**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




FORM
        10-KSB







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


For
      the
      Fiscal Year Ended December 31, 2006





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




For
      the
      transition period from ________________ to __________________





Commission
      File Number 0-19276





**Fushi
      International, Inc.**


(Name
      of
      small business issuer in its charter)





Nevada
            13-3140715(State
                or other jurisdiction of
            (IRS.
                Employerincorporation
                or organization)
            Identification
                No.)





1
                Shuang Qiang Road, Jinzhou, Dalian, People’s Republic of China
            116100(Address
                of principal executive offices)
            (Zip
                Code)




Issuer’s
      telephone number, including area code 011-86-411-8770-3333




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





Securities
                registered pursuant to Section 12(g) of the Act:
            Common
                Stock, $0.006 par valueper
                share




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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
o




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B is not contained in this form, and no disclosure will 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-KSB or any amendment
      to
      this Form 10-KSB. x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes
o
      No x





State
      issuer’s revenues for its most recent fiscal year: $67,595,774 for the fiscal
      year ended December 31, 2006.





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: $45,373,785.





(1)
      Based
      upon a closing bid price on March 27, 2007 of $7.45 per share of common stock
      on
      the over-the-counter Bulletin Board.





On
      March
      27, 2007, the issuer had 20,301,162 shares
      of
      common stock outstanding.





Transitional
      Small Business Disclosure Format (check one):


Yes o
      No: x







**Fushi
      International, Inc.**


**Form
      10-KSB**




Table
      of Contents





Forward-Looking
      Statements and Associated Risk





PART
                I
            
            
            
            PageItem
                1.
            
            Description
                of Business
            
            21Item
                2.
            
            Description
                of Property
            
            36Item
                3.
            
            Legal
                Proceedings
            
            37Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            37PART
                IIItem
                5.
            
            Market
                for Common Equity, Related Stockholder Matters and
                Small Business Issuer
              Purchases
                of Equity Securities
            
            37Item
                6.
            
            Management's
                Discussion and Analysis or Plan of Operation
            
            38Item
                7.
            
            Financial
                Statements
            
            55Item
                8.
            
            Changes
                in and Disagreements with Accountants
                on Accounting and Financial
              Disclosure
            
            56Item
                8A.
            
            Controls
                and Procedures
            
            56Item
                8B.
            
            Other
                Information
            
            57PART
                IIIItem
                9.
            
            Directors
                and Executive Officers of
                the Registrant
            
            57Item
                10.
            
            Executive
                Compensation
            
            60Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners
                and Management and Related
              Stockholder
                Matters
            
            61Item
                12.
            
            Certain
                Relationships and Related Transactions
            
            62Item
                13.
            
            Exhibits
            
            62Item
                14.
            
            Principal
                Accountant Fees and Services
            
            64SignaturesFinancial
                Statements
            
            
            
            F-1




iii





**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISK**





Certain
      statements in this Report, and the documents incorporated by reference herein,
      constitute "forward-looking statements" within the meaning of Section 27A of
      the
      Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934
      and
      the Private Securities Litigation Reform Act of 1995. Such forward-looking
      statements include statements, which involve risks and uncertainties, regarding,
      among other things, (a) our projected sales, profitability, and cash flows,
      (b)
      our growth strategies, (c) anticipated trends in our industries, (d) our future
      financing plans, and (e) our anticipated needs for, and use of, working capital.
      They are generally identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the
      negative of these words or other variations on these words or comparable
      terminology. These statements may be found under “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and “Business,” as
      well as in this Report generally. Actual events or results may differ materially
      from those discussed in forward-looking statements as a result of various
      factors, including, without limitation, the risks outlined under “Risk Factors”
and matters described in this report generally. In light of these risks and
      uncertainties, there can be no assurance that the forward-looking statements
      contained in this filing will in fact occur. You should not place undue reliance
      on these forward-looking statements.





The
      forward-looking statements speak only as of the date on which they are made,
      and, except to the extent required by federal securities laws, we undertake
      no
      obligation to update any forward-looking statement to reflect events or
      circumstances after the date on which the statement is made or to reflect the
      occurrence of unanticipated events.




Unless
      otherwise noted, all currency figures in this filing are in U.S. dollars.
      References to "yuan" or "RMB" are to the Chinese yuan (also known as the
      renminbi). According to Xe.com as of March 28, 2007, US $1.00 = 7.73180
      yuan.




The
      "Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
      International, Inc., (ii) Fushi Holdings, Inc.(formerly Diversified Product
      Inspections, Inc.) (“Fushi Holdings”), (iii) Fushi International (Dalian)
      Bimetallic Cable Co., Ltd. (formerly Dalian
      Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi
      International (Dalian)”), and (iv) Dalian Fushi Bimetallic Wire Manufacturing,
      Co., Ltd. (“Dalian Fushi”).





**RISK
      FACTORS**




We
      operate in a highly competitive environment in which there are numerous factors
      which can influence our business, financial position or results of operations
      and which can also cause the market value of our common stock to decline. Many
      of these factors are beyond our control and therefore, are difficult to predict.
      The following section sets forth what we believe to be the principal risks
      that
      could affect us, our business or our industry, and which could result in a
      material adverse impact on our financial results or cause the market price
      of
      our common stock to fluctuate or decline.




4




**RISKS
      RELATED TO OUR BUSINESS**




**Our
      limited operating history may not serve as an adequate basis to judge our future
      prospects and results of operations.**




We
      began
      the sale of copper clad aluminum wire in 2002 and copper clad steel wire in
      2003. Our limited operating history may not provide a meaningful basis on which
      to evaluate our business. Although our revenues have grown rapidly since
      inception, we cannot assure you that we will maintain our profitability or
      that
      we will not incur net losses in the future. We expect that our operating
      expenses will increase as we expand. Any significant failure to realize
      anticipated revenue growth could result in significant operating losses. We
      will
      continue to encounter risks and difficulties frequently experienced by companies
      at a similar stage of development, including our potential failure
      to:




- maintain
        our proprietary copper cladding technology for the manufacturing of composite
        wires;
- expand
        our product offerings and maintain the high quality of our products;
- manage
        our expanding operations, including the integration of any future
        acquisitions;
- maintain
        adequate control of our expenses;
- implement
        our product development, marketing, sales, and acquisition strategies and
        adapt and modify them as needed;
- anticipate
        and adapt to changing conditions in the bimetallic composite products markets
        in which we operate as well as the impact of any changes in government
        regulation, mergers and acquisitions involving our competitors, technological
        developments and other significant competitive and market dynamics.



**Quarterly
      operating Results May Fluctuate**




Our
      quarterly results of operations may fluctuate as a result of a number of
      factors, including fluctuation in the demand for and shipments of our products
      and changes in the prices of copper which directly affect the prices of our
      products and demand for our products. Therefore, quarter-to-quarter comparisons
      of results of operations have been and will be impacted by the volume of such
      orders and shipments. In addition, our operating results could be adversely
      affected by the following factors, among others, such as variations in the
      mix
      of product sales, price changes in response to competitive factors, increases
      in
      raw material costs and other significant costs, increases in utility costs
      (particularly electricity) and various types of insurance coverage and
      interruptions in plant operations resulting from the interruption of raw
      material supplies and other factors.




5




**The
      success of our business is dependent upon high copper prices which may not
      be
      stable and could decline.**




Copper
      prices, which have increased over the past several years, have varied
      significantly and may vary significantly in the future because the copper
      industry is highly volatile and cyclical in nature. This affects our business
      both positively and negatively - as our products are a substitute for pure
      copper wire, higher prices increase demand, while lower copper prices can
      decrease demand. Numerous factors, most of which are beyond our control, drive
      the cycles of the copper industry and influence copper price. These factors
      include general economic conditions, industry capacity utilization, import
      duties and other trade restrictions. We
      cannot predict copper prices in the future or the effect of fluctuations in
      the
      costs of copper on our future operating results. Consequently, fluctuations
      in
      raw material prices caused by market forces can significantly affect our
      financial results. For example, we may not be able to adjust our product prices,
      especially in the short-term, to recover the costs of increases in these raw
      materials. Our future profitability may be adversely affected to the extent
      we
      are unable to pass on higher raw material costs to our
      customers.




**We
      may encounter substantial competition in our business and our failure to compete
      effectively may adversely affect our ability to generate
      revenue.**




The
      bimetallic industry is becoming increasingly competitive. The principal elements
      of competition in the bimetallic industry are, in our opinion, pricing, product
      availability and quality. While we believe that we have attained a leadership
      position with respect to all of these factors, our major competitors with
      substantially greater resources than us may be better able than us to
      successfully endure downturns in our industrial sector. In periods of reduced
      demand for our products, we can either choose to maintain market share by
      reducing our selling prices to meet competition or maintain selling prices,
      which would likely sacrifice market share. Sales and overall profitability
      would
      be reduced under either scenario. In addition, we cannot assure you that
      additional competitors will not enter our existing markets, or that we will
      be
      able to compete successfully against existing or new competition.




**We
      may not be able to effectively control and manage our growth.**




If
      our
      business and markets grow and develop, it will be necessary for us to finance
      and manage expansion in an orderly fashion. In addition, we may face challenges
      in managing expanding product offerings and in integrating acquired businesses
      with our own. Such eventualities will increase demands on our existing
      management, workforce and facilities. Failure to satisfy such increased demands
      could interrupt or adversely affect our operations and cause production
      backlogs, longer product development time frames and administrative
      inefficiencies.




6




**If
      we are unable to successfully complete and integrate strategic acquisitions
      in a
      timely manner, our growth strategy may be adversely
      impacted.**




An
      important element of our growth strategy may be the pursuit of acquisitions
      of
      other businesses that increase our existing market share and expand our
      production capacity. However, integrating businesses involves a number of
      special risks, including the possibility that management may be distracted
      from
      regular business concerns by the need to integrate operations, unforeseen
      difficulties in integrating operations and systems, problems relating to
      assimilating and retaining the employees of the acquired business, accounting
      issues that arise in connection with the acquisition, challenges in retaining
      customers, and potential adverse short-term effects on operating results. If
      we
      are unable to successfully complete and integrate strategic acquisitions in
      a
      timely manner, our growth strategy may be adversely impacted.




**We
      depend on a concentration of customers.**




Our
      revenue is dependent, in large part, on significant orders from a limited number
      of customers. Sales to our five largest customers accounted for approximately
      41% and 28.9% of our net sales during the years ended December 31, 2005 and
      2006, respectively. We believe that revenue derived from current and future
      large customers will continue to represent a significant portion of our total
      revenue. Our inability to continue to secure and maintain a sufficient number
      of
      large customers would have a material adverse effect on our business, operating
      results and financial condition. Moreover, our success will depend in part
      upon
      our ability to obtain orders from new customers, as well as the financial
      condition and success of our customers and general economic
      conditions.




**Shortages
      or disruptions in the availability of raw materials could have a material
      adverse effect on our business**




Aluminum
      bars and copper strip, our principal raw materials, collectively accounted
      for
      approximately 90% of our costs of goods sold during the fiscal year ended
      December 31, 2006, and we expect that they will continue to account for a
      significant portion of our cost of goods sold in the future. The prices of
      raw
      materials fluctuate, subject to general economic conditions and in relation
      to
      supply and demand and other factors, and cause monthly variations in the cost
      of
      our raw materials purchases. The macro-economic factors, together with labor
      and
      other business interruptions experienced by certain suppliers, have contributed
      to periodic shortages of supply of raw materials, and such shortages may
      increase in the future. If we are unable to procure adequate supplies of copper
      and aluminum to meet our future production needs and customer demand, it will
      result in a material loss of customers and revenues and adversely impact our
      results of operations. In addition, supply shortages or disruptions or the
      loss
      of suppliers may cause us to procure our raw materials from less cost effective
      sources and may have a material adverse effect on our business, revenues and
      results of operations.




7




**We** **depend
        on a few suppliers for a significant portion of our principal raw materials
        and
        we** **do
        not have** **any** **long-term
        supply contracts with** **our
        raw materials suppliers.** **Interruptions
        of production at our key suppliers may affect our results of operations and
        financial performance.**
 We
          rely
          on a limited number of suppliers for most of the raw
          materials we use. We have in the past relied on Shanghai Jutai Copper Co.
          and
          Harbin Electric Wire Co. for our copper strip and aluminum bar supplies,
          respectively. During the fiscal year ended December 31, 2006, our biggest
          suppliers were Baotou Aluminum Co., Ltd., Harbin Electric Wire Co., Shanghai
          Jutai Copper Co. and Beijing Golden Eagle Huichuang Copper Co. Purchases
          from
          these companies represented approximately 85% of our total raw material
          purchases in 2006. Interruptions or shortages of supplies from our key
          suppliers
          of raw materials could disrupt production or impact our ability to increase
          production and sales. We do not have long-term or volume purchase agreements
          with most of our suppliers, and may have limited options in the short-term
          for
          alternative supply if these suppliers fail for any reason, including their
          business failure or financial difficulties, to continue the supply of materials
          or components. Moreover, identifying and accessing alternative sources
          may
          increase our costs. Interruptions at our key suppliers could negatively
          impact
          our results of operations, financial performance and the price of our common
          stock.




**Due
      to increased volatility of raw material prices, the timing lag between the
      raw
      material purchase and product pricing can negatively impact our
      profitability**




Volatility
      in the prices of raw materials, among other factors, may adversely impact our
      ability to accurately forecast demand and may have a material adverse impact
      on
      our results of operations. For example, our manufacturing activities are
      determined, and raw materials purchase scheduled, upon forecasted demand while
      sales prices are determined at the time of order placement, subject to
      adjustment at fulfillment. The lag between the point when raw materials are
      acquired in advance and the point when products are actually priced may impact
      us both positively and negatively, resulting in increased or reduced
      profitability. While this did not result in a material negative impact, and
      resulted in some benefits in the quarter ended June 30, 2006, our financial
      results were negatively impacted in the quarter ended September 30, 2006 and
      there can be no assurance that this will not occur again which may negatively
      impact the price of our common stock as well.




8




In
      addition to the above, we routinely maintain a certain level of finished goods
      inventories to meet near term expected demand. Pricing for the sale of these
      inventories is generally based on current raw material prices. Rapid declines
      in
      the price of raw materials may result in our inventories being carried at costs
      in excess of net realizable value and may have an adverse effect on our results
      of operations and the price of our common stock.




**Increases
      in raw materials prices will increase our need for working
      capital.**




As
      the
      prices of raw materials increase, our working capital requirements increase.
      Increases in our working capital requirements can materially adversely impact
      our results of operations, our cash flow and our available liquidity to fund
      other business needs. Furthermore, there is no assurance we would be able to
      finance additional working capital requirements or finance such working capital
      requirements on favorable terms. If we were unable to obtain financing on
      favorable terms, our business and results of operations may be materially
      adversely affected. See “Management’s discussion and analysis of financial
      condition and results of operations—Liquidity and capital resources”
below.




**Increases
      in raw materials prices may increase credit and default risk with respect to
      our
      customers.**




Increases
      in the price of our products, as raw material prices rise, may place additional
      demands on the working capital and liquidity needs of our customers.
      Accordingly, our customers’ cash flow may be negatively impacted which may have
      an adverse effect on the timing and amount of payment of our accounts
      receivable, which would in turn, negatively affect our results of operations
      and
      could affect the price of our common stock.





**Our
      profitability depends on the success of recognition of the "FUSHI" brand and
      we
      could lose our competitive advantage if we are not able to protect our FUSHI
      trademark against infringement, and any related litigation could be
      time-consuming and costly.**




We
      believe the trademarked brand "FUSHI," registered under PRC law, has gained
      substantial recognition with customers. However, the protection of intellectual
      property rights in the PRC may not be as effective as that in the United States
      or other countries. The unauthorized use of the FUSHI brand could enable some
      other manufacturers to gain market share which could harm our business and
      competitive position. Moreover, from time to time, we may seek to protect
      trademark rights through litigation, which may result in substantial litigation
      costs and diversion of resources, including the efforts of management, all
      of
      which could negatively impact our results of operations and price of our common
      stock.




Pursuant
      to our Trademark Authorization, Li Fu, our Chairman and CEO, who the registered
      owner of the "FUSHI" trademark, authorized Fushi International (Dalian) to
      use
      this trademark for a perpetual period without any fee. In the event this
      authorization is revoked or found to be unenforceable, for any reason, we could
      lose the use of the trademark, which could materially and adversely affect
      our
      business.




9





**We
      may not be able to prevent others from unauthorized use of Fushi International
      (Dalian’s) patents, which could harm our business and competitive
      position.**




Our
      success depends, in part, on our ability to protect our proprietary
      technologies. Fushi International (Dalian) has seven patents in China covering
      its modified bond-welding technology and related devices and machines for a
      manufacturing machine for copper clad aluminum wires in the PRC.




We
      have
      also made one international patent application under the International Patent
      Cooperation Treaty, which covers our bond-welding manufacturing method for
      cuponal busbar. The process of seeking patent protection can be lengthy and
      expensive and we can make no assurance that patent applications will result
      in
      patents being issued, or that existing or future issued patents will be
      sufficient to provide us with meaningful protection or any commercial
      advantage.




We
      believe that other manufacturers in the PRC have been infringing our patents
      and
      are using our core technology. Although we have pursued legal remedies available
      in the PRC to protect our patents, we can provide no assurance that the
      protection afforded under the laws of the PRC is adequate to maintain our
      competitive position or that we will be successful in all our efforts. Our
      patents and patent applications may be challenged, invalidated or circumvented
      in the future. We cannot assure you that our current or potential competitors
      do
      not have, and will not obtain, patents that will prevent, limit or interfere
      with our ability to make, use or sell our products in either the PRC or other
      countries.




Enforcement
      and implementation of PRC intellectual property-related laws has historically
      been lacking. Accordingly, intellectual property rights and confidentiality
      protections in the PRC may not be as effective as in the United States or other
      countries. Policing unauthorized use of proprietary technology is difficult
      and
      expensive, and we might need to resort to litigation to enforce or defend
      patents issued to us or to determine the enforceability, scope and validity
      of
      our proprietary rights or those of others. Such litigation may require
      significant expenditure of cash and management efforts and could harm our
      business, financial condition and results of operations. An adverse
      determination in any such litigation will impair our intellectual property
      rights and may harm our business, competitive position, business prospects,
      reputation and the price of our common stock.




**We
      may be exposed to intellectual property infringement and other claims by third
      parties, which, if successful, could cause us to pay significant damage awards
      and incur other costs.**




Our
      success also depends in large part on our ability to use and develop our
      technology and know-how without infringing the intellectual property rights
      of
      third parties. As litigation becomes more common in the PRC in resolving
      commercial disputes, we face a higher risk of being the subject of intellectual
      property infringement claims. The validity and scope of claims relating to
      weld-cladding technology and related devices and machine patents involve complex
      technical, legal and factual questions and analysis and, therefore, may be
      highly uncertain. The defense and prosecution of intellectual property suits,
      patent opposition proceedings and related legal and administrative proceedings
      can be both costly and time consuming and may significantly divert the efforts
      and resources of our technical and management personnel. An adverse
      determination in any such litigation or proceedings to which we may become
      a
      party could subject us to significant liability, including damage awards, to
      third parties, require us to seek licenses from third parties, to pay ongoing
      royalties, or to redesign our products or subject us to injunctions preventing
      the manufacture and sale of our products. Protracted litigation could also
      result in our customers or potential customers deferring or limiting their
      purchase or use of our products until resolution of such
      litigation.




10




**Potential
      environmental liability could have a material adverse effect on our operations
      and financial condition.**




To
      the
      knowledge of our management team, neither the production nor the sale of our
      products constitute activities, or generate materials in a material manner,
      that
      requires us to comply with the PRC environmental laws. Although it has not
      been
      alleged by PRC government officials that we have violated any current
      environmental regulations, we cannot assure you that the PRC government will
      not
      amend the current PRC environmental protection laws and regulations. Our
      business and operating results may be materially and adversely affected if
      we
      were to be held liable for violating existing environmental regulations or
      if we
      were to increase expenditures to comply with environmental regulations affecting
      our operations.




**We
      rely on Mr. Fu, our chairman and CEO, for the management of our business, and
      the loss of his services may significantly harm our business and
      prospects.**




We
      depend, to a large extent, on the abilities and participation of our current
      management team, but have a particular reliance upon Li Fu for the direction
      of
      our business. The loss of the services of Mr. Fu, for any reason, may have
      a
      material adverse effect on our business and prospects. We cannot assure you
      that
      the services of Mr. Fu will continue to be available to us, or that we will
      be
      able to find a suitable replacement for Mr. Fu.




We
      do not
      have key man insurance on Mr. Fu. If Mr. Fu dies and we are unable to replace
      Mr. Fu for a prolonged period of time, we may be unable to carry out our long
      term business plan and our future prospect for growth, and our business, may
      be
      harmed.




**We
      may not be able to hire and retain qualified personnel to support our growth
      and
      if we are unable to retain or hire such personnel in the future, our ability
      to
      improve our products and implement our business objectives could be adversely
      affected.**


Our
        future success depends heavily upon the continuing services of the members
        of
        our senior management team, in particular our chairman and CEO ,
        Li Fu,
        our P resident,
        Yue Yang, our chief financial officer Wenbing Chris Wang, and our chief engineer
        Xishan Yang. If one or more of our senior executives or other key personnel
        are
        unable or unwilling to continue in their present positions, we may not be
        able
        to replace them easily or at all, and our business may be disrupted and our
        financial condition and results of operations may be materially and adversely
        affected. Competition for senior management and senior technology personnel
        is
        intense, the pool of qualified candidates is very limited, and we may not
        be
        able to retain the services of our senior executives or senior technology
        personnel, or attract and retain high-quality senior executives or senior
        technology personnel in the future. Such failure could materially and adversely
        affect our future growth and financial condition.




11




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




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




We
      have
      purchased automobile insurance with third party liability coverage for our
      vehicles. In addition, we have purchased property insurance from China United
      Property Insurance Company to cover real property and plant. Except for property
      and automobile insurance, we do not have other insurance such as business
      liability or disruption insurance coverage for our operations in the PRC. In
      the
      event of a significant product liability claim or other uninsured event, our
      financial results and the price of our common stock may be adversely
      affected.




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




Our
      product warranties against technical defects of our copper clad aluminum wires
      and copper clad steel wires vary, depending on our purchase orders with
      customers. The warranties require us to replace defective components and pay
      for
      the losses customers incur from defective products or a certain percentage
      of
      the purchase price as liquidated damages for our failure to meet the specified
      product specifications and packaging requirements in the purchase orders. We
      have not established any reserve funds for potential warranty claims since
      historically we have experienced few warranty claims for our products so that
      the costs associated with our warranty claims have been low. If we experience
      an
      increase in warranty claims or if our repair and replacement costs associated
      with warranty claims increase significantly, it would have a material adverse
      effect on our financial condition and results of operations.




**RISKS
      RELATED TO DOING BUSINESS IN THE PRC**




12




**Changes
      in the policies of the PRC government could have a significant impact upon
      the
      business we may be able to conduct in the PRC and the profitability of that
      business.**




The
      PRC's
      economy is in a transition from a planned economy to a market oriented economy
      subject to five-year and annual plans adopted by the government that set
      national economic development goals. Policies of the PRC government can have
      significant effects on the economic conditions of the PRC. The PRC government
      has confirmed that economic development will follow the model of a market
      economy, such as the United States. Under this direction, we believe that the
      PRC will continue to strengthen its economic and trading relationships with
      foreign countries and business development in the PRC will follow market forces.
      While we believe that this trend will continue, we cannot assure you that this
      will be the case. Our interests may be adversely affected by changes in policies
      by the PRC government, including:




·
            changes
                in laws, regulations or their interpretation




·
            confiscatory
                taxation




·
            restrictions
                on currency conversion, imports or sources of supplies




·
            expropriation
                or nationalization of private enterprises.




Although
      the PRC government has been pursuing economic reform policies for more than
      two
      decades, we cannot assure you that the government will continue to pursue such
      policies or that such policies may not be significantly altered, especially
      in
      the event of a change in leadership, social or political disruption, or other
      circumstances affecting the PRC's political, economic and social life.




**The
      PRC laws and regulations governing our current business operations are sometimes
      vague and uncertain. Any changes in such PRC laws and regulations may have
      a
      material and adverse effect on our business.**




There
      are
      substantial uncertainties regarding the interpretation and application of PRC
      laws and regulations, including but not limited to the laws and regulations
      governing our business, or the enforcement and performance of our arrangements
      with customers in the event of the imposition of statutory liens, death,
      bankruptcy and criminal proceedings. We and any future subsidiaries are
      considered foreign persons or foreign funded enterprises under PRC laws, and
      as
      a result, we are required to comply with PRC laws and regulations. These laws
      and regulations are sometimes vague and may be subject to future changes, and
      their official interpretation and enforcement may involve substantial
      uncertainty. The effectiveness of newly enacted laws, regulations or amendments
      may be delayed, resulting in detrimental reliance by foreign investors. New
      laws
      and regulations that affect existing and proposed future businesses may also
      be
      applied retroactively. We cannot predict what effect the interpretation of
      existing or new PRC laws or regulations may have on our businesses.




13




**A
      slowdown or other adverse developments in the PRC economy may materially and
      adversely affect our customers, demand for our services and our
      business.**




All
      of
      our operations are conducted in the PRC and more than 96% of our net sales
      are
      generated from sales in the PRC. Although the PRC economy has grown
      significantly in recent years, we cannot assure you that such growth will
      continue. The bimetallic composite wire industry in the PRC is growing, but
      we
      do not know how sensitive we are to a slowdown in economic growth or other
      adverse changes in the PRC economy which may affect demand for our products.
      A
      slowdown in overall economic growth, an economic downturn or recession or other
      adverse economic developments in the PRC may materially reduce the demand for
      our products and materially and adversely affect our business.




**Inflation
      in the PRC could negatively affect our profitability and
      growth.**




While
      the
      PRC economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. If prices for our products rise at a rate that is insufficient to
      compensate for the rise in the costs of supplies, it may have an adverse effect
      on profitability. In order to control inflation in the past, the PRC government
      has imposed controls on bank credits, limits on loans for fixed assets and
      restrictions on state bank lending. The implementation of such policies may
      impede economic growth.




