SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
fiscal year ended: December 31, 2007




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




For the
transition period from __________ to ____________




Commission
File Number: 000-28481




CHINA
VALVES TECHNOLOGY, INC.


(Exact
name of registrant as specified in its charter)




Nevada
            86-0891931(State
      or other jurisdiction of incorporation
              or
      organization)
            (I.R.S.  Employer
      Identification Number)




No.
      93 West Xinsong Road, Kaifeng City, Henan Province
              People’s
      Republic of China(Address
      of principal executive office and zip
code)




(86)
      378-2925211(Registrant’s
      telephone number, including area code)
              
              Intercontinental
      Resources, Inc.(Former
      name, former address and former fiscal year, if changed since last
      report)




Securities
      registered pursuant to Section 12(b) of the Act: None
              
              Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, Par
      Value 0.001




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






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






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 ýNo o






Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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. ý













Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):




Large
      accelerated filer o
            
            Accelerated
      filer oNon-accelerated
      filer  o
            
            Smaller
      reporting company ý




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




The
issuer’s revenues for its most recent fiscal year ended December 31, 2007, were
$37,036,282.





As of
March 27, 2008, the aggregate market value of shares of the issuer’s common
stock held by non-affiliates (based upon the average bid and asked price of $10
of such shares as reported on the Over-the-Counter Bulletin Board) was
approximately $98 million. Shares of the issuer’s common stock held by each
executive officer and director have been excluded in that such persons may be
deemed to be affiliates of the issuer. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.





There
were 40,106,500 shares of common stock outstanding as of March 27,
2008.








DOCUMENTS
INCORPORATED BY REFERENCE:




None.














CHINA
VALVES TECHNOLOGY, INC.




FORM
10-K




For
the Fiscal Year Ended December 31, 2007




TABLE OF CONTENTS




Number
            
            PagePART
      I
            
            1Item
      1.
            Business
            1Item
      1A.
            Risk
      Factors
            14Item
      2.
            Properties
            23Item
      3.
            Legal
      Proceedings
            24Item
      4.
            Submission
      of Matters to a Vote of Security
      Holders
            24PART
      II
            
            24Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            24Item
      6.
            Selected
      Financial
      Data
            25Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            26Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            36Item
      8.
            Financial
      Statements and Supplementary
      Data
            36Item
      9
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            36Item
      9A
            Controls
      and procedures
            37Item
      9B
            Other
      Information
            39PART
      IIIItem
      10.
            Directors
      and Executive Officers of the
      Registrant
            39Item
      11.
            Executive
      Compensation
            42Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management
            44Item
      13.
            Certain
      Relationships and Related
      Transactions
            44Item
      14.
            Principal
      Accountant Fees and
      Services
            46PART
      IV
            
            48Item
      15.
            Exhibits
      and Financial Statement
      Schedules
            48
















Use
of Terms




Except as
otherwise indicated by the context, references in this report to the “Company,”
“China Valves,” “we,” “us” and “our” are references to the combined business of
China Valves Technology, Inc. and its subsidiary, Henan Tonghai Valve Science
Technology Co.  References to “Henan Tonghai” are references to Henan
Tonghai Valve Science Technology Co., Ltd. References to “ZhengDie Valve” are
references to Zhengzhou City ZhengDie Valve Co., Ltd. References to “High
Pressure Valve” are references to Henan Kaifeng High Pressure Valve Co.,
Ltd.  References to “China” and “PRC” are references to the People’s
Republic of China.  References to “RMB” are to Renminbi, the legal
currency of China, references to “HKD” are to the Hong Kong Dollar and
references to “$” are to the legal currency of the United States.




Forward-Looking
Statements




Certain
statements contained in this report under “Item 1—Business,” “Item 3—Legal
Proceedings,” “Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Item 10—Directors, Executive Officers and
Corporate Governance” and “Item 11—Executive Compensation” including, without
limitation, those concerning our liquidity and capital resources, contain
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, concerning our operations; economic performance;
financial condition; management forecasts; efficiencies, cost savings and
opportunities to increase productivity and profitability; income and margins;
liquidity; anticipated growth; economies of scale; the economy; future economic
performance; our ability to maintain profitability during adverse economic
cycles and unfavorable external events; future acquisitions and dispositions;
litigation; potential and contingent liabilities; management’s plans; taxes and
refinancing of existing debt. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. These statements may be preceded by,
followed by or include the words “believes,” “expects,” “anticipates,”
“intends,” “plans,” “estimates,” “may,” “could,” “should,” “would” or similar
expressions.




Forward-looking
statements are not guarantees of performance and by their nature are subject to
inherent risks and uncertainties. We caution you therefore that you should not
rely on these forward-looking statements. You should understand the risks and
uncertainties discussed in “Item 1A—Risk Factors” and elsewhere in this report,
could affect our future results and could cause those results or other outcomes
to differ materially from those expressed or implied in our forward-looking
statements.




Any
forward-looking information contained in this report speaks only as of the date
of this report. Factors or events may emerge from time to time and it is not
possible for us to predict all of them. We undertake no obligation to update or
revise any forward-looking statements to reflect new information, changed
circumstances or unanticipated events.












PART
I




Item 1.  Business




Overview




China
Valves Technology, Inc., formerly known as Intercontinental Resources, Inc.,
through its direct and indirectly subsidiaries, focuses primarily on the
development, manufacture and sale of high-quality metal values for the
electricity, petroleum, chemical, water, gas and metal industries in the
People’s Republic of China, or the PRC.





Our
operations are headquartered in Kaifeng, Henan Province, PRC.  Our two
Chinese subsidiaries, Zhengzhou ZhengDie Valve Corporation, or ZhengDie Valve,
and Kaifeng High Pressure Valve Corporation, or High Pressure Valve, are
profitable, mid-sized Chinese companies that focus primarily on the development,
manufacture and sale of high-quality metal valves for the electricity,
petroleum, chemical, water, gas and metallurgy industries in the
PRC.





Our sales
revenue and net income were $37,036,282 and $ 7,142,592, respectively, during
the fiscal year ended December 31, 2007, and $25,530,183 and $ 4,679,379,
respectively, during the same period in 2006.





History and Corporate Organization





Intercontinental
Resources, Inc., or Intercontinental, was incorporated August 1, 1997, in Nevada
as Meximed Industries to develop and produce a non-reusable medical syringe. We
later abandoned that business, as we lacked sufficient capital resources. In
January 1999 we changed the co124 urse of
our business direction and changed our name to Digital Video Display Technology
Corp. We obtained a license to market a patented audio video jukebox technology
in Canada and in five U.S. states. In July 2001 we changed our name to Iconet,
Inc. in connection with a proposal to build the jukeboxes and sell them back to
the licensor of the technology.





In June
of 2002 we resolved to investigate some possible opportunities in mineral
exploration. We optioned a property in Ontario, Canada, but after our due
diligence investigation we elected not to proceed and mutually rescinded the
agreement.





In June
of 2003 our board appointed Mr. Matthew Markin as president and as a director to
replace Randy Miller. Mr. Miller also resigned as director, so that Mr. Markin
became the sole executive officer and director of Intercontinental . Mr.
Miller's resignation was voluntary to pursue other interests, and not as a
result of any dispute with Intercontinental.





In July
of 2003, we adopted a plan of reorganization in connection with which we
completed a 1-for-143 reverse split of our common stock. Shortly thereafter, we
effected a 2-for-1 forward split.  In June 2007, we effected a
1-for-500 reverse split.







1




Reverse
Merger Transaction





On
December 16, 2007, Intercontinental entered into a Stock Purchase Agreement and
Share Exchange Agreement, or the Exchange Agreement, with China Valve Holding
Limited, or China Valve Samoa, a company incorporated under the laws of
Samoa on June 6, 2007,and the owner of China Valve Samoa.  The closing of the
transaction took place on December 16, 2007, and resulted in the merger between
Intercontinental and China Valve Samoa.  Pursuant to the terms of the
Exchange Agreement, Intercontinental acquired all of the outstanding capital
stock and ownership interests of China Valve Samoa from the sole shareholder of
China Valve Samoa for an aggregate of 40,000,000 shares, or 99.8% of
Intercontinental’s common stock.  In addition, China Valve Samoa
agreed to pay cash of $490,000. Because the acquisition is treated as a reverse
acquisition, the financial statements of Intercontinental have been
retroactively adjusted to reflect the acquisition from the beginning of the
reported period included in this report.  The share exchange transaction
has been accounted as a reverse acquisition and recapitalization of
Intercontinental whereby China Valve Samoa is deemed to be the accounting
acquirer (legal acquiree) and Intercontinental to be the accounting acquiree
(legal acquirer). The historical financial statements for periods prior to
December 16, 2007, are those of China Valve Samoa except that the equity section
and earnings per share have been retroactively restated to reflect the reverse
acquisition.





Pursuant
to the Exchange Agreement, on December 18, 2007, Intercontinental filed with the
Secretary of State for the state of Nevada a Certificate of Amendment to our
Certificate of Incorporation changing our name to “China Valves Technology,
Inc.” to better reflect our business plan.





China
Valve Samoa’s wholly owned subsidiary China Valve Holdings Limited (“China Valve
Hong Kong”) was incorporated under the laws of the Hong Kong Special
Administrative Region on June 11, 2007.  Neither China Valve Samoa nor
China Valve Hong Kong has any active business operations other than their
ownership of Henan Tonghai, which is the primary company that manufactures our
products.  Henan Tonghai was incorporated in the PRC with a registered
capital of HKD 10 million ($1,370,000).  Henan Tonghai owns 100% of
the issued and outstanding capital stock of both ZhengDie Valve, a company
formed under the laws of the PRC, and High Pressure Valve, a company formed
under the laws of the PRC.






2




The
following chart reflects our organizational structure as of the date of this
Annual Report.










Our
Industry




China is
currently experiencing growth in urbanization and heavy
industrialization.  The Company believes that increased demand for
energy and water treatment in urban centers will increase demand for valve
products. According to the China Valve Industry Association’s research, sales of
valve products in the Chinese domestic market in 2006 reached $5.36 billion, an
increase 32% from the previous year, and the Chinese market is expected to
increase at an annual rate of more than 30% for the next 5 years.





According
to the China Valve Industry Association’s research, the valve market is divided
into five primary segments: (i) power; (ii) petrochemical; (iii) oil; (iv) water
supply; and (v) metallurgy, which account for approximately 21%, 12%, 24.5%, 14% and 8% of market share,
respectively.  All other valve products account for the remaining
18.5%.








3







1.  Power
industry




Thermal
power




The power
industry has experienced rapid growth since the founding of the PRC, aided
particularly by economic reforms by the Chinese government and the opening of
the Chinese market to the outside world. In 2006, total installed capacity
achieved 600 million KW and generated electricity volume of 284 million KWh,
both of which were the highest in the world.  Although overall
installed capacity is relatively sufficient, the structure of such units has
been inefficient.  Small thermal power generating units account for
approximately 70% of total capacity, however, the above-300 KW units account for
less than 30% of the total. Compared to technology used in developed countries,
technology used in the PRC is falling far behind.  Equipment is
outdated and the majority of thermal power units are sub-critical pressure and
super-critical pressure units. These units have high coal consumption, low
efficiency and high pollution, which lead to environmental and energy-saving
problems.  Based on the current development of the Chinese domestic
power market, in 2010 China power generating installed capacity should reach
approximately 950 million KW and thermal power installed capacity should reach
approximately 550-600 million KW. Thermal power installed capacity has been
increasing by over 30 million KW annually.




The focus
of thermal power industry development is primarily on adjusting and optimizing
thermal power units. High-temperature, high-pressure and high-parameter thermal
power generating units have high-thermal efficiency, good economic results and
light pollution, which is good for environmental protection and energy
saving.  600 MW thermal power generating units have had the lowest
demand in China. There has been a trend toward 1000 MW supercritical pressure
units and these units are expected to become more prevalent in the
future.  Currently in China, there are sixteen projects that are under
construction or are scheduled to commence operation in the near
future.  These include facilities at Zhejing Ninghai, Waigaoqiao,
Wuhu, Pingdingshan and Shanxi Zhangze, with a total capacity of 34 million KW of
34 units. Kaigao Company is the sole company that would have the capacity to
manufacture valves used for ultra-critical thermal power generating
units.  We expect to have an extensive market share in the
supercritical pressure unit market.




Nuclear
power




There are
about 500 nuclear power generating units in the world, 11 of which have been
built in China with total installed capacity of 8.7 million
KW.  Presently, six nuclear power generating units having a capacity
of over a million KW are planned to be built at the Sanmen nuclear power station
and four nuclear power generating units are planned at the Tianwan nuclear power
station. Based on the Chinese state energy plan, by 2020 approximately 20
nuclear power generating units are proposed to be established in Lingdong in
Shenzhen, Yangjiang, Taishan, Peiling, Chongqing and Dalian, with an aggregate
capacity of 40 million KW, or 4-5% total installed capacity.  Demand
for valves used in the nuclear power industry is higher than demand in the
thermal power industry for power stations having similar capacity.  A
nuclear power station with two sets of one million KW nuclear power generating
units typically requires approximately 30,000 units of valves. Based on an
increase of 2.5 million KW of nuclear power generating units per year, we
estimate that the average annual demand for valves used in the nuclear power
industry will reach 38,000 units.  According to target power
generation increases set forth in the eleventh five-year plan of the Chinese
government (2006-2010), we believe the demand for valves in the nuclear power
industry will reach RMB 3 billion by 2010, with an average annual amount of RMB
0.6 billion from 2006 to 2010.  In addition, we believe that the
market for repairs of valves is approximately RMB 150 million per
year.






4






2.  Petrochemical
and oil industries




During
the period of the eleventh five-year plan (2006-2010), the focus of the
large-scale ethane and fertilizer industry is on developing 80-100 mil-mt/year
sizable projects, including build-out and transformation of existing 40-45
mil-mt/year equipment and building new large-scale ethane equipment. During this
period, the large-scale ethane equipment of 40-45 mil-mt/year in Daqing, Jilin
and Maoming will be transformed into equipment of 80 mil-mt/year. Additionally,
large-scale ethane equipment projects of 80 mil-mt/year in Tianjin and 100
mil-mt/year in Zhenhai are expected to be implemented.  It is
anticipated that several sets of new large-scale 80 mil-mt/year ethane equipment
projects will be built by joint investment and joint venture.  We
believe that the market for large-scale ethane key equipments, such as special
valves and high-temperature valves for ethane fission gas, which are currently
still imported into the PRC, will increase within the PRC.  It is
anticipated that prior to 2010, the newly established large-scale gas pipeline
would reach a capacity of above 20,000 km and the demand for large caliber
high-pressure gas pipeline ball valves will be approximately 20,000 units. The
segment of the Sino-Russian oil pipeline that is located in China requires 300
units of electromotion DN caliber pipeline valves.  During the
eleventh five-year plan period, crude high-pressure oil pipelines of 5,000 km
are planned to be built, which we believe will require approximately 3,000 units
of high-pressure DN caliber pipeline valves. Additionally, the PRC is expected
to develop the LNG station, which should generate large demand for various types
of low-temperature valves. The majority of high-standard special valves involved
in large-scale gas projects are from imports. It is necessary for us to
strengthen research and development of high-temperature, high-pressure and
grind-resist valves in order to meet demands for development of the
coal-liquefied industry.





3.  Water
supply industry





American
Watts Water Technologies Group, a leading manufacturer of equipment for water
treatment internationally, anticipates that the total demand for valves in China
to be used in the water supply industry will be RMB 10 billion.  We
believe that the budgeted amount for valves for the 70 km segment of the
north-south water transfer project in Beijing from suburban Beijing to downtown
Beijing alone is more than ten million RMB.  In addition, the scalable
hydroelectric power supply project is not only an immediate project but also a
long-term task. Major projects such as gas transportation between western and
eastern regions of the PRC, the transformation of the old industry base,
construction of downtown pipe network in major cities, residential building, and
wastewater treatment and water conservancy should also generate tremendous
demand for valves.





We
believe that the total demand for valves will reach $12 billion by 2010. The
Chinese government is expected to put an emphasis on construction of basic
infrastructure for water, electricity, gas and heat in order to ensure
continuous economic development and meet the requirement of improving people’s
living standard.  This construction should generate huge demand for
valves.  China’s valve market us expected to keep developing. We
expect to keep working on how to utilize all the tangible and intangible
resources to expand and strengthen our products and increase market
share.





Our
Strategy





Our
objective is to increase profitability, cash flow and revenue while developing
and enhancing our position as the leading valve manufacturer in
China.  Our strategy for achieving these objectives includes the
following key elements:







5




Pursue Strategic
Acquisitions. China’s
valve market is very fragmented.  According to the China Valve
Industry Association’s statistics, there are more than 4,000 valve manufactures
in the market, none with a market shares of above 1%. The top 10 valve
manufactures in China only have an aggregate Chinese market share of 8%. We
anticipate that the fragmented nature of the Chinese valve market will continue
to provide opportunities for growth through strategic acquisitions. Our
acquisition strategy will continue to focus on entities with products that
provide opportunities for us to expand and products that can be marketed through
our existing distribution channels or provide us with new distribution channels
for our existing products, thereby increasing marketing and distribution
efficiency. Furthermore, we seek acquisition candidates that demonstrate a
combination of good profit margins, strong cash flow, leading positions in the
local markets and products that generate recurring revenue.  We will
use our brand advantage to consolidate the China valve market and to increase
the market shares.





Further Penetrate
Existing Market Segments. We intend to seek to
further penetrate existing market segments to drive sustainable growth by
strengthening our existing customer relationships and attracting new customers.
We intend to further penetrate existing customers by continuing to:





·
            provide
      quality products;




·
            fulfill
      logistical requirements and volume demands efficiently and
      consistently;




·
            provide
      comprehensive product support from design to after-market customer
      service;




·
            cross-sell
      our brands across various business segments to our customers;
      and




·
            leverage
      strong established distribution
channels.




