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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2010

[    ] 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: 001-34542

CHINA VALVES TECHNOLOGY, INC.(Exact name of registrant as specified in its charter)

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

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)

(Former name, former address and former fiscal year, if changed
since last report)

Securities registered pursuant to Section 12(b) of the Act:

|Title of Each Class:          | Name of Each Exchange on Which
      Registered:
|----------------------------- | ------------------------------------------------
|Common Stock, $.001 par value | The Nasdaq Stock Market LLC                     
|                              | (Nasdaq Global Market)                          

Securities registered pursuant to Section 12(g) of the Act:
None

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

Yes [   ]  No [ X ]

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 [   ]  No [ X ]

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 [ X ]  No [   ]

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.

[   ]

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

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|Large accelerated filer[   ]                                           | Accelerated filer [ X ]        
|---------------------------------------------------------------------- | -------------------------------
|Non-accelerated filer[   ](Do not check if a smaller reportingcompany) | Smaller reporting company [   ]

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

Yes [   ]  No [ X ]

The issuers revenues for its most recent fiscal year ended December 31, 2010, were $183.7 million.

As of June 30, 2010, 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 $9.33 of such shares on such date as reported on the Over-the-Counter Bulletin
Board) was approximately $184.1 million. As of December 31, 2010, the aggregate market value of shares of the issuers common stock held by non-affiliates was approximately $293.2 million. Shares of the issuers common stock held
by each executive officer and director and by each person who owns 10 percent or more of the outstanding common stock 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 35,669,654 shares of common stock outstanding as of March 11, 2011.

DOCUMENTS INCORPORATED BY REFERENCE:

None

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|         | CHINA VALVES TECHNOLOGY, INC.                                                                                      |     
|-------- | ------------------------------------------------------------------------------------------------------------------ | ----
|         |                                                                                                                    |     
|         | FORM 10-K                                                                                                          |     
|         |                                                                                                                    |     
|         | For the Fiscal Year Ended December
      31, 2010                                                                  |     
|         |                                                                                                                    |     
|         | TABLE OF CONTENTS                                                                                                  |     
|Number   |                                                                                                                    | Page
|PART I   |                                                                                                                    |     
|Item 1.  | Business                                                                                                           | 2   
|Item 1A. | Risk Factors                                                                                                       | 12  
|Item 2.  | Properties                                                                                                         | 20  
|Item 3.  | Legal Proceedings                                                                                                  | 21  
|Item 4.  | (Removed and Reserved)                                                                                             | 21  
|PART II  |                                                                                                                    |     
|Item 5.  | Market for Registrants Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity Securities | 21  
|Item 6.  | Selected Financial Data                                                                                            | 22  
|Item 7.  | Managements Discussion and Analysis of
      Financial Condition and Results of Operations                        | 22  
|Item 7A. | Quantitative and
      Qualitative Disclosures about Market Risk                                                   | 36  
|Item 8.  | Financial Statements and Supplementary
      Data                                                                  | 36  
|Item 9   | Changes in and
      Disagreements with Accountants on Accounting and Financial Disclosure                         | 36  
|Item 9A  | Controls and procedures                                                                                            | 36  
|Item 9B  | Other Information                                                                                                  | 37  
|PART III |                                                                                                                    |     
|Item 10. | Directors, Executive
      Officers and Corporate Governance                                                       | 38  
|Item 11. | Executive Compensation                                                                                             | 40  
|Item 12. | Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder Matters               | 42  
|Item 13  | Certain Relationships and Related
      Transactions, and Director Independence                                    | 43  
|Item 14. | Principal Accountant
      Fees and Services                                                                       | 44  
|PART IV  |                                                                                                                    |     
|Item 15. | Exhibits and Financial
      Statement Schedules                                                                   | 44  

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INTRODUCTORY NOTE

Use of Terms

In this report, unless indicated otherwise, references to

- Changsha Valve are references to China Valves Technology (Changsha) Valve Co., Ltd., incorporated in the Peoples Republic of China;
- China Valves Holdings are references to China Valves Technology Holdings Limited, incorporated in Hong Kong;
- China Valves, the Company, we, us and our are references to the combined business of China Valves Technology, Inc. and our PRC and other subsidiaries;
- China Valve Samoa are references to China Valve Holdings Limited, incorporated in Samoa;
- China  and PRC are references to the Peoples Republic of China;
- $ are references to the legal currency of the United States.
- Hanwei Valve are references to Shanghai Pudong Hanwei Valve Co., Ltd., incorporated in Peoples Republic of China;
- Henan Tonghai Fluid are references to Henan Tonghai Fluid Equipment Co., Ltd.;
- HKD are references to the Hong Kong Dollar;
- Kaifeng Valve are references to Henan Kaifeng High Pressure Valve Co., Ltd.;
- Operating Subsidiaries are references to ZD Valve, Kaifeng Valve, Yangzhou Rock, Taide Valve, Changsha Valve and Hanwei Valve;
- RMB are references to Renminbi, the legal currency of China;
- Taide Valve are references to Taizhou Taide Valve Co., Ltd.;
- The Casting Company are references to Kaifeng High Pressure Valve Steel Casting Limited Liabilities Company;
- Yangzhou Rock are references to Yangzhou Rock Valve Lock Technology Co., Ltd.; and
- ZD Valve are references to Zhengzhou City ZD Valve Co., Ltd.

Forward-Looking Statements

This report contains information that may constitute forward-looking statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking
statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the futureincluding statements relating to volume growth, share of
sales and earnings per share growth, and statements expressing general views about future operating resultsare forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However,
caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical
experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors" and elsewhere in this report and those described from time to time in our
future reports filed with the Securities and Exchange Commission.

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PART I

Item 1. BUSINESS

OVERVIEW

China Valves Technology Inc. is a leading developer,
manufacturer and after market service provider of comprehensive flow management
products and services in China. Our flow service solutions help customer resolve
any problems and questions in critical industries around the world.

As a recognized leader in supplying valves, actuators, forging
and castings, valve locks and related services, we could support global
infrastructure industries, including nuclear power, fossil power, hydropower,
oil and gas, chemical and petrochemical, water treatment, mining and metal, as
well as general industrial markets where our products and services add value.
With approximately 1,900 employees in China and more than 50 distributors in
more than 30 countries, we could provide the most convenient services with a
local presence.

China Valves has evolved through organic growth and strategic
acquisitions. The Company was created in 2007 with the merger of two leading
fluid motion and control companies - ZD Valve and Kaifeng Valve. We continually
evaluate acquisitions and other strategic investment opportunities to broaden
our product portfolio, service capabilities, geographic presence or operational
capabilities to meet the growing needs of our customers. Now China Valves has
six wholly-owned subsidiaries, six heritage brands, comprehensive product line
including over 800 models and 10,000 series.

|Our industry is usually categorized into the
      following five major distinct industries, our sales mix by industry in
      2010 consists of: |      
|------------------------------------------------------------------------------------------------------------------------------------------------- | -----
|                                                                                                                                                  |      
|Power Supply                                                                                                                                      | 28.3%
|Petrochemical and Oil                                                                                                                             | 30.3%
|Water Supply                                                                                                                                      | 23.7%
|Metallurgy                                                                                                                                        | 4.9% 
|Other                                                                                                                                             | 12.8%

Our sales revenue and net income were $183.7 million and $ 43.2
million respectively, during the year ended December 31, 2010, and sales revenue
and net income of $95.4 million and $23.4 million, respectively, during the same
period in 2009.

HISTORY AND DEVELOPMENT

Our heritage trademark dates back to the 1959 founding of
Kaifeng High Pressure Valve Factory, later to be Kaifeng High Pressure Valve
Co., Ltd. Zhengzhou City ZD Valve Co., Ltd was established in 1993.

Under the name of a predecessor entity, China Valves was
incorporated in Nevada on August 1st, 1997. Kaifeng and ZD merged
together in 2007 and then China Valves Holdings Limited established in Hong Kong
in September of 2007.

In April 2009, China Valves finished the acquisition of Taizhou
Taide Valve Co., Ltd. who is a gate and butterfly valves manufacturer and its
products are mainly used in water supply industry.

In January 2010, China Valves acquired Yangzhou Rock Valve Lock
Technology Co., Ltd., a mechanical interlock safety system and triple offset
butterfly valve maker.

In February 2010, China Valves announced the acquisition of
former Watts Valve (Changsha) Co., Ltd., now renamed as China Valves Technology
(Changsha) Co., Ltd. Changsha Valve is the one of main valve suppliers of China
hydropower and fossil power industries, and we expect this acquisition will
enable us to secure the leading position in the growing markets.

In April 2010, China Valves acquired Shanghai Pudong Hanwei
Valves Co., Ltd., a joint venture of PRC and Hong Kong and a famous high-tech
valves supplier of oil and gas, petrochemical industries.

SUBSIDIARIES

China Valves owns six operations in China. Below is the current
business information of each of them. In addition to the business operation
information presented below, please see the Consolidated Financial Statements of
this annual report for more information of our business.

Kaifeng Valve

Kaifeng Valve was founded in 1959, which is located in Kaifeng
city (one of the seven ancient capitals of China), Henan province. It used to be
a large state-owned valve factory in China. The dominant products include
supercritical or ultra critical thermal power plant high pressure and
temperature valves, abrasive and erosive media refinery & petrochemical
valves. As a leading valve supplier in energy industry, "KF" brand is
considered as No. one brand in Chinese valve industry, which was awarded "the most competitive valve brand by the Chinese Ministry of Commerce.

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Products and services

Kaifeng Valve is a famous valve supplier for fossil power industry in China. Its products are used in wide variety applications in power plant, from high temperature steam isolation, high pressure feed water isolation, to the most severe
pressure-difference steam extraction duty in turbine.

Its products are used in high levels corrosion, abrasion, extreme high temperature and high pressure, zero fugitive emissions, and nuclear power plant isolations. It is considered to be the most reliable domestic high pressure isolation valves in
China.

Kaifeng Valve provides engineering, design, inspection, maintenance and repair services for its valves and related products. It sells its products and services in most geographic regions in China directly through our internal sales force and also a
perfect network of independent distributors.

Product Types

- High temperature and high pressure casting gate, globe, check valves
- High temperature and high pressure forged steel gate, globe, check valves
- API standard casting gate, globe, check valves
- Bleed steam check valves
- High pressure Y-globe, Y-globe check valves
- High vacuum gate, globe, check valves
- Automatic recirculation control valve
- Multi-stage steam control valve
- Feed water heater 3-way isolation valve
- Through way and straight way plunger valve

Customers

Besides fossil power plants, Kaifeng Valve products are widely used in refinery, petrochemical, mining and metal, pulp and paper industries. Kaifeng Valve signed Strategic Cooperation Agreement with China Dongfang Electric Corporation
(DEC), the biggest power equipment supplier in the world. Kaifeng Valve is the sole supplier of the pipeline pressure control valve for Shanghai Electric Power Generation Group. Kaifeng Valve is the Tier 1 supplier of China top 5 power
generation companies.

Kaifeng Valve is a qualified supplier of China National Nuclear Corporation (CNNC) and China Guangdong Nuclear Power Holding Co., Ltd. (CGNPC). It provides a large amount high pressure high temperature steam and water
isolation valves to nuclear power plants every year.

ZD Valve

ZD Valve is a leading manufacturer of low pressure butterfly valves, eccentric semi-ball valves, non-return valves with damping system, and valves applied in water treatment and drainage pipelines. Its brand ZD is the No. one
butterfly valve brand in the water treatment industry of China. ZD Valve occupies significant market share of butterfly valves in municipal water treatment of China. ZD Valve is located in Zhengzhou city, the capital of Henan province.

Products and services

ZD Valve is one of the most famous low pressure butterfly valve suppliers in China. Besides butterfly valves it manufactures, ZD Valve provides wide products range for applications in water treatment, petrochemical, mining and metal, fossil power
industries.

ZD Valve provides full package flow control solutions to water treatment customers. Besides these products, it also provides engineering, design, inspection, installation, commissioning, inspection, and repair services.

ZD Valve provides after sale services through its network of sales representatives which covers most of the capital cities and all of the five municipals in China, which including 24-hour onsite services, in-house repair and return manufacturing
services through its production facility.

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Product Types

- Resilient seated gate valve
- Multi-functional damping check valve
- Hydraulic damping tilting check valves
- Ventilating butterfly valve
- Triple eccentric metal seated butterfly valve
- High performance metal seated butterfly valve
- Soft seated butterfly valve
- Hydropower station hydraulic and pneumatic butterfly valve
- Eccentric semi-ball valve
- Floating ball air release valve
- 3-way control valve
- Sluice gate valve

Customers

Customer mix of ZD Valve spans several industries, including fossil power, hydropower, petrochemical, mining and metal, pulp and paper, food. However, water treatment is still the biggest market of ZD Valve, and its products are well known in the
major city water treatment companies in China.

ZD Valve has an extensive network of sales and distributors in Europe, Middle East and Southeast Asia to support our global customers.

Changsha Valve

Changsha Valves predecessor was founded in 1958, with leading products includeing hydraulic operated butterfly valves, flow control valves, spherical valves in big size, Changsha Valve is considered to be the best butterfly valve supplier for
hydropower industry in China. It has accumulated abundant experiences in fossil power, hydropower, nuclear and water treatment industries. Changsha Valve established China industrial standard of metal seated butterfly valves and power plant
butterfly valves. Its brand CSV has more than fifty years of history and occupied 40% market share in butterfly valve of the hydropower industry.

Products and services

Changsha Valves is famous for its large size butterfly valve and large size water control valve. Changsha Valve manufactures the biggest size butterfly valve (DN5500mm) in China. As one of the main valve suppliers in China hydropower industry, it
provides a broad range of industrial valves, including on/off valves, control valves, and other specialty valves.

As the standard setter of metal seated butterfly valves and power plant butterfly valves, Changsha Valve provides extensive after sales services and strong technical support to our customers.

Product types

- Large size vacuum butterfly valve
- Butt weld butterfly valve
- Hydropower station metal seated butterfly valve
- Hydraulic and pneumatic operated butterfly valve
- TRT Coal gas dust exhaust butterfly valve
- Spherical water control valve
- Top entry trunnion mounted ball valve
- Inline type sleeve water control valve
- Submerged type sleeve control valve
- Y-type and Straight way type sleeve control valve

Customers

Changsha Valve is well known in huge hydropower stations in China. Its products are widely used in the recycled water system in fossil power plants, especially in 1000MW ultra-critical power plants. Its products are increasingly used in metal,
refinery and chemical plants because their reliability and excellent after sale services.

Hanwei Valve

Hanwei Valve is a high-tech enterprise located in Pudong Airport area, Shanghai. It was founded in 1992 as a joint venture between Hong Kong and Shanghai. Hanwei Valve is famous for its advanced R&D capabilities and its strong engineering
capabilities. Different from Kaifeng Valve, ZD Valve and Changsha Valve, Hanwei Valve is committed to develop in oil and gas, petrochemical and chemical markets. "Han Wei" is considered to be a leading brand in Chinas valve industry.

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Products and services

Hanwei Valve is one of the two suppliers who can provide 24-way rotary valve in the world. 24-way rotary valve is applied in simulated moving bed adsorption-separation unit and chromatogram separation unit of petrochemical and biological
engineering. Its fully welded pipeline ball valve was well-known in China Oil &Gas industry, also entered the market in the Middle East, Southeast Asia and Central Asia. It has several patented products like 24-way rotary valve, district heating
ball valve and full welded pipeline ball valve etc.

Hanwei Valve provides design, engineering, commissioning, diagnostic, installation, inspection and repair services to its customers. We believe its ability to offer design and engineering services provides us a unique competitive advantage.

Product Types

- Axial-flow check valve
- Dual plate check valve
- Parallel slide gate valve
- High performance metal seated butterfly valve
- Trunnion mounted ball valve
- Full welded pipeline ball valve
- Fully welded district heating ball valve
- Top entry trunnion mounted ball valve
- Floating ball valve
- 24-way rotary valve
- Tank bottom valve
- Knife gate valve

Customers

Hanwei Valve is Tier One valve supplier of China National Petroleum Corporation (CNPC). It provided a large amount of fully welded pipeline ball valves and axial-flow check valves to oil and gas pipelines, and most of them were national key
projects. Hanwei Valve has earned huge reputation from its services to Sinopec and UOP.

In addition to the Chinese market, Hanwei Valve provides its products to the national petroleum companies of Middle East, Southeast Asia and Central Asia, and it also provides district heating ball valves to Russia and East Europe through its
long-term partners.

Taide Valve

Taide Valve is located in Taizhou city, Jiangsu province. It was initially founded in the 1950s as an agricultural machinery plant, and became a supplier of castings and valves in the 1990s.

Taide Valve provides resilient seated gate valves, soft seated butterfly valves and metal seated butterfly valves to water treatment and public works.

Product Types

- Resilient seated gate valve
- Soft seated butterfly valve
- Metal seated butterfly valve

Yangzhou Rock

Yangzhou Rock is a high-tech enterprise which located in Yangzhou city (one of seven ancient capitals of China), Jiangsu province. It has a registered patent for its valve mechanical interlock device. Yangzhou Rock is the only valve mechanical
interlock manufacturer in China, and it is considered to be a safe and environmentally friendly company. Yangzhou Rock is gradually emerging in the area of mechanical interlock, intelligent alarm linkage, remote flexible control and mechanical latch
delay etc.

Besides the valve mechanical interlock, it developed triple-eccentric metal seated cryogenic butterfly recently, which can be widely used which in air separation, liquefied natural gas, and cryogenic treatment industries.

Product Types

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- Quarter-turn valve interlock
- Multi-turn valve interlock
- Vessel closure lock
- Actuated valve interlock
- Anti-tamper lock in oil pipeline
- Cryogenic triple-offset butterfly valves

Customers

Yangzhou Rock customers include many famous multi-national companies like Air Product, Air Liquid, Linde, DSM, BASF. It is also a qualified supplier for CNPC, CNOOC. With its strong engineering and advanced equipments, Yangzhou Rock could provide
comprehensive aftermarket services.

ORGANIZATIONAL STRUCTURE

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



(1) Shanghai Hanhuang Valve Co., Ltd. and Hong Kong Hanxi Investment Co., Ltd were former shareholders of Hanwei Valve, both of which were acquired during acquisition of Hanwei Valve by the Company and are shell companies without any active
operations.

OUR INDUSTRY

The Chinese valve market is expected to increase at an annual rate of more than 20% for the next few years. We believe that demand for valves will be driven primarily by the energy demand and water treatment system investment and upgrading. The
stimulus package being implemented by the Chinese government in response to the global economic crisis is expected to emphasize basic infrastructure construction projects for water, electricity, gas and heat in order to ensure continuous economic
development and meet the requirement of improving peoples living standard. We believe that these initiatives should generate strong demand for valves and promising business prospects for the valve industry and our company. We intend to focus
our efforts on utilizing our tangible and intangible resources to expand and strengthen our products and increase our market share in response to industry demands.

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The other driving force is that China central government strongly promotes localization of major equipments. The proportion of domestic in nuclear power, fossil power and chemical plants increased quickly, so that China Valves will have more
opportunities to enter into the high-end valves areas which have been occupied by international companies.

As a supplier to customers in a variety of industries, our performance is largely dependent upon the overall economic conditions and the growth and performance of industries and companies operating in those industries which purchase our valve
products. The following provides a brief overview of the historical and projected performance and growth of the four largest industries in which our customers operate.

Our Involvement in the Power Industry

Fossil power

The Chinese government continues to improve installed capacity of fossil power plants to meet the growing electric demand for both industrial and residential uses. Many ultra-critical fossil power plants are on construction or on engineering, and
smaller sub-critical fossil power plants were shut down or upgrading to improve energy efficiency and improve the environment.

Kaifeng Valve is the only valve supplier in China to provide main stream isolation valve and main feed water isolation valve in ultra-critical fossil power plants. Benefiting from the government requirement for localization, Kaifeng Valve expects to
have an extensive market share in this area.

The increase use of the fossil power demands more and more large size butterfly valves and control valves for circulating water system. ZD Valve and Changsha Valve expect to receive more orders from ultra-critical fossil power plants.

Nuclear power

Nuclear power plants normally demand more valves than the same capacity fossil power plants, and purchase price and amount are much higher than traditional power plants due to higher security requirements. Thats the reason why our main
competitors invest a large amount of human and financial capacities to nuclear power.

As one of the main suppliers of high pressure high temperature valves in China nuclear power industry, Kaifeng Valve has been cooperating with two biggest nuclear investment companies in China-CNNC and CGNPC. Kaifeng Valve was awarded as qualified
valve supplier from National Energy Board.

Changsha Valve and ZD Valve are major suppliers of butterfly valves for nuclear power plants. They expect to steadily expand their market share in nuclear power industry.

Our Involvement in the Petrochemical, Oil and gas Industries

Energy preservation is the top priority of the Chinese government in recent years. Long distance oil and gas pipelines, huge LNG and LPG tank farms, large size ethylene and refinery will be built in the near future to ensure safe and efficient
transportation of energy. In addition, national oil companies like CNPC, Sinopec and CNOOC have increased their investment in oversea oilfields and refineries.

As one of the main valve suppliers of oil and gas industry, Hanwei Valve will benefit from large demand for pipeline ball valve, check valve and gate valve. Kaifeng Valve expects to receive more orders for large demand of high pressure valves in
ethylene and refinery plants.  Yangzhou Rock strives to compete with imported cryogenic butterfly valves in LNG and LPG tank farms with its reliable products and services.

Our Involvement in the Water treatment

The Chinese government stably increases its investment to upgrade public facilities, water pipe network and sewage treatment in thousands of cities and municipals. The total annual demand for valves in the water treatment industry will be RMB 10
billion in recent years.

As the main valve suppliers in water treatment, ZD Valve and Changsha Valve will improve their production capacities to meet the rapid growth of the demand.  In addition, we work closely with our customers and research institutes to develop high
quality products to compete with imported products.

OUR COMPETITIVE STRENGTHS

- Broad range of products and leading brands. From the extreme high/low temperature, extreme high pressure, extreme abrasion and corrosion, to the most complex smart valves, we believe that we have the most comprehensive range of valve
products in our industry
and enjoy leading market positions based on the estimated market share of our key products, broad brand recognition and a strong reputation for quality and service within the markets we serve.

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- Low-cost and high quality manufacturing capabilities.We believe our historical capital investment in manufacturing technologies helps us reduce the costs of producing our products. We focus on manufacturing and selling high quality
valves at competitive prices. We believe we have a price advantage over most of our competitors.
- Highly experienced and incentivized research and development team.Our R&D department composed of engineers with many years of experience, some of them is the most professional engineers in China valves industry. We are committed
to developing new products and we have in recent months generally launched a new model every two months. We have cooperated with universities and institutions to improve and develop products.
- Highly experienced, proven management team.We are led by an experienced management team with a long and successful track record, enabling us to recognize and capitalize upon attractive opportunities in our key markets. Most of senior
management members have an average of over 18 years of experience in the valve industry; top management team like CEO and CFO came from international valves group or has international management experience.

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:

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 local valve manufacturers in the market. The top ten local
valve manufactures have an aggregate Chinese market share of 12.1% only. 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 Chinas valve market and to increase our market share.

In 2010, we finished the acquisition with Yangzhou Rock, Changsha Valve and Hanwei Valve. These acquisitions enabled us to expand the products line and advanced technologies we offer to the growing oil and gas, hydropower and fossil power markets.

Further Penetrate Existing Market Segments. We plan 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;
- leverage strong established distribution channels.

Enter New Market Segments. To drive organic growth from our existing businesses, we will continue to leverage our customer relationships to develop or acquire new products and product extensions to enter into new market
segments. In 2010, we signed Strategic Cooperation Agreement with China Dongfang Electric Corporation (DEC) in 2010, the biggest power generation equipment manufacturer of the world. The first order with DEC was over $8 million. We were awarded
as qualified nuclear safety grade valve supplier by National Energy Board. Besides the traditional local market, we established sales headquarter in Shanghai to strengthen our market share in multi-national chemical companies and oversea oil and gas
market.

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. Our 24-way rotary valves have been successfully used in PX, MX etc. petrochemical plants, and
now it will be used in chromatogram separation unit of biological engineering. Deep-water ball valve will be put into production in 2011, and it will be used in the deep-sea drilling platform widely. We also focus on exploring and commercializing
new technologies in smart control like intelligent interlock, remote flexible control, intelligent alarm link. In many of our research areas, we are working with universities, institutes and experts in the appropriate fields to ensure that the
latest technologies will be applied in our products and services.

Strengthen Overseas Market.We integrated direct sales team and distributors in Europe, Russia, Middle East, Central Asia and Southeast Asia, so that they will represent all of China Valves products and services instead of the products
of ZD Valve or Hanwei Valve only. We participated in more flow control exhibitions, and upgraded our website so that oversea customers could reach us easily.



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OUR MANUFACTURING PROCESS

Our manufacturing process is a multi-step process involving the following tasks:

- purchasing and depositing of raw materials;
- raw material processing and analysis;
- production of inventory of semi-finished products (or transporting to the next step directly);
- product assembly;
- product inspection and testing, and placing finished products in inventory.

Our modern computer aided design (CAD) center can assist in the design of all products. We closely monitor and test the quality of raw materials, including casting steel blank parts, forging steel blank parts and steel. We use a
high-speed direct reading spectrograph (32 channels) for the analysis of the chemical components of raw materials. We have cobalt 60y flaw 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 metal material test room for physical and chemical analysis and mechanical testing of raw materials. In order to ensure production structural capability, we
utilize high-precision equipment, including high-precision computer numerical control (CNC) lathes and advanced welding equipment to satisfy the requirements of our product designs. 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 appropriate standards.

