**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




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




For
      the
      fiscal year ended: December 31, 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: 000-52383


**FUQI
        INTERNATIONAL,
        INC.**
 (Exact
      name of registrant as specified in its charter)







**Delaware**
            **20-1579407***(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            *(I.R.S.
                Employer*
              *Identification
                No.)*








**5/F.,
                Block 1, Shi Hua Industrial Zone**
              **Cui
                Zhu Road North**
              **Shenzhen,
                518019**
              **People’s
                Republic of China**
            
            **N/A***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*





REGISTRANT’S
      TELEPHONE NUMBER, INCLUDING AREA CODE: **86-755-2580
      6333**





SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:




None.




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:




**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered**Common
                Stock, $0.001 par value
            
            None.







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o  No x




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




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




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




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




Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx





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




At
      December 31, 2006, the last business day of the registrant’s most recently
      completed fiscal year, there were 20,715,384 shares of the registrant’s common
      stock outstanding, and there was no aggregate market value of such shares held
      by non-affiliates of the registrant because the registrant’s common stock was
      not trading on any exchange.





There
      were 20,715,384 shares of common stock outstanding as of April 13,
      2007.




DOCUMENTS
      INCORPORATED BY REFERENCE: None.









**TABLE
      OF CONTENTS**




**FUQI
      INTERNATIONAL, INC.**


**TABLE
      OF CONTENTS TO ANNUAL REPORT ON FORM 10-K**


**For
      the Fiscal Year Ended December 31, 2006**


**ITEM**
              
              
              
              ******Page****PART
                  I**Item
                  1.
              
              Business
              
              1Item
                  1A.
              
              Risk
                  Factors
              
              8Item
                  1B.
              
              Unresolved
                  Staff Comments
              
              16Item
                  2.
              
              Properties
              
              17Item
                  3.
              
              Legal
                  Proceedings
              
              17Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              17**PART
                  II**Item
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              
              18Item
                  6.
              
              Selected
                  Financial Data
              
              21Item
                  7.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              22Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              31Item
                  8.
              
              Financial
                  Statements and Supplementary Data
              
              32Item
                  9.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              32Item
                  9A.
              
              Controls
                  and Procedures
              
              32Item
                  9B.
              
              Other
                  Information
              
              33**PART
                  III**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate Governance
              
              33Item
                  11.
              
              Executive
                  Compensation
              
              35Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              37Item
                  13.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              38Item
                  14.
              
              Principal
                  Accounting Fees and Services
              
              39**PART
                  IV**Item
                  15.
              
              Exhibits
                  and Financial Statement Schedules
              
              41Signatures
              
              42




i




**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**




The
      information contained in this Form 10-K, including in the documents incorporated
      by reference into this Form 10-K, includes some statements that are not purely
      historical and that are “forward-looking statements.” Such forward-looking
      statements include, but are not limited to, statements regarding the Company
      and
      their management’s expectations, hopes, beliefs, intentions or strategies
      regarding the future, including its financial condition, results of operations,
      and the expected impact of the share exchange on the parties’ individual and
      combined financial performance. In addition, any statements that refer to
      projections, forecasts or other characterizations of future events or
      circumstances, including any underlying assumptions, are forward-looking
      statements. The words “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
      similar expressions, or the negatives of such terms, may identify
      forward-looking statements, but the absence of these words does not mean that
      a
      statement is not forward-looking.




The
      forward-looking statements contained in this Form 10-K are based on current
      expectations and beliefs concerning future developments and the potential
      effects on the parties and the transaction. There can be no assurance that
      future developments actually affecting the Company will be those anticipated.
      These forward-looking statements involve a number of risks, uncertainties (some
      of which are beyond the parties’ control) or other assumptions that may cause
      actual results or performance to be materially different from those expressed
      or
      implied by these forward-looking statements, including the
      following:




·
            Vulnerability
                of the Company’s business to general economic
                downturn;




·
            Fluctuation
                and unpredictability of costs related the gold, platinum and precious
                metals and other commodities used to make the Company’s
                product;




·
            Changes
                in the laws of the PRC that affect the Company’s
                operations;




·
            The
                Company’s inexperience in the retail jewelry
                market;




·
            The
                Company’s inability to achieve the benefits expected from the Company’s
                share exchange agreement;




·
            Competition
                from the Company’s competitors;




·
            Any
                recurrence of severe acute respiratory syndrome (SARS) or Avian
                Flu;




·
            The
                Company’s ability to obtain all necessary government certifications and/or
                licenses to conduct the Company’s
                business;




·
            Development
                of a public trading market for the Company’s securities;




·
            The
                cost of complying with current and future governmental regulations
                and the
                impact of any changes in the regulations on the Company’s operations;




·
            Fluctuation
                of the foreign currency exchange rate between U.S. Dollars and Renminbi;
                and




·
            The
                other factors referenced in this Form 10-K, including, without limitation,
                under the sections entitled “Risk Factors,” “Financial Information,”
                “Management’s Discussion and Analysis of Financial Condition and Results
                of Operations,” and “Description of
                Business.”




These
      risks and uncertainties, along with others, are also described above under
      the
      heading “Risk Factors.” Should one or more of these risks or uncertainties
      materialize, or should any of the parties’ assumptions prove incorrect, actual
      results may vary in material respects from those projected in these
      forward-looking statements. The Company undertakes no obligation to update
      or
      revise any forward-looking statements, whether as a result of new information,
      future events or otherwise, except as may be required under applicable
      securities laws.




ii




**PART
      I**




**ITEM
      1.** ****BUSINESS****





**Overview**





Fuqi
      International, Inc. (“Fuqi” or “the Company”) engages in the design,
      manufacture, marketing and wholesale distribution of a full range of precious
      metal jewelry in China. The Company currently operates through two divisions:
      (i) production and (ii) sales and marketing. The production division is
      responsible for manufacturing of the Company’s jewelry products and the sales
      and marketing division is responsible for the selling and marketing functions
      of
      the products, including customer relations and customer service. The Company
      intends to enter into the retail distribution of its jewelry products by opening
      or acquiring retail stores in China during 2007.





Fuqi
      operates through the Company’s wholly-owned subsidiary Fuqi International
      Holdings Co., Ltd., a British Virgin Islands corporation (“Fuqi BVI”) and its
      wholly-owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd., (“Fuqi
      China”) a company established under the laws of the People's Republic of
      China .





**Corporate
      History**





Fuqi
      was
      originally incorporated in the State of Arizona on September 3, 2004 as VT
      Marketing Services, Inc. The Company was a wholly-owned subsidiary of Visitalk
      Capital Corporation (“ *VCC* ”),
      and
      was formed as part of the implementation of the Chapter 11 reorganization
      plan (the “ *Visitalk
      Plan* ”)
      of
      visitalk.com, Inc. (“V *isitalk.com* ”).
      Visitalk.com filed for Chapter 11 Bankruptcy in November 2000. The Visitalk
      Plan
      became effective on September 17, 2004 (the “ *Effective
      Date* ”).
      On
      September 22, 2004, Visitalk.com merged into VCC, which was authorized as the
      reorganized debtor under the Visitalk Plan.





The
      Company’s original business was to use Visitalk.com’s technology to facilitate
      peer-to-peer marketing activities. The Visitalk Plan authorized it to acquire
      certain technology rights from VCC on the Effective Date. To acquire these
      rights, the Company issued to VCC 324,044 shares of its common stock and common
      stock purchase warrants allowing holders to purchase additional shares of its
      common stock (the “ *Plan
      Warrants* ”).
      The
      Visitalk Plan further authorized VCC to distribute 54,837 of the 324,044 shares
      of common stock to 240 creditors of Visitalk.com and all of the Plan Warrants
      to
      645 claimants of Visitalk.com, in accordance with the Visitalk Plan. After
      the
      distribution of the shares of its common stock and Plan Warrants, but prior
      to
      the Bay Peak Sale, discussed below, VCC owned approximately 82.1% of its issued
      and outstanding common stock.





On
      July
      21, 2006, the Company sold 1,368,761 shares of common stock (post Reverse Split
      described below) to BayPeak, LLC. As part of this transaction (the “ *Bay
      Peak Sale* ”),
      the
      Company abandoned its peer-to-peer marketing business, which was transferred
      to
      VCC, and began to seek companies in Asia with potential, in particular companies
      based in China, to acquire. The shares issued in the Bay Peak Sale represented
      74.49% of the Company’s outstanding shares. On July 28, 2006, Visitalk.com was
      granted its Final Decree by the Bankruptcy Court. On November 6, 2006, the
      Company conducted a reverse stock split of its shares common stock and issued
      one share for each 15.43 shares of its common stock then outstanding (the
“ *Reverse
      Split* ”).
      No
      shareholder was reversed below 100 shares in the Reverse Split and the then
      outstanding Plan Warrants were not affected by the Reverse Split. On November
      8,
      2006, the Company changed its state of incorporation from Arizona to
      Nevada.





On
      November 20, 2006, the Company entered into a share exchange agreement with
      Yu
      Kwai Chong, who is the sole shareholder of Fuqi BVI pursuant to which the
      Company agreed to acquire all of the issued and outstanding capital stock of
      Fuqi BVI (the “ *Exchange
      Transaction* ”).
      The
      Exchange Transaction closed on November 22, 2006 and, per the terms of the
      share
      exchange agreement (the “ *Share
      Exchange Agreement* ”),
      the
      Company issued an aggregate of 18,886,666 shares of its common stock in exchange
      for all of the issued and outstanding securities of Fuqi BVI. Pursuant to the
      Share Exchange Agreement, BayPeak agreed to cancel 8,761 shares of common stock.





Immediately
      after the closing of the Exchange Transaction and Reverse Split, the Company
      had
      20,715,384 outstanding shares of common stock, no options and warrants to
      purchase 16,846,982 shares of its common stock. Immediately after the Exchange
      Transaction and Reverse Split, the former Fuqi BVI stockholder held
      approximately 91.2% of its voting capital stock.




1





On
      December 8, 2006, the Company changed its corporate name from “VT Marketing
      Services, Inc.” to “Fuqi International, Inc.” and reincorporated from the State
      of Nevada to the State of Delaware.





