**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-K/A**




(Mark
      One)




 ̈
            
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**
              
              For
                the fiscal year ended June 30, 2008





 ̈
            
            **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  ̈ No





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


 ̈ Yes  ̈ 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. ྭ 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. ྭ





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 ̈





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


 ̈ Yes  ̈ No





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 $1,407,450 based upon the closing
      price
      of the common stock as quoted by Nasdaq OTC Bulletin Board on December 31,
      2007.




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
      November 10, 2008, 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).


1





**EXPLANATORY
      NOTE** :





In
      November 2008, management of the Registrant concluded that its financial
      statements for the year ended June 30, 2008, did not properly account for
      additional paid-in capital and comprehensive income for the fiscal year ended
      June 30, 2008 in accordance with United States generally accepted accounting
      principle.





After
      a
      detailed 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, 2006 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
      impacts of the above have made the changes in figures as of the years ended
      June
      30, 2007 and June 30, 2008 by restating the amount of equity items as at year
      ended June 30, 2007 and 2008.  Management is hereby restating its financial
      statements for the year ended June 30, 2007 and 2008 to correct the errors
      noted
      above.





FORWARD
      LOOKING STATEMENTS




This
      Annual Report on Form 10-K/A 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/A. Additionally, statements concerning future matters
      are forward-looking statements.




Although
      forward-looking statements in this Annual Report on Form 10-K/A 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/A. 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/A, 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
      September 15, 2008, $1.00 was equivalent to 6.8496 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.





2


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.”


3





**SHENGKAI
      INNOVATIONS, INC.**


**FORM
      10-K/A**


**For
      the Fiscal Year Ended June 30, 2008**





**TABLE
      OF CONTENTS**





**PAGE****PART
                I**Item
                1.
            
            Business
            
            5Item
                1A.
            
            Risk
                Factors
            
            26Item
                1B.
            
            Unresolved
                Staff Comments
            
            36Item
                2.
            
            Properties
            
            36Item
                3.
            
            Legal
                Proceedings
            
            37Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            37**PART
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Shareholder Matters and Issuer
                Purchases of Equity Securities
            
            37Item
                6.
            
            Selected
                Financial Data
            
            39Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            40Item
                7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            44Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            44Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosures
            
            74Item
                9A(T).
            
            Controls
                and Procedures
            
            74Item
                9B.
            
            Other
                Information
            
            75**PART
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            76Item
                11.
            
            Executive
                Compensation
            
            77Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Shareholder Matters
            
            79Item
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            81Item
                14.
            
            Principal
                Accountant Fees and Services
            
            82**PART
                IV**Item
                15.
            
            Exhibits
                and Financial Statement Schedules
            
            83Signatures
            
            85


4





**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:




5




[GRAPHIC]




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.





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”).





6


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.





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.





7


*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.




8




*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 16, 2008, $13,180,000 had been contributed as the registered capital of
      SK
      Ceramic Valves **.** The
      remaining portion of SK Ceramic Valve’s registered capital ($4,600,000) had been
      contributed and verified as of August 1, 2008.





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:




9


**Name of Shareholder**
              
              **Amount of Contribution**
                **(RMB)**
              
              **Percent of Capital**
                **Contribution**Wang 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
              %





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”).





10


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.








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:





o
            *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.





o
            *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.





o
            *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.





o
            *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.




o
            *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.




11




*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.





*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
      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.





12


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.





*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.





13


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.





*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.




14


*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.





15


Shengkai
      develops ceramic products with more than 700 types and specifications in 32
      series, under nine categories. Of these, national patents have been obtained
      for
      12 products, and applications for nine more are pending. 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 stage of stable development.
      According to statistical data in “Industrial Valves: World Markets” report
      published by the McIlvaine Company (the “McIlvaine Report”), the growth rate of
      the world sales volume of valves has remained at a level of approximately 5%
      since 2000. As of 2006, there are more than 50,000 valve manufacturers with
      valve sales volume reaching $43 billion.




Since
      reforming and opening its markets, China’s valve industry has developed rapidly,
      especially during the country’s “Tenth Five-Year Plan”. At the end of 2006, the
      number of Chinese valve manufacturers was up to over 4,000, representing 8%
      of
      the world’s total suppliers; 1,438 of them have sales of over RMB5 million,
      nearly 200 of them have output value of RMB50 million. According to the
      statistical data by the China National Bureau of Statistics, total output in
      China’s valve industry reached 2.06 million tons in 2006, which increased 17.34%
      compared with the previous year; gross industrial output value reached RMB62
      billion, which increased 20% compared with the previous year. The Bureau of
      Statistics further estimated that China’s valve industry experienced a growth
      rate of over 20% in 2007.





Market
      dispersion is more pronounced in the valve industry than many other industries
      and subjects to intense competition: the top 15 of the world manufacturers
      had a
      sales volume less than $7 billion in 2006 with a world market share of
      approximately 20%, according to the McIlvaine Report; 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 RMB4.63 billion, with a Chinese market share of less than 7
      percent.




***Operations
      of Shengkai***




Shengkai
      designs, manufactures and distributes ceramic valves in 32 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 m 2 , with
      51 sets of machine tools, of which 17 sets are for ceramics, and two sets of
      digitally controlled machine tools. Ceramic valve output in 2007 was 6,969
      sets.





16


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 can
      not
      only 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:





o
            adding
                zirconia to alumina ceramics to increase toughness and resistance
                to
                corrosion;o
            successfully
                using Martensite transformation toughening technology to increase
                toughness and reduce deformability; ando
            applying
                nano-sized powder technology to improve toughness and other
                features.o
            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***




As
      of June 30, 2008, the following material sales contracts were active and
      still being fulfilled:





**No.**
            
            **The Other Party**
            
            **Object**
            
            **Amount (RMB)**
            
            **Date of Execution**1
            
            Anhui Huainan
                Luoneng Power Generation Co., Ltd.
            
            Valves
            
            1,937,463
            
            04/10/20082
            
            Jiangxi
                Xinghuo Machinery Company Changsha Branch
            
            Valves
            
            1,846,992
            
            04/15/20083
            
            Wuhan
                Kaidi Electric and Environmental Protection Co., Ltd.
            
            Valves
            
            1,813,677
            
            06/05/20084
            
            Beijing
                Guodian Longyuan Environmental Engineering Co., Ltd.
            
            Valves
            
            1,559,487
            
            05/15/20085
            
            Datang
                Qitai River Power Generation Co., Ltd.
            
            Valves
            
            1,533,613
            
            04/15/20086
            
            Zhonghai
                Petrochemical and Chemical (China) Co., Ltd.
            
            Valves
            
            1,337,678
            
            06/17/20087
            
            Tianjin
                Chentang Thermoelectricity Co., Ltd.
            
            Valves
            
            1,279,565
            
            06/15/20088
            
            Beijing
                Boqi Electric Technology Co., Ltd.
            
            Valves
            
            981,410
            
            05/05/20089
            
            Changzhou
                Jianghe Mile Electric Metallurgy Equipment Manufacture Co.,
                Ltd.
            
            Valves
            
            855,783
            
            06/11/200810
            
            Zhejiang
                Huanqiu Power Station Valve Co., Ltd Changchun Branch
            
            Valves
            
            849,918
            
            05/05/2008




17




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





For
      the
      year ended June 30, 2006, Shengkai’s top 10 customers were as
      follows:





Major
      customers and sales amount for the year ended June 30, 2006




Name
            
            Amount (RMB)Hunan
                Yiyang No. 2 Power Generating Co., Ltd.
            
            
            2,864,500China
                Resources Power Hunan Co., Ltd.
            
            
            3,065,278Guodian
                Quanzhou Generating Co., Ltd.
            
            
            1,098,821Dezhou
                Power Plant under Huaneng Power International, Inc.
            
            
            1,326,948Beijing
                Guodian Longyuan Environmental Engineering Co., Ltd.
            
            
            1,347,362Zhenjiang
                Power Station Auxiliary Machinery Plant
            
            
            1,479,874Qinghai
                Qiaotou Co., Ltd.
            
            
            3,283,385Huadian
                Fujian Shaowu Power Generation Co, Ltd.
            
            
            2,162,592Guodian
                Yongfu Generating Co., Ltd.
            
            
            2,401,962Shanxi
                Lujin Wangqu Power Generation Co., Ltd.
            
            
            4,120,959





18




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





For
      the
      year ended June 30, 2006, Shengkai’s top 10 suppliers were as
      follows:





Suppliers
      and purchase amount for the year ended June 30, 2006





Name
            
            Amount (RMB)Tianjin
                Xinshengqiang Nonferrous Metals Co., Ltd.
            