We have set up a comprehensive and reliable quality management system with strict material manufacturing procedures and standard inspection. We have been adhering to a lean production principle. By continuously seeking to improve production, we
eliminate non-value added activities, such as reducing the waiting time among each manufacturing process, building up design standard code to reduce the cycle and improve the time of products delivery to our customers. Order-based productions reduce
inventory and improve cash flow. In addition, workplace monitoring and certain rules to follow improve the manufacturing efficiency. Because of increasing efficiencies in our production cycle, we have quicker feedback from our customers about our
products allowing us to make improvements for their next order.

WARRANTIES

We typically warranty 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 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. Please refer to Risk Factors -
Risks Related to Our Business. We do not maintain a reserve for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims.

SUPPLIERS OF OUR RAW MATERIALS

The primary raw materials that are used in the production of these valves include carbon steel, stainless steel, low temperature steel and heat resistant steel, casting blank parts and actuating devices. The prices for such materials fluctuate
depending upon market conditions. However, because we have long-term suppliers and clients, the influence of price fluctuations are not currently material to the Company.

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 seamlessly 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.

These 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 encourage our suppliers to provide advanced technology and high
quality products.

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SALES, MARKETING AND DISTRIBUTION

We market our products through regional agents. 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.

We market our products through various ways. We have total around $183.7 million sales in our six facilities and in several regional offices. In addition, we have around 50 distributors across China. We provide periodic training to our sales
staff and have direct communication and participate in trade exhibitions. In 2010, we set up a sales and marketing headquarter in Shanghai. We hired experienced sales personnel who have significant sales and marketing experience from multinational
valves companies such as Tyco and Flowserve. Moreover, a professional technical support team was set up to enhance after-market service.

OUR RESEARCH AND DEVELOPMENT EFFORTS

China Valves business is dependent on constantly improving the technology associated with developing and manufacturing valves. Therefore, China Valves has committed itself to research and development of new valves and developing state of the
art valves that improve and advance the valve industry. In 2010 and 2009 we invested a total of $228,858 and $126,750 respectively to research and development efforts,. We also intend to increase the amount of resources we allocate to
research and development as the Company continues to grow.

The company has 303 engineering and support technicians and researchers dedicated to actively researching and developing new valves and participating in valve production and improvement. China Valves 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. In addition, we focus on development of valves for nuclear power stations.

COMPETITORS

We compete against a number of international, local valve manufacturers as well as specialized manufacturers on the basis of product capacity, product quality, and breadth of product line, delivery and price. Our major competitors vary by industry
and region.

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. We compete with them in hydropower industry, and fossil power industry.
- Sufa Technology Industry, Co., Ltd.  a leading manufacturer of nuclear safety grade valves. It has broad product line which including on/off valves, control valves and specialized valves. We compete with them in nuclear power, petrochemical
and refinery industries.
- Suzhou Neway Valve Co., Ltd.  a leading manufacturer of pipeline ball valves, API gate, globe, check and ball valves in China. Neway is a famous valve brand in the international market. We compete with them in oil and gas, petrochemical and
chemical industries.
- Dalian DV Valve Co. Ltd.  a leading manufacturer of high pressure gate, globe and check valves. We compete with them in fossil power, nuclear power industries.

There are, however, certain factors that we believe set us apart from all of our competitors, including the following:

- 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-critical units of 1000MW power stations;
- We are the first manufacturer of high pressure large diameter oil pipeline valves in China;
- We are the first domestic manufacturer of 2,500lb high pressure gate valves for hydrogenation in chemical lines, which replace imported products;
- We are the first domestic manufacturer of high pressure large diameter gate valves for the coal chemical industry;
- 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;
- We are one of the two suppliers who can provide 24-way rotary valve in the world; and
- We manufacture the biggest size butterfly valve in China.

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INTELLECTUAL PROPERTY

We own the following six trademarks:

Our six operating subsidiaries own more than 50 patents for water supply and drainage pipes, supply and disposal pipes for water and gas, sewage disposal used for water and gas supply and drainage pipes, etc. The expiration dates for these patents
range from 2011 to 2018.

We cannot give any assurance that the protection afforded our intellectual property will be adequate. It may be possible for third parties to obtain and use, without our consent, intellectual property that we own or are licensed to use. Unauthorized
use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

REGULATION

Because our six operating subsidiaries are 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.

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 of 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 ADDRESS

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 475002 and our telephone number is (86) 378-2925211. Our head office in China is 21 F
Kineer Plaza, 226 Jinshui Road, Zhengzhou City, Henan Province and our telephone number is (86) 371 65673777. We maintain a website at www.cvalve.comthat contains information about us, but that information
is not a part of this Annual Report.

Item 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Our business would be adversely affected by a downturn in government spending related to infrastructure upgrades, repairs and replacements, or by reduced demand in the power, petrochemical, oil or water supply industries.

Our business is primarily dependent upon spending on new infrastructure projects, as well as infrastructure upgrades, repairs and replacement, in the power, petrochemical, oil and water supply industries. We are also subject to general economic
conditions, the need for large-scale
projects, interest rates and government incentives provided for public work projects. We believe that the Chinese stimulus plan will result in an increase in infrastructure projects and an increase in demand for our valve products. If the Chinese
stimulus plan does not have its desired effect or if there are declines in the number of projects planned by government agencies, government spending cuts, general budgetary constraints, difficulty in obtaining necessary permits or the inability of
government entities to issue debt, sales of our valves may not increase at desired rates. It is not unusual for projects in power, petrochemical, oil or water supply industries to be delayed and rescheduled for a number of reasons, including changes
in project priorities and difficulties in complying with environmental and other government regulations. We cannot assure you that economic growth experienced by China will continue or that if it does, that state and local governments will address
deferred infrastructure needs. Any significant decline in the project spending in the key industries or governmental spending on infrastructure could have a material adverse effect on our financial condition and results of operations.

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Our industry is very competitive in China.

The domestic market for valve products is fragmented and highly competitive. We compete with over 160 medium-sized, local Chinese valve manufacturers, although we are aware of only two that have similar manufacturing capacities as our company. The
number of these companies varies from time to time. While we may have greater resources than our smaller competitors, it is possible that these competitors have better access in certain local markets to customers and prospects and lower production
and raw material costs. Some of our valve products compete on the basis of price and are sold in fragmented markets with low barriers to entry, allowing less expensive domestic producers to gain market share and reduce our margins.

Our revenue will decrease if the industries in which our customers operate experience a protracted slowdown.

Our products mainly serve as key components in projects and machines operated by our customers which are mostly in the oil, power, water supply, petrochemical, and metallurgy industries. Therefore, we are subject to the general changes in economic
conditions affecting those industry segments of the economy. If the industry segments in which our customers operate do not grow or if there is a contraction in those industries, demand for our valve products will decrease. Demand for our products
is typically affected by a number of overarching economic factors, including, but not limited to, interest rates, the availability and magnitude of private and governmental investment in infrastructure projects and the health of the overall global
economy. If there is a decline in economic activity in China and the other markets in which we operate or a protracted slowdown in industries on which we rely for our sales, demand for our products and our revenue will likewise decrease.

Foreign competition is intense and could have a material adverse effect on our financial condition and results of operations.

In addition to domestic competition, we face intense competition from foreign competitors. The intensity of foreign competition is affected significantly by fluctuations in the value of the U.S. dollar against Chinese currency and by the level of
import duties imposed by the Chinese government on certain products. Our major international competitors are Velan Inc., KSB Group and Tyco Flow Inc. Many of our competitors have more resources and greater brand recognition than we enjoy. While our
resources may not be as great as our larger competitors, we believe our product quality and direct sales offices and distribution network are superior in China. If our competitors are able to gain greater market share or improve their sales efforts,
our sales may decrease, we may be forced to lower our prices, or our marketing costs may increase, all of which could negatively impact our financial results.

Any decline in the availability, or increase in the cost of raw materials could materially affect our earnings.

Our valve manufacturing operations depend heavily on the availability of various raw materials and energy resources. The mix of raw materials used in the production of valves is mainly composed of casting steel blank parts, forging steel blank parts
and steel, which represent 60% of all raw materials used in the production of valves. The fuel costs in our manufacturing operations, particularly heavy oil and electricity, account for over 2% of total manufacturing costs. The availability of raw
materials and energy resources may decline and their prices may fluctuate greatly. We have long-term relationships with several suppliers; however, we do not have long term supply contracts and if our suppliers are unable or unwilling to provide us
with raw materials on terms favorable to us, we may be unable to produce certain products. This could result in a decrease in profit and damage to our reputation in our industry. In the event our raw material and energy costs increase, we may not be
able to pass these higher costs on to our customers in full or at all. Any increase in the prices for raw materials or energy resources could materially increase our costs and therefore lower our earnings.

We depend on a group of major distributors for a significant portion of our sales; any loss of these distributors could reduce our sales and continuing consolidation of distributors could cause price pressure.

In 2010, approximately 75% of our sales revenue was generated from our direct sales teams throughout China and 25% was generated from our distributors. Sales through distributors were highly concentrated in a few distributors, with 62% of
distributor sales coming from our ten largest distributors, and 38% from the three largest distributors. Our business relationships with most of our major distributor branches may be terminated at the option of either party upon 30 days
notice.

Although our relationships with our ten largest distributors have been long-lasting, distributors in our industry have experienced significant consolidation in recent years, and we cannot assure you that our distributors will not be acquired by
other distributors who buy products from our competitors. Our ability to retain these customers in the face of other competitors generally depends on a variety of factors, including the quality and price of our products and our ability to market
these products effectively. We cannot assure you that, as consolidation among
distributors continues, distributors will not be able to force us to lower our prices, which would have an adverse impact on our financial condition or results of operations.

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Any disruption in the supply chain of raw materials and our products could adversely impact our ability to produce and deliver products.

As a manufacturing company, we face serious challenges in supply chain management for raw materials and delivery of our products. Supply chain fragmentation and local protectionism within China further complicates supply chain disruption risks.
Local administrative bodies and physical infrastructure built to protect local interests pose transportation challenges for raw material transportation as well as product delivery. In addition, profitability and volume could be negatively impacted
by limitations inherent within the supply chain, including competitive, governmental, legal, natural disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply
chain, manufacturing capability and distribution system that could adversely impact our ability to produce and deliver products.

We do not maintain a reserve for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims.

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. We have not established a reserve 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. However, if we were to experience a significant increase in
warranty claims, our financial results could be adversely affected.

Our rapid expansion could significantly strain our resources, management and operational infrastructure which could impair our ability to meet increased demand for our products and hurt our business results

To accommodate our anticipated growth, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system.
Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these
measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.

We must manage growth in operations to maximize our potential growth and achieve our expected revenues and any failure to manage growth will cause a disruption of our operations and impair our ability 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 manufacturing and production facilities and capabilities 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.

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 products and improve the quality of existing products. However, many obstacles to this expansion exist, including, but not limited to, increased competition from
similar businesses, our ability to improve our products and product mix to realize the benefits of our research and development efforts, international trade and tariff barriers, unexpected costs, costs associated with marketing efforts abroad and
maintaining attractive foreign exchange rates. 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.

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We also may not be able to retain 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.

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 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 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 rules and regulations, 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.

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial
reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a companys internal control over financial reporting. Separately, under SOX 404, as amended by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and
reporting on managements assessment of internal control over financial reporting.

Although we continue 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.

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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, performance, 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 expansion of our
products and services may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.

Our management is unfamiliar with United States securities laws and may have to expend time and resources becoming familiar with such laws which could lead to various regulatory issues.

We became a public company in December 2007 through the reverse acquisition with China Valves Samoa. Our management is not familiar with United States securities laws and will have to spend time and resources becoming familiar with such laws. This
could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations.

RISKS RELATED TO DOING BUSINESS IN CHINA

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in
China. The PRC economy differs from the economies of most developed countries in many respects, including:

- a higher level of government involvement;
- an early stage of development of the market-oriented sector of the economy;
- a rapid growth rate;
- a higher level of control over foreign exchange; and
- the control over the allocation of resources.

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Although these measures may
benefit the overall PRC economy, they may also have a negative effect on us.

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation
of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.

Any adverse change in economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our products and services and consequently
have a material adverse effect on our business and prospects.

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to
foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly
enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of
these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management
attention. In addition, all of our executive officers and all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States.

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As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.

Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant
differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations,
we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations.

Our failure to comply with the applicable laws and regulations in China could subject us to administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our products. It is possible that
changes to such laws or more rigorous enforcement of such laws or with respect to our current or past practices could have a material adverse effect on our business, operating results and financial condition. Further, additional environmental,
health or safety issues relating to matters that are not currently known to management may result in unanticipated liabilities and expenditures.

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

The PRC 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 the jurisdictions in which we operate 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. 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.

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

All our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the current account which includes dividends and trade and service-related foreign exchange transactions, but not under the
capital account which includes foreign direct investment and loans. Currently, our PRC operating subsidiary may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without
the approval of the State Administration of Foreign Exchange (SAFE) by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in
the future. Because a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside
China that are denominated in foreign currencies.

Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In
particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these
capital contributions must be approved by certain government authorities, including the Ministry of Commerce (MOFCOM) or their respective local counterparts. These limitations could affect our ability to obtain foreign exchange through
debt or equity financing.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our common stock will be indirectly 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. Because substantially all of our earnings
and cash assets are denominated in RMB and the net proceeds from our August 2008 private placement were, and the proceeds we receive from the exercise of warrants we have issued if and when those warrants are exercised for cash will be, denominated
in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect the relative purchasing power of these proceeds, our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Although we have no current
intention to pay any dividends in the foreseeable future, fluctuations in the exchange rate would also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the Peoples Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

---

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. Although we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert RMB into foreign currencies.

Currently, some of our raw materials and major equipment are imported. In the event that the U.S. dollar appreciates against the RMB, our costs will increase. If we cannot pass the resulting cost increases on to our customers, our profitability and
operating results will suffer. In addition, because our sales to international customers are growing rapidly, we are increasingly subject to the risk of foreign currency depreciation.

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

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8% . 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 and our company.

Restrictions under PRC law on our PRC subsidiaries ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay
dividends to our shareholders, and otherwise fund and conduct our businesses.

Substantially all of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments
of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to
allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can
only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends.

Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and
conduct our business.

Under the New EIT Law, China Valves Technology Inc. and its subsidiaries China Fluid Equipment and Henan Tonghai Fluid may be classified as a resident enterprise of China. Such a classification would likely result in unfavorable
tax consequences to us and our non-PRC stockholders.

China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with de facto management
bodies within China is considered a resident enterprise meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto
management as substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise. Because the New EIT Law and its implementing rules are new, no official
interpretation or application of this new resident enterprise classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

Our operating subsidiaries Kaifeng Valve, ZD Valve, Taizhou Taide Valve, Yangzhou Valve, Changsha Valve, and Shanghai Hanwei Valve are already designated as resident enterprises for PRC enterprise income tax purposes. However, if the PRC
tax authorities determine that China Valves Technology Inc. and its subsidiaries China Fluid Equipment and Henan Tonghai Fluid are also resident enterprises for PRC enterprise income tax purposes, a number of unfavorable PRC tax
consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest
on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as
tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new resident enterprise
classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively
monitoring the possibility of resident enterprise treatment for the 2008 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

---

If we were treated as a resident enterprise by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be credited against our U.S. tax.

If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency determines that CSRC approval is required in connection with the reverse acquisition, the reverse acquisition may be cancelled, or we may become subject
to penalties.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Rule) which became effective on September 8,
2006. The M&A Rule, among other things, requires that an offshore company controlled by PRC companies or individuals that have acquired a PRC domestic company for the purpose of listing the PRC domestic companys equity interest on an
overseas stock exchange must obtain the approval of the CSRC prior to the listing and trading of such offshore companys securities on an overseas stock exchange. On September 21, 2006, the CSRC, pursuant to the M&A Rule, published on its
official website procedures specifying documents and materials required to be submitted to it by offshore companies seeking CSRC approval of their overseas listings.

If the CSRC or another PRC governmental agency subsequently determines that we must obtain CSRC approval of the reverse acquisition, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory
agencies may impose fines and penalties on our operations in China and limit our operating privileges in China, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our shares.

The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the PRC Ministry of
Commerce be notified in advance of any change-of-control transaction and in some situations, require approval of the PRC Ministry of Commerce when a foreign investor takes control of a Chinese domestic enterprise. In the future, we may grow our
business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust review of any change-of-control transactions involving certain types
of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the PRC Ministry of Commerce, may delay or
inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

You may have difficulty enforcing judgments against us.

We are a Nevada holding company and most of our assets are located outside of the United States. All of our current operations are conducted in the PRC. In addition, all of our directors and officers are nationals and residents of countries other
than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be
difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority
of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in China may recognize and enforce foreign judgments in
accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide
for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if
they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest. Accordingly, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

RISKS RELATED TO THE MARKET FOR OUR STOCK

Although publicly traded, the trading market in our common stock has been substantially less liquid than the average trading market for a stock quoted on the Nasdaq Stock Market and this low trading volume may adversely affect the price of our
common stock.

Our common stock started trading on the Nasdaq Global Market under the symbol CVVT in November 2009. The trading volume of our common stock has been comparatively low to other companies listed on Nasdaq. Limited trading volume will
subject our shares of common stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that is attractive to you.

The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.

The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:

---

- our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
- changes in financial estimates by us or by any securities analysts who might cover our stock;
- speculation about our business in the press or the investment community;
- significant developments relating to our relationships with our customers or suppliers;
- stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the steel industries;
- customer demand for our products;
- investor perceptions of the steel industries in general and our company in particular;

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our managements attention and resources.
Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our common
stock and other interests in our company at a time when you want to sell your interest in us.

We do not intend to pay dividends for the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales
of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the
discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.

- the operating and stock performance of comparable companies;
- general economic conditions and trends;
- major catastrophic events;
- announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
- changes in accounting standards, policies, guidance, interpretation or principles;
- loss of external funding sources;
- sales of our common stock, including sales by our directors, officers or significant stockholders; and
- additions or departures of key personnel.

Item 2. PROPERTIES

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.

We did not previously own the building and land we operate on. Those buildings and the land use rights were owned by the Casting Company, one of our major suppliers and the land use rights and the buildings from which Kaifeng Valve operates were
leased from the Casting Company. The Casting Company is located on the same piece of land. As a condition precedent to the consummation of the Securities Purchase Agreement related to the private placement of our common stock, on August 26, 2008,
Kaifeng Valve and the Casting Company entered into an Agreement for the Transfer of Land Use Right and Housing Titles (the  Real Estate Transfer Agreement ) for the transfer of the land use rights for all the land and all
the buildings on the land to Kaifeng Valve (the  Real Estate ). As the transfer was expected to take up to ten months to complete with relevant Chinese government agencies, on August 26, 2008, Kaifeng Valve and the Casting
Company also entered into a Lease Agreement (the  Lease Agreement ) pursuant to which the Casting Company agreed to lease the Real Estate to Kaifeng Valve until the latter acquires title to the Real Estate. In addition,
Kaifeng Valve and the Casting Company entered into a Leaseback Agreement (the  Leaseback Agreement ) pursuant to which Kaifeng Valve agreed to lease back to the Casting Company the portion of the Real Estate and the
buildings used by the Casting Company, for a period of one year starting on the date of the acquisition of title to the Real Estate by Kaifeng Valve.

In connection with the Real Estate Transfer Agreement, on August 26, 2008, the Company entered into a Real Estate Share Escrow Agreement with the shareholder of the Casting Company, Mr. Bin Fang, Brean Murray, Carret & Co., LLC and Escrow, LLC
(the  Real Estate Escrow Agreement ), pursuant to which the Company issued and placed in escrow, for the benefit of Mr. Fang or his designee, 2,750,000 shares of the Companys common stock in exchange for Mr.
Fangs agreement to cause the Casting Company to transfer the Real Estate under the Real Estate Transfer Agreement. On March 6, 2009, the land use right for the Real Estate was transferred from the Casting Company to Kaifeng Valve and the
2,750,000 shares were released to Mr. Bin Fang.

All the onsite buildings and workplaces are utilized for manufacturing, R&D and administrative purposes. In addition, there is land available on for future expansion.

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|The following lease expenses were incurred
      in 2010 and 2009 with respect to the operating entities: |   |         |  |  
|--------------------------------------------------------------------------------------------------------- | - | ------- |  | -
|                                                                                                          |   |         |  |  
|Year Ended December 31, 2010                                                                              |   |         |  |  
|                                                                                                          |   | ZD      |  |  
|                                                                                                          |   | Valve   |  |  
|Usage                                                                                                     |   | US $    |  |  
|Office                                                                                                    | $ | 35,424  |  |  
|Production & Operation Facilities                                                                         |   | 309,960 |  |  
|Total Cost                                                                                                | $ | 345,384 |  |  
|                                                                                                          |   |         |  |  
|Year Ended December 31, 2009                                                                              |   |         |  |  
|                                                                                                          |   | ZD      |  |  
|                                                                                                          |   | Valve   |  |  
|Usage                                                                                                     |   | US $    |  |  
|Office                                                                                                    | $ | 35,186  |  | $
|Production & Operation
      Facilities                                                                   |   | 307,881 |  |  
|Total Cost                                                                                                | $ | 343,067 |  | $
|Item 3. LEGAL PROCEEDINGS                                                                                 |   |         |  |  

On February 4, 2011, a plaintiff filed a purported class action
naming the Company, its Chairman and certain present and former senior
executives as defendants, asserting claims for certain violations of the
securities laws and seeking unspecified damages. The complaint, which is styled
Donald Foster, et al. v. China Valves Technology, Inc., et al., is
currently pending in the U.S. District Court for the Southern District of New
York. Substantially identical complaints, styled Donald London, et. al. v.
China Valves Technology, Inc., et. al., and Elliott Greenberg, et. al. v.
China Valves Technology, Inc. et al., were filed in the same court on
February 17, 2011 and March 8, 2011, respectively. The complaints purport to
assert claims on behalf of a purported class of persons and entities who
purchased shares of the Companys common stock at allegedly artificially high
prices during the period between January 12, 2010 and January 13, 2011 and who
suffered damages as a result of such purchases. The allegations in the
complaints relate to the Companys acquisitions of Changsha Valve and Hanwei
Valve and include allegations regarding the Companys financial statements and
press releases. The complaints allege, among other things, that the Companys
statements about the nature and quality of the Companys acquisition of Changsha
Valve were materially false and misleading and that the Companys statements
failed to describe the role in the transaction of an alleged related party. In
addition, the complaints allege that the Companys statements about the Hanwei
Valve acquisition were materially false and misleading because they failed to
disclose the alleged involvement of certain related parties and allegedly
misdescribed the transaction as a purchase of assets rather than as a purchase
of an entity. The Company has not yet responded to any complaint, but intends to
contest the allegations and to defend itself vigorously.

Item 4. (Removed and reserved).

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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 Nasdaq Global Market under the symbol "CVVT". On July 24,
2009, the Company amended its articles of incorporation with the State of Nevada
to effect a one-for-two reverse stock split (the Reverse Split). The Reverse
Split affects all issued and outstanding shares of the Company's common stock
immediately prior to the effectiveness of the Reverse Split with any fractional
shares rounded up to the next highest whole share. The Reverse Split took effect
on August 13, 2009.

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

|                                    |   | Closing Prices | 
|----------------------------------- | - | -------------- | 
|                                    |   | High           | 
|Year Ending December 31, 2010       |   |                | 
|4th Quarter                         | $ | 12.64          | 
|3rd Quarter                         | $ | 11.45          | 
|2nd Quarter                         | $ | 13.75          | 
|1st Quarter                         | $ | 14.85          | 
|                                    |   | Closing Prices | 
|                                    |   | High           | 
|Year Ending December 31,
      2009 |   |                | 
|4th Quarter                         | $ | 9.96           | 
|3rd Quarter                         | $ | 9.25           | 
|2nd Quarter                         | $ | 3.10           | 
|1st Quarter                         | $ | 5.00           | 

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 March 11, 2011, there were 85 stockholders of record of our
common stock.

Dividend Policy

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.

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 Annual 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 Annual Report.

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Our Business

Through our subsidiaries and commercial and contractual relationships and arrangements with other Chinese companies, we operate companies in China that develop, manufacture and distribute high quality metal valves for a variety of different
industries. We are located in Kaifeng, Henan Province and do business throughout China, Southeast Asia, the Middle-East and Europe. We produce over 800 models of valves and service numerous industries, including the thermal power, water supply,
municipal construction, sewage disposal, oil and chemical, metallurgy, heat power, and nuclear power industries. We are the leader in valve sales for the thermal power, water supply industries, oil and chemical, and valve lock in China.

Principal Factors Affecting our Financial Performance  
We believe that the following factors affect our financial performance:

- Growth of Chinas Urbanization and Industrialization

The annual growth rate of the valve production industry in China is expected to be 20% for the next few 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 Valves and similarly situated companies. For example, in June 2007, the State
Department of China issued a new policy called Expedite the development of Chinas equipment manufacturing industry. In this policy, the Chinese government committed to 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. In addition, the stimulus package offered by the Chinese government will provide market opportunities for us. As
long as China continues to promote economic growth and allow manufacturing companies to grow and expand their operations, China Valves expects its operations will be positively affected by PRC regulations.