The
      Company’s shares of common stock are not currently listed or quoted for trading
      on any national securities exchange or national quotation system. The
      transactions contemplated by the Share Exchange Agreement, as amended, were
      intended to be a “tax-free” incorporation pursuant to the provisions of Section
      368 of the Internal Revenue Code of 1986, as amended.





All
      share
      information presented in this Form 10-K reflect the Reverse Split. For financial
      accounting purposes, the Exchange Transaction was treated as a reverse
      acquisition by Fuqi BVI, under the purchase method of accounting, and was
      treated as a recapitalization with Fuqi BVI as the accounting acquirer.
      Accordingly, the Company’s historical financial statements have been prepared to
      give retroactive effect to the reverse acquisition completed on November 22,
      2006, and represent the operations of Fuqi BVI and its wholly-owned subsidiary,
      Shenzhen Fuqi Jewelry Co., Ltd. (“Fuqi China”), a company established under the
      laws of the People's Republic of China. Upon the acquisition of Fuqi BVI, the
      Company’s sole business operations became that of Fuqi BVI.





**Design
      and Product Development**





Since
      the
      commencement of its jewelry operations in 2001, the Company has expanded its
      line of products from basic gold jewelry to a range of products that include
      rings, bracelets, necklaces, earrings and pendants made from precious metals
      such as platinum, gold, palladium and Karat gold (K-gold). The Company also
      manufactures jewelry with diamond and other precious stone inlays, in addition
      to gold coins and gold bars.





The
      Company’s product series include the following:





·
            *Gold
                Series.*This
                series includes K-gold, 24K gold ornaments, gold bars, gold coins,
                gifts,
                other gold charms and customized
                products.




·
            *Platinum
                Series (pt).*This
                series includes pt990, pt950 and pt900 products. The quality markings
                for
                platinum are based on parts per thousand. For example, the marking
                pt900
                means that 900 parts out of 1000 are pure platinum, or in other words,
                the
                item is 90% platinum and 10% other
                metals.




·
            *K-Gold
                Series.*This
                series is primarily derived from Italian-influenced arts and
                designs.




·
            *Studded
                Jewelry Series.*This
                series is made from pt950, pt900, 18K gold, 14K gold and other
                customer-designated rare metals studded with diamonds, emerald, jade
                and
                semi-precious stones.





All
      of
      Fuqi’s designs are originated by its in-house designers. Fuqi’s designers are
      educated by art schools or colleges in China and have gained an average of
      three
      to five years of experience from other jewelry companies. In generating new
      design ideas, the Company’s designers research and study designs that are
      popular in China and worldwide. The Company’s designers conduct design and
      market research through various forms, including trade expositions, industrial
      magazines and the Internet. The Company’s designers also receive feedback from,
      and respond to, the Company’s customers. The
      Company continuously designs and produces new styles of jewelry and currently
      carry more than 20,000 product styles. The
      Company assigns serial numbers to each of its products styles, and maintains
      an
      information management system that utilizes a product database.





**Manufacturing**





The
      Company has a large-scale production base that includes a modern factory of
      more
      than 53,000 square feet, a dedicated senior design team, and more than 600
      trained technical workers. In the production of its jewelry, the Company
      believes it uses the latest jewelry processing equipment and procedures. Since
      2003, the Company held an ISO 9001 accreditation, which is an international
      standard of quality. The International Organization for Standardization (ISO)
      (http://www.iso.org/iso/en/iso9000-14000/understand/inbrief.html) defines ISO
      9000 quality management system is one of international references for quality
      management requirements in business-to-business dealings. This means the
      organization being accredited by an independent assessment organization has
      to
      fulfill:





·
            the
                customer's quality requirements,
                and




2




·
            applicable
                regulatory requirements, while aiming
                to




·
            enhance
                customer satisfaction, and




·
            achieve
                continual improvement of its performance in pursuit of these objectives.





The
      ISO
      9000 quality management system is well recognized by China governmental bodies
      and businesses. This accreditation can serve as a basis for the Company’s
      customers to determine the minimum standard of quality assurance that the
      Company can achieve. The Company believes that this accreditation also indicates
      to the Company’s customers that the Company is running an effective system to
      track quality issues and possible rework progress of its products. In January
      2007, the Company also passes the assessment of ISO 14000 accreditation. The
      ISO
      defines ISO 14000 system an environmental management system, which means the
      organization being accredited by an independent assessment organization has
      to:





·
            minimize
                harmful effects on the environment caused by its activities, and




·
            achieve
                continual improvement of its environmental
                performance.




Fuqi
      produced thousands of product styles on the following product processing
      lines:





·
            Jewelry
                processing line for manufacturing precious metal, pure-color gold
                ornaments, including gold, platinum, palladium and other related
                metals;




·
            K-gold
                product line for processing multiple types of metals including 8K
                through
                24K gold and platinum ornaments;




·
            Studded
                jewelry processing line;




·
            Gold
                bar and gold coin processing line;
                and




·
            Rare
                metals craftwork and collections manufacturing
                line.





The
      Company’s maximum annual output capacity of the gold jewelry, other rare and
      precious metal jewelry, K-gold jewelry and inlaid jewelry is approximately 30.0
      tons, 15 tons, 5.0 tons and
      60,000 pieces, respectively.





**Business
      and Growth Strategy**





Fuqi’s
      current business and growth strategy is to:





·
            Develop
                platinum as the primary metal from which Fuqi’s jewelry is manufactured to
                capitalize on the recent increase in consumption of platinum jewelry
                in
                China. In 2006, Fuqi began to shift its product line to produce more
                platinum jewelry and Fuqi intend invest in the development a new
                production line produce studded platinum jewelries.




·
            Strengthen
                the Company’s brand name in the China jewelry industry by expanding the
                marketing and promotion of its products and maintaining large-scale
                production of quality products.




·
            Grow
                with the large and developing Chinese jewelry market by controlling
                costs
                and raising additional capital to fund such
                growth.




·
            Continue
                to rely on Fuqi’s production and wholesale operations while moving
                resources into the commencement of Fuqi’s retail distribution operations
                by opening retail stores throughout
                China.





Fuqi
      intends to establish a retail sales plan aimed at gaining market share in the
      growing consumer market in China. Fuqi intends to open retail stores throughout
      China, initially, and in Hong Kong and the United States in the future. During
      2007, Fuqi intends to open and/or acquire 20 retail counters and open 2 retail
      stores in municipalities and provincial capitals throughout China. In
      2008,
      the Company plans to acquire an additional 6 to 7 retail stores and acquire
      40
      to 50 counters, while opening 2 to 3 stores and 20 to 30 counters in that year.
      The Company has identified various locations for its retail outlets and the
      Company is currently negotiating the acquisition of leases of such locations
      without acquiring the existing business. The Company’s Chinese legal counsel is
      preparing a letter of intent with preliminary acquisition terms to be entered
      into with sellers with respect to five of these locations. Assuming that
      negotiations continue at their current pace without unanticipated delay, the
      Company believes that the letters of intent for these five stores and counters
      will be entered into in April 2007 and acquired in May 2007. There can be no
      assurances that the negotiations and acquisition will continue in a timely
      manner or at all.




3





Through
      these retail outlets, the Company intends to offer is entire range of jewelry
      products to showcase and sell. Furthermore, Fuqi plans to design and manufacture
      a number of fine diamond and gem stone jewelry to be sold exclusively in the
      Company’s retails shops.





In
      connection with the Company’s retail expansion plan, the Company has conducted
      an analysis on historical sales information and market studies and, based on
      this analysis, the Company has begun to select locations on which the Company
      intends establish its retail network. Fuqi has not yet secured any locations
      but
      it has identified a number of locations in various cities for the first and
      second phase of retail expansion. In terms of management talent, the Company
      has
      identified and begun to negotiate with an experienced senior executive, who
      has
      over 26 years of experience in retail industry, to join the team for this
      expansion. The Company has started in-house design of management and control
      system manuals for use of retail outlets. The Company has investigated human
      resources markets in these locations identified that it believes that the
      availability of sales forces is not an issue. The Company has also researched
      and planned organizational and logistical steps, such as legal requirements
      of
      local governments, management talent, sales forces and outlet locations for
      its
      retail expansion. Based on this, the Company believes that there is barrier
      that
      would prevent it from selling its products in the retail market.





The
      Company believes that the demand for precious metal jewelries is still growing
      in a rate higher than the general economic growth and that its participation
      in
      retail distribution will not create competition to its existing clients. The
      Company believes that its design teams can create new designs and establish
      new
      markets through its retail network. The Company hopes that the new designs
      may
      create mass marketing and advertising opportunities for its products, which
      the
      Company believes may strengthen consumer demand for its products.





Fuqi
      believes that China represents an excellent retail sales opportunity for various
      reasons that include:





·
            *increased
                profit potential*-
                with the intensified competition and increases in the cost of raw
                materials, profit from the production and wholesale distribution
                of
                jewelry is generally decreasing. The Company believes that entering
                into
                the retail market is a viable strategy to maintain and increase
                profitability in the China jewelry
                industry.




·
            *large
                retail market*—
                China’s retail sales market is one of largest in the
                world.




·
            *growing
                jewelry market*—
                China’s jewelry market has recently experienced significant
                growth.




·
            *large
                pool of potential consumers*—
                China has a large population including a substantial number of potential
                customers.




·
            *favorable
                regulatory changes*—
                as a member of the World Trade Organization (WTO), China is eliminating
                a
                number of restrictions on foreign ownership and operation of retail
                stores. Tariffs on colored gem stones, gold, silver and pearls have
                been
                reduced in the past and economic and trade relationships between
                China and
                Hong Kong have generally been
                liberalized.




·
            *changing
                consumer preferences*—
                the Company believes that Chinese consumers are embracing a more
                Western
                view of jewelry as a fashion accessory and desire more contemporary,
                colorful designs.





**Sales
      and Marketing**





Fuqi
      relies on its sales and marketing division, which is located at its executive
      offices in Shenzhen, China for the distribution of its products. Fuqi trains
      its
      salespeople in its product lines. Fuqi’s marketing and distribution strategy is
      to screen and identify the strongest retail customers in each distribution
      channel and to focus on design and sales efforts towards the largest and fastest
      growing retailers and distributors. Fuqi’s jewelry is sold to a network of
      approximately 1,000 distributors, retailers and wholesale agencies. The Company
      maintains a broad base of customers and concentrate its efforts on department
      stores, wholesalers, national jewelry chains, fine jewelers, and stores that
      sell fashionable jewelry to youth. The Company also works closely with its
      major
      customers and attempt to adjust its product strategies and structure based
      on
      customer feedback. The Company believes this helps decrease the likelihood
      of
      overstocked and undesired products.