Enter New Market
segments. To
drive organic growth from our existing businesses, we intend to continue to
leverage our customer relationships to develop or acquire new products and
product extensions to enter into new market segments.  For example in
2007, we successfully entered into the nuclear power station valve markets by
signing a deals with two large nuclear power stations.  In addition,
we intend to increase our market share in the nuclear power market by increasing
our investment in research and development, obtaining production licenses and
establishing a sales team specifically focused on the nuclear power
industry.  In the oil and chemical industry, there has been increased
construction of long-range pipelines for the transmission of oil and
gas.  This increase should result in increased demand for ball valves
and flat valves.  We have completed the design of these valves and
plan to add equipment to our existing facilities to enhance
production.




High End Product
Focus. We will keep focusing on high end, more sophisticated valve
products, including high-parameter and special usage valves.  The
majority of valve companies in China focus only on low end products at lower
prices. Because of our technology and R&D strength, we will continue
focusing on high end valve products and pursing higher margins than the industry
average.  Additionally, we intend to cooperate with the electricity
power design colleges and solicit support from industry
associations.




Increase in
International Sales.  We plan to increase our focus on sales
into international markets.  In the short term, we plan to focus on
neighboring developing countries and in the long term, we expect to focus on the
United States and Europe.




Our
Products





China
Valve produces valves for many different industries.  The main product
lines consist of:




-
            High
      pressure and high temperature valves for power station
    units;





-
            Valves
      for long distance petroleum
pipelines;






6





-
            Special
      valves for chemical lines;





-
            Large
      valves for water supply pipe
networks;





-
            Valves
      for sewage; and





-
            Valves
      for long distance gas pipelines.





China
Valve produces over 700 models of valves and more than 10,000 standards of
valves in categories such as low, medium and high-pressure
valves.  The valves are produced with varying diameters from 3mm to
1300mm and with pressure caps that range from 150lbs to 4500lbs.  In
addition, different valve products can be used in temperatures ranging from -196
degrees Celsius to 610 degrees Celsius.





The major
materials that are used in the production of these valves include carbon steel,
stainless steel, low temperature steel and heat resistant steel
extra.





The
Company also produces the following types of valves:




-
            Gate
      valves;





-
            Globe
      valves;





-
            Check
      valves;





-
            Throttle
      valves;





-
            Butterfly
      valves;





-
            Ball
      valves;





-
            Safety
      valves;





-
            Water
      pressure test valves;





-
            Vacuum
      valves; and





-
            Extraction
      check valves extra.




Our
Manufacturing Process





Our
manufacturing process consists of the following steps:





Ø
            purchasing
      and depositing of raw materials,




Ø
            processing,




Ø
            production
      of inventory of semi-finished products (or transporting to the next step
      directly),




Ø
            completing
      the part processing and assembling
products,




Ø
            product
      inspection and testing, and




Ø
            production
      of inventory of finished products.






7




Our
modern CAD center can assist in the design of all products.  The
Company closely monitors and tests quality of raw materials, including casting
steel blank parts, forging steel blank parts and steel. The Company uses a
high-speed direct reading spectrograph (32 channels) for the analysis of the
chemical components of raw materials.  We have cobalt 60γflaw detectors,
high-power magnetic particle flaw detectors and ultrasonic flaw detectors,
non-destructive equipment that helps to ensure the internal quality of forging
blank parts. We have a mental material test room for physical and chemical
analysis and mechanics testing of raw materials. In order to ensure production
structural capability, we utilize high-precision equipment, including
high-precision CNC lathes and advanced welding equipment to satisfy requirements
of products design. We have modern product-processing workshops mainly with CNC
lathes and approximately 20 units of large-scale high-precision equipment,
including 4 m CNC vertical lathes, CNC horizontal lathes and CNC boring and
milling machines. In addition, we have pressure equipment to conduct pressure
testing for finished products in accordance with relative
standards.





Our
company has set up a comprehensive and reliable quality management system with
strict and material manufacturing procedures and standard inspection. In
addition, our company acquired an API quality certificate in January of 1994, a
Norway DNV ISO9001 in May of 1996, a European Union CE in 2004 and a China
special equipment manufacturing certificate in 2005.





Warranties




We
typically warrant all of our products and provide replacement or credit to our
customers who are not satisfied with our products for a period of one year from
the date of shipment.  When we receive an indication that a product
did not perform as expected, our quality control specialists and laboratory
personnel test the product to determine if our process was correct for the
specifications submitted by the customer and if the manufacturing process was
completed as planned.  If we failed to produce the product according
to the customer’s specifications or if the manufacturing process was flawed, we
provide immediate credit to the customer.  If we produced the product
to the customer’s specifications and if the manufacturing process was not
flawed, we send a team to the customer’s facilities to see if we can assist the
customer in correcting its process.  Typically a team consists of at
least one engineer, at least one experienced production person and the
customer’s sales representative.  If the product was manufactured to
the proper specifications, our team works with the customer in developing
corrective action to solve its problem.




We have
not established reserve funds for potential customer claims because,
historically, we have not experienced significant customer complaints about our
products and none of our customers have requested damages for any loss incurred
due to product quality problems.  We believe that our customer support
teams, our quality assurance and manufacturing monitoring procedures will
continue to keep claims at a level that does not support a need for a
reserve..  We review customer returns on a monthly basis and may
establish a reserve fund as we expand our business by volume and products. . If
we were to experience a significant increase in warranty claims, our financial
results could be adversely affected. See “Risk Factors - Risks Related to Our
Business - 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.”





Suppliers
of Our Raw Material





Our raw
materials are primarily varieties of steel and casting blank parts and driven
devices. The price for such material fluctuates depending upon market
conditions. However, since we have long-term suppliers and clients, the
influence of material price fluctuation is not currently material to the
Company.






8




We have
established long-term relationships with key suppliers. However, we do not
exclusively rely on our key suppliers. We have adopted a dual supplier system
for raw materials. Therefore, if our primary suppliers cannot supply us with our
raw material for any reason, we are able to acquire raw material from another
supplier.  All of our suppliers must meet our quality standards and
delivery requirements consistently in order to remain on our approved supplier
list. If deliveries are delayed repeatedly, we terminate the partnership with
such supplier.




The
flexible sourcing arrangements are designed to ensure the stable supply of raw
material and promote healthy competition among our suppliers.  We
believe our supplier arrangements would encourage our suppliers to provide
advanced technology and high quality products.




Top
10 Suppliers in 2007





Rank
            Company
      Name
            Purchasing
      amount
              in
      2007
            Location
            Material
            Percentage
      of total purchasing amount1
            Kaifeng
      High Pressure Valve Castings Ltd
            2,543,564.31
            Kaifeng,
      Henan
            Casting
            22%2
            Sichuan
      Jiangyou City Xinchuan Special Steel, Inc.
            662,471.31
            Jiangyou,
              Sichuan
            Steel
            6%3
            Luoyang
      Menjin Yonghui Castings Plant
            424,201.23
            Luoyang
            Electricity
              Installation
            4%4
            Yuzhou
      Huolong Ding Country Light Industry Welfare
              Castings
      Plant
            337,517.61
            Yuzhou,
              Henan
            Casting
      Copper
            3%5
            Shanghai
      Demorui Drive, Inc.
            291,254.01
            Shanghai
            Electricity
              Installation
            3%6
            Linzhou
      Minwei Refined Castings Plant
            241,158.16
            Linzhou
            Valve
      Accessory
            2%7
            Huixian
      Huahe Metal Magnesium Plant
            234,507.80
            Huixian
            Electricity
              Installation
            2%8
            Linzhou
      Jinhe Power Service Ltd
            223,853.03
            Linzhou
            Welding
      Rod
            2%9
            Zhengzhou
      Fuheng Material Ltd
            211,229.60
            Zhengzhou
            Welding
      Rod
            2%10
            Huixian
      Feida Heavy Synthetical Mechinary Ltd
            201,457.19
            Huixian
            Electricity
              Installation
            2%







9






Our
Major Customers




Our major
customers are large-scale equipment enterprises in electricity, chemical, oil
and water supply industries in China.  Most of our customers are
state-owned entities with good reputations. Our customers include Shanghai
Turbine Corporation, Dongfang Turbine Corporation, Shanghai Waigaoqiao Disan
Generating Power Inc. and Sichuan Electric Power Construction
Corporation.  The number of our clients exceeds 400.  As we
continue to build sales in the domestic market, we also plan to  grow
by developing sales overseas.  We focus on maintaining long-term
relationships with our customers.  We have enjoyed recurring orders
from most of our customers for periods of 5 to 30 years.  Our typical
contract has a one-year term and is usually renewable.




The
following table shows the revenues generated and percentage of total revenues
received from our ten largest customers during the years ended December 31,
2007.





Top
      10 Clients in 2007Rank
            Clients
      Name
            Sales
      in 2007
            Percentage
      of Total Revenue (2007)1
            Shang
      Hai Tap Water Inc.
            2,565,217.39
            7.44%2
            Kunshan
      Tap Water Group Ltd
            1,144,265.48
            3.32%3
            Shanghai
      Waigaoqiao Disan Generating Power Inc.
            852,374.36
            2.47%4
            Wuhan
      Steel Processing Ltd
            836,909.88
            2.43%5
            Sino
      Tianchen Chemical Project Co.
            777,821.92
            2.26%6
            East
      Hope Sanmen Xia Aluminum Industry Ltd
            683,831.36
            1.98%7
            Shanghai
      Turbine Co.
            655,377.63
            1.90%8
            Sichuan
      Electric Power Construction Co.
            628,646.72
            1.82%9
            Materials
      Supplier for Daqing Oilfield
            602,750.94
            1.75%10
            Nanjing
      Huashui Water Disposal Equipment Ltd
            555,248.48
            1.61%







10






Sales,
Marketing and Distribution





We market
our products through regional agents. In addition, High Pressure Valve has 37
sales agents across China and we adopt the management method of project
authorization to avoid the conflict in bidding. We provide periodic training to
our sales staff.  Because we have direct communication with clients
and participate in trade exhibitions, our sales staff has produced successful
results.  As a major supplier of valve products in China, we believe
we have established a good reputation in our industry.





Our
Research and Development Efforts





China
Valve’s business is dependent on constantly improving the technology associated
with developing and manufacturing valves.  Therefore, China Valve has
committed itself to research and development of new valves and developing state
of the art valves that improve and advance the valve industry.  Over
the past few years, China Valve has invested more than 5% of its total revenue
in research and development.  We also intend to increase the amount of
resources we allocate to research and development as the Company begins to
grow.





The
company has 246 technicians and researchers dedicated to actively researching
and developing new valves and participating in the valve production and
improvement.  China Valve operates a research and development
laboratory with Lanzhou Science and Engineering University (the only
university in China that offers a major in valve development and
manufacturing).  It has also partnered with Hefei General Mechanical
Study Department Valves Study institute to work to improve the development,
manufacture and quality of valves produced in China.





Competition





China is
experiencing tremendous growth in its economy, especially in urbanization and
industrialization.  China Valve is a leading valve producer in China
and is involved in the development, manufacture and sale of valves in many
different industries, including the thermal power industry, sewage disposal, oil
and chemical industry, metallurgy, hot power industry and nuclear power
industry.  There are approximately 4,000 valve manufacturers in China
and the Company believes that China Valve is one of the largest and has the most
comprehensive product lines.





The
following is a list of our major competitors in the valve industry:




·
            Hong
      Cheng Machinery Co., Ltd – a manufacturer of medium pressure big diameter
      butterfly valves for the water supply
industry;




·
            Sufa
      Technology Industry, Co., Ltd – a manufacturer of nuclear power industry
      used valves; and




·
            Guangdong
      Mingzhu Group Co., Ltd – a manufacturer of small diameter ball
      valves.




There
are, however, certain factors that we believe set us apart from all of our
competitors.  China Valve is a top producer of many types of valves
and has positioned itself as the leading valve producer in China.  In
addition, the following factors will help China Valve continue to set itself
apart from its competitors:






11




·
            We
      are the first manufacturer of main stream gate valves for 300MW and main
      water supply gate valves for 600MW power stations in
  China;




·
            We
      are the sole designer and manufacturer in China of valves that are used
      for ultra supercritical units of 1000MW power
  stations;




·
            We
      are the first manufacturer of high pressure large diameter oil pipeline
      valves in China;




·
            We
      were the first domestic manufacturer of 2500 pound high pressure gate
      valves for hydrogenation in chemical lines, which substitutes for imported
      products;




·
            We
      were the first domestic manufacturer of high pressure large diameter gate
      valves for the coal chemical industry;
and




·
            We
      are the sole manufacturer in China that produces all of the following:
      blowtorch valves, water pressure testing valves, steam controlling valves
      for high parameter power stations and bypass valves for high pressure
      heaters.




Intellectual
Property





The
Company owns a significant number of patents on its valves.  The
following is a list of all the products that are patented by China Valves and a
description of each product.








Product
      Name
            Patent
      Number
            Expiration
      date
            DescriptionBi-directional
      Metal Sealed Butterfly Valve
            ZL98242105.2
            1/15/2010
            The
      product is used for water supply and drainage pipes and can prevent
      flowing backwards. This product is characterized by wear proof and long
      duration.Extension
      Butterfly Valve
            ZL98242104.4
            1/22/2010
            The
      product is used for supply and disposal pipes for water and gas of
      chemical, steel and electricity. The product is characterized by
      convenient installation and un-installation and excellent sealing
      effect.Bi-directional
      Seal Ball Valve
            ZL00229964.X
            3/1/2011
            The
      product is used for chemical, steel and electricity and sewage disposal
      used water and gas supply and drainage pipes. The product is characterized
      by wear proof, long duration and excellent sealing
  effect.Hydraulic
      Check Butterfly Valve with
              Heavy
      Hammer
            ZL02228101.0
            11/20/2012
            The
      product is used for water supply and sewage pipes to prevent water flow
      backward. It is characterized by high efficiency and energy
      saving.Eccentric
      Ball Surface Valve (appearance design)
            ZL02355048.1
            5/28/2013
            The
      product is used for supply and sewage pipes for oil, chemical, metallurgy
      and electricity industries.








12






Extension
      Metal Seated Butterfly Valve
            ZL02278887.5
            8/6/2013
            The
      product is used on water and gas supply and disposal pipes in the oil,
      chemical, steel and electricity construction industries. It is
      characterized by easy installation and un-installation and long
      duration.Valves
      Open and Close Executing Mechanism
            ZL0227886.7
            8/27/2013
            This
      product is used for valves that are produced by the Company. This product
      is characterized by reasonable design and high efficiency in
      transmission.Eccentric
      Ball Surface Valve
            ZL02279458.1
            9/17/2013
            This
      product is used industries such as oil, chemical, gas, metallurgy,
      electricity, paper manufacturing and heat. This product is especially
      suitable for cutting or adjusting flows of industrial pipes, which
      transporting flows contain particular matter, ash cinder and texture
      extra.Life
      Test Equipment for Valves
            ZL032438656.6
            6/16/2014
            This
      product is used for sealing life duration test.Flat
      Gate Valve
            ZL
      02290648.7
            12/31/2013
            This
      product is used on water supply and disposal facilities. This product is
      characterized by lightweight, easy installation and corrosion
      resistance.Mechanical
      Electromagnetic Lock Equipment Hydraulic Check Butterfly Valves with Heavy
      Hammer
            ZL02138706.0
            11/17/2014
            This
      product is used for hydraulic check butter fly valves with heavy hammer.
      It is characterized by its safety, reliability and energy
      saving.





Regulation





Because
our operating subsidiary Henan Tonghai is located in the PRC, we are regulated
by the national and local laws of the PRC.




There is
no private ownership of land in China and all land ownership is held by the
government of the PRC, its agencies and collectives.  Land use rights
can be obtained from the government for a period up to 70 years and are
typically renewable.  Land use rights can be transferred upon approval
by the land administrative authorities of the PRC (State Land Administration
Bureau) upon payment of the required land transfer fee.  China Valves
does not own the building and land it operates on.  High Pressure
Valve owns three manufacturing companies and the equipment of the casting
company. The land and the buildings of High Pressure Valve belong to the casting
company.   See “OUR BUSINESS – Our Facilities” for more
details.






13






In
addition, we are also subject to the PRC’s foreign currency
regulations.  The PRC government has control over Renminbi reserves
through, among other things, direct regulation of the conversion or Renminbi
into other foreign currencies.  Although foreign currencies that are
required for “current account” transactions can be bought freely at authorized
Chinese banks, the proper procedural requirements prescribed by Chinese law must
be met.  At the same time, Chinese companies are also required to sell
their foreign exchange earnings to authorized Chinese banks and the purchase of
foreign currencies for capital account transactions still requires prior
approval of the Chinese government.




We do not
face any significant government regulation in connection with the production of
our products. We do not require any special government permits to produce our
products other than those permits that are required of all corporations in
China.




Our
Employees





As of
December 31, 2007, we had approximately 904 full-time employees.  The
number of employees in each department is detailed in the following
chart:





Department
            Number
      of EmployeesMarketing
            86Management
            48Finance
      and Accounting
            25Research
      & Development
            102Human
      Resources
            10Production
      workers
            492Engineering
      and Technical Support
            141Total
            904





Our
Addresses




The
address of China Valves’ principal executive office in China is No. 93 West
Xinsong Road, Kaifeng City, Henan Province, People’s Republic of China and our
telephone number is (86) 378-2925211.  We maintain a website at www.cvalve.net that
contains information about us, but that information is not a part of this Annual
Report.




Item 1A.  RISK
FACTORS




Item 1B.  RISKS
RELATED TO OUR BUSINESS




We
need to manage growth in operations to maximize our potential growth and achieve
our expected revenues and our failure to manage growth will cause a disruption
of our operations resulting in the failure to generate revenue.