            
            538,752.29Tianjin
                Kaiming Metal Materials Co., Ltd.
            
            
            904,287.76Shanghai
                Yuelong New Materials Co., Ltd.
            
            
            1,466,529.72Tianjin
                Tiansha Haiyan Grinding Tools Manufacturing Co., Ltd.
            
            
            1,519,322.11Tianjin
                Jinhan Trade Co., Ltd.
            
            
            1,634,408.72Tianjin
                Zhiliang Metal Forging Co., Ltd.
            
            
            2,735,274.41Tianjin
                Dongrui Foundry Co., Ltd.
            
            
            3,440,285.87Tianjin
                Jinwan’an Pneumatic Hydraulic Complete Equipment Co., Ltd.
            
            
            3,462,773.48Botou
                Alloy Casting Plant
            
            
            5,284,073.53Tianjin
                Baili Ertong Machinery Co., Ltd.
            
            
            9,476,479.52





***Marketing
      and Sales***





In
      2008,
      Shengkai spent RMB342,486.80 for marketing and sales efforts and in 2009 plans
      to invest an additional RMB 2,646,162. 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 will be responsible for domestic marketing and engaging in direct sales
      for regular customers and sales via agents for spot sales. Sales teams will
      be
      set up by geographical region. Currently, Shengkai has set up distribution
      offices in Hunan, Jilin, Heilongjiang, Hebei, Jiangxi and Hubei and plans to
      increase its sales force, enlarge investment in marketing and increase sales
      volume. Due to geographical limitations and cultural differences, Department
      No.
      2 will engage in no direct sales, but will instead utilize 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.





19




**Sales
      training** : Each
      sales personnel member in the company will be 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.





**Value-added
      services** :
      Shengkai will enhance the quality of our before-sales, during sales and
      after-sales service. Shengkai will develop 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 environmental protection
      and
      electric power industry. Shengkai will also dedicate its energies to expanding
      our market into new fields like petrochemicals, metallurgy and ore mining.
      In
      the fiscal year 2008, revenue was $32,355,692.93, with the power industry
      comprising approximately 80.3% of revenue, and the aluminum, petrochemical
      and
      chemical, metallurgy and other industries comprising approximately 1.5%, 7.3%,
      6.4% and 4.4%, respectively. We have already taken the first step toward
      entering the petrochemical industry market by gaining the qualification of
      first-class supplier for PetroChina and CPCC.  We estimate that
      by fiscal year 2009, the petrochemical industry will comprise approximately
      20% of Shengkai's revenue, and the metallurgy, aluminum and power industries
      will comprise 10%, 5%, and 65% 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 2006.





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. Fuji kin 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
      R&D 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 Fuji Kin have
      a
      mature production scale 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.





20




*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 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. 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.




Shengkai
      has established a cooperative relationship with Tianjin University of Science
      & Technology. 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:





o
            **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.o
            **Lower
                production costs**.
                We plan to digitalize its machinery and streamline its valve production
                so
                as to lower the production cost of ceramic valves and hasten their
                substitution for metal valves.o
            **Internationalization**.
                Currently, 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.





***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 value production
      (the Computer System) on August 26, 2007. The Company expected the Computer
      System to be delivered within 2 years and total cost is approximately $8,759,636
      (RMB 60,000,000). Shengkai has already paid $4,379,818 (RMB 30,000,000) for
      the
      Computer System and is committed to pay the balance during next fifteen
      months.





21




Shengkai
      focuses its technology development on those product areas that have
      the highest demand, so as to speed-up 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 to greatly
      enhance process precision and efficiency and will improve the over all quality
      of Shengkai’s valves. We anticipate the mode of an entire digital-controlled
      machine tool process 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.




In
      addition, Shengkai has certain intellectual property rights as listed
      below:





*Patents*





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




**No.**
            
            **Utility**
              **Models**
            
            **Certificate**
              **No.**
            
            **Utility**
              **Models**
              **No.**
            
            **Designer**
            
            **Application**
              **Date**
            
            **Authorized**
              **Announcement**
            
            **Owner**1
            
            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
            
            ZL200420029886.4
            
            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
            
            Shengkai




Additionally,
      in January 2008, we applied for, and expect to obtain, patents for nine newer
      valve products, listed below:





**No.**
            
            **Utility Models**
            
            **Type**
            
            **Application No.**
            
            **Application Date**
            
            **Applicants**1
            
            Ceramic
                valves with purge devices
            
            Utility
                Model
            
            200820002560.0
            
            1/22/2008
            
            Shengkai2
            
            Throttle
                ceramic valves
            
            Utility
                Model
            
            200820002561.5
            
            1/22/2008
            
            Shengkai3
            
            Fast-opening
                ceramic adjusting valves
            
            Utility
                Model
            
            200820002565.3
            
            1/22/2008
            
            Shengkai4
            
            Eccentric
                anti-seize abrasion-resistant spherical valves
            
            Utility
                Model
            
            200820002564.9
            
            1/22/2008
            
            Shengkai5
            
            Spherical
                ceramic adjusting valves
            
            Utility
                Model
            
            200820002562.X
            
            1/22/2008
            
            Shengkai6
            
            Ceramic
                butterfly valves
            
            Utility
                Model
            
            200820002563.4
            
            1/22/2008
            
            Shengkai7
            
            Ceramic
                seal switching valves
            
            Utility
                Model
            
            200820002566.8
            
            1/22/2008
            
            Shengkai8
            
            Fine-tuning
                ceramic adjusting valves
            
            Utility
                Model
            
            200820002567.2
            
            1/22/2008
            
            Shengkai9
            
            Hemispherical
                ceramic adjusting valves
            
            Utility
                Model
            
            200820002559.8
            
            1/22/2008
            
            Shengkai




22


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





**Name**
            
            **Patent No.**
            
            **Application Date**
            
            **Approval date**Sealing
                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, 1999





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




Mr.
      Wang
      also owned a utility model patent named “Wear resistant slab delivering gate
      valve,” which was transferred to Shengkai pursuant to a patent transfer
      agreement.  The application date for such patent was August 24, 1995 and
      has since expired.





*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**[GRAPHIC]
            
            No.1239606
            
            No.6:
                metal valves (parts of non-machinery)
            
            Shengkai
            
            1/14/1999 to 1/13/2009“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 2/20/2012[GRAPHIC]
            
            No.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 5/6/2017[GRAPHIC]
            
            No.4152532
            
            No.20:
                non-metallic valves, non-metallic ball valves, plastic water pipe
                valves,
                plastic drip valves
            
            Shengkai
            
            5/7/2007
                to 5/6/2017[GRAPHIC]
            
            No.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 10/13/2016[GRAPHIC]
            
            No.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 10/13/2016[GRAPHIC]
            
            No.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




23




Shengkai
      has registered the following domain names:





Domain Name
            
            Owner
            
            Registration Date
            
            Expiration Date“Ceramicvalve.net”
            
            Shengkai
            
            4/13/2007
            
            4/13/2009
                (extended from 4/13/2008)“Shengkai.com”
            
            Shengkai
            
            N/A
            
            6/15/2009[GRAPHIC]
            
            Shengkai
            
            4/13/2007
            
            4/13/2009
                (extended from 4/13/2008)[GRAPHIC]
            
            Shengkai
            
            4/16/2007
            
            4/16/2009
                (extended from 4/16/2008)[GRAPHIC]
            
            Shengkai
            
            4/13/2007
            
            4/13/2009
                (extended from 4/13/2008)[GRAPHIC]
            
            Shengkai
            
            4/13/2007
            
            4/13/2009
                (extended from 4/13/2008)[GRAPHIC]
            
            Shengkai
            
            4/13/2007
            
            4/13/2009
                (extended from 4/13/2008)[GRAPHIC]
            
            Shengkai
            
            4/13/2007
            
            4/13/2009
                (extended from 4/13/2008)





***Employees***





As
      of
      September 9, 2008, Shengkai had 136 employees, 60 of which possess a diploma
      over junior college level, representing 44.12% of the work force recruited.
      We
      currently have three senior-level professionals and 10 mid-level professionals
      with graduate degrees.





24


Employee
      benefits include five state-mandated insurance plans:





o
            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.





o
            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.




o
            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.





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





o
            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, 2008, 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/A.