4





Fuqi
      expects to move into the retail distribution of its products in 2007. As
      discussed above in “Business and Growth Strategies,” the Company intends open
      retail outlets throughout China, initially, and in Hong Kong and in the future,
      other countries.





The
      Company’s products are mainly designed for the middle income class in China,
      with an emphasis on young ladies. Approximately 5% of the Company’s designs are
      for new-born children, 20% of its designs are for middle-aged men, 30% of its
      designs are for middle to older-aged women and the rest of its designs are
      for
      young women. The majority of the Company’s products are sold in China at an
      average retail price of US$200 to US$300, including tax, which would be a
      similar price range if these products were sold in the United
      States.





Fuqi
      continues to devote its efforts towards brand development and utilize marketing
      concepts in an attempt to enhance the marketability of its products. During
      the
      past two years, Fuqi has carried out a brand development strategy based on
      product quality and design excellence. Fuqi has participated in various
      marketing activities and exhibitions to promote its products and brand. For
      example, in 2004, the Company was the laurel sponsor for multiple beauty
      pageants, including the “Miss Intercontinental Final” and the “Miss China
      Universe.” As a laurel sponsor, the Company designed and crafted the laurels
      and/or batons that were presented to a contest’s winner, in addition to the
      contest’s second and third place runner-ups. Fuqi has also sponsored numerous
      beauty contests such as:





·
            the
                Final of Miss Global of WTO;




·
            the
                17th World Miss University Contest;




·
            the
                1st China Miss University Contest; and




·
            China
                Final of Miss World.





Fuqi
      believes that the laurels and batons created in connection with its sponsorship
      of beauty contests provide the Company an opportunity to showcase the Company’s
      design and craftsmanship ability, in addition to strengthening its brand
      recognition.





Fuqi
      has
      received various governmental awards with respect to its brand, including
      recognition as a “Chinese Famous Brand,” which is reserved for the top ten most
      recognized brands of the jewelry in China. The Company also received other
      recognitions, including “Famous
      Brand in China Jewelry Industry”, “Shenzhen Well-known Brand”, “Shenzhen 300
      enterprises with Ultimate Growth” and “China Quality Promise Credit Management
      Enterprise (Brand)”. The Company believes that governmental awards and other
      forms of recognition raise brand recognition for its products.





The
      “Fuqi” trademark has been registered in the United States, Italy, Japan, Hong
      Kong and China.




**Supply
      of Raw Materials**





Fuqi
      is a
      full member of the Shanghai Gold Exchange, a manufacturer designated by the
      Platinum Guild International, and a standing council member of Shenzhen Gold
      Association of China. Shanghai Gold Exchange is the Company’s primary source of
      supply for its raw materials, which consist of precious metals.





Fuqi
      maintains its supply of raw materials at its warehouse in Shenzhen, China.
      The
      Company purchases large volume of precious metals approximately five times
      per
      month from Shanghai Gold Exchange in advance and in anticipation of orders
      resulting from its marketing programs. In order to minimize the risk of storage
      and devaluation, the Company only purchases pre-cut gemstones, including ruby
      and jade, upon customers’ requests. The Company does not have a designated
      supplier for these pre-cut stones. When a customer places an order that requires
      pre-cut stones, the Company purchases the pre-cut stones as required from local
      supplies in Shenzhen.





**Competition**





The
      jewelry production industry is highly competitive, and the Company’s competitors
      include domestic and foreign jewelry manufacturers, wholesalers, and importers
      who may operate on a national, regional and local scale. Many of the Company’s
      competitors have substantially greater financial, technical and marketing
      resources and personnel than the Company. Fuqi’s competitors in the jewelry
      production industry include Nongjia, Cuilu, ADK, Junli, Baohengde and
      Anshenghua. The Company’s strategy is to provide competitively priced, moderate-
      to high-quality products to the high-volume retail jewelry market. The Company
      believes competition is largely based on quality, service, pricing, and
      established customer relationships.




5





Fuqi
      intends to enter into the jewelry retail industry, which is also highly
      competitive. Many of the Company’s potential competitors in the retail industry
      will have larger customer bases, longer operating histories and significantly
      greater financial, technical, marketing and other resources. Most of these
      retailers, including Chow Sang Sang Group, Luk Fook Jewelry, TSL Jewelry and
      Hang Fung Gold Technology, have numerous branches set up across China and may
      have secured the most desirable locations for retail stores. It is difficult
      for
      a newcomer to enter into the retail industry, but the Company believes that
      its
      established production and wholesale distribution business will facilitate
      its
      entrance into the retail market.





**Major
      Customers**





During
      the year ended December 31, 2005 approximately 15% of the Company’s sales were
      generated from one customer, Beijing
      Hua Shang Rui Lin Trading Co., Ltd. During the years ended December 31, 2006
      and
      2004, there were no single customers that generated more than 10% of the total
      sales.





**Seasonality**





The
      Company’s business is seasonal in nature. The Company’s sales and net income are
      traditionally higher in the fourth calendar quarter than the rest of the year. The
      primary factors that affect the seasonal changes in the Company’s business
      operations are holidays and traditional Chinese festivals. In the fourth
      quarter, retailers often experience increased sales due to the golden week
      of
      Chinese National Day, Christmas and New Year’s Day. In addition, jewelry
      retailers commonly stock up from wholesalers to prepare for potentially higher
      sales during the period before Chinese New Year, which is a peak season of
      marriage and newborns in China. This seasonal trend in our business occurred
      during 2005; however, there was a slight deviation in during 2006. During fiscal
      2006, a larger portion of the Company’s sales was generated during the first
      quarter, with net income was $2.3 million for the first quarter of 2006, as
      compared to net income of $0.4 million, $0.9 million and $2.1 million for the
      second, third and forth calendar quarters, respectively. During
      fiscal 2005, the Company had net income was of $2.1 million for the fourth
      quarter, as compared to net income of $1.3 million, $0.6 million and $1.3
      million for the first, second and third calendar quarters, respectively, of
      2005. The Company believes that deviation in 2006 was related to customers
      speculating the direction of precious metal prices and holding their orders
      longer until their inventory levels were too low to meet the peak season. The
      Company believes that, in 2007, the seasonality of the Company’s business
      seasonality will return to normal.





**Government
      Regulations**





In
      April
      2001, the Shenzhen Business Bureau granted Fuqi the right to operate for a
      period of ten years from the date of the inception of wholly-owned subsidiary,
      Fuqi China. On May 17, 2006, this right allowed the Company to transform Fuqi
      China into a Wholly Owned Foreign Enterprise (a “ *WOFE* ”)
      and
      formally transfer the ownership of Fuqi China from the founder to Fuqi BVI.
      Neither this transfer nor the Company’s acquisition by the VTM changed its
      business plan. The right to operate as a WOFE expires 30 years from the date
      of
      this approval but based on current PRC legislation, this right is renewable
      by
      application. A WOFE can only conduct business within its approved business
      scope, which ultimately appears on the business license. This license permits
      the Company to design, manufacture, sell and market jewelry products to
      department stores throughout the PRC. Any amendment to the scope of the
      Company’s business requires further application and government approval. The
      Company cannot assure you that it will be able to obtain the necessary
      government approval for any change or expansion of its business.





Under
      the
      PRC laws, supplies of precious metals such as platinum, gold and silver are
      highly regulated by certain government agencies. Shanghai Gold Exchange is
      the
      Company’s primary source of supply for its raw materials, which almost
      substantially consist of precious metals. The Company is required to obtain
      several membership and approval certificates from these government agencies
      in
      order to continue to conduct its business. The Company may be required to renew
      such memberships and to obtain approval certificates periodically. If the
      Company is unable to renew these periodic membership or approval certificates,
      it would materially affect its business operations. The Company is currently
      in
      good standing with these agencies.




6





Fuqi
      has
      also been granted independent import and export rights. These rights permit
      the
      Company to import and export jewelry in and out of China. With the relatively
      lower cost of production in China, the Company intend to expand into overseas
      markets after the launch of its China-based retail plan. However, the Company
      does not currently have plans to import jewelry into China.





**Employees**





Fuqi
      has
      more than 600 full-time employees. The Company is not subject to any collective
      bargaining agreements and believes its relationship with its employees is
      good.





Fuqi
      is
      required to contribute a portion of its employees’ total salaries to the Chinese
      government’s social insurance funds, including medical insurance, unemployment
      insurance and job injuries insurance, and a housing assistance fund, in
      accordance with relevant regulations. Fuqi contributed approximately $140,000,
      $138,000 and $152,000 for the years ended December 31, 2006, 2005 and 2004,
      respectively. Fuqi expects that the amount of its contribution to the
      government’s social insurance funds to increase in the future as it expands its
      workforce and operations.





**Facilities**





Fuqi’s
      principal executive offices are located at 5/F., Block 1, Shi Hua Industrial
      Zone, Cui Zhu Road North, Shenzhen 518019, China. The Company owns approximately
      15,000 square feet of office and showroom space at this location.





Fuqi’s
      jewelry production facility is located in Shenzhen, China and, including office
      spaces, consists of approximately 66,000 square feet of building space. Fuqi
      owns approximately 33,000 square feet of this space and the remainder is leased
      from a landlord, Guanghong Jin Tong Hai Enterprises Ltd. The Company has
      acquired the space for production facility, office and show room located at
      5/F., Block 1, Shi Hua Industrial Zone during 2005.





In
      July
      2005, the Company entered into a leasing agreement with Shenzhen Jin Tong Hai
      Enterprises Ltd. to lease the production plan on 4th floor Block 1, Shi Hua
      Industrial Park for a approximately $112,000 per annum. from July 2005 to June
      2010. The lease agreement will terminate in June 2010. The Company has the
      right
      to renew the lease prior to its termination. At the time of renewal, the lease
      amount will be renegotiated, and based on the current industrial leasing market,
      the Company expects that the lease amount will be increased by approximately
      35%
      in the year of 2010.