In order
to maximize potential growth in our current and potential markets, we believe
that we must expand the scope of our valve manufacture and production and
continue to develop new and improved valves. This expansion will place a
significant strain on our management and our operational, accounting, and
information systems.  We expect that we will need to continue to
improve our financial controls, operating procedures and management information
systems.  We will also need to effectively train, motivate and manage
our employees.  Our failure to manage our growth could disrupt our
operations and ultimately prevent us from generating the revenues we
expect.







14




We
cannot assure you that our internal growth strategy will be successful, which
may result in a negative impact on our growth, financial condition, results of
operations and cash flow.





One of
our strategies is to grow internally through increasing the development of new
valves and improve the quality of existing valves.  However, many
obstacles to this expansion exist, including, but not limited to, increased
competition from similar businesses, international trade and tariff barriers,
unexpected costs, costs associated with marketing efforts abroad and maintaining
attractive foreign exchange ratios.  We cannot, therefore, assure you
that we will be able to successfully overcome such obstacles and establish our
services in any additional markets.  Our inability to implement this
internal growth strategy successfully may have a negative impact on our growth,
future financial condition, results of operations or cash flows.





We
cannot assure you that our acquisition growth strategy will be successful,
resulting in our failure to meet growth and revenue expectations.





In
addition to our internal growth strategy, we have also explored the possibility
of growing through strategic acquisitions.  We intend to pursue
opportunities to acquire businesses in the PRC that are complementary or related
in product lines and business structure to us.  We may not be able to
locate suitable acquisition candidates at prices that we consider appropriate or
to finance acquisitions on terms that are satisfactory to us.  If we
do identify an appropriate acquisition candidate, we may not be able to
negotiate successfully the terms of an acquisition, or, if the acquisition
occurs, integrate the acquired business into our existing
business.  Acquisitions of businesses or other material operations may
require debt financing or additional equity financing, resulting in leverage or
dilution of ownership.  Integration of acquired business operations
could disrupt our business by diverting management away from day-to-day
operations. The difficulties of integration may be increased by the necessity of
coordinating geographically dispersed organizations, integrating personnel with
disparate business backgrounds and combining different corporate
cultures.  We also may not be able to maintain key employees or
customers of an acquired business or realize cost efficiencies or synergies or
other benefits we anticipated when selecting our acquisition
candidates.  In addition, we may need to record write-downs from
future impairments of intangible assets, which could reduce our future reported
earnings.  At times, acquisition candidates may have liabilities or
adverse operating issues that we fail to discover through due diligence prior
to the acquisition.  In addition to the above, acquisitions in
the PRC, including state owned businesses, will be required to comply with the
laws of the PRC, to the extent applicable. There can be no assurance that any
given proposed acquisition will be able to comply with PRC requirements, rules
and/or regulations, or that we will successfully obtain governmental approvals
that are necessary to consummate such acquisitions, to the extent
required.  If our acquisition strategy is unsuccessful, we will not
grow our operations and revenues at the rate that we anticipate.





If
we are not able to implement our strategies in achieving our business
objectives, our business operations and financial performance may be adversely
affected.





Our
business plan is based on circumstances currently prevailing and the bases and
assumptions that certain circumstances will or will not occur, as well as the
inherent risks and uncertainties involved in various stages of
development.  However, there is no assurance that we will be
successful in implementing our strategies or that our strategies, even if
implemented, will lead to the successful achievement of our
objectives.  If we are not able to successfully implement our
strategies, our business operations and financial performance may be adversely
affected.






15






We
may have difficulty defending our intellectual property rights from
infringement, resulting in lawsuits requiring us to devote financial and
management resources that would have a negative impact on our operating
results.




We regard
our service marks, trademarks, trade secrets, patents and similar intellectual
property as critical to our success.  We rely on trademark, patent and
trade secret law, as well as confidentiality and license agreements with certain
of our employees, customers and others to protect our proprietary rights. We
have received patent protection for certain of our products in the
PRC.  No assurance can be given that our patents, trademarks and
licenses will not be challenged, invalidated, infringed or circumvented, or that
our intellectual property rights will provide competitive advantages to
us.  There can be no assurance that we will be able to obtain a
license from a third-party for technology that we may need to conduct our
business or that such technology can be licensed at a reasonable
cost.





Presently,
we provide our valves mainly in the PRC.  To date, no trademark or
patent filings have been made other than in the PRC.  To the extent
that we market our services in other countries, we may have to take additional
action to protect our intellectual property.  The measures we take to
protect our proprietary rights may be inadequate and we cannot give you any
assurance that our competitors will not independently develop formulations,
processes and services that are substantially equivalent or superior to our own
or copy our products.





We
depend on our key management personnel and the loss of their services could
adversely affect our business.





We place
substantial reliance upon the efforts and abilities of our executive
officers.  The loss of the services of any of our executive officers
could have a material adverse effect on our business, operations, revenues or
prospects.  We do not maintain key man life insurance on the lives of
these individuals.





We
may never pay any dividends to shareholders.





We have
never paid any dividends and have not declared any dividends to
date.  Our board of directors does not intend to distribute dividends
in the near future.  The declaration, payment and amount of any future
dividends will be made at the discretion of the board of directors and will
depend upon, among other things, the results of our operations, cash flows and
financial condition, operating and capital requirements and other factors the
board of directors considers relevant.  There is no assurance that
future dividends will be paid, and, if dividends are paid, there is no assurance
with respect to the amount of any such dividend.





Management
exercises significant control over matters requiring shareholder approval which
may result in the delay or prevention of a change in our control.





Mr.
Siping Fang, our Chairman and Chief Executive Officer, through his common stock
ownership, currently has voting power equal to approximately 60% of our voting
securities.  As a result, management, through such stock ownership,
exercises significant control over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions.  This concentration of ownership in management may also
have the effect of delaying or preventing a change in control of us that may be
otherwise viewed as beneficial by shareholders other than
management.






16




We
may incur significant costs to ensure compliance with United States corporate
governance and accounting requirements.





We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission. We expect all
of these applicable rules and regulations to significantly increase our legal
and financial compliance costs and to make some activities more time consuming
and costly.  We also expect that these applicable rules and
regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage.  As a result, it may be more difficult
for us to attract and retain qualified individuals to serve on our board of
directors or as executive officers.  We are currently evaluating and
monitoring developments with respect to these newly applicable rules, and
we cannot predict or estimate the amount of additional costs we may incur or the
timing of such costs.





We
may not be able to meet the accelerated filing and internal control reporting
requirements imposed by the Securities and Exchange Commission, resulting
in a possible decline in the price of our common stock and our inability to
obtain future financing.





As
directed by Section 404 of the Sarbanes-Oxley Act, the Securities and Exchange
Commission adopted rules requiring each public company to include a report of
management on the company's internal controls over financial reporting in its
annual reports.  In addition, the independent registered public
accounting firm auditing a company's financial statements must also attest to
and report on management's assessment of the effectiveness of the company's
internal controls over financial reporting as well as the operating
effectiveness of the company's internal controls. While we are not subject to
these requirements for the fiscal year ended December 31, 2007, beginning
January 1, 2008, we are subject to these requirements.





While we
expect to expend significant resources in developing the necessary documentation
and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there
is a risk that we may not be able to comply timely with all of the requirements
imposed by this rule.  In the event that we are unable to receive a
positive attestation from our independent registered public accounting firm with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements and our stock price and ability to
obtain equity or debt financing as needed could suffer.





In
addition, in the event that our independent registered public accounting firm is
unable to rely on our internal controls in connection with its audit of our
financial statements, and in the further event that it is unable to devise
alternative procedures in order to satisfy itself as to the material accuracy of
our financial statements and related disclosures, it is possible that we would
be unable to file our Annual Report on Form 10-K with the Securities and
Exchange Commission, which could also adversely affect the market price of our
common stock and our ability to secure additional financing as
needed.





We
may have difficulty raising necessary capital to fund operations as a result of
market price volatility for our shares of common stock.





In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies has experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies.  For these reasons, our shares of common stock can
also be expected to be subject to volatility resulting from purely market forces
over which we will have no control.  If our business development plans
are successful, we may require additional financing to continue to develop and
exploit existing and new products and services related to our industries and to
expand into new markets.  The exploitation of our services may,
therefore, be dependent upon our ability to obtain financing through debt and
equity or other means.







17




RISKS
RELATED TO DOING BUSINESS IN CHINA




Adverse
changes in China’s political or economic situation could harm us and our
operational results.





Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time.  This could
either benefit or damage our operations and profitability.  Some of
the things that could have this effect are:




•
            Level
      of government involvement in the
economy;




•
            Control
      of foreign exchange;




•
            Methods
      of allocating resources;




•
            Balance
      of payments position;




•
            International
      trade restrictions; and




•
            International
      conflict.




The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many
ways.  As a result of these differences, we may not develop in the
same way or at the same rate as might be expected if the Chinese economy were
similar to those of the OECD member countries.





Our
business is largely subject to the uncertain legal environment in China and your
legal protection could be limited.





The
Chinese legal system is a civil law system based on written
statutes.  Unlike common law systems, it is a system in which
precedents set in earlier legal cases are not generally used.  The
overall effect of legislation enacted over the past 20 years has been to enhance
the protections afforded to foreign invested enterprises in
China.  However, these laws, regulations and legal requirements are
relatively recent and are evolving rapidly, and their interpretation and
enforcement involve uncertainties.  These uncertainties could limit
the legal protections available to foreign investors, such as the right of
foreign invested enterprises to hold licenses and permits such as requisite
business licenses.  In addition, all of our executive officers are
residents of China and not of the U.S., and substantially all the assets of
these persons are located outside the U.S.  As a result, it could be
difficult for investors to effect service of process in the U.S., or to enforce
a judgment obtained in the U.S. against us or any of these persons.





The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.





China
only recently has permitted provincial and local economic autonomy and private
economic activities.  The Chinese government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership.  Our ability
to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, import and export tariffs, environmental
regulations, land use rights, property and other matters.  We believe
that our operations in China are in material compliance with all applicable
legal and regulatory requirements.  However, the central or local
governments of these jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations.







18




Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.





Future
inflation in China may inhibit our ability to conduct business profitably in
China.





In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation.  During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%.  These factors
have led to the adoption by the Chinese government, from time to time, of
various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation.  High inflation may in the
future cause the Chinese government to impose controls on credit and/or prices,
or to take other action, which could inhibit economic activity in China, and
thereby harm the market for our products.





Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could harm our operations.





A renewed
outbreak of SARS or another widespread public health problem in China, where our
operations are conducted, could have a negative effect on our
operations.





Our
operations may be impacted by a number of health-related factors, including the
following:





·
            quarantines
      or closures of some of our offices which would severely disrupt our
      operations,




·
            the
      sickness or death of our key officers and employees,
  and




·
            a
      general slowdown in the Chinese
economy.




Any of
the foregoing events or other unforeseen consequences of public health problems
could damage our operations.





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





The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars.  Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only
buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange
business.  In addition, conversion of RMB for capital account items,
including direct investment and loans, is subject to governmental approval in
China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items.  We cannot be certain that the
Chinese regulatory authorities will not impose more stringent restrictions on
the convertibility of the RMB.







19




Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.





In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register
with the competent local SAFE branch before establishing or acquiring control
over an offshore special purpose company, or SPV, for the purpose of engaging in
an equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. Internal implementing guidelines issued by
SAFE, which became public in June 2007 (known as Notice 106), expanded the reach
of Circular 75 by (i)
purporting to cover the establishment or acquisition of control by PRC residents
of offshore entities which merely acquire “control” over domestic companies or
assets, even in the absence of legal ownership; (ii) adding requirements
relating to the source of the PRC resident’s funds used to establish or acquire
the offshore entity; (iii)
covering the use of existing offshore entities for offshore financings; (iv) purporting to cover
situations in which an offshore SPV establishes a new subsidiary in China or
acquires an unrelated company or unrelated assets in China; and (v) making the domestic
affiliate of the SPV responsible for the accuracy of certain documents which
must be filed in connection with any such registration, notably, the business
plan which describes the overseas financing and the use of proceeds. Amendments
to registrations made under Circular 75 are required in connection with any
increase or decrease of capital, transfer of shares, mergers and acquisitions,
equity investment or creation of any security interest in any assets located in
China to guarantee offshore obligations, and Notice 106 makes the offshore SPV
jointly responsible for these filings. 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 our stockholders who are PRC residents as defined in Circular 75 have
registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries.  However, we cannot provide any
assurances that their existing registrations have fully complied with, and they
have made all necessary amendments to their registration to fully comply 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.  For example, our present and prospective PRC
subsidiaries’ ability to conduct foreign exchange activities, such as the
remittance of dividends and foreign currency-denominated borrowings, may be
subject to compliance with Circular 75 by our PRC resident beneficial
holders.  In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular
75.  We also have little control over either our present or
prospective direct or indirect stockholders or the outcome of such registration
procedures.  A failure by our PRC resident beneficial holders or
future PRC resident stockholders to comply with Circular 75, 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.







20






We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations that
became effective on September 8, 2006.





On August
8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, which became effective
on September 8, 2006.  This new regulation, among other things,
governs the approval process by which a PRC company may participate in an
acquisition of assets or equity interests.  Depending on the structure
of the transaction, the new regulation will require the PRC parties to make a
series of applications and supplemental applications to the government
agencies.  In some instances, the application process may require the
presentation of economic data concerning a transaction, including appraisals of
the target business and evaluations of the acquirer, which are designed to allow
the government to assess the transaction.  Government approvals will
have expiration dates by which a transaction must be completed and reported to
the government agencies.  Compliance with the new regulations is
likely to be more time consuming and expensive than in the past and the
government can now exert more control over the combination of two
businesses.  Accordingly, due to the new regulation, our ability to
engage in business combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be able to negotiate a
transaction that is acceptable to our stockholders or sufficiently protect their
interests in a transaction.





The new
regulation allows PRC government agencies to assess the economic terms of a
business combination transaction.  Parties to a business combination
transaction may have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report and the
acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction.  The regulations also
prohibit a transaction at an acquisition price obviously lower than the
appraised value of the PRC business or assets and in certain transaction
structures, require that consideration must be paid within defined periods,
generally not in excess of a year.  The regulation also limits our
ability to negotiate various terms of the acquisition, including aspects of the
initial consideration, contingent consideration, holdback provisions,
indemnification provisions and provisions relating to the assumption and
allocation of assets and liabilities.  Transaction structures
involving trusts, nominees and similar entities are
prohibited.  Therefore, such regulation may impede our ability to
negotiate and complete a business combination transaction on financial terms
that satisfy our investors and protect our stockholders’ economic
interests.





The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and RMB.





The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and RMB, and between those currencies and other currencies in which our
sales may be denominated.  For example, to the extent that we need to
convert U.S. dollars into RMB for our operational needs and should the RMB
appreciate against the U.S. dollar at that time, our financial position, the
business of the Company, and the price of our common stock may be
harmed.  Conversely, if we decide to convert our RMB into U.S. dollars
for the purpose of declaring dividends on our common stock or for other business
purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be
reduced.







21




RISKS
RELATED TO THE MARKET FOR OUR STOCK





Our
common stock is quoted on the OTC Bulletin Board, which may have an unfavorable
impact on our stock price and liquidity.





Our
common stock is quoted on the OTC Bulletin Board.  The OTC Bulletin
Board is a significantly more limited market than the New York Stock Exchange or
Nasdaq system.  The quotation of our shares on the OTC Bulletin Board
may result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock, could depress the trading
price of our common stock and could have a long-term adverse impact on our
ability to raise capital in the future.





We
may be subject to penny stock regulations and restrictions and you may have
difficulty selling shares of our common stock.





The SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions.  If
our common stock becomes a “penny stock”, we may become subject to Rule 15g-9
under the Exchange Act, or the “Penny Stock Rule”.  This rule imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and “accredited
investors” (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their
spouses).  For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction prior to
sale.  As a result, this rule may affect the ability of broker-dealers
to sell our securities and may affect the ability of purchasers to sell any of
our securities in the secondary market.





For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market.  Disclosure is also
required to be made about sales commissions payable to both the broker-dealer
and the registered representative and current quotations for the
securities.  Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stock.





There can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule.  In any event, even if our common stock were exempt from
the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the SEC the authority to restrict any person from
participating in a distribution of penny stock, if the SEC finds that such a
restriction would be in the public interest.







22




Our
largest stockholder, Siping Fang, holds a significant percentage of our
outstanding voting securities and accordingly may make decisions regarding our
daily operations, significant corporate transactions and other matters that
other stockholders may believe are not in their best interests.





Mr.
Siping Fang is the beneficial owner of approximately 60% of our outstanding
voting securities.  As a result, he possesses significant influence
over the election of our board of directors and significant corporate
transactions.  His ownership may also have the effect of delaying or
preventing a future change in control, impeding a merger, consolidation,
takeover or other business combination or discourage a potential acquirer from
making a tender offer.  Other stockholders may believe that these
future decisions made by Mr. Siping Fang are not in their best
interests.




Future
sales or perceived sales of our common stock could depress our stock
price.




A
substantial number of shares of our common stock held by our current
stockholders are freely tradable.  If the holders of these freely
tradable shares were to attempt to sell a substantial amount of their holdings
at once, the market price of our common stock could
decline.  Moreover, the perceived risk of this potential dilution
could cause stockholders to attempt to sell their shares and investors to short
the stock, a practice in which an investor sells shares that he or she does not
own at prevailing market prices, hoping to purchase shares later at a lower
price to cover the sale.  As each of these events would cause the
number of shares of our common stock being offered for sale to increase, our
common stock’s market price would likely further decline.  All of
these events could combine to make it very difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.




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




We have
never declared or paid any cash dividends on shares of our common stock. We
intend to retain any future earnings to fund the operation and expansion of our
business and, therefore, we do not anticipate paying cash dividends on shares of
our common stock in the foreseeable future.




Certain
provisions of our Articles of Incorporation may make it more difficult for a
third party to effect a change-of-control.