**Fushi
      International (Dalian) and Dalian Fushi are subject to restrictions on paying
      dividends and making other payments to us.**




We
      are a
      holding company incorporated in the State of Nevada and do not have any assets
      or conduct any business operations other than investments in our subsidiaries
      and affiliates, Fushi International (Dalian) and Dalian Fushi. As a result
      of
      this holding company structure, we rely entirely on dividends payments from
      Fushi International (Dalian) for funds. PRC regulations currently permit payment
      of dividends only out of accumulated profits, as determined in accordance with
      PRC accounting standards and regulations. Fushi International (Dalian) and
      Dalian Fushi also are required to set aside a portion of their after-tax profits
      according to PRC accounting standards and regulations to fund certain reserve
      funds. The PRC government also imposes controls on the conversion of RMB into
      foreign currencies and the remittance of currencies out of the PRC. We may
      experience difficulties in completing the administrative procedures necessary
      to
      obtain and remit foreign currency. Furthermore, if Fushi International (Dalian)
      or Dalian Fushi incurs debt on its own in the future, the instruments governing
      the debt may restrict its ability to pay dividends or make other payments.
      If we
      or Fushi International (Dalian) is unable to receive all of the revenues from
      operations, we may be unable to pay dividends on our common stock. See also
      "Risk Factors--Risks Related to an Investment in Our Common Stock -- We are
      unlikely to pay cash dividends in the foreseeable future."




**Governmental
      control of currency conversion may affect the value of your
      investment.**




14




The
      PRC
      government imposes controls on the convertibility of renminbi into foreign
      currencies and, in certain cases, the remittance of currency out of the PRC.
      Fushi International (Dalian) receives substantially all of its revenues in
      renminbi, which is currently not a freely convertible currency. Shortages in
      the
      availability of foreign currency may restrict our ability to remit sufficient
      foreign currency to pay dividends, or otherwise satisfy foreign currency
      dominated obligations, to the extent they are incurred in the future. Under
      existing PRC foreign exchange regulations, payments of current account items,
      including profit distributions, interest payments and expenditures from the
      transaction, can be made in foreign currencies without prior approval from
      the
      PRC State Administration of Foreign Exchange by complying with certain
      procedural requirements. However, approval from appropriate governmental
      authorities is required where renminbi is to be converted into foreign currency
      and remitted out of PRC to pay capital expenses such as the repayment of bank
      loans denominated in foreign currencies.




The
      PRC
      government also may at its discretion restrict access in the future to foreign
      currencies for current account transactions. If the foreign exchange control
      system prevents us from obtaining foreign currency, we may be unable to pay
      dividends or meet obligations that may be incurred in the future that require
      payment in foreign currency. See "Risk Factors--Risks Related to an Investment
      in Our Common Stock--We are unlikely to pay cash dividends in the foreseeable
      future."




**The
      fluctuation of the Renminbi may materially and adversely affect your
      investment** .




The
      value
      of the renminbi against the U.S. dollar and other currencies may fluctuate
      and
      is affected by, among other things, changes in the PRC's political and economic
      conditions. As we rely entirely on revenues earned in the PRC, any significant
      revaluation of the renminbi may materially and adversely affect our cash flows,
      revenues and financial condition. For example, to the extent that we need to
      convert U.S. dollars we receive from an offering of our securities into renminbi
      for our operations, appreciation of the renminbi against the U.S. dollar could
      have a material adverse effect on our business, financial condition and results
      of operations. Conversely, if we decide to convert our renminbi into U.S.
      dollars for the purpose of making payments for dividends on our common stock
      or
      for other business purposes and the U.S. dollar appreciates against the
      renminbi, the U.S. dollar equivalent of the renminbi we convert would be
      reduced. In addition, the depreciation of significant U.S. dollar denominated
      assets could result in a charge to our income statement and a reduction in
      the
      value of these assets.




On
      July
      21, 2005, the PRC government changed its policy of tying the value of the
      renminbi to the U.S. dollar. Under the new policy, the renminbi is permitted
      to
      fluctuate within a narrow and managed band against a basket of certain foreign
      currencies. This change in policy has resulted in a continuous appreciation
      of
      the renminbi against the U.S. dollar. While the international reaction to the
      renminbi revaluation generally has been positive, there remains significant
      international pressure on the PRC government to adopt an even more flexible
      currency policy, which could result in a further and more significant
      appreciation of the renminbi against the U.S. dollar.







15




The
      following table sets forth information concerning exchange rates between the
      RMB
      and the U.S. dollar for the periods indicated. These rates are provided solely
      for your convenience and are not necessarily the exchange rates that we used
      in
      this presentation or will use in the preparation of our periodic reports or
      any
      other information to be provided to you. The source of these rates is the
      Federal Reserve Bank of New York.




**Noon
                    Buying Rate****Period**
                
                
                **Period End**
                
                **Average****(1)**
                
                **Low**
                
                **High****(RMB
                    per US$1.00)**2002
                
                
                8.28
                
                8.2772
                
                8.28
                
                8.272003
                
                
                8.2767
                
                8.2771
                
                8.28
                
                8.27652004
                
                
                8.2765
                
                8.2768
                
                8.2774
                
                8.27642005
                
                
                8.0702
                
                8.1826
                
                8.2765
                
                8.07022006
                
                
                7.8041
                
                **7.9636**
                
                8.0702
                
                7.8041August
                7.9538
                
                7.9722
                
                8.000
                
                7.9538September
                7.904
                
                7.9334
                
                7.9545
                
                7.8965October
                7.8785
                
                7.9018
                
                7.9168
                
                7.8728November
                7.834
                
                7.8622
                
                7.875
                
                7.8303December
                7.8041
                
                7.8219
                
                7.835
                
                7.8041




(1)
      Annual averages are calculated from month-end rates. Monthly averages are
      calculated using the average of the daily rates during the relevant
      period.





Unless
      otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars
      to RMB in this report were made at a rate of RMB7.9636 to US$1.00, the annual
      average of 2006.




**If
      preferential tax concessions granted by the PRC government are changed or
      expire, our financial results and results of operations would be materially
      and
      adversely affected.**




Our
      results of operation may be adversely affected by changes to, or expiration
      of,
      preferential tax concessions that our subsidiaries in the PRC currently enjoy.
      The statutory tax rate generally applicable to domestic PRC companies is 33%,
      including 30% state income tax and 3% local income tax. Our subsidiaries, Fushi
      International (Dalian) as a Wholly Foreign Owned Enterprise, or WFOE, and Dalian
      Fushi as a “new or high-technology enterprise” located in Economic Development
      Zone of the Dalian City, have been subject to tax exemptions or relatively
      low
      tax rates. The estimated tax savings for the year ended December 31, 2006
      without preferential tax treatment amounted to approximately $5.6
      million.




As
      a
      newly adopted PRC corporate income tax law comes into effect, preferential
      tax
      benefits currently granted to WFOE’s are to be phased out and we would be
      subject to the same tax treatment as a domestic Chinese company, applying a
      uniform 25% tax rate to company profits. The loss of these preferential tax
      treatment that is currently available to us will have a material and adverse
      effect on our financial condition and results of operations and could adversely
      impact the price of our common stock.




16




In
      addition, tax laws in China are subject to interpretation by local tax
      authorities. Our preferential tax treatment may not remain in effect, or may
      change, in which case we may be required to pay the higher income tax rate
      generally applicable to Chinese companies, or such other rate as is required
      by
      the laws of China.




**The
      PRC State Administration of Foreign Exchange, or SAFE, requires PRC residents
      to
      register with, or obtain approval from, SAFE regarding their direct or indirect
      offshore investment activities.**




Recent
      PRC State Administration of Foreign Exchange Regulations regarding offshore
      financing activities by PRC residents have undertaken continuous changes which
      may increase the administrative burden we face and create regulatory
      uncertainties that could adversely affect the implementation of our acquisition
      strategy, and a failure by our shareholders who are PRC residents to make any
      required applications and filings pursuant to such regulations may prevent
      us
      from being able to distribute profits and could expose us and our PRC resident
      shareholders to liability under PRC law.




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




A
      renewed
      outbreak of SARS or another widespread public health problem in the PRC, where
      all of our revenue is derived, could have an adverse effect on our operations.
      Our operations may be impacted by a number of health-related factors, including
      quarantines or closures of some of our offices that could leave us without
      many
      employees to conduct our business which would materially and adversely affect
      our operations and financial condition.




**Because
      our principal assets are located outside of the United States and nearly all
      of
      our directors and all our officers reside outside of the United States, it
      may
      be difficult for you to enforce your rights based on the United States Federal
      securities laws against us and our officers and some directors in the United
      States or to enforce judgments of United States courts against us or them in
      the
      PRC.**




Two
      of
      our three directors and all of our officers reside outside of the United States.
      In addition, our operating subsidiary, Fushi International (Dalian), is located
      in the PRC and substantially all of its assets are located outside of the United
      States. It may therefore be difficult for investors in the United States to
      enforce their legal rights based on the civil liability provisions of the United
      States Federal securities laws against us in the courts of either the United
      States or the PRC and, even if civil judgments are obtained in courts of the
      United States, to enforce such judgments in PRC courts. Further, it is unclear
      if extradition treaties now in effect between the United States and the PRC
      would permit effective enforcement against us or our officers and directors
      of
      criminal penalties, under the United States Federal securities laws or
      otherwise.




17




**We
      may have difficulty establishing adequate management, legal and financial
      controls in the PRC.**




PRC
      companies have historically not adopted a Western style of management and
      financial reporting concepts and practices, which includes strong corporate
      governance, internal controls and, computer, financial and other control
      systems. In addition, we may have difficulty in hiring and retaining a
      sufficient number of qualified employees to work in the PRC. As a result of
      these factors, we may experience difficulty in establishing management, legal
      and financial controls, collecting financial data and preparing financial
      statements, books of account and corporate records and instituting business
      practices that meet Western standards. Therefore, we may, in turn, experience
      difficulties in implementing and maintaining adequate internal controls as
      required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result
      in
      significant deficiencies or material weaknesses in our internal controls which
      could impact the reliability of our financial statements and prevent us from
      complying with SEC rules and regulations and the requirements of the
      Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of
      compliance could have a materially adverse effect on our business.




**RISKS
      RELATED TO AN INVESTMENT IN OUR COMMON STOCK.**




**Our
      officers, directors and affiliates control us through their positions and stock
      ownership and their interests may differ from other
      shareholders.**




On
      a
      diluted basis, our officers, directors and affiliates beneficially own
      approximately 60.23% of our voting stock by virtue of their ownership of our
      common stock. Li Fu, our chairman and CEO, beneficially owns approximately
      52.3%
      of our voting stock. As a result, Mr. Fu is able to influence the outcome of
      stockholder votes on various matters, including the election of directors and
      extraordinary corporate transactions, including business combinations. Mr.
      Fu's
      interests may differ from other shareholders.




**We
      are unlikely to pay cash dividends in the foreseeable
      future.**




We
      currently intend to retain any future earnings for use in the operation and
      expansion of our business. We do not expect to pay any cash dividends in the
      foreseeable future but will review this policy as circumstances dictate. Should
      we decide in the future to do so, as a holding company, our ability to pay
      dividends and meet other obligations depends upon the receipt of dividends
      or
      other payments from our operating subsidiary. In addition, our operating
      subsidiary, from time to time, may be subject to restrictions on its ability
      to
      make distributions to us, including as a result of restrictions on the
      conversion of local currency into U.S. dollars or other hard currency and other
      regulatory restrictions. See, "Risk Factors-Risks Related to Doing Business
      in
      the PRC-- Fushi International (Dalian) and Dalian Fushi are subject to
      restrictions on paying dividends and making other payments to us", Risk
      Factors-Risks Related to Doing Business in the PRC-- Governmental control of
      currency conversion may affect the value of your investment" and "Market for
      Our
      Common Stock-- Dividends."




**There
      is currently a very limited trading market for our common
      stock.**




18




Our
      common stock has been quoted on the over-the-counter Bulletin Board since July
      2005. There is a limited trading market for our common stock and our common
      stock may never be included for trading on any stock exchange or through any
      other quotation system, including, without limitation, the NASDAQ Stock Market.
      You may not be able to sell your shares due to the absence of an established
      trading market.




**Our
      common stock is illiquid and subject to price volatility unrelated to our
      operations** .




The
      market price of our common stock could fluctuate substantially due to a variety
      of factors, including market perception of our ability to achieve our planned
      growth, quarterly operating results of other companies in the same industry,
      trading volume in our common stock, changes in general conditions in the economy
      and the financial markets or other developments affecting our competitors or
      us.
      In addition, the stock market is subject to extreme price and volume
      fluctuations. This volatility has had a significant effect on the market price
      of securities issued by many companies for reasons unrelated to their operating
      performance and could have the same effect on our common stock.




A
      large
      number of shares of common stock will be issuable for future sale which will
      dilute the ownership percentage of our holders of common stock. We are required
      to register for public sale a significant portion of these shares of common
      stock and this may depress our stock price.


**RISKS
          RELATED TO OUR RECENT** **HIGH YIELD AND CONVERTIBLE NOTES**





**Covenants
      in our debt instruments restrict or prohibit our ability to engage in or enter
      into a variety of transactions.**





O n
      January
      25, 2007, we entered into a Notes Purchase Agreement with Citadel Equity Fund,
      LLC, as well as Indentures, a Share Pledge Agreement and an Investor Rights
      Agreement. The Notes Purchase Agreement relates to the purchase and sale of
      $40
      million Guaranteed Senior Secured Floating Rate Notes Due 2012 and $20 million
      of 3% Guaranteed Senior Secured Convertible Notes Due 2012.





The
      indentures governing our Notes contain various covenants that may limit our
      discretion in operating our business. In particular, we are limited in our
      ability to merge, consolidate or transfer substantially all of our assets,
      issue
      stock of subsidiaries, incur additional debts and create liens on our assets
      to
      secure debt. In addition, if there is default, and we do not maintain certain
      financial covenants or we do not maintain borrowing availability in excess
      of
      certain pre-determined levels, we may be unable to incur additional
      indebtedness, make restricted payments (including paying cash dividends on
      our
      capital stock) or redeem or repurchase our capital stock. If we can not satisfy
      the required business targets of the indentures, we also have the possibility
      to
      default.





The
      indentures governing our Notes require us to maintain certain financial ratios
      and limit our ability to make capital expenditures. These covenants and ratios
      could have an adverse effect on our business by limiting our ability to take
      advantage of financing, merger and acquisition or other corporate opportunities
      and to fund our operations. Any future debt could also contain financial and
      other covenants more restrictive than those imposed under the indenture
      governing our Notes.




19





The
      Notes
      and their corresponding debt could have significant consequences to investors.
      For example, they could:





·
              reduce
                  the availability of our cash flow to fund future working capital,
                  capital
                  expenditures, acquisitions and other general corporate
                  purposes;·
              limit
                  our ability to obtain additional financing for working capital,
                  capital
                  expenditures, and other general corporate
                  requirements;




·
              expose
                  us to interest rate fluctuations because the interest rate is
                  variable;




·
              increase
                  our vulnerability to general adverse economic and industry
                  conditions;




·
              require
                  us to sell assets to reduce indebtedness or influence our decisions
                  about
                  whether to do so;




·
                    restrict
                        us from making strategic acquisitions or pursuing business
                        opportunities;


·
                  limit
                      our flexibility in planning for, or reacting to, changes in
                      our business
                      and the industry in which we
                      operate;
 ·
                limit,
                    along with the financial and other restrictive covenants in our
                    indebtedness, among other things, our ability to borrow additional
                    funds;
                    and
  ·
                place
                    us at a competitive disadvantage compared to competitors that
                    may have
                    proportionately less
                    debt.




In
          addition, our ability to make scheduled payments or refinance our obligations
          depends on our successful financial and operating performance, cash flows,
          and
          capital resources, which in turn depend upon prevailing economic conditions
          and
          certain financial, business, and other factors, many of which are beyond
          our
          control. If our cash flows and capital resources are insufficient to fund
          our
          debt obligations, we may be forced to reduce or delay capital expenditures,
          sell
          material assets or operations, obtain additional capital, restructure our
          debt,
          or declare bankruptcy. In the event that we are required to dispose of
          material
          assets or operations to meet our debt service and other obligations, the
          value
          realized on such assets or operations will depend on market conditions
          and the
          availability of buyers. Accordingly, we may be forced to sell at an unfavorable
          price.
  20


**We
      have pledged the shares of our subsidiaries as security for the Notes and upon
      a
      default, we could lose those securities and therefore, our
      business.**





Pursuant
      to our Share Pledge Agreement, we have pledged the shares of our wholly owned
      subsidiary, Fushi Holdings, and its shares of Fushi International (Dalian)
      as
      security for our obligations under the Notes. In the event of a default, we
      could lose the shares of our subsidiaries and therefore, our business, to the
      holders of the Notes which would materially and adversely affect the price
      of
      our common stock.




**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**Our
      History**




We
      were
      incorporated as a Nevada company on October 6, 1982 under the name M, Inc.
      We
      changed our corporate name to Parallel Technologies, Inc. in June 1991. We
      were
      formed as a "blank check" entity for the purpose of seeking a merger,
      acquisition or other business combination transaction with a privately-owned
      entity seeking to become a publicly-owned entity. In a series of restructuring
      transactions which began in 2005 and were completed in 2006 (the
“Restructuring”), we acquired Fushi Holdings which is a holding company for
      Fushi International (Dalian) which controls Dalian Fushi. The Restructuring
      is
      more fully described in our Current Report on Form 8-K filed with the SEC on
      December 14, 2005.




Dalian
      Fushi was formed as "Dalian Fushi Bimetallic Conductor Wire Factory" on June
      12,
      2001. In July 2001, Dalian Fushi acquired certain aluminum copper cladding
      manufacturing assets, as well as the related technology and manufacturing
      facilities with approximately 2,000 square meters construction area from Dongyi
      Company Ltd. ("Dongyi"), a bimetallic wire manufacturer in the PRC, for a total
      purchase price of RMB 12 million (approximately $1.48 million), in a settlement
      of a loan dispute.




**Our
      Corporate Structure**




As
      set
      forth in the following diagram, following our acquisition of Fushi Holdings
      and
      the business of Dalian Fushi under the Restructuring, Fushi Holdings is our
      direct, wholly-owned subsidiary and Fushi International (Dalian) is a
      wholly-owned subsidiary of Fushi Holdings. Fushi International (Dalian) has
      control over Dalian Fushi's remaining operations and financial affairs as a
      result of the Restructuring.




21







**Overview
      of Our Business**




We
      are
      engaged, through our indirectly wholly-owned operating subsidiary Fushi
      International (Dalian), in the manufacture and sale of bimetallic composite
      wire
      products, principally copper clad aluminum wires ("CCA"), Copper Clad Aluminum
      is an electrical conductor which has an outer sleeve of copper metallurgically
      bonded to a solid aluminum core. It combines the conductivity and corrosion
      resistance of copper with the light weight and relatively low cost of aluminum,
      making it uniquely suited to many electrical applications where weight to
      conductivity issues are important. CCA can be offered as a cost effective
      substitute for single copper wire in a wide variety of applications such as
      coaxial cable for cable television, signal transmission lines for
      telecommunication networks, distribution lines for electricity, wire components
      for electronic instruments and devices.




Our
      bimetallic composite wire products are produced using our patented and
      proprietary "rolling bond welding" manufacturing technology, which was included
      as a research project under the National Torch Program of PRC. Our proprietary
      technology allows us to produce high quality products that deliver stable
      conductivity performance. We maintain an internal Research and Development
      Department to improve our current product features and develop new devices
      and
      technologies to produce new products that will optimize the performance and
      structure of bimetallic composite materials. Because of our research and
      development ("R&D") initiatives, we are recognized by the Dalian Municipal
      Government as a "new- and high-technology" enterprise and have been receiving
      governmental funding or subsidies for our operations and R&D activities.
      Complementary to our internal product research and development is outside
      research from China’s scientific research institutions. We have been cooperating
      closely with various scientific research institutions to advance development
      of
      new products and production methods. We have on-going relationships with
      Tsinghua University, North East University of China, Dalian Institute of
      Technology etc. Recently, we have formed strategic partnership with the Optical
      and Electronic Cable Association of China to establish a joint research and
      development center to further enhance our technology leadership in the
      industry.




22




We
      use
      "FUSHI" as the tradename for all of our composite wire products. Due to our
      emphasis on quality control and the high quality of our products, our CCA
      products were awarded a "famous products" award in Liaoning Province and our
      mark "FUSHI" was awarded a "famous mark" award in Liaoning Province. See "Risk
      Factors - Risks Related to Our Business - Our profitability depends on our
      success on brand recognition and we could lose our competitive advantage if
      we
      are not able to protect our trademark against infringement, and any related
      litigation could be time-consuming and costly."




We
      achieved profitability in 2002, shortly after the commencement of our
      operations. Since 2002, we have experienced consistent growth - Net sales
      increased from $33.71 million for the fiscal year ended December 31, 2005 to
      $67.7 million for the fiscal year ended December 31, 2006. The majority of
      sales
      are made to finished cable manufacturers, which is a growing market for our
      products.




We
      believe we are currently the largest manufacturer and supplier of bimetallic
      composite products in the PRC. Our largest customers include the PRC operations
      of U.S.-based Andrew Corporation, ACOME Xintai Cable., Ltd, Leoni (Changzhou)
      Electronics Co., Ltd.




**The
      Bimetallic Industry**




We
      are
      primarily focused on manufacturing and selling CCA. CCA combines the light
      weight, high flexibility and low cost of aluminum with the conductivity and
      corrosion resistance of copper. In addition, it is more robust than an aluminum
      conductor and does not creep at a mechanical connection. Easy to handle and
      install, CCA is widely used in applications requiring the conductivity of copper
      while retaining the light weight advantages of aluminum. For example, because
      television and networks have high frequency transmission signals and the high
      frequency signals are transmitted on the surface layer, CCA is an ideal inner
      conductor for cable television signal transmission cables and, thus, is used
      extensively in overhead coaxial cable for high frequency television
      signals.




23




CCA
      wire
      is also widely used in telephone and electrical power applications, large
      capacity communication networks, telephone conductor antenna cables, control
      signal cables, and other applications. Because of its high performance, lower
      production cost, and lighter weight, CCA wire is also replacing solid copper
      or
      aluminum in other applications. For instance, it is used to replace copper
      as a
      grounding conductor on structures and underground powers lines to combat
      corrosion and theft problems. It also replaces aluminum in overhead power lines
      in corrosive environments.




Because
      of the significant cost savings they offer, CCA products are becoming
      increasingly utilized as customers look to offset the rising cost of solid
      copper based solutions. Rising copper prices and the massive build out of
      infrastructure in the PRC have been the principal drivers of industry-wide
      growth in the PRC. The applications base for CCA as a substitute and/or
      improvement to solid copper are expanding from co-axial cable, shielding wire,
      braided wire, electromagnetic wire and winding wire, to include transformer
      wire, distribution wire, automotive harness, and applications in computer,
      micro
      electronics and power transmission. An industry report by *Research
      in China* estimates that the PRC CCA market has grown from approximately 10,000 tons
      of
      industry-wide sales in 2004 to 30,000 tons in 2005 and 70,000 tons in 2006,
      representing a compound annual growth rate of 91.3%. Despite this growth, CCA
      is
      equivalent to only approximately 1.5% of the annual consumption of copper by
      the
      PRC during 2006, where we believe approximately 75% of the consumption was
      by
      the wire and cable industry. As high copper prices continue to drive strong
      demand for CCA, a small shift in copper market share towards CCA can generate
      significant industry revenue growth.




**Our
      Products**




We
      currently have large-scale production of CCA products. It is fabricated by
      fusing a core of aluminum wire with an external copper cladding using our
      proprietary and patented metallurgical "rolling bond welding" techniques.
      Measured by the copper layer thickness, CCA can be divided into two types,
      10%
      and 15%, each of which has DC resistance of less than 0.02743 mm(2)/m ohms
      and
      0.02676 mm(2)/m ohms, respectively. The 10% type is primarily used in high
      frequency signal transmission, while the 15% type is used in generators and
      other non-signal transmission applications.




Both
      the
      10% and 15% CCA can be made in various diameters. The normal diameters of our
      CCA products range from 1.7 mm to 7.6 mm, which are the normal specifications
      required by our customers; but we can draw the product to as small as 0.05
      mm,
      if so requested by our customers.




Due
      to
      its makeup, our CCA bimetallic wire is much lighter than copper and only
      slightly heavier than bare aluminum. Specifically, the density is approximately
      2.7 times lighter than copper and 1.26% heavier than aluminum. In comparison
      with solid copper wire, our CCA product normally costs 15% to 20% less per
      ton
      and each ton of CCA can yield wire 2.7 times as long as each ton of solid copper
      does. Additionally, by way of conductivity, it can be treated as a copper
      conductor from the standpoint of an enameling process because of the outer
      copper jacket.




24




Measured
      by the production stage of the manufacturing process, CCA can be classified
      into
      hard-drawn and annealed types of CCA and we manufacture both. Hard-drawn CCA
      is
      used where strength is required, such as electronic instruments and devices.
      Some customers buy our CCA at the hard-drawn stage without final annealing,
      or
      at the intermediate annealing stage, for further processing, such as to draw
      to
      a small a size as they desire.




**Manufacturing
      Process**




Manufacturing
      CCA involves cladding rod of aluminum with copper strip, and then drawing the
      clad rod to the desired wire diameter. The core technology we currently use
      in
      our production is the "Rolling Bond Welding Method." In this particular method,
      we insert copper strip and aluminum or steel bar in a rolling tube, the size
      of
      which depends on the specification of the end product required by the customer.
      Then we use a special roller machine to weld and bond the copper strip around
      the aluminum or steel rod. Finally, we use an argon arc welding machine to
      seal
      the small gap between the two materials. According to our customers' feedback,
      our technique yields an end product with more even copper cladding and better
      conductivity than other techniques commonly used in the industry.




We
      also
      hold a patent on the press-cladding method, which is our other proprietary
      technology that is designed for production of large size CCA. The manufacturing
      equipment for large scale production using this patent is still in the
      developing stage.




We
      have
      submitted an international patent application for our cuponal busbar, a
      specialty CCA. The manufacturing technology for our cuponal busbar is a new
      and
      special method that is different from our Rolling Bond Welding Method. Under
      this method, we put aluminum bar into a copper pipe, then we apply heat and
      pressure to clad the two metals together.




Our
      manufacturing process of CCA wires can be described as follows:




·
              Cleaning:
                  Before cladding or bonding, both the copper and core material receive
                  special cleaning to help create a complete metallurgical
                  bond.




·
            Proprietary
                Cladding or Bonding: After cleaning, a proprietary cladding or bonding
                process is applied to wrap the copper strip around the central core.
                We
                use our patented "Rolling Bond Welding" process to metallurgically
                bond
                copper with aluminum or steel.




·
            Breakdown:
                The bimetallic wire after cladding or bonding is drawn to an intermediate
                diameter, the size of which depends on the physical and mechanical
                properties required to support the customer's application. The ratio
                of
                copper thickness to core diameter remains constant throughout the
                drawing
                process so that the conductivities of the end products remain
                constant.




·
            Intermediate
                Annealing. Annealing is the process to release mechanical stress
                through
                heat and gradual cooling to render copper less brittle. This intermediate
                annealing process is normally applied to CCS to give the conductors
                the
                pliability and malleability required in certain applications, especially
                electrical grounding. Some CCS is sold at this stage, but the majority
                goes on to the finish drawing
                process.