7




**ITEM
      1A:**  **RISK
      FACTORS**





Any
      investment in the Company’s common stock involves a high degree of risk.
      Potential investors should carefully consider the material risks described
      below
      and all of the information contained in this Form 10-K before deciding whether
      to purchase any of its securities. The Company’s business, financial condition
      or results of operations could be materially adversely affected by these risks
      if any of them actually occur. None of the Company’s securities are currently
      listed or quoted for trading on any national securities exchange or national
      quotation system. If and when the Company’s securities are traded, the trading
      price could decline due to any of these risks, and an investor may lose all
      or
      part of his investment. Some of these factors have affected Fuqi’s financial
      condition and operating results in the past or are currently affecting the
      Company. This filing also contains forward-looking statements that involve
      risks
      and uncertainties. The Company’s actual results could differ materially from
      those anticipated in these forward-looking statements as a result of certain
      factors, including the risks faced described below and elsewhere in this Form
      10-K.





**RISKS
      RELATED TO THE COMPANY'S OPERATIONS**





**Jewelry
      purchases are discretionary, may be particularly affected by adverse trends
      in
      the general economy, and a decline in either will make it more difficult to
      generate revenue.**





The
      success of the Company’s operations depends to a significant extent upon a
      number of factors relating to discretionary consumer spending in China. These
      factors include economic conditions and perceptions of such conditions by
      consumers, employment, the rate of change in employment, the level of consumers’
disposable income, business conditions, interest rates, consumer debt levels,
      availability of credit and levels of taxation for the economy as a whole and
      in
      regional and local markets in China where the Company manufactures and sells
      its
      products. There can be no assurance that consumer spending on jewelry will
      not
      be adversely affected by changes in general economic conditions in China and
      globally.





**Most
      of Fuqi’s sales are of products that include gold, platinum, precious metals and
      other commodities, and fluctuations in the availability and pricing of
      commodities would adversely impact its ability to obtain and produce products
      at
      favorable prices.**





The
      jewelry industry generally is affected by fluctuations in the price and supply
      of diamonds, gold, platinum and, to a lesser extent, other precious and
      semi-precious metals and stones. In the past, Fuqi has not hedged its
      requirement for gold, platinum or other raw materials through the use of
      options, forward contracts or outright commodity purchasing, but it intends
      to
      engage in such hedging in the future, depending on its available resources.
      A
      significant disruption in the Company’s supply of gold, platinum, and other
      commodities could decrease its production and shipping levels, materially
      increase its operating costs and materially adversely affect its profit margins.
      Shortages of gold, platinum, and other commodities or interruptions in
      transportation systems, labor strikes, work stoppages, war, acts of terrorism
      or
      other interruptions to or difficulties in the employment of labor or
      transportation in the markets in which the Company purchases its raw materials
      and may adversely affect its ability to maintain production of its products
      and
      sustain profitability. If the Company was to experience a significant or
      prolonged shortage of gold, platinum, and other commodities, the Company would
      be unable to meet its production schedules and to ship products to its customers
      in timely fashion, which would adversely affect its sales, margins and customer
      relations.





**Fuqi
      has only been engaged in the manufacture and wholesale distribution of jewelry
      products and has no experience or operating history with respect to its intended
      entry into the retail jewelry market. Fuqi’s attempt to enter the retail market
      may fail, divert management’s attention and adversely affect its operating
      results.**





Fuqi
      has
      derived nearly all of its net revenues from the production and wholesale
      distribution of its jewelry products. The Company intends to devote management
      time and resources to establishing retail stores throughout China. The Company
      has no experience or operating history in the retail market, and its attempt
      to
      enter the market could fail and use substantial resources. Because the retail
      industry is new to the Company, it may be unable to effectively assess or
      address the evolving risks and difficulties present in this market, which could
      threaten its capacity to continue overall operations successfully in the
      future.




8





**Fuqi
      may need to raise additional funds in the future. These funds may not be
      available on acceptable terms or at all, and, without additional funds, Fuqi
      may
      not be able to maintain or expand its business.**




Fuqi
      expects to expend significant resources to commence its planned retail
      distribution of its manufactured jewelry in China. The Company will require
      substantial additional funds in order to finance its planned retail
      distribution, fund operating expenses, and to develop manufacturing, marketing
      and sales capabilities. Fuqi also expects to require additional funds to shift
      the focus of its primary product from gold to platinum. Without raising
      additional funds, it may not be able to meet these goals. The Company may seek
      additional funding through public or private financing or through collaborative
      arrangements with strategic partners.





You
      should also be aware that in the future:





·
            Fuqi
                cannot be certain that additional capital will be available on favorable
                terms, if at all;




·
            any
                available additional financing may not be adequate to meet the Company’s
                goals; and




·
            any
                equity financing would result in dilution to shareholders.




If
      the
      Company cannot raise additional funds when needed, or on acceptable terms,
      it
      may not be able to effectively execute its growth strategy (including entering
      the retail market), take advantage of future opportunities, or respond to
      competitive pressures or unanticipated requirements. In addition, the Company
      may be required to scale back or discontinue its production and development
      program, or obtain funds through strategic alliances that may require it to
      relinquish certain rights.




**Fuqi’s
      ability to maintain or increase its revenue could be harmed if Fuqi is unable
      to
      strengthen and maintain a brand image.**





Fuqi
      believes that primary factors in determining customer buying decisions in
      China’s jewelry sector include customer price, confidence in the merchandise
      sold, and the level and quality of customer service. The ability to
      differentiate its products from competitors by Fuqi’s brand based marketing
      strategies is a factor in attracting consumers, and if its strategy and efforts
      to promote its brand, such as beauty contest sponsorship, fails to garner brand
      recognition, its ability to generate revenue may suffer. If Fuqi is unable
      to
      differentiate its products, its ability to sell its products wholesale and
      its
      planned sale of products retail will be adversely affected. I f
      the
      Company fails to anticipate, identify or react appropriately or in a timely
      manner to customer buying decisions, the Company could experience reduced
      consumer acceptance of its products, a diminished brand
      image, higher markdowns, and costs to recast overstocked jewelry. These factors
      could result in lower selling prices and sales volumes for the Company’s
      products, which could adversely affect its financial condition and results
      of
      operations. This risk is particularly acute because the Company relies on a
      limited demographic customer base for a large percentage of its sales.





**If
      the Company is not able to adapt to changing jewelry trends in China, its
      inventory may be overstocked and the Company may be forced to reduce the price
      of its overstocked jewelry or incur the cost to recast it into new jewelry.**





The
      Company depends on consumer fashions, preferences for jewelry and the demand
      for
      particular products in China. Jewelry design trends in China can change rapidly,
      as evidenced by the recent increase in the consumption of platinum jewelry
      in
      the Chinese market. The ability to predict accurately future changes in taste,
      respond to changes in consumer preferences, carry the inventory demanded by
      customers, deliver the appropriate quality, price products correctly and
      implement effective purchasing procedures, all have an important influence
      on
      determining sales performance and achieved gross margin. If the Company fails
      to
      anticipate, identify or react appropriately to changes in styles and trends,
      it
      could experience excess inventories, higher than normal markdowns or an
      inability to sell its products. If such a situation exists, the Company may
      need
      to incur additional costs to recast its products to fit the demand recovering
      only the raw material with all labor invested in the product lost.




9





**The
      Company’s failure to manage growth effectively could have an adverse effect on
      its employee efficiency, product quality, working capital levels, and results
      of
      operations.**




The
      Company intends to conduct a growth strategy into retail distribution of its
      products that it hopes will result in rapid growth, which will place significant
      demands on its managerial, operational and financial resources. Any
      significant growth in the market for the Company’s current wholesale business
      and its planned retail distribution would require it to expand its employee
      base
      for managerial, operational, financial, and other purposes. During any growth,
      the Company may face problems related to its
      operational and financial systems and controls, including quality control and
      delivery and service capabilities. The Company would also need to continue
      to
      expand, train and manage its employee base. The
      Company currently has approximately 600 full-time employees, and, at that size,
      a rapid increase in the number of its employees would be difficult to manage.
      Continued future growth will impose significant added responsibilities upon
      the
      members of management to identify, recruit, maintain, integrate, and motivate
      new employees. If the Company is able to launch its retail business, some of
      these employees would need retail experience, which it currently have none.





Aside
      from increased difficulties in the management of human resources, the Company
      may also encounter working capital issues, as it will need increased liquidity
      to finance the purchases of raw materials and supplies, development of new
      products, establishment of new retail stores, and the hiring of additional
      employees. The Company’s failure to manage growth effectively may lead to
      operational and financial inefficiencies that will have a negative effect on
      its
      profitability. The
      Company cannot assure you that it will be able to timely and effectively meet
      that demand and maintain the quality standards required by its existing and
      potential customers and licensees.





**Fuqi
      is dependent on certain key personnel and loss of these key personnel could
      have
      a material adverse effect on its business, financial condition and results
      of
      operations.**




Fuqi’s
      success is, to a certain extent, attributable to its management, sales and
      marketing, and operational and technical expertise of certain key personnel.
      Each of Fuqi’s named executive officers, including its Chief Executive Officer
      Yu Kwai Chong, performs key functions in the operation of its business. The
      Company does not have employment agreements with such key personnel, and there
      can be no assurance that the Company will be able to retain these officers
      or
      that such personnel may not receive and/or accept competing offers of
      employment. The loss of a significant number of these employees could have
      a
      material adverse effect upon the Company’s business, financial condition, and
      results of operations.





**Fuqi
      is controlled by one shareholder, whose interests may differ from those of
      other
      shareholders. As a result, Fuqi could be prevented from entering into
      potentially beneficial transactions if they conflict with its major
      shareholder’s interests.**





As
      of the
      close of the Share Exchange Transaction, Mr. Chong, Fuqi’s Chief Executive
      Officer and its largest shareholder, beneficially owns or controls approximately
      91.2% of the Company’s outstanding shares. Mr. Chong was the former sole
      stockholders of Fuqi BVI. Mr. Chong possesses significant influence over the
      Company, giving him the ability, among other things, to elect a majority of
      the
      Board of Directors and to approve significant corporate transactions. Such
      stock
      ownership and control may also have the effect of delaying or preventing a
      future change in control, impeding a merger, consolidation, takeover or other
      business combination or discourage a potential acquirer from making a tender
      offer or otherwise attempting to obtain control of the Company. Without the
      consent of Mr. Chong, the Company could be prevented from entering into
      potentially beneficial transactions if they conflict with the Company’s major
      shareholder’s interests. The interests of this shareholder may differ from the
      interests of the Company’s other shareholders.