***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.




o
            Business
                License (No. 120191000015144) issued on December 17, 2007 by Tianjin
                Administration for Industry and
                Commerce.




o
            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.




o
            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.





o
            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.





o
            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 on July
                31,
                2001. The expiration date is August 22,
                2009.





o
            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.




25


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





o
            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 April 30, 2007 and June
                16,
                2006. The valid terms are respectively two
                years.





**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 prospectus before deciding to invest in our common
      stock.*





***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 (“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
      (“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.




26





*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 September 15, 2008. 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, 2008, we had working capital of approximately $23,592,880. Our capital
      requirements in connection with the development of our business are significant.
      During the quarter ended June 30, 2008, we spent approximately $10,187,360
      for
      the purchase of raw materials and equipment, of which $9,952,652 was used to
      raw
      materials and $234,708 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, it may be 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 anFd 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. 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.





*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.





27


*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 Chinese 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.





*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.





28


*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.*





Upon
      exercise 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, will
      beneficially own 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.




*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:




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




29




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




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




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




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





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





o
            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;




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




o
            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 the Purchaser’s 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 Shareholder 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 purchaser 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.





30




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 Shareholder 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, 2009 (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




o
            the
                amount of government involvement;




o
            the
                level of development;




o
            the
                growth rate;




o
            the
                control of foreign
                exchange; and




o
            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.




31


*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 with 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.




32


*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.




*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.





33


*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 “SOSA.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.





*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.


34





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 Securities Exchange Act of 1934 (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.




*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.





35


*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 first apply to our annual report for the
      2007
      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 2008 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.





Our
      land
      use rights are set forth below:





**Land
      Use Rights through Grants from Land Management Authority**




**Land
                No.**
            No.
                01-17-(3)-8**Land
                Use Right Certificate No.**
            Jin
                Nan Dan Guo Yong (2001) Geng 2 Zi No.045**User
                of the Land**
            Shengkai**Location**
            Wang
                Gang Road, Shuangang, Jinnan Economic & Technology Development Area,
                Tianjin**Usage**
            Commercial
                Services**Area
                (****m2****)**
            10023.0**Form
                of Acquisition**
            Grant
                from related Land Management Authority**Expiration
                Date**
            21/09/2048**Encumbrances**
            N/A





We
      occupy
      the following buildings, as set forth below:




36




**Owned
      Premises**





**Part
                1**
            
            **Part
                2**
            
            **Part
                3**
            
            **Part
                4**
            
            **Part
                5****Certificate
                No.**
            No.
                120018246**Owner**
            Shengkai**Location**
            Wang
                Gang Road, Shuangang, Jinnan Economic& Technology Development Area,
                Tianjin**Category**
            Private**Area
                (****m2****)**
            931.06
            
            1192.90
            
            493.64
            
            824.74
            
            2691.41**Usage
                of Design**
            Industry
            
            Industry
            
            Industry
            
            Industry
            
            Industry**Structure**
            Mixture
            
            Mixture
            
            Mixture
            
            Mixture
            
            Mixture**Encumbrances**
            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
      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, 2008
      (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.





Calendar
                Quarter
            
            Low
                Bid
            
            High
                Bid2007
                First Quarter
            
            
            0.80
            
            
            0.702007
                Second Quarter
            
            
            0.80
            
            
            0.702007
                Third Quarter
            
            
            0.80
            
            
            0.702007
                Fourth Quarter
            
            
            0.80
            
            
            0.542008
                First Quarter
            
            
            1.00
            
            
            0.602008
                Second Quarter
            
            
            1.00
            
            
            0.602008
                Third Quarter
            
            
            2.00
            
            
            0.602008
                Fourth Quarter
            
            
            2.75
            
            
            0.15





As
      of
      September 15, 2008, we had approximately 49 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.





37




***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***




During
      the year ended December 31, 2005, we issued 3,255 shares of Series A convertible
      preferred stock at $10.00 per share, for a total of $32,550.





During
      the three months ended March 31, 2006, we issued 300 shares of Series A
      convertible preferred stock at $10.00 per share, for a total of
      $3,000.





During
      the three months ended March 31, 2006, we issued 75,000 shares of common stock
      for services rendered at a value of $7,500.





During
      the three months ended March 31, 2006, the holders of 3,555 shares of Series
      A
      convertible preferred stock exercised the right to convert such shares into
      355,500 shares of common stock.





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.




38


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”).





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, 2007 and 2006 and the fiscal
      periods ended June 30, 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 30,2008
            
            2007
            
            2006Net
                revenues
            
            $
            32,355,693
            
            $
            23,124,748
            
            $
            13,677,946Cost
                of sales
            
            
            (13,211,608
            )
            
            (9,244,592
            )
            
            (5,353,487
            )Gross
                profit
            
            $
            19,144,085
            
            $
            13,880,156
            
            $
            8,324,459Other
                income - disposal of property,plant and equipment
            
            
            31,712
            
            
            -
            
            
            -Operating
                expenses:Selling
            
            
            (2,951,888
            )
            
            (2,639,249
            )
            
            (1,467,675
            )General
                and administrative
            
            
            (1,973,331
            )
            
            (1,398,330
            )
            
            (639,190
            )Operating
                income
            
            $
            14,250,578
            
            $
            9,842,577
            
            $
            6,217,594Other
                income - government grant
            
            
            -
            
            
            639
            
            
            30,938Other
                income - tax refund
            
            
            -
            
            
            24,867
            
            
            -Other
                expense - transaction costs for reverse merger
            
            
            (43,209
            )
            
            -
            
            
            -Other
                expense
            
            
            (32
            )
            
            (109
            )Interest
                income
            
            
            18,562
            
            
            8,831
            
            
            5,921Interest
                expenses
            
            
            -
            
            
            (20,174
            )
            
            (24,712
            )Income
                before income taxes
            
            $
            14,225,899
            
            $
            9,856,631
            
            $
            6,229,741Income
                taxes
            
            
            (4,138,860
            )
            
            (3,284,829
            )
            
            (2,055,815
            )Net
                income
            
            $
            10,087,039
            
            $
            6,571,802
            
            $
            4,173,926




***Balance Sheet Data***





As at June 30
            
            As at June 30,2008
            
            2007
            
            2006Cash
                and cash equivalents
            
            $
            21,313,484
            
            $
            1,691,476
            
            $
            1,292,869Working
                capital
            
            
            23,592,880
            
            
            11,515,991
            
            
            12,185,920Total
                assets
            
            
            39,767,207
            
            
            23,268,830
            
            
            19,668,974Total
                debts
            
            
            2,585,665
            
            
            2,852,863
            
            
            3,529,581Total
                shareholders’ equity
            
            
            37,181,542
            
            
            20,415,967
            
            
            16,139,393




39





**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, 2008 and 2007 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 14 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, 2008 and 2007***




Revenue





Revenue
      for the year ended June 30, 2008 was $32,355,693, an increase of $9,230,945
      or
      39.9% from $23,124,748 for the comparable period in 2007. Similar to the last
      two fiscal years, approximately 94.1% of our source of revenue came from
      customers in the electric power, petrochemical and chemical and metallurgy
      industries for the past year. The electric power industry was still the
      significant market to our revenue, contributing approximately 80.3% of total
      revenue for the year ended June 30, 2008. Revenue from the electric power
      industry was approximately $26.0 million for the year ended June 30, 2008,
      an
      increase of approximately $8.1 million or 45. 3% from approximately $17.9
      million for the comparable period in 2007. The increase was primarily
      attributable to broadening our customer base. Revenue from the petrochemical
      and
      chemical industry and metallurgy industries were approximately $2.4 million
      for
      the year ended June 30, 2008, an increase of approximately $1.0 million or
      71.4%
      from approximately $1.4 million for the comparable period in 2007. Revenue
      from
      aluminum industry was approximately $0.5 million for the year ended June 30,
      2008, an increase of approximately $0.3 million or 150% from approximately
      $0.2
      million for the comparable period in 2007. Revenue from other industries
      contributed and metallurgy industry were steady and recorded $3.6 million for
      both the years ended June 30, 2008 and 2007.





At
      present we are experiencing a deficiency of production capacity to meet demand
      for our products. We plan to expand our production capacity by acquiring
      additional financing to expand our operations.





Gross
      Profit





Gross
      profit for the year ended June 30, 2008 was $19,144,085, an increase of
      $5,263,929 or 37.9% compared to $13,880,156 for the comparable period in 2007.
      The gross profit margin for the year ended June 30, 2008 decreased slightly
      to
      59.2% from 60.0% for the comparable period in 2007. This was primarily
      attributable to costs related to the provision of sample products and
      promotional discounts to new customer to increase their confidence in our
      products, as well as to increases in raw material costs.