25




·
            Finish
                Drawing. The CCA after initial breakdown, or the CCS after intermediate
                annealing, go through a series of draws to its final size. Our drawing
                equipment can take the wire down to sizes as small as 0.09 mm. After
                finish drawing, hard drawn CCA and CCS wires are taken up on reels
                and
                ready for shipping, while wires to be annealed moves on to the final
                anneal process. CCA and CCS finished at this point are call hard-drawn
                wires.




·
            Final
                Anneal. CCS or CCA that requires stress relief or full annealing
                will go
                through the furnaces of the final anneal process. The resulted CCA
                and CCS
                are generally referred to annealed
                wires.




**Manufacturing
      Equipment**




We
      currently have a total of 20 manufacturing lines for the production of regular
      sized wires. Each manufacturing line cost approximately $660,000 and consists
      of
      a main rolling, welding and cladding machine and more than 50 different pieces
      of accessory machines and equipment, such as a connecting machine, furnace,
      vacuum annealing oven, special container, boiler, copper strip slitter, aluminum
      stake drawer, and finished goods drawer. In addition, we have five machines
      along with accessories devoted to producing “fine wire” products which were
      introduced in 2006.




We
      are in
      the process of expanding our manufacturing lines to 40 and a portion of the
      net
      proceeds from our $60 million debt financing with Citadel Equity Fund LLC are
      being applied to purchase machines and equipment in the PRC and from German
      companies.




Five
      of
      the manufacturing lines, are encumbered by a security interest we granted to
      the
      PRC Industrial and Commercial Bank to secure the payment of our borrowings.
      Pursuant to the Notes Purchase Agreement with Citadel Equity Fund, LLC, as
      a
      post-closing covenant, we are required to use our best efforts, to the extent
      permitted by applicable laws and enforceable, to effectuate grant of first
      priority security interest over all the assets of our Fushi International
      (Dalian) and Dalian Fushi subsidiaries, including manufacturing equipment,
      that
      are currently unencumbered, and second priority security interest over all
      the
      other assets.




**Quality
      Control**




Our
      production process follows strict quality control standards. Before our raw
      materials are to be used for production, our Quality Control Department first
      examines the raw materials to ensure quality. The manufacturing process is
      closely supervised by manufacturing managers and is frequently examined by
      our
      Quality Control Department. Before our products are shipped, our quality control
      inspectors use various testing devices to perform a thorough inspection of
      all
      finished products, including full physical and electrical properties, such
      as
      conductivity, tensile strength, and elongation of the products. We enclose
      a
      testing certificate in all shipments of our products. As a result of our strict
      quality control standards, our production facility has been certified under
      ISO
      9001 quality standards, which certification was renewed in 2005 and
      2006.




26




Every
      two
      years we submit our products to third party governmental testing centers, such
      as the Quality Test Center of Information Transmittal Wire of the Ministry
      of
      Information Industry of the PRC and the Dalian Institute of Product Quality
      Supervision and Inspection, for full physical and electrical properties tests.
      We have passed these tests in the past and the test reports showed that our
      products meet and exceed American Society for Testing and Materials ("ASTM")
      B566-93 standards for copper and bimetallic copper wire. ASTM International
      is a
      non-profit industry-wide organization which publishes standards, methods of
      testing, recommended practices, definitions and other related materials. On
      March 7, 2007, our wholly owned subsidiary, Fushi International (Dalian) was
      officially admitted to ASTM International as an organizational member.




We
      allow
      our largest customers to inspect our production process and test our end
      products prior to shipment to ensure our customers' satisfaction with the
      product quality and specifications. In some instances, we also submit our sample
      products to our customers for testing. In the event that our products fail
      the
      customers' tests, we allow our customers to cancel the order. Historically,
      we
      have not experienced any cancellation of orders due to product test failures.
      We
      believe our customers' involvement in our quality control process not only
      ensures the high quality of our products, but also fosters a long term and
      trusting relationship.




**Warranties**




We
      offer
      warranty coverage for most of our products, although we do not have a standard
      warranty program. The terms and conditions of our warranty coverage depend
      on
      our purchase orders with customers. Generally, we guarantee our customers'
      satisfaction with our products. If a customer has a complaint about our
      products, we will go to the customer’s site to examine the product and provide a
      remedy that is satisfactory to the customer. Additionally, we agree to
      compensate our customers for losses caused by our products' failure under our
      purchase orders with customers. In some cases we agree to assume all such
      losses, while in some other cases we agree to pay liquidated damages equal
      to
      certain percentage of the sales price.




We
      have
      not established any 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. However, we intend to establish a reserve
      fund
      as we seek to expand our business internationally. If we were to experience
      a
      significant increase in warranty claims, our financial results could be
      adversely affected. See "Risk Factors - Risks Related to Our Business - We
      do
      not maintain a reserve fund for warranty or defective products claims. Our
      costs
      could substantially increase if we experience a significant number of warranty
      claims."




**Raw
      Materials and Suppliers**




27




Raw
          materials used in our products include copper strip, aluminum bar, steel
          wire,
          plastic bags, corrugated paper, wire rotating machine, steel ramming stretch
          oil, petroleum, cleansing agents, engine oil, gear oil, caustic soda, aluminum
          drawing oil, copper wiredrawing fluid, various lubricants, and other industrial
          materials. The principal raw materials are aluminum bar and copper strip,
          each
          of which historically accounts for more than 40% of our total annual raw
          materials purchases. No other raw material exceeds 2% of our total annual
          raw
          materials purchases. Measured by tonnage, aluminum bar is our largest raw
          material purchase, with an annual purchase of approximately 7,727 tons,
          as
          compared to approximately 2,567 tons of copper strip for the
          fiscal year ended December 31, 2006 .




Our
      principal raw materials are generally available in the market and we have not
      experienced any raw material shortages in the past. Because of the general
      availability of these raw materials, we do not believe that we will experience
      any raw material shortages in the future.




We
      have
      in the past relied on Shanghai Jutai Copper Co. and Harbin Electric Wire Co.
      for
      our copper strip and aluminum bars supplies, respectively. In 2006 our biggest
      suppliers were Baotou Aluminum Co., Ltd., Harbin Electric Wire Co., Shanghai
      Jutai Copper Co. and Beijing Golden Eagle Huichuang Copper Co. Purchases from
      these companies represented approximately 93.4% of our total raw material
      purchases in 2006.





The
      following table sets forth our five largest suppliers for the fiscal year ended
      December 31, 2006:





**List
                of Top 5 Suppliers**
            
            **Percentage
                of Total Purchases**Beijing
                Golden Eagle Copper Co., Ltd.
            
            
            26.8
            %Baotou
                Aluminum Co., Ltd
            
            
            23.3
            %Harbin
                Electric Wire Co.
            
            
            19.1
            %Shanghai
                Jutai Copper Co.
            
            
            15.8
            %Dalian
                Zhonghe
            
            
            8.4
            %**Top
                5 suppliers as % of total purchase**
            
            
            **93.4**
            **%**




We
          do not
          have formal long-term committal purchase contracts with our suppliers and,
          therefore, we are exposed to the risk of fluctuating raw material prices.
          In the
          purchase contracts with our primary suppliers, we typically specify the
          quantity
          of our copper and aluminum purchases for the following 6 to 12 months,
          based on
          our projected manufacturing output determined by the purchase orders we
          receive.
          The raw materials are delivered in installments based on our order flow
          throughout the period. See
          "Risk Factors - Risks Related to Our Business- We do not have any long-term
          supply contracts with our raw materials suppliers. Any significant fluctuation
          in price of our raw materials may have a material adverse effect on the
          manufacturing cost of our products."




28




In
      addition to these short-term purchase contracts, we also purchase from our
      primary suppliers or other suppliers to satisfy additional raw materials needs
      from additional orders we did not previously project. Due to our dependence
      on a
      concentrated number of suppliers for our principal raw materials, we cannot
      guarantee that necessary materials will continue to be procured at the prices
      currently available or acceptable to us. To the extent that these suppliers
      are
      not able to provide these materials in sufficient quantity and quality on a
      timely and cost-efficient basis, our results of operations could be adversely
      impacted until we find another qualified supplier. See “Risk
      Factors- **** Risks
      Related to Our Business-We depend on a few suppliers for a significant portion
      of our principal raw materials. Interruptions of production at our key suppliers
      may affect our results of operations and financial performance. In the past,
      we
      had experienced price increases on our principal raw materials and we were
      able
      to transfer the additional cost to our customers. However, there can be no
      assurance that we can transfer all of the additional costs resulting from the
      increase in purchase price of raw materials in the future.




As
      customary to the industry, suppliers typically make delivery upon receipt of
      our
      full or partial upfront payment for the purchase. We normally require our
      suppliers to purchase freight insurance to ensure against any risk of loss
      during the shipping period and any such loss will be the supplier's
      responsibility. After we receive the delivered raw materials, we have three
      days
      to raise any dispute regarding the quality and quantity of the goods.




**Customers**




Our
      products' target markets are manufacturers of finished wire and cable products.
      In most cases, our customers incorporate our products in end-products that
      they
      subsequently supply to their customers. The products manufactured by us are
      used
      by these end-product makers as standard components, materials or parts that
      are
      built to their specifications. Therefore, our business is driven, in part,
      by
      the strength, growth prospects and activity in the end-markets in which our
      products are used.




We
      have a
      large customer base, with more than 100 regular customers both in and outside
      of
      the PRC. Among the 93 PRC domestic customers, 40 are in the southern part of
      the
      PRC, 7 are in the southwestern part of the PRC, 13 are in the central part
      of
      the PRC, and 27 are in the eastern part of the PRC. Our customer base includes
      some of the global leading brands in the coaxial cable industry, such as Andrew
      Corporation, one of the largest communication cable manufacturers in the world.
      Because of these customers' large purchase orders, we have historically derived
      a significant portion of our sales from a smaller number of customers since
      we
      commenced production in 2002. We have much more diverse base of revenue sources
      now. For example, our 5 largest customers account for an increasingly smaller,
      but healthier, percentage of net sales compared to past fiscal years. Our top
      5
      customers represented 41% and 28.9% of our net sales during the fiscal years
      ended December 31, 2005 and 2006, respectively. Further, we anticipate that
      our
      overall customer composition and the concentration of our top customers will
      change as we expand our business and shift our product portfolio to
      higher-margin products; however, we can give no assurance that this will be
      the
      case.




29





The
      following table sets forth our ten largest customers in fiscal
      2006:





**List
                of Top 10 Customers**
            
            **Percentage
                of**
              **Net
                Sales '06**Zhuhai
                Hansheng Industrial Co., Ltd.
            
            
            6.57
            %Jiangxi
                Lianchuang Photoelectricity Science Co.
            
            
            5.87
            %Taizhou
                Yihua Specialty Electric Co., Ltd.
            
            
            5.68
            %ACOME
                Xintai Cable., Ltd.
            
            
            5.49
            %Leoni
                (Changzhou) Electronics Co., Ltd.
            
            
            5.29
            %Shantou
                Jinqiao (Golden Bridge) Cable Co., Ltd.
            
            
            5.14
            %Danyang
                Lihua Wire and Cable Co., Ltd.
            
            
            4.94
            %Yantai
                Xinmu Wire and Cable Co., Ltd.
            
            
            3.65
            %Wuhan
                Qinda Electric Appliance Co., Ltd.
            
            
            3.55
            %Shenzhen
                Kingsignal Cable Tech. Co., Ltd.
            
            
            3.32
            %**Top
                10 customers as % of total sales:**
            
            
            **49.50**
            **%**




**Marketing,
      Sales and Distribution**




We
      market
      and sell all of our products in the PRC through our direct sales force and
      internationally through sales agents and distributors.




PRC
      Sales .
      Currently, a vast majority of our sales are made to PRC customers and we sell
      our products to customers directly through our Sales and Marketing Department.
      The Sales and Marketing Department of Fushi International (Dalian), which
      consists of 17 people, is responsible for maintaining existing customer
      relationships and developing new customers.




International
      Sales .
      Sales
      to customers located outside of the PRC are only a small percentage of our
      total
      annual sales. To expand our international markets, we have signed letters of
      intent with foreign independent agents to market our products
      overseas.




**Product
      Delivery and Risk of Loss**




For
      customers in the PRC, we usually deliver the goods to the customers' place
      of
      business, while in some cases customers make their own delivery arrangements.
      Our Shipping Department delivers our products to customers. The Shipping
      Department has four heavy trucks and eight contracted drivers. We can ship
      up to
      30 tons per day.




We
      normally include shipping expenses in the purchase price of our products and,
      therefore, delivery costs are ultimately borne by our customers. In addition,
      some orders require us to purchase freight insurance on behalf of a customer
      in
      which case the cost of such freight insurance is included in the purchase price
      of the products.




For
      export sales to international customers our typical delivery terms are
      free-on-board, so that customers are responsible for the cost of transportation
      and bear the risk of loss during transportation.




30


**Insurance**




Product
      Liability Insurance .
      We
      currently do not carry any product liability or other similar insurance. While
      product liability lawsuits in the PRC are rare and we have never experienced
      significant failures of our products, we cannot give any assurance that we
      will
      not have exposure for liability in the event of the failure of any of our
      products in the future. This is particularly true given our plan to
      significantly expand our sales into international markets, like the United
      States, where product liability claims are more prevalent.




Property
      Insurance and Other Insurance .
      We
      purchased automobile insurance with third party liability coverage for our
      vehicles. In addition, we have purchased property insurance from China United
      Property Insurance Company to cover real property and plant of up to RMB
      103,350,000 (approximately $13,439,532), and manufacturing machine and equipment
      of up to RMB 36,750,000 (approximately $4,541,410); insurance from China Pacific
      Property insurance company and Yongan property insurance company to cover real
      property and plant of up to RMB 20,000,000 (approximately $2,600,780) and
      RMB89,000,000 (approximately $11,573,472), respectively. The total coverage
      of
      our property and equipment is approximately $32,155,194. However, our property
      and equipment net of depreciation as of December 31, 2006 and 2005 was
      $47,256,475 and $38,641,783, respectively, and our property insurance therefore
      covers only less than a third of the value of our property and equipment. See
      "Risk Factors - Risks Related to Our Business - We do not presently maintain
      product liability insurance, and our property and equipment insurance does
      not
      cover the full value of our property and equipment, which leaves us with
      exposure in the event of loss or damage to our properties or claims filed
      against us."




Except
          for property and automobile insurance, we do not have other insurance such
          as
          business liability or disruption insurance coverage for our operations
          in the
          PRC. Further, we do not have key man insurance for our officers and executive
          managers. Therefore, the loss of one or more of our officers and executive
          managers will adversely affect our business and operations. See "Risk Factors
          -
          Risks Related to Our Business - We do not have key man insurance on our
          chairman
          and CEO ,
          Mr. Fu,
          on whom we rely for the management of our business."
  **Competition**




Competition
      in the bimetallic industry can be characterized by rapid growth and a
      concentration of manufacturers, primarily due to rising copper prices and
      accelerated replacement of copper by bimetallic products applications. The
      most
      significant factors that affect our competitive position are:




·
      the performance and cost effectiveness of our products relative to those of
      our
      competitors;


· 
        o ur
        ability to manufacture and deliver products in required volumes, on a timely
        basis and at competitive prices;
  31
  ·the
            quality and reliability of our
            products;
  ·our
            customer support
            capabilities . ;
  ·excellence
            and flexibility in
            operations;
  · degree
        of global and local presence;
  · effectiveness of customer service;
  · overall
        management capability.




We
      believe that we can differentiate ourselves by offering superior product
      quality, timely delivery, at attractive pricing. See "Risk Factors - Risks
      Related to Our Business -- We may encounter substantial competition in our
      business and our failure to compete effectively may adversely affect our ability
      to generate revenue."




Our
      goal
      is to become the worldwide leader in the bimetallic industry. Set forth below
      are our measures and strategies:


·
              Cost
                  reduction.  By improving our production ability and enhancing
                  equipment management, optimizing the process and products structure,
                  perfecting the supplier system and cutting production cost, we
                  will strive
                  to maintain and expand our profit
                  margins.
  ·
                Research
                    and Development.  By partnering with the China Optical and Electronic
                    Association and other domestic research institutions and leveraging
                    out
                    strong R&D capability, we plan to further strengthen our competitive
                    position and gain increased market share in the
                    PRC.
  ·
              Domestic
                  and international expansion.  We plan to continue to focus on the
                  robust PRC market while expanding and enhancing our sales, distribution
                  and customer support capabilities for international
                  sales.
  ·
              Raw
                  materials. We plan to mitigate the risk of increases in raw material
                  price
                  volatility through effective requirements planning, working closely
                  with
                  key suppliers to obtain the best possible pricing and delivery
                  terms and
                  implementing price increases wherever warranted.
  ·
              Acquisitions/
                  Strategic alliance.  We are reviewing strategic investments,
                  acquisitions and/or forming strategic relationships with companies
                  that
                  can substantially broaden our customer base and expand our distribution
                  capability. We will seek acquisition targets that fulfill the following
                  criteria:




(i)
            Companies
                that can be easily integrated into product manufacturing and corporate
                management;




32




(ii)
            Companies
                that have strong joint venture partners that would become major customers;




(iii)
                Companies
                    whose existing customerswouldsubstantially
                    broaden our customer base and increase our market share, especially
                    relating to markets that we have not penetrated or products that
                    we have
                    not offered; and
  (iv)
                Companies
                    which are located in places that wouldput
                    us closer to our target customers, allowing us to serve them
                    better and
                    faster.


**Intellectual
      Property**




Our
      principal intellectual property rights are our patents, patent application
      and
      the trademark "FUSHI." We obtained the right to use the "FUSHI" trademark from
      Mr. Li Fu pursuant to a Trademark Authorization.


PRC
          Patents and the PRC Patent Law Protections .
          Fushi International (Dalian) is the registered owner of the patents issued
          by
          the Patent Office of the State Intellectual Property Office of the PRC
          listed
          below. See
“We
          may not be able to prevent others from unauthorized use of Fushi International
          (Dalian)'s patents, which could harm our business and competitive
          position.”


Type
                        of
                    
                    
                    
                    
                    
                    Date
                        of
                    
                    Date
                        of Publication andPatent
                    
                    Patent
                    
                    Patent
                        No.
                    
                    Inventor's
                        Name
                    
                    Application
                    
                    Term1.
                        Metallurgical
                    
                    Utility
                    
                    ZL
                        2004 2
                    
                    Mr.
                        Xishan Yang
                    
                    April
                        9, 2004
                    
                    March
                        30, 2005; term: 10Rolling
                        and Welding
                    
                    
                    
                    0031104.0
                    
                    
                    
                    
                    
                    years
                        from 4/9/2004 toDevice
                        for CCA and
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4/8/2014CCS2.
                        Polyurethane
                    
                    Utility
                    
                    ZL
                        2003 2
                    
                    Mr.
                        Xishan Yang
                    
                    November
                        11,
                    
                    December
                        8, 2004;(PU)
                        Roller
                    
                    
                    
                    0105378.5
                    
                    
                    
                    2003
                    
                    term:10
                        years from 11/11/2003to
                        11/10/20133.
                        Aluminum Bar
                    
                    Utility
                    
                    ZL200320105379.X
                    
                    Mr.
                        Xishan Yang
                    
                    November
                        11,
                    
                    April
                        20, 2005; term: 10Brushing
                        Machine
                    
                    
                    
                    
                    
                    
                    
                    2003
                    
                    years
                        from 11/11/2003 to11/10/20134.
                        Press Cladding
                    
                    Utility
                    
                    ZL
                        2003 2
                    
                    Mr.
                        XiShan Yang
                    
                    November
                        11,
                    
                    February
                        2, 2005; term:Device
                        for CCA
                    
                    
                    
                    0105377.0
                    
                    
                    
                    2003
                    
                    10
                        years from 11/11/2003to
                        11/10/20135.
                        Vertical Integrated
                    
                    Utility
                    
                    ZL2003
                        2
                    
                    Mr.
                        Xishan
                    
                    November
                    
                    November
                        25, 2005 term:Drawing
                        Machine for
                    
                    
                    
                    0105380.2
                    
                    Yang
                    
                    11,
                        2003
                    
                    10
                        years from 11/11/2003CCA
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    to
                        11/10/20136.
                        Jointing Device for
                    
                    Utility
                    
                    ZL992234549
                    
                    Mr.
                        XiShan Yang
                    
                    April
                        12, 1999
                    
                    February
                        12, 2000 term:Copper
                        Clad Steel
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10
                        years from 4/12/1999Bimetallic
                        Composite Lead
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    to
                        4/11/20097.
                        Facture for Producing
                    
                    Utility
                    
                    Pending
                    
                    Mr.
                        XiShan Yang
                    
                    April
                        28, 2005
                    
                    PendingRegular
                        Wire of CopperClad
                        Aluminum8.
                        Jointing Device
                        Producing
                          Copper
                            Clad Aluminum Lead
                    
                    Utility
                    
                    ZL96238273.6
                    
                    Mr.
                        XiShan Yang
                    
                    August
                        22, 1996
                    
                    August
                        8, 1998 term:
                        10
                          years from 8/11/1996
                          to
                            8/10/20069.
                        Globose Cushion
                    
                    Utility
                    
                    ZL96238273.6
                    
                    Mr.
                        XiShan Yang
                        Mr.
                          Jizhou Ding
                    
                    December
                        9, 2005
                    
                    January
                        17, 2007 term:
                        10
                          years from 12/9/2005
                          to
                            12/8/2015
  33




The
        issued patents nos. 1 through 3 and 5 listed above relate to our "Rolling
        Bond
        Welding" method for the production of round-sized CCA. The patented "Press
        Cladding Device for CCA" is to be used for large sized CCA and required
        manufacturing equipment is still under development.
  The
        PRC
        Patent Law was adopted by the National People's Congress, the parliament
        in PRC,
        in 1984 and was subsequently amended in 1992 and 2000. The Patent Law aims
        to
        protect and encourage invention, foster applications of invention and promote
        the development of science and technology. To be patentable, invention or
        unity
        models must meet three conditions: novelty, inventiveness and practical
        applicability. Certain items are not patentable under the Patent Law, which
        include scientific discoveries, rules and methods for intellectual activities,
        methods used to diagnose or treat diseases, animal and plant breeds or
        substances obtained by means of nuclear transformation. The Patent Office
        under
        the State Council is responsible for receiving, examining and approving patent
        applications. A patent is valid for a term of twenty years in the case of
        an
        invention and a term of ten years in the case of utility models and designs.
        Our
        patents are all utility models and subject to the ten years' protection.
        Any use
        of patent without consent or a proper license from the patent owner constitutes
        an infringement of patent rights.
  We
        believe several manufacturers in the PRC have infringed our patents by using
        our
        patented technologies without our prior authorization or paying license fees.
        We
        have already taken legal action to seek damages or injunctions against these
        manufacturers and were awarded favorable judgments on two actions in 2006.
        We
        also had 8 pending cases in 2006 against the infringement of Dalian Fushi’s
        patented Jointing Device Producing Copper Clad Aluminum Lead and we believe
        that
        we have a strong likelihood of success.
  International
        Patent Application and the PCT .  Dalian
        Fushi submitted an international patent application under the International
        Patent Cooperation Treaty ("PCT") on April 28, 2005. This patent application
        (PCT/CN2005/00585) is for Bond-Welding Manufacturing Method for Cuponal Busbar
        and relates to the production of cuponal busbar. The application is still
        under
        review.
  This
        application was invented by Mr. Xishan Yang, our senior engineer and Vice
        President of R&D. A PCT application covers all of the PCT member countries,
        which include most major industrialized countries. As of March 18, 2007,
        there
        were 136 member countries. The PRC became a member of the PCT in
        1994




There
      are
      two phases in a PCT application. The first phase is the International Phase.
      Under this Phase, an applicant like Dalian Fushi can file an application using
      Chinese language in the PRC. Then it will have one year to claim the priority
      of
      its PRC filing date in other member countries. The main benefit of filing
      through PCT instead of directly in the member countries is to allow an applicant
      to delay "National Phase" filing in the member countries up to 30 months from
      the initial filing, which is 18 months more than it would normally have when
      filing directly in foreign countries. During this International Phase period,
      an
      applicant can gather more market information and have more time to make
      decisions about where to file patent applications. At the end of the
      International Phase period, it will enter the National Phase by filing national
      applications in each country in which the applicant will want a patent. The
      Trade-Related Aspects of Intellectual Property Rights (the "TRIPS") determine
      the term of a patent applied under the PCT in the member countries.


Trademarks
        and the PRC Trademark Law Protections .
        The
        trademark "FUSHI" is registered with the Trademark Office of the State
        Administration for Industry and Commerce in PRC ("SAIC"). The registered
        scope
        of use includes wire products such as wire cable, electric wire, electric
        resister, telephone line, and cable line. The registered owner is Mr. Li
        Fu, our
        founder, chairman and chief executive officer. Mr. Fu has authorized us to
        use
        the trademark without any fee or charge for its term. The registered term
        is
        valid from April 28, 2003 to April 27, 2013. The trademark was recognized
        as a
        "Well Known Trademark" in Dalian city by Dalian Administration of Industry
        and
        Commerce for a period commencing from October 2004 to October
        2007.




34


Under
        the
        PRC Trademark Law, which was adopted in 1982 and revised in 2001, registered
        trademarks are granted a term of ten years protection, renewable for further
        terms. Each renewal is limited to ten years term and the registrant must
        continue to use the trademark and apply for a renewal within six months prior
        to
        the expiration of the current term.
  Domain
        Names. we own
        and operate a website under the internet domain name www.fushiinternational.com.
        We pay an annual fee to maintain its registration. The information contained
        on
        our website does not form part of this report.
  Other
        Intellectual Property Rights Protections in the PRC .  In
        addition to patent, trademark and trade secret protection law in the PRC,
        we
        also rely on contractual confidentiality provisions to protect our intellectual
        property rights and our brand. Our research and development personnel and
        executive officers are subject to confidentiality agreements to keep our
        proprietary information confidential. In addition, they are subject to a
        one-year covenant not to compete following the termination of employment
        with
        our company. Further, they agree that any work product belongs to our
        company.
  **Research
        and Development Activities**
  In
        2002,
        we set up a research center headed by Mr. Xishan Yang, who is our Chief
        Executive Vice President of Research and Development and Chief Engineer.
        The
        research center consists of 27 full time engineers and research and development
        personnel that possess expertise in the areas of metal processing, machinery
        design, material science, process control automation and cable manufacturing.
        In
        2006, pursuant to a Strategic Alliance Agreement, we formed partnership with
        the Optical
        and Electronic Cable Association of China to establish a joint research and
        development center to further enhance our technology leadership in the
        industry. We plan
        to hire another 15 to 20 full time engineers after the set up of the center.
        In
        the fiscal years ended December 31, 2006 and 2005, we spent $195,058 and
        approximately RMB 500,000($65,000) respectively, on research and development
        activities. Most of these expenses were used to improve product quality,
        develop
        more rigorous specifications, and develop new metal composite including rare
        non-ferrous metals, precision alloys, precious metals and aluminum
        alloys.