Our
Articles of Incorporation authorizes the board of directors to issue up to
300,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by the stockholders. These terms
may include preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of the
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.




Item 2.   Properties




All land
in China is owned by the government of China.  Individuals and
companies are permitted to acquire rights to use land or land use rights for
specific purposes.  In the case of land used for industrial purposes,
the land use rights are granted for a period of up to 50 years.  This
period may be renewed at the expiration of the initial and any subsequent
terms.  Granted land use rights are transferable and may be used as
security for borrowings and other obligations.




China
Valve is operated in facilities located on approximately 74 acres of land. The
subsidiaries of China Valve operate on land that they rent.  High
Pressure Valve was privatized in 2004 and pursuant to the PRC policy of
privatization, the use of land and offices in China is state subsidized until
the end of 2007.  Therefore, High Pressure Valve does not incur any
expenses with respect to its property.







23




With
respect to ZhengDie Valve, the following expenses were incurred in 2006 and 2007
with respect to its property:





Year
Ended 2006




Usage
            
            Amount
      in USDOffice
            
            $
            24,000Production
      Facilities
            
            $
            266,667Operation
      Facilities
            
            $
            6,667Total
      Cost
            
            $
            297,334





Year
Ended 2007




Usage
            
            Amount in
      USDOffice
            
            $
            32,000Production
      Facilities
            
            $
            266,667Operation
      Facilities
            
            $
            6,667Total
      Cost
            
            $
            305,334




Item 3.  Legal
Proceedings




Before
the reverse acquisition on December 18, 2007, Intercontinental was sued by
Merrill Lynch Canada, Inc., in British Columbia, Canada, in July 2000.
Other than initial pleadings, the plaintiff has not proceeded with the suit
since it was filed. Intercontinental believes that the suit is without
merit.  In connection with the reverse acquisition, Intercontinental
agreed to place a portion of the purchase price into escrow pending resolution
of this suit.  If required, the portion of the purchase price for the
reverse acquisition held in escrow will be used to settle this
lawsuit.




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




There
were no matters that were submitted during the fourth quarter of 2007 to a vote
of security holders that have not already been disclosed in a Current Report on
Form 8-K during the period.




PART
II




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




Market for our Common
Stock




Our
common stock, having $0.001 par value per share ("Common Stock"), is traded on
the Over-The-Counter Bulletin Board ("OTCBB") under the symbol
"CVVT.OB."





On
December 31, 2007, the closing bid quotation for our common stock as reported on
the OTCBB was $11.  The bid price reflects inter-dealer quotations,
does not include retail markups, markdowns or commissions and does not
necessarily reflect actual transactions.







24






The
following table sets forth, for the periods indicated, the high and low bid
prices of our common stock.  These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.




Closing
      Bid Prices (1)High
            
            LowYear
      Ended December 31, 20081st
      Quarter (through March 27, 2008)
            
            $
            10
            
            
            $
            10




Closing Bid Prices (1)High
            
            LowYear
      Ended December 31, 20071st
      Quarter
            
            $
            N/A
            
            
            $
            N/A2nd
      Quarter
            
            
            N/A
            
            
            
            N/A3rd
      Quarter
            
            
            N/A
            
            
            
            N/A4th
      Quarter
            
            
            11
            
            
            
            1.50




(1) The
above tables set forth the range of high and low closing bid prices per share of
our common stock as reported by www.quotemedia.com for the periods
indicated.




Reports to
Stockholders




We plan
to furnish our stockholders with an annual report for each fiscal year ending
December 31 containing financial statements audited by our independent certified
public accountants. Additionally, we may, in our sole discretion, issue
unaudited quarterly or other interim reports to our stockholders when we deem
appropriate. We intend to maintain compliance with the periodic reporting
requirements of the Exchange Act.




Approximate Number of
Holders of Our Common Stock




On
December 31, 2007, there were approximately 107 stockholders of record of our
common stock.




Dividend
Policy




Other
than the dividends declared or paid by our subsidiary China Valves before the
reverse acquisition transaction and the forward stock split on December 18,
2007, we have never declared dividends or paid cash dividends. Our board of
directors will make any future decisions regarding dividends. We currently
intend to retain and use any future earnings for the development and expansion
of our business and do not anticipate paying any cash dividends in the near
future.




Item 6.   Selected
Financial Data




Not
required.








25




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




Overview





The
following discussion is an overview of the important factors that management
focuses on in evaluating our business, financial condition and operating
performance and should be read in conjunction with the financial statements
included in this Current Report.  This discussion contains
forward-looking statements that involve risks and
uncertainties.  Actual results could differ materially from those
anticipated in these forward looking statements as a result of any number of
factors, including those set forth under the section entitled “Risk Factors” and
elsewhere in this Current Report.





Our
Business





Through
China Valve’s subsidiaries and certain commercial and contractual relationships
and arrangements with other Chinese companies, we operate companies in China
that develop, manufacture and distribute valves for a variety of different
industries.  We are located in Henan Province but do business
throughout China.  China Valve engages in the development, manufacture
and sales of high quality metal valves for the electricity, petroleum, chemical,
water, gas and metal industries.





Our
production facility in Kaifeng has an area of more than 74
acres.   We are the leader in valve sales for the thermal power
and water supply industries, according to the Board Chairman of China Valve
Industry Association. We produce over 700 models of valves and service
numerous industries, including the thermal power, water supply, sewage disposal,
oil and chemical, metallurgy, heat power, and nuclear power
industries.





Revenue





Ourrevenue
increased $11.5 million, or 45%, to $37.0 million in 2007 from $25.6 million in
2006. This increase was primarily driven by a 25% increase in the average
selling price of products sold and a 75% increase in the volume of products
sold. The increase in average selling price in 2007 was primarily due to the
increase in raw material prices, particularly steel metal price, and the
increased sales volume was attributable to (1) increase in demand of our
products fueled by rapid industrialization and manufacturing development in
China, (2) our successful marketing efforts, (3) retaining our existing
customers and adding additional large customers and (4) our expansion into the
nuclear power station valve market segment.





Our
revenue is generated from sales of metal valves.  The following table
sets forth the breakdown of our revenues by product types for the periods
indicated.





2007
            
            
            2006Components
      of Revenues
            Gate
      Valves
            
            $
            11,648,638
            
            
            $
            6,743,329Butterfly
      Valves
            
            
            12,615,048
            
            
            
            9,243,173Ball
      Valves
            
            
            1,619,598
            
            
            
            1,213,375Check
      Valves
            
            
            2,624,910
            
            
            
            1,365,465Ventilate
      Valves
            
            
            622,871
            
            
            
            242,428Extension
      Valves
            
            
            662,787
            
            
            
            661,729Others
            
            
            5,119,406
            
            
            
            4,615,478Abstraction
      Check Valve
            
            
            1,009,119
            
            
            
            979,018Safety
      Valves
            
            
            1,113,906
            
            
            
            466,189Total
      revenue
            
            
            $
            37,036,282
            
            
            $
            25,530,183









26




Cost
of Revenue





Cost of
revenue includes our direct costs to manufacture our products, including the
cost of our raw materials, employee remuneration for staff engaged in production
activity, and related expenses that are directly attributable to the production
of products.





Gross
Profit and Gross Margin





Gross
profit is equal to the difference between our revenue and the cost of
revenue.  Gross margin is equal to gross profit divided by
revenue.  Between fiscal years 2006 and 2007, we were able to maintain
gross margins between approximately 40% to 45%.





Operating
Expenses





Our
operating expenses consist of salaries, sales commission and other selling
expense and general and administrative expenses. We expect most components of
our operating expenses will increase as our business grows and as we incur
increased costs related to being a public company.





Principal
Factors Affecting our Financial Performance





We
believe that the following factors affect our financial
performance:





·  Growth
of China’s Urbanization and Industrialization





According
to the China Valve Industry Association’s research result, the annual growth
rate of the valve production industry in China is expected to be 32% for the
next 5 years.  This growth is fueled by rapid industrialization and
manufacturing industries developing in China.  If this growth
continues, we believe that the growth rate of the valve production industry will
grow at a similar rate and that the Company will be able to sustain its growth
and continue to be a leader in the valve production industry in
China.




·  PRC
Regulations




China has
looked favorably on the valve production industry and has loosened regulations
to promote manufacturing growth in China, which ultimately benefits China Valve
and similarly situated companies.  For example, in June, 2007, the
state department of China state issued a new policy called “expedite the
development of China equipment manufacturing industry.”  In this
policy, the Chinese government mentioned it will promote the development of
China’s equipment manufacturing industry, which includes the valve industry,
through, among other things, tax incentives, import/export support and capital
support.  As long as China continues to promote economic growth and
allow manufacturing companies to grow and expand their operations, China Valve
expects its operations will be positively effected by PRC
regulations.




Taxation





United
States





China
Valves Technology, Inc. is subject to United States tax at a tax rate of 34%. No
provision for U.S. federal income taxes has been made as the Company had no
taxable income for the reporting period.







27




Samoa





China
Valves Limited was incorporated in Samoa and, under the current laws of Samoa,
is not subject to income taxes.




PRC





The
Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various local income
tax laws (the “Income Tax Laws”).





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DEs and FIEs. The Company is currently evaluating the impact
that the new EIT will have on its financial condition.





Under the
existing Chinese Income Tax Laws, FIEs generally are subject to an income tax at
an effective rate of 33% (30% state income taxes plus 3% local income taxes) on
income as reported in their statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in specially designated regions
for which more favorable effective tax rates apply. Starting on January 1, 2008,
China unified the corporate income tax rule on FIEs and DEs.  The
unified corporate income tax rate is 25%.





The
Company’s subsidiary, Henan Kaifeng High Pressure Valve Co., Ltd, is exempt from
income tax due to a Keifang city tax incentive for companies to
privatize.





The
Company’s other operating subsidiary, Zhengzhou City Zhengdie Valve Co., Ltd, is
subject to an income tax at an effective rate of 33% (30% state income taxes
plus 3% local taxes).




Results
of Operations




The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.




Year Ended December 31,2006
            
            
            2007(in
      thousands)Sales
      revenue
            
            
            25,530,183
            
            
            
            37,036,282Cost
      of sales
            
            
            14,522,202
            
            
            
            22,050,041Gross
      profit
            
            
            11,007,981
            
            
            
            14,986,241ExpensesGeneral
      & administrative expenses
            
            
            2,181,294
            
            
            
            3,245,954Research
      and development costs
            
            
            33,260
            
            
            
            104,502Selling
      expenses
            
            
            2,248,613
            
            
            
            2,998,585Total
      operating expenses
            
            
            4,463,167
            
            
            
            6,349,041Other
      income
            
            
            13,729
            
            
            
            393,686Other
      expense
            
            
            183,441
            
            
            
            22,053Financial
      cost
            
            
            537,562
            
            
            
            528,498Income
      before income taxes
            
            
            5,837,540
            
            
            
            8,480,335Income
      taxes
            
            
            1,158,161
            
            
            
            1,337,743Minority
      interestsNet
      income
            
            
            4,679,379
            
            
            
            7,142,592As
      a Percentage of Sales RevenueSales
      revenue
            
            
            100
            %
            
            
            100
            %Cost
      of sales
            
            
            57
            %
            
            
            60
            %Gross
      profit
            
            
            43
            %
            
            
            40
            %ExpensesGeneral
      & Administrative expenses
            
            
            9
            %
            
            
            9
            %Research
      and development costs
            
            
            0.10
            %
            
            
            0.30
            %Selling
      expenses
            
            
            9
            %
            
            
            8
            %Total
      operating expenses
            
            
            17
            %
            
            
            17
            %Income
      before income taxes
            
            
            23
            %
            
            
            23
            %Income
      taxes
            
            
            5
            %
            
            
            4
            %Net
      income
            
            
            18
            %
            
            
            19
            %






28







Comparison
of 2007 and 2006





SalesRevenue.Sales revenue increased
$11.5 million, or 45%, to $37.0 million in 2007 from $25.6 million in 2006. This
increase was primarily driven by a 25% increase in the average selling price of
products sold and a 75% increase in the volume of products sold. The increase in
average selling price in 2007 was primarily due to the increase in raw material
prices, particularly the steel metal price, and the increased sales volume was
attributable to (1) increase in demand of our products fueled by rapid
industrialization and manufacturing development in China, (2) our successful
marketing efforts, (3) retaining our existing customers and adding additional
large customers and (4) our expansion into the nuclear power station valve
market segment.




CostofSales. Our cost of sales increased $7.5
million to $22.0 million in 2007 from $14.5 million in 2006. The cost of sales,
as a percentage of sales revenue, increased 3% from 57% in 2006 to 60% in
2007.  As sales revenue increases, cost of goods sold would also
increase due to our needs to purchase more raw materials in order to meet the
demand for our products. The slight increase in cost of sales as a percentage of
sales revenue is attributable to the increase in costs of materials and labor
used in production that we did not pass on to our customers.




GrossProfit.Our gross profit
increased $4.0 million to $15.0 million in 2007 from $11.0 million in 2006.
Gross profit as a percentage of net sales revenue decreased from 43.12% to
40.46%. This was primarily driven by higher raw material costs that affected the
selling price. As we discussed in the above, this increase is attributable to
the increase in costs of materials and labor used in production that we did not
pass on to our customers.




General and
AdministrativeExpenses.Our administrative
expenses increased $1.1 million, or 45%, to $3.2 million in 2007 from $2.2
million in 2006. As a percentage of sales revenue, administrative expenses
remained consistent, at approximately 9% from 2006 to
2007.







29






Research and
development costs.Our research and
development costs consist of amounts spent on developing new products and
enhancing our existing products. Our research and development costs increased
$71,242, or 214%, to $104,502 in 2007 from $33,260 in 2006. The increase was
primarily attributable to (1) our update of certain of our product lines, (2)
the increase in our research and development expense for certain of our valve
products (3) the increase in our research and development expense for our
nuclear power station valve products, (4) our increase investment in our high
end valve products and (5) our increased spending in developing new
products.





SellingExpenses. Our selling expenses increased to
$3.0 million in 2007 from $2.2 million in 2006. As a percentage of sales
revenue, our selling expenses have stayed fairly consistent, decreasing by only
1% from 2006 to 2007. The increase in selling expenses is directly related to
the increase in sales revenue.  Our addition of 5 new sales companies
in 2007 also contributed to the increase in our selling expense.





TotalOperatingExpenses.Our total expenses increased $1.9
million to $6.3 million in 2007 from $4.5 million in 2006. As a percentage of
sales revenue, our total expenses remained unchanged in 2007 from
2006.




IncomeBeforeIncomeTaxes.Income from operations before
income taxes increased $2.6 million, or  45%, to $ 8.5 million in 2007
from $5.8 million in 2006. Income from operations before income taxes as a
percentage of revenue remained unchanged in 2007 from 2006.




NetIncome.Net income increased $2.5
million, or 53%, to $7.1 million in 2007 from $4.7 million in 2006 due to an
overall increase in revenue.




Allowance
for Doubtful Debts




Our trade
receivables net of allowance for doubtful accounts were $17.3 million as of
December 31, 2007, an increase of $7.7 million, or 80%, from $9.6 million as of
December 31, 2006. Our allowance for doubtful accounts totaled $274,167 as of
December 31, 2007. We had no allowance for doubtful debts as of December 31,
2006.




The
increase of our trade receivables was mainly due to overall increase in sales
revenue.  Generally we consider a trade receivable as a doubtful
account only if it remains uncollected for more than one year.  Our
allowance for doubtful debts accounts for an insignificant portion of the
receivable balance in spite of the increasing trade receivable balance
throughout the reporting periods because almost all the outstanding debts were
aged less than one year. Many of our customers have long business relationships
with us and good settlement histories. In the absence of significant bad debt
experience, we consider the existing provisioning policy as
adequate.







30




Liquidity
and Capital Resources







As of
December 31, 2007, we had cash and cash equivalents of $2.77 million and
restricted cash of $40,856. The following table provides detailed information
about our net cash flow for all financial statements periods for 2006 and
2007.




(dollars in
thousands)




Years
      Ended December 31,2006
              
              
              2007(dollars in
      thousands)Net
      cash (used in) provided by operating activities
              
              $
              (3,310
              )
              
              $
              5,098Net
      cash used in investing activities
              
              
              (2,184
              )
              
              
              (2,091
              )Net
      cash provided by (used in) financing activities
              
              
              9,280
              
              
              
              (5,883
              )Effect
      of foreign currency translation on cash
                and
      cash equivalents
              
              
              331
              
              
              
              57Net
      cash flow
              
              
              4,117
              
              
              
              (2,818
              )




The
Company currently generates its cash flow through operations which it believes
will be sufficient to sustain current level operations for at least the next
twelve months.  In 2008, we intend to continue to work to develop new
valves and expand our presence as the leader in the development and manufacture
of various valves.





We intend
to grow and expand our business in 2008.  One of the ways we expect to
grow is through acquisitions of other similar companies. We expect to acquire
high-growth small and medium size companies but will also evaluate the benefits
of acquiring larger competitors where we can combine our brand names and
consolidate the valve industry and increase our market share in the
industry.  These acquisitions will be financed either through revenues
of the Company or by financings and sales of the Company’s stock or other
securities.





In
addition, China Valve expects to increase its market development and strengthen
its hold as a leader of valve manufacturers by improving the quality of existing
valves and developing newer, better quality valves.





Lastly,
China Valve intends to increase our market share by expanding into overseas
markets.  We anticipate expanding into neighboring Asian countries
over the next few years and then growing into an international valve
manufacturer that distributes to countries all over the world.





We will
require approximately $30 million ($27 million net of financing cost) in
financing to fund our strategic acquisitions and operations expansion plans for
2008. The following table sets forth how we would use such proceeds in 2008.
However, we can provide no assurance that we will be able to obtain such
financing on terms favorable to the Company, if at all.  If we are
unable to obtain such financing, we may be unable to effectuate our strategic
and expansion plans and our operations and financial condition may be adversely
effected.