40




Selling
      Expenses





Selling
      expenses for the year ended June 30, 2008 was $2,951,888, an increase of
      $312,639 or 11.8%, from $2,639,249 for the comparable period in 2007. The major
      selling expense was commission paid to the agents for introducing new customers
      to us which was approximately $2.6 million in the year ended June 30, 2008,
      an
      increase of approximately $0.4 million or 18.2% from approximately $2.2 million
      in the year ended June 30, 2007. Another major selling expense was travelling
      expense which was $76,907 in the year ended June 30, 2008, an increase of
      $35,346 from $41,561 in the year ended June 30, 2007. This increase was mainly
      attributable to more frequent travel to meet new local and oversea
      customers.




General
      and Administrative Expenses





General
      and administrative expenses for the year ended June 30, 2008 were $1,973,331,
      an
      increase of $575,001 or 41.1% compared to $1,398,330 for the comparable period
      in 2007. The increase was primarily attributable to increases in amortization
      of
      intangible assets, from $462,182 to $719,171 over the comparable periods of
      2007
      and 2008 representing an increase of $256,989 or 55.6%. Two new patents were
      amortized for 7 months only in the fiscal year of 2007 but were amortized for
      the whole year in the fiscal year of 2008. Another reason was the increase
      in
      the expenses related to preparation for the Reverse Merger Transaction and
      Private Placements.





Interest
      expense




There
      was
      no interest expense for the year ended June 30, 2008 compared to $20,174 for
      the
      comparable period in 2007 because the short term loan with interest rate of
      6.417% per annum was redeemed early in February 2007 and no short term loan
      remained outstanding during the year ended June 30, 2008.





Income
      Tax Expenses





Income
      tax for the year ended June 30, 2008 was $4,138,860, an increase of 26% or
      $854,031 from $3,284,829 for the comparable period in 2007. The increase was
      primarily attributable to the increase in sales. The PRC government decreased
      the income tax rate on enterprises from 33% to 25% since January 1, 2008, which
      reduced income tax expenses by nearly $0.6 million from those expenses that
      would have been incurred if the previous tax rate was applied.




**Liquidity
      and Capital Resources**





***Cash
      and Cash Equivalent***




Our
      cash
      and cash equivalents were $1,691,476 at the beginning of the year ended June
      30,
      2008 and increased to $21,313,484 by the end of such period, an increase of
      $19,622,008 or 1160%.  The net change in cash and cash equivalents
      represented an increase of 4822% or $19,223,401from $398,607 for the comparable
      period in 2007. The increase was primarily attributable to an increase in cash
      provided by financing activities.





***Net
      cash provided by operating activities***




Net
      cash
      provided by operating activities was $9,900,785 for the year ended June 30,
      2008, an increase of $639,895 or 6.9% from $9,260,
      890 for the comparable period in 2007. This increase was primarily attributable
      to an increase of $3.5 million in net income from operation but partially
      setting off by an increase of trade receivables and a decrease of other payables
      over the comparable periods .





***Net
      cash used in investing activities***




Net
      cash
      used in investing activities was $4,817,565 for the year ended June 30, 2008,
      a
      decrease of $413,734 or 7.9% from $5,231,299 for the year ended June 30, 2007.
      The change was primarily attributable to decrease payments in fixed asset
      expenditures for the year ended June 30, 2008.




41




***Net
      cash used in financing activities***





Net
      cash
      provided by investing activities was $13,725,000 for the year ended June 30,
      2008 versus net cash used in financing activities of $3,704,394 for the same
      period in 2007. The net proceeds of $13.7 million was raised from the private
      placement 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, 2008,
      and
      the effect these obligations are expected to have on our liquidity and cash
      flows in future periods.


**Totals**
            
            **Less Than**
              **1 Year**
            
            **1
                to 3**
              **Years**
            
            **Thereafter**Capital
                expenditures (1)
            
            $
            4,114,871
            
            $
            2,743,247
            
            $
            1,371,623




**** (1)
      Capital expenditure is commitment for the purchase of computer systems and
      patent applications. See Note 17 - Commitment and Contingency in the notes
      to
      the financial statements, included elsewhere in this report. 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 “Company
      System”) on August 26, 2007. **** The
      Company expects the Computer System will be delivered within 2 years and the
      total costs were $8,229,742. As of June 30, 2008, the Company has already paid
      $4,114,871 for the Computer System and is committed to pay the balance during
      next fifteen months.





**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.




42




***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





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.




43


The
      management of the Company does not anticipate that the adoption of these three
      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.**


**SHENGKAI
        INNOVATIONS, INC.**
 **(FORMERLY
        KNOWN AS SOUTHERN SAUCE COMPANY, INC.)**
 **FINANCIAL
        STATEMENTS**
 **FOR
        THE YEARS ENDED JUNE 30, 2008 AND 2007**
 **(Stated
        in US dollars)**





44


**SHENGKAI
        INNOVATIONS** **,
        INC.**
 **(f/k/a
        SOUTHERN SAUCE COMPANY, INC.)**





CONTENTS
            PAGESINDEPENDENT
                AUDITOR’S REPORT
            46CONSOLIDATED
                BALANCE SHEETS
            47
                –48CONSOLIDATED
                STATEMENTS OF INCOME ANDCOMPREHENSIVE
                INCOME
            49CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY
            50CONSOLIDATED
                STATEMENTS OF CASH FLOWS
            51
                – 52CONSOLIDATED
                NOTES TO FINANCIAL STATEMENTS
            53
                – 73


45





**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.


(Formerly
      known as Southern Sauce Company, Inc.)





**Independent
      Auditor’s Report**





We
      have
      audited the accompanying consolidated balance sheets of Shengkai Innovations,
      Inc. as of June 30, 2008 and 2007 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. as of June 30, 2008 and 2007 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 & CoHong
                  Kong, China
              Albert
                  Wong & CoNovember
                  11, 2008
              Certified
                  Public Accountants




46





**SHENGKAI
                INNOVATIONS, INC.****(f/k/a
                SOUTHERN SAUCE COMPANY, INC.)****CONSOLIDATED
                BALANCE SHEETS****AS
                AT JUNE 30, 2008 AND 2007****(Stated
                in US Dollars)**




Note
            
            2008
            
            2007**ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            21,313,484
            
            $
            1,691,476Pledged
                deposits
            
            
            4
            
            
            500,000
            
            
            23,489Trade
                receivables
            
            
            
            
            
            3,596,318
            
            
            1,706,861Notes
                receivable
            
            
            
            
            
            8,732
            
            
            -Other
                receivables
            
            
            5
            
            
            19,791
            
            
            51,538Deposits
                and prepaid expenses
            
            
            
            
            
            2,543
            
            
            37,771Amounts
                due from directors andShareholders
            
            
            6
            
            
            -
            
            
            9,215,594Advances
                to suppliers
            
            
            
            
            
            12,350
            
            
            182,962Inventories
            
            
            7
            
            
            725,327
            
            
            1,459,163Total
                current assets
            
            
            
            
            $
            26,178,545
            
            $
            14,368,854Plant
                and equipment, net
            
            
            8
            
            
            2,523,062
            
            
            2,174,055Intangible
                assets, net
            
            
            9
            
            
            6,699,932
            
            
            6,725,921Deposits
                on purchase of computer system
            
            
            
            
            
            4,365,668
            
            
            -**TOTAL
                ASSETS**
            
            
            
            
            $
            39,767,207
            
            $
            23,268,830**LIABILITIES
                AND **STOCKHOLDERS’
                EQUITY****Current
                liabilitiesNotes
                payable
            
            
            
            
            $
            -
            
            $
            33,086Accounts
                payable
            
            
            
            
            
            938,483
            
            
            763,534Advances
                from customers
            
            
            
            
            
            29,852
            
            
            52,090Other
                payables
            
            
            10
            
            
            549,626
            
            
            1,037,146Accruals
            
            
            
            
            
            116,673
            
            
            139,685Income
                tax payable
            
            
            
            
            
            951,031
            
            
            827,322Total
                current liabilities
            
            
            
            
            $
            2,585,665
            
            $
            2,852,863**TOTAL
                LIABILITIES**
            
            
            