Recent Development

Registered Direct

On January 5, 2011, we conducted a registered direct offering of an aggregate of 1,000,000 shares of our common stock at a price of $10.00 per share for gross proceeds of approximately $10 million, to several accredited institutional
investors. In addition, we issued to the investors warrants to purchase 250,000 shares of common stock, in the aggregate, at a price of $10.00 per share, exercisable for 180 days beginning on the date of the initial issuance of the warrants. The
proceeds of the financing have or will be used for working capital.

Taxation

United States

We are subject to United States tax at a tax rate of 34%. No provision for US federal income taxes has been made as we had no taxable income in the United States for 2009 and 2010.

Hong Kong

Our subsidiaries, China Fluid and Hong Kong Hanxi are incorporated in Hong Kong. The subsidiaries did not earn any income that was derived in Hong Kong for the years ended December 31, 2010 and 2009 and therefore was not subject to Hong Kong Profit
Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

PRC

We conduct all our operating business through its operating subsidiaries in China. The operating subsidiaries are governed by the income tax laws of the PRC, the Company does not have any deferred tax assets or deferred tax liabilities because there
are no temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities.

---

Substantially all of our income may be derived from dividends
we receive from our PRC operating subsidiaries described above. The New EIT Law
and its implementing rules generally provide that a 10% withholding tax applies
to China-sourced income derived by non-resident enterprises for PRC enterprise
income tax purposes. We expect that such 10% withholding tax will apply to
dividends paid to us by our PRC subsidiaries but this treatment will depend on
our status as a non-resident enterprise. For detailed discussion of PRC tax
issues related to resident enterprise status, see Risk Factors  Risks
Associated with Doing Business in China. Under the New EIT Law, China Valves
Technology Inc. and its subsidiaries China Fluid Equipment and Henan Tonghai
Fluid may be classified as a resident enterprise of China. Such a
classification would likely result in unfavorable tax consequences to us and our
non-PRC stockholders.

Our Operating Subsidiaries are classified as resident
enterprises under the EIT law. Beginning in January 2008, both Kaifeng Valve and
ZD Valve became subject to an income tax at an effective rate of 25% under the
EIT law. The new acquired operating company, Taide Valve, and Yangzhou Valve is
also subject to an income tax rate of 25%. Changsha Valve is subject to an
income tax at a reduced rate of 12.5% in 2010, which is the last year of tax
benefit period before subjecting to a full 25% tax rate. Hanwei Valve as a high
technology enterprise is subject to an income tax at rate of 15% until 2011. The
local tax authorities will do a special taxation review regarding its
development of high technology at the end of 2011. If the review is positive,
Hanwei Valve will be subject to 15% of income tax rate for another three years
until another three-year taxation review in 2014. We incurred income taxes of
$14.5 million for the year ended December 31, 2010, an increase of $5.9 million
or 68.9% from the taxes we incurred in the same 2009 period.

Penalties and interest incurred related to underpayment of
income tax are classified as income tax expense in the year incurred. No
significant penalties or interest relating to income taxes have been incurred
during the years ended December 31, 2010 and 2009.

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, |  
|---------------------------------------------------- | - | ----------------------------- | -
|                                                     |   | 2010                          |  
|Sales revenue                                        | $ | 183,696,126                   |  
|Cost of sales                                        |   | (103,276,910                  | )
|Gross profit                                         |   | 80,419,216                    |  
|Expenses                                             |   |                               |  
|General &
      administrative expenses              |   | (15,563,906                   | )
|Research and development costs                       |   | (228,858                      | )
|Selling expenses                                     |   | (10,414,293                   | )
|Non-cash stock compensation Expense                  |   | (56,019                       | )
|Total operating expenses                             |   | (26,263,076                   | )
|Income from operations                               |   | 54,156,140                    |  
|Change in fair value of
      derivative instruments |   | (785,350                      | )
|Gain from acquisition                                |   | 3,714,840                     |  
|Other income, net                                    |   | 669,462                       |  
|Interest and finance expense, net                    |   | (100,997                      | )
|Total other income /(expense) , net                  |   | 3,497,955                     |  
|Income before income taxes                           |   | 57,654,095                    |  
|Income taxes                                         |   | (14,456,566                   | )
|Net income                                           | $ | 43,197,529                    |  
|Foreign currency
      translation gain/(loss)       |   | 6,078,504                     |  
|Comprehensive Income                                 | $ | 49,276,033                    |  
|As a Percentage of Sales
      Revenue               |   |                               |  
|Sales revenue                                        |   | 100.0%                        |  
|Cost of sales                                        |   | 56.2%                         |  
|Gross profit                                         |   | 43.8%                         |  
|Expenses                                             |   |                               |  
|General &
      administrative expenses              |   | 8.5%                          |  
|Research
      and development costs                 |   | 0.1%                          |  
|Selling expenses                                     |   | 5.7%                          |  
|Non-Cash
      Stock Compensation Expense            |   | 0%                            |  
|Total operating expenses                             |   | 14.3%                         |  
|Income before income taxes                           |   | 31.4%                         |  
|Income taxes                                         |   | 7.9%                          |  
|Net income                                           |   | 23.5%                         |  

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|The following tables set
      forth our sales by valve types, in terms of sales revenues for the periods
      indicated. |   |                               |  |  
|-------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------- |  | -
|                                                                                                                           |   | Year
      Ended December 31, | 
|                                                                                                                           |   | 2010                          |  |  
|Sales revenue                                                                                                              |   | (in
      thousands)          | 
|Gate valves                                                                                                                | $ | 32,771                        |  | $
|Check valves                                                                                                               |   | 9,778                         |  |  
|Globe valves                                                                                                               |   | 8,037                         |  |  
|Safety valves                                                                                                              |   | 2,307                         |  |  
|Butterfly valves                                                                                                           |   | 77,213                        |  |  
|Ball valves                                                                                                                |   | 30,477                        |  |  
|Vent valves                                                                                                                |   | 487                           |  |  
|Other                                                                                                                      |   | 22,626                        |  |  
|Total sales revenue                                                                                                        | $ | 183,696                       |  | $

The China Valve Industry Association divides the valve market
into five primary segments: (i) power; (ii) petrochemical and oil; (iii) water
supply; (iv) metallurgy; and (v) other areas. Our revenues in these markets are
as follows:

|                      |   | Year Ended December
      31, | 
|--------------------- | - | ----------------------------- | 
|                      |   | 2010                          | 
|                      |   | (in thousands)                | 
|Power Supply          | $ | 51,964                        | 
|Petrochemical and Oil |   | 55,635                        | 
|Water Supply          |   | 43,626                        | 
|Metallurgy            |   | 8,998                         | 
|Other                 |   | 23,473                        | 
|Total sales revenue   | $ | 183,696                       | 

Year Ended December 31, 2010 Compared with Year Ended
December 31, 2009

Sales Revenue. Sales revenue increased $88.3
million, or 92.6%, to $183.7 million in 2010 from $95.4 million in 2009. The
majority of this increase resulted from recently acquired subsidiaries, Yangzhou
Valve, Changsha Valve and Hanwei Valve, which contributed $68.4 million to our
sales revenue. Adjusting for the effect of changes in exchange rates, our sales
revenue increased by 91.3% . The increase was also attributable to increased
demand for our products fueled by rapid industrialization and governmental
capital expenditure on Chinas infrastructure. In addition, our innovations on
high temperature high pressure power station gate valves and two-way metal
sealing butterfly valves, which are popular among our customers, also
contributed to sales volume increases as compared to sales in the same period
last year. We also made efforts to expand sales in the petrochemical, oil and
nuclear areas, while strengthening the current thermal power and hydro-power
market for our products. Our success in adding new types of valves, such as
large diameter high pressure valves used in power stations, valves for nuclear
power plants, and other large governmental water-pipe projects requiring
supplies of 3.5 meter and up diameter valves also helped fuel demand for our
products and contributed to the sales increase. Our sales from organic growth
accounted for 22.6% of total sales growth while sales from our newly acquired
companies accounted for 77.4% of total sales growth.

In 2010, revenues from butterfly valves, gate valves and ball
valves constituted 76.5% of our total revenues for the period.

Revenue from butterfly valves for 2010 amounted to $77.2
million which is $40.2 million or 108.7% more than revenue for the same period
ended on December 31, 2009. This increase is mainly attributable to the newly
acquired subsidiary Changsha Valve whose key product is butterfly valve. It is
also due to the fact that we are the sole manufacturer and distributor for the
integrated two-way metal sealed butterfly valves used to control municipal water
and sewage flow. These new generation butterfly valves have achieved around 90%
market share in the largest ten cities in China.

---

Revenue from gate valves for 2010 amounted to $32.8 million which is $6.2 million or 23.4% more than that of 2009. These increases were attributable to the large increase in power station construction projects in China. By the end of 2007,
the Company had developed the capability to manufacture high quality technology intensive forged steel valves for use in ultra supercritical thermal power generators in 1,000MW power stations. The Company is the sole designer and manufacturer in
China for this type of valve, which can replace the imported valves used in the thermal power industry. The newly developed, high-margin valves perform as well as the similar advanced overseas products and resulted in a large amount of orders in
2010. The other factor in the sales increase in 2010 was the continued extensive use of gate valves in the petro-chemical and nuclear power industries.

Revenue from ball valves for 2010 amounted to $30.5 million, which is $24.5 million or 411.4% more than that for 2009. This increase was attributable to the recently acquired subsidiary Hanwei Valve.

Cost of Sales. Our cost of sales is primarily comprised of the costs of our raw materials such as steel castings, components, labor and overhead. Our cost of sales increased $54.8 million, or 112.8% to $103.3 million in
2010 from $48.5 million in 2009. The cost of sales, as a percentage of sales revenue, increased from 50.9% in 2009 to 56.2% in 2010. The increase was in line with the increase in sales revenues and was also attributable to from higher labor and
management costs of those newly acquired entities. The increase in cost of raw materials also contributed to an increase in cost of sales.

Gross Profit. Our gross profit is equal to the difference between our sales revenue and our cost of sales. Our gross profit increased $33.6 million, or 71.7% to $80.4 million in 2010 from $46.8 million in 2009. Gross profit
as a percentage of net sales revenue decreased to 43.8% from 49.1% for the same period in 2009. The decrease in gross profit percentage was because the three recently acquired subsidiaries had lower overall gross profit percentage as the products
sold by these subsidiaries during the period, such as gate valves and ball valves, had lower gross profit than that of the butterfly valves and high pressure valves sold by ZD Valve and Kaifeng Valve. In addition, the higher labor and management
costs of the new subsidiaries resulted in higher fixed costs per unit and lower overall gross profit percentage. Furthermore, in 2010 the Company sold more medium to low pressure valves, which generally have lower selling prices, which also
contributed to the decrease in gross profit percentage. The Company is currently standardizing production methodology and techniques at the new subsidiaries in order to optimize the new subsidiaries production capacity.

General and Administrative Expenses. Our general and administrative expenses, which consist primarily of related salaries and benefits, business development, travelling expenses, and legal and professional expenses, were
$15.6 million for 2010, compared with $7.3 million for 2009, an increase of $8.3 million or approximately 112.8% .The increase is primarily due to increase in salary expense for the newly acquired subsidiaries, as well as the hire of
more educated entry-level administrative and technologic personnel. Professional fees, travel expense and meal and entertainment expenses also increased due to various business acquisition activities. Depreciation expense increased as result of
increased fixed asset purchases. General and administrative expenses as percentage of total revenue is 8.5% in 2010 as compared to 7.7% in 2009. The increase is primarily due to the increased expenses added by the recently acquired subsidiaries.

Selling Expenses. Selling expenses, which consist primarily of sales commission, advertising and promotion expenses, sales tax, freight charges and related compensation, were $10.4 million for 2010, compared with $6.3
million for 2009, an increase of $4.1 million or 64.8%, which was in line with the sales revenue increase. However, the implementation of the strengthened cost control policy and the setup of Headquarter of Sales and Marketing in Shanghai
resulted in significantly improved marketing activities and brought in more large sales contracts with relatively lower sales and marketing expenses in 2010. The percentage of sales and marketing expenses as percentage of sales was 5.7%, compared to
6.6% in 2009.

Total Operating Expenses. Our total operating expenses increased $12.5 million, or 90.6%, to $26.3 million in 2010 from $13.8 million in 2009, which was in line with the sales revenue increase and mainly attributable
to newly acquired subsidiaries.

Income Before Income Taxes. Income before income taxes increased $25.7 million, or 80.7%, to $57.6 million in 2010 from $31.9 million in 2009. Income before income taxes as a percentage of revenue decreased to 31.4%
in 2010 from 33.5% in 2009.

Net Income. Net income increased $19.8. million, or 85.0%, to $43.2 million in 2010 from $23.4 million in 2009 as result of 92.6% increase in sales revenue and a lower effective income tax rate in 2010.

Foreign Currency Translation Gains

We had a foreign currency translation gain of $6.1 million in 2010 as compared with a $0.007 million currency translation loss in 2009. In July 2005, China reformed its foreign currency exchange policy and allowed the Renminbi to fluctuate
as much as 0.3 percent per day against the U.S. dollar. We use period-end exchange rates in translating our assets and liabilities denominated in Renminbi into U.S. dollars and average exchange rates for the period to translate our income and
expenses. At December 31, 2010, the period end exchange rate was RMB1 to US$0.1517 and the average exchange rate for 2010 was RMB1 to US$0.14760. At December 31, 2009, the period end exchange rate was RMB1 to US$0.1467 and the average
exchange rate for 2009 was RMB1 to US$0.14661. RMB appreciated approximately 3.4% in 2010 in terms of the period-end exchange rate of 2010 compared with that of 2009.

---

Our sales revenue increased by RMB 594.1 million or 91.3%
compared with the same period in 2009 and our operating expenses increased by RMB 86.0 million or 91.4% compared with the same period in 2009. As the Renminbi
appreciated against the U.S. dollar during the period, our reported sales
revenues and operating expenses were affected, increasing 92.6% and 90.6%,
respectively, in U.S. dollar terms, as follows:

|                               |  | Year Ended December 31, |  |  |              |  |  |         |  |  |      |  |  |              | 
|------------------------------ |  | ----------------------- |  |  | ------------ |  |  | ------- |  |  | ---- |  |  | ------------ | 
|(in million)                   |  |                         |  |  | 2010         |  |  |         |  |  |      |  |  | 2009         | 
|                               |  | US$                     |  |  | Average Rate |  |  | RMB     |  |  | US$  |  |  | Average Rate | 
|Revenue                        |  | 183.7                   |  |  | 0.14760      |  |  | 1,244.6 |  |  | 95.4 |  |  | 0.14661      | 
|Total
      operating expenses |  | 26.3                    |  |  | 0.14760      |  |  | 178.2   |  |  | 13.8 |  |  | 0.14661      | 

Allowance for Doubtful Debts

Our trade receivables net of allowance for doubtful accounts
were $84.1 million as of December 31, 2010, an increase of $51.8 million, or
160.2%, from $32.3 million as of December 31, 2009. Our allowance for doubtful
accounts totaled $998,739 as of December 31, 2010, compared with $908,338 at
December 31, 2009.

The increase in our trade receivables was mainly due to
recently acquired subsidiaries. Generally we consider a trade receivable as a
doubtful account if it remains uncollected for more than one year from the due
date or as specific events occurred to our customers which may require us to
reserve allowance even if trade balance is below 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 we have improved our account receivables collections. 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.

Liquidity and Capital Resources

As of December 31, 2010, we had cash and cash equivalents of
$25.8 million and restricted cash of $1.2 million. The following table provides
summarized information about our net cash flow for 2010 and 2009.

|                                                                          |   | Years Ended                  |  
|------------------------------------------------------------------------- | - | ---------------------------- | -
|                                                                          |   | December 31,                 |  
|                                                                          |   | 2010                         |  
|                                                                          |   | (dollars in
      thousands) |  
|Net cash provided (used in) by
      operating activities                 | $ | 17,193                       |  
|Net cash used in investing activities                                     |   | (30,599                      | )
|Net cash provided (used in) by
      financing activities                 |   | 24,219                       |  
|Effect of foreign currency translation on cash and
      cash equivalents |   | 523                          |  
|Net (decrease) increase in cash and
      cash equivalents                |   | 11,336                       |  
|Cash and cash equivalents, beginning of year                              |   | 14,485                       |  
|Cash and cash equivalents, end of
      year                              | $ | 25,821                       |  

Operating Activities

In the fiscal year ended December 31, 2010, our net cash flow
provided by operating activities was $17.2 million, a decrease of $7.9 million
from the net cash flow provided by operating activities of $25.1 million for the
same period in 2009. This is attributed to an increase of accounts receivables
of $49.6 million which offsets a strong increase of net profit of $19.8 million
compared with 2009.

Investing Activities

Our main uses of cash for investing activities are for
acquisitions of other companies, which the three acquisitions were closed with
cash paid by $25.6 million in 2010. Also we spend another $4.3 million on the
acquisition of plant and equipment as well as on building improvements. Net cash
used in investing activities in 2010 was $30.6 million, as compared with $25.7
million in 2009.

Financing Activities

Net cash provided by financing activities in 2010 totaled $24.2
million. On January 5, 2010, we completed a registered direct offering of our
common shares to certain accredited investors resulting in $23.9 million in net
proceeds.

Our debt to equity ratio was 0.26 as of December 31, 2010 as
compared to 0.24 as of December 31, 2009. We believe we have greatly improved
our companys position by decreasing our borrowings. We plan to maintain our
debt to equity ratio at the ratio as of December 31, 2010.

---

As of December 31, 2010, the maturities for our bank loans are
all below one year.

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.

Capital Expenditures

Our capital expenditures in 2010 and 2009 are set forth below.
Our capital expenditures were used primarily for plant construction and
purchases of equipment to expand our production capacity.

|                                              |   | Years Ended December
      31, | 
|--------------------------------------------- | - | ------------------------------ | 
|                                              |   | 2010                           | 
|                                              |   | (in thousands)                 | 
|Construction costs                            | $ | 590                            | 
|Purchase of equipment                         | $ | 3,710                          | 
|Advance on equipment &
      construction fee | $ | 125                            | 
|Total capital expenditure                     | $ | 4,425                          | 

Our depreciation and amortization expense for the years ended
December 31, 2010 and 2009, and the income statement line items in which it is
included, was as follows:

|                                                  |   | Years Ended December
      31, | 
|------------------------------------------------- | - | ------------------------------ | 
|                                                  |   | 2010                           | 
|                                                  |   | (in thousands)                 | 
|Cost of goods sold                                | $ | 1,928                          | 
|General and administrative expenses               | $ | 2,942                          | 
|Total depreciation and amortization
      expense | $ | 4,870                          | 

Obligations under Material Contracts

We did not have any long-term debt obligations, capital
commitments, purchase obligations or other long-term liabilities as of December
31, 2010.

Business Combinations

On January 13, 2010, the Company acquired the assets of
Yangzhou Rock Valve Lock Technology Co., Ltd. for a total cash consideration of
$7.2 million. Yangzhou Valve designs, manufactures and distributes interlock
valves, valve block devices, magnetic valves, and mechanical interlocking
machines.

In February 2010, the Company acquired all the equity interests
in Able Delight (Changsha) Valve Co, Ltd., formerly an indirect subsidiary of
Watts Water Technologies, Inc. (Watts), for a purchase price of $12.12 million
plus certain assumed obligations and acquisition expenses of $2.81 million, or
an aggregate expenditure of approximately $15 million. Changsha Valve was purchased from Able
Delight Investment, Ltd., which had acquired Changsha Valve from Watts in
January 2010 with $6.07 million from funds loaned to it by the Company. The
Company directly paid the balance of $8.93 million to other parties as disclosed
in 8ka released on November 18, 2010. Able Delight Investment, Ltd. had been
formed in November 2009 by Qing Lu, the wife of Bin Li, a 34% stockholder of the
Company, in order to facilitate the Companys purchase of Changsha Valve. The
Companys purchase price included the discharge of the loan, payments to certain
of Watts subsidiaries, and certain other financial obligations of Changsha
Valve. Changsha Valve is a manufacturer of butterfly and other valves used by
hydro, thermal and nuclear power plants and in water and sewage treatment
applications.

On April 8, 2010, the Company acquired from certain
unaffiliated individuals the two entities that were owners of the joint venture
that in turn owned Shanghai Pudong Hanwei Valve Co., Ltd. (Hanwei Valve),
together with certain intangible assets used in the operation of Hanwei Valve,
for an aggregate of $19.5 million. Hanwei Valve is a manufacturer of various
valve products and the sole producer in China of the fully-welded ball valve
used in long distance gas pipelines and the 24-way rotary valve used in the
petrochemical industry.

The acquisitions of Yangzhou Valve, Changsha Valve and Hanwei
Valve contributed, in the aggregate, $68.4 million to the Companys 2010 sales
revenues, representing 37.2% of such revenues, and contributed significantly to
the Companys 85.0% increase in net income for 2010.

---

Critical Accounting Policies

Our consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our
contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and
assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from
other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their
application.

When reviewing our financial statements, the following should also be considered: (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of
reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.

Revenue Recognition

The Companys revenue recognition policies are in accordance with U.S. generally accepted accounting principles regarding revenue recognition. 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 delivery for
domestic sales when risk of loss and title passes to the customer. For international sales, the revenue recognition criteria are generally satisfied under Free on Board (FOB) terms, in which the Companys responsibility ends once
the goods clear the port of shipment.

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.

The Company allows its customers to retain 5% to 10% of the contract prices as retainage during the warranty period, usually 12 or 24 months, to guarantee product quality. Historically, the Company has experienced insignificant warranty claims
resulting in the Company having to repair or exchange a defective product. Due to the infrequency and insignificant amount of warranty claims, the ability to collect retainage is reasonably assured and is recognized at the time of shipment.

The Company also provides services to some of its sales agents and distributors. The Company recognizes revenue on these services once a contract is signed and the services have been rendered.

Foreign Currency Translation and Other Comprehensive Income

The reporting currency of the Company is the US dollar. The functional currency of our Chinese operating entities Kaifeng Valve, ZD Valve, Taizhou Taide Valve, Yangzhou Valve, Changsha Valve and Hanwei Valve is the 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; shareholders equity is translated at the historical rates and
items in the income and cash flow statements 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 $12,230,406 and $ 6,151,902 as of December 31, 2010 and 2009, respectively. The balance sheet amounts with the exception of equity
at December 31, 2010 and 2009 were translated at 6.59 RMB and 6.82 RMB to $1.00 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the year ended December 31, 2010 and 2009 were 6.78 RMB and
6.82 RMB to $1.00, respectively.

Income Taxes

The Company applies the accounting standard regarding accounting for income taxes and the accounting standard regarding accounting for uncertainty in income taxes for income taxes. This accounting standard requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred
taxes. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred
taxes are 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 probable that taxable profit will be available against which deductible temporary differences can be utilized.

---

Under the accounting standard regarding, accounting for uncertainty in income taxes, 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. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended
December 31, 2010 and 2009. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Warranties

We typically warranty all of our products. It is the Companys policy to replace parts if they become defective within one year after deployment at no additional charge. Historically, failure of product parts due to materials or workmanship is
rare. Therefore, at December 31, 2010 and December 31, 2009, the Company made no provision for warranty claims for our products. Management continuously evaluates the potential warranty obligation. Management will record the expenses related to the
warranty obligation if the estimated amount becomes material at the time revenue is recorded.

Concentration 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.

Certain financial instruments may subject the Company to concentration of credit risk. The Company maintains bank deposits within state-owned banks within the PRC, Hong Kong and United States. Balances at financial institutions of state owned banks
within the PRC are not covered by insurance. As of December 31, 2010 and 2009, the Companys cash and restricted cash balances, totaling $26,596,872 and $14,505,745, respectively at those dates, were not covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Five suppliers represented approximately 24% and 17% of the Companys total purchases for the years ended December 31, 2010 and 2009, respectively. Five customers accounted for 9% and 11% of total sales as of December 31, 2010 and 2009
respectively.

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.

Fair Value of Financial Instruments

The Company adopted SFAS No. 157, Fair Value Measurements on January 1, 2008. SFAS No. 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements
for fair value measures. The carrying amounts reported in the balance sheets for receivables and payables qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of interest. The three levels are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the
financial instruments.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

The Company analyzes all financial instruments with features of both liabilities and equity under the accounting standards regarding accounting for certain financial instruments with characteristics of both liabilities and equity, accounting for
derivative instruments and hedging activities, accounting for derivative financial instruments indexed to, and potentially settled in, a companys own stock, and the accounting
standard regarding determining whether an instrument (or embedded feature) is indexed to an entitys own stock. The accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed
to the Companys own stock and (b) classified in stockholders equity in the statement of financial position would not be considered a derivative financial instrument. This standard provides a two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuers own stock and thus able to qualify for this accounting standard scope exception. All warrants issued by the Company are denominated in USD; because the
Companys functional currency is the RMB, the Company accounts for these warrants as derivative instrument liabilities and marks them to market each period. Because there is no quoted or observable market price for the warrants, the Company
used level 3 inputs for its valuation methodology.