In
      addition to our own internal initiatives on R&D activities to develop new
      products, some of our R&D activities are initiated by our customers, who
      convey their needs to us, and we conduct research activities to improve or
      enhance our existing products to meet their needs.




We
      have
      also participated in cooperative research and development programs with local
      university and research institute. For example, pursuant to a Joint Development
      Agreement, we are collaborating with Northeast University of China on the
      research and development of manufacturing equipment for our patented press
      cladding device for a fee. Programs like this have supplemented our internal
      R&D department and allowed us to utilize the resources and talent pool in
      these universities.




Going
      forward, we intend to further enhance our Research and Development efforts
      by
      expanding our engineering team.




**Government
      Regulation**




Our
      patents and trademark are subject to the regulations on intellectual property
      rights in the PRC. See "Business-Intellectual Property" for more information
      regarding the PRC patent and trademark laws.




We
      also
      are subject to business license and approval regulations that are required
      for
      all corporations in the PRC.




**Environmental
      Compliance**




We
      are
      subject to environmental regulations that are generally applicable to
      manufacturing companies in the PRC, for example, to complete an environmental
      inspection on our new manufacturing facilities. Other than that, to the
      knowledge of our management team, neither the production nor the sale of our
      products constitute activities, or generate materials in a material manner,
      that
      requires our operation to comply with the PRC environmental laws. See "Risk
      Factors - Risks Related to Our Business - Potential environmental liability
      could have a material adverse effect on our operations and financial
      condition."




35


**Employees**
  Fushi
        International (Dalian) currently has 407 full time employees, of whom 44
        are
        managerial, administrative, finance and accounting staff, 31 are engineers
        and
        research and development personnel, 17 are engaged in sales and marketing,
        and
        315 are in manufacturing. From time to time, we also hire temporary workers
        and
        contractors as necessary. Currently, Fushi International (Dalian) has 47
        temporary staff for product delivery, cafeteria workers and security
        guards.
  
 **ITEM
        2.**  **DESCRIPTION
        OF PROPERTY**
  Under
        PRC
        law, all land in the PRC is owned by the government, which grants a "land
        use
        right" to an individual or entity after a purchase price for such "land use
        right" is paid to the government. The "land use right" allows the holder
        the
        right to use the land for a specified long-term periods of time and enjoys
        all
        the ownership incidents to the land. Dalian Fushi holds land use rights for
        one
        piece of land that was used in its business and Fushi International (Dalian)'s
        business. In addition, we have the right to use another smaller piece of
        land
        that is registered under the name of a formerly affiliated company (the “Dongyi
        Property”). Set forth below is the detailed information regarding these two
        pieces of land:


Registered
                  Owner
                    of land
                  use
                    right
                
                Location
                    &
                  Certificate
                    of
                  Land
                    Use Right
                  Number
                
                Usage
                
                Square
                    Meters
                
                Construction
                    on
                  the
                    Land
                
                Term
                    of Use RightDalian
                    Fushi
                
                1
                    Shuang Qiang
                
                Industrial
                
                103,605
                    Sq. M;
                
                Dalian
                    Fushi's
                
                50
                    years fromRoad,
                    Yang Jia
                
                Use
                
                
                
                new
                    facilities
                
                July,
                    2003Village,
                    JinzhouDistrict,
                    Dalian,PRC;
                    #0625014Dongyi
                
                8
                    Hai La'er Road,
                
                Industrial
                
                3,569
                    Sq. M;
                
                Dalian
                    Fushi's
                
                40
                    years fromDalian
                
                Use
                
                
                
                old
                    facilities
                
                March
                    4, 1989Development
                    Zone;PRC;#0626006


36




We
      acquired the Dongyi Property in connection with the acquisition of Dongyi in
      2001. Dongyi was dissolved after the acquisition. Because of the transfer fees
      that would be incurred as a result of change of registered owner, and because
      this land is no longer being used in the business, we have not, and we do not
      intend to change the registered owner of this land. Currently, we lease the
      facilities located on the Dongyi Property to a third party.




The
      land
      registered under our name, as well as the buildings and improvements on the
      land, secures our bank loans from Bank of China and Industrial and Commercial
      Bank.




We
      believe these facilities are in good condition.




For
      information concerning the costs associated with land use rights, see note
      9 to
      Dalian Fushi's audited financial statements for the years ended December 31,
      2005 and 2006.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**




From
      time
      to time, we may become involved in various lawsuits and legal proceedings which
      arise in the ordinary course of business. Litigation is subject to inherent
      uncertainties, and an adverse result in these or other matters may arise from
      time to time that may harm our business. In
      addition to the litigations described below, we have also commenced a number
      of
      legal actions against companies which we believe are infringing on our patents,
      as described above.




**Kuhns
      Brothers Litigation**




On
      December 11, 2006 we received service of an action filed by Kuhns Brothers,
      Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co., Inc.
      against us in the United States District Court, District of Connecticut on
      November 27, 2006. The action seeks declaratory judgment concerning the
      interpretation and enforceability of specific terms of an engagement letter
      agreement, dated May 27, 2005, by and between Kuhns Brothers, Inc. and us,
      which
      we terminated in September 2006. We believe that the plaintiffs’ claims are
      without merit and we intend to vigorously defend the action.




We
      believe that the outcome of the matter above will have no material effect on
      our
      financial condition or results of operations. Except as described above, we
      are
      not currently involved in any material litigation.





**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**




There
      were no stockholders meetings in the fourth quarter of this fiscal year or
      actions through unanimous written consents by the stockholders of the
      Company.





**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**




**Market
      for Common Equity and Related Stockholder Matters.**




The
      Company's common stock is currently quoted on the Over-the-Counter Bulletin
      Board under the trading symbol "FSIN.OB."




37




On
      March
      27, 2007, the last reported close price of our common stock was $7.45 per
      share.




As
      of
      March 27, 2007, there were 22,782,106 shares of our common stock issued and
      outstanding on a fully diluted basis, and there were approximately 628 holders
      of record of our outstanding shares.





The
      closing prices for the fiscal quarters for fiscal years ended on December 31,
      2006 are set forth below(1):




Quarter
                  Ended
              
              Closing
                  Price03/31/2006
              
              $
              5.1506/30/2006
              
              $
              7.5009/29/2006
              
              $
              7.2512/29/2006
              
              $
              5.10


(1)
      Closing prices prior to 2006 are omitted as we completed as reverse merger
      in
      December, 2005.




Recent
      Sales of Unregistered Securities; Use of Proceeds from Unregistered
      Securities




During
      the fiscal year ended December 31, 2006, a total of 148,985 warrants were
      exercised, with 80,000 exercised at $.01 per share and the balance at $3.67
      per
      share. The shares of common stock issued upon exercise were issued in reliance
      on Section 4(2) under the Securities Act of 1933.




**Dividend
      Policy**




Our
      board
      of directors has not declared a dividend on our common stock during the last
      two
      fiscal years or the subsequent interim period and we do not anticipate the
      payments of dividends in the near future as we intend to reinvest our profits
      to
      grow operations. See "Risk Factors - Risks Related to an Investment in our
      common stock - We are unlikely to pay cash dividends in the foreseeable future."
      We rely entirely on dividends from Fushi International (Dalian) for our funds
      and PRC regulations may limit the amount of funds distributed to us from Fushi
      International (Dalian), which will affect our ability to declare any dividends.
      See "Risk Factors - Risks Related to Doing Business in the PRC - Fushi
      International (Dalian) and Dalian Fushi are subject to restrictions on paying
      dividends and making other payments to us" and "- Governmental control of
      currency conversion may affect the value of your investment."




**Equity
      Compensation Plan Information**




We
      currently do not have any equity compensation plans, but plan to establish
      an
      Employee Stock Ownership Plan (ESOP).





**ITEM
      6.**   **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**Overview**




Since
      our
      founding in 2002, we have grown to be the leading manufacturer of bimetallic
      products in the PRC market. Today, we serve over 93 customers, covering all
      the
      major geographical markets in the PRC with what we estimate to be a 17% market
      share of the bimetallic wire market. Our principal product Copper Clad Aluminum,
      or CCA, combines the conductivity and corrosion resistance of copper with the
      light weight and relatively low cost of aluminum. Normally using 70% less copper
      than conventional copper wire, but offering materially the same utility and
      functionality, CCA is a cost effective substitute for solid copper wire in
      a
      wide variety of applications such as coaxial cable for cable television and
      various video and data applications, signal transmission lines for
      telecommunication networks, distribution lines for electricity, wire components
      for electronic instruments and devices, utilities, building wire and other
      industrial wires.




38





Between
      2004 and 2006, the PRC market experienced substantial growth in the use of
      bimetallic composite wiring as a substitute to solid copper in an expanding
      base
      of applications. Rising copper prices and the massive build out of
      infrastructure have been the principal drivers of industry wide growth in the
      PRC, among other things. According to an industry report by *Research
      in China* ,
      the PRC
      bimetallic market is estimated to have grown from approximately 10,000 tons
      of
      industry-wide sales in 2004 to 30,000 tons in 2005 and 70,000 tons in 2006,
      representing compound annual growth rate, or CAGR, of 91.3%, and is anticipated
      to continue the growth at similarly significant rates in 2007 and 2008. At
      the
      present time, bimetallic wire accounts for an insignificant 1.5% of the copper
      replacement market. It is projected that by 2011, it could account for as much
      as 20% of the market.





In
      response to the economic conditions, we moved into a facility that is 25 times
      the size of our previous facility. We expanded capacity by increasing our
      production lines from 5 to 20. We maintained in excess of 90% utilization on
      a
      12,000 ton annual capacity. As a result, our net sales increased from $15.7
      million in 2004 to $33.7 million in 2005 and $67.6 million in 2006, representing
      a CAGR of 62.8%.





The
      price
      of copper impacts our sales and earnings in two significant ways. First, copper
      is one of the principal raw material used in manufacturing our product. If
      we
      were to take an order from a customer and then subsequently purchase the raw
      copper materials to fill the order, an increase in copper prices would decrease
      our margin since we would not be able to pass on these added costs to the
      customer. Conversely, if copper prices were to decrease after an order is taken,
      it may lead to higher margins. We, however, regularly make advance payments
      to
      our suppliers to lock in copper prices ahead of time. Since our sales price
      is
      determined at the time of order placement, this enables us to price the order
      on
      pre-existing copper prices and allows us to expand our margins in an operating
      environment of rising copper prices.




More
      significantly, our product is used as a viable substitute for copper. When
      there
      is a large differential between the price of copper and aluminum, demand for
      our
      product increases, as do our margins. When the differential narrows, demand
      for
      our product may moderate, as will our margins.





39


Copper
      prices exhibited greater than normal levels of volatility in 2006, trending
      upward dramatically in the first half of 2006, particularly in the second
      quarter and then slowly descending in the third quarter, accelerating their
      decrease in the fourth quarter of 2006. However, the 2006 year-end price of
      copper was still above the beginning of the year price. We believe that our
      revenue will continue to be impacted by fluctuations in raw material prices
      and
      our ability to increase sales, maintain and potentially expand gross, operating
      and net margins largely depends on whether we are able to pass raw material
      price increases along to our customers and whether the difference between copper
      and aluminum increases or decreases. See Risk Factors- Risks Related to Our
      Business.





With
      respect to the overall business trend in 2007 and forward, we anticipate sales
      growth to continue to be aggressive and broadly based, principally due to
      increased conversion market visibility, expanding market sizes, favorable
      pricing environment, product profitability, and momentum to gain additional
      market share.  Our ability to meet increased customer demand for our
      products will largely depend on whether we have sufficient production capacity
      and working capital, among other factors.





**COMPARISON
      OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 WITH THE YEAR
      ENDED DECEMBER 31, 2005**





**General**




The
      following table shows, for the periods indicated, information derived from
      our
      consolidated statements of income, expressed as a percentage of sales for the
      period presented.




Year
                ended December 312006
            
            2005Revenues
            
            
            100.0
            %
            
            100.0
            %Cost
                of Goods Sold
            
            
            63.3
            %
            
            63.5
            %Gross
                Profit
            
            
            36.7
            %
            
            36.5
            %Operating
                expensesSelling
                expenses
            
            
            0.9
            %
            
            0.9
            %General
                and administrative expenses
            
            
            5.6
            %
            
            6.0
            %Total
                operating expense
            
            
            6.5
            %
            
            6.9
            %Income
                from operations
            
            
            30.2
            %
            
            29.6
            %Other
                income (expense)Interest
                income
            
            
            0.1
            %
            
            0.3
            %Interest
                expense
            
            
            -1.6
            %
            
            -3.1
            %Other
                income
            
            
            0.5
            %
            
            0.6
            %Other
                expense
            
            
            0.0
            %
            
            0.0
            %Liquidated
                damage expense
            
            
            -2.2
            %
            
            0.0
            %Total
                other (expense), net
            
            
            -3.2
            %
            
            -2.2
            %Income
                before income taxes
            
            
            27.0
            %
            
            27.4
            %Provision
                for income taxes
            
            
            0.6
            %
            
            4.2
            %Net
                income
            
            
            26.4
            %
            
            23.2
            %




41




**Selected
      Financial and Product Data:**





Increase/(Decrease)
            
            Dec.31,
                2006
            
            Dec.
                31, 2005Net
                sales
            
            
            100.5
            %
            $
            67,595,774
            
            $
            33,709,428Gross
                Profit
            
            
            101.6
            %
            
            24,814,105
            
            
            12,309,180Operating
                Income
            
            
            104.6
            %
            
            20,385,606
            
            
            9,962,617Net
                income
            
            
            128.4
            %
            
            17,810,026
            
            
            7,798,981Pro
                forma net income,
              (adding
                back one time registration penalty charge)
            
            
            147.3
            %
            
            19,288,546
            
            
            7,798,981EPS-
                Basic
            
            
            99.9
            %
            $
            0.89
            
            $
            2,015.76EPS-
                Diluted
            
            
            68
            %
            
            0.84
            
            
            0.50Pro
                forma EPS- Diluted
            
            
            82
            %
            
            0.91
            
            
            0.50Weighted
                avg. # of shares- basic
            
            
            
            
            
            19,933,193
            
            
            3,869Weighted
                avg. # of shares- diluted
            
            
            
            
            
            21,276,263
            
            
            15,689,053Cash
            
            
            232.5
            %
            $
            20,493,551
            
            $
            6,163,670Total
                Assets
            
            
            35.2
            %
            
            96,162,135
            
            
            71,136,934Long
                term debt
            
            
            6.0
            %
            
            10,256,000
            
            
            9,675,859Avg.
                Copper Price (COMEX)
            
            
            83.5
            %
            $
            6,175
            
            $
            3,365Avg.
                Aluminum Price (COMEX)
            
            
            31.4
            %
            
            2,343
            
            
            1,783Avg.
                Copper Price (Changjiang, PRC)*
            
            
            80.7
            %
            
            7,835
            
            
            4,337Avg.
                Aluminum Price (Changjiang, PRC)*
            
            
            24.4
            %
            
            2,563
            
            
            2,061CCA
                Average Selling Price
            
            
            39.0
            %
            
            5777
            
            
            4,156*
                converted at US$1= RMB 7.9636 for ’06converted
                at US$1= RMB 8.1826 for ’05





**Net
      Sales**





Net
      sales
      were $67.6 million in 2006, compared to $33.7 million in 2005. The 100.5%
      sales growth in the fiscal year ended December 31, 2006 was primarily
      attributable to a 39.0% increase in the average selling price of product sold
      and 44.3% increase in the volume of bimetallic products sold, along with a
      change in the mix of product sold. The significant increases in average selling
      price in 2006 were primarily due to the increase in raw material prices,
      particularly copper prices, and to a lesser degree, changes in the mix of
      product sold towards more profitable products. Sales volume increases were
      generally driven by several factors, including increased capacity utilization,
      accelerated customer acceptance of bimetallic products as a low cost substitute
      for solid copper wire, and more effective sales and marketing efforts, partially
      offset by the negative effect of limited and fluctuating availability of working
      capital.




42





The
      following table summarizes average selling prices, sales volumes, production
      capacities and utilizations for the fiscal years 2004, 2005, and 2006.





FY2006
            
            FY2005
            
            FY2004Avg.
                Selling Price ($/ton)
            
            
            5,777
            
            
            4,156
            
            
            3,523Sales
                Volume (tons)
            
            
            11,701
            
            
            8,111
            
            
            4,446Avg.
                # of Production lines
            
            
            20
            
            
            14
            
            
            8Capacity
                (tons/2-shifts)
            
            
            12000
            
            
            8400
            
            
            4800Utilization
            
            
            97.5
            %
            
            96.6
            %
            
            92.6
            %





*Customers*





We
      significantly expanded and diversified our customer base in 2006. Our five
      largest customers accounted for 28.9% of total sales in 2006, down significantly
      from 41% in 2005 and 75.4% in 2004. Our largest customer accounted for less
      than
      6.6% of sales in 2006. In fact, our ten largest customers in 2006 accounted
      for
      only 49.5% of net sales. We believe this increased diversification will
      significantly limit our risk and give us a stronger based on which to expand.
      We
      further believe our overall customer composition and the concentration of our
      top customers will change as we expand our business and seek to shift our
      product portfolio to higher margin products. However, the loss of, or
      significant reduction in orders from any of our largest may still have a
      material adverse impact on our financial condition and operating results. As
      we
      scale up our business, we will expand sales and marketing efforts
      proportionately and seek to further diversify our customer base, product mix
      and
      geographic presence to mitigate the customer concentration risk. Our objective
      is to focus on retaining existing business and winning new business to capture
      more market share, both inside the PRC and overseas.





The
      following table sets forth our ten largest customers in fiscal
      2006:





**List
                of Top 10 Customers**
            
            **Percentage
                of Net Sales '06**Zhuhai
                Hansheng Industrial Co., Ltd.
            
            
            6.57
            %Jiangxi
                Lianchuang Photoelectricity Science Co.
            
            
            5.87
            %Taizhou
                Yihua Specialty Electric Co., Ltd.
            
            
            5.68
            %ACOME
                Xintai Cable., Ltd.
            
            
            5.49
            %Leoni
                (Changzhou) Electronics Co., Ltd.
            
            
            5.29
            %Shantou
                Jinqiao (Golden Bridge) Cable Co., Ltd.
            
            
            5.14
            %Danyang
                Lihua Wire and Cable Co., Ltd.
            
            
            4.94
            %Yantai
                Xinmu Wire and Cable Co., Ltd.
            
            
            3.65
            %Wuhan
                Qinda Electric Appliance Co., Ltd.
            
            
            3.55
            %Shenzhen
                Kingsignal Cable Tech. Co., Ltd.
            
            
            3.32
            %**Top
                10 customers as % of total sales:**
            
            
            **49.50**
            **%**




43




The
      following table breaks down number of our customers and sales to application
      categories by province, for fiscal 2006.





Province
            
            Number
                of Customers
            
            Co-axial
                Cable (tons)
            
            Electromagnetic
                Wire (tons)
            
            Shielding
                Wire (tons)
            
            Sales
              (tons)
            
            As
                % of TotalGuangdong
            
            
            23
            
            
            2,197
            
            
            879
            
            
            1,318
            
            
            4,394
            
            
            38
            %Jiangsu
            
            
            13
            
            
            814
            
            
            325
            
            
            488
            
            
            1,627
            
            
            14
            %Zhejiang
            
            
            14
            
            
            879
            
            
            351
            
            
            527
            
            
            1,757
            
            
            15
            %Hubei
            
            
            8
            
            
            396
            
            
            28
            
            
            141
            
            
            565
            
            
            5
            %Jiangxi
            
            
            9
            
            
            621
            
            
            39
            
            
            116
            
            
            776
            
            
            7
            %Sichuan
            
            
            7
            
            
            798
            
            
            50
            
            
            150
            
            
            998
            
            
            9
            %Shandong
            
            
            13
            
            
            803
            
            
            100
            
            
            100
            
            
            1,003
            
            
            9
            %Others
            
            
            6
            
            
            290
            
            
            145
            
            
            146
            
            
            581
            
            
            5
            %Total
            
            
            93
            
            
            6,798
            
            
            1,917
            
            
            2,986
            
            
            11,701
            
            
            100.00
            %





In
        addition to diversifying our customer base, we also diversified our product
        base. Co-axial cable declined from 75.2% in 2005 to 58.1% in 2006, while
        electromagnetic wire increased from 0.3% in 2005 to 16.4% in 2006. As a matter
        of core competence, we only produce the core metallic wire using our patented
        continuous welding process and then sell to companies that apply the exterior
        insulating coatings and jackets. Existing application categories that we
        supplied products in bulk quantity in 2006 principally consist of the co-axial
        segment, the electromagnetic wire segment, and the shielded wire segment,
        accounting for 58.1%, 16.4%, and 25.5% respectively, as illustrated by the
        above
        table. Emerging application categories that are in the process of developing
        economically justifiable markets include transformer wire, distribution wire,
        automotive harness, micro-electronics wire, and power transmission line.





The
      following table breaks down application categories as percentage of total
      sales.




FY
                2006
            
            FY
                2005sales
                (tons)
            
            %
                of total sales
            
            sales
                (tons)
            
            %
                of total salesCo-axial
                Cable
            
            
            6,798
            
            
            58.1
            %
            
            6,100
            
            
            75.2
            %Electromagnetic
                Wire
            
            
            1,917
            
            
            16.4
            %
            
            23
            
            
            0.3
            %Shielding
                Wire
            
            
            2,986
            
            
            25.5
            %
            
            1,988
            
            
            24.5
            %Total
            
            
            11,701
            
            
            100.0
            %
            
            8,111
            
            
            100.0
            %




Although
        we generally do not have long-term contracts with customers, we typically
        enter
        into master orders, memoranda, or a letter of intent with some of our larger
        customers to document a long term buying relationship or pattern. Over the
        past
        three years, we have developed what we believe are good and long term
        relationships with key customers such as Andrew Corporation, ACOME Xintai
        Co.,
        Ltd., Zhuhai Hansheng Industrial Co., Ltd, Leoni (Changzhou) Electronics
        Co.,
        Ltd etc.




44





Our
      manufacturing activities are determined and scheduled upon projected sales
      information. Customers typically submit purchase orders seven to fifteen days
      prior to the requested delivery date. However, the lead time can be as short
      as
      three days. The sales price is determined at the time of purchase based on
      a
      formula or a unit price for each product. In either case, the purchase price
      is
      a function of the market price of copper and/or aluminum at the time of
      purchase, subject to adjustment at the time of delivery.





In
      recent
      years, the actual purchases made by our large customers tended to exceed their
      annual projections. To meet customer’s purchase requirements beyond the
      projected range, we normally maintain a 10 to 15 day inventory of regular sized
      CCA. This regular sized CCA inventory can be easily drawn to the customers’
specified size and available for delivery without much time.





Geographically,
      a substantial portion of our customers are based in the PRC. For customers
      such
      as Andrew Corporation, although it is a US based corporation, most of its orders
      are placed through its subsidiaries operating inside the PRC. We categorize
      orders of such type as domestic orders. As a result, we anticipate that most
      of
      our net sales will continue to be derived from sale to our PRC customers.
      Nevertheless, we are seeking to have a significantly larger portion of our
      sales
      come from outside of the PRC as we expand our international marketing and
      distribution efforts




*Accounts
      Receivable*





Accounts
      receivable was $7.0 million as of December 31, 2006. Accounts receivable related
      to our top five and top ten customers accounted for 42.43% and 73.25%,
      respectively, of our total accounts receivable balance.





We
      routinely extend unsecured credit to large or regular customers with good credit
      history. Management reviews its accounts receivable on a regular basis to
      determine if the allowance for doubtful accounts is adequate at each
      quarter-end. We only extend 30 to 90 day trade credit to our largest customers,
      which tend to be well-established and large businesses, and we have not seen
      any
      accounts receivable go uncollected beyond 90 days or experienced any write-off
      of accounts receivable in the past. Therefore, we elected not to make any
      provision for doubtful accounts and consider all accounts receivable
      collectable.




**Cost
      of Goods Sold**





Cost
        of
        goods sold increased to $42.8 million in 2006, from $21.4 million in
        2005, as measured by percentage of net sales, was 63.3% in 2006 compared
        with
        63.5% in 2005. Cost of good sold principally consists of the cost of raw
        materials, labor, utilities, manufacturing costs, manufacturing related
        depreciation, machinery maintenance costs, purchasing and receiving costs,
        inspection costs, shipping and handling costs, and other fixed costs. The
        significant increase in Cost of Goods Sold was principally due to substantially
        increased production and sales volume resulting from strong market demand
        and
        added capacity. The slight drop in Cost of Goods Sold as a percentage of
        sales
        largely reflects our pricing success in passing on the increases in our
        principal raw material costs, especially the volatile copper price, in almost
        its entirety to the customers.




45





Copper
      and aluminum are the primary raw materials we use in the manufacture of our
      products. In 2006, we purchased over 2,567 tons of copper strip and 7,727 tons
      of aluminum bar. Raw materials and other raw material costs accounted for 89.6%
      and 3.9%of COGS, respectively, in 2006. Other variable costs including
      manufacturing labor, maintenance, shipping and handling, utility amounted to
      $0.82 million, or 1.9% of COGS. Depreciation and overhead costs as a percentage
      of COGS were 3.8% in 2006. The manufacturing related depreciation for 2006
      was
      $0.81 million.




*Suppliers*





We
      also
      significantly diversified our sources of supply. We have historically relied
      on
      two key suppliers, namely Harbin Electric Wire Co. and Shanghai Jutai Copper
      Co., for the procurement of copper strip and aluminum bar. These two suppliers
      combined to account for approximately 41% and 96% of our total raw material
      purchases during the fiscal years 2005 and 2004, respectively. During fiscal
      2006, however, based on cost, they were replaced by Baotou Aluminum Co., Ltd.
      and Beijing Golden Eagle Copper Co., Ltd as the largest suppliers of our
      aluminum bars and copper strips purchased, respectively. Our dependence on
      a
      concentrated number of raw material suppliers has been substantially reduced.





The
      following table sets forth our five largest suppliers for fiscal 2006:




**List
                of Top 5 Suppliers**
            
            **Percentage
                of Total Purchases**Beijing
                Golden Eagle Copper Co., Ltd.
            
            
            26.8
            %Baotou
                Aluminum Co., Ltd
            
            
            23.3
            %Harbin
                Electric Wire Co.
            
            
            19.1
            %Shanghai
                Jutai Copper Co.
            