31







Planned
      Projects
            Investments
              ($
      million)Internal
      Development:Additions
      to working capital
            3.0Increase
      R&D expenses
            1.0Upgrade/Purchase
      new equipment
            3.0Merger
      and Acquisitions:Acquire
      high-growth medium/small valve firms
            5.0Acquire
      large competitive valve companies
            15.0Total:
            27.0




Operating
Activities




Net cash
provided by operating activities was $5.1 million in 2007, as compared to net
cash used in operating activities of $3.3 million in 2006. The increase was
mainly due to our substantial increase in sales revenue.




Investing
Activities




Our main
uses of cash for investing activities are for the acquisition of plant and
equipment as well as purchases for construction.  Net cash used in
investing activities in 2007 was $2.1 million, as compared to $2.2 million in
2006. The decrease of net cash used in investing activities was mainly
attributable to fewer equipment purchases in 2007.




Financing
Activities




Net cash
used in financing activities in 2007 totaled $5.9 million as compared to net
cash provided by financing activities of $9.3 million in 2006. The decrease in
net cash from financing activities is attributable to repayment of all of our
notes payable, totaling $4.3 million in 2007.  Since we were able to
receive substantial cash from our revenue, our borrowing activity decreased and
we paid off our notes payable.




Our debt
to equity ratio was 0.74 as of December 31, 2007 as compared to 1.14 as of
December 31, 2006. We believe we have greatly improved our company’s position by
decreasing our borrowings. We plan to maintain our debt to equity ratio below
85%, increase long-term loans, decrease short-term loans and increase the ratio
of the borrowing in foreign currency to take advantage of the expected increase
of the value of the Renminbi against the U.S. dollar.





As of
December 31, 2007, the maturities for our bank loans are all below one year,
except for a $1.1 million long term loan from Zhengzhou Shangjie Credit Union
due in 2009.





We
believe that we maintain good relationships with the banks we deal with and our
current available working capital, after receiving the aggregate proceeds of the
capital raising activities and bank loans, should be adequate to sustain our
operations at our current levels through at least the next twelve
months.







32




Obligations
under Material Contracts





We had a
capital commitment of approximately $725,000 for the acquisition of plant
and machinery as of December 31, 2006, but we have no material capital
commitments as of December 31, 2007.




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make assumptions,
estimates and judgments that affect the amounts reported in the financial
statements, including the notes thereto, and related disclosures of commitments
and contingencies, if any. We consider our critical accounting policies to be
those that require the more significant judgments and estimates in the
preparation of financial statements, including the following:







•
            Allowancefordoubtfulaccounts. We establish
      an allowance for doubtful accounts based on our assessment of the
      collectibility of trade receivables. A considerable amount of judgment is
      required in assessing the amount of the allowance. Among other things, we
      consider the historical level of credit losses and apply percentages to
      aged receivable categories. We make judgments about the creditworthiness
      of each customer based on ongoing credit evaluations, and we monitor
      current economic trends that might impact the level of credit losses in
      the future. If the financial condition of the customers were to
      deteriorate, resulting in their inability to make payments, a larger
      allowance may be required.




Based on
the above assessment, during the reporting periods, we have established a
general provisioning policy for an allowance equivalent to 100.0% of the gross
amount of trade receivables due over one year. Additional specific provision is
made against trade receivables aged less than one year to the extent they are
considered to be doubtful.




Bad debts
are written off when identified. We extend unsecured credit to customers ranging
from three to six months in the normal course of business. We do not accrue
interest on trade accounts receivable.




Historically,
losses from uncollectible accounts have not significantly deviated from our
estimated allowance, and no significant additional bad debts have been written
off directly to the profit and loss. This general provisioning policy has not
changed in the past since establishment, and we consider the aforementioned
general provisioning policy to be adequate and not too excessive and do not
expect to change this established policy in the near future.





•
            Inventories. Inventories are
      stated at the lower of cost or market. Cost is determined on a weighted
      average basis and includes all expenditures incurred in bringing the goods
      to the point of sale and putting them in a saleable
      condition.  In assessing the ultimate realization of
      inventories, we make judgments as to future demand requirements compared
      to current or committed inventory levels.  Our reserve
      requirements generally increase as our projected demand requirements
      decrease due to market conditions and product life cycle changes. We
      estimate the demand requirements based on market conditions, forecasts
      prepared by our customers, sales contracts and orders in
    hand.






33




In
addition, we estimate net realizable value based on intended use, current market
value and inventory aging analyses. We write down the inventories for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventories and the estimated market value based upon assumptions about
future demand and market conditions.




Based on
the above assessment, we established a general 50.0% provision for inventories
aged over one year.




Historically,
the actual net realizable value has been close to our estimates.




•
            Property,plantandequipment. Our property, plant
      and equipment are stated at cost less accumulated depreciation. Cost
      represents the purchase price of the asset and other costs incurred to
      bring the asset into its existing
use.




Construction
in progress mainly represents expenditures in respect of our new offices and
factories under construction. All direct costs relating to the acquisition or
construction of our new office and factories are capitalized as construction in
progress. No depreciation is provided in respect of construction in
progress.




Maintenance
or repairs are charged to expense as incurred.  Upon sale or
disposition, the applicable amounts of asset cost and accumulated depreciation
are removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.




•
            Revenuerecognition. Revenue from sales
      of our products is recognized when all of the following have occurred: (i)
      persuasive evidence of an arrangement exists, (ii) delivery has occurred
      or services have been rendered, (iii) the price is fixed or determinable,
      and (iv) the ability to collect is reasonably assured. These criteria are
      generally satisfied at the time of shipment when risk of loss and title
      passes to the customer.





The
      Company recognizes revenue when the goods are delivered and title has
      passed. Sales revenue represents the invoiced value of goods, net of a
      value-added tax (VAT). All of the Company's products that are sold in the
      PRC are subject to a Chinese value-added tax at a rate of 17% of the gross
      sales price or at a rate approved by the Chinese local government. This
      VAT may be offset by the VAT paid by the Company on raw materials and
      other materials included in the cost of producing their finished
      product.




Recently
issued accounting pronouncements




In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “AccountingforUncertaintyinIncomeTaxes” (“FIN 48”). This
interpretation requires that we recognize in our financial statements the impact
of a tax position if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN 48
are effective as of the beginning of our 2007 fiscal year. The adoption of FIN
48 has no material effect on our financial statements.






34







In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157 FairValueMeasurement(“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.  SFAS 157 shall be
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including any financial statements
for an interim period within that fiscal year. The provisions of this statement
should be applied prospectively as of the beginning of the fiscal year in which
SFAS 157 is initially applied, except in some circumstances where the statement
shall be applied retrospectively. We are currently evaluating the effect, if
any, of SFAS 157 on our financial statements.




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Options 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 few exceptions. SFAS 159 also establishes
presentation and disclosure requirements to facilitate comparisons between
companies that choose different measurement attributes for similar assets and
liabilities. The requirements of SFAS 159 are effective for the 2008 fiscal
year. We are in the process of evaluating this guidance and therefore have not
yet determined the impact that SFAS 159 will have on our financial statements
upon adoption.




In
December 2007, the FASB issued 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. The guidance will
become effective for the fiscal year beginning after December 15, 2008. Our
management is in the process of evaluating the impact that SFAS 160 will have on
the Company’s financial statements upon adoption.




In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS
141 (Revised) establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective for the fiscal year beginning after December 15, 2008. We are in the
process of evaluating the impact that SFAS 141 (Revised) will have on the
Company’s financial statements upon adoption.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.




Seasonality




Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.






35




Item
7A.  Quantitative
and Qualitative Disclosure About Market Risk




Interest
Rate Risk




We are
exposed to interest rate risk primarily with respect to our short-term bank
loans.  Although the interest rates are fixed for the terms of the
loans, the terms are typically twelve months and interest rates are subject to
change upon renewal.  Since December 21 2007, China People’s Bank has
increased the interest rate of RMB bank loans with a term of 6 months or less by
0.99%, and loans with a term of 6 to 12 months by 1.35%.  The new
interest rates are 6.57% and 7.47% for RMB bank loans with a term 6 months or
less and loans with a term of 6-12 months, respectively.  A
hypothetical 1.0% increase in the annual interest rates for all of our credit
facilities at December 31, 2007 would decrease net income before provision for
income taxes by approximately $0.3 million for the year ended December 31,
2007.  Management monitors the banks’ interest rates in conjunction
with our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds.  We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate
risk.




Foreign
Exchange Risk




While our
reporting currency is the U.S. Dollar, all of our consolidated revenues and
consolidated costs and expenses are denominated in Renminbi.  All of
our assets are denominated in RMB except for cash which is in RMB and Hong Kong
Dollar.  As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S.  Dollars and RMB.  If the RMB
depreciates against the U.S.  Dollar, the value of our RMB revenues,
earnings and assets as expressed in our U.S. Dollar financial statements will
decline.  We have not entered into any hedging transactions in an
effort to reduce our exposure to foreign exchange risk.




Inflation




Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results.  Although we do not believe
that inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if the
selling prices of our products do not increase with these increased
expenses.




Item 8.  Financial
Statements and Supplementary Financial Data




The full
text of our audited consolidated financial statements as of December 31, 2007
and 2006 begins on page F-1 of this Annual Report on Form 10-K.




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




Change
in Accountants




Chisholm,
Bierwolf & Nilson, LLC, or Chisholm, has served as our independent auditor
in connection with the audits of our fiscal years ended December 31, 2006 and
2005, and review of the subsequent interim period through September 30,
2007.  In connection with the reverse acquisition, our board of
directors recommended and approved the appointment of Madsen &
Associates  CPAs, Inc., or Madsen, as the independent auditor for the
Company.





On
February 19, 2008, Madsen was dismissed as independent auditor for the
Company.  On February 19, 2008, the Company engaged Moore Stephens
Wurth Frazer & Torbet, LLP (“Moore Stephens”) as its principal independent
auditor.  This decision to engage Moore Stephens was ratified by the
majority approval of the Board of Directors of the Company.




36






Management
of the Company has not had any disagreements with Madsen and Chisholm related to
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure.  For the two most recent fiscal years
and any subsequent interim period through Madsen’s termination on February 19,
2008, there has been no disagreement between the Company and Madsen on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Madsen would have caused it to make a reference to the subject
matter of the disagreement in connection with its reports.




Item 9A.  Controls
and Procedures.




Disclosure
Controls and Procedures





As
required by Rule 13a-15 under the Exchange Act, our management, including our
Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2007.





Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.




Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our Chief Executive Officer and our Chief Financial Officer.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that because of the material weakness in internal control over
financial reporting described below, our disclosure controls and procedures were
not effective as of December 31, 2007.




Management’s Report on
Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.  Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”).  We engaged Ernst & Young Hua Ming to assist the
Company in improving the internal control system based on COSO internal control
framework.  Management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007.  In
making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control – Integrated Framework.  During our assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2007, management identified significant deficiencies related
to the following:





1.Accounting
and Finance Personnel Weaknesses– US GAAP expertise -
The current staff in the accounting department is relatively new and
inexperienced, and needs substantial training so as to meet with the higher
demands of being a U.S. public company. The accounting skills and understanding
necessary to fulfill the requirements of U.S. GAAP-based reporting, including
the skills of subsidiary financial statements consolidation, are inadequate and
were inadequately supervised. The lack of sufficient and adequately trained
accounting and finance personnel resulted in an ineffective segregation of
duties relative to key financial reporting functions.






37





2.  Lack of
internal audit function – The Company lacks qualified resources to
perform the internal audit functions properly.  In addition, the scope
and effectiveness of the internal audit function are yet to be
developed.





3.Lack of
Internal Audit System - The Company lacked an internal audit department,
which was ineffective in preventing and detecting control lapses and errors in
the accounting of certain key areas like revenue recognition, purchase
approvals, inter-company transactions, cash receipt and cash disbursement
authorizations, inventory safeguard and proper accumulation for cost of
products, in accordance with the appropriate costing method used by the
company.





We had
been preparing to be in compliance with the internal control obligations,
including Section 404, for our fiscal year ending December 31, 2008, and only
recently became aware of the need to comply with such rules for our fiscal year
ended December 31, 3007.  As a result, during most of 2007 our
internal accounting staff was primarily engaged in ensuring compliance with PRC
accounting and reporting requirements for our operating subsidiaries and was not
required to meet or apply U.S. GAAP requirements.  As a result, with
the exception of certain additional persons hired at the end of 2007 to address
these deficiencies, our current accounting department responsible for financial
reporting of the Company, on a consolidated basis, is relatively new to U.S.
GAAP and the related internal control procedures required of U.S. public
companies.  Although our accounting staff is professional and
experienced in accounting requirements and procedures generally accepted in the
PRC, management has determined that they require additional training and
assistance in U.S. GAAP matters.  Management has determined that our
internal audit function is also significantly deficient due to insufficient
qualified resources to perform internal audit functions.  Finally,
management determined that the lack of an Audit Committee of the board of
directors of the Company also contributes to insufficient oversight of our
accounting and audit functions.





In order
to correct the foregoing deficiencies, we have taken the following remediation
measures:




1.  Hiring additional
accounting and operations personnel and engaging outside contractors with
technical accounting expertise, as needed, and reorganizing the accounting and
finance department to ensure that accounting personnel with adequate experience,
skills and knowledge relating to complex, non-routine transactions are directly
involved in the review and accounting evaluation of our complex, non-routine
transactions.




2.  Involving both internal
accounting and operations personnel and outside contractors with technical
accounting expertise, as needed, early in the evaluation of a complex,
non-routine transaction to obtain additional guidance as to the application of
generally accepted accounting principles to such a proposed
transaction.




3.  Requiring senior
accounting personnel and the principal accounting officer to review complex,
non-routine transactions to evaluate and approve the accounting treatment for
such transactions.




4.  Interviewing prospective
new Directors for our Board, including a member who is appropriately
credentialed as a financial expert with a goal to establish both an Audit and
Compensation committee as well as sufficient independent Directors.




5. Evaluating the internal audit
function in relation to the Company’s financial resources and
requirements.






38




We
believe that the foregoing steps will remediate the significant deficiency
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate.





A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.  A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of the company's financial
reporting.




Our
management is not aware of any material weaknesses in our internal control over
financial reporting, and nothing has come to the attention of management that
causes them to believe that any material inaccuracies or errors exist in our
financial statements as of December 31, 2007.  The reportable
conditions and other areas of our internal control over financial reporting
identified by us as needing improvement have not resulted in a material
restatement of our financial statements.  Nor are we aware of any
instance where such reportable conditions or other identified areas of weakness
have resulted in a material misstatement or omission in any report we have filed
with or submitted to the Commission.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.





Auditor
Attestation





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





Changes
in Internal Controls over Financial Reporting




Except as
described above, there were no changes in our internal controls over financial
reporting during the fourth quarter of fiscal year 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




Item
9B.  Other
Information.




None.




PART
III




Item 10.   Directors,
Executive Officers of and Corporate Governance




Directors
and Executive Officers




The
following table sets forth the names, ages, and positions of our new executive
officers and directors as of December 31, 2007. Executive officers are elected
annually by our Board of Directors.  Each executive officer holds his
office until he resigns, is removed by the Board, or his successor is elected
and qualified.  Directors are elected annually by our stockholders at
the annual meeting.  Each director holds his office until his
successor is elected and qualified or his earlier resignation or
removal.






39





NAME
            AGE
            POSITIONSiping
      Fang
            55
            President,
      Chief Executive Officer and DirectorZengbiao
      Yu
            47
            DirectorRenrui
      Tang
            35
            Chief
      Financial Officer and DirectorHuifeng
      Chen
            36
            DirectorZhiyuan
      Jia
            37
            Chief
      Technology OfficerBinjie
      Fang
            35
            Chief
      Operating Officer and Director




Siping Fang, Chairman, Chief Executive Officer and
Director


Male, 55,
Mr. Fang has over 20 years’ of experience in the valve industry.  In
2001, Mr. Fang established Zheng Zhou City Zhengdie Valves Co. Mr. Fang has been
appointed as President and CEO of that company. Mr. Fang has been responsible
for making strategic decisions, leading the management to carry on operations in
all aspects. In 2003, Mr. Fang acquired PRC-owned enterprise Henan Kaifeng High
Pressure Valves Company Limited. Mr. Fang has been appointed as President and
CEO of the company. Mr. Fang has been responsible for making strategic decisions
on major corporate issues and overlooking the comprehensive operations and
market expansion.





Zengbiao
Yu, Director


Mr. Yu is
47 years old. He has been working as a professor and a ph.D. tutor for Tsinghua
University since 1999. In the past 5 years, Mr. Yu has completed approximately
20 research projects, published more than 30 thesis and 8 books. His research
has been focused on organizational behavior, accounting acts and management
accounting. Mr. Yu’s work has generated wide recognition in the finance and
accounting fields. At present, Mr. Yu is devoting his time to projects related
to "research on global oil company budget management system" of China Oil Group,
the State’s nature science’s significant project, "research on management theory
and methods on functionalization, grouplization and scientific of water and
electricity enterprises", "cost control, budget management, internal control and
performance valuation integration system design" of Zheng Zhou Zhengdie Valve
Company Limited.


Mr. Yu is
currently a member of P.R.C. Accounting Study Committee and P.R.C. Cost Research
Committee, the special editor of publication from P.R.C. accounting Study
Committee, which is "Accounting Study" and independent director of "China Heavy
Auto" and "Shanghai Yongle Company Limited." In addition, he is an editor of
"Educational Case Journal" published by IMA of U.S.A.
  Mr. Yu
has a ph.D. in modern management accounting from a business school established
jointly by University of Illinois and Xiamen University. He was awarded
"certificates of high attainment" from the University of Illinois in 1991 as an
"outstanding accountant" from Ministry of Finance in 1995.