---

The Company invested in China Perfect Machinery Industry Co., Ltd. in 1996 and Kaifang Commercial Bank in 1997. These long term investments are carried at the lower of cost or market value and amounted to $790,572 and $764,515 as of December
31, 2010 and December 31, 2009, respectively. There is no quoted or observable market price for these investments; therefore, the Company used level 3 inputs for its valuation methodology.  Based on its proportionate share of the underlying book
value of the investees, the Company believes the fair value of the investments is at least equal to the original cost. The determination of the fair value was based on the capital investment that the Company contributed.  There has been no change in
the carrying value since inception, other than the effects of translating the balances to US dollars.

Long-lived Assets

Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether their carrying value has
become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives. For the year-ended December 31, 2010, the Company impaired long lived assets in the amount of $1,341,962, which were included in cost of goods sold.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is instead tested for impairment. Goodwill is reviewed for impairment annually in accordance with generally
accepted accounting principles in the United States of America.The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair
value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is
recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying value, step two does not need to be performed. The Company performs its annual impairment review of goodwill every year at December 31 and when a triggering event occurs between annual impairment
tests. No impairment loss was recorded for the year ended December 31, 2010.

Stock Based Compensation

The Company applies Statement of Financial Accounting Standards on Accounting for Stock-Based Compensation, which defines a fair-value-based method of accounting for stock based employee compensation and transactions in which an entity
issues its equity instruments to acquire goods and services from non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with the standard and the "Accounting for Equity Instruments that are issued to
Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services" standard, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. The standard allows
the simplified method to determine the term of employee options when other information is not available.

Recently issued accounting pronouncements

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling
financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account
for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about
the deconsolidation of a subsidiary or de-recognition of a group of assets.  This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect the adoption of this
ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02  Accounting and Reporting for Decreases in Ownership of a Subsidiary  a Scope Clarification. The amendments in this
Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets
that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51. If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an
entity adopted SFAS No. 160. The Company adopted this standard and the adoption of this standard did not have material effect on the Companys consolidated financial statements.

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In January 2010, FASB issued ASU No. 2010-06  Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net
number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and
valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value
measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company
is currently evaluating the impact of this ASU. However, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for
listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has
been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010.

In April 2010, the FASB issued Accounting Standards Update 2010-13, CompensationStock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades, or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of
the entitys equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as
equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The Company does not expect the adoption of ASU 2010-17 to have a significant impact on
its consolidated financial statements.

In April 2010, the FASB issued Accounting Standard Update 2010-17, Revenue RecognitionMilestone Method (Topic 605): Milestone Method of Revenue Recognition orASU 2010-17.This Update provides guidance on the
recognition of revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in
the period the milestone is achieved. The pronouncement is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 does not
have any significant impacts on the consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This update amends codification topic 310 on receivables to improve the disclosures that an
entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and
provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new
disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20, which was issued in January 2011.

In December 2010, the FASB issued Accounting Standards Update 2010-28 which amend Intangibles- Goodwill and Other (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors
indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances
changes that would more likely than not reduce the faire value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December 15, 2010. Early adoption is not
permitted. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.

In December 2010, the FASB issued Accounting Standards Update 2010-29 which address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for
business combinations (Topic 805). This ASU specifies that if a public entity
presents comparative financial statements, the entity should disclose revenue
and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. This ASU also expands the
supplemental pro forma disclosures under Topic 805 to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. ASU 2010-29 is effective prospectively for 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, 2010. Early
adoption is permitted. The Company is currently evaluating the impact of this
ASU and expected the adoption of this ASU will have an impact on its future
business combinations.

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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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK

Not required.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL
DATA

The full text of our audited consolidated financial statements
as of December 31, 2010 and 2009 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

DISCLOSURES.

We were notified that, effective January 1, 2010, certain
partners of MSWFT and Frost, PLLC (Frost) formed Frazer Frost, LLP (Frazer
Frost), a new partnership. Pursuant to the terms of a combination agreement by
and among MSWFT, Frazer Frost and Frost (the Combination Agreement), MSWFT and
Frost each contributed substantially all of their assets and certain of their
liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFTs
engagement letter with us and becoming our new independent accounting firm.
Frazer Frost is registered with the Public Company Accounting and Oversight
Board (PCAOB).

Item 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and
Procedures

Our management, with the participation of our chief executive
officer and chief financial officer, Mr. Jianbao Wang and Mr. Gang Wei,
respectively, evaluated the effectiveness of our disclosure controls and
procedures. The term disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, such as this report, that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, Mr. Wang and Mr. Wei 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,
2010, to satisfy the objectives for which they are intended.

(b) Managements annual report on internal control over
financial reporting

Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our chief executive officer and chief financial officer, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with
U.S. GAAP, and includes those policies and procedures that:

---

- pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of
our management and directors; and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2010, our management identified material weakness related to the following:

Control Environment-The Companys control environment did not sufficiently promote effective internal control over financial reporting. Specifically, the Company did not conduct a comprehensive risk assessment during the
year with all of its major transactions. In addition, the lack of oversight from top management also results in incomplete disclosure on its acquisitions.

Accounting and Finance Personnel Weaknesses  US GAAP expertise. Our current accounting staff is relatively new and inexperienced, and needs substantial training to meet 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 ineffective top level review and analysis of year-end evaluation of the Companys inventory and AR allowance.

As disclosed in our Management's Annual Report on Internal Control over Financial Reporting filed with the 2009 Form 10-K, the Company's management has identified the steps necessary to address the material weaknesses described above and in 2010, we
continued to implement these remedial procedures.

1. Hire, as needed, additional US GAAP experienced accounting and operations personnel and outside contractors with technical accounting expertise and reorganized 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. Involve, as needed, both internal accounting and operations personnel and outside contractors with technical accounting expertise early in the evaluation of our complex, non-routine transaction to obtain additional guidance as to the application
of generally accepted accounting principles to such a proposed transaction.

3. Require that our senior accounting personnel and the principal accounting officer review our complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions. We will also consult experts in the event that
transaction is beyond our comprehension.

4. We are currently documenting and implementing internal control over financial reporting, however, as of December 31, 2010, we did not have sufficient time to remediate all deficiencies identified in order to render current years internal
control over financial reporting effective. We will continue monitor and improve controls over financial reporting in the coming year.

Our management is not aware that the material weakness in our internal control over financial reporting causes them to believe that any material inaccuracies or errors existed in our financial statement as of December 31, 2010. 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.

Management remains committed to improving its internal controls and will continue to work to put effective controls in place. The Company is actively recruiting staff with good knowledge of U.S. GAAP to assist in the Companys financial
reporting.

The Companys independent public accounting firm has audited and issued a report
on the Companys internal control over financial reporting which is included in this Annual Report on Form 10-K and incorporated by reference
herein.

(c) Changes in internal control over financial reporting

Except as described above, there were no changes in our internal controls over financial reporting during our fiscal year ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of China Valves
Technologies, Inc

We have audited China Valves Technologies, Inc.s and
Subsidiaries (the Companys) internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, 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 or procedures may deteriorate.

A material weakness is a control deficiency, or combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Companys annual or
interim financial statements will not be prevented or detected on a timely
basis. The following material weakness has been identified and included in
managements assessment.

Control Environment -The Companys control
environment did not sufficiently promote effective internal control over
financial reporting. Specifically, the Company did not conduct a comprehensive
risk assessment during the year with all of its major transactions. In addition,
the lack of oversight from top management also result in incomplete disclosure
on its acquisitions. These control deficiencies by themselves do not directly
result in a material misstatement to the financial statements; however,
deficiencies in the control environment are pervasive in nature.

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Accounting and Finance Personnel Weaknesses
 US GAAP expertise. The Companys current accounting staff is relatively
new and inexperienced, and needs substantial training to meet 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 ineffective top level review and
analysis of year-end evaluation of the Companys inventory and AR allowance This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2010 financial statements, and this
report does not affect our report dated March 16, 2011 on those financial
statements.

In our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the control criteria,
the Company has not maintained effective internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated balance sheets
and the related statements of income and other comprehensive income, shareholders equity, and cash flows of the Company, and our report dated March 16, 2011
expressed an unqualified opinion on those financial statements.

/s/ Frazer Frost, LLP

Brea, California

March 16, 2011

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Item 9B. OTHER INFORMATION

None.

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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE

Directors and Executive Officers

The following table sets forth the names, ages, and positions
of our executive officers and directors as of March 11, 2011. 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.

|NAME          | AGE | POSITION                                  
|------------- | --- | ------------------------------------------
|Siping Fang   | 58  | President, Chairman and
      Secretary   
|Jianbao Wang  | 42  | Chief Executive Officer                   
|Gang Wei      | 36  | Chief Financial Officer                   
|Zengbiao Yu   | 56  | Director                                  
|Peter Li      | 47  | Director                                  
|William Haus  | 48  | Director                                  
|Zhiming Wang  | 70  | Chief Engineer                            
|Qizhong Xiang | 63  | Chief Technology Officer                  
|Binjie Fang   | 38  | Chief Operating Officer
      and Director

Siping Fang, Chairman, Chairman and Secretary

Mr. Fang has over 20 years of experience in the valve
industry. In 2001, Mr. Fang established ZD Valve and was appointed as President
and CEO of that company. In 2003, Mr. Fang acquired state-owned enterprise High
Pressure Valve and was appointed as President and CEO of the company. Mr. Fang
has been responsible for making strategic decisions on major corporate issues
and directing the operations and market expansion of both companies. In 2007,
Mr. Fang became our CEO after the reverse acquisition of China Valve Samoa.

Mr. Fang possesses particular knowledge and experience in the
valve industry that strengthen the Boards collective qualifications, skills,
and experience. His demonstrated capabilities in leading, growing and guiding
our Company provide the Board with a key understanding of the Company, its
culture, its personnel, and its strengths and weaknesses. These capabilities
combined with his prior business and managerial experience strengthen the
Boards collective qualifications, skills, and experience and make him qualified
to lead the Companys Board.

Jianbao Wang, Chief Executive Officer

Mr. Wang was appointed as our CEO on October 8, 2010. Mr. Wang
has been General Manager of the Company since July 2009 and has played an
integral part in completing and integrating three acquisitions for the Company,
as well as improving the Company's management and business processes. Prior to
working for the Company, between August 2007 and June 2009 Mr. Wang served as
President of the Asia Pacific Region at Globe Turbocharger Specialties Inc., the
exclusive global Original Equipment Manufacturer for ALCO turbochargers and
parts, where he, among other accomplishments, developed the company's supply
chain and sales force in Asia. From July 2002 to August 2007, Mr. Wang served as
International Purchasing Manager of the Asia Pacific Region for KSB AG, a German
public company, for which he established three Greenfield operations in Dalian,
Shanghai and Zhengjiang, formed the company's regional purchasing office and
reorganized procurement flow.

Before that, Mr. Wang had approximately ten years of work
experience at Siemens Pump and Compressor Co. Ltd. and Changzhou Electric
Traction Motor Works ("CETMW"), of which he spent a year and a half at the
headquarters of Pakistan Railway as chief representative for CETMW. Mr. Wang
received his bachelor's degree majoring in hydraulic and pneumatic technology
from Xi'an Jiaotong University in July 1992 and received a diploma majoring in
executive commerce and management from Nanjing University of Science and
Technology in January 1999. Mr. Wang completed his EMBA program and received a
master's degree from the Cheung Kong Graduate School of Business in August 2010.

Gang Wei, Chief Financial Officer

Mr. Wei was appointed as our CFO on December 16, 2010. Mr. Wei was Chief Financial Advisor of State Grid International
Development Limited from February 2010 to December 2010, which is a subsidiary
of State Grid Corporation of China, where he served as a key management member
to help State Grid acquire transmission business at Brazil and copper mining
business at Chile. He was also responsible for financial reporting, financial
planning and analysis, budgeting and treasury management. From September 2007 to
February 2010, Mr. Wei was European Regional Controller and Treasury Accounting
Manager for EMEA and America of Brambles Limited at London, a global business
service  group headquartered in Sydney, Australia that operates in over 45 countries  and is  listed  on  the  ASX  under the  ticker  symbol  BRB. Among other responsibilities, he managed the financial reporting and financial control function for a
number of entities located in the region.  He was also responsible for performance management, treasury management and  risk control. From June 2005 to September 2007, Mr. Wei served as Senior  Group Accountant and  Senior Accounting  Manager at
Kazakhmys PLC,  a FTSE  100 company  headquartered  in  London that  operates  in  mining, natural resources, energy and manufacturing. From February 2001 to September 2002, Mr. Wei was Chief Financial Officer of Coastal Industrial Group. Between
November 1997 and January 2001, Mr. Wei worked as Finance Manager for China Laurel Group. Mr. Wei earned a doctorate degree in Finance from Cardiff Business School of Cardiff University in the UK. He is a member of CPA of China Mainland and Hong
Kong, fellow member of ACCA, and charter holder of CFA.

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Zengbiao Yu, Director

Mr. Yu has been working as a professor and a Ph.D. tutor for Tsinghua University since 1999. Mr. Yu is currently the vice president of Management Accounting Section of Accounting Society of China, director of Chinese Costing Association, independent
director of Zhongyuan Special Steel Co., Ltd. and CNHTC Jinan Truck Co.,Ltd . In addition, he is a member of Editorial Advisory and Review Board of the IMA Educational Case Journal in U.S.A. As a PhD student, Mr. Yu had been educated jointly
by the University of Illinois at Urbana-Champaign (UIUC) and Xiamen University (XU), and received his doctorate from XU in 1993. He had been Dean of Business School and Head of Accounting Department of Hebei University for more than 3 years. He was
awarded Certificates of High Attainment from UIUC in 1991 and recognized as an outstanding accountant by the Ministry of Finance of PRC in 1995. He is author of more than 80 papers and 10 books on financial and managerial
accounting.

Mr. Yu possesses extensive knowledge and experience in accounting and finance. Mr. Yus background, knowledge and achievements bring important value to the Board, as well as to the Audit Committee, and strengthens the Boards collective
qualifications, skills, and experience.

William Haus, Director

Mr. William Haus has extensive experience in business and finance for public companies as well as China-based companies. Since August 2008, Mr. Haus has been the CEO and director of CS China Acquisition Corporation, a special purpose acquisition
corporation focused on effecting a business combination with a China-based private company. Over the past eight years, Mr. Haus has worked in a variety of roles in analyzing companies and evaluating companies as potential investments. From September
2005 to May 2008, Mr. Haus was the Analyst for The Pinnacle Fund & The Pinnacle China Fund, both of which are hedge funds focused on investment opportunities in the United States and China. Between April 2005 and September 2005, he was the
Senior Vice President and Equity Research Analyst for Healthcare Information Technology and Pharmaceutical Outsourcing, Stanford Group Company, a securities brokerage firm. From March 2000 to March 2005, Mr. Haus was the Senior Equity Research
Analyst for Healthcare Information Technology and Pharmaceutical Outsourcing, Advest, Inc., a securities brokerage firm. Mr. Haus graduated from the State University of New York College at Fredonia with a B.S. in business administration and a B.A.
in economics and received a Master of Business Administration from Boston University. He is a Chartered Financial Analyst (CFA) and member of the CFA Institute. Mr. Haus is also independent director of China Nutrifruit Group Limited, a food products
producer, listed on NYSE Amex.

Mr. Hauss experiences in investment roles and in senior management at several companies, including U.S. listed companies, that do business in China and the United States provides relevant insight and a breadth of knowledge and experience that
strengthen the Boards collective qualifications, skills, and experience.

Peter Li, Director

Peter Li brings more than 15 years experience of corporate financial management, investor relationship management, corporate strategy and internal controls. Peter Li is the CFO of Hollysis Automation Technologies Ltd. (NASDAQ: HOLI) since February
2009. Since August 2008, Mr. Li has been a co-founder and director of CS China Acquisition Corp., an OTCBB listed company engaged in seeking a business combination with a Chinese operating company. Since June 2008, he has also been an independent
director and audit committee chairman for Yuhe International Inc., an OTCBB listed company in the broiler breeding business in China. Mr. Li is also a senior advisor to Yucheng Technologies, Ltd., a leading IT service provider to the banking
industry in China. Between October 2004 and November 2006, Mr. Li was the CFO of Beijing Sihitech Technology Co. which merged to form Yucheng Technologies, Ltd. Prior to his tenure at Beijing Sihitech Technology Co., Mr. Li worked in corporate
financial management with various companies, including the role of Internal Controller at Lenovo. Mr. Li graduated from Beijing Foreign Studies University with a B.A. and received a Master of Education from the University of Toronto. Mr. Li is a
Certified General Accountant in Ontario, Canada.

Mr. Lis vast experience has provided him with in-depth knowledge of publicly listed companies in the United States. He also brings an understanding of investor relations, SEC reporting, and the perspective of the investment community. Mr.
Lis knowledge and other professional experience have given him particular knowledge and experience that strengthen the Boards collective qualifications, skills, and experience.

Zhiming Wang, Chief Engineer

Mr. Wang has over 45 years experience in the valve industry. He joined the Company as Chief Engineer in May 2010 when he sold Shanghai Hanwei Valves Co. Ltd. to the Company in April 2010. Before he founded Shanghai Hanwei Valves Co. Ltd in
December 1992, Mr. Wang worked for Shanghai Lianggong Valves Co. Ltd. from July 1966. He worked as technician, engineer, senior engineer, director of nuclear power office and chief engineer at Shanghai Lianggong during the period from July 1966 to
December 1992.  Mr. Wang had been granted a number of patents and national and local awards due to his significant contribution to the valve industry in China. Mr. Wang graduated from Shanghai Industry University in June 1966 with a B.S.

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Qizhong Xiang, Chief Technology Officer

Since 1998, Mr. Xiang has been working in various positions for the Companys subsidiary ZD Valve as a valve engineer, vice president of marketing and director of research and development. Prior to joining the Company, Mr. Xiang was a valve
engineer for Hong Cheng Co. Ltd.

Binjie Fang, Director

Mr. Fang was appointed as a director and became the Chief Operating Officer of the Company in 2007. Between September 1995 and January 2005, he was the head of the operations and human resource departments of ZD Valve, a subsidiary of the Company
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 ZD Valve. His major responsibilities include supervising company operations
in various aspects and managing marketing and business development activities. Mr. Fang possesses significant knowledge and experience in the valve industry. His knowledge and experience strengthens the Boards collective qualifications,
skills, and experience.

Board Composition and Committees

The Board of Directors is currently composed of five members: Siping Fang, Binjie Fang, William Haus, Peter Li and Zengbiao Yu. We currently have standing audit, corporate governance and nominating, and compensation committees.

Our audit committee comprises Peter Li, William Haus and Zengbiao Yu. Peter Li serves as the chairman of the audit committee. The audit committee is primarily responsible for reviewing the services performed by our independent auditors, evaluating
our accounting policies and our system of internal controls. Mr. Li serves as our audit committee financial expert as that term is defined by the applicable SEC rules.

The corporate governance and nominating committee comprises William Haus, Peter Li and Zengbiao Yu with Mr. Yu as the chairman. The committee is primarily responsible for nominating directors and setting policies and procedures for the nomination of
directors. The committee is also responsible for overseeing the creation and implementation of our corporate governance policies and procedures.

The compensation committee comprises Peter Li, William Haus and Zengbiao Yu with William Haus as the chairman. The compensation committee is primarily responsible for reviewing and approving our compensation and benefit policies, including
compensation of executive officers.

Independent Directors

Our Board is currently composed of five members, three of which, Peter Li, William Haus and Zengbiao Yu, are independent as that term is defined by Rule 4200(a)(15) of the NASDAQ listing standards.

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.

Involvement in Certain Legal Proceedings

None of our directors or executive officers has, during the past ten years:

- been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

---

- had any bankruptcy petition filed by or against the business or property
  of the person, or of any partnership, corporation or business association of
  which he was a general partner or executive officer, either at the time of the
  bankruptcy filing or within two years prior to that time;
- been subject to any order, judgment, or decree, not subsequently reversed,
  suspended or vacated, of any court of competent jurisdiction or federal or
  state authority, permanently or temporarily enjoining, barring, suspending or
  otherwise limiting, his involvement in any type of business, securities,
  futures, commodities, investment, banking, savings and loan, or insurance
  activities, or to be associated with persons engaged in any such activity;
- been found by a court of competent jurisdiction in a civil action or by
  the Securities and Exchange Commission or the Commodity Futures Trading
  Commission to have violated a federal or state securities or commodities law,
  and the judgment has not been reversed, suspended, or vacated;
- been the subject of, or a party to, any federal or state judicial or
  administrative order, judgment, decree, or finding, not subsequently reversed,
  suspended or vacated (not including any settlement of a civil proceeding among
  private litigants), relating to an alleged violation of any federal or state
  securities or commodities law or regulation, any law or regulation respecting
  financial institutions or insurance companies including, but not limited to, a
  temporary or permanent injunction, order of disgorgement or restitution, civil
  money penalty or temporary or permanent cease-and-desist order, or removal or
  prohibition order, or any law or regulation prohibiting mail or wire fraud or
  fraud in connection with any business entity; or
- been the subject of, or a party to, any sanction or order, not
  subsequently reversed, suspended or vacated, of any self-regulatory
  organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C.
  78c(a)(26)), any registered entity (as defined in Section 1(a)(29) of the
  Commodity Exchange Act (7 U.S.C. 1(a)(29)), or any equivalent exchange,
  association, entity or organization that has disciplinary authority over its
  members or persons associated with a member.

Section 16(A) Beneficial Ownership Reporting
Compliance

Under U.S. securities laws, directors, certain executive
officers and persons holding more than 10% of our common stock must report their
initial ownership of the common stock, and any changes in that ownership, to the
SEC. The SEC has designated specific due dates for these reports.

Code of Ethics

On September 9, 2009, our board of directors adopted a new code
of ethics that applies to all of our directors, officers and employees,
including our principal executive officer, principal financial officer and
principal accounting officer. The new code replaces our prior code of ethics
that applied only to our principal executive officer, principal financial
officer, principal accounting officer or controller and any person who performed
similar functions, and addresses, among other things, honesty and ethical
conduct, conflicts of interest, compliance with laws, regulations and policies,
including disclosure requirements under the federal securities laws,
confidentiality, trading on inside information, and reporting of violations of
the code. A copy of the Code of Ethics can be found on our website www.cvalve.com . China Valves, please make sure it was
uploaded on the website.

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 2010 and 2009: Siping Fang, who became our
President and Chief Executive Officer when we completed the reverse acquisition.
No other executive officers received total compensation in excess of $150,000 in
any fiscal year.

|                                                                  |  |  |      |  |      |         |   |         |         |   | Total   | 
|----------------------------------------------------------------- |  |  | ---- |  | ---- | ------- | - | ------- | ------- | - | ------- | 
|Name and Principal Position                                       |  |  | Year |  |      | Salary  |   |         | ($)     |  
|Siping Fang, President,
      and Director                        |  |  | 2010 |  | $    | 100,000 |   | $       | 100,000 |  
|                                                                  |  |  |      |  | 2009 |         | $ | 100,000 |         | $ | 100,000 | 
|Jianbao Wang, Chief
      Executive Officer                       |  |  | 2010 |  | $    | 147,600 |   | $       | 147,600 |  
|                                                                  |  |  |      |  | 2009 |         | $ | 73,305  |         | $ | 73,305  | 
|Gang We, Chief Financial
      Officer (1)                        |  |  | 2010 |  | $    | 0       |   | $       | 0       |  
|                                                                  |  |  |      |  | 2009 |         | $ | 0       |         | $ | 0       | 
|                                                                  |  |  |      |  |      |         |   |         |         |   |         | 
|(1) Mr. Wei formally joined the
      Company on January 1, 2011. |  |  |      |  |      |         |   |         |         |   |         | 

---

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 December 16, 2010, the Company and Mr. Wei entered into an
employment agreement (the "Employment Agreement"), which is effective as of
December 16, 2010 (the "Effective Date") and will expire on December 16, 2015
(the "Employment Period"). The Employment Agreement provides, among other
things, that Mr. Wei's base salary will be RMB75,000 per month after personal
income tax (approximately $11,232). Additionally, within three months of the
Effective Date, upon approval of the board of directors of the Company, the
Company will grant Mr. Wei options to purchase 500,000 shares of the Company's
common stock at the price of $10.31 per share or the lower price when the board
approves. Mr. Wei may exercise options to purchase 260,000 shares on the first
anniversary of his employment with the Company, and 30,000 share every three
months after the first anniversary. The Employment Agreement contains covenants
prohibiting Mr. Wei from competing with the Company during the Employment Period
and for three years after the Employment Period. The Employment Agreement also
prohibits Mr. Wei from disclosing any confidential information of the Company.

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

The following table sets forth all compensation awarded to,
earned by or paid to the directors in 2010:

|             |   | Fees Earned or |  |  | Stock  |  |  | Option |  |   |        | 
|------------ | - | -------------- |  |  | ------ |  |  | ------ |  | - | ------ | 
|Name         |   | Paid in Cash   |  |  | Awards |  |  | Awards |  |   | Total  | 
|Zengbiao Yu  | $ | 24,167         |  |  | N/A    |  |  | N/A    |  | $ | 24,167 | 
|Siping Fang  |   | N/A            |  |  | N/A    |  |  | N/A    |  |   | N/A    | 
|Binjie Fang  |   | N/A            |  |  | N/A    |  |  | N/A    |  |   | N/A    | 
|Peter Li     | $ | 20,000         |  |  | N/A    |  |  | N/A    |  | $ | 20,000 | 
|William Haus | $ | 30,000         |  |  | N/A    |  |  | N/A    |  | $ | 30,000 | 

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.