**RISKS
      RELATED TO DOING BUSINESS IN CHINA**





**All
      of Fuqi’s assets are located in China and all of its revenues are derived from
      its operations in China, and changes in the political and economic policies
      of
      the PRC government could have a significant impact upon what business Fuqi
      may
      be able to conduct in the PRC and accordingly on the results of its operations
      and financial condition.**




10





Fuqi’s
      business operations may be adversely affected by the current and future
      political environment in the PRC. The PRC has operated as a socialist state
      since the mid-1900s and is controlled by the Communist Party of China. The
      Chinese government exerts substantial influence and control over the manner
      in
      which Fuqi must conduct its business activities. The PRC has only permitted
      provincial and local economic autonomy and private economic activities since
      1988. The government of the PRC has exercised and continues to exercise
      substantial control over virtually every sector of the Chinese economy,
      including the jewelry industry, through regulation and state ownership. Fuqi’s
      ability to operate in China may be adversely affected by changes in Chinese
      laws
      and regulations, including those relating to taxation, import and export
      tariffs, raw materials, environmental regulations, land use rights, property
      and
      other matters. Under the current government leadership, the government of the
      PRC has been pursuing economic reform policies that encourage private economic
      activity and greater economic decentralization. There is no assurance, however,
      that the government of the PRC will continue to pursue these policies, or that
      it will not significantly alter these policies from time to time without notice.





**Fuqi’s
      operations are subject to PRC laws and regulations that are sometimes vague
      and
      uncertain. Any changes in such PRC laws and regulations, or the interpretations
      thereof, may have a material and adverse effect on Fuqi’s
      business.**





The
      PRC's
      legal system is a civil law system based on written statutes. Unlike the common
      law system prevalent in the United States, decided legal cases have little
      value
      as precedents in China. There are substantial uncertainties regarding the
      interpretation and application of PRC laws and regulations, including but not
      limited to the laws and regulations governing the Company’s business, or the
      enforcement and performance of the Company’s arrangements with customers in the
      event of the imposition of statutory liens, death, bankruptcy and criminal
      proceedings. The Chinese government has been developing a comprehensive system
      of commercial laws, and considerable progress has been made in introducing
      laws
      and regulations dealing with economic matters such as foreign investment,
      corporate organization and governance, commerce, taxation and trade. However,
      because these laws and regulations are relatively new, and because of the
      limited volume of published cases and judicial interpretation and their lack
      of
      force as precedents, interpretation and enforcement of these laws and
      regulations involve significant uncertainties. New laws and regulations that
      affect existing and proposed future businesses may also be applied
      retroactively. The Company is considered a foreign person or foreign funded
      enterprise under PRC laws, and as a result, the Company is required to comply
      with PRC laws and regulations. The Company cannot predict what effect the
      interpretation of existing or new PRC laws or regulations may have on its
      businesses. If the relevant authorities find the Company in violation of PRC
      laws or regulations, they would have broad discretion in dealing with such
      a
      violation, including, without limitation:





·
            levying
                fines;




·
            revoking
                the Company’s business, other licenses or
                authorities;




·
            requiring
                that the Company restructure its ownership or operations;
                and




·
            requiring
                that the Company discontinue some or all of its
                business.




**The
      scope of the Company’s business license in China is limited, and the Company may
      not expand or continue its business without government approval and renewal,
      respectively.**




Fuqi
      is a
      wholly-owned foreign enterprise, commonly known as a WOFE. A WOFE can only
      conduct business within its approved business scope, which ultimately appears
      on
      the business license. Fuqi’s license permits it to design, manufacture, sell and
      market jewelry products to department stores throughout the PRC. Any amendment
      to the scope of the Company’s business requires further application and
      government approval. In order for Fuqi to expand its business beyond the scope
      of its license, Fuqi will be required to enter into a negotiation with the
      authorities for the approval to expand the scope of its business. The Company
      cannot assure you that it will be able to obtain the necessary government
      approval for any change or expansion of its business.





**Inflation
      in China could negatively affect the Company’s profitability and
      growth.**





While
      the
      Chinese 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. During the past decade, the rate of inflation in China has been
      as
      high as approximately 20% and China has experienced deflation as low as minus
      2%. If prices for the Company’s products rise at a rate that is insufficient to
      compensate for the rise in the costs of supplies such as raw materials, it
      may
      have an adverse effect on the Company’s 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. In October 2004,
      the
      People's Bank of China, the PRC's central bank, raised interest rates for the
      first time in nearly a decade and indicated in a statement that the measure
      was
      prompted by inflationary concerns in the Chinese economy. In April 2006, the
      People’s Bank of China raised the interest rate again. Repeated rises in
      interest rates by the central bank would likely slow economic activity in China
      which could, in turn, materially increase the Company’s costs and also reduce
      demand for its products.




11





**Recent
      PRC regulations relating to acquisitions of PRC companies by foreign entities
      may create regulatory uncertainties that could restrict or limit the Company’s
      ability to operate, including its ability to pay dividends.**





The
      PRC
      State Administration of Foreign Exchange, or “ *SAFE* ,”
issued
      a public notice in January 2005 concerning foreign exchange regulations on
      mergers and acquisitions in China. The public notice states that if an offshore
      company controlled by PRC residents intends to acquire a PRC company, such
      acquisition will be subject to strict examination by the relevant foreign
      exchange authorities. The public notice also states that the approval of the
      relevant foreign exchange authorities is required for any sale or transfer
      by
      the PRC residents of a PRC company's assets or equity interests to foreign
      entities for equity interests or assets of the foreign entities.





In
      April
      2005, SAFE issued another public notice further explaining the January notice.
      In accordance with the April notice, if an acquisition of a PRC company by
      an
      offshore company controlled by PRC residents has been confirmed by a Foreign
      Investment Enterprise Certificate prior to the promulgation of the January
      notice, the PRC residents must each submit a registration form to the local
      SAFE
      branch with respect to their respective ownership interests in the offshore
      company, and must also file an amendment to such registration if the offshore
      company experiences material events, such as changes in the share capital,
      share
      transfer, mergers and acquisitions, spin-off transaction or use of assets in
      China to guarantee offshore obligations. The April notice also provides that
      failure to comply with the registration procedures set forth therein may result
      in restrictions on any of the Company’s PRC resident shareholders and Fuqi BVI
      and Fuqi China. Pending the promulgation of detailed implementation rules,
      the
      relevant government authorities are reluctant to commence processing any
      registration or application for approval required under the SAFE
      notices.





In
      addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
      State-owned Assets Supervision and Administration Commission of the State
      Council, State Administration of Taxation, State Administration for Industry
      and
      Commerce, China Securities Regulatory Commission and SAFE, amended and released
      the *Provisions
      for Foreign Investors to Merge and Acquire Domestic Enterprises* ,
      new
      foreign-investment rules which took effect September 8, 2006, superseding much,
      but not all, of the guidance in the prior SAFE circulars. These new rules
      significantly revise China’s regulatory framework governing onshore-offshore
      restructurings and how foreign investors can acquire domestic enterprises.
      These
      new rules signify greater PRC government attention to cross-border merger,
      acquisition and other investment activities, by confirming MOFCOM as a key
      regulator for issues related to mergers and acquisitions in China and requiring
      MOFCOM approval of a broad range of merger, acquisition and investment
      transactions. Further, the new rules establish reporting requirements for
      acquisition of control by foreigners of companies in key industries, and
      reinforce the ability of the Chinese government to monitor and prohibit foreign
      control transactions in key industries.




These
      new
      rules may significantly affect the means by which offshore-onshore
      restructurings are undertaken in China in connection with offshore private
      equity and venture capital financings, mergers and acquisitions. It is expected
      that such transactional activity in China in the near future will require
      significant case-by-case guidance from MOFCOM and other government authorities
      as appropriate. It is anticipated that application of the new rules will be
      subject to significant administrative interpretation, and the Company will
      need
      to closely monitor how MOFCOM and other ministries apply the rules to ensure
      its
      domestic and offshore activities continue to comply with PRC law. Given the
      uncertainties regarding interpretation and application of the new rules, the
      Company may need to expend significant time and resources to maintain
      compliance.




12




The
      Company’s business operations or future strategy could be adversely affected by
      the interpretations and implementation of the SAFE notices and the new rules.
      For example, the Company may be subject to more stringent review and approval
      process with respect to its foreign exchange activities.





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




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





**We
      had enjoy certain preferential tax concessions and loss of these preferential
      tax concessions may cause our tax liabilities to increase and our profitability
      to decline.**





The
      Company’s subsidiary, Fuqi China, enjoyed a reduced enterprise income tax rate
      of 15%, which is granted to all enterprises operating in Shenzhen Special
      Economic Zone, and prior to 2006, the Company was under the preferential income
      tax rate of 7.5% in 2005 and 2004 due to its status of being a new business.
      That status expired effective January 1, 2006. The expiration of the
      preferential tax treatment will increase the Company’s tax liabilities and
      reduce its profitability. Additionally,
      the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007.
      Under the EIT Law, effective January 1, 2008, China will adopt a uniform tax
      rate of 25.0% for all enterprises (including foreign-invested enterprises)
      and
      cancel several tax incentives enjoyed by foreign-invested enterprises. Since
      the
      PRC government has not announced implementation measures for the transitional
      policy with regards to such preferential tax rates, the Company cannot
      reasonably estimate the financial impact of the new tax law to it at this time.
      Further, any future increase in the enterprise income tax rate applicable to
      the
      Company or other adverse tax treatments, could increase the Company’s tax
      liabilities and reduce our net income.





**Any
      recurrence of severe acute respiratory syndrome, or SARS, the Avian Flu, or
      another widespread public health problem, in the PRC could adversely affect
      the
      Company’s operations.**





A
      renewed
      outbreak of SARS, the Avian Flu or another widespread public health problem
      in
      China, where all of the Company’s manufacturing facilities are located and where
      all of its sales occur, could have a negative effect on its operations. The
      Company’s business is dependent upon its ability to continue to manufacture its
      products. Such an outbreak could have an impact on the Company’s operations as a
      result of:





·
            quarantines
                or closures of some of its manufacturing facilities, which would
                severely
                disrupt the Company’s operations,




·
            the
                sickness or death of the Company’s key officers and employees,
                and




·
            a
                general slowdown in the Chinese
                economy.




Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could adversely affect the Company’s operations.





**Because
      the Company’s business is located in the PRC, it may have difficulty
      establishing adequate management, legal and financial controls, which the
      Company is required to do in order to comply with U.S. securities
      laws.**





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. Most of the Company’s middle and top management staff are not educated
      and trained in the Western system. In addition, the Company may need to rely
      on
      a new and developing communication infrastructure to efficiently transfer its
      information from retail nodes to the head quarter. In addition, the Company
      may
      have difficulty in hiring and retaining a sufficient number of qualified
      employees to work in the PRC. As a result of these factors, the Company 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, the Company 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 the Company’s internal controls which
      could impact the reliability of its financial statements and prevent it 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 the Company’s business.




13





**You
      may experience difficulties in effecting service of legal process, enforcing
      foreign judgments or bringing original actions in China based upon U.S. laws,
      including the federal securities laws or other foreign laws against the Company
      or its management.**





All
      of
      the Company’s current operations, including the manufacturing and distribution
      of jewelry, are conducted in China. Moreover, most of the Company’s directors
      and officers are nationals and residents of China. All or substantially all
      of
      the assets of these persons are located outside the United States and in the
      PRC. As a result, it may not be possible to effect service of process within
      the
      United States or elsewhere outside China upon these persons. In addition,
      uncertainty exists as to whether the courts of China would recognize or enforce
      judgments of U.S. courts obtained against the Company or such officers and/or
      directors predicated upon the civil liability provisions of the securities
      laws
      of the United States or any state thereof, or be competent to hear original
      actions brought in China against the Company or such persons predicated upon
      the
      securities laws of the United States or any state thereof.


**R****ISKS****R****ELATED****T****O****T****HE****C****OMPANY’S****C****APITAL****S****TRUCTURE**





**There
      is no current trading market for the Company’s common stock, and there is no
      assurance of an established public trading market, which would adversely affect
      the ability of its investors to sell their securities in the public
      market.**





The
      Company’s common stock is not currently listed or quoted for trading on any
      national securities exchange or national quotation system. In the future, the
      Company intends to apply for the listing of its common stock on the NASDAQ
      Global Market, or NASDAQ. There is no guarantee that securities will be granted
      approval for listing on the NASDAQ. If the Company fails to obtain a listing
      on
      the NASDAQ, it may seek quotation on the OTC Bulletin Board. The NASD has
      enacted changes that limit quotations on the OTC Bulletin Board to securities
      of
      issuers that are current in their reports filed with the Securities and Exchange
      Commission. The effect on the OTC Bulletin Board of these rule changes and
      other
      proposed changes cannot be determined at this time. The OTC Bulletin Board
      is an
      inter-dealer, over-the-counter market that provides significantly less liquidity
      than the NASDAQ or American Stock Exchange. Quotes for stocks included on the
      OTC Bulletin Board are not listed in the financial sections of newspapers as
      are
      those for the NASDAQ or American Stock Exchange. Therefore, prices for
      securities traded solely on the OTC Bulletin Board may be difficult to obtain
      and holders of common stock may be unable to resell their securities at or
      near
      their original offering price or at any price.





**The
      Company** **may not be able to achieve the benefits expected to result from the Share
      Exchange Transaction, and, instead, its management’s diverted attention could
      materially and adversely affect its daily operations, its stock price and
      operating results.**




On
      November 20, 2006, the Company entered into the Share Exchange Agreement with
      the sole shareholder of Fuqi BVI pursuant to which the Company agreed to acquire
      all of the issued and outstanding share capital of Fuqi BVI in exchange for
      newly issued shares of the Company’s common stock. On November 22, 2006, the
      Share Exchange closed, and Fuqi BVI became the Company’s wholly-owned subsidiary
      and the Company’s sole business operation became that of Fuqi BVI and its
      wholly-owned subsidiary, Fuqi China. Also, the management and directors of
      Fuqi
      BVI became the management and directors of the Company upon the closing of
      the
      Share Exchange. In addition, the Company changed its corporate name from “VT
      Marketing Services, Inc.” to “Fuqi International, Inc.” and reincorporated from
      the State of Nevada to the State of Delaware.




14





The
      Share
      Exchange was effected for various reasons, including:





·
            access
                to the capital markets of the United
                States;




·
            the
                increased market liquidity expected to result from exchanging stock
                in a
                private company for securities of a public company that may eventually
                be
                traded;




·
            the
                ability to use registered securities to make acquisition of assets
                or
                businesses;




·
            increased
                visibility in the financial
                community;




·
            enhanced
                access to the capital markets;




·
            improved
                transparency of operations; and




·
            perceived
                credibility and enhanced corporate image of being a publicly traded
                company.





There
      can
      be no assurance that any of the anticipated benefits of the Share Exchange
      will
      be realized in respect to the Company’s new business operations. In addition,
      the attention and effort devoted to achieving the benefits of the Share Exchange
      and attending to the obligations of being a public company, such as reporting
      requirements and securities regulations, could significantly divert management’s
      attention from other important issues, which could materially and adversely
      affect the Company’s operating results or stock price in the
      future.





**If** **the
      Company** **fails to maintain effective internal controls over financial reporting, the
      price of its common stock may be adversely affected.**





The
      Company’s internal control over financial reporting may have weaknesses and
      conditions that need to be addressed, the disclosure of which may have an
      adverse impact on the price of the Company’s common stock. The Company is
      required to establish and maintain appropriate internal controls over financial
      reporting. Failure to establish those controls, or any failure of those controls
      once established, could adversely impact Fuqi’s public disclosures regarding the
      Company’s business, financial condition or results of operations. The Company’s
      failure of these controls could also prevent it from maintaining accurate
      accounting records and discovering accounting errors and financial frauds.
      In
      addition, management’s assessment of internal controls over financial reporting
      may identify weaknesses and conditions that need to be addressed in the
      Company’s internal controls over financial reporting or other matters that may
      raise concerns for investors. Any actual or perceived weaknesses and conditions
      that need to be addressed in Fuqi’s internal control over financial reporting,
      disclosure of management’s assessment of the Company’s internal controls over
      financial reporting or disclosure of its public accounting firm’s attestation to
      or report on management’s assessment of its internal controls over financial
      reporting may have an adverse impact on the price of its common
      stock.





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




Rules
      adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
      require annual assessment of the Company’s internal control over financial
      reporting, and attestation of this assessment by the Company’s independent
      registered public accountants. The SEC extended the compliance dates for
      non-accelerated filers, as defined by the SEC. Accordingly, the Company believes
      that the annual assessment of its internal controls requirement will first
      apply
      to its annual report for the 2007 fiscal year and the attestation requirement
      of
      management’s assessment by the Company’s independent registered public
      accountants will first apply to its annual report for the 2008 fiscal year.
      The
      standards that must be met for management to assess the internal control over
      financial reporting as effective are new and complex, and require significant
      documentation, testing and possible remediation to meet the detailed standards.
      The Company may encounter problems or delays in completing activities necessary
      to make an assessment of its internal control over financial reporting. In
      addition, the attestation process by the Company’s independent registered public
      accountants is new and it may encounter problems or delays in completing the
      implementation of any requested improvements and receiving an attestation of
      the
      Company’s assessment by its independent registered public accountants. If the
      Company cannot assess its internal control over financial reporting as
      effective, or its independent registered public accountants are unable to
      provide an unqualified attestation report on such assessment, investor
      confidence and share value may be negatively impacted.




15




**The
      Company’s common stock may be considered a “penny stock,” and thereby be subject
      to additional sale and trading regulations that may make it more difficult
      to
      sell.**





The
      Company’s common stock, which is not currently listed or quoted for trading, may
      be considered to be a “penny stock” if it does not qualify for one of the
      exemptions from the definition of “penny stock” under Section 3a51-1 of the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”) once, and
      if, it starts trading. The Company’s common stock may be a “penny stock” if it
      meets one or more of the following conditions (i) the stock trades at a price
      less than $5.00 per share; (ii) it is NOT traded on a “recognized” national
      exchange; (iii) it is NOT listed on the NASDAQ Capital Market, or even if so,
      has a price less than $5.00 per share; or (iv) is issued by a company that
      has
      been in business less than three years with net tangible assets less than $5
      million.





The
      principal result or effect of being designated a “penny stock” is that
      securities broker-dealers participating in sales of the Company’s common stock
      will be subject to the “penny stock” regulations set forth in Rules 15-2 through
      15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires
      broker-dealers dealing in penny stocks to provide potential investors with
      a
      document disclosing the risks of penny stocks and to obtain a manually signed
      and dated written receipt of the document at least two business days before
      effecting any transaction in a penny stock for the investor's account. Moreover,
      Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
      investor for transactions in such stocks before selling any penny stock to
      that
      investor. This procedure requires the broker-dealer to (i) obtain from the
      investor information concerning his or her financial situation, investment
      experience and investment objectives; (ii) reasonably determine, based on that
      information, that transactions in penny stocks are suitable for the investor
      and
      that the investor has sufficient knowledge and experience as to be reasonably
      capable of evaluating the risks of penny stock transactions; (iii) provide
      the
      investor with a written statement setting forth the basis on which the
      broker-dealer made the determination in (ii) above; and (iv) receive a signed
      and dated copy of such statement from the investor, confirming that it
      accurately reflects the investor's financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult and time consuming for holders of the Company’s common stock to resell
      their shares to third parties or to otherwise dispose of them in the market
      or
      otherwise.





**The
      ability of the Company’s Chinese operating subsidiary to pay dividends may be
      restricted due to foreign exchange control regulations of
      China.**




The
      ability of the Company’s Chinese operating subsidiary to pay dividends may be
      restricted due to the foreign exchange control policies and availability of
      cash
      balance of the Chinese operating subsidiary. Because substantially all of the
      Company’s operations are conducted in China and its revenues are generated in
      China, all of its revenue being earned and currency received are denominated
      in
      Renminbi (RMB). RMB is subject to the exchange control regulation in China,
      and,
      as a result, the Company may be unable to distribute any dividends outside
      of
      China due to PRC exchange control regulations that restrict its ability to
      convert RMB into US Dollars.