            
            15.8
            %Dalian
                Zhonghe
            
            
            8.4
            %**Top
                5 suppliers as % of total purchases**
            
            
            **93.4**
            **%**




**Gross
      margin**





Gross
        profit was $24.8 million in 2006, up 101.6% from gross profit of approximately
        $12.3 million in 2005. As a percentage of net sales or gross margin, gross
        profit increased slightly from 36.5% to 36.7%. This was primarily driven
        by
        higher raw material costs and correspondingly higher average selling prices,
        and
        to a lesser degree, particularly in the case of second quarter of 2006, the
        favorable impact of advance payments where we were able to lock in raw material
        prices at low levels upon points of purchase and price the products at high
        levels upon delivery. In addition, we benefited from improved product
        mix.




46




A
          majority of our sales are pursuant to a pricing formula that is based on
          the
          Shanghai Changjiang spot prices of copper and aluminum, adding raw material
          processing fees and margins markup ranging from RMB Yuan 11,000 to
          15,000 ,
          or
          $1,381 to $1,884 converted at 1 USD to 7.9636 RMB Yuan, depending on diameters. While our revenue and cost of goods sold fluctuate
          with
          raw material prices, our profitability is highly correlated to, and the
          attractiveness of our products is considerably affected by, the price ratio
          between copper and aluminum.
  However,
        there is sometimes a lag between the change in price of copper and our gross
        margins. In the third quarter of 2006, the spread between copper and aluminum
        was the highest in the year, but our margins were the lowest. The same
        conditions occurred in the fourth quarter of 2005. While a higher differential
        is extremely positive for both demand and margins over the long-term, increasing
        copper prices can hurt margins in the short term.
  Over
        the
        last eight quarters, spot price of copper has escalated rapidly and has been
        subject to significant volatility. The average quarterly spot prices per
        ton of
        copper and aluminum for COMEX, LME and Shanghai Yangtze of China, along with
        related gross margins of our company, for the periods indicated are summarized
        as follows:




1Q'06
            
            2Q'06
            
            3Q'06
            
            4Q'06
            
            FY2006Avg.
                COMEX Cu ($/ton)
            
            
            4,500
            
            
            6,740
            
            
            7,080
            
            
            6,380
            
            
            6,175Avg.
                COMEX Al ($/ton)
            
            
            2,243
            
            
            2,448
            
            
            2,230
            
            
            2,452
            
            
            2,343*Comex
                Cu/Al*
            
            
            *2.01*
            
            
            *2.75*
            
            
            *3.17*
            
            
            *2.60*
            
            
            *2.64*Avg.
                LME Cu ($/ton)
            
            
            4,480
            
            
            6,540
            
            
            6,960
            
            
            6,420
            
            
            6,100Avg.
                LME Al ($/ton)
            
            
            2,216
            
            
            2,432
            
            
            2,292
            
            
            2,473
            
            
            2,353*LME
                Cu/Al*
            
            
            *2.02*
            
            
            *2.69*
            
            
            *3.04*
            
            
            *2.60*
            
            
            *2.59*Avg.
                Changjiang Cu (RMB/ton)
            
            
            47,218
            
            
            65,172
            
            
            68,814
            
            
            67,318
            
            
            62,391Avg.
                Changjiang Al (RMB/ton)
            
            
            19,728
            
            
            20,741
            
            
            19,890
            
            
            21,288
            
            
            20,407*Yangtze
                Cu/Al*
            
            
            *2.39*
            
            
            *3.14*
            
            
            *3.46*
            
            
            *3.16*
            
            
            *3.06****Gross
                Margin***
            
            
            ***36.1***
            ***%***
            
            ***44.4***
            ***%***
            
            ***30.9***
            ***%***
            
            ***34.1***
            ***%***
            
            ***36.7***
            ***%***1Q'05
            
            
            2Q'05
            
            
            3Q'05
            
            
            4Q'05
            
            
            FY2005Avg.
                COMEX Cu ($/ton)
            
            
            2,940
            
            
            3,060
            
            
            3,400
            
            
            4,060
            
            
            3,365Avg.
                COMEX Al ($/ton)
            
            
            1,823
            
            
            1,688
            
            
            1,711
            
            
            1,912
            
            
            1,783*Comex
                Cu/Al*
            
            
            *1.61*
            
            
            *1.81*
            
            
            *1.99*
            
            
            *2.12*
            
            
            *1.89*Avg.
                LME Cu ($/ton)
            
            
            2,960
            
            
            3,080
            
            
            3,400
            
            
            3,900
            
            
            3,335Avg.
                LME Al ($/ton)
            
            
            1,711
            
            
            1,629
            
            
            1,675
            
            
            1,877
            
            
            1,723*LME
                Cu/Al*
            
            
            *1.73*
            
            
            *1.89*
            
            
            *2.03*
            
            
            *2.08*
            
            
            *1.94*Avg.
                Changjiang Cu (RMB/ton)
            
            
            32,193
            
            
            35,061
            
            
            35,319
            
            
            39,196
            
            
            35,486Avg.
                Changjiang Al (RMB/ton)
            
            
            16,251
            
            
            16,903
            
            
            16,503
            
            
            17,814
            
            
            16,868*Yangtze
                Cu/Al*
            
            
            *1.98*
            
            
            *2.07*
            
            
            *2.14*
            
            
            *2.20*
            
            
            *2.10****Gross
                Margin***
            
            
            ***37.8***
            ***%***
            
            ***43.9***
            ***%***
            
            ***45.7***
            ***%***
            
            ***28.5***
            ***%***
            
            ***36.5***
            ***%***




47




Our
      gross
      profit margins have historically fluctuated between 30% and 45%. We realized
      a
      slight increase in the gross margin for fiscal 2006 as a whole, although the
      quarterly margins varied widely. The first quarter of 2006 had a normal margin
      of 36.1%. During the second quarter as copper ran to a record high, margins
      rose
      to 44.4%. Margin declined sharply in the third quarter to 30.9% and then
      rebounded back to 33.1% in the fourth quarter of 2006. See “Risk Factors- Risks
      Related to Our Business- Due to increased volatility of raw material prices,
      the
      timing lag between the raw material purchases and the product pricing can
      negatively impact our profitability”. In the second quarter, we benefited from
      the rapidly rising copper price to realize increased profitability by utilizing
      previously-acquired, lower cost raw material inventory to fulfill orders priced
      at current higher copper prices. In the third quarter, the reverse happened,
      but
      to a much lesser degree.


We
          anticipate that the gross margins for future quarters will continue to
          fluctuate
          due to several factors, including, continued raw-material price volatility,
          changes in the relative mix of our products, and the average selling prices
          for
          our products, among other things. As exhibited by our historical profitability
          pattern, although raw material prices fluctuate over time, which caused
          monthly
          variations in the costs of raw material purchases, the fluctuations tend
          to be
          short term, making forecasting operating results and performance on annual
          and
          long term basis much easier to do than on a quarterly basis. As we continue
          to
          focus on enhancing profitability, optimizing cost structure and expanding
          margins, we anticipate the gross margins to somewhat stabilize in the range
          between 3 4 %
          and
          38%.




**Selling,
      General and Administrative Expenses**




Selling
      expenses, which principally include sales related staff salary and welfare,
      travel expenses, and sales commissions, were $613,119 in 2006, compared to
      $317,324 in 2005, a 93.2% increase. As a percentage of net sales, selling
      expenses remained unchanged at 0.9% in 2006 compared to 2005. General and
      administrative expenses, as a percentage of net sales, dropped to 5.6% of net
      sales in 2006, compared to 6.0% in 2005. The decrease was primarily due to
      the
      semi-fixed nature of many of these costs including office expenses, supplies,
      administrative salaries, insurance, and utilities. Research
      and development expense, which is included in general and administrative
      expenses, increased by $195,058 in 2006.


During
        2006, we took advantage of economies of scale, improved efficiency and leverage
        of operating expenses to achieve economic results. Going forward, our operating
        expenses will continue to be affected by our investment in sales, marketing
        and
        customer support personnel and commissions paid to our sales force for revenue
        generated. In addition, we anticipate that general and administrative expenses
        will increase for the foreseeable future as a result of our expected continued
        growth and the costs of complying with our reporting and other requirements
        as a
        public company.





**Interest
      Expense**





Interest
      expense increased to $1.07 million in 2006 from $1.03 million in 2005,
      while as a percentage of net sales, interest expense dropped to 1.6% in 2006
      from 3.1%. The slight increase in absolute amount is largely due to the higher
      average short term bank loan levels on our revolving credit facility partially
      offset by capitalization of interest relating to the construction of assets
      in
      the amounts of approximately $282,641 in 2006.




48





**Registration
      Rights Penalty**





In
      December 2005, we entered into stock purchase agreements (the “Stock Purchase
      Agreements”) pursuant to which we raised gross proceeds of $12 million. The
      Stock Purchase Agreements required that we file a registration statement
      registering the resale of the securities sold pursuant thereto, and that the
      registration statement be effective within 120 days of filing. In the event
      the
      registration statement was not declared effective within that time period,
      each
      investor was entitled to liquidated damages equal to 3% of each investor’s
      shares for each 30 day period after 120 days that the registration statement
      was
      not declared effective.





As
      a
      result of the foregoing provisions, we incurred a penalty of 255,000 shares
      as
      of August 2, 2006, the date our registration statement on Form SB-2 was declared
      effective, which resulted in a charge to income of $1.5 million.





**Income
      tax**





Fushi
      International, Inc. (formerly Parallel Technologies, Inc.) is a company
      incorporated in the State of Nevada and Fushi Holdings is a company incorporated
      in the State of Delaware. We conduct substantially all our operations through
      our PRC operating subsidiaries. Although we are subject to United States
      taxation, we do not anticipate incurring significant United States income tax
      liability for the foreseeable future because:




·
            we
                did not conduct any material business or maintain any branch office
                in the
                United States,





·
            the
                earnings generated from our non-U.S. operating companies are generally
                eligible for a deferral from United States taxation until such earnings
                are repatriated to the United States,
                and





·
            we
                believe that we will not generate any significant amount of income
                inclusions under the income imputation rules applicable to a United
                States
                company that owns "controlled foreign corporations" for United States
                federal income tax purposes.




Therefore,
      no provision for U.S. federal income taxes or tax benefits on the undistributed
      earnings and/or losses of our company has been made.




49




PRC
      Enterprise income tax


In
        2006,
        our business operations were solely conducted by our subsidiaries incorporated
        in the PRC. PRC enterprise income tax is calculated based on taxable income
        determined under PRC accounting principles. In accordance with “Income Tax Law
        of China for Enterprises with Foreign Investment and Foreign Enterprises,” or
        the Income Tax Law, foreign invested enterprises, or FIEs, established in
        the
        PRC are generally subject to an enterprise income tax rate of 25%. PRC domestic
        companies are governed by the Enterprise Income Tax Laws of the PRC and are
        also
        generally subject to an enterprise income tax rate of 33 % (30%
        state income taxes plus 3% local income taxes). However,
        the Income Tax Laws provide certain favorable tax treatment to a company
        that
        qualifies as a "new or high-technology enterprise" or a “Foreign Invested
        Enterprise (“ FIE”)
        located in the old town of an inshore open city”. Additionally, the governments
        at the provincial, municipal and local levels can provide many tax incentives
        and abatements based on a number of programs at each level.




The
      Dalian Municipal Government issued a notice in 2000 providing for a series
      of
      tax preferential treatments to companies that qualify as "new or high-tech"
      enterprise or companies that are registered and operate in a specified
      development zone in Dalian City.





Dalian
      Fushi was incorporated in the PRC and is subject to PRC income tax which is
      computed according to the relevant laws and regulations in the PRC. Dalian
      Fushi's bimetallic composite conductor wire product was approved by Dalian
      Cit
      as a "high-tech" project. As a result, Dalian Fushi is a business entity that
      is
      qualified as a "new or high-technology enterprise," and is entitled to a
      two-year full exemption from the PRC enterprise income tax starting from its
      first year of operation, which expired on December 31, 2003, followed by a
      50%
      reduction and other favorable tax treatment for the succeeding three years,
      which expires on December 31, 2006. After December 31, 2006, we may consider
      available options under applicable PRC tax laws that would enable us to qualify
      for further preferential tax treatment. The provision for income taxes for
      the
      year ended December 31, 2006 was $398,425.





Fushi
      International (Dalian) was incorporated in the PRC as an FIE and is subject
      to
      PRC income tax which is computed according to the relevant laws and regulations
      in the PRC. Fushi International (Dalian) has located its factories in a special
      economic region in Dalian and is granted certain preferential treatments
      including a corporate income tax rate of 24%. In September 2005, Fushi
      International (Dalian) was approved as a wholly foreign owned enterprise. This
      economic region allows Fushi International (Dalian), now Fushi International
      (Dalian) Bimetallic Cable Co., Ltd after name change which went effective
      January 2007, a two-year income tax exemption for the years ended December
      31,
      2006 and 2007, and a 50% income tax reduction for the following three years
      ended December 31, 2008, 2009, and 2010.





Since
      Fushi International, Inc, and DPI incurred net operating losses for income
      tax
      purposes for 2006, Fushi International (Dalian) is entitled to tax exemption,
      and income tax provision made for Dalian Fushi for the year ended December
      31,
      2006 was $398,425, a total of $398,425 was made for tax provision on a
      consolidated basis for the fiscal year ended December 31, 2006.




50





**Net
      Income**





Net
      income increased to approximately $17.8 million, or 26.3% of net sales for
      the
      year ended December 31, 2006, from approximately $7.8 million, or 23.1% of
      net
      sales for the year ended December 31, 2005, representing an increase of $10
      million or 128.4% and an expansion of net margin by 3.2% percentage points.
      The
      bottom line increase is primarily due to i) substantial revenue increases,
      ii) sustained gross margin in spite of extremely volatile raw material prices;
      and iii) improved operating efficiency resulting from cost control measures.
      Earning per share was $0.89 and $0.84 on a diluted basis.





The
      pro
      forma net income would amount to $19.3 million and the EPS would increase from
      $0.50 to $0.91 had the 255,000 registration rights penalty shares valued at
      approximately $1.5 million not been charged to the income statement.





**Foreign
      Currency Translation Gains**





In
      the
      year ended December 31, 2006, the RMB steadily rose against the US dollar.
      As a
      result of the appreciation of the RMB, we recognized a foreign currency
      translation gain of $1.9 million. Given the uncertainty of exchange rate
      fluctuations, we cannot estimate the effect of these fluctuations on our future
      business, product pricing, results of operations or financial condition. See
      “Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation
      of
      the Renminbi may materially and adversely affect your investment.”




Materially
      all of our revenues and a majority of our expenses in 2006 were denominated
      in
      RMB Yuan. The income statement accounts and balance sheet amounts with the
      exception of equity at December 31, 2006 were translated at 1 RMB Yuan to
      0.12557 USD, or 1 USD to 7.9636 RMB Yuan. The equity accounts were stated at
      their historical rate.





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      historically financed our working capital requirements and capital expenditures
      through cash flows from operations, bank loans and sales of its common stock.
      As
      is customary in the industry, we provide payment terms to most of our customers
      that exceed terms that we receive from our suppliers. Therefore, the Company’s
      liquidity needs have generally consisted of working capital necessary to finance
      receivables and raw material inventory. Capital expenditures have historically
      been necessary to expand the production capacity of the Company’s manufacturing
      operations.




51




As
      of
      December 31, 2006, we had approximately $20.5 million in cash, up $14.3 million
      from $6.2 million at December 31, 2005.





Working
      capital, as measured by current assets less current liabilities, at December
      31,
      2006, was $18.1 million compared to $10 million at December 31, 2005. The
      working capital primarily consists of (i) change in accounts receivable
      resulting from revenue growth; (ii) change in inventory to reflect requirement
      of expanded operation and customer base, including advances for raw materials.
      During the third quarter of 2006, we experienced a shortfall of working capital
      because of higher raw materials costs and the routine lags in customer payments.
      Although this situation was rectified in the fourth quarter of 2006, we are
      not
      in a position to provide any assurance that similar incident will not happen
      again. See “Risk Factors- Risk Related to Our Business- Increases in raw
      materials prices will increase our need for working capital **.**





For
        2006,
        cash generated from operating activities totaled $13.3 million compared to
        cash
        provided by operations of $3.1 million in 2005. This was principally
        attributable to a $10 million increase in net earnings and a $0.5 million
        decrease in inventory resulting from more efficient use of raw materials
        and
        finished goods partially offset by (i) $0.6 million increase in accounts
        receivables due to credit sales growth and rise in raw material prices that
        drove sales prices higher; (ii) $1.7 million decrease in accounts payables;
        (iii) $5.1 million decrease in income tax payable and other tax payable.
        Overall, rising and volatile copper prices and the resultant increase in
        accounts receivables and advance payment arrangements for raw material
        inventories significantly impacted our working capital funding requirements.





Going
      forward, our working capital needs relating to the realization of our revenue
      and capacity expansion plans for the long and short term will depend upon
      numerous factors, including the
      prices we pay our suppliers to procure the raw materials, operating
      and internally cash generating results, competition, our
      relationships with suppliers or customers, the
      availability of credit facilities and financing alternatives, none of which
      can
      be predicted with certainty.





Accounts
      Receivable Turnover for 2006 was 10.2, or 35 days as Days Receivable
      Outstanding; Inventory Turnover was 11.6, or approximately 32 days as Days
      Inventory Outstanding.  Our Quick Ration was 1.0.




Cash
      used
      in investing activities was approximately $13.0 million, primarily as a result
      of capital investment in new equipment and machinery including advances to
      machinery and equipment suppliers, as well as decoration and improvement of
      the
      office building, all as part of our planned expansion.




Financing
      activities provided net cash inflow of $12.1 million during 2006. We rolled
      over
      maturing, short term working capital loans and also drew down from our existing
      credit line facilities to meet working capital needs. Maturities for the working
      capital financing range from three to six months. We intend to renew these
      loans
      over again when they become due. In addition, On September 13, 2006, Mr. Li
      Fu,
      our largest shareholder and Chairman of the Board, entered into a stock
      purchase agreement to sell a total of 800,000 shares of common stock of the
      Company to Pope Investments LLC and Halter Pope USX China Fund. The transaction
      closed on September 19, 2006. The shares were sold in a private sale transaction
      and with a restrictive legend. On September 20, 2006, Mr. Fu advanced a large
      portion of the proceeds from the private sale amounting to $4.45
      million to the Company in meeting the Company’s working capital needs. The loan
      is unsecured, interest free and repayable on demand.




52




As
      of
      December 31, 2006, we had the following long-term bank loans and short-term
      working capital financing outstanding with the following terms:


Name
                  of lenders
              
              Date
                  of borrowing
              
              Date
                  of maturity
              
              Interest
                  rate per annum
              
              Borrowed
                  amount (RMB)
              
              Borrowed
                  amount (USD)LONG
                  TERM LOANSIndustrial
                  and Commercial
                Bank
                  of China
              
              
              2003.05.06
              
              
              2008.04.10
              
              
              5.580
              %
              
              40,000,000
              
              $
              5,128,000Industrial
                  and Commercial
                Bank
                  of China
              
              
              2003.05.17
              
              
              2008.04.10
              
              
              5.580
              %
              
              40,000,000
              
              $
              5,128,000Total
                  long terms loans:
              
              
              
              
              
              
              
              
              
              
              
              80,000,000
              
              $
              10,256,000SHORT
                  TERM LOANSRevolving
                  credit line of RMB100MM for working capitalBank
                  of China
              
              
              2006.09.22
              
              
              2007.04.21
              
              
              6.732
              %
              
              22,000,000
              
              $
              2,820,400Bank
                  of China
              
              
              2006.11.23
              
              
              2007.02.22
              
              
              6.547
              %
              
              20,000,000
              
              $
              2,564,000Bank
                  of China
              
              
              2006.12.28
              
              
              2007.03.27
              
              
              6.547
              %
              
              17,000,000
              
              $
              2,179,400Bank
                  of China
              
              
              2006.06.12
              
              
              2007.03.11
              
              
              5.940
              %
              
              30,000,000
              
              $
              3,846,000Dalian
                  Commercial Bank of China
              
              
              2006.05.16
              
              
              2007.05.15
              
              
              6.338
              %
              
              7,600,000
              
              $
              974,320ShenZhen
                  Development Bank
              
              
              2006.12.12
              
              
              2007.04.12
              
              
              5.833
              %
              
              936,153
              
              
              120,015Total
                  short term loans:
              
              
              
              
              
              
              
              
              
              
              
              RMB97,536,153
              
              $
              12,504,135




·
            Translated
                using 1USD=7.8003RMB




On
      January 24, 2007, we and Citadel Equity Fund Ltd. ("Citadel") entered into
      a
      Notes Purchase Agreement (the “Notes Purchase Agreement”) pursuant to indicative
      financing term sheets dated December 19, 2006. Pursuant to the terms of the
      Notes Purchase Agreement, the Company offered and sold and Citadel purchased
      (a)
      $40,000,000 of the Company’s Guaranteed Senior Secured Floating Rate Notes due
      2012 (the “HY Notes”) and (b) $20,000,000 of the Company’s 3.0% Senior Secured
      Convertible Notes due 2012 (the “Convertible Notes” and collectively with the HY
      Notes, the "Notes").





The
      HY
      Notes and the Convertible Notes were issued pursuant to indentures, each dated
      January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
      together, the "Indentures") among the Company, the FHI, as guarantor, and The
      Bank of New York, as trustee for the Notes. Pursuant to the Indentures, FHI
      has
      agreed, and all of the Company’s other existing and future domestic subsidiaries
      are obligated, to guarantee, on a senior secured basis, to the holders of the
      Notes and the trustee the payment and performance of the Company’s obligations
      thereunder.




53





As
      security for the Notes, the Company and The Bank of New York, as collateral
      agent, entered into a share pledge agreement, dated January 25, 2007 (the "Share
      Pledge Agreement"), to guarantee the Notes with all of the shares of common
      stock of each of our subsidiaries.


The indentures for
          the
          notes, there are a number of restrictions on our governing
          our Notes contain various covenants that may limit our discretion in operating
          our business including the incurrence .
          In
          particular, we are limited in our ability to merge, consolidate or transfer
          substantially all of our assets, issue stock of subsidiaries,
          incur additional
          debt ,
          restrictions on payments, distribution s
          and asset
          sales. create
          liens on our assets to secure debt. In
          addition, if
          there
          is default, or we do not maintain certain financial covenants or we do
          not
          maintain borrowing availability in excess of certain pre-determined levels,
          we
          may be unable to incur additional indebtedness, make restricted payments
          or
          redeem or repurchase our capital stock. If we can not satisfy the required
          business targets of the indentures, we also have the possibility to
          default.
 
 The
          indentures governing our Notes require us to maintain certain financial
          ratios
          and limit our ability to make capital expenditures. For example, we
          are
          required to maintain (a) a Fixed Charge Coverage Ratio, as determined as
          of the
          last day of each fiscal quarter, for the four fiscal quarters ending on
          such
          day, of at least 2.0 to 1.00, (b) a leverage ratio, as determined as of
          the last
          day of each fiscal quarter, for the four fiscal quarters ending on such
          day, not
          exceeding 5.5 to 1.00 from the issue date of the notes through December
          31,
          2007, and 5.0 to 1.00 thereafter. Covenants
          and ratios like this could have an adverse effect on our business by limiting
          our ability to take advantage of financing, merger and acquisition or other
          corporate opportunities and to fund our operations. Further, they could
          reduce
          the availability of our cash flow to fund future working capital, capital
          expenditures, acquisitions and other general corporate purposes, and limit
          our
          ability to obtain additional financing for working capital, capital
          expenditures, and other general corporate requirements, among other things.
          See
          Risk Factors- Risks Related to Our Recent High Yield and Convertible
          Notes. Detailed
          terms of the indentures, notes and related transaction documents can be
          found in
          our Current Report on Form 8-K filed with the SEC on January 26, 2007,
          as well
          as the transaction documents which are annexed thereto.




Interest
      on the notes is payable semi-annually in arrears, commencing July, 2007. We
      anticipate that existing cash reserves and cash flow from future operations
      will
      be used for such purposes.





**Critical
      Accounting Policies**





Management's
      discussion and analysis of its financial condition and results of operations
      are
      based upon the Company's consolidated financial statements, which have been
      prepared in accordance with United States generally accepted accounting
      principles. The Company's financial statements reflect the selection and
      application of accounting policies which require management to make significant
      estimates and judgments. See note 1 to the Company's consolidated financial
      statements, "Summary of Significant Accounting Policies and Organization".
      Management bases its estimates on historical experience and on various other
      assumptions that are believed to be reasonable under the circumstances. Actual
      results may differ from these estimates under different assumptions or
      conditions. The Company believes that the following reflect the more critical
      accounting policies that currently affect the Company's financial condition
      and
      results of operations:





Revenue
      recognition





Revenue
      is recognized when product is shipped and title passes to the customer and
      collectibility is reasonably assured. Sales revenue represents the invoiced
      value of goods, net of a 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. This VAT may be offset by VAT paid by the Company on raw materials and
      other materials included in
      the
      cost of producing its finished products.




54





Although
      most of our products are covered by our warranty programs, the terms and
      conditions of which vary depending on the customers and the product sold.
      Because we have not experienced any significant warranty claims in the past,
      we
      have not established any reserve fund for warranty claims or defective
      products.





Property,
      Plant and Equipment





Building,
      plant and equipment are recorded at cost less accumulated depreciation and
      amortization. Depreciation and amortization are recorded utilizing the
      straight-line method over the estimated original useful lives of the assets.
      Amortization of leasehold improvements is calculated on a straight-line basis
      over the life of the asset or the term of the lease, whichever is shorter.
      Major
      renewals and betterments are capitalized and depreciated; maintenance and
      repairs that do not extend the life of the respective assets are charged to
      expense as incurred. Upon disposal of assets, the cost and related accumulated
      depreciation are removed from the accounts and any gain or loss is included
      in
      income. Depreciation related to property and equipment used in production is
      reported in cost of sales.





Long-term
      assets of the Company are reviewed annually as to whether their carrying value
      has become impaired.





Bad
      debts





The
      Company's business operations are conducted in the PRC. The Company extends
      unsecured credit to its relatively large customers with good credit history.
      Management reviews its accounts receivable on a regular basis to determine
      if
      the bad debt allowance is adequate at each year-end. Because we only extend
      trade credits to our largest customers, who tend to be well-established and
      large sized businesses, and we have not experienced any write-off of accounts
      receivable in the past. Thus, we elected not to provide for any bad debt
      allowance and considered all accounts receivable collectable.





Off-Balance
      Sheet Arrangements





We
      have
      not engaged in any off-balance sheet transactions since its
      inception.