            
            $
            2,585,665
            
            $
            2,852,863Commitments
                and contingencies
            
            
            17
            
            $
            -
            
            $
            -





See
      accompanying notes to consolidated financial statements


47





**SHENGKAI
                INNOVATIONS, INC.****(f/k/a
                SOUTHERN SAUCE COMPANY, INC.)****CONSOLIDATED
                BALANCE SHEETS (Continued)****AS
                AT JUNE 30, 2008 AND 2007****(Stated
                in US Dollars)**


(Restated)




Note
            
            2008
            
            2007(Restated)
            
            (Restated)**STOCKHOLDERS’
                EQUITY**Preferred
                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.
                (restated)
            
            
            11
            
            $
            5,916
            
            $
            -Common
                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
            
            
            12
            
            
            22,113
            
            
            20,550Additional
                paid-in capital (restated)
            
            
            12
            
            
            23,494,626
            
            
            10,452,168Statutory
                reserves (restated)
            
            
            
            
            
            2,875,066
            
            
            1,665,187Retained
                earnings (restated)
            
            
            
            
            
            8,257,303
            
            
            7,122,377Accumulated
                other comprehensiveIncome
                (restated)
            
            
            
            
            
            2,526,518
            
            
            1,155,685$
            37,181,542
            
            $
            20,415,967**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            
            
            
            $
            39,767,207
            
            $
            23,268,830





See
      accompanying notes to consolidated financial statements


48





**SHENGKAI
                INNOVATIONS, INC.****(f/k/a
                SOUTHERN SAUCE COMPANY, INC.)****CONSOLIDATED
                STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****FOR
                THE YEARS ENDED JUNE 30, 2008 AND 2007****(Stated
                in US Dollars)**


(Restated)




Note
            
            2008
            
            2007Net
                revenues
            
            
            
            
            $
            32,355,693
            
            $
            23,124,748Cost
                of sales
            
            
            
            
            
            (13,211,608
            )
            
            (9,244,592
            )Gross
                profit
            
            
            
            
            $
            19,144,085
            
            $
            13,880,156Other
                income – disposal of property, plant and equipment
            
            
            
            
            
            31,712
            
            
            -Operating
                expenses:Selling
            
            
            
            
            
            (2,951,888
            )
            
            (2,639,249
            )General
                and administrative
            
            
            
            
            
            (1,973,331
            )
            
            (1,398,330
            )Operating
                income
            
            
            
            
            $
            14,250,578
            
            $
            9,842,577Other
                income – government grant
            
            
            
            
            
            -
            
            
            639Other
                income – tax refund
            
            
            
            
            
            -
            
            
            24,867Other
                expense – transaction costs forreverse
                merger
            
            
            
            
            
            (43,209
            )
            
            -Other
                expense
            
            
            
            
            
            (32
            )
            
            (109
            )Interest
                income
            
            
            
            
            
            18,562
            
            
            8,831Interest
                expenses
            
            
            
            
            
            -
            
            
            (20,174
            )Income
                before income taxes
            
            
            
            
            $
            14,225,899
            
            $
            9,856,631Income
                taxes
            
            
            13
            
            
            (4,138,860
            )
            
            (3,284,829
            )Net
                income
            
            
            
            
            $
            10,087,039
            
            $
            6,571,802Foreign
                currency translation adjustment (restated)
            
            
            
            
            
            1,370,833
            
            
            898,215Comprehensive
                income
            
            
            
            
            $
            11,457,872
            
            $
            7,470,017Basic
                earnings per share before dividend
            
            
            14
            
            $
            0.456
            
            $
            0.320Basic
                earnings per share after dividend
            
            
            14
            
            $
            0.106
            
            $
            0.320Diluted
                earnings per share after dividend
            
            
            14
            
            $
            0.084
            
            $
            0.320Basic
                weighted average share outstanding
            
            
            14
            
            
            22,112,500
            
            
            20,550,000Diluted
                weighted average share outstanding
            
            
            14
            
            
            28,028,026
            
            
            20,550,000




See
      accompanying notes to consolidated financial statements


49





**SHENGKAI
                INNOVATIONS, INC.****(f/k/a
                SOUTHERN SAUCE COMPANY, INC.)****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’EQUITY****FOR
                THE YEARS ENDED JUNE 30, 2008 AND 2007****(Stated
                in US Dollars)**


(Restated)




AccumulatedCommon
                    stock
                
                
                
                Additional
                
                
                
                
                
                otherNumber
                
                
                
                Preferred
                
                paid-in
                
                Statutory
                
                Retained
                
                comprehensiveof
                    share
                
                Amount
                
                stock
                
                capital
                
                reserves
                
                earnings
                
                Income
                
                TotalBalance,
                    July 1, 2006 (restated)
                
                
                20,550,000
                
                $
                20,550
                
                $
                -
                
                $
                10,452,168
                
                $
                739,029
                
                $
                4,670,176
                
                $
                257,470
                
                $
                16,139,393Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,571,802
                
                
                -
                
                
                6,571,802Appropriations
                    tostatutory
                    reserves
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                926,158
                
                
                (926,158
                )
                
                -
                
                
                -Dividends
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,193,443
                )
                
                -
                
                
                (3,193,443
                )Foreign
                    currency ranslation adjustment (restated)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                898,215
                
                
                898,215Balance,
                    June 30, 2007(restated)
                
                
                20,550,000
                
                $
                20,550
                
                $
                -
                
                $
                10,452,168
                
                $
                1,665,187
                
                $
                7,122,377
                
                $
                1,155,685
                
                $
                20,415,967Balance,
                    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 shares issued in private placement, net of transaction costs
                    of $1,275,000
                    (restated)
                
                
                -
                
                
                -
                
                
                5,916
                
                
                13,719,084
                
                
                -
                
                
                -
                
                
                -
                
                
                13,725,000Appropriations
                    to statutory reserves (restated)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,209,879
                
                
                (1,209,879
                )
                
                -
                
                
                -Dividends
                
                
                -
                
                
                -
                
                
                -
                
                
                7,742,234
                
                
                -
                
                
                (7,742,234
                )
                
                -
                
                
                -Foreign
                    currency translation 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
                
                $
                37,181,542





See
      accompanying notes to consolidated financial statements


50





**SHENGKAI
                INNOVATIONS, INC.****(f/k/a
                SOUTHERN SAUCE COMPANY, INC.)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE YEARS ENDED JUNE 30, 2008 AND 2007****(Stated
                in US Dollars)**





2008
            
            2007Cash
                flows from operating activitiesNet
                income
            
            $
            10,087,039
            
            $
            6,571,802Depreciation
            
            
            154,557
            
            
            121,234Amortization
            
            
            719,171
            
            
            462,182Gain
                on disposal of property, plant and equipment
            
            
            (31,712
            )
            
            -Adjustments
                  to reconcile net income to net cash
                  provided by operating activities:Trade
                receivables
            
            
            (1,604,622
            )
            
            52,569Notes
                receivable
            
            
            (8,230
            )
            
            -Other
                receivables
            
            
            35,246
            
            
            30,243Deposits
                and prepaid expenses
            
            
            37,106
            
            
            (35,968
            )Amounts
                due from directors and shareholders
            
            
            36,630
            
            
            608,630Advances
                to suppliers
            
            
            179,708
            
            
            1,844,452Inventories
            
            
            842,385
            
            
            (74,003
            )Notes
                payable
            
            
            (34,602
            )
            
            (77,439
            )Accounts
                payable
            
            
            86,038
            
            
            (62,556
            )Advances
                from customers
            
            
            (26,341
            )
            
            (93,303
            )Other
                payables
            
            
            (566,625
            )
            
            (128,694
            )Accruals
            
            
            (36,116
            )
            
            95,219Income
                tax payable
            
            
            31,153
            
            
            (53,478
            )Net
                cash provided by operating activities
            
            $
            9,900,785
            
            $
            9,260,890Cash
                flows from investing activitiesSales
                proceeds of property, plant and equipment
            
            $
            68,581
            
            $
            -Purchase
                of property, plant and equipment
            
            
            (295,841
            )
            
            (226,649
            )Payment
                of intangible assets
            
            
            -
            
            
            (4,981,772
            )Payment
                of deposits on computer system
            
            
            (4,114,871
            )
            
            -Increase
                in pledged deposits
            
            
            (475,434
            )
            
            (22,878
            )Net
                cash used in investing activities
            
            $
            (4,817,565
            )
            $
            (5,231,299
            )Cash
                flows from financing activitiesProceeds
                  from stock issued, net of transaction costs of
                  $1,275,000
            
            $
            13,725,000
            
            $
            -Bank
                repayments
            
            
            -
            
            
            (510,951
            )Dividend
                paid
            
            
            -
            
            
            (3,193,443
            )Net
                cash provided by/(used in) financing activities
            