**Fuqi** **does not foresee paying cash dividends in the foreseeable future and, as a
      result, its investors sole source of gain, if any, will depend on capital
      appreciation, if any.**





Fuqi
      does
      not plan to declare or pay any cash dividends on its shares of common stock
      in
      the foreseeable future and the Company currently intend to retain any future
      earnings for funding growth. The Company’s wholly-owned subsidiary, Fuqi China,
      prior to merger with the Company, paid
      cash
      dividends of $2,739,726, $5,421,687 and $3,975,904 during the years ended
      December 31, 2006, 2005 and 2004, respectively. Each of these
      dividends was paid by the Company’s subsidiary to Mr. Chong, as its sole
      stockholder, which offset partially the amounts due to the Company’s subsidiary
      by Mr. Chong. Fuqi currently has no intention to declare dividends in the
      foreseeable future. As a result, you should not rely on an investment in the
      Company’s securities if you require dividend income. Capital appreciation, if
      any, of the Company’s shares may be your sole source of gain for the foreseeable
      future. Moreover, you may not be able to resell your shares in Fuqi at or above
      the price you paid for them.




**ITEM
      1B. UNSOLVED STAFF COMMENTS**





Not
      applicable.




16




**ITEM
      2. PROPERTIES** ****





Fuqi’s
      principal executive offices are located at 5/F., Block 1, Shi Hua Industrial
      Zone, Cui Zhu Road North, Shenzhen 518019, China. The Company owns approximately
      15,000 square feet of office and showroom space at this location.





The
      Company’s jewelry production facility is located in Shenzhen, China and,
      including office spaces, consists of approximately 66,000 square feet of
      building space. The Company owns approximately 33,000 square feet of this space
      and the remainder is leased from a landlord, Guanghong Jin Tong Hai Enterprises
      Ltd. The Company has acquired the space for production facility, office and
      show
      room located at 5/F., Block 1, Shi Hua Industrial Zone during 2005.





In
      July
      2005, Fuqi entered into a leasing agreement with Shenzhen Jin Tong Hai
      Enterprises Ltd. to lease the production plan on 4th floor Block 1, Shi Hua
      Industrial Park for a approximately $112,000 per annum, from July 2005 to June
      2010. The lease agreement will terminate in June 2010. The Company has the
      right
      to renew the lease prior to its termination. At the time of renewal, the lease
      amount will be renegotiated, and based on the current industrial leasing market,
      the Company expects that the lease amount will be increased by approximately
      35%
      in the year of 2010.




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





Fuqi
      is
      not involved in any material legal proceedings, nor is it aware of any potential
      or threatened material litigation, or any asserted claims that may result in
      material litigation or other legal proceedings.




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




On
      December 8, 2006, prior to the effective registration of the Company’s common
      stock under Section 12(g) of the Securities Exchange Act of 1934, as amended,
      the Board of Directors of the Company resolved to take action by unanimous
      written consent to reincorporate the Company from the State of Nevada to the
      State of Delaware and to change its name from “VT Marketing Services, Inc.” to
“Fuqi International, Inc.,” effective December 8, 2006. The reincorporation and
      name change was approved by the written consent of the majority stockholder
      of
      the Company that holds 91.2% of its voting capital stock.




17




**PART
      II**




ITEM
      5.
      MARKET FOR REGISTRANT’S COMMON STOCK,RELATED  **STOCKHOLDER**  **MATTERS**  **AND**  **ISSUER** **PURCHASES
      OF EQUITY SECURITIES**





**Market
      Information**





The
      shares of common stock of the Company are not currently listed or quoted for
      trading on any national securities exchange or national quotation system. The
      Company intends to apply for listing of its common stock on the
      NASDAQ.





If
      and
      when the Company’s common stock is listed or quoted for trading, the price of
      its common stock will likely fluctuate in the future. The stock market in
      general has experienced extreme stock price fluctuations in the past few years.
      In some cases, these fluctuations have been unrelated to the operating
      performance of the affected companies. Many companies have experienced dramatic
      volatility in the market prices of their common stock. The Company believes
      that
      a number of factors, both within and outside its control, could cause the price
      of the Company’s common stock to fluctuate, perhaps substantially. Factors such
      as the following could have a significant adverse impact on the market price
      of
      its common stock:




·
            The
                Company’s ability to obtain additional financing and, if available, the
                terms and conditions of the
                financing;





·
            The
                Company’s financial position and results of
                operations;





·
            Concern
                as to, or other evidence of, the reliability and efficiency of the
                Company’s proposed products and services or its competitors’ products and
                services;





·
            Announcements
                of innovations or new products or services by the Company or its
                competitors;





·
            Federal
                and state governmental regulatory actions and the impact of such
                requirements on the Company’s
                business;





·
            The
                development of litigation against the
                Company;





·
            Period-to-period
                fluctuations in the Company’s operating
                results;





·
            Changes
                in estimates of the Company’s performance by any securities
                analysts;





·
            The
                issuance of new equity securities pursuant to a future offering or
                acquisition;





·
            Changes
                in interest rates;





·
            Competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital
                commitments;





·
            Investor
                perceptions of the Company; and





·
            General
                economic and other national
                conditions.





**Recent
      Sales of Unregistered Securities**





On
      September 17, 2004, and in accordance with the Visitalk.com’s implementation of
      the Chapter 11 reorganization plan (as previously defined, the “ *Visitalk
      Plan* ”),
      the
      Company issued to VCC 324,044 shares of common stock and common stock purchase
      warrants allowing holders to purchase additional shares of its common stock
      (the
“Plan Warrants”) to acquire certain technology rights from VCC. The Visitalk
      Plan further authorized VCC to distribute 54,837 of the 324,044 shares of common
      stock to 240 creditors of Visitalk.com and all of the Plan Warrants to 645
      claimants of Visitalk.com, in accordance with the Visitalk Plan. Section 1145
      of
      the Bankruptcy Code exempts the original issuance of securities under a plan
      of
      reorganization (as well as subsequent distributions by the distribution agent)
      from registration under the Securities Act and state securities laws. Under
      Section 1145, the issuance of securities pursuant to a plan of reorganization
      is
      exempt from registration if three principal requirements are satisfied:





(1)
            the
                securities must be issued under a plan of reorganization by a debtor,
                its
                successor or an affiliate participating in a joint plan with the
                debtor;





(2)
            the
                recipients of the securities must hold a claim against the debtor
                or such
                affiliate, an interest in the debtor or such affiliate, or a claim
                for an
                administrative expense against the debtor or such affiliate; and




18


(3)
            the
                securities must be issued entirely in exchange for the recipient's
                claim
                against or interest in the debtor or such affiliate or "principally"
                in
                such exchange and "partly" for cash or property.





The
      Company believes that the offer and sale of the common stock and the Plan
      Warrants, in accordance with the Visitalk Plan, satisfy the requirements of
      Section 1145(a) of the Bankruptcy Code and, therefore, are exempt from
      registration under the Securities Act and state securities laws.





On
      July
      21, 2006, pursuant to Stock Purchase Agreements, the Company issued a total
      of
      1,460,011 shares of common stock (post Reverse Split) to two investors for
      an
      aggregate amount of $67,500. On July 21, 2006, it issued 36,617 shares of common
      stock to VCC in connection with the Stock Purchase Agreements. The securities
      were offered and issued to investors under the Stock Purchase Agreements in
      reliance upon exemptions from registration pursuant to Section 4(2) under the
      Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. The
      investors qualified as an accredited investor (as defined by Rule 501 under
      the
      Securities Act of 1933, as amended). On July 21, 2006, the Company also
      issued 1,317 shares of common stock to 134 unaffiliated shareholders under
      an
      anti-dilution arrangement in the Visitalk Plan. The
      Company believes that the offer and sale of the common stock, in accordance
      with
      the Visitalk Plan, satisfy the requirements of Section 1145(a) of the Bankruptcy
      Code and, therefore, are exempt from registration under the Securities Act
      and
      state securities laws.




On
      November 22, 2006, pursuant to an Exchange Agreement, the Company acquired
      all
      of the outstanding capital stock of Fuqi BVI in a stock for stock exchange.
      The
      Company issued a total of 18,886,666 shares of common stock to Yu Kwai Chong,
      who was the sole shareholder of Fuqi BVI, in exchange for all of the issued
      and outstanding capital of Fuqi BVI. The securities were offered and issued
      to
      Yu Kwai Chong in reliance upon exemptions from registration pursuant to Section
      4(2) under the Securities Act of 1933, as amended, and Rule 506 promulgated
      thereunder. Yu Kwai Chong qualified as an accredited investor (as defined by
      Rule 501 under the Securities Act of 1933, as amended).





**Stockholders**





As
      of
      December 31, 2006, the Company had approximately 208 common stockholders. In
      addition, the Company has 330 holders of its Plan Warrants and no option
      holders.





**Rule
      144**





The
      Company had 20,715,384 shares of common stock currently issued and outstanding
      as of the close of the Share Exchange Transaction. In general, under
      Rule 144 under the Securities Act of 1933, as amended (the "Securities
      Act"), a person who has beneficially owned shares of the Company’s common stock
      for at least one year would be entitled to sell within any three-month period
      a
      number of shares that does not exceed the greater of:




·
            1%
                of the number of shares of its common stock then outstanding, which
                will
                equal approximately 207,241 shares of the Company’s common stock;
                or  ·
            the
                average weekly trading volume of its common stock, if and when the
                Company’s common stock is traded publicly traded, during the four calendar
                weeks preceding the filing of a notice on Form 144 with respect to
                the sale.




Sales
      under Rule 144 are also subject to manner of sale provisions and notice
      requirements and to the availability of current public information about the
      Company for at least 90 days.




Under
      Rule 144(k) under the Securities Act, a person who is not deemed to have
      been one of the Company’s affiliates at any time during the 90 days preceding a
      sale, and who has beneficially owned the shares proposed to be sold for at
      least
      two years is entitled to sell the shares without complying with the manner
      of
      sale, public information, volume limitation or notice provisions of
      Rule 144.