**ITEM
      7.**   **FINANCIAL
      STATEMENTS**





The
      following table presents selected financial data for us for the previous two
      fiscal years ended December 31, 2006 and 2005. We derived the selected financial
      data set forth below from our statements of operations for the two fiscal years
      ended December 31, 2006 and 2005, and our balance sheets as at December 31,
      2006
      and 2005, each is included in this report. You should read the following summary
      financial data in conjunction with the consolidated financial statements and
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operations" appearing elsewhere in this report.




55




For
                  the Fiscal Year ended December 31,2006
              
              2005Gross
                  revenues
              
              $
              67,595,774
              
              $
              33,709,428Income
                  from operations
              
              $
              20,385,606
              
              $
              9,962,617Net
                  income
              
              $
              17,810,026
              
              $
              7,798,981Total
                  assets
              
              $
              96,162,135
              
              $
              72,151,278Total
                  liabilities
              
              $
              31,028,011
              
              $
              26,927,483





The
      Company's consolidated financial statements, including the notes thereto,
      together with the report of independent certified public accountants thereon,
      are presented beginning at page F-1.





**ITEM
      8.**   **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





On
      October 17, 2006, Fushi International, Inc. (the “Company”) dismissed Jimmy C.H.
      Cheung & Co. (“Cheung”) as its independent accountant. Cheung had been
      previously engaged as the principal accountant to audit the Company’s financial
      statements. The decision to change accountants was approved by the Company's
      Board of Directors.





From
      the
      date of Cheung’s retention as the Company’s registered independent certified
      public accounting firm on December 13, 2005 through the date of Cheung’s
      dismissal, there were no disagreements between Cheung and the Company on any
      matter of accounting principles or practices, financial statement disclosure,
      auditing scope, or procedure, which disagreements, if not resolved to the
      satisfaction of Cheung, would have caused it to make reference to the subject
      matter of the disagreement in connection with its reports.





On
      October 17, 2006, the Company retained Moore Stephens Wurth Frazer and Torbet,
      LLP (“Moore Stephens”) as its new independent accountant, which retention was
      approved by the Board of Directors of the Company. Moore Stephens is located
      at
      1199 South Fairway Drive. Suite 200, Walnut, California 91789. The Company
      has
      not consulted with Moore Stephens on any matters relating to the application
      of
      accounting principles or any matter that was either the subject of a
      disagreement or a reportable event prior to this engagement.





**ITEM
      8A. CONTROLS AND PROCEDURES**


(a)  
          Disclosure Controls and Procedures.
 
 At
          the
          conclusion of the fiscal year ended December 31, 2006, we carried out an
          evaluation, under the supervision and with the participation of our management,
          including our Chairman and Chief Executive Officer and Chief Accounting
          Officer,
          of the effectiveness of the design and operation of our disclosure controls
          and
          procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
          Act.  Based on this evaluation, our officers concluded that, as of December
          31, 2006, our disclosure controls and procedures were effective and adequately
          designed to ensure that the information required to be disclosed by us
          in the
          reports we submit under the Exchange Act is recorded, processed, summarized
          and
          reported within the time periods specified in the applicable rules and
          forms and
          that such information was accumulated and communicated to our chief executive
          officer and chief financial officer, in a manner that allowed for timely
          decisions regarding required disclosure.


56




(b)  
        Changes in Internal Control over Financial Reporting
  During
        the fiscal year ended December 31, 2006, there was no change in internal
        control
        over financial reporting that has materially affected, or is reasonably likely
        to materially affect our internal control over financial reporting. However,
        in
        November, 2006, we engaged independent consultants to initiate a comprehensive
        review of our financial and accounting systems and procedures in preparation
        for
        compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  The
        consultants are currently in the process of conducting evaluation of our
        internal control over financial reporting, and designing and implementing
        enhanced processes and procedures to improve our internal control over financial
        reporting.
 
 Based
        on
        the preliminary results of the consultant’s review, we believe that we lack a
        comprehensive company level controls system, including an assessment framework
        of design and operating effectiveness.  We are in the process of
        implementing controls with the assistance of the independent
        consultant





**ITEM
      8B. OTHER INFORMATION**





There
      were no matters required to be disclosed on Form 8-K during the quarter ended
      December 31, 2006 which were not disclosed on such form.





**PART
      III**





**ITEM
      9.**   **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(** **a** **)
      OF THE EXCHANGE ACT.**




**DIRECTORS
      AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS**




**Our
      Directors and Executive Officers**




The
      following are our Directors and Executive Officers. The same persons also have
      been elected as directors of Fushi Holdings and Fushi International (Dalian)
      and
      hold similar positions with each of these entities. Except for John D. Kuhns,
      each of our current executive officers and directors is a resident of the PRC.
      As a result, it may be difficult for investors to effect service of process
      within the United States upon them or to enforce court judgments obtained
      against them in United States courts.


Directors
                  and Executive Officers
              
              Position/Title
              
              AgeLi
                  Fu
              
              Chairman
                  of Board and CEO
              
              41Yue
                  Mathus Yang
              
              Vice-President,
                  Director
              
              39John
                  D. Kuhns
              
              Director
              
              57Wenbing
                  Chris Wang
              
              Treasurer,
                  Secretary
              
              36




All
      of
      our directors hold office until the next annual meeting of shareholders, and
      until their successors have been qualified after being elected or appointed.
      Officers serve at the discretion of our Board of Directors.




57




**Directors
      and Executive Officers of Dalian Fushi**




Dalian
      Fushi's current executive officers and directors are:


Directors
                  and Executive Officers
              
              Position/Title
              
              AgeLi
                  Fu
              
              Executive
                  Director
              
              41Yue
                  Mathus Yang
              
              General
                  Manager
              
              39Wenbing
                  Chris Wang
              
              Chief
                  Financial Officer
              
              36Xishan
                  Yang
              
              Chief
                  Engineer and
              
              69Executive
                  Vice President of R&DChunyan
                  Xu
              
              Supervisor
                  Director
              
              51Yang
                  Roy Yu
              
              Executive
                  Vice President of Financeand
                  Accounting
              
              25




The
      following is a description of the business experience for the last five years
      for each of the above named directors and executive officers of our company,
      Fushi Holdings, Fushi International (Dalian) and Dalian Fushi.




Mr.
      Li Fu
      was appointed our Chairman and CEO on December 13, 2005. Mr. Fu is a founder
      of
      Dalian Fushi and has been the Executive Director of Dalian Fushi since he
      founded the company in 2001. Prior to founding Dalian Fushi and focusing his
      time on Dalian Fushi's management and operations, Mr. Fu had founded and managed
      Dalian Fushi Enterprise Group Co., Ltd., a holding company owning various
      subsidiaries in the hotel, process control instrumentation, international trade,
      automobile maintenance and education businesses. Mr. Fu graduated from PLA
      University of Science and Technology with a degree in Engineering.




Mr.
      Yue
      Mathus Yang was appointed a director and President of our company on December
      13, 2005. He has served as the General Manager of Dalian Fushi since November
      2004. Mr. Yang is the founder of Forward Investment Co., Ltd and has served
      as
      its Chairman since 2000. Prior to that, Mr. Yang worked for Liaoning Province
      Economic & Trade Collaboration Enterprise Group as an Executive VP from 1994
      to 1998 and the Export Department of Liaoning Province Chemicals Import &
Export Corporation as a Business Manager from 1990 to 1994. Mr. Yang graduated
      from Shenyang Finance University with a Bachelor's Degree in International
      Trade.




Mr.
      John
      D. Kuhns was appointed a director of our company on December 13, 2005. Mr.
      Kuhns
      has been a 45% shareholder, a director and chairman of Kuhns Brothers, Inc.,
      a
      holding company founded in 1987 for its 100% subsidiary, Kuhns Bros. & Co.,
      Inc., an investment banking firm specializing in providing financing for power
      technology ventures, and, more recently, manufacturing operations within the
      PRC. Additionally, Kuhns Brothers, Inc. owns 100% of Kuhns Brothers Securities
      Corporation, a broker dealer, registered with the SEC, in which Mr. Kuhns is
      the
      Chairman. Since March 2005, Mr. Kuhns has been a director and chairman of Deli
      Solar (USA), Inc., a U.S. reporting company with solar hot water heaters
      manufacturing operation in the PRC. Since 2002 Mr. Kuhns has been a director
      and
      chairman of Distributed Power, Inc., a public company that owns electric
      generating projects. Mr. Kuhns is also a director of China Sciences
      Conservational Power Limited, a company listed on the Hong Kong Stock Exchange.
      Neither of the foregoing Kuhns companies, nor Deli Solar (USA), Inc.,
      Distributed Power, Inc. or China Sciences Conservational Power Limited are
      affiliated with the Company. Mr. Kuhns holds a bachelors degree in sociology
      and
      fine arts from Georgetown University, a master's degree in fine arts from the
      University of Chicago and an MBA degree from the Harvard Business
      School.




Mr.
      Wenbing Chris Wang has served as our Chief Financial Officer since December
      13,
      2005. Mr. Wang has served as Chief Financial Officer of Dalian Fushi since
      March
      2005. Mr. Wang served as an Executive Vice President of Redwood Capital, Inc.
      from November 2004 to March 2005, with specific focus on providing strategic
      and
      financial advisory services to China based clients seeking access to the U.S.
      capital markets. Mr. Wang previously served as Assistant VP of Portfolio
      Management at China Century Investment Corporation from October 2002 to
      September 2004. Mr. Wang began his investment banking career at Credit Suisse
      First Boston (HK) Ltd in 2001. From 1999 to 2000, Mr. Wang worked for VCChina
      as
      Management Analyst. Fluent in both English and Chinese, Mr. Wang holds an MBA
      in
      Finance and Corporate Accounting from Simon Business School of University of
      Rochester.




58




Mr.
      Xishan Yang has served as the Executive Vice President of R & D and Chief
      Engineer of Dalian Fushi since its inception in 2001. Mr. Yang has more than
      40
      years of working experience in the communication electronics industry. He had
      held executive management positions with a number of electronic enterprises
      prior to joining our company. During his career, Mr. Yang has focused on the
      development, design, and processes of metallic and bimetallic cable production.
      He holds several patents for the design of the modified Cladding and Drawing
      processes for CCA and CCS production used by Dalian Fushi and has extensive
      experience in production management. Mr. Yang graduated from Harbin Industrial
      University with a graduate degree in engineering.




Ms.
      Chunyan Xu has served as the Controller of Dalian Fushi since 2001. She
      previously served as the Chief Accountant at the Dalian Personnel Bureau and
      served as a Finance Manager of a Chinese public company. Ms. Xu has many years
      of experience in industrial accounting, public company accounting and accounting
      management.





Mr.
      Yang
      Roy Yu has served as our Executive Vice President of Corporate Finance and
      Account since February 2006. Mr. Yu previously worked for Harbin Yinhai Co.
       At Harbin Yinhai, he served primarily as Manager of the Investment and
      Development Department and was active in all aspects of its financial
      operations. Born in Harbin, Mr. Yu received his B.A. in Accounting and Finance
      from London South Bank University, and was qualified by the Association of
      Chartered Certified Accountants in 2004.




**FAMILY
      RELATIONSHIPS**




There
      are
      no family relationships among our directors or executive officers.




**AUDIT
      COMMITTEE FINANCIAL EXPERT**




Our
      board
      of directors currently acts as our audit committee. Our board of directors
      has
      not yet determined whether we have a member who qualifies as an "audit committee
      financial expert" as defined in Item 401(e) of Regulation S-B, and is
      "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under
      the
      Exchange Act. Our board of directors is in the process of searching for a
      suitable candidate for this position.




**AUDIT
      COMMITTEE**




We
      have
      not yet appointed an audit committee, and our board of directors currently
      acts
      as our audit committee. At the present time, we believe that the members of
      board of directors are collectively capable of analyzing and evaluating our
      financial statements and understanding internal controls and procedures for
      financial reporting. Our company, however, recognizes the importance of good
      corporate governance and intends to appoint an audit committee comprised
      entirely of independent directors, including at least one financial expert,
      during our 2007 fiscal year.




SECTION
      16(A) BENEFICIAL REPORTING COMPLIANCE




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
      directors and executive officers, and persons who own more than 10% of a
      registered class of the Company's equity securities, to file with the Securities
      and Exchange Commission initial reports of ownership and reports of changes
      in
      ownership of common stock and other equity securities of the Company. These
      insiders are required by Securities and Exchange Commission regulations to
      furnish the Company with copies of all Section 16(a) forms they file, including
      Forms 3, 4 and 5. To the Company's knowledge, based solely on review of the
      copies of such reports furnished to the Company and written representations
      that
      no other reports were required, during the calendar year ended December 31,
      2006, and to date, all Section 16(a) filing requirements applicable to its
      insiders were complied with.




59





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following is a summary of the compensation paid by is to our CEO and executive
      officers who have received compensation in excess of $100,000 for the two years
      ended December 31, 2006 and 2005, respectively.


Salary
                    (cash
                      or non-cash)
                
                Bonus
                    (cash
                      or non-cash)
                
                Stock
                    Awards
                
                Option
                    Awards
                
                Non-Equity
                    Incentive Plan Compensation
                
                Non-Qualified
                    Deferred Compensation Earnings
                
                All
                    Other Compensation
                
                TotalName
                      and Principal Position
                
                Year
                
                ($)
                
                ($)
                
                ($)
                
                ($)
                
                ($)
                
                ($)
                
                ($)
                
                ($)Li
                    Fu (1)
                
                
                2006
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —2005
                
                
                240,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Yue
                    Mathus Yang (2)
                
                
                2006
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —2005
                
                
                180,000
                
                
                
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Chris
                    Wenbing Wang (3)
                
                
                2006
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —2005
                
                
                120,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —





(1)
      Mr.
      Fu's annual salary for 2005, commencing in December, 2005, was
      $240,000.





(2)
      Mr.
      Yang joined us in November 2004. Beginning in December 2005, his annual salary
      was $180,000.





(3)
      Mr.
      Wenbing Chris Wang joined us in March 2005. Beginning in December 2005, his
      annual salary was $120,000.





Although
      we do not have any equity compensation plans, under our Series B convertible
      preferred stock purchase agreement we are to reserve for issuance 2,000,000
      shares of common stock under an approved and qualified employee stock ownership
      plan, the terms of which will be determined by the compensation committee of
      our
      Board of Directors.





Compensation
      Discussion and Analysis





Overview
      of Compensation Program and Philosophy





We
        have
        three executive officers, Messrs Li Fu, Yue Mathus Yang and Chris Wenbing
        Wang.
        Messrs Li Fun and Yue Mathus Yang are also directors of the Company. We do
        not
        have a separate compensation committee and the Board of Directors serves
        as the
        Company’s compensation committee.




60




The
      Board
      of Director’s goal in determining compensation levels is to adequately reward
      the efforts and achievements of executive officers for the management. We have
      no pension plan, stock option plan, non-equity incentive plan or deferred
      compensation arrangement. We have not used a compensation consultant in any
      capacity but believe that ourexecutive officer compensation package is
      comparable to similar businesses in ourlocation of operations.





Each
      of
      the three executive officers has an employment agreement that outlines salary
      and benefit arrangements. The three agreements have similar terms, which
      include, but are not limited to: base salaries of cash, discretionary bonus,
      termination for cause and termination without notice and the provision of
      labor-related benefits in conformance with PRC labor laws. These agreements
      have
      ten-year terms.





Notwithstanding
      the said employment agreements, each of the three executive officers has elected
      to waive and forego their base salaries for the fiscal year ended December
      31,
      2006.





Compensation
      of Directors





Persons
      who are directors and employees are not currently additionally compensated
      for
      their services as a director. There is no plan for compensation of persons
      who
      are directors who are not employees, but it is expected that in the future
      we
      will create a remuneration and expense reimbursement plan. It is anticipated
      that such a plan would be primarily based on stock options.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




**Beneficial
      Ownership of Our Voting Securities**




The
      following table sets forth certain information as of March 27, 2007 with respect
      to the beneficial ownership of each class of our voting securities by (i) any
      person or group owning more than 5% of each class of our voting securities,
      (ii)
      each director, (iii) each executive officer, and (iv) all executive officers
      and
      directors as a group. We effectuated a name change and a reverse stock split
      on
      January 30, 2006. The table reflects the beneficial ownership of our common
      stock by the foregoing individuals after the reverse stock-split.




In
      determining beneficial ownership of the common stock, the number of shares
      shown
      includes shares which the beneficial owner may acquire upon exercise of warrants
      or options which may be acquired within 60 days. In determining the percent
      of
      common stock beneficially owned by a person on March 27, 2007, (a) the numerator
      is the number of shares of the common stock beneficially owned by such person,
      including shares which the beneficial owner may acquire within 60 days upon
      conversion or exercise of a derivative security (in this case the warrants)
      and
      (b) the denominator is the sum of (i) the total shares of common stock
      outstanding on March 27, 2007 which is approximately 20,000,000, and (ii) the
      total number of shares that the beneficial owner may acquire upon exercise
      of
      the warrants. Unless otherwise stated, each beneficial owner has sole power
      to
      vote and dispose of the shares.




Except
      as
      otherwise stated, the address of the directors and executive officers listed
      in
      the table is c/o our company, 1 Shuang Qiang Road, Jinzhou, Dalian, People's
      Republic of China 116100.




Beneficial
                    Ownership of Common StockName
                    of Beneficial Owner
                
                Shares
                
                PercentOwner
                    of More than 5%Li
                    Fu(transferred from Dalian FushiEnterprise
                    Group Company, Ltd.("Fushi
                    Group")(1)1
                    Shuang Qiang Road, JinzhouDalian,
                    People's Republic ofChina
                    116100
                
                
                11,915,998
                
                
                52.3
                %(2)Pope
                    Asset Management LLC5100
                    Poplar Avenue, Suite 512Memphis,
                    TN 38137
                
                
                2,716,463
                (3)
                
                11.9
                %Directors
                    and Executive OfficersLi
                    Fu (transferred from Fushi Group)Chairman
                    of Board, Director,CEO
                
                
                11,915,998
                
                
                52.3
                %Yue
                    Mathus YangDirector
                    and President
                
                
                1,272,244
                
                
                5.58
                %John
                    D. KuhnsDirectorThe
                    Farm House558
                    Lime Rock RoadLakeville,
                    CT 06039
                
                
                637,988
                (4)
                
                2.8
                %Wenbing
                    Chris WangChief
                    Financial Officer
                
                
                200,000
                
                
                0.88
                %Xishan
                    YangHead
                    of Research and Development
                
                
                241,448
                
                
                1.06
                %Chunyan
                    Xu Controller
                
                
                22,751
                
                
                0.10
                %All
                    Directors and Executive Officers as a group
                
                
                14,190,429
                
                
                62.7
                %




(1)
      On
      December 13, 2005, Dalian Fushi Bimetallic Manufacturing Company, Ltd., a
      company owned by Fushi Group, Chunyan Xu, Yue Mathus Yang and Xishan Yang,
      acquired 20,000,000 pre-split shares of our common stock from Glenn A. Little.
      Under SEC rules, each of those persons is deemed to have acquired beneficial
      ownership of all of those shares. For purpose of Rule 13d-3 of the Exchange
      Act,
      they may be considered collectively as a "group", and thus each is deemed to
      be
      the beneficial owner of the entire 20,000,000 pre-split shares. These 20,000,000
      shares were converted into approximately 81,542 shares of common stock
      immediately following the reverse stock split, representing approximately 0.4%
      of the voting capital of the Company post reverse stock split. The individual
      percentage of ownership of voting stock of the Company for each member of the
      group includes this 0.4%.




(2)
      On or
      about March 3, 2006, Fushi Group, of which Mr. Li Fu, our chairman of Board
      and
      CEO, owns 85%, has transferred its entire equity interest in the Company to
      Mr.
      Li Fu. On about the same time, Mr. Fu has agreed to transfer out of his shares
      an aggregate of 2,939,774 shares to his immediate family members and 200,000
      shares to Mr. Wenbing Wang. Thus, Mr. Fu is the beneficial owner of a total
      of
      12,796,421 shares (including Dalian Fushi's holdings) under Rule 13d-3 of the
      Exchange Act.


As
        a
        condition of our series B convertible preferred stock purchase agreements,
        Dalian Fushi deposited in escrow its 20,000,000 pre-reverse stock-split shares
        of common stock acquired from Glenn Little. These shares were converted
        into 81,542 shares of common stock at the reverse stock split, representing
        approximately 0.4% of our outstanding common stock.
  Our
        management team, which includes Li Fu, Yue Mathus Yang, Xishan Yang and Chunyan
        Xu, deposited in escrow 746,254 shares of series A convertible preferred
        stock
        that have collectively converted into 14,719,578 shares of common stock,
        representing approximately 73.6% of our outstanding common stock, following
        the
        reverse stock-split. Up to 3,000,000 shares in escrow, secure indemnity
        obligations under the series B convertible preferred stock purchase agreements
        and our obligation to meet the net profit targets for the fiscal years ended
        December 31, 2005 and December 31, 2006.


61




(3)
      Pope
      Asset Management LLC, a registered investment advisor, acquired these shares
      for
      the accounts of 139 of its clients and has sole voting power over these shares,
      but shares dispositive power with its clients over the shares in their
      respective accounts. Includes warrants to purchase 619,689 shares of common
      stock.




(4)
      Includes warrants to purchase 89,745 shares of common stock, as well as 239,506
      shares of common stock owned by Kuhns Brothers and warrants held by Kuhns
      Brothers to purchase 149,575 shares of common stock. Mr. Kuhns one of our
      directors, is the Chairman and 45% shareholder of Kuhns Brothers. Thus, Mr.
      Kuhns has the voting and investment power over the securities held by Kuhns
      Brothers and is deemed to be the beneficial owner of these securities under
      Rule
      13d-3 of the Exchange Act.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**





As
      of
      December 31, 2006 **,** Kuhns
      Brothers, Inc was paid $80,000 based on an engagement letter agreement dated
      May
      27, 2005, by and between Kuhns Brothers, Inc. and the Company, which the Company
      terminated in September 2006. The majority owner of Kuhns Brothers, Inc. is
      John
      D. Kuhns, one of our Directors.





On
      September 13, 2006, Mr. Li Fu, our largest shareholder, Chief Executive Officer
      and Chairman of the Board, entered into two stock purchase agreements to sell
      a
      total of 800,000 shares of common stock of the Company to Pope Investments
      LLC
      and Halter Pope USX China Fund. The transaction closed on September 19, 2006.
      The shares were sold in a private sale transaction and with a restrictive
      legend. On September 20, 2006, Mr. Fu advanced a large portion of the proceeds
      from the private sale amounting to $4.45 million to the Company in meeting
      the
      Company’s working capital needs. The loan is unsecured, interest free and
      repayable on demand.





None
      of
      our directors is an independent director pursuant to the definition of
“independent director” under NASDAQ, Marketplace Rule 4200(a)(15). We do
      not have a separately designated audit, nominating or compensation committee
      or
      committee performing similar functions and the Board of Directors fulfills
      the
      roles of such committees.  The members of the Board of Directors are also
      not independent under the relevant committee independence standards of the
      Rules
      of NASDAQ.




**ITEM
      13.**  **EXHIBITS**


Number
              
              Description3.1
              
              Articles
                  of Incorporation, as amended(1)3.2
              
              Bylaws(1)3.3
              
              Specimen
                  of Common stock certificate(1)3.4
              
              Certificate
                  of Designations authorizing the Series A Convertible Preferred
                  Stock
                  (1)3.5
              
              Certificate
                  of Designations authorizing the Series B Convertible Preferred
                  Stock. (1)




62




4.1
                
                Form
                    of Stock Purchase Agreement, dated as of December 13, 2005 by
                    and among
                    Parallel Technologies, Inc., Dalian Fushi, the management of
                    Dalian Fushi,
                    Chinamerica Fund, LP, and the other investors named
                    therein.(1).4.2
                
                Form
                    of Warrant (included as Exhibit A to Exhibit 4.1).4.4
                
                Form
                    of Amendment No. 1 to Stock Purchase Agreement, dated as of December
                    13,
                    2005 by and among Parallel Technologies, Inc., Dalian Fushi,
                    the
                    management of Dalian Fushi, Chinamerica Fund, LP, and the other
                    investors
                    named therein.(3)4.5
                
                Form
                    of Stock Purchase Agreement, dated as of December 28, 2005, by
                    and among
                    Parallel Technologies, Inc., Dalian Fushi, the management of
                    Dalian Fushi,
                    Heller Capital Investments, LLC and the other investors named
                    therein.(3)4.6
                
                Form
                      of Notes Purchase Agreement, dated as of January 24, 2007,
                      by and among
                      the Company and Citadel Equity Fund Ltd. (4)4.7
                
                Form
                      of HY Indentures, dated as of January 25, 2007, by and among
                      the Company,
                      the FHI and the Bank of New York. (5)4.8
                
                Form
                      of CB Indentures, dated as of January 25, 2007, by and among
                      the Company,
                      the FHI and the Bank of New York. (6)4.9
                
                Form
                      of Share Pledge Agreement, dated as of January 25, 2007, by
                      and among the
                      Company and the Bank of New York. (7)4.10
                
                Form of
                  Investor Rights
                  Agreement, dated as of January 25, 2007, by and among the Company,
                  FHI,
                  FID, DF, Li Fu, Mathus Yue Yang, Chris Wenbing Wang and Citadel.
                  (8)
  10.1
              
              Share
                  Exchange Agreement dated as of December13, 2005 between Parallel
                  Technologies, Inc. and the stockholders of Diversified Product
                  Inspections, Inc. (1)10.2
              
              Translation
                  of Purchase Agreement, dated as of December 13, 2005, between Fushi
                  International (Dalian) and Dalian Fushi. (1)10.3
              
              Translation
                  of Entrusted Management Agreement, dated as of December 13, 2005,
                  by and
                  among Fushi International (Dalian), Dalian Fushi, Dalian Fushi
                  Enterprise
                  Group Co., Ltd., Yue Yang, Xishan Yang, and Chunyan Xu.
                  (1)10.4
              
              Translation
                  of First Patents Transfer Contract, dated as of December 13, 2005,
                  by and
                  between Fushi International (Dalian) and Dalian Fushi.
                  (1)10.5
              
              Translation
                  of Second Patent Transfer Contract, dated as of December 13, 2005,
                  by and
                  between Fushi International (Dalian) and Li Fu. (1)10.6
              
              Translation
                  of Voting Proxy Agreement, dated as of December 13, 2005,
                  by and among Fushi International (Dalian), Dalian Fushi EnterpriseGroup Co., Ltd., Yue Yang, Xishan Yang, and Chunyan Xu.
                  (1)10.7
              
              Translation
                  of Exclusive Option Agreement, dated as of December 13, 2005, by
                  and among
                  Fushi International (Dalian), Dalian Fushi, Dalian Fushi Enterprise
                  Group
                  Co., Ltd., Yue Yang, Xishan Yang, and Chunyan Xu.(1).