On November 22, 2008, the Company appointed Peter Li and
William Haus as new directors of the Company to fill the vacancies created by
Huifeng Chen and Renrui Tangs resignations from the board on the same day. We
entered into separate independent director agreements with Peter Li and William
Haus.

Mr. Lis agreement is effective as of November 22, 2008 for a
term of two years. Under the terms of Mr. Lis agreement, the Company agreed to
pay Mr. Li a monthly fee of $1,000, as compensation for the services to be
provided by him as a director of the Company. The Company also agreed to grant a
non-qualified stock option to Mr. Li for the purchase of 22,500 shares of common
stock of the Company at an exercise price of $8.00. One third of the options (or
7,500 shares) will vest on November 22, 2009. The remaining options will vest in
eight equal quarterly installments (or 1,875 shares each installment) over a
two-year period in every quarter after November 22, 2009. The stock option
expires in five years. Mr. Lis agreement also contains customary
confidentiality and non-compete provisions.

The agreement with Mr. Haus became effective on December 1,
2008 and was revised on June 29, 2009. Under the terms of Mr. Haus agreement,
the Company agreed to pay Mr. Haus a monthly fee of $2,000, as compensation for
the services to be provided by him as a director of the Company. The Company
also agreed to grant 5,000 shares of common stock to Mr. Haus on June 29, 2009.
On June 29, 2009, the Company agreed to grant a non-qualified stock option to
Mr. Haus for the purchase of 27,500 shares of common stock of the Company at an exercise price of $6.00. The stock option expires on June 28,
2014. Mr. Haus agreement also contains customary confidentiality and
non-compete provisions.

---

On October 8, 2010, the Compensation Committee and the Board
approved to increase the compensation for Mr. Li, Mr. Yu and Mr. Haus to $5,000
a month.

The stock options granted to Mr. Li and Mr. Haus have not yet
been issued as of December 31, 2010. The restricted common shares granted to Mr.
Haus was issued on February 2, 2011.

Mr. Siping Fang and Mr. Binjie Fang are paid in their capacity
as executive officers of the Company and 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, 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.

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 STOCKHOLDERS MATTERS.

The following table sets forth certain information regarding
our common stock $0.001 par value, beneficially owned on March 11, 2011, 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.

Unless otherwise specified, the address of each of the persons
set forth below is in care of China Valves Technology, Inc., No. 93 West Xinsong
Road, Kaifeng , Henan Province, China 475002.

|                                                             |                                            | Amount & Nature of | Percent of
|------------------------------------------------------------ | ------------------------------------------ | ------------------ | ----------
|Name & Address of                                            |                                            | Beneficial         | Class (2) 
|Beneficial Owner                                             | Office, if Any                             | Ownership (1)      |           
|                                                             | Officers and
      Directors               |                    |           
|Siping Fang                                                  | President and Chairman                     | 0                  | *         
|Jianbao Wang                                                 | Chief Executive Officer                    | 0                  |           
|Gang Wei                                                     | Chief Financial Officer                    | 0                  |           
|Binjie Fang                                                  | Chief Operating Officer
      and Director | 0                  | *         
|Qizhong Xiang                                                | Chief Technology Officer                   | 0                  | *         
|Zhiming Wang                                                 | Chief Engineer                             | 0                  |           
|William Haus                                                 |                                            | 5,000              | *         
|5700 Henry Cook Blvd. Suite #6333, Plano, TX 
    75024-4542 | Director                                   |                    |           

---

|Peter Li                                                            |                            |            |       
|------------------------------------------------------------------- | -------------------------- | ---------- | ------
|C/O CS China Acquisition Corp.                                      |                            |            |       
|4100 N. E. Second Avenue, Miami, FL 33137                           | Director                   | 0          | *     
|Zengbiao Yu Director                                                |                            | 0          | *     
|All officers and directors as a group (9 persons
      named above) |                            | 5,000      | 0%    
|                                                                    | 5% Securities
      Holder |            |       
|Bin Li                                                              |                            | 12,583,032 | 34.31%
|1165 Rugglestone Way, Duluth, GA 30097                              |                            |            |       
|SAM Sustainable Asset Management Ltd.                               |                            | 2,904,121  | 7.92% 
|Bin Fang                                                            |                            | 2,275,000  | 6.20% 

* Less than 1%.

1 Beneficial ownership is determined in accordance
with the rules of the Commission and includes voting or investment power with
respect to the ordinary shares.

2 A total of 36,669,654 shares of our common stock
as of March 11, 2011 are considered to be outstanding pursuant to the Commission
Rule 13d-3(d)(1). For each beneficial owner above, any options exercisable
within 60 days have been included in the denominator.

Changes in Control

There are no arrangements known to us, including any pledge by
any person of our securities, the operation of which may at a subsequent date
result in a change in control of the Company.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.

Transactions with Related Persons

The following includes a summary of transactions since the
beginning of 2010, 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 no less
favorable to the Company than the terms available or the amounts that would be
paid or received, as applicable, in arm's-length transactions.

The Company had the following significant related party
transactions as of December 31, 2010 and 2009, respectively:

|                                                                                                             |   | December 31, |   |   | December 31, |  
|------------------------------------------------------------------------------------------------------------ | - | ------------ | - | - | ------------ | -
|                                                                                                             |   | 2010         |   |   | 2009         |  
|Accounts Receivable  related party; receivable from
      Zhengzhou tonghai Trade                           | $ | 200,185      |   | $ | -            |  
|Other receivable  related party: receivable from Zhengzhou
      Tonghai Trade, unsecured, interest-free.   |   | 152,179      |   |   | -            |  
|Purchase deposit  related party, High Pressure
      Valve Co.                                              |   | 917,202      |   |   | 385,066      |  
|Accounts payable  related party                                                                             |   | (2,382,906   | ) |   | -            |  
|Other payable - related parties: cash advance from
      officers, unsecured, interest-free, due upon demand |   | (1,899,627   | ) |   | (1,891,870   | )
|Total                                                                                                        | $ | (3,012,967   | ) | $ | (1,506,804   | )

---

The Company purchases raw material, such as castings, from the
Casting Company. Total raw material purchase from related party amounted to
$12,384,382 and $4,401,499 for the years ended December 31, 2010 and 2009,
respectively. Total valve sales to the Casting Company amounted for $168,566 and
$0 for the years ended December 31, 2010 and 2009, respectively.

The Company also makes finished goods purchases and sales
to/from a related party -Zhengzhou Tonghai Trade Co., Ltd, which is established
by a Sales officer of the Company. Total valve purchases from Zhengzhou Tonghai
Trade Co., Ltd amounted to $4,614,791 and $25,762 for the years ended December
31, 2010 and 2009, respectively. Total valve sales to Zhengzhou Tonghai Trade
Co., Ltd amounted to $473,108 and $0 for the years ended December 31, 2010 and
2009, respectively.

ZD Valve leased its manufacturing plant and office space from
ZhengZhou Cheng Long Corporation, a related party. ZD Valve made leasehold
improvements to its leased manufacturing plant in the amount of $615,260, which
is used as rental payments for the following two years. As of December 31, 2010,
prepaid rental of $254,760 remains to be amortized as rental expense.

Promoters and Certain Control Persons

We did not have any promoters at any time during the past five
fiscal years.

Director Independence

Our Board is currently composed of 5 members, of which Zengbiao
Yu, Peter Li and William Haus are 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. During 2009, our board met
four times and no director missed any meetings of the board.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Frazer Frost LLP, (Frazer Frost) are the Companys
independent PCAOB registered public accounting firm and were engaged to examine
the Companys consolidated financial statements for the fiscal years ended
December 31, 2010 and 2009.

Audit Fees. Frazer Frost was paid aggregate fees of
approximately $383,368 and $325,891 for the fiscal years ended December 31, 2010
and 2009, respectively, for professional services rendered for the audit of our
annual financial statements.

Tax Fees. Frazer Frost was paid $10,000 for the fiscal
year ended December 31, 2010 for professional services rendered for tax
compliance and $7,000 was paid for the fiscal year ended December 31, 2009.

All Other Fees . Frazer Frost was paid no
other fees for professional services during the fiscal years ended December 31,
2010 and 2009.

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.

---

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       
|    | Section 2.                                                                                                                                     | Consolidated Balance Sheets                                         
|    | Section 3.                                                                                                                                     | Consolidated Statements of
    Income and Other Comprehensive Income
|    | Section 4.                                                                                                                                     | Consolidated Statement of Stockholders
      Equity                
|    | Section 5.                                                                                                                                     | Consolidated Statements
      of Cash Flows                         
|    | Section 6.                                                                                                                                     | Notes to Consolidated Financial Statements                          
|(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. | Description                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|2.1         | Share Exchange Agreement, dated December 18, 2007, among the Company, the stockholders of the Company, China Valves and the China Valves Shareholder (incorporated herein by reference to Exhibit 2.1 to the registrant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 on August 1, 1997 (incorporated herein by reference to Exhibit 3.1 to the SB-2 Registration Statement filed on November 1, 2001)                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|3.2         | Certificate of Amendment to Certificate of Incorporation changing the corporate name filed with the Secretary of State of Nevada (incorporated herein by reference to Exhibit 3.2 to the registrants current report on Form 8-K
filed on December 21, 2007).                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|3.          | 3 Bylaws of the registrant, as amended to date, (incorporated herein by reference to Exhibit 3.2 to the SB-2 Registration Statement
filed on November 1, 2001).                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|3.4         | Certificate to Accompany Restated Articles or Amended and Restated Articles of China Valves Technology, Inc. (incorporated herein by reference to Exhibit 3.1 to the registrants current report on Form 8-K filed on July 30,
2009.                                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|4.1         | Form of warrants, (incorporated herein by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on December 31, 2009).                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|4.2         | Form of warrants, (incorporated herein by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on December 29, 2009).                                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.1        | Form of Securities Purchase Agreement, dated August 26, 2008 (incorporated herein by reference to Exhibit 10.1 to the registrants current report on Form 8-K filed on August 27, 2008).                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.2        | Form of Registration Rights Agreement, dated August 26, 2008 (incorporated herein by reference to Exhibit 4.1 to the registrants current report on Form 8-K filed on August 27, 2008).                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.3        | Escrow Agreement, dated August 26, 2008, by and among the Company, Brean Murray, Carret & Co., LLC, The Pinnacle Fund, LLC, Pinnacle China Fund, LLC and Escrow, LLC. (incorporated herein by reference to Exhibit 10.4 to the
registrants current report on Form 8-K filed on August 27, 2008).                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.4        | Form of Holdback Escrow Agreement, dated August 26, 2008 (incorporated herein by reference to Exhibit 10.2 to the registrants current report on Form 8-K filed on August 27, 2008).                                                                                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.5        | Form of Make Good Escrow Agreement, dated August 26, 2008 (incorporated herein by reference to Exhibit 10.3 to the registrants current report on Form 8-K filed on August 27, 2008).                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.6        | Form of Lockup Agreement, dated August 26, 2008 by and between the Company and the stockholders listed therein (incorporated herein by reference to Exhibit 4.2 to the registrants current report on Form 8-K filed on August
27, 2008).                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.7        | Form of Warrant (incorporated herein by reference to Exhibit 4.3 to the registrants current report on Form 8-K filed on August 27, 2008).                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.8        | English version of Agreement for Transfer of Land Use Right and Housing Titles, dated August 26, 2008, by and between the Companys wholly owned subsidiary Kaifeng High Pressure Valve Co., Ltd. and Kaifeng High Pressure Valve
Steel Casting Limited Liabilities Company (incorporated herein by reference to Exhibit 10.5 to the registrants current report on Form 8-K filed on August 27, 2008).
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.9        | English version of Premises Lease Agreement, dated August 26, 2008, by and between the Companys wholly owned subsidiary Kaifeng High Pressure Valve Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited Liabilities
Company (incorporated herein by reference to Exhibit 10.6 to the registrants current report on Form 8-K filed on August 27, 2008).                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.10       | English version of Premises Leaseback Agreement, dated August 26, 2008, by and between the Companys wholly owned subsidiary Kaifeng High Pressure Valve Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited
Liabilities Company (incorporated herein by reference to Exhibit 10.7 to the registrants current report on Form 8-K filed on August 27, 2008).                               
|            |                                                                                                                                                                                                                                                                                                                                                                                                        
|10.11       | English version of Manufacturing and Supply Agreement, dated August 26, 2008, by and between the Companys wholly owned subsidiary Kaifeng High Pressure Valve Co., Ltd. and Kaifeng High Pressure Valve Steel Casting Limited
Liabilities Company (incorporated herein by reference to Exhibit 10.9 to the
      registrants current report on Form 8-K filed on August 27,
  2008).                 

---

|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 | Placement Agency Agreement between the Company and Rodman
      & Renshaw, LLC, effective as of December 27, 2009 (Incorporated by
      reference to Exhibit 10.2 to the Companys current report on Form 8-K
      filed on December 27, 2009)                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.13 | Amendment Agreement between the Company and Rodman &
      Renshaw, LLC, effective as of December 30, 2009 (incorporated herein by
      reference to Exhibit 10.3 to the registrants current report on Form 8-K
      filed on December 31, 2009.)                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.14 | Form of Securities Purchase Agreement (incorporated
      herein by reference to Exhibit 10.1 to the registrants current report on
      Form 8-K filed on December 29, 2009)                                                                                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.15 | Placement Agency Agreement between the Company and Rodman
      & Renshaw, LLC, effective as of December 27, 2009 (incorporated herein
      by reference to Exhibit 10.2 to the registrants current report on Form
      8-K filed on December 29, 2009)                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.16 | Asset Purchase Agreement, dated as of February 15, 2009,
      by and between Taizhou Taide Valve Co., Ltd. and Taizhou Wote Valve Co.,
      Ltd. (incorporated by reference to Exhibit 10.1 to the registrants
      current report on Form 8-K filed on April, 21, 2009).                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.17 | Amendment to Registration Rights Agreement, dated March
      4, 2009, among China Valves Technology, Inc. and the purchasers identified
      therein. (incorporated by reference to Exhibit 10.1 to the registrants
      current report on Form 8-K filed on March 9, 2009).                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.18 | English Translation of Asset Purchase Agreement, dated
      January 13, 2010, by and among Henan Tonghai Fluid Equipment Co., Ltd.,
      Guichun Xie, Lizhen Huang and Lanzhou Sufa Technology Co., Ltd.
      (incorporated by reference to Exhibit 10.1 to the registrants current
      report on Form 8-K filed on January 19, 2010)                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.19 | English Translation of Asset Purchase Agreement, dated
      February 3, 2010, by and between China Fluid Equipment Limited and Able
      Delight Investment Limited. (incorporated by reference to Exhibit 10.1 to
      the registrants current report on Form 8-K filed on February 8,
    2010)                                                                                               
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.20 | English translation of Asset Transfer Agreement, dated as
      of April 8, 2010, by and among Henan Tonghai Fluid Equipment Co., Ltd.,
      Shanghai Pudong Hanwei Valve Co., Ltd., Shanghai Hanhuang Valve Co., Ltd.
      and Hong Kong Hanxi Investment Co., Ltd. (incorporated by reference to
      Exhibit 10.1 to the registrants current report on Form 8-K filed on April
      9, 2010)
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.21 | English translation of Loan Agreement by and between
      China Fluid Equipment Holdings Limited and Able Delight Investment
      Limited, dated December 10, 2009. (incorporated by reference to Exhibit
      10.1 to the registrants current report on Form 8-K/A filed on November
      18, 2010)                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.22 | English Translation of Employment Agreement with Gang Wei
      dated December 15, 2010 (incorporated by reference to Exhibit 10.1 to the
      registrants current report on Form 8-K filed on December 16,
  2010).                                                                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|21    | List of Subsidiary *                                                                                                                                                                                                                                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                     
|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.

---

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 16, 2011 | By :/s/ Jianbao Wang                 
|(Date Signed)  | Jianbao Wang, Chief Executive Officer

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 | President, Director                                                                          | March 16, 2011
|Siping Fang           |                                                                                              |               
|                      |                                                                                              |               
|/s/ Jianbao Wang      | Chief Executive Officer (Principal
      Executive Officer)                                  | March 16, 2011
|Jianbao Wang          |                                                                                              |               
|                      |                                                                                              |               
|/s/ Gang Wei          | Chief Financial Officer (Principal
      Financial Officer and Principal Accounting Officer) | March 16, 2011
|Gang Wei              |                                                                                              |               
|                      |                                                                                              |               
|/s/ Peter Li          | Director                                                                                     | March 16, 2011
|Peter Li              |                                                                                              |               
|                      |                                                                                              |               
|/s/ William Haus      | Director                                                                                     | March 16, 2011
|William Haus          |                                                                                              |               
|                      |                                                                                              |               
|/s/
      Zengbiao Yu | Director                                                                                     | March 16, 2011
|Zengbiao Yu           |                                                                                              |               
|                      |                                                                                              |               
|/s/
      Binjie Fang | Chief Operating Officer and Director                                                         | March 16, 2011
|Binjie Fang           |                                                                                              |               

---

|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                             |           
|---------------------------------------------------------------------- | ----------
|                                                                       | Page      
|Report of Independent Registered
      Public Accounting Firm          | F-1       
|Consolidated Balance Sheets                                            | F-2       
|Consolidated Statements of Income
      and Other Comprehensive Income | F-3       
|Consolidated Statement of Stockholders Equity                         | F-4       
|Consolidated Statements of Cash
      Flows                            | F-5       
|Notes to Consolidated Financial Statements                             | F-6 - F-26
|                                                                       |           

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of China Valves
Technologies, Inc

We have audited the accompanying consolidated balance sheets of China Valves
Technologies, Inc and Subsidiaries (the Company) as of December 31, 2010 and
2009, and the related statements of income and other comprehensive income, shareholders equity, and cash flows for each of the years in the two-year
period ended December 31, 2010. The Company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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2010 and 2009, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2010 in
conformity with accounting principles generally accepted in the United States of
America. We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Companys internal
control over financial reporting as of December 31, 2010, based on criteria
established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 16, 2011 expressed an adverse opinion on the
Companys internal control over financial reporting because of material
weaknesses.

/s/ Frazer Frost, LLP Brea, CA March 16, 2011

F-1

---

CHINA VALVES
TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS 
AS OF DECEMBER 31, 2010 AND
2009

|ASSETS                                                                                                                                                                                         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                                                                                                                                                                               |  
|                                                                                                                                                                                               |  
|                                                                                                                                                                                               |  
|CURRENT ASSETS:                                                                                                                                                                                |  
|Cash and cash equivalents                                                                                                                                                                      | $
|Restricted cash                                                                                                                                                                                |  
|Notes receivable                                                                                                                                                                               |  
|Accounts receivable, net of allowance for doubtful accounts of
      $998,739 and
      $908,338 as of December 31, 2010 and 2009, respectively                                                |  
|Accounts receivable - related party                                                                                                                                                            |  
|Other receivables                                                                                                                                                                              |  
|Other receivables - related parties                                                                                                                                                            |  
|Inventories, net                                                                                                                                                                               |  
|Advances on inventory purchases                                                                                                                                                                |  
|Advance on inventory purchases - related party                                                                                                                                                 |  
|Prepaid expenses                                                                                                                                                                               |  
|Rental prepayment - short-term                                                                                                                                                                 |  
|Total current assets                                                                                                                                                                           |  
|PLANT AND
      EQUIPMENT, net                                                                                                                                                                 |  
|                                                                                                                                                                                               |  
|OTHER ASSETS:                                                                                                                                                                                  |  
|Accounts receivable - retainage, long
      term                                                                                                                                               |  
|Deposits for acquisition                                                                                                                                                                       |  
|Advances on equipment purchases                                                                                                                                                                |  
|Rental prepayment - long-term                                                                                                                                                                  |  
|Long-term receivable                                                                                                                                                                           |  
|Goodwill                                                                                                                                                                                       |  
|Intangibles, net                                                                                                                                                                               |  
|Other investments, at lower of cost or market                                                                                                                                                  |  
|Total other assets                                                                                                                                                                             |  
|Total
      assets                                                                                                                                                                             | $
|                                                                                                                                                                                               |  
|LIABILITIES AND SHAREHOLDERS'
      EQUITY                                                                                                                                                     |  
|                                                                                                                                                                                               |  
|CURRENT LIABILITIES:                                                                                                                                                                           |  
|Accounts payable - trade                                                                                                                                                                       | $
|Accounts payable - related party                                                                                                                                                               |  
|Short-term loans                                                                                                                                                                               |  
|Short-term loans - related parties                                                                                                                                                             |  
|Other payables                                                                                                                                                                                 |  
|Other payables - related party                                                                                                                                                                 |  
|Notes payable                                                                                                                                                                                  |  
|Accrued liabilities                                                                                                                                                                            |  
|Customer deposits                                                                                                                                                                              |  
|Taxes payable                                                                                                                                                                                  |  
|Warrant liabilities                                                                                                                                                                            |  
|Total current liabilities                                                                                                                                                                      |  
|                                                                                                                                                                                               |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                  |  
|                                                                                                                                                                                               |  
|SHAREHOLDERS' EQUITY:                                                                                                                                                                          |  
|Common stock, $0.001 par value;
      300,000,000 shares authorized; 34,664,654 shares and 31,727,212
      shares issued and outstanding as of December 31, 2010 and 2009,
      respectively |  
|Additional paid-in-capital                                                                                                                                                                     |  
|Statutory reserves                                                                                                                                                                             |  
|Retained earnings                                                                                                                                                                              |  
|Accumulated other comprehensive income                                                                                                                                                         |  
|Total shareholders' equity                                                                                                                                                                     |  
|Total
      liabilities and shareholders' equity                                                                                                                                               | $

See report of independent
registered public accounting firm.

The accompanying notes are an
integral part of these statements.

F-2

---

CHINA VALVES TECHNOLOGY, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME 
FOR
THE YEARS ENDED DECEMBER 31, 2010 AND
2009

|                                                     |   | 2010        |   |   | 2009       |  
|---------------------------------------------------- | - | ----------- | - | - | ---------- | -
|REVENUE                                              | $ |             |   | $ |            |  
|Revenue                                              |   | 183,077,333 |   |   | 95,370,012 |  
|Related party
      revenue                          |   | 618,793     |   |   | -          |  
|Total Revenue                                        |   | 183,696,126 |   |   | 95,370,012 |  
|                                                     |   |             |   |   |            |  
|COST OF GOODS SOLD                                   |   | 103,276,910 |   |   | 48,527,336 |  
|                                                     |   |             |   |   |            |  
|GROSS PROFIT                                         |   | 80,419,216  |   |   | 46,842,676 |  
|                                                     |   |             |   |   |            |  
|EXPENSES:                                            |   |             |   |   |            |  
|Selling expense                                      |   | 10,414,293  |   |   | 6,317,766  |  
|General and administrative                           |   | 15,563,906  |   |   | 7,312,439  |  
|Research and
      development                       |   | 228,858     |   |   | 126,750    |  
|Stock compensation expense                           |   | 56,019      |   |   | 47,057     |  
|Total Operating
      Expenses                       |   | 26,263,076  |   |   | 13,804,012 |  
|                                                     |   |             |   |   |            |  
|INCOME FROM
      OPERATIONS                         |   | 54,156,140  |   |   | 33,038,664 |  
|                                                     |   |             |   |   |            |  
|OTHER (INCOME)
      EXPENSE :                       |   |             |   |   |            |  
|Other income, net                                    |   | (669,462    | ) |   | (510,692   | )
|Gain from
      acquisition                          |   | (3,714,840  | ) |   | -          |  
|Interest and finance expense, net                    |   | 100,997     |   |   | 128,518    |  
|Change in fair
      value of derivative instruments |   | 785,350     |   |   | 1,508,997  |  
|Total Other (Income) Expense, net                    |   | (3,497,955  | ) |   | 1,126,823  |  
|                                                     |   |             |   |   |            |  
|INCOME BEFORE PROVISION FOR INCOME
      TAXES       |   | 57,654,095  |   |   | 31,911,841 |  
|                                                     |   |             |   |   |            |  
|PROVISION FOR INCOME TAXES                           |   | 14,456,566  |   |   | 8,558,748  |  
|                                                     |   |             |   |   |            |  
|NET INCOME                                           |   | 43,197,529  |   |   | 23,353,093 |  
|                                                     |   |             |   |   |            |  
|OTHER COMPREHENSIVE INCOME                           |   |             |   |   |            |  
|Foreign currency
      translation gain (loss)       |   | 6,078,504   |   |   | (7,075     | )
|                                                     |   |             |   |   |            |  
|COMPREHENSIVE
      INCOME                           | $ | 49,276,033  |   | $ | 23,346,018 |  
|                                                     |   |             |   |   |            |  
|BASIC EARNINGS PER
      SHARE:                      |   |             |   |   |            |  
|Weighted average number of shares                    |   | 34,547,224  |   |   | 30,771,356 |  
|Basic earnings per
      share                       | $ | 1.25        |   | $ | 0.76       |  
|                                                     |   |             |   |   |            |  
|DILUTED EARNINGS
      PER SHARE:                    |   |             |   |   |            |  
|Weighted average number of shares                    |   | 34,695,639  |   |   | 30,946,392 |  
|Diluted earnings
      per share                     | $ | 1.25        |   | $ | 0.75       |  

See report of independent registered public accounting
firm.

The accompanying notes are an integral part of these
statements.