            $
            13,725,000
            
            $
            (3,704,394
            )





See
      accompanying notes to consolidated financial statements


51





**SHENGKAI
                INNOVATIONS, INC.****(f/k/a
                SOUTHERN SAUCE COMPANY, INC.)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****(****Continued)****FOR
                THE YEARS ENDED JUNE 30, 2008 AND 2007****(Stated
                in US Dollars)**





2008
            
            2007Net
                cash and cash equivalents sourced
            
            $
            18,808,220
            
            $
            325,197Effect
                of foreign currency translation on cash and cash
                equivalents
            
            
            813,788
            
            
            73,410Cash
                and cash equivalents–beginning of year
            
            
            1,691,476
            
            
            1,292,869Cash
                and cash equivalents–end of year
            
            $
            21,313,484
            
            $
            1,691,476Supplementary
                cash flow information:Interest
                received
            
            $
            19,752
            
            $
            8,831Interest
                paid
            
            
            -
            
            
            20,174Tax
                paid
            
            
            3,429,056
            
            
            3,338,307





See
      accompanying notes to consolidated financial statements


52


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**1.**
            **ORGANIZATION
                AND****PRINCIPAL
                ACTIVITIES**





Shengkai
      Innovations, Inc. (formerly known as “Southern Sauce Company, 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
      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 the historical financial statements of
      Shen
      Kun. The accompanying audited consolidated financial statements were
      retroactively adjusted to reflect the effects of the recapitalized. The
      1,562,500 shares of Shengkai Innovations, Inc. outstanding prior to the stock
      exchange transaction were accounted for at the net book value at the time of the
      transaction, which was a deficit of $62,206. Accordingly, the consolidated
      statements of income include the results of operations of Tianjin Shengkai
      Industrial Technology Development Co., Ltd from the acquisition date through
      June 30, 2008, and 2007.





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
      December 2003) Consolidated of Variable Interest Entities, and Interpretation
      of
      ARB No. 51. The reverse-merger also included an equity financing of $15,000,000
      by the issuance of 5,915,526 Series A Convertible Preferred Stock at $2.5357
      per
      share to 1 accredited investor.





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.





On
      October 23, 2008, the Company changed its name from Southern Sauce Company,
      Inc.
      to Shengkai Innovations, Inc.


53


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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.
      Retroactively restated as of June 30, 2007, 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.


54





**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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)*
            *Restricted
                cash*





Restricted
      cash represents deposits on account to secure sales contracts and deposit for
      investor relation or public relation affairs as at the year ended June 30,
      2007
      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.


55





**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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.





**2008**
            
            **2007**Cash
                on hand
            
            $
            4,880
            
            $
            6,306Agricultural
                Bank of China
            
            
            421
            
            
            376Bank
                of China
            
            
            12,888
            
            
            197Industrial
                and Commercial Bank of China
            
            
            8,317,060
            
            
            1,615,485Industrial
                Bank Co. Ltd.
            
            
            37,070
            
            
            36,351Shanghai
                Pudong Development Bank
            
            
            12,939,316
            
            
            32,761The
                Hong Kong and Shanghai Banking Corporation Limited
            
            
            1,849
            
            
            -$
            21,313,484
            
            $
            1,691,476


56





**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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, 2008 and 2007
      were
      $17,845 and $222,430 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, 2008 and 2007 were $126,172 and $198,740
      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, 2008 and 2007 were $288 and $  1,662
      respectively. The retirement benefit expenses included in and the general and
      administrative expenses for the years ended June 30, 2008 and 2007 were $16,521
      and $8,834 respectively.


57


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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. The
      reporting currency of the Group is the U.S. dollar (USD). 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, 2008Balance
                sheet
            RMB
                6.87180 to US$1.00Statement
                of income and comprehensive income
            RMB
                7.29063 to US$1.00




June
                30, 2007Balance
                sheet
            RMB
                7.62480 to US$1.00Statement
                of income and comprehensive income
            RMB
                7.82854 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.


58


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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, 2008 and 2007 amounted to $21,308,604
      and $1,685,170 respectively. The Company has not experienced any losses in
      such
      accounts and believes it is not exposed to any risks on its cash in bank
      accounts.





*(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 $2,875,066 as at
      June
      30, 2008.





*(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.


59


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (** **Continued)**





*(u)*
            *Recent
                accounting pronouncements*




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 the fiscal year beginning on October 1, 2008. The
      Company is currently evaluating the impact of SFAS 159 on its consolidated
      financial statements but does not expect it to have a material
      effect.





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





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.


60


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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, 2008, and 2007. 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, 2008, and 2007, almost 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, 2008, and 2007, nearly all of the Group’s sales were
      generated from the PRC. In addition, nearly all accounts receivable as of June
      30, 2008, and 2007, 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, 2008, and 2007, 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 30,2008
            
            2007Customer
                A
            
            $
            851,262
            
            $
            98,007Customer
                B
            
            
            772,723
            
            
            -Customer
                C
            
            
            415,440
            
            
            -





**4.**
            **PLEDGED
                DEPOSITS**





Pledged
      deposits as at the year ended June 30, 2008 and 2007 were restricted cash kept
      in purpose of investor relation or public relation affairs and to secure sales
      contracts respectively.


61





**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**5.**
            **OTHER
                RECEIVABLES**





2008
            
            2007Disbursement
                and advances to employee
            
            $
            -
            
            $
            8,114Tender
                deposits
            
            
            10,623
            
            
            9,443Sundry
            
            
            9,168
            
            
            33,981$
            19,791
            
            $
            51,538








**6.**
            **AMOUNTS
                DUE FROM DIRECTORS AND
                SHAREHOLDERS**





2008
            
            2007Wang
                Chen, Executive director andShareholder
            
            $
            -
            
            $
            6,854,876Guo
                Wei, Shareholder
            
            
            -
            
            
            2,360,718$
            -
            
            $
            9,215,594





Balances
      with directors and shareholders represent advances to the respective director
      and shareholders. These balances are interest free and unsecured and have no
      fixed repayment date.





**7.**
            **INVENTORIES**





Inventories
      comprise the followings:





2008
            
            2007Finished
                goods
            
            $
            298,411
            
            $
            834,496Work
                in process
            
            
            15,264
            
            
            15,302Raw
                materials
            
            
            411,652
            
            
            609,365$
            725,327
            
            $
            1,459,163





62


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**8.**
            **PLANT
                AND EQUIPMENT, NET**





2008
            
            2007At
                costBuildings
            
            $
            2,042,921
            
            $
            1,769,823Machinery
                and equipment
            
            
            631,830
            
            
            403,842Office
                equipment
            
            
            135,637
            
            
            109,622Motor
                vehicles
            
            
            369,897
            
            
            412,956$
            3,180,285
            
            $
            2,696,243Less:
                accumulated depreciation
            
            
            (657,223
            )
            
            (522,188
            )$
            2,523,062
            
            $
            2,174,055





Depreciation
      expenses included in the cost of sales for the years ended June 30, 2008 and
      2007 were $97,554 and $83,208 respectively; and in the general and
      administrative expenses for the years ended June 30, 2008 and 2007 were $57,003
      and $38,026 respectively.


63


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**9.**
            **INTANGIBLE
                ASSETS, NET**





2008
            
            2007Land
                use rights, at cost
            
            $
            888,825
            
            $
            801,048Less:
                accumulated amortization
            
            
            (283,748
            )
            
            (239,705
            )605,077
            
            
            561,343Patent
                rights, at costs
            
            
            7,421,636
            
            
            6,688,700Less:
                accumulated amortization
            
            
            (1,335,167
            )
            
            (534,440
            )6,086,469
            
            
            6,154,260Others,
                at costs
            
            
            19,835
            
            
            17,876Less:
                accumulated amortization
            
            
            (11,449
            )
            
            (7,558
            )8,386
            
            
            10,318$
            6,699,932
            
            $
            6,725,921





Amortization
      expenses included in the general and administrative expenses for the years
      ended
      June 30, 2008 and 2007 were $719,171 and $462,182 respectively.





**10.**
            **OTHER
                PAYABLES**





2008
            
            2007Commission
                payables
            
            $
            180,291
            
            $
            703,085Expense
                payables
            
            
            3,636
            
            
            -Sales
                commission to employee
            
            
            -
            
            
            42,919Other
                commission to employee
            
            
            -
            
            
            20,528Retention
                money for construction
            
            
            -
            
            
            29,564Sundry
                PRC taxes payables
            
            
            352,521
            
            
            238,420Sundry
            
            
            13,178
            
            
            2,630$
            549,626
            
            $
            1,037,146


64


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**11.**
            **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 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. 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.