63





10.8
              
              Translation
                  of Shares Pledge Agreement, dated as of December 13, 2005, by and
                  among
                  Fushi International (Dalian), Dalian Fushi Enterprise Group Co.,
                  Ltd., Yue
                  Yang, Xishan Yang, and Chunyan Xu. (1)10.10
              
              Stock
                  Purchase Agreement dated as of November 8, 2005 between Glenn A.
                  Little
                  and Dalian Fushi. (1)10.11
              
              Consulting
                  Agreement dated as of November 8, 2005 between Parallel Technologies,
                  Inc.
                  and Glenn A. Little. (1)10.12
              
              Form
                  of Engagement Letter dated May 27, 2005 between Dalian Fushi and
                  Kuhns
                  Brothers, Inc. (1)14.1
              
              Code
                  of ethics16.1
              
              Letter dated
                December
                2, 2005 from Parallel Technologies, Inc. to S.W.
                Hatfield, CPA (1)16.2
              
              Letter dated
                December
                2, 2005 from S.W. Hatfield, CPA to the Securities and Exchange Commission.
                (2)21.1
              
              List of
                Subsidiaries31.1
              
              Certification
                of Li Fu
                pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;31.2
              
              Certification
                of
                Wenbing Wang pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002;32.1
              
              Certification
                pursuant
                to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2002;
  
 (1)
              
              Incorporated
                by
                reference to the Registrant's Current Report on Form 8-K filed on
                December
                14, 2005.(2)
              
              Incorporated
                by
                reference to the Registrant's Current Report on Form 8-K/A (Amendment
                No.
                1) filed on December 20, 2005.(3)
              
              Incorporated
                by
                reference to the Registrant's Current Report on Form 8-K filed on
                January
                5, 2006.(4)-(8)
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K filed
                  on January 26, 2007.




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




The
      Company paid or accrued the following fees in each of the prior two fiscal
      years
      to its principal accountants:





1.
      Jimmy
      C.H. Cheung & Co.


Fiscal
                  Year Ended
              
              Fiscal
                  Year EndedDecember
                  31, 2006
              
              December
                  31, 2005Audit
                  Fees
              
              
              None
              
              $
              70,000Audit
                  Related Fees
              
              $
              41,000
              
              $
              32,000Tax
                  Fees
              
              
              None
              
              
              NoneAll
                  Other Fees
              
              
              None
              
              
              None


2.
        Moore
        Stephens Wurth Frazer and Torbet, LLP
 Fiscal
                    Year EndedDecember
                    31, 2006Audit
                    Fees
                
                $
                90,000Audit
                    Related Fees
                
                $
                15,000Tax
                    Fees
                
                $
                8,543All
                    Other Fees
                
                
                None




In
      the
      event that we should require substantial non-audit services, the Board of
      Directors would approve such services and the fees therefore.




64




**SIGNATURES**





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




FUSHI
                INTERNATIONAL, INC.Date: April
                2, 2007
              By:
              /s/ Li FuLi Fu, CEO
                (principal executive
                  officer)




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, this Report has been signed below by the following persons on behalf
      of
      the Registrant and in the capacities and on the dates indicated.




April 2, , 2007
              
              
              /s/ Wenbing Chris WangWenbing
                  Chris Wang, Chief Financial Officer
                (principal
                  financial officer and principal accounting
                  officer)




April 2, , 2007
                
                
                /s/ Yue YangYue
                  Yang, Director
 April 2, , 2007
                  
                  
                  /s/ Li FuLi
                    Fu,
                    Director




65


FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETAS
                  OF DECEMBER 31, 2006
   **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  
  To
          the
          Board of Directors and Stockholders of
  Fushi
          International, Inc.
  We
          have
          audited the accompanying consolidated balance sheet of Fushi
          International, Inc. and subsidiaries as
          of
          December 31, 2006, and the related consolidated statements of income and
          other
          comprehensive income, shareholders’ equity, and cash flows for the year then
          ended. These consolidated financial statements are the responsibility of
          the
          company’s management. Our responsibility is to express an opinion on these
          financial statements based on our audit. The consolidated financial statements
          of Fushi International, Inc. and subsidiaries as of December 31, 2005 in
          the
          accompanying consolidated financial statements were audited by other auditors
          whose report dated March 4, 2006 expressed an unqualified opinion on those
          statements.
  We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          consolidated financial statements are free of material misstatement. The
          company
          is not required to have, nor were we engaged to perform, an audit of its
          internal control over financial reporting. Our audit included consideration
          of
          internal control over financial reporting as a basis for designing audit
          procedures that are appropriate in the circumstances, but not for the purpose
          of
          expressing an opinion on the effectiveness of the company’s internal control
          over financial reporting. Accordingly, we express no such opinion. An audit
          also
          includes examining, on a test basis, evidence supporting the amounts and
          disclosures in the consolidated financial statements, assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audit provide a reasonable basis for our opinion.
  In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Fushi International,
          Inc.
          and subsidiaries as of December 31, 2006, and the results of its operations
          and
          its cash flows for the year then ended in conformity with accounting principles
          generally accepted in the United States of America.
  
 Moore
          Stephens Wurth Frazer and Torbet, LLP
 
 Walnut,
          California
 March
          26,
          2007
  F-1
 
 JIMMY
          C.H. CHEUNG & CO
 Certified
          Public Accountants
 (A
          member
          of Kreston International)
 
 
 REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
          the
          Board of Directors of:
 Parallel
          Technologies, Inc. and subsidiaries
 
 
 We
          have
          audited the accompanying balance sheets of Parallel Technologies,
          Inc.
 and
          subsidiaries, as of December 31, 2005 (consolidated) and 2004 and
          the
 related
          statements of operations and comprehensive income, stockholders'
          equity
 and
          cash
          flows for the years ended December 31, 2005 (consolidated) and
          2004.
 These
          financial statements are the responsibility of the Company's
          management.
 Our
          responsibility is to express an opinion on these financial statements
          based
 on
          our
          audits.
 
 We
          conducted our 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 of the financial
 statements
          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 Parallel Technologies, Inc.
          and
 subsidiaries,
          as of December 31, 2005 and 2004, and the results of its
 operations
          and its cash flows for the years ended December 31, 2005 and 2004,
          in
 conformity
          with accounting principles generally accepted in the United States
          of
 America.
 
 
 JIMMY
          C.H. CHEUNG & CO
 Certified
          Public Accountants
 
 
 Hong
          Kong
 
 Date:
          March 4, 2006
 
 
 1607
          Dominion Centre, 43 Queen's Road East, Wanchai, Hong Kong
 Tel:
          (852) 25295500 Fax: (852) 28651067 Email:
          jchc@krestoninternational.com.hk
 Website:
          http://www.jimmycheungco.com
 F-2
 ASSETSCURRENT
                  ASSETS:Cash
              
              $
              20,493,551Accounts
                  receivable, trade
              
              
              7,042,408Inventories
              
              
              7,403,116Other
                  receivables and prepaid expenses
              
              
              497,380Advances
                  to suppliers
              
              
              3,390,917Total
                  current assets
              
              
              38,827,372PLANT
                  AND EQUIPMENT, net
              
              
              47,256,475OTHER
                  ASSETS:Advances
                  to suppliers, noncurrent
              
              
              4,559,357Intangible
                  asset, net
              
              
              5,518,931Total
                  other assets
              
              
              10,078,288Total
                  assets
              
              $
              96,162,135LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable, trade
              
              $
              1,055,684Liquidated
                  damage payable
              
              
              1,466,250Short
                  term bank loans
              
              
              12,504,135Other
                  payables and accrued liabilities
              
              
              321,276Customer
                  deposits
              
              
              531,065Taxes
                  payable
              
              
              982,345Loan
                  from shareholder
              
              
              3,911,256Total
                  current liabilities
              
              
              20,772,011LONG
                  TERM LIABILITIES:Long
                  term debts
              
              
              10,256,000Total
                  liabilities
              
              
              31,028,011SHAREHOLDERS'
                  EQUITY:Common
                  stock,$0.006 par value, 100,000,000 shares authorized,20,046,162
                  shares issued and outstanding
                Preferred
                  stock, $0.001 par value, 5,000,000
                  shares authorized, no shares outstanding as of December 31,
                  2006
              
              
              120,277Additional
                  paid in capital
              
              
              29,364,955Statutory
                  reserves
              
              
              4,452,467Retained
                  earnings
              
              
              28,496,702Accumulated
                  other comprehensive income
              
              
              2,699,723Total
                  shareholders' equity
              
              
              65,134,124Total
                  liabilities and shareholders' equity
              
              $
              96,162,135




See
        report of independent registered public accounting firm.
 The
        accompany notes are an integral part of this statement.




F-3


FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF INCOME ANDOTHER
                  COMPREHENSIVE INCOMEFOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND
                  2005
  2006
              
              2005(Restated)REVENUES
              
              $
              67,595,774
              
              $
              33,709,428COST
                  OF GOODS SOLD
              
              
              42,781,669
              
              
              21,400,248GROSS
                  PROFIT
              
              
              24,814,105
              
              
              12,309,180OPERATING
                  EXPENSESelling
                  expenses
              
              
              613,119
              
              
              317,324General
                  and administrative expenses
              
              
              3,815,380
              
              
              2,029,239Total
                  operating expense
              
              
              4,428,499
              
              
              2,346,563INCOME
                  FROM OPERATIONS
              
              
              20,385,606
              
              
              9,962,617OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              73,949
              
              
              95,766Interest
                  expense
              
              
              (1,072,769
              )
              
              (1,033,861
              )Other
                  income
              
              
              322,817
              
              
              191,871Other
                  expense
              
              
              (22,632
              )
              
              (15,177
              )Liquidated
                  damage expense
              
              
              (1,478,520
              )
              
              --Total
                  other income (expense)
              
              
              (2,177,155
              )
              
              (761,401
              )INCOME
                  BEFORE INCOME TAXES
              
              
              18,208,451
              
              
              9,201,216PROVISION
                  FOR INCOME TAXES
              
              
              398,425
              
              
              1,402,235NET
                  INCOME
              
              
              17,810,026
              
              
              7,798,981OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              1,923,828
              
              
              775,895COMPREHENSIVE
                  INCOME
              
              $
              19,733,854
              
              $
              8,574,876NET
                  INCOME PER SHARE-BASIC
              
              $
              0.89
              
              $
              2,015.76BASIC
                  WEIGHTED AVERAGE NUMBER OF SHARES
              
              
              19,933,193
              
              
              3,869NET
                  INCOME PER SHARE-DILUTED
              
              $
              0.84
              
              $
              0.50DILUTED
                  WEIGHTED AVERAGE NUMBER OF SHARES
              
              
              21,276,263
              
              
              15,689,053


See
          report of independent registered public accounting firm.
 The
          accompany notes are an integral part of this statement.
  F-4




FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY


FOR
        THE
        YEARS ENDED DECEMBER 2006 AND 2005
 Series
                    A
                
                Series
                    BConvertible
                
                Convertible
                
                
                
                
                
                
                
                
                
                AccumulatedPreferred
                    stock
                
                Preferred
                    stock
                
                Common
                    Stock
                
                
                
                
                
                
                
                comprehensiveNumber
                
                
                
                Number
                
                
                
                Number
                
                Par
                
                Paid-in
                
                Statutory
                
                Retained
                
                incomeof
                    shares
                
                Amount
                
                of
                    shares
                
                Amount
                
                of
                    shares
                
                Value
                
                capital
                
                reserves
                
                earnings
                
                (loss)
                
                TotalsBALANCE,
                    January 1, 2005
                
                
                784,575
                
                $
                785
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                $
                19,350,932
                
                $
                1,220,164
                
                $
                6,119,998
                
                $
                -
                
                $
                26,691,879Recapitalization
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                78,459
                
                
                471
                
                
                26,157
                
                
                
                
                
                
                
                
                
                
                
                26,628Shares
                    issued for placement
                
                
                
                
                
                
                
                
                216,000
                
                
                216
                
                
                -
                
                
                -
                
                
                9,930,196
                
                
                
                
                
                
                
                
                
                
                
                9,930,412Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,798,981
                
                
                
                
                
                7,798,981Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,208,146
                
                
                (1,208,146
                )
                
                
                
                
                -Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                775,895
                
                
                775,895BALANCE,
                    December 31, 2005, (restated )
                
                
                784,575
                
                
                785
                
                
                216,000
                
                
                216
                
                
                78,459
                
                
                471
                
                
                29,307,285
                
                
                2,428,310
                
                
                12,710,833
                
                
                775,895
                
                
                45,223,795Conversion
                    of preferred stock
                
                
                (784,575
                )
                
                (785
                )
                
                (216,000
                )
                
                (216
                )
                
                19,818,718
                
                
                118,912
                
                
                (195,411
                )
                
                
                
                
                
                
                
                
                
                
                (77,500
                )Exercise
                    of stock warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                148,985
                
                
                894
                
                
                253,081
                
                
                
                
                
                
                
                
                
                
                
                253,975Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                17,810,026
                
                
                
                
                
                17,810,026Adjustment
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,024,157
                
                
                (2,024,157
                )
                
                
                
                
                -Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,923,828
                
                
                1,923,828BALANCE,
                    December 31, 2006
                
                
                0
                
                $
                0
                
                
                0
                
                $
                0
                
                
                20,046,162
                
                $
                120,277
                
                $
                29,364,955
                
                $
                4,452,467
                
                $
                28,496,702
                
                $
                2,699,723
                
                $
                65,134,124


See
            report of independent registered public accounting firm.
 The
                accompany notes are an integral part of this statement.
 F-5




FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2006 AND 2005




2006
            
            2005(Restated)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            17,810,026
            
            $
            7,798,981Adjustments
                to reconcile net income to cashprovided
                by (used in) operating activities:Depreciation
            
            
            2,208,924
            
            
            1,779,898Amortization
            
            
            223,800
            
            
            207,489Change
                in operating assets and liabilities:(Increase)
                decrease in assets:Accounts
                receivable
            
            
            (616,477
            )
            
            (4,334,780
            )Inventories
            
            
            478,455
            
            
            (5,451,667
            )Other
                receivables
            
            
            726
            
            
            (820,169
            )Increase
                (decrease) in liabilities:Accounts
                payable
            
            
            (1,747,265
            )
            
            1,130,246Other
                payables and accrued liabilities
            
            
            (360,312
            )
            
            40,327Customer
                deposits
            
            
            404,906
            
            
            112,189Other
                taxes payable
            
            
            (2,959,284
            )
            
            1,208,536Income
                taxes payable
            
            
            (2,132,806
            )
            
            1,401,898Net
                cash provided by operating activities
            
            
            13,310,693
            
            
            3,072,948CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (8,493,919
            )
            
            (6,913,780
            )Advances
                for purchase of equipment
            
            
            (4,465,823
            )
            
            -Net
                cash used in investing activities
            
            
            (12,959,742
            )
            
            (6,913,780
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Loan
                from shareholder
            
            
            4,450,000
            
            
            -Advance
                to shareholder
            
            
            (532,379
            )
            
            (108,958
            )Due
                to related companies
            
            
            3,367,897
            
            
            (46,175
            )Due
                from related companies
            
            
            -
            
            
            (2,825,230
            )Proceeds
                from bank loans
            
            
            24,365,120
            
            
            16,927,470Payments
                on bank loans
            
            
            (19,714,490
            )
            
            (16,499,700
            )Net
                proceeds from stock issuance in private placement
            
            
            -
            
            
            9,930,412Exercise
                of stock warrants
            
            
            248,729
            
            
            -Proceeds
                from (fees paid for) recapitalization
            
            
            (77,500
            )
            
            471Additional
                paid-in capital
            
            
            -
            
            
            26,157Net
                cash provided by financing activities
            
            
            12,107,377
            
            
            7,404,447EFFECT
                OF EXCHANGE RATE ON CASH
            
            
            1,868,337
            
            
            (9,011
            )INCREASE
                IN CASH
            
            
            14,326,665
            
            
            3,554,604CASH,
                beginning of year
            
            
            6,166,886
            
            
            2,612,282CASH,
                end of year
            
            $
            20,493,551
            
            $
            6,166,886


See
          report of independent registered public accounting firm.
 The
          accompany notes are an integral part of this statement.
  F-6


FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  **Note
        1 - Organization**
 
 Fushi
        International, Inc. (formerly Parallel Technologies, Inc.) was incorporated
        under the name of M, Inc. in the state of Nevada on October 6, 1982. The
        name
        was changed to Parallel Technologies, Inc. (“Parallel”) on June 3, 1991 and
        changed to Fushi International, Inc. (“Fushi International”) on January 30, 2006
        on consummation of a business combination transaction. During 1995, Parallel
        ceased all business operations and disposed of all assets, liabilities and
        operating activities. Since the fiscal year ended December 31, 1995, Parallel
        had no business operations, assets or liabilities, until December 13, 2005,
        when
        it acquired Diversified Product Inspections, Inc. (“DPI”) and its wholly owned
        subsidiary, Dalian Diversified Product Inspections Bimetallic Cable Co.,
        Ltd.
        (“Dalian DPI”).
 
 DPI
        was
        incorporated on September 22, 2005 in the state of Delaware. Through its
        wholly
        owned subsidiary, Dalian DPI incorporated in the People's Republic of China
        (“PRC”) as a wholly owned foreign limited liability company on September 24,
        2005. DPI is engaged in the manufacturing and selling of copper clad aluminum
        and steel wire, both of which are bimetallic composite wire products that
        are
        principally used for network signal transmission cable, cable television
        wire
        and other applications. Dalian DPI commenced business on December 28,
        2005.
 
 Dalian
        Fushi Bimetallic Manufacturing Company Limited (“Dalian Fushi”) was incorporated
        on January 16, 2002 in the PRC as a limited liability company. The business
        activities of Dalian Fushi are the same with those of Dalian DPI. Dalian
        Fushi
        is a 100% variable interest entity of the Company.
 
 On
        December 13, 2005, Parallel consummated a Plan of Exchange (“the Agreement”)
        with the shareholders of DPI pursuant to which Parallel issued 784,575.16
        shares
        of newly designated Series A Convertible Preferred Stock to the stockholders
        of
        DPI for all the issued and outstanding stock of DPI.
 
 The
        merger of Parallel and DPI was treated for accounting purposes as a capital
        transaction and recapitalization by DPI (“the accounting acquirer”) and
        re-organization by Parallel (“the accounting acquiree”). The financial
        statements have been prepared as if the reorganization had occurred
        retroactively.
 
 Accordingly,
        the financial statements include the following:
  (1)  The
        balance sheet consists of the net assets of the acquirer at historical cost
        and
        the net assets of the acquiree at historical cost
 
 (2) The
        statement of operations includes the operations of the acquirer for the periods presented
        and the operations of the acquiree from the date of the merger.
 
 On
        the
        same date, Dalian DPI entered into a series of agreements (collectively known
        as
        the Restructuring Agreements) with Dalian Fushi and the shareholders of Dalian
        Fushi in which Dalian DPI will take over the management of the business
        activities of Dalian Fushi and will hold a 100% variable interest in Dalian
        Fushi.
 
 F-7
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 As
        both
        companies are under common control, this has been accounted for as a
        reorganization of entities and the financial statements have been prepared
        as if
        the reorganization had occurred retroactively.
 
 Fushi
        International, DPI, Dalian DPI and Dalian Fushi are hereinafter referred
        to as
        (“the Company”).
 
 **Note
        2 - Summary of Significant Accounting Policies**
 
 Principles
        of consolidation
 
 The
        accompanying consolidated financial statements include the financial statements
        of Fushi International and it’s wholly owned subsidiaries, DPI, Dalian DPI and
        its 100% variable interest entity Dalian Fushi. All significant inter-company
        transactions and balances have been eliminated in consolidation.
 
 Consolidation
        of variable interest entity
 
 In
        accordance with Interpretation No. 46R, Consolidation of Variable Interest
        Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
        that lack sufficient equity to finance their activities without additional
        financial support from other parties or whose equity holders lack adequate
        decision making ability. All VIEs with which the Company is involved must
        be
        evaluated to determine the primary beneficiary of the risks and rewards of
        the
        VIE. The primary beneficiary is required to consolidate the VIE for financial
        reporting purposes.
 
 On
        December 13, 2005 Dalian DPI entered into the Restructuring Agreements with
        Dalian Fushi and its shareholders in which Dalian DPI took over the management
        of the business activities of Dalian Fushi. The Restructuring Agreements
        consist
        of the following agreements:
 
 a)
        Dalian
        Fushi leased to Dalian DPI land and 5 production lines which are the only
        assets
        of Dalian Fushi.
 
 b)
        First
        and second patent contracts in which 4 patents in use and 1 pending registration
        patents are transferred from Dalian Fushi to Dalian DPI for
        $14,870.
 
 c)
        Trademark authorization in which the trademark "Fushi" registered in the
        name of
        a stockholder was transferred to Dalian DPI free of charge.
 
 d)
        Entrusted management contract in which the shareholders of Dalian Fushi
        entrusted the business operation of Dalian Fushi and its management to Dalian
        DPI at a monthly management fee. The monthly management fee shall be the
        monthly
        net income earned by Dalian Fushi. Dalian DPI shall assume all the operation
        risks out of the entrusted management of Dalian Fushi and bear all the losses
        incurred by Dalian Fushi.
 
 e)
        Shareholders' voting proxy agreement in which Dalian Fushi appointed Board
        of
        Directors of Dalian DPI as their proxy to vote on all matters that require
        Dalian Fushi shareholders' approval.
  F-8
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 f)
        Exclusive Option Agreement in which Dalian Fushi shareholders granted Dalian
        DPI
        an irrecoverable option to acquire Dalian Fushi's equity and remaining
        assets.
 
 g)
        Share
        Pledge Agreement in which Dalian Fushi shareholders pledged all their equity
        interests in Dalian Fushi to guarantee Dalian DPI's rights and benefits under
        the Restructuring Agreements.
 
 The
        Company has concluded that Dalian Fushi is a VIE and that the Company is
        the
        primary beneficiary. Under the requirements of FASB Interpretation No. 46
        (R),
        Consolidation of Variable Interest Entities, an interpretation of ARB No.
        51
        ("FIN 46"), the Company consolidated the financial statements of Dalian Fushi,
        a
        VIE of Dalian DPI. As both companies are under common control, the financial
        statements have been prepared as if the transaction had occurred
        retroactively .
 
 Use
        of
        estimates
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates.
 
 Revenue
        recognition
  The
        Company's revenue recognition policies are in compliance with Staff Accounting
        Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
        customers when a formal arrangement exists, the price is fixed or determinable,
        the delivery is completed, no other significant obligations of the Company
        exist
        and collectability is reasonably assured. Payments received before all of
        the
        relevant criteria for revenue recognition are recorded as customer
        deposits.
 
 Advertising
        costs
 
 Advertising
        costs for the years ended December 31, 2006 and 2005 were $10,919 and $10,967
        respectively, are expensed as incurred.
 
 Foreign
        currency translation and comprehensive income
 
 The
        reporting currency of the Company is the US dollar. The functional currency
        of
        Fushi International and DPI is the US dollar. The functional currency of
        Dalian
        DPI and Dalian Fushi is Renminbi (RMB).
 
 For
        the
        subsidiaries whose functional currencies are RMB, all assets and liabilities
        accounts were translated at the exchange rate on the balance sheet date;
        stockholder's equity are translated at the historical rates and items in
        the
        statement of operations items are translated at the average rate for the
        year.
        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.
  Translation
        adjustments resulting from this process included in accumulated other
        comprehensive income in the consolidated statement of shareholders’ equity
        amounted to $2,699,723 as of December 31, 2006. The balance sheet amounts
        with
        the exception of equity at December 31, 2006 were translated at 7.80 RMB
        to
        $1.00 USD. The equity accounts were stated at their historical rate. The
        average
        translation rates applied to income statement accounts for the year ended
        December 31, 2006 was 7.96 RMB.
  F-9
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 Cash
        and concentration of risk
 
 The
        Company considers all highly liquid investments with original maturities
        of
        three months or less at the time of purchase to be cash equivalents, for
        cash
        flow statement purposes. Cash includes cash on hand and demand deposits in
        accounts maintained with state owned banks within the PRC and the United
        States.
 
 Certain
        f inancial
        instruments, which subject the Company to concentration of credit risk, consist
        of cash. The Company maintains balances at financial institutions which,
        from
        time to time, may exceed Federal Deposit Insurance Corporation insured limits
        for the banks located in the Unites States. Balances at financial institutions
        or state owned banks within the PRC are not covered by insurance. As of December
        31, 2006, the Company had deposits in excess of federally insured limits
        total
        of $20,195,702. 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.
 
 Accounts
        receivables and allowance for doubtful accounts
 
 Management
        regularly reviews aging of receivables and changes in payment trends by its
        customers, and records a reserve when they believe collection of amounts
        due are
        at risk. Accounts considered uncollectible are written off. At December 31,
        2006, management concluded no reserves were necessary. The Company had accounts
        receivable of $7,037,162 as of December 31, 2006.
  Inventories
  Inventories
        are stated at the lower of cost or market using a weighted average method.
        Inventories consist of raw materials, work in process, finished goods and
        supplies. Raw materials consist of copper, aluminum and steel used in
        production. The cost of finished goods included direct costs of raw materials
        as
        well as direct labor used in production. Indirect production costs such as
        utilities and indirect labor related to production such as assembling, shipping
        and handling costs are also included in the cost of inventory.
 
 The
        Company reviews its inventory regularly for possible obsolete goods or to
        determine if any reserves are necessary for potential obsolescence. As of
        December 31, 2006, the Company has determined that no reserves are
        necessary.
 
 Financial
        instruments
 
 Statement
        of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
        Value of Financial Instruments” requires disclosure of the fair value of
        financial instruments held by the Company. SFAS 107 defines the fair value
        of
        financial instruments as the amount at which the instrument could be exchanged
        in a current transaction between willing parties.
  F-10
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 The
        Company considers the carrying amount of cash, accounts receivable, other
        receivables, accounts payable, accrued liabilities and other payables to
        approximate their fair values because of the short period of time between
        the
        origination of such instruments and their expected realization and their
        current
        market rate of interest.
 
 Plant
        and equipment, net
  Plant
        and
        equipment are stated at cost. Expenditures for maintenance and repairs are
        charged to earnings as incurred; additions, renewals and betterments are
        capitalized. When property and equipment are retired or otherwise disposed
        of,
        the related cost and accumulated depreciation are removed from the respective
        accounts, and any gain or loss is included in operations. Depreciation of
        property and equipment is provided using the straight-line method for
        substantially all assets with estimated lives as follows:
 Estimated
                    Useful LifeBuildings
                
                
                20-30
                    yearsMachinery
                    and equipment
                
                
                10-15
                    yearsOther
                    equipment
                
                
                5
                    yearsTransportation
                    equipment
                
                
                5
                    years
  Construction
        in progress represents the costs incurred in connection with the construction
        of
        buildings or new additions to the Company’s plant facilities. No depreciation is
        provided for construction in progress until such time as the assets are
        completed and are placed into service. The Company borrowed $10,256,000 to
        fund
        additions to the plant. Interest capitalized for the year ended December
        31,
        2006 was $ 282,641 .
 