Renrui
Tang, Director


Male, 35,
between 1994 and 2004, Mr. Tang worked for Zhengzhou City Zhengdie Valve Co.,
Ltd as the manger for financial department. He had been in charge of the firm’s
financing activities and various issues in accounting fields.  From
2004 to the present, Mr. Tang was the financial director of Henan Kaifeng High
Pressure Co, Ltd.  His major duties include managing accounting and
financing activities, supervising financial analysis, capital allocation,
internal control and auditing.





Huifeng
Chen, Director


Female,
36, From 2004 to the present, Ms. Chen has been the Financial Director of
Zhengzhou City ZhengDie Valve Co., Ltd. She has been in charge of various fields
in accounting and finance. Her major responsibilities include supervising the
preparation of financial statements, capital budgeting, internal control and
auditing.





Binjie
Fang, Chief Operating Officer and Director


Male, 35,
Between September 1995 and January 2005 he was the head of the operations and
human resource departments of Zhengzhou City Zhengdie Valve Co.,
Ltd.  His major responsibilities included managing daily operations
and human resource related issues.  From January 2005 to the present,
Mr. Fang has been the general manager of Zhengdie Valve Co., Ltd.  His
major responsibilities include supervising company operations in various aspects
and managing marketing and business development activities.







40




Board
Composition and Committees





The board
of directors is currently composed of Siping Fang, Binjie Fang, Renrui Tang,
Huifeng Chen and Zengbiao Yu.





We
currently do not have standing audit, nominating or compensation committees,
although we may form such committees in the future.  Since we do not
currently have an audit committee, we do not have an audit committee financial
expert.  Our board of directors handles the functions that would
otherwise be handled by an audit committee.  Upon the establishment of
an audit committee, the board of directors will determine whether any of the
directors qualify as an audit committee financial expert.





We have
not implemented a process for stockholders to send communications to the board
of directors because we have not had significant operations until
recently.  We intend to establish a reporting mechanism as soon as
practicable.





Independent
Directors




We did
not have independent directors in the fiscal year ended December 31,
2007.  However, Zengbiao Yu, our newly appointed director effective as
of January 30, 2008, is “independent” as that term is defined by Rule
4200(a)(15) of the Marketplace Rules of The Nasdaq Stock Market,
Inc.




Policy
Regarding Board Attendance





Our
directors are expected to attend Board meetings as frequently as necessary to
properly discharge their responsibilities and to spend the time needed to
prepare for each such meeting.  Our directors are expected to attend
annual meetings of stockholders, but we do not have a formal policy requiring
them to do so.




Family
Relationships




Mr.
Binjie Fang is the son of Mr. Siping Fang.  Other than otherwise
disclosed, there are no other family relationships between any of our directors
or executive officers and any other directors or executive
officers.




Code
of Ethics




We
currently do not have a code of ethics that applies to our officers, employees
and directors, including our Chief Executive Officer and senior executives,
however, we intend to adopt one in the near future.







41




Item 11.   Executive
Compensation




Summary
Compensation Table





The
following table sets forth information concerning all compensation awarded to,
earned by or paid to the following persons for services rendered in all
capacities during 2007 and 2006: Matthew Markin, our former Chairman and Chief
Executive Officer; and Fang Siping, who became our President and Chief Executive
Officer when we completed the reverse acquisition.  No other executive
officers received total compensation in excess of $100,000 in either fiscal
year.








Name
      and Principal Position
            Year
            Salary
            Total
              ($)Matthew
      Markin, former Chairman and CEO  (1)
            2006
            0
            02007
            0
            0Fang
      Siping, President, CEO and Director  (2)
            2006
            0
            02007
            $100,000
            $100,000





(1)
            On
      December 16, 2007, we acquired China Valve in a reverse acquisition
      transaction that was structured as a share exchange and in connection with
      that transaction, Matthew Markin tendered his resignation from the board
      of directors and from all offices held in the Company, effective
      immediately.





(2)
            In
      connection with the reverse acquisition of China Valve on December 16,
      2007, Fang Siping was elected President, CEO and director of the Company
      effective upon the resignation of Mr.
Markin.





Bonuses
and Deferred Compensation





We do not
have any bonus, deferred compensation or retirement plan.





Options
and Stock Appreciation Rights





We do not
currently have a stock option or other equity incentive plan.





Employment
Contracts





On
12/01/2007, our subsidiary, China Valves  Limited, entered into 5-year
employment agreements with Fang Siping, our Chief Executive Officer and
President, Tang Renrui, our Chief Financial Officer and Fang Binjie, our Chief
Operating Officer. Under the employment agreements, Mr. Siping Fang, Mr. Tang
Renrui and Mr. Fang Binjie receive an annual salary of $100,000, $40,000 and
$40,000, respectively. The employment agreements do not provide payments
relating to severance or following a change of control. Our executives are
subject to customary confidentiality and non-competition covenants as provided
in their employment agreements.






42







We have
not granted any equity-based awards to any of our named executive officers, nor
do we provide retirement benefits (other than a state compensation scheme in
which all of our employees in China participate) or severance or change of
control benefits to our named executive officers.





Payment
of Post-Termination Compensation




The
Company does not have change-in-control agreements with any of its executive
officers, and the Company is not obligated to pay severance or other enhanced
benefits to executive officers upon termination of their
employment.




Director
Compensation




Zengbiao
Yu was appointed director effective as of January 30, 2008.  We
entered into an independent director Indemnification Agreement with Zengbiao Yu,
pursuant to which he is entitled to $17,000, as annual compensation for the
services to be provided as an independent director, and as chairperson of
various board committees, as applicable.  Under the terms of the
Indemnification Agreement, we agreed to indemnify the independent director
against expenses, judgments, fines, penalties or other amounts actually and
reasonably incurred by the independent director in connection with any
proceeding if the independent director acted in good faith and in our best
interests.  It is our practice to reimburse our directors for
reasonable travel expenses related to attendance at board of directors and
committee meetings.





The
compensation paid to our remaining directors, Messrs. Fang , Mr. Chen and Mr.
Tang, was paid in their capacity as executive officers of the Company - they do
not receive any additional compensation for their service as
directors.





Limitation
of Liability and Indemnification of Officers and Directors




Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.




Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934 may be permitted to our directors, officers and controlling persons
pursuant to provisions of the Articles of Incorporation and Bylaws, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.






43




At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.




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




The following table sets forth certain
information regarding our common stock beneficially owned on December 18, 2007,
for (i) each shareholder known to be the beneficial owner of 5% or more of our
outstanding common stock, (ii) each of our officers and directors, and (iii) all
executive officers and directors as a group.  In general, a person is
deemed to be a "beneficial owner" of a security if that person has or shares the
power to vote or direct the voting of such security, or the power to dispose or
to direct the disposition of such security.  A person is also deemed
to be a beneficial owner of any securities of which the person has the right to
acquire beneficial ownership within 60 days.  To the best of our
knowledge, all persons named have sole voting and investment power with respect
to such shares, except as otherwise noted.  Except as set forth in
this report, there are not any pending or anticipated arrangements that may
cause a change in control.  At December 31, 2007, 40,106,500 shares of
our common stock were outstanding.





Name
      and Address of Beneficial Owner  (1)
            Nature
      of Security
            Number
      of Shares
            Percentage
      of
              Common
      StockMr.
      Siping Fang
            Common
      Stock
            24,300,000
            60.75%Mr.
      Junfeng Feng
            -
            0
            0%Renrui
      Tang
            -
            0
            0%Huifeng
      Chen
            -
            0
            0%Zhiyuan
      Jia
            -
            0
            0%Binjie
      Fang
            -
            0
            0%All
      directors and executive officers as a group (1 person)
            Common
      Stock
            24,300,000
            60.75%





(1)
Unless otherwise indicated in the footnotes to the table, each shareholder shown
on the table has sole voting and investment power with respect to the shares
beneficially owned by him.




Item
13.   Certain
Relationships and Related Transactions


The
following includes a summary of transactions since the beginning of the last
fiscal year, or any currently proposed transaction, in which we were or are to
be a participant and the amount involved exceeded or exceeds $120,000, and in
which any related person had or will have a direct or indirect material interest
(other than compensation described under “Executive
Compensation”).  We believe the terms obtained or consideration that
we paid or received, as applicable, in connection with the transactions
described below were comparable to terms available or the amounts that would be
paid or received, as applicable, in arm's-length transactions.





During
the year, advances were made to the Company by Mr. Siping Fang, our CEO and
major shareholder, for cash flow purposes. As at December 31, 2007 and 2006, the
outstanding amount due to Mr. Siping Fang was US$2,848,032 and $1,805,389,
respectively. The advance is unsecured, interest-free and has no fixed terms of
repayment.







44




The Company has borrowed monies from certain
employees for cash flow purposes. The loans bear interest of 10% with no fixed
repayment terms. Loans from employees amounted to $671,188 and $624,170 as of
December 31, 2007 and 2006, respectively.





Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons





As we
increase the size of our board of directors and gain independent directors, we
expect to prepare and adopt a written related-person transactions policy that
sets forth our policies and procedures regarding the identification, review,
consideration and approval or ratification of “related-persons
transactions.”  For purposes of our policy only, a “related-person
transaction” will be a transaction, arrangement or relationship (or any series
of similar transactions, arrangements or relationships) in which we and any
"related person" are participants involving an amount that exceeds
$50,000.  Transactions involving compensation for services provided to
us as an employee, director, consultant or similar capacity by a related person
will not be covered by this policy.  A related person will be any
executive officer, director or a holder of more than five percent of our common
stock, including any of their immediate family members and any entity owned or
controlled by such persons.





We
anticipate that, where a transaction has been identified as a related-person
transaction, the policy will require management to present information regarding
the proposed related-person transaction to our audit committee (or, where
approval by our audit committee would be inappropriate, to another independent
body of our board of directors) for consideration and approval or
ratification.  Management’s presentation will be expected to include a
description of, among other things, the material facts, the direct and indirect
interests of the related persons, the benefits of the transaction to us and
whether any alternative transactions are available.




To
identify related-person transactions in advance, we are expected to rely on
information supplied by our executive officers, directors and certain
significant stockholders.  In considering related-person transactions,
our board of directors will take into account the relevant available facts and
circumstances including, but not limited to:




●
            the
      risks, costs and benefits to us;




●
            the impact
      on a director's independence in the event the related person is a
      director, immediate family member of a director or an entity with which a
      director is affiliated;●
            the
      terms of the transaction;


●
            the
      availability of other sources for comparable services or products;
      and


●the terms
available to or from, as the case may be, unrelated third parties or to or from
our employeesgenerally.




We also
expect that the policy will require any interested director to excuse himself or
herself from deliberations and approval of the transaction in which the
interested director is involved.





Director
Independence




Our Board
is currently composed of 5 members, one of which, Zengbiao Yu, is “independent”
as that term is defined under the NASDAQ listing standards.




All
actions of the board of directors require the approval of a majority of the
directors in attendance at a meeting at which a quorum is
present.  Our directors have a duty of to act in good faith with a
view to our interests.  In fulfilling their duty of care to us, our
directors must ensure compliance with our Certificate of
Incorporation.  Board action requires the approval of a majority of
the directors in attendance at a meeting at which a quorum is
present.  During 2007, our board met 5 times and no director missed
any meetings of the board.




45






Our board
of directors has not made a determination as to whether any member of our board
is an audit committee financial expert.  Upon the establishment of an
audit committee, the board will determine whether any of the directors qualify
as an audit committee financial expert.




Item 14.  Principal
Accounting Fees and Services.




Moore
Stephens Wurth Frazer and Torbet, LLP, was the Company’s independent registered
public accounting firm engaged to examine the Company’s consolidated financial
statements for the fiscal year ended December 31, 2007.




Fees
for the fiscal years ended December 31, 2007





Audit Fees.Moore
Stephens Wurth Frazer and Torbet, LLP, Independent POAOB registered public
accounting firm, was paid aggregate fees of approximately $180,000 for the
fiscal year ended December 31, 2007, for professional services rendered for the
audit of our annual financial statements.




Tax Fees.Moore
Stephens Wurth Frazer and Torbet, LLP, Independent POAOB registered public
accounting firm, was not paid any fees for the fiscal years ended December 31,
2007 for professional services rendered for tax compliance, tax advice and tax
planning.  This service was not provided.





All Other Fees. Moore
Stephens Wurth Frazer and Torbet, LLP, Independent POAOB registered public
accounting firm, was paid no other fees for professional services during the
fiscal years ended December 31, 2007.





Board
of Directors Pre-Approval Policies and Procedures





Our Board
of Directors has adopted the policy to pre-approve audit and permissible
non-audit services provided by our independent auditors.








46




PART
IV




Item 15.  Exhibits,
Financial Statement and Schedules




(a)
              The
      following documents are filed as part of this
  Report:


(1)
              Financial
      Statements are set forth beginning on page F-1 of this
    Report


Section
1.  Report of
Independent Registered Public Accounting
Firm          
F-2




Section
2.  Consolidated
Balance
Sheets                                                              
F-3




Section
3.  Consolidated
Statement of
Operations                                              
F-4




Section
4.  Consolidated
Statement of Stockholders’
Equity                            
F-5




Section
5.  Consolidated
Statement of Cash
Flows                                             
F-6




Section
6.  Notes to
Consolidated
Statements                                                     
F-7-F-27




(2)
              Financial
      Statement Schedules: All Schedules are omitted because the information
      called for is not applicable, is not required, or because the financial
      information is set forth in the financial statements or notes
      thereto.


(3)
              Exhibits


Exhibits
(Including Those Incorporated By Reference).




Exhibit
Index




Exhibit No.
            
            Description2.1
            
            Share
      Exchange Agreement, dated December 16, 2007, among the Company, the
      stockholders of the Company, China Valves Limited and its stockholders.
      [Incorporated by reference to Exhibit 2.1 to the Company’s current report
      on Form 8-K filed on December 21, 2007].3.1
            
            Articles
      of Incorporation of the Company as filed with the Secretary of State of
      Nevada, as amended to date.  [Incorporated by reference to
      Exhibits 3.1 and 3.2 to the Company’s current report on Form 8-K filed on
      December 21, 2007].21
            
            List
      of subsidiaries of the Company.*31.1
            
            Certification
      of Chief Executive Officer, pursuant to Rule 13a – 14(a).
  *31.2
            
            Certification
      of Chief Financial Officer, pursuant to Rule 13a – 14(a).
  *32.1
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *32.2
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *




* filed
herein.







47






SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.







CHINA
      VALVES TECHNOLOGY, INC.March
      31, 2008
            By:/s/  Siping
      Fang(Date
      Signed)
            Siping
      Fang, President







Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities
and on the dates indicated.




Each
person whose signature appears below hereby authorizes Siping Fang as
attorney-in-fact to sign on his behalf, individually, and in each capacity
stated below, and to file all amendments and/or supplements to this annual
report on Form 10-K.









Signature
            
            Capacity
            
            Date/s/
      Siping Fang
              Siping
      Fang
            
            President,
      Director and Chief Executive Officer (Principal Executive
      Officer)
            
            March
      31, 2008/s/
      Renrui Tang
              Renrui
      Tang
            
            Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer) and Director
            
            March
      31, 2008














48

















Exhibit
Index




Exhibit
      No.
            
            Description2.1
            
            Share
      Exchange Agreement, dated December 16, 2007, among the Company, the
      stockholders of the Company, China Valves Limited and its stockholders.
      [Incorporated by reference to Exhibit 2.1 to the Company’s current report
      on Form 8-K filed on December 21, 2007].3.1
            
            Articles
      of Incorporation of the Company as filed with the Secretary of State of
      Nevada, as amended to date.  [Incorporated by reference to
      Exhibits 3.1 and 3.2 to the Company’s current report on Form 8-K filed on
      December 21, 2007].21
            
            List
      of subsidiaries of the Company.*31.1
            
            Certification
      of Chief Executive Officer, pursuant to Rule 13a – 14(a).
  *31.2
            
            Certification
      of Chief Financial Officer, pursuant to Rule 13a – 14(a).
  *32.1
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *32.2
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    *




* filed
herein.






49






INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS














PageReports
      of Independent Registered Public Accounting Firms
            F-2
      - F-3Consolidated
      Balance Sheets
            F-4Consolidated
      Statements of Income and Other Comprehensive Income
            F-5Consolidated
      Statements of Stockholders’ Equity
            F-6Consolidated
      Statements of Cash Flows
            F-7Notes
      to Consolidated Financial Statements
            F-8
      - F-22









F-1




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM













To the
Board of Directors and Stockholders


of China
Valves Technology, Inc




We have
audited the accompanying consolidated balance sheet of China Valves Technology,
Inc and subsidiaries as of December 31, 2007, and the related statements of
income, stockholders’ equity and comprehensive income, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of China Valves Technology, Inc. and subsidiaries as of December 31, 2006 in the
accompanying consolidated financial statements were audited by other auditors
whose report dated December 6, 2007 expressed an unqualified opinion on those
statements.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Valves Technology, Inc
and subsidiaries as of December 31, 2007, and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.






/s/ Moore
Stephens Wurth Frazer and Torbet, LLP








Walnut,
California


March 31,
2008






F-2






Madsen
& Associates CPAs, Inc.
 