F-3

---

CHINA VALVES TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
FOR THE YEARS
ENDED DECEMBER 31, 2010 AND 2009

|                                                                                             |  | Common Stock |  |   | Additional |  |   | Common Stock |  |   | Retained Earnings |   |   | Accumulated other | 
|-------------------------------------------------------------------------------------------- |  | ------------ |  | - | ---------- |  | - | ------------ |  | - | ----------------- | - | - | ----------------- | 
|                                                                                             |  | Number       |  |   | Par        |  |   | Paid-in      |  |   | Subscription      |   |   | Statutory         | 
|                                                                                             |  | of shares    |  |   | Value      |  |   | capital      |  |   | receivable        |   |   | reserves          | 
|BALANCE, December 31, 2008                                                                   |  | 31,192,552   |  | $ | 31,192     |  | $ | 66,935,968   |  | $ | (9,834,000        | ) | $ | 2,958,659         | 
|                                                                                             |  |              |  |   |            |  |   |              |  |   |                   |   |   |                   | 
|Cashless exercise of warrants                                                                |  | 201,326      |  |   | 201        |  |   | 755,811      |  |   |                   |   |   |                   | 
|Release of shares in escrow related to common stock
      issued for real estate acquisition |  |              |  |   |            |  |   |              |  |   | 9,834,000         |   |   |                   | 
|Stock based
      compensation                                                               |  |              |  |   |            |  |   | 47,057       |  |   |                   |   |   |                   | 
|Common stock
      issuance for cash at $9.00                                                |  | 333,334      |  |   | 333        |  |   | 2,796,107    |  |   |                   |   |   |                   | 
|Net income                                                                                   |  |              |  |   |            |  |   |              |  |   |                   |   |   |                   | 
|Adjustment
      to statutory reserve                                                        |  |              |  |   |            |  |   |              |  |   |                   |   |   | 2,575,916         | 
|Foreign
      currency translation adjustment                                                |  |              |  |   |            |  |   |              |  |   |                   |   |   |                   | 
|BALANCE, December 31, 2009                                                                   |  | 31,727,212   |  | $ | 31,726     |  | $ | 70,534,943   |  | $ | -                 |   | $ | 5,534,575         | 
|Exercised
      warrants                                                                     |  | 523,329      |  |   | 523        |  |   | 5,304,103    |  |   |                   |   |   |                   | 
|Stock
      compensation                                                                     |  |              |  |   |            |  |   | 56,019       |  |   |                   |   |   |                   | 
|Common
      stock issuance for cash at $9.00                                                |  | 2,414,113    |  |   | 2,414      |  |   | 20,538,252   |  |   |                   |   |   |                   | 
|Net income                                                                                   |  |              |  |   |            |  |   |              |  |   |                   |   |   |                   | 
|Adjustment to statutory reserve                                                              |  |              |  |   |            |  |   |              |  |   |                   |   |   | 4,512,138         | 
|Foreign
      currency translation adjustment                                                |  |              |  |   |            |  |   |              |  |   |                   |   |   |                   | 
|BALANCE,
      December 31, 2010                                                             |  | 34,664,654   |  | $ | 34,663     |  | $ | 96,433,317   |  | $ | -                 |   | $ | 10,046,713        | 

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 SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE YEARS ENDED
DECEMBER 31, 2010 AND 2009

|                                                                                              |   | 2010        |   |   | 2009        |  
|--------------------------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                                                              |   |             |   |   |             |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                         |   |             |   |   |             |  
|Net income                                                                                    | $ | 43,197,529  |   | $ | 23,353,093  |  
|Adjustments to reconcile net income to cash provided by
      (used in) operating activities: |   |             |   |   |             |  
|Depreciation                                                                                  |   | 4,167,004   |   |   | 1,694,675   |  
|Amortization                                                                                  |   | 703,168     |   |   | 261,050     |  
|Bad debt provision (recovery)                                                                 |   | 57,836      |   |   | (254,963    | )
|Loss on disposal of fixed assets                                                              |   | 343,333     |   |   | 87,876      |  
|(Gain) from acquisition                                                                       |   | (3,662,704  | ) |   | (252,183    | )
|Stock compensation cost                                                                       |   | 56,019      |   |   | 47,057      |  
|Change in fair value of warrant liabilities                                                   |   | 785,350     |   |   | 1,508,997   |  
|Inventory allowance                                                                           |   | 681,989     |   |   | 432,707     |  
|Change in operating assets and liabilities:                                                   |   |             |   |   |             |  
|Restricted cash due to sales covenant                                                         |   | (923,572    | ) |   | (113,814    | )
|Notes receivable                                                                              |   | (2,323,098  | ) |   | 465,721     |  
|Accounts receivable and retainage                                                             |   | (49,609,832 | ) |   | (5,040,954  | )
|Other receivables and other
      receivables-related parties                                 |   | 1,704,875   |   |   | 455,396     |  
|Inventories                                                                                   |   | 1,376,219   |   |   | 1,563,708   |  
|Advance on inventory purchases                                                                |   | 264,940     |   |   | (213,271    | )
|Advance on inventory purchases-related party                                                  |   | (490,053    | ) |   | 981,778     |  
|Prepaid expenses                                                                              |   | 137,706     |   |   | (185,647    | )
|Long term receivable                                                                          |   | 442,800     |   |   | (57,513     | )
|Accounts payable-trade and accounts payable
      - related party                             |   | 12,491,821  |   |   | 322,728     |  
|Other payables and other payables - related parties                                           |   | 1,314,478   |   |   | (1,552,141  | )
|Accrued liabilities                                                                           |   | (1,005,589  | ) |   | 317,514     |  
|Customer deposits                                                                             |   | 2,959,823   |   |   | 196,078     |  
|Taxes payables                                                                                |   | 4,522,913   |   |   | 1,065,354   |  
|Net cash provided by operating activities                                                     |   | 17,192,955  |   |   | 25,083,246  |  
|                                                                                              |   |             |   |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |   |             |   |   |             |  
|Acquisition of intangible assets                                                              |   | (573,142    | ) |   | (1,524,071  | )
|Advance on equipment purchases                                                                |   | (124,895    | ) |   | (654,530    | )
|Purchases of plant and equipment                                                              |   | (3,709,966  | ) |   | (9,738,815  | )
|Addition to construction in progress                                                          |   | (590,032    | ) |   | -           |  
|Proceeds from sale of equipment                                                               |   | 4,927       |   |   | 11,729      |  
|Advance on lease                                                                              |   | -           |   |   | (614,882    | )
|Cash paid for business acquisitions                                                           |   | (25,606,289 | ) |   | -           |  
|Investment deposit                                                                            |   | -           |   |   | (13,209,395 | )
|Net cash used in investing activities                                                         |   | (30,599,397 | ) |   | (25,729,964 | )
|                                                                                              |   |             |   |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                         |   |             |   |   |             |  
|Restricted cash due to covenant                                                               |   | 105,616     |   |   | 57,162      |  
|Restricted cash due to notes payable                                                          |   | 738,000     |   |   | 2,199,183   |  
|Other payables-related party financing related                                                |   | -           |   |   | (471,648    | )
|Repayment of notes payable                                                                    |   | (1,033,200  | ) |   | (2,199,150  | )
|Proceeds from short term debt                                                                 |   | 4,018,346   |   |   | 3,232,751   |  
|Repayments of short term loan                                                                 |   | (3,391,577  | ) |   | (6,982,848  | )
|Repayments of short term loans-related parties                                                |   | (100,310    | ) |   | (161,782    | )
|Proceeds from equity financing                                                                |   | 23,881,858  |   |   | -           |  
|Proceeds from private placement financing                                                     |   | -           |   |   | 2,850,000   |  
|Net cash provided by (used in) financing
      activities                                     |   | 24,218,733  |   |   | (1,476,332  | )
|                                                                                              |   |             |   |   |             |  
|EFFECTS OF EXCHANGE RATE CHANGES ON CASH                                                      |   | 522,908     |   |   | 180,575     |  
|                                                                                              |   |             |   |   |             |  
|INCREASE (DECREASE) IN CASH                                                                   |   | 11,335,199  |   |   | (1,942,475  | )
|                                                                                              |   |             |   |   |             |  
|CASH and CASH EQUIVALENTS, beginning                                                          |   | 14,485,408  |   |   | 16,427,883  |  
|                                                                                              |   |             |   |   |             |  
|CASH and CASH EQUIVALENTS, ending                                                             | $ | 25,820,607  |   | $ | 14,485,408  |  
|                                                                                              |   |             |   |   |             |  
|                                                                                              |   |             |   |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                             |   |             |   |   |             |  
|Cash paid for interest                                                                        | $ | 127,113     |   | $ | 302,058     |  
|Cash paid for income taxes                                                                    | $ | 11,961,017  |   | $ | 8,020,771   |  
|Additional Non-cash investing and financing
      activities                                  |   |             |   |   |             |  
|Cashless exercise of warrants                                                                 | $ | 231,500     |   | $ | 756,012     |  
|Common stock issued for real estate
      acquisition                                         | $ | -           |   | $ | 9,834,000   |  
|Long-term prepayment transferred to
construction-in-progress                                  | $ | -           |   | $ | 2,001,733   |  

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
SUBSIDIARIESNOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2010

Note 1 
Organization

China Valves Technology, Inc., (the
Company), was incorporated in Nevada in August 1997. Through its direct and
indirect subsidiaries, the Company focuses primarily on the development,
manufacture and sale of high-quality metal valves for the electricity,
petroleum, chemical, water, gas and metal industries in the Peoples Republic of
China (PRC). The Companys operations are headquartered in Zhengzhou, Henan
Province, PRC.

RECENT DEVELOPMENTS

On January 13, 2010, the Company
through its 100% indirectly owned subsidiary, Henan Tonghai Fluid Equipment Co,
Ltd acquired 100% of Yangzhou Rock Valve Lock Technology Co. Ltd., or Yangzhou
Rock. Yangzhou Rock became an operating subsidiary. See Note 16- business
combinations for details.

On February 3, 2010, the Company through
its 100% directly owned subsidiary, China Fluid Equipment Holdings Limited
("China Fluid") acquired 100% of Watts (Changsha) Valve (Changsha Valve).
Changsha Valve became an operating subsidiary. See Note 16- business
combinations for details.

On April 8, 2010, the Company through
its 100% directly owned subsidiary, China Fluid Equipment Holdings Limited
(China Fluid) acquired 100% of Shanghai Pudong Hanwei Valve Co., Ltd ("Hanwei
Valve"). See Note 16  business combination for details.

Note 2  Summary of significant
accounting policies

THE REPORTING
ENTITIES

The accompanying consolidated financial
statements include the following subsidiaries:

Name of entity
    Place of incorporation
    Ownership
    Principle
      businessChina Valves Technology
      (Changsha) Valve Co., Ltd
    PRC
    100%
      Indirectly
    ManufacturingYangzhou Rock Valve Lock Technology Co., Ltd.
    PRC
    100%
      Indirectly
    ManufacturingHenan Kai Feng
      High Pressure Valve Co., Ltd.
    PRC
    100%
      Indirectly
    ManufacturingZhengzhou City ZhengDie Valve., Ltd.
    PRC
    100%
      Indirectly
    ManufacturingTai Zhou Tai De Valve
      Co., Ltd.
    PRC
    100%
      Indirectly
    ManufacturingShanghai Pudong Hanwei Valve Co., Ltd.
    PRC
    100%
      Indirectly
    ManufacturingHenan Tonghai Fluid
      Equipment Co., Ltd.
    PRC
    100%
      Indirectly
    Holding CompanyShanghai Han Huang Investment Co., Ltd.
    PRC
    100%
      Indirectly
    Holding
      CompanyHong Kong Han Xi Co.,
      Ltd.
    Hong
      Kong
    100%
      Indirectly
    Holding CompanyChina Valves Technology
      Holdings Co. (formerly China Fluid Equipment Holdings
      Limited)
    Hong Kong
    100%
    Directly
    Holding Company


See report of independent registered public accounting firm.

F-6

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The results of operations of the three
acquired entities, Yangzhou Rock, Changsha Valve and Hanwei Valve, are included
in the consolidated statement of income since the acquisition dates in
accordance to the acquisition method in ASC 805.

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 and other comprehensive
income, stockholders equity and cash flows include all adjustments, consisting
only of normal recurring items, considered necessary to give a fair presentation
of operating results for the periods presented. All material inter-company
transactions and balances have been eliminated in consolidation.

The Renminbi (RMB) of the Peoples
Republic of China has been determined to be the Companys functional currency.
The balance sheets were translated at year end exchange rates. Expenses were
translated at moving average exchange rates in effect during the periods. The
effects of rate changes on assets and liabilities are recorded as accumulated
other comprehensive income.

PRINCIPLES OF
CONSOLIDATION

China Valves Technology Inc. is a
holding company which conducts its business through its operating subsidiaries.
The consolidated financial statements include the accounts of the Company and
the Companys wholly indirectly owned subsidiaries. All intercompany
transactions have been eliminated. The results of companies acquired during the
year are included in the consolidated financial statements from the effective
date of acquisition.

USE OF ESTIMATES

The preparation of consolidated
financial statements in conformity with US GAAP requires the Company 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. Significant items subject to such estimates and assumptions include
the useful lives of fixed assets; the allowance for doubtful accounts; the fair
value determination of financial and equity instruments, realizability of
inventories; the recoverability of goodwill, intangible assets, land use rights,
plant and equipment; and accruals for income tax uncertainties and other
contingencies. The current economic environment has increased the degree of
uncertainty inherent in these estimates and assumptions.

REVENUE RECOGNITION

The Companys revenue recognition
policies are in accordance with U.S. generally accepted accounting principles
regarding revenue recognition. 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 delivery for domestic sales when
risk of loss and title passes to the customer. For international sales, the
revenue recognition criteria are generally satisfied under Free on Board (FOB)
terms, in which the Companys responsibility ends once the goods clear the port
of shipment.

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.

The Company allows its customers to
retain 5% to 10% of the contract prices as retainage during the warranty period,
usually 12 or 24 months, to guarantee product quality. Historically, the Company
has experienced insignificant warranty claims resulting in the Company having to
repair or exchange a defective product. Due to the infrequency and insignificant
amount of warranty claims, the ability to collect retainage is reasonably
assured and is recognized at the time of shipment.

The Company also provides services to
some of its sales agents and distributors. The Company recognizes revenue on
these services once a contract is signed and the services have been
rendered.

WARRANTIES

The Company typically warranty all of
its products and provide replacement or credit to its customers who are not
satisfied with the products for a period of one year from the date of shipment.
The Company has not established reserve funds for potential customer claims because, historically, the Company has not experienced significant customer complaints about its products. The Company believes that its customer support teams, quality assurance team and manufacturing monitoring
procedures will continue to keep claims at a level that does not support a need for a reserve. The Company reviews customer returns on a monthly basis and may establish a reserve when necessary.

See report of independent registered public accounting firm.

F-7

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COST OF GOODS SOLD

Cost of goods sold consists primarily of direct material costs, direct labor costs, direct depreciation and related direct expenses attributable to the production of the products. Inbound shipping and handling costs and
purchasing are included in direct material costs. Manufacturing overhead includes expenses such as indirect labor, depreciation as it relates to the cost of production, rent, utilities, receiving costs, and equipment maintenance and
repairs.

SHIPPING AND HANDLING

Shipping and handling costs incurred for shipping of finished products to customers are included in selling expense and totaled $1,131,575 and $386,929 for the years ended December 31, 2010, and 2009,
respectively.

ADVERTISING

Advertising costs are expensed as incurred and totaled $153,159 and $36,834 for the years ended December 31, 2010, and 2009, respectively.

FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME

The reporting currency of the Company is the US dollar. The functional currency of the Company and the local currency of its operating subsidiaries is the Chinese Renminbi (RMB).

For those entities whose currency is other than the US dollar, all assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date; shareholders equity is translated at
historical rates and items in the statements of income and of cash flows are translated at the average rate for the period. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported
in the statement of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheet. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of
shareholders equity. Transaction 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.

The balance sheet amounts with the exception of equity at December 31, 2010 and 2009 were translated at 6.59 RMB and 6.82 RMB to $1.00. The average translation rates applied to the statements of operations and cash
flows for the years ended December 31, 2010 and 2009 were 6.76 RMB and 6.82 RMB to $1.00, respectively.

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 thirty years.

Construction in progress represents direct costs of construction as well as 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. Interest incurred during construction is capitalized into construction in progress. All other interest is expensed as incurred. No
depreciation is provided until construction is completed and the asset is ready for its intended use. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and betterments to property and equipment are
capitalized.

INTANGIBLE ASSETS

Intangible assets consist of patents, software and land use rights. Patents and software are subject to amortization. Patents are being amortized over 5-20 years as management believes those are the estimated useful life of
the patents currently owned by the Company. Land use rights are carried at cost and charged to expense on a straight-line basis over the period the rights are granted, 46.4 - 50 years. Software is amortized over 10 years, its estimated useful life.

GOODWILL

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is instead tested for impairment. Goodwill is reviewed for impairment annually in
accordance with generally accepted accounting principles in the United States of America.The goodwill impairment test is a two-step test. Under the first step, the fair value of the
reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step
two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of that goodwill. The implied fair value of goodwill
is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the
reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. The Company performs its annual impairment review of goodwill every year
at December 31 and when a triggering event occurs between annual impairment tests. No impairment loss was recorded for the year ended December 31, 2010.

See report of independent registered public accounting firm.

F-8

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LONG-LIVED ASSETS

Long lived assets, including buildings and improvements, equipment and intangible assets are reviewed if events and changes in circumstances indicate that its carrying amount may not be recoverable, to determine whether
their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of depreciation and amortization
to determine whether subsequent events and circumstances warrant revised estimates of useful lives. For the year-ended December 31, 2010, the Company impaired long lived assets in the amount of $1,341,962, which were included in cost of goods
sold.

INVENTORIES

The Company values its inventories 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 or if a write down is necessary because the carrying value exceeds net realizable value.

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 which have alternative future uses, either in
research and development, marketing, or sales, are classified as property and equipment and depreciated over their estimated useful lives.

RETIREMENT BENEFIT COSTS

Amounts payable to the PRC state managed retirement benefit programs are expensed in the financial statements following the accrual basis of accounting.

INCOME TAXES

The Company applies the accounting standard regarding accounting for income taxes and the accounting standard regarding accounting for uncertainty in income taxes for income taxes. This accounting standard requires
recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes. The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by
the balance sheet date. Deferred taxes are 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 probable that
taxable profit will be available against which deductible temporary differences can be utilized.

Under the accounting standard regarding, accounting for uncertainty in income taxes, 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. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalties or interest relating to income taxes have been
incurred during the years ended December 31, 2010 and 2009. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise of cash in banks 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.

See report of independent registered public accounting firm.

F-9

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RESTRICTED CASH

The Companys restricted cash consists
of cash in the bank as security for its product shipments, notes payable,
government required housing fund, and cash held in escrow pursuant to the
Securities Purchase Agreement entered into on August 26, 2008. For restricted
cash held in bank, the restriction is released after the customers have received
and inspected the products.The Company has notes payable outstanding with various banks
and is required to keep certain amounts on deposit that are subject to
withdrawal restrictions. Cash held in escrow pursuant to the Securities Purchase
Agreement is released after the Company satisfies certain covenants as stated in
the Securities Purchase Agreement. Restricted cash amounted to $1,164,598 and $1,047,389 as of
December 31, 2010 and December 31, 2009, respectively.

|                                       |   | December 31, 2010 |  |   | December 31, 2009 | 
|-------------------------------------- | - | ----------------- |  | - | ----------------- | 
|                                       |   |                   |  |   |                   | 
|Deposit for notes
      payable issued | $ | -                 |  | $ | 733,500           | 
|Cash held in escrow account            |   | -                 |  |   | 105,616           | 
|Employee housing
      fund            |   | 153,278           |  |   | -                 | 
|Cash held for sales
      covenants    |   | 1,011,320         |  |   | 208,273           | 
|Total restricted
      cash            | $ | 1,164,598         |  | $ | 1,047,389         | 

CONCENTRATION 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, restrictions on currency conversion and remittance abroad, and rates
and methods of taxation, among other things.

Certain financial instruments may
subject the Company to concentration of credit risk. The Company maintains bank
deposits within state-owned banks within the PRC, Hong Kong and United States.
Balances at financial institutions of state owned banks within the PRC are not
covered by insurance. As of December 31, 2010 and December 31, 2009, the
Companys cash and restricted cash balances, totaling $26,596,872 and
$14,505,745 respectively at those dates, were not covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.

Five major suppliers, including a
related party, represented approximately 24% and 17% of the Companys total
purchases for the years ended December 31, 2010 and 2009, respectively. Five
major customers represented approximately 9% and 11% of the Companys total
sales for the years ended December 31, 2010 and 2009.

FAIR VALUE OF FINANCIAL
INSTRUMENTS

The accounting standards regarding
disclosures about fair value of financial instruments defines financial
instruments and required fair value disclosure of those instruments. This
accounting standard defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure
requirements for fair value measures. Receivables, investments, payables, short
and long term debt and warrant liabilities qualified as financial instruments.
Management believes the carrying amounts of receivables, payables and debt are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments, their expected realization, and if
applicable, their stated interest rate is equivalent to interest rates currently
available. The three levels are defined as follows:

Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities
in active markets.

Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the assets or liability, either
directly or indirectly, for substantially the full term of the financial
instruments.

Level
3 inputs to the valuation methodology are unobservable and significant to the
fair value.

The Company analyzes all financial
instruments with features of both liabilities and equity under the accounting
standards regarding accounting for certain financial instruments with
characteristics of both liabilities and equity, accounting for derivative
instruments and hedging activities, accounting for derivative financial
instruments indexed to, and potentially settled in, a companys own stock, and
the accounting standard regarding determining whether an instrument (or embedded
feature) is indexed to an entitys own stock. The accounting standard specifies
that a contract that would otherwise meet the definition of a derivative but is
both (a) indexed to the Companys own stock and (b) classified in stockholders
equity in the statement of financial position would not be considered a
derivative financial instrument. This standard provides a two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuers own stock and thus able to qualify for this accounting
standard scope exception. All warrants issued by the Company are
denominated in USD; because the Companys functional currency is the RMB, the
Company accounts for these warrants as derivative instrument liabilities and
marks them to market each period. Because there is no quoted or observable market price for the
warrants, the Company used level 3 inputs for its valuation
methodology.

See report of independent registered public accounting firm.

F-10

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The Company invested in China Perfect
Machinery Industry Co., Ltd. in 1996 and Kaifeng Commercial Bank in 1997. There
is no quoted or observable market price for these investments; therefore, the
Company used level 3 inputs for its valuation methodology. Based on its
proportionate share of the underlying book value of the investees, the Company
believes the fair value of the investments is at least equal to the original
cost. The determination of the fair value was based on the capital investment
that the Company contributed. There has been no change in the carrying value
since inception, other than the effects of translating the balances to US
dollars.

A discussion of the valuation technique
used to measure the fair value of the warrant liabilities is provided in Note
13.

|                        |   | Carrying Value
      as of |  |  | Fair Value Measurements at
      December 31, 2010 using Fair Value
      Hierarchy | 
|----------------------- | - | -------------------------- |  |  | ----------------------------------------------------------------------------------- | 
|                        |   | December 31, 2010          |  | 
|                        |   |                            |  |  | Level 1                                                                             | 
|Other
      investments | $ | 790,572                    |  |  |                                                                                     | 
|Warrant liabilities     | $ | 880,565                    |  |  |                                                                                     | 

Except for the warrant liabilities and
other investments, the Company did not identify any other asset and liability
that are measured at fair value on a recurring basis in accordance with the
accounting standard.

|Level 3 Valuation
      Reconciliations:                   |   |                     |  
|---------------------------------------------------------- | - | ------------------- | -
|                                                           |   | Warrant liabilities |  
|Balance, December
      31, 2009                           | $ | 1,730,837           |  
|Issuance of new warrants                                   |   | 165,296             |  
|Exercised warrants
      reclassified to                   |   |                     |  
|APIC                                                       |   | (1,800,918          | )
|Reclassified of
      forfeited warrant                    |   | (3,801              | )
|Current year fair value change of
      exercised warrants |   | 767,113             |  
|Current year fair
      value change                       |   | 22,038              |  
|Balance, December 31, 2010                                 | $ | 880,565             |  

RECEIVABLES

The Companys business operations are
conducted in the PRC by selling on various credit terms. Management reviews its
receivables 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. Known bad debts are written
off against the allowance for doubtful accounts when identified. The Companys
existing reserve is consistent with its historical experience and considered
adequate by management.

EARNINGS PER SHARE

The Company reports earnings per share
in accordance with the provisions of the accounting standard regarding "Earnings
per Share." This accounting standard 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 (using the treasury stock
method) that could occur if securities or other contracts to issue common stock
were exercised and converted into common stock.

Common stock equivalents represent the
dilutive effect of the assumed exercise of the outstanding stock options and
warrants, using the treasury stock method, at either the beginning of the
respective period presented or the date of issuance, whichever is later, and
only if the common stock equivalents are considered dilutive based upon the
Company's net income (loss) position at the calculation date.

OTHER INVESTMENTS

The Company invested in China Perfect
Machinery Industry Co., Ltd. in 1996 and Kaifeng Commercial Bank in 1997. The
Company owns approximately 0.07% of China Perfect Machinery Industry Co. Ltd.
and approximately 0.82% of Kaifeng Commercial Bank. The Company does not have
the ability to exercise control over the investee companies and the investments
have been recorded under the cost method. These long term investments amounted to and $790,572 and $764,515 as of December 31, 2010 and December 31, 2009, respectively.

See report of independent registered public accounting firm.