 The
        Company periodically evaluates the carrying value of long-lived assets in
        accordance with SFAS 144. When estimated cash flows generated by those assets
        are less than the carrying amounts of the asset, the Company recognizes an
        impairment loss. Based on its review, the Company believes that, as of December
        31, 2006, there were no significant impairments of its long-lived
        assets.
 
 Intangible
        assets
 
 Intangible
        assets consist of land use rights and patents. The Company amortizes the
        land
        use rights on a straight line basis over 50 years and patents over 7-15 years.
 
 The
        Company evaluates intangible assets for impairment, at least on an annual
        basis
        and whenever events or changes in circumstances indicate that the carrying
        value
        may not be recoverable from its estimated future cash flows. Recoverability
        of
        intangible assets, other long-lived assets, and goodwill is measured by
        comparing their net book value to the related projected undiscounted cash
        flows
        from these assets, considering a number of factors including past operating
        results, budgets, economic projections, market trends and product development
        cycles. If the net book value of the asset exceeds the related undiscounted
        cash
        flows, the asset is considered impaired, and a second test is performed to
        measure the amount of impairment loss. As of December 31, 2006, no impairment
        of
        intangible assets has been recorded.
 
 F-11
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 Research
        and development
 
 Research
        and development expenses include salaries, consultant fees, supplies and
        materials, as well as costs related to other overhead such as facilities,
        utilities and other departmental expenses. The costs we incur with respect
        to
        internally developed technology and engineering services are included in
        research and development expenses as incurred as they do not directly relate
        to
        any particular licensee, license agreement or licenses fee.
 
 Research
        and development costs are recorded in selling and general and administrative
        expenses. Research and development costs were $195,058 and $65,000 during
        the
        years ended December 31, 2006 and 2005, respectively.
 
 Earning
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share excludes
        dilution and is computed by dividing income available to common stockholders
        by
        the weighted average common shares outstanding during the period. Diluted
        earnings per share takes into account the potential dilution that could occur
        if
        securities or other contracts to issue common stock were exercised and converted
        into common stock using the treasury method.
 
 Income
        taxes
 
 The
        Company has adopted Statement of Financial Accounting Standards No. 109,
        “Accounting for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of
        deferred income tax liabilities and assets for the expected future tax
        consequences of temporary differences between income tax basis and financial
        reporting basis of assets and liabilities. Provision for income taxes consist
        of
        taxes currently due plus deferred taxes.
 
 Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized. Deferred tax is calculated at the tax rates that are expected
        to apply to the period when the asset is realized or the liability is settled.
  Deferred
        tax is charged or credited in the income statement, except when it related
        to
        items credited or charged directly to equity, in which case the deferred
        tax is
        also dealt with in equity. Deferred tax assets and liabilities are offset
        when
        they relate to income taxes levied by the same taxation authority and the
        Company intends to settle its current tax assets and liabilities on a net
        basis.
        There are no deferred tax amounts at December 31, 2006.
 
 F-12
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 Value
        Added Tax
 
 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. This VAT
        may
        be offset by VAT paid by the Company on raw materials and other materials
        included in the cost of producing their finished product. The Company recorded
        VAT Payable and VAT receivable net of payments in the financial statements.
        The
        VAT tax return is filed offsetting the payables against the
        receivables.
 
 Recently
        issued accounting pronouncements
 
 In
        February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation, clarifies which interest-only strips and principal-only
        strips are not subject to the requirements of SFAS No. 133, establishes a
        requirement to evaluate interest in securitized financial assets to identify
        interests that are freestanding derivatives or that are hybrid financial
        instruments that contain an embedded derivative requiring bifurcation, clarifies
        that concentrations of credit risk in the form of subordination are not embedded
        derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
        qualifying special-purpose entity from holding a derivative financial instrument
        that pertains to a beneficial interest other than another derivative financial
        instrument. This statement is effective for all financial instruments acquired
        or issued after the beginning of the Company’s first fiscal year that begins
        after September 15, 2006. Management does not believe the implementation
        of this
        pronouncement will have a material effect on the Company’s financial
        statements.
 
 In
        July
        2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
        in
        Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN
        48
        clarifies the accounting for uncertainty in income taxes recognized in a
        company's financial statements in accordance with FAS 109, "Accounting for
        Income Taxes". FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. FIN 48 also provides
        guidance on derecognition, classification, interest and penalties, accounting
        in
        interim periods, disclosure and transition. The requirements of FIN 48 are
        effective beginning January 1, 2007. Management
        does not believe the implementation of this pronouncement will have a material
        effect on the Company’s financial statements.
 
 In
        September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements.
  However,
          for some entities, the application of this Statement will change current
          practice.
 This
          Statement is effective for financial statements issued for fiscal years
          beginning after November 15, 2007, and interim periods within those fiscal
          years. Management is currently evaluating the effect of this pronouncement
          on
          financial statements.
  F-13
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 **Note
        3 - Restatement**
  The
        Company is restating its consolidated balance sheet, statements of income
        and
        other comprehensive income, shareholders’ equity and cash flows for the year
        ended December 31, 2005 to correct the accounting and calculation of the
        foreign
        exchange translation gain recorded as part of other comprehensive Income.
 
 The
        Company originally translated certain non-monetary assets and liabilities
        at the
        prevailing exchange rates at the time the transaction transpired and the
        Company
        is restating to translate these assets and liabilities at the exchange rates
        ( 8.06
        RMB
        to $1.00 USD )
        as of
        December 31, 2005 in accordance to SFAS No. 52.
 
 The
        effects of these restatements are as follows:
 December
                    31,
                
                
                
                December
                    31,2005
                
                
                
                2005PreviouslyReported
                
                Adjustments
                
                RestatedConsolidated
                    statement of shareholders' equityOther
                    comprehensive income
                
                $
                17,200
                
                $
                758,695
                
                $
                775,895Consolidated
                    statements of income and other comprehensive incomeNet
                    income
                
                $
                7,798,981
                
                $
                -
                
                $
                7,798,981Other
                    comprehensive income
                
                $
                17,200
                
                $
                758,695
                
                $
                775,895Comprehensive
                    income
                
                $
                7,816,181
                
                $
                758,695
                
                $
                8,574,876Net
                    income per share-basic
                
                $
                2,015.76
                
                $
                -
                
                $
                2,015.76Net
                    income per share-diluted
                
                $
                0.50
                
                $
                -
                
                $
                0.50Consolidated
                    statements of cash flowsNet
                    cash provided by operating activities
                
                $
                2,949,198
                
                $
                123,750
                
                $
                3,072,948Net
                    cash used in investing activities
                
                $
                (6,954,383
                )
                $
                40,603
                
                $
                (6,913,780
                )Net
                    cash provided by financing activities
                
                $
                7,539,373
                
                $
                (134,926
                )
                $
                7,404,447Effect
                    of exchange rate on cash
                
                $
                17,200
                
                $
                (26,211
                )
                $
                (9,011
                )Net
                    increase in cash and cash equivalents
                
                $
                3,551,388
                
                $
                3,216
                
                $
                3,554,604
 F-14
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 **Note
        4 - Additional product sales information**
  The Company’s
        revenues by geographic area, namely the Chinese domestic market and
        international market, are as follows:
 2006
                
                2005(restated)Domestic
                    China
                
                $
                65,480,981
                
                $
                33,274,995Other
                    foreign countries
                
                
                2,114,793
                
                
                434,433Total
                    sales
                
                $
                67,595,774
                
                $
                33,709,428
  **Note
        5 - Inventories**
 
 Inventories
        at December 31, 2006 consisted of the following:
  Raw
                    materials
                
                $
                5,380,640Work
                    in process
                
                
                242,350Finished
                    goods
                
                
                1,736,507Packaging
                    materials
                
                
                14,727Semi
                    finished goods
                
                
                28,892Totals
                
                $
                7,403,116
 F-15
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 **Note
        6 - Plant and equipment**
 
 Plant
        and
        equipment at December 31, 2006 consisted of the following:
 Buildings
                    and improvements
                
                $
                18,809,588Transportation
                    equipment
                
                
                2,559,806Machinery
                
                
                8,814,271Equipments
                
                
                415,083Construction
                    in progress
                
                
                22,110,429Totals
                
                
                52,709,177Less
                    accumulated depreciation
                
                
                5,452,702Totals
                
                $
                47,256,475
  Depreciation
        expense for the years ending December 31, 2006 and 2005 amounted to $2,208,924
        and $1,779,898, respectively.
 
 **Note
        7 - Advances to suppliers**
 
 Advances
        on inventory purchases are monies deposited or advanced to outside vendors
        on
        future inventory and equipment purchases. Most of the Company’s vendors require
        a certain amount of money to be deposited with them as a guarantee that the
        Company will receive their purchases on a timely basis. The advances to
        suppliers were $3,390,917 for inventory and $4,559,357 for equipment purchases
        as of December 31, 2006.
 
 **Note
        8 - Major customers and suppliers**
 
 Six
        major
        customers accounted for 34% of the sales for the year ended December 31,
        2006
        and five customers accounted for 41% of the Company’s total sales for the year
        ended December 31, 2005. Total receivable balance due from these customers
        at
        December 31, 2006 and 2005 amounted to $3,645,893 and $2,851,191,
        respectively.
  Four
        major suppliers provided approximately 85% of the Company’s purchases of raw
        materials for the year ended December 31, 2006 and two suppliers provided
        approximately 41% of the Company’s raw materials for the year ended December 31,
        2005. There is no accounts payable due to those suppliers at December 31,
        2006
        and 2005.
 
 **Note
        9 - Intangible assets**
 
 Intangible
        assets consist of land use rights and patents. All land in the People’s Republic
        of China is government owned and cannot be sold to any individual or company.
        However, the government grants the user a “land use right” (the Right) to use
        the land. The Company amortizes the Right on a straight line basis over 50
        years.
  F-16
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 Intangible
        assets at December 31, 2006 consisted of the following:
  Patents
                
                $
                1,381,996Land
                    use rights
                
                
                5,135,5646,517,560Less:
                    accumulated amortization
                
                
                (998,629
                )Total
                
                $
                5,518,931
  Amortization
        expense for the years ended December 31, 2006 and 2005 amounted to $223,801
        and
        $207,489, respectively.
 
 **Note
        10 - Income taxes**
 
 Under
        the
        Income Tax Laws of PRC, the Company is generally subject to an income tax
        at an
        effective rate of 33% (30% state income taxes plus 3% local income taxes)
        on
        income reported in the statutory financial statements after appropriate tax
        adjustments. For enterprise that qualifies as a "new or high-technology
        enterprise" or a “Foreign Invested Enterprise (“FIE”) located in the old town of
        an inshore open city, it subject to a income tax rate of 24%. In addition,
        if
        the enterprise is located in a specially designated region where it allows
        foreign enterprises a two-year income tax exemption and a 50% income tax
        reduction for the following three years.
 
 The
        Company’s wholly owned subsidiary, Dalian DPI, is a foreign limited liability
        company and located in the old town of an inshore open city. The company
        has
        income tax exemption for the years ended December 2006 and 2007 and 50% income
        tax reduction for the years ended December 31, 2008, 2009 and 2010.
 
 Dalian
        Fushi was in incorporated in the PRC and is subject to PRC income tax. Dalian
        Fushi located its factory in a special economic region in Dalian, PRC and
        qualified as a "new or high-technology enterprise" who is allowed a two year
        income tax exemption beginning in 2002, the fist year after they became
        profitable, and a 50% income tax reduction for the following three years,
        2004
        through 2006. The provision for income taxes for the period ended December
        31
        consisted of the following:
  2006
                
                2005(restated)Provision
                    for China income tax
                
                $
                362,205
                
                $
                1,274,452Provision
                    for China local tax
                
                
                36,220
                
                
                127,783Total
                    provision for income taxes
                
                $
                398,425
                
                $
                1,402,235
 F-17
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the years ended December 31:
  2006
                
                2005U.S.
                    Statutory rates
                
                
                34.0
                %
                
                34.0
                %Foreign
                    income not recoginized in USA
                
                
                (34.0
                )
                
                (34.0
                )China
                    income taxes
                
                
                33.0
                
                
                33.0China
                    income tax exemption
                
                
                (31.0
                )
                
                (18.0
                )Total
                    provision for income taxes
                
                
                2.0
                %
                
                15.0
                %
 The
        estimated tax savings for the year ended December 31, 2006 amounted to
        $6,281,290. The net effect on earnings per share had the income tax been
        applied
        would decrease basic earnings per share from $0.89 to $0.58 and diluted earning
        per share from $0.84 to $0.54.
 
 Fushi
        International, Inc. and DPI were incorporated in the United States and have
        incurred net operating losses for income tax purposes for 2006 and 2005.
        The net
        operating loss carry forwards for United States income taxes amounted to
        $2,431,026 which may be available to reduce future years’ taxable income. These
        carry forwards will expire, if not utilized, through 2025 and 2026. Management
        believes that the realization of the benefits from these losses appears
        uncertain due to the Company’ limited operating history and continuing losses
        for United States income tax purposes. Accordingly, the Company has provided
        a
        100% valuation allowance on the deferred tax asset benefit to reduce the
        asset
        to zero.The valuation allowance at December 31, 2006 was $826,549. The net
        change in the valuation allowance for 2006 was an increase of $876,059.
        Management will review this valuation allowance periodically and make
        adjustments as warranted.
 
 Value
        Added Tax
 
 VAT
        on
        sales and VAT on purchases amounted to $60,346,802 and $7,161,857 for the
        year
        ended December 31, 2006 and $ 33,259,972 and $4,055,420 for the year ended
        December 31, 2005, 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 at December 31, 2006 consisted of the followings:
 VAT
                
                $
                606,758Others
                
                
                375,587Total
                    taxes payable
                
                $
                982,345
  **Note
        11 - Loan from shareholder**
 
 In
        September 2006, one of the Company's shareholders advanced
        $4,451,328  to
        the
        Company for operations. This amount has been reduced by a receivable due
        from
        the same shareholder in the amount of $540,072. The balance as of December
        31,
        2006 is $3,911,256. This loan is non-interest bearing, unsecured and is payable
        on demand **.**
 
 **Note
        12 - Liquidated damage payable**
 
 The
        Company was obligated to make efforts to file a registration statement with
        the
        SEC for the registration of the common stock issued upon the conversion of
        the
        series B convertible preferred stock to be declared effective by the SEC
        within
        90 days and not later than 120 days from the date of its initial filling.
        After
        the 120 th day of
        the initial filing and for each 30-calendar day period thereafter in which
        the
        registration statement fails to be declared effective, the Company shall
        issue
        to each investor a number of shares of common stock equal to 3% of such
        investor's shares covered by such registration statement at that
        time.
  F-18
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 The
        Company has accrued $1,466,250 as liquidated damages payable and expensed
        that
        amount in the year ended December 31, 2006. This amount is based on the shares
        accrued from May 14, 2006 through August 2, 2006 and it is valued at the
        highest
        bid on August 2, 2006, the date of the registration statement to be declared
        effective, which is at $5.75 per common stock share. In January 2007, the
        Company issued 255,000 shares of common stock at $0.006 par value to the
        investors as payment for the liquidated damages.
 
 **Note
        13 - Short term bank loans**
 
 Short
        term bank loans represent amounts due to various banks and are due on demand
        or
        normally within one year. These loans generally can be renewed with the banks.
        Short term bank loans at December 31, 2006, consisted of the
        following:
  Dalian
                    Commercial Bank Sahekou Branch due May 15, 2007 annual interest
                    at 6.338%,
                    secured by the Company land use right and the building
                
                $
                974,320Bank
                    of China Dalian Xinhaiwen Branch due March 11, 2007 annual interest
                    at
                    5.94%, secured by the Company land use right and building
                
                
                3,846,000Bank
                    of China Dalian Xinhaiwen Branch due February 22, 2007 annual
                    interest at
                    6.547%, secured by the Company land use right and building
                
                
                2,564,000Bank
                    of China Dalian Xinhaiwen Branch due March 27, 2007 annual interest
                    at
                    6.547%, secured by the Company land use right and building
                
                
                2,179,400Bank
                    of China Dalian Xinhaiwen Branch due April 21, 2007 annual interest
                    at
                    6.732%, secured by the Company land use right and building
                
                
                2,820,400ShenZhen
                    Development Bank, Dalian Branch due April 12, 2007 annual interest
                    at
                    5.8%, secured by the Company export letter of credits
                
                
                120,015Total
                
                $
                12,504,135
  Total
        interest expense for the years ending December 31, 2006 and 2005 amounted
        to
        $1,352,377 and $1,371,642, including interest capitalized of $282,641 and
        $337,781, respectively.
  F-19
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 The
        Company has paid off its short term loans of $3,846,000, $2,564,000 and
        $2,179,000 in 2007 and obtained a new short term loan of $3,870,219 in February
        2007 at annual interest rate of 6.73% which is due in October 2007.
 
 **Note
        14 - Long term debts**
 
 Long
        term
        debts are loans borrowed from banks which are mainly used for the purpose
        of
        purchasing additions to the plant and equipment and consisted of the following
        at December 31:
  2006ICBC,
                      Dalian JinZhou BranchDue
                      April 10, 2008, annaul interestat
                      5.58%, secured by the Companyland
                      use right and building
                  
                  $
                  5,128,000ICBC,
                      Dalian JinZhou BranchDue
                      April 10, 2008, annaul interestat
                      5.58%, secured by the Companyland
                      use right and building
                  
                  
                  5,128,000Totals
                  
                  $
                  10,256,000
 Interest
        capitalized for the year ended December 31, 2006 was $282,641.
 
 **Note
        15 - Supplemental disclosure of cash flow information**
 
 Income
        taxes paid amounted to $2,288,242 and $0 for the years ended December 31,
        2006
        and 2005, respectively. Interest paid for the year ended December 31, 2006
        and
        2005 amounted to $1,352,377 and $1,371,642, respectively
 
 **Note
        16 - Earnings per share**
 
 The
        following is information of net income per share at December 31:
 2006
                
                2005Net
                    Income for basic earnings per share
                
                $
                17,809,734
                
                $
                7,798,981Weighted
                    average shares used in basic computation
                
                
                19,933,193
                
                
                3,869Diluted
                    effect of stock warrants
                
                
                1,343,070
                
                
                15,685,184Weighted
                    average shares used in diluted computation
                
                
                21,276,263
                
                
                15,689,053Earnings
                    per share:Basic
                
                $
                0.89
                
                $
                2,015.76Diluted
                
                $
                0.84
                
                $
                0.50
  F-20
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
            31, 2006
 **Note
        17 - Stockholders' Equity**
  (A)
                Reverse
                    stock split
 
 On
        January 30, 2006, the Company affected a 245.27:1 reverse stock split.  All
        share and per share amounts have been retroactively restated throughout these
        financial statements to reflect the effect of the reverse split.
 (B)
                  Series
                        A and Series B Convertible Preferred
                        Stocks
 The
        Series A and Series B Convertible Preferred Stocks (“Series A and B Stocks”)
        were automatically converted into common stock upon the effectiveness of
        the
        reverse split on January 30, 2006 under the certificates of designation for
        Series A and B Stocks.
 (C)
                    Following
                            the reverse stock split and as of December 2006, the
                            Company had
                            outstanding:
 (1)
              20,046,162
                  shares of common stock, par value
                  $.006.
 
 (2)
              Warrants
                  purchasing 2,056,015 shares of common stock at an initial exercise
                  price
                  of $3.67 per share, expires December
                  2010.
 
 (3)
              Warrants
                  purchasing 424,929 shares of common stock with exercise prices
                  of $3.11
                  per share, expires December 2011.
 (D)
                    During
                              the third and forth quarters of 2006, the following
                              warrants were
                              exercised:
 (1)
                    Warrants
                        were exercised for 12,909 shares of common stock. The warrants
                        were
                        initially issued on January 30, 2006, and were each exercisable
                        for one
                        share of the Company's common stock at $3.67 per
                        share.
 F-21
  (2)
              Warrants
                  were exercised for 80,000 shares of common stock. The warrants
                  were
                  initially issued on January 30, 2006, and were each exercisable
                  for one
                  share of the Company's common stock at $0.01 per
                  share.
 
 (3)
              Warrants
                  were exercised for 56,076 shares of common stock. The warrants
                  were
                  initially issued on January 30, 2006, and were each exercisable
                  for one
                  share of the Company's common stock at $3.67 per
                  share.
 
 The
        Company has 2,056,015 warrants exercisable at $3.67 and 424,929, warrants
        exercisable at $3.11 outstanding as of December 31, 2006.
 Outstanding
                    Warrants
                
                Exercisable
                    WarrantsExercise
                    Price
                
                Number
                
                Average
                    Remaining Contractual Life
                
                Average
                    Exercise Price
                
                Number
                
                Average
                    Remaining Contractual Life$3.67
                
                
                2,056,015
                
                
                3.95
                    years
                
                $
                3.67
                
                
                2,056,015
                
                
                3.95
                    years$3.11
                
                
                424,929
                
                
                3.95
                    years
                
                $
                3.11
                
                
                424,929
                
                
                3.95
                    years
  **Note
        19 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before a
        Sino-foreign cooperative joint venture enterprise distributes profits to
        its
        partners, it must first satisfy all tax liabilities, provide for losses in
        previous years, and make allocations, in proportions determined at the
        discretion of the board of directors, after the statutory reserve.
 
 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 dividend
        to
        shareholders. For the year ended December 31, 2006, the Company transferred
        $2,024,157 representing 10% of the year’s net income determined in accordance
        with PRC accounting rules and regulations, to this reserve.
  F-22
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 The
        surplus reserve fund is non-distributable other than during liquidation and
        can
        be used to fund previous years’ losses, if any, and may be utilized for business
        expansion or converted into share capital by issuing new shares to existing
        shareholders in proportion to their shareholding or by increasing the par
        value
        of the shares currently held by them, provided that the remaining reserve
        balance after such issue is not less than 25% of the registered
        capital.
 
 **Note
        20 - Current vulnerability due to certain concentrations**
 
 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 environments 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 the North America
        and Western Europe. These include risks associated with, among others, the
        political, economic and legal environments and foreign currency exchange.
        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.
 
 **Note
        21 - Commitments and contingencies**
 
 According
        to the amended Articles of Association of Dalian DPI, Fushi International,
        Inc.
        has to commit $49,800,000 in registered capital contributions. As of December
        31, 2006, the Company had committed $9,132,500 of the registered capital
        requirement and had registered capital commitments of $40,667,500. This
        commitment was paid in January 2007. These transactions have no effect on
        the
        Company’s consolidated shareholders’ equity at December 31, 2006.
 
 The
        Company has been named a defendant in a pending litigation that was filed
        at the
        China International Economic and Trade Arbitration Commission over a disputed
        investment consulting agreement. The damage claimed amounts to US$420,000
        for
        past due commission. The Company claims that the plaintiff did not render
        services as stipulated in the agreement and believes any negative outcome
        of
        this litigation is highly unlikely.
 
 The
        Company has been named a defendant of an action filed in the United States
        District Court of a disputed contract agreement. The Company believes the
        claim
        is without merit and does not anticipate any negative outcome of this
        case.
 
 **Note
        22 - Subsequent events**
 
 On
        January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered
        into a Notes Purchase Agreement. On January 29, 2007, the Company closed a
        US$60 million financing with Citadel.  In this transaction, Citadel
        purchased (i) US$40 million principal amount (less than 6% of commission
        for
        proceeds of $37,600,000) of guaranteed senior secured floating rate notes
        (“HY notes”) due 2012 and (ii) US$20 million principal amount (less 6%
        commission for proceeds of $18,800,000) of the Company’s 3% senior secured
        convertible notes (“Convertible notes”) due 2012, which are convertible into
        shares of the Company's common stock at an initial conversion price of US$7.00
        per share. These notes are secured by the shares of the Company's
        wholly-owned subsidiary, Fushi Holdings Inc., (“FHI”) (formerly, Diversified
        Product Inspections, Inc, known as “DPI”), a Delaware corporation. Citadel was
        also granted certain corporate governance rights over the Company and its
        subsidiaries.  Merrill Lynch Far East Limited acted as the placement agent
        for this transaction.
  F-23
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
          31, 2006
 Neither
        the Notes nor the Common Stock issuable upon conversion of  the Convertible
        Notes have been registered under the U.S. Securities Act of 1933, as amended,
        nor is the Company obligated to so register them.
 
 As
        security for the Notes, the Company and The Bank of New York, as collateral
        agent, entered into a share pledge agreement, dated January 25, 2007 (the
        "Share
        Pledge Agreement"), to guarantee the Notes with all of the shares of common
        stock of FHI held by the Company as collateral. The Company owns 100% of
        the
        FHI, which is pledged as collateral on the notes.
 
 In
        connection with the transaction, the Company, FHI, Fushi International (Dalian)
        Bimetallic Cable Co., Ltd. (formerly, Dalian Diversified Product Inspections
        Bimetallic Cable Co., Ltd., known as “Dalian DPI”), a wholly-owned subsidiary of
        FHI (“FID”), Dalian Fushi, Li Fu, our Chairman and Chief Executive Officer,
        Mathus Yue Yang, our President, Chris Wenbing Wang, our Chief Financial Officer
        and Citadel entered into an Investor Rights Agreement dated January 25, 2007.
        Pursuant to the Investor Rights Agreement, Citadel was granted, among other
        things and subject to certain conditions, the right to designate up to certain
        number of the Company's board of directors, a right of first refusal with
        respect to any financing sought by the Company and the right to approve the
        Company's annual business plan and budget. In addition, pursuant to the Investor
        Rights Agreement, Messrs. Fu, Yang and Wang agreed to a non-competition covenant
        relating to their employment and ability to engage in a business that is
        competitive with the Company's business for five years.
 
 The
        HY
        Notes and the Convertible Notes were issued pursuant to indentures, each
        dated
        January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
        together, the "Indentures") among the Company, the FHI, as guarantor, and
        The
        Bank of New York, as trustee for the Notes. Pursuant to the Indentures, FHI
        has
        agreed, and all of the Company's other existing and future domestic subsidiaries
        are obligated, to guarantee, on a senior secured basis, to the holders of
        the
        Notes and the trustee the payment and performance of the Company's obligations
        thereunder.
 
 Management
        has completed its initial review of the accounting for the transactions and
        has
        tentatively concluded that the conversion option does not qualify as an embedded
        derivative under FAS 133 nor does it qualify for beneficial conversion treatment
        under EITF 98-5 and 0-27.
  F-24