 684
      East Vine Street #3, Murray, UT 84107
              PHONE:
      (801) 268-2632 FAX: (801) 268-3978
  REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
   To the
Directors and
  Stockholders
of China Valve Holdings Limited (Incorporated in Samoa)
  We have
audited the accompanying balance sheets of China Valve Holdings Limited as of
December 31, 2006 and 2005, and the related statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the years ended
December 31, 2006 and 2005. China Valve Holdings Limited's management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements referred to above present fairly, in all
material respects, the financial position of China Valve Holdings Limited as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for each of the years ended December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of
America.
  s/Madsen
& Associates CPA's, Inc.
  Madsen
& Associates CPA's, Inc.
  Salt Lake
City, Utah
   December
6, 2007


F-3




CHINA VALVES TECHNOLOGY INC. AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31, 2007 AND DECEMBER 31, 2006A S S E T
      SDecember
      31,
              
              
              December
      31,2007
              
              
              2006CURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              2,773,262
              
              
              $
              5,591,211Restricted
      cash
              
              
              40,856
              
              
              
              -Accounts
      receivable, net of allowance for doubtful accounts of
    $274,167
              
              
              16,789,383
              
              
              
              9,171,675and
      $0 as of December 31, 2007 and December 31, 2006, respectivelyOther
      receivables
              
              
              4,638,477
              
              
              
              3,689,926Inventories
              
              
              10,539,087
              
              
              
              14,739,845Advances
      on inventory purchases
              
              
              458,699
              
              
              
              -Prepaid
      expenses
              
              
              519,043
              
              
              
              554,031Total
      current assets
              
              
              35,758,807
              
              
              
              33,746,688PLANT
      AND EQUIPMENT, net
              
              
              7,523,788
              
              
              
              4,373,362OTHER
      ASSETS:Accounts receivable - retainage, long term
              
              
              559,368
              
              
              
              469,229Advances on equipment purchases
              
              
              324,858
              
              
              
              -Goodwill
      - purchased
              
              
              19,449,851
              
              
              
              18,187,242Intangibles,
      net of accumulated amortization
              
              
              435,633
              
              
              
              54,405Other investments, at lower of cost or market
              
              
              714,485
              
              
              
              668,104Total
      other assets
              
              
              21,484,195
              
              
              
              19,378,980Total
      assets
              
              $
              64,766,790
              
              
              $
              57,499,030L I A B I L I T I E
      S A N D S H A R E H O L D E R S' E Q U I T
      YCURRENT
      LIABILITIES:Accounts
      payable - trade
              
              $
              6,452,519
              
              
              $
              8,843,663Short
      term loans
              
              
              6,479,291
              
              
              
              10,105,186Short
      term loans - related parties
              
              
              671,188
              
              
              
              491,366Other
      payables
              
              
              4,435,982
              
              
              
              2,169,379Other
      payable - related partites
              
              
              2,848,032
              
              
              
              1,805,389Notes
      payable
              
              
              -
              
              
              
              4,195,651Accrued
      liabilities
              
              
              1,734,679
              
              
              
              514,941Customer
      deposits
              
              
              2,810,352
              
              
              
              2,053,498Taxes
      payable
              
              
              1,064,512
              
              
              
              408,759Total
      current liabilities
              
              
              26,496,555
              
              
              
              30,587,832Long-term
      liabilities:Long
      term debt
              
              
              1,096,800
              
              
              
              -Total
      long term liabilities
              
              
              1,096,800
              
              
              
              -SHAREHOLDERS'
      EQUITY:Common
      Stock, $0.001 par value; 300,000,000 shares authorized40,106,500 shares and 40,000 000 issued and outstanding as of December 31,
      2007and
      December 31, 2006, respectively
              
              
              40,107
              
              
              
              40,000Additional
      paid-in-capital
              
              
              16,365,029
              
              
              
              15,115,137Statutory
      reserves
              
              
              1,749,601
              
              
              
              1,032,933Retained
      earnings
              
              
              15,844,953
              
              
              
              9,419,029Accumulated
      other comprehensive income
              
              
              3,173,745
              
              
              
              1,304,099Total
      shareholders' equity
              
              
              37,173,435
              
              
              
              26,911,198Total
      liabilities and shareholders' equity
              
              $
              64,766,790
              
              
              $
              57,499,030





See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these statements.






F-4




CHINA VALVES TECHNOLOGY INC. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 20062007
              
              
              2006SALES
              
              $
              37,036,282
              
              
              $
              25,530,183COST
      OF GOODS SOLD
              
              
              22,050,041
              
              
              
              14,522,202GROSS
      PROFIT
              
              
              14,986,241
              
              
              
              11,007,981EXPENSES:Selling
      expense
              
              
              2,998,585
              
              
              
              2,248,613General
      and administrative
              
              
              3,245,954
              
              
              
              2,181,294Research
      and development
              
              
              104,502
              
              
              
              33,260Total
      Operating Expenses
              
              
              6,349,041
              
              
              
              4,463,167INCOME
      FROM OPERATIONS
              
              
              8,637,200
              
              
              
              6,544,814OTHER
      EXPENSE (INCOME) :Other
      income
              
              
              (393,686
              )
              
              
              (13,729
              )Interest
      expense (Finance costs)
              
              
              528,498
              
              
              
              537,562Other
      expense
              
              
              22,053
              
              
              
              183,441Total
      Other Expense (Income)
              
              
              156,865
              
              
              
              707,274INCOME
      BEFORE PROVISION FOR INCOME TAXES
              
              
              8,480,335
              
              
              
              5,837,540INCOME
      TAX EXPENSE
              
              
              1,337,743
              
              
              
              1,158,161NET
      INCOME
              
              
              7,142,592
              
              
              
              4,679,379OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain
              
              
              1,869,646
              
              
              
              823,057COMPREHENSIVE
      INCOME
              
              $
              9,012,238
              
              
              $
              5,502,436WEIGHTED
      AVERAGE NUMBER OF SHARES
              
              
              40,003,550
              
              
              
              40,000,000EARNINGS
      PER COMMON SHARE
              
              $
              0.18
              
              
              $
              0.12




See
report of independent registered public accounting firm.
 The
accompanying notes are an integral part of these statements.






F-5




CHINA
      VALVES TECHNOLOGY INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006Common
      Stock
              
              
              Additional
              
              
              Retained
      Earnings
              
              
              Accumulated
      otherNumber
              
              
              Par
              
              
              Paid-in
              
              
              Statutory
              
              
              
              
              
              comprehensiveof
      shares
              
              
              Value
              
              
              capital
              
              
              reserves
              
              
              Unrestricted
              
              
              income
              
              
              TotalBALANCE,
      January 1, 2006
              
              
              40,000,000
              
              
              $
              40,000
              
              
              $
              15,115,137
              
              
              $
              508,001
              
              
              $
              5,258,080
              
              
              $
              481,042
              
              
              $
              21,402,260Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,679,379
              
              
              
              
              
              
              
              4,679,379Adjustement
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              524,932
              
              
              
              (524,932
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              823,057
              
              
              
              823,057Other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,502
              
              
              
              
              
              
              
              6,502BALANCE,
      December 31,2006
              
              
              40,000,000
              
              
              $
              40,000
              
              
              $
              15,115,137
              
              
              $
              1,032,933
              
              
              $
              9,419,029
              
              
              $
              1,304,099
              
              
              $
              26,911,198Shares
      issued for reorganization onDecember
      18, 2007
              
              
              106,500
              
              
              
              107
              
              
              
              (107
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Capital
      contribution from shareholder
              
              
              
              
              
              
              
              
              
              
              1,249,999
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,249,999Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,142,592
              
              
              
              
              
              
              
              7,142,592Adjustement
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              716,668
              
              
              
              (716,668
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,869,646
              
              
              
              1,869,646BALANCE,
      December 31, 2007
              
              
              40,106,500
              
              
              $
              40,107
              
              
              $
              16,365,029
              
              
              $
              1,749,601
              
              
              $
              15,844,953
              
              
              $
              3,173,745
              
              
              $
              37,173,435




See
report of independent registered public accounting firm.
 The
accompanying notes are an integral part of these statements.






F-6




CHINA
      VALVES TECHNOLOGY INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 20062007
              
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              7,142,592
              
              
              $
              4,679,379Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:Depreciation
              
              
              551,252
              
              
              
              409,441Amortization
      of intangible assets
              
              
              18,917
              
              
              
              17,763Provision
      for losses on accounts receivable
              
              
              263,308
              
              
              
              -Loss
      on disposal of fixed assets
              
              
              1,363
              
              
              
              10,992Change
      in operating assets and liabilities:Accounts
      receivable - trade, other receivables and prepaid expenses
              
              
              (8,087,872
              )
              
              
              (4,595,754
              )Inventories
              
              
              3,215,500
              
              
              
              (5,094,953
              )Accounts
      payable - trade
              
              
              (2,886,075
              )
              
              
              809,056Other
      payables and accrued liabilities
              
              
              2,805,919
              
              
              
              216,717Other
      payables - related party
              
              
              880,977
              
              
              
              -Customer
      deposits
              
              
              589,965
              
              
              
              (408,796
              )Taxes
      payable
              
              
              602,527
              
              
              
              202,153Others
              
              
              -
              
              
              
              443,745Net
      cash provided by (used in) operating activities
              
              
              5,098,373
              
              
              
              (3,310,257
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Intangible
      assets
              
              
              (381,419
              )
              
              
              (597,842
              )Advance
      on equipment purchases
              
              
              (311,992
              )
              
              
              -Purchases
      of plant and equipment
              
              
              (628,934
              )
              
              
              (1,485,832
              )Construction
      in progress
              
              
              (768,387
              )
              
              
              (94,068
              )Proceeds
      from sale of equipment
              
              
              -
              
              
              
              15,384Investment
              
              
              -
              
              
              
              (21,888
              )Net
      cash used in investing activities
              
              
              (2,090,732
              )
              
              
              (2,184,246
              )CASH
      FLOWS FINANCING ACTIVITIES:Restricted
      cash due to export covenant
              
              
              (39,238
              )
              
              
              -Proceeds
      from short term debt
              
              
              4,747,066
              
              
              
              3,339,178Proceeds
      from short term loans-related party
              
              
              139,939
              
              
              
              -Repayments
      of short term debt
              
              
              (8,724,565
              )
              
              
              -Proceeds
      from long term debt
              
              
              1,053,360
              
              
              
              2,579,666Repayment
      of (proceeds from) notes payable
              
              
              (4,309,215
              )
              
              
              2,858,931Increase
      in long term accounts payable
              
              
              -
              
              
              
              230,760Increase
      in other long term liabilities
              
              
              -
              
              
              
              271,784Contributed
      capital
              
              
              1,249,999
              
              
              
              -Net
      cash (used in) provided by financing activities
              
              
              (5,882,654
              )
              
              
              9,280,319EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
              
              
              57,064
              
              
              
              330,861(DECREASE)
      INCREASE IN CASH
              
              
              (2,817,949
              )
              
              
              4,116,677CASH,
      beginning of year
              
              
              5,591,211
              
              
              
              1,474,534CASH,
      end of year
              
              $
              2,773,262
              
              
              $
              5,591,211SUPPLEMENTAL
      DISCLOUSRES OF CASH FLOW INFORMATION:Cash
      paid for interest
              
              $
              665,213
              
              
              $
              550,808Cash
      paid for income taxes
              
              $
              1,005,265
              
              
              $
              1,117,724




See
report of independent registered public accounting firm.
 The
accompanying notes are an integral part of these
statements.




F-7


CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  Note
1 – Organization
 
 China
Valves Technology, Inc, formerly known as Intercontinental Resources, Inc., (the
“Company”) was incorporated in the State of Nevada in August 1997, under the
name Meximed Industries, Inc. In January 1999, the Company changed its name to
Digital Video Display Technology Corporation and in July 2001 to Iconet, Inc. In
the middle of 2003 the Company again changed its name to Anglotajik Minerals,
Inc. The Company was considered to be in the exploration stage as its operations
principally involved research and exploration, market analysis, and other
business planning activities, and no revenue was generated from its business
activities. The Company suspended its proposed activities in mineral exploration
in the Republic of Tajikistan, thus the Company again changed its name to
Intercontinental Resources, Inc in May of 2006.
 
 On December 16, 2007, the Company
entered into a Stock Purchase Agreement and Share Exchange (the “Exchange Agreement”) with China Valve Holding Limited
(“China Valve
Samoa”), a company
incorporated under the laws ofSamoaand the equity owner of
China Valve
Samoa.The
closing of the transaction took place on December 16, 2007 (the “Closing Date”) and resulted in the merger between
the Company and China Valve Samoa (the “Merger”).  Pursuant to the terms of
the Exchange Agreement, the Company acquiredall of the outstanding capital stock
and ownership interests of China Valve Samoa (the “Interests”) from the China Valve Samoa
shareholder for 40,000,000 shares, or 99.8% of the Company’s common stock.  In addition,
China Valve Samoa agreed to pay cash of$490,000 (the “Purchase Price”). Because the acquisition is treated
as a reverse acquisition, the financial statements of the Company have been
retroactively adjusted to reflect the acquisition from the beginning of the
reported period.The stock exchangetransaction has been accounted as a
reverse acquisition and recapitalization of the Company whereby China Value
Samoa is deemed to be the accounting acquirer (legal acquiree) and the Company
to be the accounting acquiree (legal acquirer). The historical financial statements for periods prior to
December 16, 2007 are those of China Valve Samoa except that the equity section
and earnings per share have been retroactively restated to reflect the reverse
acquisition.
 
 Pursuant
to the Exchange Agreement, on December 18, 2007 the Company filed with the
Secretary of State for the state of Nevada a Certificate of Amendment to our
Certificate of Incorporation changing our name to “China Valves Technology, Inc”
to better reflect our business.  The Company through its subsidiaries in
the People’s Republic of China (PRC) focuses primarily on the development,
manufacture and sale of high-quality metal valves for electricity, petroleum,
chemical, and water, gas and metal industries.
 
 China
Valve Samoa was incorporated on June 6, 2007 in Samoa. China Valve Samoa’s
principal activity is investment holding and its operations are carried out in
Samoa.
  Pursuant
to a group reorganization, China Valve Samoa became the holding company of the
group in September 2007 by acquiring 100% interest in China Valve Holdings
Limited (incorporated in Hong Kong) ("CVHL") on September 28, 2007. CVHL
established Henan Tonghai Valve Science Technology Co., Ltd. ("TVST"), a
wholly-own subsidiary in the People's Republic of China, on September 5, 2007.
Later, TVST acquired a 100% interest in Henan Kai Feng High Pressure Valve Co.,
Ltd. and Zhengzhou City Zhengdie Valve Co., Ltd., both companies incorporated in
the People's Republic of China, on September 20, 2007 and October 25, 2007,
respectively.
   F-8
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  The
acquisitions of Henan Kai Feng Pressure Valve Co., Ltd. and Zhengzhou City
Zhengdie Valve Co., Ltd. have been treated for accounting purposes as
acquisitions under common control.  Accordingly, the financial
statements have been prepared on a consolidated basis for the years being
presented.
  Note
2 – Summary of significant accounting policies
 
 THE
REPORTING ENTITIES
 
 The
accompanying consolidated financial statements include the following
entities:
 
 Name
      of entity
              Place
      of incorporation
              Capital
              Ownership
              Principle
      businessLocal
      currency
              USDChina
      Valve Holdings Limited.
              Samoa
              HKD
      10,000
              $1,281
              100%
      Directly
              InvestmentChina
      Valve Holdings Limited.
              Hong
      Kong
              HKD
      10,000
              $1,281
              100%
      Indirectly
              InvestmentHenan
      Tonghai Valve Science Technology Co., Ltd.
              PRC
              HKD
      10,000,000
              $1,281,000
              100%
      Indirectly
              Product
      Design and developmentHenan
      Kai Feng High Pressure Valve Co., Ltd.
              PRC
              RMB
      60,000,000
              $7,260,000
              100%
      Indirectly
              ManufactureZhengzhou
      City ZhengDie Valve., Ltd.
              PRC
              RMB
      33,768,100
              $4,085,940
              100%
      Indirectly
              Manufacture
 
 BASIS OF
PRESENTATION
 
 The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP").  In the opinion of management, the accompanying balance
sheets, and statements of income, stockholders’ equity and cash flows include
all adjustments, consisting only of normal recurring items.  All
material inter-company transactions and balances have been eliminated in
consolidation.
  USE OF
ESTIMATES
  The
preparation of consolidated financial statements in conformity with US GAAP,
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
   F-9
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  REVENUE
RECOGNITION
  The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized when all of the following have
occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable, and (iv) the ability to collect is reasonably assured. These
criteria are generally satisfied at the time of shipment when risk of loss and
title passes to the customer.
 
 The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost of
producing their finished product.
 
 SHIPPING
AND HANDLING
 
 Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs which totaled $336,852and$256,229 for the years
ended December 31, 2007, and 2006, respectively.
 
 ADVERTISING
 
 Advertisement
costs are expensed as incurred and totaled $29,413 and $54,612 for the years
ended December 31, 2007, and 2006, respectively.
 
 FOREIGN
CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME
 
 The
reporting currency of the Company is the US dollar. The functional currency of
its Chinese operating entities Henan Kai Feng Pressure Valve Co., Ltd. and
Zhengzhou City Zhengdie Valve Co., Ltd is Renminbi (RMB).
 
 For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the income and cash flow statements amounts are translated at the
average rate for the year. Because cash flows are calculated based using the
average translation rate, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
statement of shareholders’ equity. The resulting translation gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
  Accumulated
other comprehensive income in the consolidated statement of shareholders’ equity
amounted to $3,173,745 and $1,304,099 as of December 31, 2007 and 2006,
respectively. The balance sheet amounts with the exception of equity at December
31, 2007 and 2006 were translated at 7.29 RMB and 7.80 RMB to $1.00 USD,
respectively. The average translation rates applied to income and cash flow
statement amounts for the year ended December 31, 2007 and 2006 were 7.59 RMB
and 7.96 RMB to $1.00, respectively.
 