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.


65





**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**11.**
            **PREFERRED
                STOCK AND WARRANTS
                (Continued)**





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%.





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.





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 American 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.





**12.**
            **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 $23,494,626
      as
      at the year ended June 30, 2008. The new capital structure will be retroactively
      restated in the consolidated balance sheet as of June 30, 2008, and
      2007.


66


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**13.**
            **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:





2008
            
            2007U.S.
                statutory rate
            
            
            34
            %
            
            34
            %Foreign
                income not recognized in the U.S.
            
            
            (34
            )%
            
            (34
            )%PRC
                Enterprise Income Tax
            
            
            25
            %
            
            33
            %Provision
                for income tax
            
            
            25
            %
            
            33
            %





(b)
            The
                PRC Enterprise Income Tax rate was changed to 25% from 33% since
                January
                1, 2008.





Income
      before income tax expenses of $14,225,899, and $9,856,631 for the years ended
      June 30, 2008 and 2007 respectively, was attributed to subsidiaries with
      operations in China. Income tax expense related to China income for the years
      ended June 30, 2008, and 2007 are $4,138,860, and $3,284,829,
      respectively.


67


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**14.**
            **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:
            
            2008
            
            2007Net
                income for the year
            
            $
            10,087,039
            
            $
            6,571,802Non-Cash
                Dividends on convertible preferred stock
            
            
            (7,742,234
            )
            
            -Earnings
                for the purpose of basic earnings per share
            
            $
            2,344,805
            
            $
            6,571,802Effect
                of dilutive potential common stock
            
            
            -
            
            
            -Earnings
                for the purpose of dilutive earnings per share
            
            $
            2,344,805
            
            $
            6,571,802Number
                of shares:Weighted
                average number of common stock for the purpose of basic earnings
                per
                share
            
            
            22,112,500
            
            
            20,550,000Effect
                of dilutive potential common stock - conversion of convertible preferred
                stock
            
            
            5,915,526
            
            
            -Weighted
                average number of common stock for the purpose of dilutive earnings
                per
                share
            
            
            28,028,026
            
            
            20,550,000Earnings
                per share:Basic
                earnings per share before dividend
            
            $
            0.456
            
            $
            0.320Basic
                earnings per share after dividend
            
            $
            0.106
            
            $
            0.320Dilutive
                earnings per share after dividend
            
            $
            0.084
            
            $
            0.320


68





**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**15.**
            **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.





**16.**
            **RELATED
                PARTIES TRANSACTIONS**





The
      following material transactions with related parties during the years were
      in
      the opinion of the directors, carried out in the ordinary course of
      business.





Due
      from
      related parties:




2008
            
            2007Amounts
                  due from directors andshareholders (note 6)
            
            $
            -
            
            $
            9,215,594





**17.**
            **COMMITMENTS
                AND CONTINGENCY**





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
      $8,229,742 (RMB 60,000,000). The Company had already paid $4,114,871
      (RMB30,000,000) for the Computer System and committed to pay the balance during
      next fifteen months.





**18.**
            **SEGMENT
                INFORMATION**





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





**19.**
            **SUBSEQUENT
                EVENT**





As
      of
      July 18, 2008, the Company sold 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,
      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
      received $4,613,790 as net proceeds from this financing.


69


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**20.**
            **RESTATEMENT
                OF CONSOLIDATED FINANCIAL
                STATEMETNS**





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 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, 2006 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
              
              
              2008**STOCKHOLDERS’
                  EQUITY**Preferred
                  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 reflected a decrease
      of $6,781,656 in additional paid-in capital and a decrease of accumulated other
      comprehensive income of $554,786. The Statutory reserves decreased from
      $3,217,565 as originally reported, to $2,875,066, a decrease of $342,499. The
      corresponding changes reflected a decrease of retained earnings of $342,499.
      The
      total stockholders’ equity has no changes.


70


**SHENGKAI
      INNOVATIONS, INC.**


**(f/k/a
      SOUTHERN SAUCE COMPANY, INC.)**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(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
      in
      comprehensive income was composed of an increase of $544,359 in foreign currency
      translation adjustment.




71




**CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’EQUITY**


**SHENGKAI
        INNOVATIONS, INC.**
 **(f/k/a
        SOUTHERN SAUCE COMPANY, INC.)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED JUNE 30, 2008 AND 2007**
 **(Stated
        in US Dollars)**
 
 **20.**
              **RESTATEMENT
                  OF CONSOLIDATED FINANCIAL STATEMENTS****(Continued)**


ITEMS
            
            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 sharesissued
                in privateplacement,
                netof
                transaction costs of $1,275,000
            
            
            7,342,358
            
            
            6,382,642
            
            
            -
            
            
            -
            
            
            -
            
            
            5,916
            
            
            13,719,084
            
            
            -
            
            
            -
            
            
            -Appropriations
                to statutoryReserves
            
            
            -
            
            
            -
            
            
            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




72




**SHENGKAI
      INNOVATIONS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2008 AND 2007**


**(Stated
      in US Dollars)**





**20.**
            **RESTATEMENT
                OF CONSOLIDATED FINANCIAL STATEMETNS****(Continued)**





**CONSOLIDATED
      BALANCE SHEETS**




Original
              
              RestatedJune
                  30,**ITEMS**
              
              2007
              
              2007**STOCKHOLDERS’
                  EQUITY**Additional
                  paid-in capital
              
              $
              10,462,595
              
              $
              10,452,168Accumulated
                    other comprehensiveIncome
              
              
              1,145,258
              
              
              1,155,685




As
      a
      result of restatement of the consolidated balance sheet as of June 30, 2007,
      additional paid-in capital decreased from $10,462,595 as originally reported,
      to
      $10,452,168, a decrease of $10,427. The corresponding change reflected a
      decrease in accumulated other comprehensive income of $10,427. The total
      stockholders’ equity has no changes.




**CONSOLIDATED
                STATEMENTS OF INCOME AND COMPREHENSIVE
                INCOME**







Original
            
            RestatedFor
                the year ended June 30,ITEMS
            
            2007
            
            2007Net
                income
            
            $
            6,571,802
            
            $
            6,571,802Foreign
                currency translation adjustment
            
            
            887,788
            
            
            898,215Comprehensive
                income
            
            $
            7,459,590
            
            $
            7,470,017




As
      a
      result of restatement of consolidated income and comprehensive income for the
      year ended June 30, 2007, comprehensive income increased from $7,459,590 as
      originally reported, to $7,470,017, an increase of $10,427. The increase
      comprehensive income was composed of an increase of $10,427 in foreign currency
      translation adjustment.





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’EQUITY**




Original
            
            RestatedFor
                the year ended June 30ITEMS
            
            2007
            
            2007Accumulated
            
            
            
            AccumulatedAdditional
            
            Other
            
            Additional
            
            otherPaid-in
            
            Comprehensive
            
            paid-in
            
            comprehensivecapital
            
            Income
            
            capital
            
            IncomeBalance,
                July 1, 2006
            
            $
            10,462,595
            
            $
            257,470
            
            $
            10,452,168
            
            $
            257,470Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -Appropriations
                  tostatutory reserves
            
            
            -
            
            
            -
            
            
            -
            
            
            -Dividends
            
            
            -
            
            
            -
            
            
            -
            
            
            -Foreign
                  currencytranslation adjustment
            
            
            -
            
            
            887,778
            
            
            -
            
            
            898,215Balance,
                June 30, 2007
            
            $
            10,462,595
            
            $
            1,145,258
            
            $
            10,452,168
            
            $
            1,155,685


73




**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 December 31, 2007. 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, 2008, the
      Company’s internal control over financial reporting is effective based on those
      criteria.


74





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.


75




**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**
            
            **Age**Wang
                Chen
            
            Chief
                Executive Officer, Director
            
            43Guo
                Wei
            
            Director
            
            40





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.





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




76





**Directors and Executive Officers**
            
            **Position/Title**
            
            **Age**Wang
                Chen
            
            Chief
                Executive Officer, Chief Technology Officer, Executive
                Director
            
            43Guo
                Wei
            
            Chief
                Financial Officer
            
            40Guo
                Chuanji
            
            Supervisor
            
            77He
                Li
            
            Chief
                Operating Officer
            
            31Liu
                Xiaoqian
            
            Chief
                Marketing Officer
            
            28




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 did not timely file Form 4s on three occasions with respect to the
      vesting of certain options under a call option agreement dated June 9, 2008,
      by
      and between Mr. Wang and Li Shaoqing.




