officer, director or any member of these
individuals’ immediate families, any corporation or organization with whom any
of these individuals is an affiliate or any trust or estate in which any of
these individuals serves as a trustee or in a similar capacity or has a
substantial beneficial interest in is or has been indebted to the Company at any
time since the beginning of the Company’s last fiscal year.





Procedures
for Approval of Related Party Transactions




Our board
of directors is charged with reviewing and approving all potential related party
transactions.  All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.





Director
Independence





The
Company currently does not have a director that qualifies as an “independent”
director as that term is defined under the National Association of Securities
Dealers Automated Quotation system.  Our company, however, recognizes
the importance of good corporate governance and intends to appoint an audit
committee comprised entirely of independent directors, including at least one
financial expert, during our fiscal year ending June 30, 2010.





Item 14.   Principal Accounting Fees and
Services




Audit
Fee





The
aggregate fees incurred by the Company’s independent registered public
accounting firms, for professional services rendered for the audit of our annual
financial statements for the year ended June 30, 2009, and for the reviews of
the financial statements included in our Quarterly Reports on Form 10-Q during
this fiscal year were approximately $98,000.





Audit-Related
Fees





The
Company did not incur any fees from its independent registered public accounting
firms for audit-related services during the year ended June 30,
2009.





Tax
Fees





The
Company did not incur any fees from its independent registered public accounting
firms for tax compliance or tax consulting services during the year ended June
30, 2009.


50





All
Other Fees





The
Company incurred approximately $11,000 in fees from its independent registered
public accounting firms for services rendered to the Company, other than the
services covered in "Audit Fees" for the fiscal year ended June 30,
2009.





PART
IV





Item 15.   Exhibits, Financial Statements
Schedules





Footnote
                  
                  Exhibit
      No.
                  
                  Description(1)
                  
                  3.1
                  
                  Articles
      of Incorporation.(2)
                  
                  3.2
                  
                  Articles
      of Amendment to the Articles of Incorporation.(1)
                  
                  3.3
                  
                  Bylaws.(3)
                  
                  3.4
                  
                  Articles
      of Amendment to the Articles of Incorporation, setting forth the
      Certificate of Designations authorizing the Series A Preferred
      Stock.(3)
                  
                  3.5
                  
                  Specimen
      of common stock certificate.(3)
                  
                  4.1
                  
                  Form
      of Series A Warrant, June 2008 Financing.(3)
                  
                  4.2
                  
                  Securities
      Purchase Agreement, dated as of June 10, 2008, by and among the Company
      and the Purchasers.(3)
                  
                  4.3
                  
                  First
      Amendment to Securities Purchase Agreement, dated as of June 23, 2008, by
      and among the Company and the Purchasers.(3)
                  
                  4.4
                  
                  Registration
      Rights Agreement, dated as of June 10, 2008, by and among the Company and
      the Purchasers.(3)
                  
                  4.5
                  
                  Registration
      Rights Agreement dated as of June 10, 2008, by and among the Company and
      the Shell Shareholders.(3)
                  
                  4.6
                  
                  Form
      of Lock-Up Agreement, dated as of June 10, 2008, by and among the Company
      and certain Shareholders.(4)
                  
                  4.7
                  
                  Form
      of Series A Warrant, July 2008 Financing.(4)
                  
                  4.8
                  
                  Securities
      Purchase Agreement, dated as of July 18, 2008, by and among the Company
      and Blue Ridge Investments, LLC.(4)
                  
                  4.9
                  
                  Registration
      Rights Agreement, dated as of July 18, 2008, by and among the Company and
      Blue Ridge Investments, LLC.(3)
                  
                  10.1
                  
                  Merger
      Agreement and Plan of Reorganization, dated as of June 9, 2008 between the
      Company, the controlling shareholders of the Company, Shen Kun Acquisition
      Sub Limited, Shen Kun International Limited, and the shareholders of Shen
      Kun International Limted. (3)(3)
                  
                  10.2
                  
                  Securities
      Escrow Agreement, dated as of June 10, 2008, by and between the Company,
      Vision Opportunity China LP as representative of the Purchasers, Li
      Shaoqing, and Loeb & Loeb LLP, as escrow agent.(3)
                  
                  10.3
                  
                  Investor
      and Public Relations Escrow Agreement, dated as of June 10, 2008, between
      the Company and Vision Opportunity China LP as representative of the
      Purchasers and Sichenzia Ross Friedman Ference LLP, as escrow
      agent.