  F-10
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  PLANT AND
EQUIPMENT
  Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated life of the asset,
ranging from five to ten years.
  Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until construction is completed and the asset is
ready for its intended use.
  INTANGIBLE
ASSETS
  Goodwill
is tested for impairment on an annual basis as of the end of the Company's
fiscal year, or when impairment indicators arise. The Company uses a
fair-value-based approach to test for impairment. The Company evaluates the
recoverability of intangible assets periodically and takes into account events
and circumstances that warrant revised estimates of useful lives or that
indicated that impairment exists. All of the Company's intangible assets,
currently consisting of patents and software, are subject to amortization.
Patents, which have a legal life of 10 years in the PRC, are being amortized
over 5 years as management has determined that five years is the estimated
useful life of the patents currently owned by the Company. Software is amortized
over 10 years.
  LONG-LIVED
ASSETS
  The
Company periodically reviews the carrying amount of its long-lived assets for
impairment. An asset is considered impaired when estimated future cash flows are
less than the carrying amount of the asset. In the event the carrying amount of
such asset is considered not recoverable, the asset is adjusted to its fair
value. Fair value is generally determined based on discounted future cash
flow.
  INVENTORY
  The Company values its inventory at the
lower of cost or market, determined on a weighted average method, or net
realizable value.The
Company reviews its inventories periodically to determine if any
reserves are necessary for potential obsolescence.  As ofDecember 31, 2007and 2006 the Company determined no
reserves are necessary.
  RESEARCH
AND DEVELOPMENT COSTS
 
 Research
and development costs are expensed as incurred. The costs of material and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales, are classified as property and equipment or
depreciated over their estimated useful lives.
 
 
 F-11
   CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  RETIREMENT
BENEFIT COSTS
  Amounts
payable for the PRC state managed retirement benefit programs are expensed in
the financial statements following the accrual basis of accounting.
  INCOME
TAXES
  The
Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (SFAS 109) that requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Since the Company had no operations within the United States
there is no provision for US income taxes and there are no deferred tax amounts
as of June 30, 2007 and 2006.
 
 The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit.  In principle,
deferred tax liabilities are recognized for all taxable temporary differences,
and deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
 
 Deferred
tax is calculated at the tax rates that are expected to apply to the period when
the asset is realized or the liability is settled.  Deferred tax is
charged or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net
basis.
 
 The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.
  RELATED
PARTIES
  Parties
are considered to be related to the company if the company has the ability,
directly or indirectly, to control the party, or exercise significant influence
over the party in making financial and operating decisions, or vice versa, or
where the company and the party are subject to common control or common
significance. Related parties may be individuals (being members of key
management personnel, significant shareholders and/or their close family
members) or other entities which are under the significant influence of related
parties of the company where those parties are individuals, and post-employment
benefit plans which are for the benefits of employees of the company or of any
entity that is a related party of the company.
   F-12
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  CASH AND
CASH EQUIVALENTS
  Cash and
cash equivalents comprise cash at bank and on hand, demand deposits with banks
and other financial institutions, and short-term, highly liquid investments
which are readily convertible into known amounts of cash and which are subject
to an insignificant risk of changes in value, having been within three months of
maturity at acquisition.
  RESTRICTED
CASH
 
 The
Company is required to have restricted cash in the bank as security for its
exported products, the restriction is released after the customers have received
and inspected the products. Restricted cash amounted to $40,856 and $0 as of
December 31, 2007 and 2006, respectively.
 
 CONCENTRATIONS
RISKS
  The
Company's operations are carried out 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's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
 
 Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. Total cash
(including restricted cash balances) in these banks on December 31, 2007 and
2006 amounted to $2,814,118 and $5,591,211, respectively, of which no
deposits are covered by insurance. 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.
 
 Five
major suppliers, which represented approximately 38% and 30% of the Company’s
total purchases for the years ended December 31, 2007 and 2006, respectively.
Five suppliers accounted for 5% and 15% of total accounts receivable as of
December 31, 2007 and 2006 respectively.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS
  Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities, other payables and line of credit to approximate
their fair values because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of
interest.
 
  F-13
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
 The
Company’s business operations are conducted in the PRC.  During the
normal course of business, the Company extends unsecured credit to its customers
by selling on various credit terms. Management reviews its accounts receivable
on a quarterly basis to determine if the allowance for doubtful accounts is
adequate. An estimate for doubtful accounts is recorded when collection of the
full amount is no longer probable. The Company’s existing reserve is consistent
with its historical experience and considered adequate by the
management.
 
 EARNINGS
PER COMMON SHARE
  The
Company reports earnings per share in accordance with the provisions of SFAS No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method.
 
 All per
share data including earnings per share has been retroactively restated to
reflect the merger on December 16, 2007 as if it had occurred at the beginning
of 2006. For the year ended December 31, 2007 and 2006, basic and diluted
earnings per share amount to $0.18 and $0.12, respectively.
 
 LONG TERM
INVESTMENT
 
 The
Company invested in China Perfect Machinery Industry Co., Ltd. in 1996 and
Kaifang Commercial Bank in1997. The Company does not have the ability to
exercise control of the investee companies and the investment has been recorded
under the cost method. Long term investment amounted to $714,485 and $ 668,104
as of December 31, 2007 and 2006, respectively. Management believes there is no
impairment as of December 31, 2007.
 
 CUSTOMER
DEPOSIT
 
 Customer deposits represent amounts
advanced by customers on product orders. The product normally is shipped within
six months after receipt of the advance payment and the related sale is
recognized in accordance with the Company’s revenue recognition policy. As of
December 31, 2007 and December 31, 2006, customer deposits amounted to
$2,810,352and $2,053,498,
respectively.
 
 
 F-14
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
   RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
  In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements”(“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value under
accounting principles generally accepted in the United States (GAAP) and expands
disclosures about fair value measurements. Fair value is defined under SFAS 157
as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy which
requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The Company does not
expect the adoption of SFAS 157 to have a material impact on the Company’s
financial position or results of operations.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of FAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 will be effective in the first quarter of fiscal 2009. The Company is
evaluating the impact that this statement will have on its consolidated
financial statements.
 
 In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed.  The Company adopted FSP EITF 07-3 and expensed the
research and development as incurred.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.
 
  F-15
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS 141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.
  RECLASSIFICATIONS
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
  Note
3 - Plant and equipment
  Plant
and equipment consist of the following:
 
 2007
              
              
              2006Machinery
              
              $
              10,018,027
              
              
              $
              7,505,237Motor
      vehicles
              
              
              1,519,634
              
              
              
              956,412Office
      equipment and others
              
              
              2,790,370
              
              
              
              554,322Construction
      in progress
              
              
              239,059
              
              
              
              1,386,026Total
              
              
              14,567,090
              
              
              
              10,401,997Less:
      Accumulated depreciation
              
              
              (7,043,302
              )
              
              
              (6,028,635
              )Total
              
              $
              7,523,788
              
              
              $
              4,373,362
 
 Depreciation
expense was $551,252 and $409,441 for the years ended December 31, 2007 and
2006, respectively. Capitalized interest amounted to $117,446 as of December 31,
2007. No interest was capitalized in 2006.
 
 Note
4 – Goodwill and intangible assets
  In 2004,
the Company acquired two separate companies engaged in the production of
valves. As a result of these acquisitions the Company recorded goodwill in
the amount of $19,449,851. This goodwill represents the fair value of the assets
acquired in these acquisitions over the cost of the assets
acquired.
   F-16
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  Intangible
assets consist of the following:
 
 December 31, 2007
              
              
              December 31, 2006Patents
              
              $
              96,969
              
              
              $
              90,675Software
              
              
              397,149
              
              
              
              -494,118
              
              
              
              90,675Less:
      Accumulated Amortization
              
              
              (58,485
              )
              
              
              (36,270
              )Net
      Carrying Amount
              
              $
              435,633
              
              
              $
              54,405
  Aggregate
amortization expense was $18,918 and $17,763 for the years ended December 31,
2007 and 2006, respectively.
 
 Note
5 - Inventories
  As of
December 31, 2007 and 2006  inventories of the Company were as
follows:
 
 December
      31, 2007
              
              
              December 31, 2006Raw
      Materials
              
              $
              2,393,230
              
              
              $
              2,534,837Work-in-progress
              
              
              666,897
              
              
              
              3,329,104Finished
      goods
              
              
              7,478,960
              
              
              
              8,875,904Total
      Inventory
              
              $
              10,539,087
              
              
              $
              14,739,845
 
 The
Company reviews its inventory periodically for possible obsolete goods and to
determine if any reserves are necessary for potential
obsolescence.  As of December 31, 2007 and 2006, the Company believes
no reserves are necessary.
 
 Note
6 – Accounts receivable
  Accounts
receivable consists of the following:
 
 December
      31, 2007
              
              
              December
      31, 2006Total
      accounts receivable
              
              
              17,622,918
              
              
              
              9,640,904Allowance
      for bad debts
              
              
              (274,167
              )
              
              
              -Accounts
      receivable, net
              
              
              17,348,751
              
              
              
              9,640,904Accounts
      receivable - non-current retainage
              
              
              (559,368
              )
              
              
              (469,229
              )Accounts
      receivable - current
              
              $
              16,789,383
              
              
              $
              9,171,675
 
  F-17
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  At
December 31, 2007 and 2006, retainage held by customers included in the
Company’s accounts receivable as following:
 
 December 31, 2007
              
              
              December
      31, 2006RetainageCurrent
              
              $
              1,264,062
              
              
              $
              573,054Non-current
      (due in 2008 and 2007)
              
              
              559,368
              
              
              
              469,229Total
      retainage
              
              $
              1,823,430
              
              
              $
              1,042,283
 
 Retainage
represents portions held for payment by customers pending quality inspection
ranging from 12-18 months after shipment of products.
 
 Management
reviews its accounts receivable on a regular basis to determine if the allowance
for doubtful accounts is adequate.
  The
following represents the changes of allowance for doubtful
accounts:
 2007
              
              
              2006Balance,
      beginning of the year
              
              $
              -
              
              
              $
              -Additions
      to the reserve
              
              
              274,167Recovery
      of amounts previously reserved
              
              
              -Balance,
      end of the year
              
              $
              274,167
              
              
              $
              -
  Note
7 – Advances on inventory purchases
 
 Advances on inventory purchases are
monies deposited or advanced to outside vendors or related parties on future
inventory purchases. The total outstanding amount was $458,699and $0 as of December 31,
2007 and December 31, 2006, respectively.
 
  F-18
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  Note
8 - Loans
 
 Short-term
      Loans:2007
              
              
              2006Loan
      from Commercial Bank of Zhengzhou City, dueApril
      2008.  Monthly interest only payment at0.79875%
      per month guaranteed by Zhengzhou HuazhongCapital
      Construction Co., Ltd
              
              $
              370,170
              
              
              $
              346,140Loan
      from Commercial Bank of Zhengzhou, dueJanuary
      2008. Monthly interest only payment at0.765%
      per month, guaranteed by Zhengzhou HuazhongCapital
      Construction Co., Ltd .(This
      loan was repaid in Jan 2008.)
              
              
              1,371,000
              
              
              
              -Loan
      from Agriculture Bank, due July 2007Monthly
      interest only payment at 0.765% per month,guaranteed
      by Zhengzhou Huazhong Capital Construction Co.,  Ltd
              
              
              -
              
              
              
              1,025,600Loan
      from Comercial Bank of Shong Du Branch, due June 2007Monthly
      interest only payment from 5.1% to 6.63% per annum ,guaranteed
      by KeifengCast Iron Co., Ltd
              
              
              -
              
              
              
              4,358,800Loan
      from unrelated third party, non secured, non interest
    bearingwith
      no fixed date of repayment
              
              
              991,178
              
              
              
              829,916Citic
      bank, Zhengzhou branch, due June 18, 2008Monthly
      interest only payment at 7.227%per
      annum, guaranteed by Keifang Cast Iron Co., Ltd.
              
              
              2,742,000
              
              
              
              -Citic
      bank, Shong Du branch, due June 18, 2007Monthly
      interest only payment at 6.138%per
      annum, guaranteed by Keifang Cast Iron Co., Ltd.
              
              
              -
              
              
              
              2,564,000Loan
      from Local Bureau of Finance, Kaifeng City.No
      expiration date, Non interest bearing
              
              
              511,383
              
              
              
              478,186Loan
      from Local Bureau of Finance, Kaifeng City. Noexpiration
      date. Monthly interest only payment at2.55%
      per annum
              
              
              246,780
              
              
              
              230,760Special
      Payable from China National Development Committee.No
      expiration date and non interest bearing.
              
              
              246,780
              
              
              
              271,784Total
              
              $
              6,479,291
              
              
              $
              10,105,186Long-term
      loan:Loan
      from Zhengzhou Shangjie Credit Union, dueJuly,
      2009.  Monthly interest only at 0.84375%per
      month, guaranteed by Zhengzhou HuazhongCapital
      Construction Co., Ltd.
              
              $
              1,096,800
              
              
              $
              -
   F-19
 CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
   Total
interest expense for the years ended December 31, 2007 and 2006 on the debt
listed above amounted to $595,504 and $537,050 respectively.
 
 Note
9 - Income taxes
 
 The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
 
 Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DEs and FIEs. The Company is currently evaluating the impact
that the new EIT will have on its financial condition.
 
 Under the
existing Chinese Income Tax Laws, foreign investment enterprises (“FIEs”)
generally are subject to an income tax at an effective rate of 33% (30% state
income taxes plus 3% local income taxes) on income as reported in their
statutory financial statements after appropriate tax adjustments unless the
enterprise is located in specially designated regions for which more favorable
effective tax rates apply. Starting on January 1, 2008, China will unify the
corporate income tax rule on foreign invested enterprises and domestic
enterprises. The unified corporate income tax rate is 25%.
 
 The
Company’s subsidiary Henan Kai Feng Pressure Valve Co., Ltd is exempt from
income tax due to Keifang city tax incentive for companies to
privatize.
 
 The
Company’s other operating subsidiary Zhengzhou City Zhengdie Valve Co., Ltd is
subject to an income tax at an effective rate of 33% (30% state income taxes
plus 3% local taxes)
 2007
              
              
              2006Provision
      for China Income Tax
              
              $
              1,216,130
              
              
              $
              1,052,874Provision
      for China Local Tax
              
              
              121,613
              
              
              
              105,287Total
      provision for taxes
              
              $
              1,337,743
              
              
              $
              1,158,161
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2007:
 
 2007
              
              
              2006U.S.
      Statutory rates
              
              
              34.0
              %
              
              
              34.0
              %Foreign
      income not recognized in USA
              
              
              (34.0
              )
              
              
              (34.0
              )China
      income taxes
              
              
              33.0
              
              
              
              33.0China
      income tax exemption
              
              
              (17.0
              )
              
              
              (13.0
              )Total
      provision for income taxes
              
              
              16.0
              %
              
              
              20.0
              %
 
 The
estimated tax savings from the tax exemptions for the year ended December 31,
2007, amounted to $1,460,768. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $0.18 to
$0.14.
 
 The
estimated tax savings for the year ended December 31, 2006 amounted to $768,227.
The net effect on earnings per share had the income tax been applied would
decrease basic earnings per share from $0.12 to $0.10.
 
 VAT on
sales and VAT on purchases in China amounted to $6,160,529 and $4,340,131 for
the year ended December 31, 2007 and $ 3,020,143 and $2,183,023 for the year
ended December 31, 2006, respectively. Sales and purchases are recorded net of
VAT collected and paid as the Company acts as an agent for the government. VAT
taxes are not impacted by the income tax holiday.
 
  F-20
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  Taxes
payable at December 31, 2007 and 2006 consisted of the following:
 
 2007
              
              
              2006VAT
              
              $
              875,845
              
              
              $
              125,957Others
              
              
              188,667
              
              
              
              282,802Total
      taxes payable
              
              $
              1,064,512
              
              
              $
              408,759
  Note
10 – Reserves
 
 The laws
and regulations of the People’s Republic of China require that before foreign
invested enterprise can legally distribute profits, it must first satisfy all
tax liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include the surplus reserve fund and
the common welfare fund.
 
 Statutory surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
 
 The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the years ended December 31, 2007 and 2006, the Company
transferred $714,259 and $467,938 to this reserve which represents 10% of the
current year’s net income determined in accordance with PRC accounting rules and
regulations. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
 
 Note
11 - Operating leases
 
 The
Company leases office space and factory space from ZhengZhou Cheng Long
Corporation and Kaifeng High-Pressure Valve Steel Casting Co., Ltd.
  Total
lease expense for the years ended December 31, 2007 and 2006 was $305,334 and
$297,334, respectively. Total future minimum lease payments at December, 2007,
are as follows:
  
 Year
      ended December 31
              
              Amount2008
              
              $
              308,1072009
              
              
              308,1072010
              
              
              308,1072011
              
              
              308,1072012
              
              
              308,107Thereafter
 
  F-21
  CHINA
VALVES TECHNOLOGY, INC AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  Note
12 - Commitments and contingencies
 
 As of
December 31, 2006, capital commitments to acquire plant and machinery
totaled approximately $725,000. The Company had no capital commitments as
of December 31, 2007.
  Note
13 – Related party transactions
  The Company
had the following significant related party transactions during the year ended
December 31, 2007:
  During
the year, advances were made to the Company by Mr. Fang Si Ping, CEO and
major shareholder for cash flow purposes. As of December 31, 2007 and 2006, the
outstanding amount due to Mr. Fang Si Ping was $2,848,032 and $1,805,389,
respectively. The advance is unsecured, interest-free and has no fixed
terms of repayment.
 
 The Company borrowed
money from certain employees for cash flow purposes. The loans bear
interest of 10% with no fixed repayment terms. Loans from employees amounted to
$671,188 and $491,366 as of December 31, 2007 and 2006,
respectively.
 
 Note 14–Legal proceedings
 
 Before
the reverse acquisition on December 18, 2007, Intercontinental Resources Inc.
(“Intercontinental Resources”) was sued by Merrill Lynch Canada, Inc., in
British Columbia, Canada, in July 2000. Other than initial pleadings, the
plaintiff did not proceed with the suit since it was filed. Intercontinental
Recourses believes that the suit is without merit.  In connection with
the reverse acquisition, Intercontinental Resources agreed to place $200,000
into escrow pending resolution of this suit.  If required, the portion
of the purchase price for the reverse acquisition held in escrow will be used to
settle this lawsuit.
 
 F-22