F-11

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The Company evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. For investments carried at cost, the Company recognizes
impairment in the event that the carrying value of the investment exceeds the Companys proportionate share of the net book value of the investee. As of December 31, 2010, management believes no impairment charge is necessary.

CUSTOMER DEPOSITS

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, 2010 and December 31, 2009, customer deposits amounted to $6,499,833 and $3,325,906, respectively.

STOCK COMPENSATION

The Company applies the accounting standard regarding accounting for stock compensation, which defines a fair-value-based method of accounting for stock based employee compensation and transactions in which an entity issues
its equity instruments to acquire goods and services from employees and non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with this accounting standard and the accounting standard regarding
accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling goods or services, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is
more reliably measured. This accounting standard allows the simplified method to determine the term of employee options when other information is not available.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to
have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is
required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands
the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect
the adoption of this ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02  Accounting and Reporting for Decreases in Ownership of a Subsidiary  a Scope Clarification. The
amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements  An Amendment of ARB No. 51. If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this
update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company
adopted this standard and the adoption of this standard did not have material effect on the Companys consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06  Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of
Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2) Activity in Level 3 fair value measurements.
In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as
one net number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures
about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for
fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
The Company is currently evaluating the impact of this ASU. However, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

See report of independent registered public accounting firm.

F-12

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In February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, or ASU 2010-09. ASU 2010-09 primarily rescinds
the requirement that, for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the
disclosure requirement has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010.

In April 2010, the FASB issued Accounting Standards Update 2010-13, CompensationStock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades, or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a
substantial porting of the entitys equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it
otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.The Company does not expect the adoption of ASU 2010-17 to have a significant impact on its consolidated financial statements.

In April 2010, the FASB issued Accounting Standard Update 2010-17, Revenue RecognitionMilestone Method (Topic 605): Milestone Method of Revenue Recognition orASU 2010-17.This Update provides guidance on the recognition of revenue under the milestone method, which allows a vendor to adopt an
accounting policy to recognize all of the arrangement consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in the period the milestone is achieved. The pronouncement is effective on a prospective
basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 does not have any significant impacts on the consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This update amends codification topic 310 on receivables to improve
the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain
existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December
31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which was issued in January 2011.

In December 2010, the FASB issued Accounting Standards Update 2010-28 which amend Intangibles- Goodwill and Other (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with
zero or negative carrying amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any
adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an
event occurs or circumstances changes that would more likely than not reduce the faire value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December
15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.

In December 2010, the FASB issued Accounting Standards Update 2010-29 which address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations
(Topic 805). This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had
occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for 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, 2010. Early adoption is permitted. The Company is currently evaluating the impact of this ASU and expected the adoption of this ASU will have an impact on its future business
combinations.

Note 3  Accounts receivable

Accounts receivable consists of the following:

See report of independent registered public accounting firm.

F-13

---

|                                                        |   | December 31, 2010 |   |   | December 31, 2009 |  
|------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                        |   |                   |   |   |                   |  
|                                                        |   |                   |   |   |                   |  
|Total
      accounts receivable                         | $ | 89,897,470        |   | $ | 34,772,775        |  
|Accounts receivable  related party                     |   | 200,185           |   |   | -                 |  
|Allowance for bad debts                                 |   | (998,739          | ) |   | (908,338          | )
|Accounts receivable, net                                |   | 89,098,916        |   |   | 33,864,437        |  
|Accounts receivable  non-current retainage             |   | (4,751,605        | ) |   | (1,523,395        | )
|Accounts receivable (including related party)  current | $ | 84,347,311        |   | $ | 32,341,042        |  

Retainage represents portion payments
held by customers pending quality inspection ranging from 12-24 months after
shipment of products. As of December 31, 2010 and December 31, 2009, retainage
held by customers included in the Companys accounts receivable is as follows:

|                                                                                   |   | December 31, 2010 |   |   | December 31, 2009 |  
|---------------------------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|Retainage                                                                          |   |                   |   |   |                   |  
|Current                                                                            | $ | 7,754,714         |   | $ | 2,409,971         |  
|Non-current                                                                        |   | 4,751,605         |   |   | 1,523,395         |  
|Total retainage                                                                    | $ | 12,506,319        |   | $ | 3,933,366         |  
|                                                                                   |   |                   |   |   |                   |  
|The following represents
      the changes in the allowance for doubtful accounts: |   |                   |   |  
|                                                                                   |   |                   |   |   |                   |  
|                                                                                   |   |                   |   |   |                   |  
|                                                                                   |   |                   |   |   |                   |  
|                                                                                   |   | December 31, 2010 |   |   | December 31, 2009 |  
|Balance, beginning
      of the period                                             | $ | 908,338           |   | $ | 1,163,457         |  
|Additions to the
      reserve                                                     |   | 353,036           |   |   | -                 |  
|Recovery of amounts
      previously reserved                                      |   | (295,200          | ) |   | (254,963          | )
|Foreign currency
      translation adjustment                                      |   | 32,565            |   |   | (156              | )
|Balance, end of the
      period                                                   | $ | 998,739           |   | $ | 908,338           |  
|                                                                                   |   |                   |   |   |                   |  
|                                                                                   |   |                   |   |   |                   |  
|Note 4 
      Inventories, net                                                    |   |                   |   |   |                   |  
|                                                                                   |   |                   |   |   |                   |  
|                                                                                   |   | December 31, 2010 |   |   | December 31, 2009 |  
|Raw
      materials                                                                | $ | 4,742,642         |   | $ | 2,497,225         |  
|Work-in-progress                                                                   |   | 3,764,667         |   |   | 1,398,973         |  
|Finished
      goods                                                               |   | 7,810,526         |   |   | 5,783,576         |  
|Semi-finished products                                                             |   | 1,082,765         |   |   |                   |  
|Total                                                                              |   | 17,440,600        |   |   | 9,679,774         |  
|Less: Inventory Allowance                                                          |   | (1,148,663        | ) |   | (432,973          | )
|Inventory,
      net                                                               | $ | 16,251,937        |   | $ | 9,246,801         |  

The Company values its inventories at
the lower of cost or market, determined on a weighted average method, or net
realizable value. As of December 31, 2010, management determined the carrying
amount of inventory exceeded net realizable value; therefore, $1,859,681 had
been written down and included in cost of goods sold. There were no write down
of inventory due to lower of cost or market as of December 31, 2009.

Management reviews inventories for
obsolescence and slow moving at least annually and records an additional
inventory allowance of $715,690 for the year-ended December 31, 2010. Inventory
allowance for the year ended December 31, 2009 amounted to $432,973.

See report of independent registered public accounting firm.

F-14

---

Note 5  Plant and equipment,
net

|Plant and equipment
      consist of the following: |   |                   |   |   |                   |  
|--------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                    |   |                   |   |   |                   |  
|                                                    |   | December 31, 2010 |   |   | December 31, 2009 |  
|                                                    |   |                   |   |   |                   |  
|Buildings and improvements                          | $ | 22,043,897        |   | $ | 14,219,087        |  
|Machinery and
      equipment                       |   | 26,569,403        |   |   | 19,932,240        |  
|Motor
      vehicles                                |   | 2,701,563         |   |   | 2,125,653         |  
|Office
      equipment                              |   | 1,473,776         |   |   | 782,764           |  
|Construction in progress                            |   | 497,652           |   |   | 1,299,471         |  
|Total                                               |   | 53,286,291        |   |   | 38,359,215        |  
|Less:
      Accumulated depreciation                |   | (12,512,729       | ) |   | (9,890,349        | )
|Plant and equipment,
      net                      | $ | 40,773,562        |   | $ | 28,468,866        |  

The Company has no major capital
commitment as of December 31, 2010. Depreciation expense was $4,167,004 and
$1,694,675 for the years ended December 31, 2010 and 2009, respectively.
Capitalized interest amounted to $60,152 and $147,537 for the years ended
December 31,2010and 2009, respectively.

For the year-ended December 31, 2010,
the Company impaired long lived assets in the amount of $1,341,962, which were
included in cost of goods sold.

Note 6  Goodwill

In 2004, the Company acquired two
companies engaged in the production of valves. As a result of these acquisitions
the Company recorded goodwill representing the fair value of the assets acquired
in these acquisitions over the cost of the assets acquired.

The Company acquired 100% of Hanwei
Valve with a total cash consideration of approximately $19.5 million on April 8,
2010. The fair value of the assets of Hanwei Valve was valued at approximately
$8.5 million on the acquisition date; the Company recognized approximately $11.0
million goodwill through the said acquisition.

The Company accounts for business
combinations using the purchase method of accounting. The total consideration
paid in an acquisition is allocated to the fair value of the acquired companys
identifiable assets and liabilities. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill.

The goodwill recognized in conjunction
with the acquisition of Hanwei Valve represents intangible values that Hanwei
Valve has built over its more than 16 years of history, which do not qualify for
separate recognitions, or other factors. These values include but are not
limited to:

|i)   | Expected synergies from combining operations
      of the Companys operating subsidiaries and Hanwei Valve;
|---- | ------------------------------------------------------------------------------------------------------------
|     |                                                                                                             
|ii)  | The experienced work force;                                                                                 
|     |                                                                                                             
|iii) | Proprietary technologies related to certain
      products                                                  
|     |                                                                                                             
|iv)  | The proprietary manufacturing
      processes.                                                              

As of December 31, 2010 and December
31, 2009, the carrying value of goodwill amounted to $32,955,163 and $20,811,767,
respectively.

The following table reconciles the
beginning and ending balance of goodwill:

|                                              |   | Goodwill   | 
|--------------------------------------------- | - | ---------- | 
|                                              |   |            | 
|Balance, December
      31, 2009              | $ | 20,811,767 | 
|Goodwill purchased                            |   | 11,046,074 | 
|Foreign currency
      translation adjustment |   | 1,097,322  | 
|Balance, December 31, 2010                    | $ | 32,955,163 | 

See report of independent registered public accounting firm.

F-15

---

Note 7 - Intangible assets, net

Intangible assets consist of the
following:

|                                     |   | December 31, 2010 |   |   | December 31, 2009 |  
|------------------------------------ | - | ----------------- | - | - | ----------------- | -
|                                     |   |                   |   |   |                   |  
|Patents                              | $ | 2,682,719         |   | $ | 62,256            |  
|Software                             |   | 2,014,267         |   |   | 1,598,280         |  
|Land use
      rights*               |   | 19,417,596        |   |   | 8,330,649         |  
|Total                                |   | 24,114,582        |   |   | 9,991,185         |  
|Less: Accumulated
      amortization |   | (1,086,702        | ) |   | (352,005          | )
|Intangibles, net                     | $ | 23,027,880        |   | $ | 9,639,180         |  

|* | Land use rights consist of land use rights of
      $792,998 acquired as part of the acquisition of Taide Wote Valve;
      $1,095,486 was acquired as part of the acquisition of Yangzhou Rock Lock
      Valve, $5,921,094, acquired as part of the acquisition of Able Delight
      (Changsha) Valve,$3,786,432 acquired as part of the acquisition of Hanwei
      Valve and land use rights of $7,821,586 transferred from the Casting
      Company under the escrow agreement by issuing 2,750,000 shares of common
      stock.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The gross amount of the intangible
assets amounted to $24,114,582 and $9,991,185 as of December 31, 2010 and
December 31, 2009, respectively. The remaining weighted average amortization
period is 39 years.

Amortization expense was $703,168 and
$261,050 for the years ended December 31, 2010 and 2009,
respectively.

The estimated aggregate amortization
expense for each of the five succeeding fiscal years is as follows:

|             |   | Estimated
      Amortization |  |   | Net             | 
|------------ | - | ---------------------------- |  | - | --------------- | 
|Years ended, |   | Expense                      |  |   | carrying Amount | 
|2011         | $ | 703,168                      |  | $ | 22,324,712      | 
|2012         |   | 703,168                      |  |   | 21,621,544      | 
|2013         |   | 703,168                      |  |   | 20,918,376      | 
|2014         |   | 703,168                      |  |   | 20,215,208      | 
|2015         |   | 703,168                      |  |   | 19,512,040      | 
|Thereafter   |   | 19,512,040                   |  |   | -               | 
|Total        | $ | 23,027,880                   |  |   |                 | 

Note 8  Loans

|SHORT TERM LOANS:                                                                                                                      |   | December 31, 2010 |  |   | December 31, 2009 | 
|-------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|                                                                                                                                       |   |                   |  |   |                   | 
|                                                                                                                                       |   |                   |  |   |                   | 
|Communications bank of China,
      Changsha branch 
    Due December 2011, annual interest at 6.116%
    Citic bank, Zhengzhou branch | $ | 758,500           |  | $ | -                 | 
|Due December 2011 and 2010 annual
      interest at 6.672%, and 5.841%, guaranteed
      by Kaifeng Cast Iron Co., Ltd.                |   | 3,034,000         |  |   | 2,934,000         | 
|Unrelated third parties,
      non-secured, ranging from non-interest bearing to annual interest at 10.00%, due on demand              |   | 1,017,393         |  |   | 1,302,995         | 
|Local Bureau of Finance, Kaifeng City.
      no expiration date and unsecured                                                          |   | 838,901           |  |   | 811,251           | 
|Total short term loans                                                                                                                 | $ | 5,648,794         |  | $ | 5,048,246         | 

Total interest incurred for the years
ended December 31, 2010 and 2009 amounted to $127,113 and $138,562,
respectively, Capitalized interest amounted to $60,152 and $147,537 for the
years ended December 31, 2010 and 2009, respectively.

As of December 31, 2010, there are no
restrictive covenants related to the loans stated above.

Note 9 - Taxes

Income Taxes

The Company and its subsidiaries file
separate income tax returns.

See report of independent registered public accounting firm.

F-16

---

The United States of
America

The Company is incorporated in the
State of Nevada in the U.S. and is subject to a gradual U.S. federal corporate
income tax of 15% to 34%. The State of Nevada does not impose any corporate
state income tax.

Hong Kong

The Companys subsidiaries, China Fluid
and Hong Kong Hanxi are incorporated in Hong Kong. The subsidiaries did not earn
any income that was derived in Hong Kong for the years ended December 31, 2010
and 2009 and therefore was not subject to Hong Kong Profit Tax. The payments of
dividends by Hong Kong companies are not subject to any Hong Kong withholding
tax.

PRC

The Company conducts all its operating
business through its operating subsidiaries in China. The operating subsidiaries
are governed by the income tax laws of the PRC, the Company does not have any
deferred tax assets or deferred tax liabilities because there are no temporary
differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities.

The Companys operating subsidiaries,
High Pressure Valve, Zhengdie Valve Taizhou Wote, Yangzhou Rock Valve are all
subject to an income tax at an effective rate of 25%. Changsha Valve is subject
to an income tax at a reduced rate of 12.5%, which is the last year of tax
benefit period before subjecting to a full 25% tax rate. Hanwei Valve is subject
to an income tax at rate of 15%.

Penalties and interest incurred related
to underpayment of income tax are classified as income tax expense in the year
incurred. No significant penalties or interest relating to income taxes have
been incurred during the years ended December 31, 2010 and 2009.

The following table reconciles the U.S.
statutory rate to the Companys effective tax rate:

|                                                       |  | For the
      year ended, |  
|------------------------------------------------------ |  | ------------------------- | -
|                                                       |  | December 31, 2010         |  
|                                                       |  |                           |  
|                                                       |  | 2010                      |  
|U.S. Statutory
      rate                              |  | 34.0%                     |  
|Foreign income not recognized in
      USA             |  | (34.0                     | )
|China income
      taxes                               |  | 25.0                      |  
|(Non-taxable income)
      Non-deductible expenses (1) |  | 7.1                       |  
|China income tax
      exemption                       |  | (7.0                      | )
|Total provision for income
      taxes                 |  | 25.1%                     |  

(1) This represents expenses incurred
by the Company that are not deductible for PRC income tax purpose for the 12
months ended December 31, 2010 and 2009, respectively.

The Company has cumulative
undistributed earnings of foreign subsidiaries of $87,296,411 as of December 31,
2010, is included in consolidated retained earnings and will continue to be
indefinitely reinvested in international operations. Accordingly, no provision
has been made for U.S. deferred taxes related to future repatriation of these
earnings, nor is it practicable to estimate the amount of income taxes that
would have to be provided if we concluded that such earnings will be remitted in
the future.

Value added tax

VAT on sales and VAT on purchases in
China amounted to $30,738,159 and $9,119,027 for the years ended December 31,
2010 and $14,902,035 and $5,870,603 for the years ended December 31, 2009,
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.

|Taxes payable consisted of the
      following: |   |                   |  |   |                   | 
|----------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|                                                |   |                   |  |   |                   | 
|                                                |   | December 31, 2010 |  |   | December 31, 2009 | 
|                                                |   |                   |  |   |                   | 
|VAT payable                                     | $ | 2,505,802         |  | $ | 732,106           | 
|Income tax payable                              |   | 4,013,347         |  |   | 1,507,849         | 
|Other taxes and
      levies payable            |   | 308,969           |  |   | 53,391            | 
|Total taxes payable                             | $ | 6,828,118         |  | $ | 2,293,346         | 

See report of independent registered public accounting firm.

F-17

---

Note 10  Statutory
reserves

The laws and regulations of the PRC
require that before a 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, to the statutory reserve. The statutory
reserves include the 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. The remaining
reserve to fulfill the 50% registered capital requirement amounted approximately
$26.3 million and $14.5 million as of December 31, 2010 and December 31, 2009,
respectively.

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 50% of the registered capital.

Note 11 - Commitments and
contingencies

Lease Agreement

The Companys subsidiary, ZhengDie
Valve entered into a lease agreement for a manufacturing plant and office space
with ZhengZhou Cheng Long Corporation, a related party, from January 1, 2008 to
December 31, 2008. The lease agreement was subsequently extended to December 31,
2012. In 2009, ZhengDie Valve made leasehold improvements to its leased
manufacturing plant in the amount of $615,260, which is used as rental payments
for the following two years. As of December 31, 2010, prepaid rental of $254,760
remains to be amortized as rental expense.

The Companys subsidiary, Tonghai
entered into a lease agreement for an office space with Jia Hong Yao, an
unrelated party, from September 20, 2009 to September 19, 2014 with annual lease
payments of $29,273. In addition, Tonghai also entered into a lease agreement
for a sales office space from July 10, 2010 to July 9, 2015 with annual payments
of $214,746.

Total lease expense, including amounts
included cost of sales, for the years ended December 31, 2010 and 2009 was
$482,030 and $350,336, respectively.

The future minimum lease payments at
December 31, 2010 are as follows:

|                                    |   | Amount    | 
|----------------------------------- | - | --------- | 
|                                    |   |           | 
|Year ending
      December 31, 2011 |   | 315,753   | 
|Year ending December 31,
      2012 |   | 589,402   | 
|Year ending
      December 31, 2013 |   | 244,018   | 
|Year ending December 31,
      2014 |   | 236,700   | 
|Year ending
      December 31, 2015 |   | 107,373   | 
|Total                               | $ | 1,493,246 | 

Make Good Escrow Agreement

In connection with the Companys
private placement on August 26, 2008, the Company entered into a Make Good
Escrow Agreement, under which the 12,583,032 shares of the Companys common
stock held by Bin Li, the Companys major shareholder, were placed in escrow. Of
these shares, 12,150,000 are the subject of the Earn-In Agreement between Bin Li
and Siping Fang and Bin Li entered into the Make Good Escrow Agreement on behalf
of Siping Fang. For each of the calendar years 2008, 2009 and 2010, 4,194,344
shares will be released to the investors or returned to Bin Li, depending on the
fulfillment of specified earnings targets. The specified earnings target for
calendar 2008 was net income of $10,500,000, for calendar 2009 the target is net
income of $23,000,000 and fully diluted earnings per share of $0.738 and for
calendar 2010 the target is net income of $31,000,000 and fully diluted earnings
per share of $0.994. On August 14, 2009, the parties to the Make Good Escrow
Agreement entered into an amendment pursuant to which for calendar 2009 the
target was amended to $21,000,000 and fully diluted earnings per share of $0.668
and for calendar 2010 the target was amended to net income of $34,000,000 and
fully diluted earnings per share of $1.082. The Company had met the specified
earnings targets and accordingly, 4,194,344 shares were released from escrow and
returned to Bin Li for each of the year ended December 31, 2009 and 2008,
respectively. The Company has also met the
specified earnings target for the year ended December 31, 2010, and thus
4,194,344 will be released from escrow after the Company has filed its December
31, 2010 annual 10K.

See report of independent registered public accounting firm.

F-18

---

Employment Contract

On December 16, 2010, the Company and
Mr. Wei entered into an employment agreement (the "Employment Agreement"), which
is effective as of December 16, 2010 (the "Effective Date") and will expire on
December 16, 2015 (the "Employment Period"). The Employment Agreement provides,
among other things, that Mr. Wei's base salary will be RMB75,000 per month after
personal income tax (approximately $11,232). Additionally, within three months
of the Effective Date, upon approval of the board of directors of the Company,
the Company will grant Mr. Wei options to purchase 500,000 shares of the
Company's common stock at the price of $10.31 per share or the lower price when
the board approves the options. Mr. Wei may exercise options to purchase 260,000
shares on the first anniversary of his employment with the Company, and 30,000
share every three months after the first anniversary. As of December 31, 2010,
the board of directors has not approved the grant of the options.

Contingency

On February 4, 2011, a plaintiff filed
a purported class action naming the Company, its Chairman and certain present
and former senior executives as defendants, asserting claims for certain
violations of the securities laws and seeking unspecified damages. The
complaint, which is styled Donald Foster, et al. v. China Valves Technology,
Inc., et al., is currently pending in the U.S. District Court for the Southern
District of New York. Substantially identical complaints, styled Donald London,
et. al. v. China Valves Technology, Inc., et. al., and Elliott Greenberg, et.
al. v. China Valves Technology, Inc. et al., were filed in the same court on
February 17, 2011 and March 8, 2011, respectively. The complaints purport to
assert claims on behalf of a purported class of persons and entities who
purchased shares of the Companys common stock at allegedly artificially high
prices during the period between January 12, 2010 and January 13, 2011 and who
suffered damages as a result of such purchases. The allegations in the
complaints relate to the Companys acquisitions of Changsha Valve and Hanwei
Valve and include allegations regarding the Companys financial statements and
press releases. The complaints allege, among other things, that the Companys
statements about the nature and quality of the Companys acquisition of Changsha
Valve were materially false and misleading and that the Companys statements
failed to describe the role in the transaction of an alleged related party. In
addition, the complaints allege that the Companys statements about the Hanwei
Valve acquisition were materially false and misleading because they failed to
disclose the alleged involvement of certain related parties and allegedly
misdescribed the transaction as a purchase of assets rather than as a purchase
of an entity. The Company has not yet responded to any complaint, but intends to
contest the allegations and to defend itself vigorously.

Note 12  Related party
transactions

The Company had the following
significant related party transactions as of December 31, 2010 and 2009,
respectively:

|                                                                                                                                             |   | December 31, |   |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | -
|                                                                                                                                             |   | 2010         |   |   | 2009         |  
|                                                                                                                                             |   |              |   |   |              |  
|Accounts Receivable  related
      party; receivable from Zhengzhou tonghai
      Trade                                                     | $ | 200,185      |   | $ | -            |  
|Other receivable  related
      party: receivable from Zhengzhou Tonghai
      Trade, unsecured, interest-free.                             |   | 152,179      |   |   | -            |  
|Purchase deposit 
      related party, High Pressure Valve
      Co.                                                                        |   | 917,202      |   |   | 385,066      |  
|Accounts payable  related
      party                                                                                                       |   | (2,382,906   | ) |   | -            |  
|Other payable and short term
      loan - related parties: cash advance from
      officers, unsecured, interest-free, due
      upon demand |   | (1,899,627   | ) |   | (1,891,870   | )
|Total                                                                                                                                        | $ | (3,012,967   | ) | $ | (1,506,804   | )

On August 26, 2008, the Companys
wholly owned subsidiary High Pressure Valve and Kaifeng High-Pressure Valve
Steel Casting Limited Liabilities Company entered into an Agreement for Transfer
of Land Use Right and Housing for the transfer of certain real estate to High
Pressure Valve. The Company placed 2,750,000 shares of common stock in escrow,
valued at $9,834,000 or $3.576 per share, the same price paid on August 26, 2008
by the accredited investors under the Securities Purchase Agreement. The
transfer of the title to the Real Estate was completed on March 6, 2009, and
with effect from that date, it is accounted for as fixed assets and intangible
assets and depreciated over the estimated useful lives. As a result of the
transfer of the Real Estate on March 6, 2009, the Company recorded additional paid in capital of $9,834,000. On April 11, 2009, High Pressure Valve and the Casting Company entered into a leasing agreement pursuant to which High Pressure Valve agreed to lease
back the portion of the Real Estate used by the Casting Company at an annual rental of $400,000 for a period of two years starting on April 1, 2009. For the years ended December 31, 2010 and 2009, total rental income from the Casting Company
amount to $400,000 and $300,391 respectively.

See report of independent registered public accounting firm.

F-19

---

The Company purchases raw material, such as castings, from the Casting Company. Total raw material purchase from related party amounted to $12.4 million and $4.4 million for the years ended December 31, 2010 and
2009, respectively. For the year ended 2010, the Company also sold a total of $0.15 million of valves to the Casting Company.