**Item
      11.**  **Executive
      Compensation.**





The
      following is a summary of the compensation we paid to our Chief Executive Office
      and former Chief Executive Officers, John Vogel and Robert Jordan, for the
      two
      years ended June 30, 2008 and 2007. No executive officer received compensation
      in excess of $100,000 for any of those years. ****


77




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 (former CEO(1)
            
            
            2008
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-John
                Vogel (former CEO(2)
            
            
            2008
            
            
            -0-
            
            
            -0-
            
            
            11,100
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2007
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Robert
                Jordan (former CEO)(3)
            
            
            2008
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-2007
            
            
            -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, 2008 and 2007, 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 )(2)
              
              
              2008
              
              $
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              $
              -0-2007
              
              
              -0-
              
              
              2,435,011
              (1)
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              2,435,011Guo
                  Wei (Chief Financial Officer)(3)
              
              
              2008
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-2007
              
              
              -0-
              
              
              751,353
              (1)
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              751,353





(1)
            Based
                on an exchange rate of $1.00 to 7.82854 as of June 30,
                2007.





(2)
            Wang
                Chen has been Chief Executive Officer of Shengkai since June 1994.
                He
                received cash dividends of RMB 19,062,580 (approximately $2,435,011)****in
                the fiscal year ended June 30, 2007 and received no compensation
                in the
                fiscal year ended June 20, 2008.




(3)
            Guo
                Wei was appointed Chief Financial Officer of Shengkai in January
                2007. She
                received cash dividends of RMB 5,882,000 (approximately $751,353)
                in the
                fiscal year ended June 30, 2007 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).





78




***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 registration statement, 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 September 15, 2008.




**Amount
                and Nature of Beneficial Ownership (1)****Name
                and Address of****Beneficial
                Owner**
            
            **Common**
              **Stock**
            
            **Preferred**
              **Shares**
              **(2****)(14)**
            
            **Warrants**
              **(3)(14)**
            
            **Total
                (4)**
            
            **Percentage
                of**
              **common**
              **stock
                (%)****Owner
                of More than 5% of Class**Vision
                Opportunity China LP 520 Madison Avenue, 12th Floor New York, NY
                10022
                (5)
            
            
            677,500
            
            
            5,915,526
            (14)
            
            7,098,632
            (14)
            
            13,691,658
            (14)
            
            9.9
            (14)%Hare
                & Co., as custodian for Blue Ridge Investments, LLC 214 N. Tryon
                Street Charlotte, NC 28255 (6)
            
            
            0
            
            
            1,971,842
            (14)
            
            2,366,211
            (14)
            
            4,338,053
            (14)
            
            9.9
            (14)%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
            
            
            10,440,000
            
            
            0
            
            
            0
            
            
            10,440,000
            
            
            47.21
            %**Directors
                and Executive Officers (9)**John
                Vogel (director and former CEO) (10) 31200 Via Colinas, Suite 200
                Westlake
                Village, CA 91362
            
            
            6,000
            
            
            0
            
            
            0
            
            
            6,000
            
            
            
            *%Robert
                Scherne (former principal accounting officer) (11) 31200 Via Colinas,
                Suite 200 Westlake Village, CA 91362
            
            
            15,000
            
            
            0
            
            
            0
            
            
            15,000
            
            
            
            *%Mr.
                Wang Chen (director and current CEO) (12)
            
            
            11,434,286
            
            
            0
            
            
            0
            
            
            11,434,286
            
            
            43.01
            %Ms.
                Guo Wei (director) (13)
            
            
            11,434,286
            
            
            0
            
            
            0
            
            
            11,434,286
            
            
            43.01
            %**All
                Directors and Executive Officers (4 persons)**
            
            
            11,455,286
            
            
            0
            
            
            0
            
            
            11,455,286
            
            
            51.80
            %





79


(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 September 15, 2008, (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 September 15, 2008
      (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 14 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 14 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 14 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 underly the Warrant issued to Blue Ridge Investments, LLC,
      in
      the July 2008 Financing. The Warrants have a term of five years.





(4)
        As of September 15, 2008, 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 14 below) in the June 2008
      Financing that closed on June 11, 2008. Vision Opportunity China LP also
      owns 677,500 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 14 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)
        Long Sunny Limited is owned by Li Shaoqing and Mr. Wang Chen. Their
      respective beneficial ownership in the Company is based upon their respective
      interest in Long Sunny Limited. Accordingly, 10,440,000 shares of common stock
      issued to Long Sunny Limited as a result of the consummation of the Reverse
      Merger Transaction are beneficially attributed to Mr. Li. Under a call option
      agreement described in note 12 below, our CEO and director, Mr. Wang Chen,
      has
      the right to acquire all of the shares of Long Sunny Limited that are owned
      by
      Mr. Li. If Mr. Wang does acquire those shares, he will become the beneficial
      owner of a majority of our stock held by Long Sunny Limited.





80




(9)
        Aside from John Vogel and Robert Scherne, 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)
        On June 9, 2008, Mr. Vogel, a director of our Company and former CEO,
      received 6,000 shares of our common stock as consideration for services
      rendered.





(11)
        On June 9, 2008, Mr. Scherne, our former Controller, received 15,000
      shares of our common stock as consideration for services rendered.





(12)
        Mr. Wang, our new director and CEO and the longstanding chairman and CEO
      of Shengkai, beneficially owns 8,451,929 shares of our common stock through
      his
      40% interest in our controlling shareholder, Long Sunny Limited.





In
      addition to the 6,960,000 shares beneficially owned by Mr. Wang through his
      40%
      interest in Long Sunny Limited, Mr. Wang beneficially owns 4,474,286 shares
      of
      our common stock pursuant to an agreement that gives him the right to become
      the
      beneficial owner of the majority of our common stock. That agreement is a call
      option agreement between Mr. Wang and Mr. Li Shaoqing, the holder of 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
      (each monthly period constituting a “Performance Period and collectively, the
“Performance Periods”). If the companies meet these performance targets, Mr.
      Wang may exercise his call option to purchase one-seventh of the shares held
      by
      Mr. Li in Long Sunny Limited beginning 45 days after the last date of the
      Performance Period. If and when Mr. Wang does acquire all of Mr. Li’s stock in
      Long Sunny Limited, he will become the beneficial owner of 100% of our common
      stock, or 17,400,000 shares, owned by Long Sunny Limited. For the
      Performance Periods ending June 30, July 31, and August 31, 2008, options to
      purchase three-sevenths of Mr. Li’s shares in Long Sunny Limited, equivalent to
      4,474,286 shares of our common stock owned by Long Sunny Limited, have vested
      and will be exercisable as of October 15, 2008.





(13)
        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.





(14)
        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 September 15,
      2008.




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




Set
      forth
      below are the related party transactions since June 30, 2006, among the Company
      and its shareholders, officers, and/or directors:





o
            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:





o
            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.





o
            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.


81





o
            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.





o
            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.




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




o
            5,000
                shares of our common stock to Sichenzia Ross Friedman Ference LLP,
                for
                legal services rendered.o
            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.o
            6,000
                shares of our common stock to John Vogel, our director and former
                CEO.o
            15,000
                shares of our common stock to Robert Scherne, our former
                Controller.




o
            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, 2009.




**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, 2008, and for the reviews
      of
      the financial statements included in our Quarterly Reports on Form 10-QSB 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,
      2008.





***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, 2008.





82




***All
      Other Fees***





The
      Company incurred approximately $10,000 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,
      2008.




**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.(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.




83




(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.(3)
            
            16.1
            
            Letter
                from the Company to Sherb & Co., LLP, dated as of June 12,
                2008.(3)
            
            16.2
            
            Letter
                from Sherb & Co., LLP to the SEC.(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 Form 8-K filed with the SEC on April 14,
                2008.(3)
            Incorporated
                by reference to our Form 8-K/A filed with the SEC on June 23,
                2008.(4)
            Incorporated
                by reference to our Form 8-K filed with the SEC on July 24,
                2008.(5)
            Incorporated
                by reference to our Form 8-K filed with the SEC on July 31,
                2008.


84




**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 14 th day of
      November, 2008.





**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
            
            November
                14, 2008Wang
                ChenChief
                Executive Officer and Director/s/
                Guo Wei
            
            November
                14, 2008Guo
                WeiDirector




85