(3)
            
            10.4
            
            Escrow
      Agreement, dated as of June 2, 2008, between the Company, Shen Kun
      International Limited, Vision Opportunity China LP, and Loeb & Loeb
      LLP, as escrow agent.


51




(3)
            
            10.5
            
            First
      Amendment to Escrow Agreement, dated as of June 4, 2008, between the
      Company, Shen Kun International Limited, Vision Opportunity China LP, and
      Loeb & Loeb LLP, as escrow agent.(3)
            
            10.6
            
            Engagement
      Letter Agreement between Shengkai and Aegis Capital Corp., dated May
      26, 2008.(3)
            
            10.7
            
            Equity
      Pledge Agreement, dated as of May 30, 2008.(3)
            
            10.8
            
            Exclusive
      Purchase Option Agreement, dated as of May 30, 2008.(3)
            
            10.9
            
            Consigned
      Management Agreement, dated as of May 30, 2008.(3)
            
            10.10
            
            Loan
      Agreement, dated as of May 30, 2008.(3)
            
            10.11
            
            Technology
      Service Agreement, dated as of May 30, 2008.(3)
            
            10.12
            
            Financial
      Consulting Agreement, dated as of September 16, 2007 between Shengkai and
      Mass Harmony Asset Management Limited.(3)
            
            10.13
            
            Assignment
      of Intellectual Property, dated as of June 9, 2008 between the company and
      Michael Jordan.(4)
            
            10.14
            
            Supplementary
      Agreement dated as of July 3, 2008 to the Equity Pledge Agreement dated as
      of May 30, 2008.(4)
            
            10.15
            
            Securities
      Escrow Agreement, dated as of July 18, 2008, by and between the Company,
      Blue Ridge Investments, LLC, Li Shaoqing, and Loeb & Loeb LLP, as
      escrow agent.(5)
            
            10.16
            
            Second
      Amendment to Securities Purchase Agreement, dated as of July 31, 2008, by
      and between the Company and Vision Opportunity China
LP.(5)
            
            10.17
            
            First
      Amendment to Securities Escrow Agreement, dated as of July 31, 2008, by
      and among the Company, Vision Opportunity China LP, Li Shaoqing, and Loeb
      & Loeb LLP, as escrow agent.(5)
            
            10.18
            
            First
      Amendment to Securities Purchase Agreement, dated as of July 31, 2008, by
      and between the Company and Blue Ridge Investments,
LLC.(5)
            
            10.19
            
            First
      Amendment to Securities Escrow Agreement, dated as of July 31, 2008, by
      and among the Company, Blue Ridge Investments, LLC, Li Shaoqing, and Loeb
      & Loeb LLP, as escrow agent.(6)
            
            10.20
            
            Land
      Use Agreement dated January 23, 2009, between Shengkai (Tianjin) Ceramic
      Valves Co., Ltd. and Tianjin Airport Industrial Park Land
      Bureau.(3)
            
            21.1
            
            List
      of Subsidiaries.


31.1
            
            Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.





(1)
            Incorporated
      by reference to the exhibit of the same number to our registration
      statement on Form SB-2 filed with the SEC on May 26,
      2005.(2)
            Incorporated
      by reference to our current report on Form 8-K filed with the SEC
      on April 14, 2008.(3)
            Incorporated
      by reference to our current report on Form 8-K/A filed with the SEC on
      June 23, 2008.(4)
            Incorporated
      by reference to our current report on Form 8-K filed with the SEC on July
      24, 2008.(5)
            Incorporated
      by reference to our current report on Form 8-K filed with the SEC on July
      31, 2008.(6)
            Incorporated
      by reference to our quarterly report on Form 10-Q filed with the SEC on
      February 13, 2009.


52




SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Tianjin, PRC, on
the 2nd day of
September, 2009.





SHENGKAI
      INNOVATIONS, INC.By:
                /s/
      Wang ChenWang
      ChenChief
      Executive Officer and
Director





In
accordance with the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.





/s/
      Wang Chen
                  
                  September
      2,  2009Wang
      ChenChief
      Executive Officer and Director/s/
      Guo Wei
                  
                  September
      2, 2009Guo
      WeiDirector


53