The Company also makes finished goods purchases and sales to/from a related party -Zhengzhou Tonghai Trade Co., Ltd, which is established by a Sales officer of the Company. Total valve purchases from Zhengzhou Tonghai Trade
Co., Ltd amounted to $4.6 million and $0.02 million for the years ended December 31, 2010 and 2009, respectively. Total valve sales to Zhengzhou Tonghai Trade Co., Ltd amounted to $0.47 million and $0 for the years ended December 31,
2010 and 2009, respectively.

As discussed in note 11 above, the Companys subsidiary, ZhengDie Valve leases its manufacturing plant and office space from ZhengZhou Cheng Long Corporation, a related party. ZhengDie Valve made leasehold improvements
to its leased manufacturing plant in the amount of $615,260, which is used as rental payments for the following two years. As of December 31, 2010, prepaid rental of $254,760 remains to be amortized as rental expense.

Note 13  Shareholders' equity

REGISTERED DIRECT OFFERING

On December 27, 2009, China Valves entered into a securities purchase agreement to sell a total of 333,334 shares of common stock, par value $0.001 per share, for an aggregate purchase price of $3,000,006 (gross
purchase price). The Company received $2,796,440 in net proceeds. The share price is at $9.00 per share. The purchaser also received 50,000 shares of warrant shares at an exercise price of $9.00 (exercisable for 30 days beginning on the
date of initial issuance of the Warrant).

On January 7, 2010, the Company entered another securities purchase agreement to sell a total of 2,414,113 shares of common stock, par value $0.001 per share for an aggregate purchase price of $21,727,017 gross
proceeds. Subtracting placement agent fees, legal and other expenses, net proceeds amounted to $20,540,666. The shares are priced at $9.00 per share. The Purchasers also receive warrants to purchase an aggregate of 362,116 shares of common
stock (subject to adjustment in certain circumstances) at an exercise price of $9.00. The warrants are exercisable for 30 days beginning on the date of the initial issuance of the warrants.

WARRANTS

2008 placement agent warrants

At the closing of the 2008 private placement, as part of the compensation to the placement agent, the Company issued warrants to the placement agent to acquire 587,249 shares of common stock. The warrants have a strike
price equal to $4.29 and a term of 3 years. The shares underlying the warrants will have registration rights. The warrants contain a standard anti-dilution provision for stock dividends, stock splits, stock combination, recapitalization and a
change of control transaction. Because the warrants are denominated in U.S. dollars and the Companys functional currency is the RMB, they do not meet the requirements of the accounting standard to be indexed only to the Companys stock.
Accordingly, they are accounted for at fair value as derivative liabilities and marked to market each period

The initial value of the warrants was determined using the Cox-Ross-Rubinstein binomial model using the following assumptions: volatility of 75%; risk free interest rate of 2.64%; dividend yield of 0% and expected term of 3
years. The volatility of the Companys common stock was estimated by management averaging its own volatility and three other comparable companies volatility, the risk free interest rate was based on Treasury Constant Maturity Rates
published by the U.S. Federal Reserve for periods applicable to the life of the warrants, the dividend yield was based on the Companys current and expected dividend policy and the expected term is equal to the contractual life of the warrants.
The value of the warrants was based on the Companys common stock price of $3.576 on the date the warrants were issued.

On February 18, 2009, the placement agent, Brean Murray, Carret & Co., LLC performed a cashless exercise of 352,349 warrant shares; which were converted to 201,326 shares of common stock. The Company valued the
conversion on exercise date, and recorded $229,673 loss from changes in fair value of derivative. A total of $756,012 of carrying value and derivative liability had been reclassified into equity.

In the month of February, 2010, the placement agent, Rosewood Securities LLC exercised 10,202 warrants shares into 10,202 shares of common stock. The Company valued the conversion on the exercise date, and recorded a
$62,233 loss from changes in fair value of derivative. A total of $94,440 of carrying value and derivative liability had been reclassified into equity. These losses were recorded in the Companys income statement.

See report of independent registered public accounting firm.

F-20

---

On April 7, 2010, another 82,567
warrant shares were exercised into 82,567 shares of common stock. The Company
valued the conversion on the exercise date, and recorded a $280,928 loss from
changes in fair value of derivative in the income statement. A total of $786,819
of carrying value and derivative liability had been reclassified into
equity.

2009 placement agent
warrants

At the closing of the 2009 securities
purchase, the Company issued short-term 30-day common stock purchase warrants to
acquire 50,000 shares of common stock. The warrants have a strike price equal to
$9.00 and a term of 30 days. The shares underlying the warrants will have
registration rights. The warrants contain a standard anti-dilution provision for
stock dividends, stock splits, stock combination, recapitalization and a change
of control transaction. Because the warrants are denominated in U.S. dollars and
the Companys functional currency is the Renminbi, they do not meet the
requirements of the accounting standard to be indexed only to the Companys
stock. Accordingly, they are accounted for at fair value as derivative
liabilities and marked to market each period The initial value of the warrants
was determined using the Cox-Ross-Rubinstein binomial model using the following
assumptions: volatility 96%; risk free interest rate 0.030%; dividend yield of
0% and expected term of one month. The value of the warrants was based on the
Companys common stock price of $9.140 on the date the warrants were issued. The
warrants were valued at $53,560 when they were issued on December 28, 2009. As
of December 31, 2009, the estimated fair value of these warrants was $56,484 and
a loss of $2,924 was recorded in the Companys income statement.

On January 19, 2010, the 50,000
warrants shares as described above were exercised at $9.00 into 50,000 shares of
common stock. The Company valued the conversion on exercise date, and recorded
$56,016 loss from changes in fair value of derivative. A total of $112,500
carrying value and derivative liability had been reclassified into equity. These
losses and liability were recorded in the Companys income statement and balance
sheet, respectively.

2010 warrants

On January 7, 2010, the Company issued
short-term 30-day common stock purchase warrants to acquire 362,116 shares of
common stock. The warrants have a strike price equal to $9.00 and a term of 30
days. The shares underlying the warrants will have registration rights. The
warrants contain a standard anti-dilution provision for stock dividends, stock
splits, stock combination, recapitalization and a change of control transaction.
Because the warrants are denominated in U.S. dollars and the Companys
functional currency is the Renminbi, they do not meet the requirements of the
accounting standard to be indexed only to the Companys stock. Accordingly, they
are accounted for at fair value as derivative liabilities and marked to market
each period. The initial value of the warrants was determined using the
Cox-Ross-Rubinstein binomial model using the following assumptions:

- Expected volatility of 19.36%
- Expected dividend yield of 0%
- Risk-free interest rate of 0.020%
- Expected lives of 30 days
- Market price at issuance date of $9.39
- Strike price of $9.00

The value of the warrants was based on
the Companys common stock price of $9.39 on the date the warrants were issued.
The warrants were valued at $165,296 when they were issued on January 7, 2010.

From January to March 2010, all, but

3,334 shares of warrant shares in connection with the 2010 securities purchase
were exercised. A total of $575,576 carrying value and derivative liability had
been reclassified to equity. The Company recorded a loss of $410,281 related to
these warrants. On February 4, 2010, the expiration date of the warrants shares
pursuant to the shares purchase agreement of January 7, 2010, 3,334 shares were
not exercised and therefore expired. A total of $3,801 of carrying value and
derivative liability had been reversed.

In December, 2010, CCG exercised all of
its 50,000 warrant shares into 21,778 shares of common stock. The Company valued
the conversion on the exercise date, and recorded a $4,209 gain from changes in
fair value of derivative in the income statement. A total of $231,500 of
carrying value and derivative liability had been reclassified into
equity.

As of December 31, 2010 and December
31, 2009, warrant liabilities amount to $880,565 and $1,730,837, respectively.
The Company recorded a total loss of $785,350 and $1,508,997, in the Companys
statements of operations related to the change in fair value of warrants for the
years ended December 31, 2010 and 2009, respectively.

Warrants issued and outstanding, all of
which are exercisable at December 31, 2010,

See report of independent registered public accounting firm.

F-21

---

|                                 |  |             |   |   | Weighted |  |  | Average     | 
|-------------------------------- |  | ----------- | - | - | -------- |  |  | ----------- | 
|                                 |  |             |   |   | Average  |  |  | Remaining   | 
|                                 |  | Warrants    |   |   | Exercise |  |  | Contractual | 
|                                 |  | Outstanding |   |   | Price    |  |  | Life        | 
|Balance, December
      31, 2008 |  | 637,249     |   | $ | 4.42     |  |  | 2.60        | 
|Granted                          |  | 50,000      |   |   | 9.00     |  |  | 0.08        | 
|Forfeited                        |  | -           |   |   |          |  |  |             | 
|Exercised                        |  | (352,349    | ) |   | 4.29     |  |  |             | 
|Balance, December
      31, 2009 |  | 334,900     |   | $ | 5.26     |  |  | 1.15        | 
|Granted                          |  | 362,116     |   |   | 9.00     |  |  | 0.08        | 
|Forfeited                        |  | (3,334      | ) |   | 9.00     |  |  |             | 
|Exercised                        |  | (551,551    | ) |   | 7.94     |  |  |             | 
|Balance, December
      31, 2010 |  | 142,131     |   | $ | 4.29     |  |  | 0.08        | 

As of December 31, 2010, only 142,131
shares of 2008 placement agent warrants remains outstanding.

STOCK COMPENSATION

In connection with the Companys
private placement on August 26, 2008, the Company entered into the Make Good
Escrow Agreement, under which 12,583,032 shares of the Companys common stock
held by Bin Li, the Companys major shareholder, were placed in escrow. These
shares are the subject of an Earn-In Agreement between Bin Li and Siping Fang as
described in Note 1 to the consolidated financial statements. Bin Li entered
into the Make Good Escrow Agreement on behalf of Siping Fang. For each of the
calendar years 2008, 2009 and 2010, 4,194,344 shares will be released to the
investors or returned to the shareholder, depending on the fulfillment of
specified earnings targets. As of September 30, 2010, a total of 8,388,688
shares has been returned to the shareholder upon meeting 2008 and 2009s
earnings target. In 2008, the Company recorded $15.0 million expenses for the
release of the escrow shares as the escrow shares were originally thought to be
compensatory. However, in January 2010, FASB issued ASU No. 2010-05  Escrowed
Share Arrangements and the Presumption of Compensation. This update codifies
EITF Topic D-110, which clarifies overcoming the presumption that for certain
shareholders these arrangements represent compensation. Historically, an
escrowed share arrangement involving the release of shares to certain
shareholders based on performance-related criteria is presumed to be
compensatory. When evaluating whether the presumption of compensation has been
overcome, substance of the arrangement should be considered, including whether
the arrangement was entered into for purposes unrelated to, and not contingent
upon, continued employment. If specific facts and circumstances indicate that
the arrangement, such as investors request that specific significant
shareholders participate in an escrowed share arrangement, which will be
released or canceled without regard to continued employment, is in substance an
inducement made to facilitate the transaction on behalf of the company, rather
than as compensatory, the arrangement should be recognized and measured
according to its nature and reflected as a reduction of the proceeds allocated
to the newly-issued securities. The Companys CEO, SiPing Fangs, escrowed
shares, in connection with the 2008 Make Good Escrow agreement, are placed in
escrow at request of the investors and without regard to continued employment.
Based on the clarification from the ASU, the release of the escrowed shares to
SiPing Fang as result of the Company meeting the make good annual income target
should not be recorded as compensation expense. Hence, the Company did not
record compensation expense for Mr. Fang for the years ended December 31, 2010
and 2009.

On June 29, 2009, the Company granted
one of its independent directors 5,000 shares of restricted common stock. The
stock will vest on January 1, 2011. The Company valued the fair value of the
stock grant at $22,500 based on the shares issued and the stock price of $4.50
on June 29, 2009. The $22,500 stock compensation will be amortized over a 2 year
period.

On June 29, 2009, the Company granted
options to the Companys independent directors to purchase a total of 50,000
shares of common stock. 27,500 options, expires 5 years from the date of grant,
are exercisable at a price of $6.00 per share; and 22,500 options, expires 4.4
years from the date of grant, are exercisable at a price of $8.00 per share. On
June 30, 2009, the Company granted options to the Companys officer to purchase
a total of 50,000 shares of common stock. This 50,000 options, expires 3.0 years
from the date of grant, are exercisable at a price of $6.00. The $172,771 fair
values of the 100,000 stock options are expensed ratably over the service period
of the respective personnel. The fair value of the stock options was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: exercise prices of $6.00 (for 27,500 stock options),
$8.00 (for 22,500 stock options) and $6.00 (for 50,000 stock options), expected
life of options of 2 years( for 27,500 stock options), 2 years( for 22,500 stock
options) and 3 years (for 50,000 stock options) expected volatility of 107%,
expected dividend yield of 0%, and risk-free interest rate of 1.11% (for 27,500
stock options), 1.11% (for 22,500 stock options) and 1.64% (for 50,000 stock
options

On May 28, 2010, the Companys CFO
resigned and the 50,000 options granted to her were forfeited.

For the years ended December 31, 2010
and 2009, $56,019 and $47,057 were expensed and recorded as compensation expense
in the Companys income statements, respectively.

See report of independent registered public accounting firm.

F-22

---

|The following is a summary of the
      stock options activity: |  |             |   |   |           |  |   |           | 
|--------------------------------------------------------------- |  | ----------- | - | - | --------- |  | - | --------- | 
|                                                                |  |             |   |   |           |  |   |           | 
|                                                                |  |             |   |   | Weighted- |  |   |           | 
|                                                                |  | Number of   |   |   | Average   |  |   | Aggregate | 
|                                                                |  | Options     |   |   | Exercise  |  |   | Intrinsic | 
|                                                                |  | Outstanding |   |   | Price     |  |   | Value     | 
|Balance, January 1,
      2009                                  |  | -           |   | $ | -         |  | $ | -         | 
|Granted                                                         |  | 100,000     |   |   | 6.56      |  |   |           | 
|Balance, December 31,
      2009                                |  | 100,000     |   | $ | 6.56      |  |   | 279,000   | 
|Forfeited                                                       |  | (50,000     | ) |   | 6.00      |  |   | -         | 
|Exercised                                                       |  | -           |   |   | -         |  |   | -         | 
|Balance, December
      31, 2010                                |  | 50,000      |   | $ | 6.90      |  | $ | 179,000   | 

Following is a summary of the status of
options outstanding at December 31, 2010:

|               |  | Outstanding Options |  |  |                         |  |   | Exercisable Options | 
|-------------- |  | ------------------- |  |  | ----------------------- |  | - | ------------------- | 
|               |  |                     |  |  |                         |  |   |                     | 
|               |  |                     |  |  | Average
      Remaining |  |   | Average             | 
|Exercise Price |  | Number              |  |  | Contractual Life        |  |   | Exercise Price      | 
|$6.00          |  | 27,500              |  |  | 3.49                    |  | $ | 6.00                | 
|$8.00          |  | 22,500              |  |  | 2.89                    |  | $ | 8.00                | 
|Total          |  | 50,000              |  |  |                         |  |   |                     | 

The aggregate intrinsic value of
exercisable shares amounts to $119,335 as of December 31, 2010.

On April 24, 2009, the Companys Board
of Directors approved a one-for-two reverse split (the Reverse Split) of the
Companys common shares. On July 24, 2009, the Company filed a Certificate to
Accompany Restated Articles or Amended and Restated Articles with the Secretary
of State of the State of Nevada that affects the reverse split. Shareholders are
not entitled to receive fractional shares as a result of the Reverse Split. Any
fractional shares will be rounded up to the next highest whole share.

All share and per share amounts used in
the Company's consolidated financial statements and notes thereto have been
retroactively restated to reflect the 1-for-2 reverse stock split, which are
effective on August 13, 2009.

Note 14 - Earnings per
Share

The following is a reconciliation of
the basic and diluted earnings per share computation for the years ended
December 31, 2010 and 2009:

|Basic earnings per
      share                                        |   | 2010       |  |   | 2009       | 
|--------------------------------------------------------------------- | - | ---------- |  | - | ---------- | 
|                                                                      |   |            |  |   |            | 
|Net
      income attributable to holders ofcommon shares              | $ | 43,197,529 |  | $ | 23,353,093 | 
|Basic weighted average
      number ofcommon shares
      outstanding |   | 34,547,224 |  |   | 30,771,356 | 
|Basic earnings per share                                              | $ | 1.25       |  | $ | 0.76       | 
|                                                                      |   |            |  |   |            | 
|                                                                      |   |            |  |   |            | 
|                                                                      |   |            |  |   |            | 
|Dilutive earnings per share                                           |   | 2010       |  |   | 2009       | 
|                                                                      |   |            |  |   |            | 
|Net
      income attributable to holdersof common shares              | $ | 43,197,529 |  | $ | 23,353,093 | 
|Basic weighted average
      numberof common shares
      outstanding |   | 34,547,224 |  |   | 30,771,356 | 
|Warrants                                                              |   | 118,821    |  |   | 160,110    | 
|Stock
      compensation                                              |   | 29,594     |  |   | 14,926     | 
|Dilutive weighted average numberof common shares outstanding          |   | 34,695,639 |  |   | 30,946,392 | 
|Dilutive
      earnings per share                                     | $ | 1.25       |  | $ | 0.75       | 

The warrants issued in 2008 with an
exercise price of $4.29, 50,000 warrants issued in 2007 with an exercise price
of $6.00, and investor warrants issued in 2009 and 2010 have been included in
the diluted earnings per share calculation for the year ended December 31, 2010 and warrants issued
in 2008 and 2009 have been included in the diluted earnings per share
calculation for the year ended December 31, 2009 due to their dilutive
nature.

See report of independent registered public accounting firm.

F-23

---

As described in Note 13, the Company
granted its independent directors and officer restricted common stocks of 5,000
shares vesting in 2011 and 100,000 option shares on June 29thand June
30th,
2009. The stock compensations are included in the diluted earnings per share for
the years-ended December 31, 2010 and 2009 due to its dilutive nature.

Note 15 - Geographic and product
lines

The Company sells valves, which are
used by customers in various industries. The production process, class of
customer, selling practice and distribution process are the same for all valves.
The Companys chief operating decision-makers (i.e. chief executive officer and
his direct reports) review financial information presented on a consolidated
basis, accompanied by disaggregated information about revenues by product lines
for purposes of allocating resources and evaluating financial performance. There
are no segment managers who are held accountable for operations, operating
results and plans for levels or components below the consolidated unit level.
Based on qualitative and quantitative criteria established by the accounting
standard regarding Disclosures about Segments of an Enterprise and Related
Information, the Company considers itself to be operating within one reportable
segment.

The Company does not have long-lived
assets located in foreign countries. In accordance with the enterprise-wide
disclosure requirements of the accounting standard, the Company's net revenue
from external customers by main product lines (based upon primary markets
defined by the Chinese Valve Industry Association) and by geographic areas is as
follows:

|                      |   | For the years
    ended December 31, | 
|--------------------- | - | ------------------------------------ | 
|                      |   | 2010                                 | 
|                      |   | (in thousands)                       | 
|Power Supply          | $ | 51,963                               | 
|Petrochemical and Oil |   | 55,635                               | 
|Water Supply          |   | 43,626                               | 
|Metallurgy            |   | 8,999                                | 
|Other                 |   | 23,473                               | 
|Total sales revenue   | $ | 183,696                              | 

|                          |   | For the
      years ended December 31, | 
|------------------------- | - | -------------------------------------- | 
|                          |   | 2010                                   | 
|                          |   | (in thousands)                         | 
|China                     | $ | 177,006                                | 
|International             |   | 6,690                                  | 
|Total sales
      revenue | $ | 183,696                                | 

Note 16  Business
combinations

Effective January 1, 2009, the Company
adopted the accounting standard regarding business combinations. This standard
retains the fundamental requirements that the acquisition method of accounting
(which this standard called the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination.
This standard 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 the old accounting standard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. If
the fair value of the identifiable assets and liabilities is still greater than
the consideration transferred, then the acquirer is to recognize a gain for the
difference on the acquisition date.

Yangzhou Rock
acquisition

In January, 2010, a subsidiary of the
Company completed the acquisition of Yangzhou Rock Valve Lock Technology Co.,
Ltd. ("Yangzhou Rock"), for a total cash consideration of $7.2 million. The
acquisition was accounted as a business combination in accordance to the terms
of the purchase agreement. The Company assumed the following net assets:

See report of independent registered public accounting firm.

F-24

---

|Yangzhou Rock           |   | Fair Value |  |   | Assumed by the Company | 
|----------------------- | - | ---------- |  | - | ---------------------- | 
|Inventory               | $ | 1,734,593  |  | $ | 1,734,593              | 
|Buildings and Equipment |   | 3,350,119  |  |   | 3,350,119              | 
|Intangible
      Assets |   | 3,111,580  |  |   | 3,111,580              | 
|Total assets            |   | 8,196,292  |  |   | 8,196,292              | 
|Total
      liabilities |   | -          |  |   | -                      | 
|Net assets              | $ | 8,196,292  |  | $ | 8,196,292              | 

The Company allocated the purchase
price based on the fair value of the assets acquired and recorded a gain of
approximately $1.0 million in other income in the current period.

Changsha Valve acquisition

In February 2010, the Company acquired all the equity interests
in Able Delight (Changsha) Valve Co, Ltd. (Changsha Valve), formerly an
indirect subsidiary of Watts Water Technologies, Inc. (Watts), for a purchase
price of $12.12 million plus certain assumed obligations and acquisition
expenses, for which the Company paid off $2.81 million, or an aggregate
expenditure of approximately $15 million at time of acquisition. Changsha Valve
was purchased from Able Delight Investment, Ltd., which had acquired Changsha
Valve from Watts in January 2010 with $6.07 million from funds loaned to it by
the Company. Able Delight Investment, Ltd. had been formed in November 2009 by
Qing Lu, the wife of Bin Li, a 34% stockholder of the Company, in order to
facilitate the Companys purchase of Changsha Valve. The Companys purchase
price included the discharge of the loan, payments to certain of Watts
subsidiaries, and certain other financial obligations of Changsha Valve. The
acquisition was accounted as a business combination in accordance to the terms
of the purchase agreement. Net assets acquired included the following:

|Changsha Valve          |   | Fair
      Value |  |   | Assumed by the Company | 
|----------------------- | - | ---------------- |  | - | ---------------------- | 
|Cash                    | $ | 8,740            |  | $ | 8,740                  | 
|Receivables             |   | 3,454,156        |  |   | 3,454,156              | 
|Inventory               |   | 4,954,596        |  |   | 4,954,596              | 
|Buildings and equipment |   | 4,595,254        |  |   | 4,595,254              | 
|Intangible Assets       |   | 5,490,873        |  |   | 5,490,873              | 
|Total assets            |   | 18,503,619       |  |   | 18,503,619             | 
|Payables                |   | 3,703,845        |  |   | 3,703,845              | 
|Total liabilities       |   | 3,703,845        |  |   | 3,703,845              | 
|Net assets              | $ | 14,799,774       |  | $ | 14,799,774             | 

The Company allocated the purchase price based on the fair
value of the assets acquired and liabilities assumed and recorded a gain of
approximately $2.68 million in other income in the current period.

Hanwei Valve acquisition

In April 2010, the Company acquired
from certain unaffiliated individuals the two entities that were owners of the
joint venture that in turn owned Shanghai Pudong Hanwei Valve Co., Ltd. (Hanwei
Valve), together with certain intangible assets used in the operation of Hanwei
Valve, for an aggregate of $19.5 million. Net Assets acquired are as follow:

|                        |   |            |  |   | Assumed by the | 
|----------------------- | - | ---------- |  | - | -------------- | 
|Hanwei Valve            |   | Fair Value |  |   | Company        | 
|Inventory               | $ | 1,802,490  |  | $ | 1,802,490      | 
|Buildings and Equipment |   | 2,526,087  |  |   | 2,526,087      | 
|Intangible
      Assets |   | 4,121,271  |  |   | 4,121,271      | 
|Goodwill purchased      |   | 11,046,074 |  |   | 11,046,074     | 
|Total assets            |   | 19,495,922 |  |   | 19,495,922     | 
|Total liabilities       |   | -          |  |   | -              | 
|Net assets              | $ | 19,495,922 |  | $ | 19,495,922     | 

The Company allocated the purchase
price based on the fair value of the assets acquired and recorded a goodwill of
approximately $11.0 million in the current period.

See report of independent registered public accounting firm.

F-25

---

Note 17  Subsequent events

On January 4, 2011, China Valves Technology, Inc. (the Company) entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with certain purchasers (the Purchasers)
pursuant to which the Company will sell a total of 1,000,000 shares (the Shares) of common stock, par value $0.001 per share (the Common Stock), for an aggregate purchase price of $10,000,000 (the Purchase
Price). The Shares are priced at $10.00 per share. The Purchasers will also receive a warrant to purchase an aggregate of 250,000 shares (the Warrant Shares) of Common Stock (subject to adjustment in certain circumstances) at
an exercise price of $10.00 (the Warrant). The Warrant is exercisable for 180 days beginning on the date of the initial issuance of the Warrant. The Shares and the Warrant Shares are to be sold pursuant to a shelf registration
statement (the Registration Statement) declared effective by the Securities and Exchange Commission (the SEC) on December 14, 2009.

Also, on January 4, 2011, the Company entered into a placement agency agreement (the Placement Agency Agreement) with Rodman & Renshaw, LLC (the Placement Agent) in which the Placement Agent
agreed to act as placement agent in connection with this offering. The Placement Agent has no obligation to buy any securities from the Company.

See report of independent registered public accounting firm.

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