**Warrants**





The
      Company also currently has outstanding two series of Plan Warrants with
      8,423,491 in each series. Each Plan Warrant provides for the purchase of one
      share of common stock. The Series C Plan Warrants are exercisable at $3.00
      per
      share and the Series E Plan warrants are exercisable at $4.00 per share. Any
      common stock issued upon exercise of a Plan Warrant is immediately tradable
      without restriction. The Plan Warrants are governed by a Warrant Agreement.
      The
      Warrant Agreement that governs the Plan Warrants restricts any one stockholder
      from acquiring ownership greater than 4.99% of the Company’s common
      stock.




19





**Dividends**





The
      Company does not expect to declare or pay any cash dividends on its common
      stock
      in the foreseeable future, and it currently intends to retain future earnings,
      if any, to finance the expansion of its business. The decision whether to pay
      cash dividends on the Company’s common stock will be made by the Company’s board
      of directors, in their discretion, and will depend on its financial condition,
      operating results, capital requirements and other factors that the board of
      directors considers significant.





The
      Company’s wholly-owned subsidiary, Fuqi China, prior to merger with the Company,
      paid cash dividends of $2,739,726, $5,421,687 and $3,975,904 during the years
      ended December 31, 2006, 2005 and 2004 respectively. Each of these dividends
      was
      paid by the Company’s subsidiary to Mr. Chong, as its sole stockholder, which
      offset partially the amounts due to the Company’s subsidiary by Mr.
      Chong.





**Transfer
      Agent**





The
      transfer agent and registrar for the Company’s common stock is Computershare
      Trust Company, Inc.





**Penny
      Stock Regulation**





The
      Company’s common stock, which is not currently listed or quoted for trading, may
      be considered to be a “penny stock” if it does not qualify for one of the
      exemptions from the definition of “penny stock” under Section 3a51-1 of the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”) once, and
      if, it starts trading. The Company’s common stock may be a “penny stock” if it
      meets one or more of the following conditions (i) the stock trades at a price
      less than $5.00 per share; (ii) it is NOT traded on a “recognized” national
      exchange; (iii) it is NOT quoted on the NASDAQ Capital Market, or even if so,
      has a price less than $5.00 per share; or (iv) is issued by a company that
      has
      been in business less than three years with net tangible assets less than $5
      million.




The
      principal result or effect of being designated a “penny stock” is that
      securities broker-dealers participating in sales of the company’s common stock
      will be subject to the “penny stock” regulations set forth in Rules 15-2 through
      15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires
      broker-dealers dealing in penny stocks to provide potential investors with
      a
      document disclosing the risks of penny stocks and to obtain a manually signed
      and dated written receipt of the document at least two business days before
      effecting any transaction in a penny stock for the investor’s account. Moreover,
      Rule 15g-9 requires broker-dealers in penny stocks to approve the account of
      any
      investor for transactions in such stocks before selling any penny stock to
      that
      investor. This procedure requires the broker-dealer to (i) obtain from the
      investor information concerning his or her financial situation, investment
      experience and investment objectives; (ii) reasonably determine, based on that
      information, that transactions in penny stocks are suitable for the investor
      and
      that the investor has sufficient knowledge and experience as to be reasonably
      capable of evaluating the risks of penny stock transactions; (iii) provide
      the
      investor with a written statement setting forth the basis on which the
      broker-dealer made the determination in (ii) above; and (iv) receive a signed
      and dated copy of such statement from the investor, confirming that it
      accurately reflects the investor’s financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult and time consuming for holders of the Company’s common stock to resell
      their shares to third parties or to otherwise dispose of them in the market
      or
      otherwise.





**Equity
      Compensation Plans**





Refer
      to
      ITEM 11 below for information with respect to the Company’s equity compensation
      plan.




20




**ITEM
      6.** **SELECTED
      CONSOLIDATED FINANCIAL DATA**





The
      following selected consolidated statement of operations data for the years
      ended
      December 31, 2006, 2005, 2004, 2003 and 2002 and the balance sheet data as
      of
      December 31, 2006, 2005 and 2004 is derived from the Company’s audited
      consolidated financial statements, which, except for 2003 and 2002, are included
      elsewhere in this Form 10-K. The following data is qualified in its entirety
      by
      and should be read in conjunction with “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” and the Company’s consolidated
      financial statements and related notes included elsewhere in this Form
      10-K.




**Consolidated
                Statement of Operations Data:**
            
            
            **Years
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002*****(in
                thousands)*****Net
                sales**
            
            $
            92,409
            
            $
            72,580
            
            $
            56,765
            
            $
            29,501
            
            $
            15,226**Cost
                of sales**
            
            
            83,619
            
            
            64,964
            
            
            50,862
            
            
            26,019
            
            
            13,592**Gross
                profit**
            
            
            8,790
            
            
            7,616
            
            
            5,903
            
            
            3,482
            
            
            1,634**Operating
                expenses:**Selling
                and marketing
            
            
            490
            
            
            624
            
            
            549
            
            
            251
            
            
            199General
                and administrative
            
            
            794
            
            
            671
            
            
            1,006
            
            
            1,006
            
            
            390Total
                operating expenses
            
            
            1,284
            
            
            1,295
            
            
            1,555
            
            
            1,257
            
            
            589**Income
                from operations**
            
            
            7,506
            
            
            6,321
            
            
            4,348
            
            
            2,225
            
            
            1,045**Other
                income (expenses):**Interest
                expense
            
            
            (799
            )
            
            (498
            )
            
            (100
            )
            
            -
            
            
            -Interest
                income
            
            
            70
            
            
            -
            
            
            -
            
            
            1
            
            
            1Loss
                on disposal of fixed assets
            
            
            -
            
            
            -
            
            
            (45
            )
            
            -
            
            
            -Miscellaneous
            
            
            13
            
            
            (1
            )
            
            4
            
            
            40
            
            
            48Total
                other income (expenses)
            
            
            (716
            )
            
            (499
            )
            
            (141
            )
            
            41
            
            
            49**Income
                before provision for income taxes**
            
            
            6,790
            
            
            5,822
            
            
            4,207
            
            
            2,266
            
            
            1,094**Provision
                for income taxes**
            
            
            995
            
            
            452
            
            
            359
            
            
            193
            
            
            81**Net
                income**
            
            
            5,795
            
            
            5,370
            
            
            3,848
            
            
            2,073
            
            
            1,013**Other
                comprehensive income -**foreign
                currency translation adjustments
            
            
            288
            
            
            143
            
            
            -
            
            
            -
            
            
            -**Comprehensive
                income**
            
            $
            6,083
            
            $
            5,513
            
            $
            3,848
            
            $
            2,073
            
            $
            1,013


**As of December
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002*****(in thousands)*****Consolidated
                  Balance Sheet Data:**Cash
              
              $
              13,355
              
              $
              71
              
              $
              256
              
              $
              1,294
              
              $
              235Total
                  assets
              
              
              31,125
              
              
              28,115
              
              
              11,230
              
              
              8,579
              
              
              9,097Notes
                  payable
              
              
              14,087
              
              
              12,392
              
              
              4,819
              
              
              380
              
              
              -Total
                  stockholders’ equity
              
              $
              10,945
              
              $
              7,607
              
              $
              2,695
              
              $
              2,823
              
              $
              437





21




**Recapitalization**





The
      acquisition of Fuqi BVI, and its wholly oned subsidiary Fuqi China, by the
      Company pursuant to the Share Exchange Transaction was accounted for as a
      recapitalization by the Company. The recapitalization was, at the time of the
      Share Exchange, the merger of a private operating company (Fuqi BVI) into a
      non-operating private shell corporation with nominal net assets and as such
      is
      treated as a capital transaction, rather than a business combination. As a
      result no goodwill is recorded. The transaction is the equivalent to the
      issuance of stock by the private company for the net monetary assets of the
      shell corporation. The pre-acquisition financial statements of Fuqi BVI are
      treated as the historical financial statements of the consolidated companies.
      The financial statements presented reflect the change in capitalization for
      all
      years presented, therefore the capital structure of the consolidated enterprise,
      being the capital structure of the legal parent, is different from that
      appearing in the financial statements of Fuqi BVI in earlier periods due to
      the
      recapitalization.




**ITEM
      7. MANAGEMENT DISCUSSION AND ANALYSIS** **AND
      RESULTS OF OPERATIONS** ****





The
      following discussion contains forward-looking statements that involve risks
      and
      uncertainties. Forward-looking statements include, but are not limited to,
      statements regarding future events, the Company’s plans and expectations and
      financial projections. The Company’s actual results could differ materially from
      those discussed herein. Factors that could cause or contribute to such
      differences include, but are not limited to, those discussed elsewhere in this
      Form 10 -K.
      See
“ ITEM
      1A.
      RISK FACTORS .”





**Overview**





Fuqi
      is
      engaged in the design, manufacture, marketing and wholesale distribution of
      a
      full range of precious metal jewelry in China. The Company currently operates
      through two divisions: (i) production and (ii) sales and marketing. The
      production division is responsible for manufacturing of the Company’s jewelry
      products and the sales and marketing division is responsible for the selling
      and
      marketing functions of the products, including customer relations and customer
      service. The Company intends to enter into the retail distribution of its
      jewelry products by opening or acquiring retail stores in China during 2007.





Fuqi generates its revenues primarily from the sale of gold and platinum
      jewelry. The Company intends to develop platinum as the primary metal from
      which
      its jewelry is manufactured to capitalize on the recent increase in consumption
      of platinum jewelry in China. The Company also will devote resources to
      strengthen its brand name in the China jewelry industry by expanding the
      marketing and promotion of its products and maintaining large-scale production
      of quality products. The
      Company’s operations are subject to all of the risks inherent in establishing a
      business enterprise in China, particularly one that is dependent, initially,
      on
      the ever-changing retail trends in products that are discretionary. If
      Fuqi
      does not receive the consumer or business acceptance that it anticipate, its
      revenues and operating results will likewise not reach the levels it
      anticipates. In
      addition, the Company’s ability to effectively conduct its operations must be
      evaluated in light of the problems, expenses, difficulties, complications and
      delays frequently encountered in connection with establishing a growth business,
      including uncertainty as to production capabilities, market acceptance,
      marketing methods, expenses and competition. The Company may not be successful
      in its proposed new business activities, such as entering the retail market
      for
      its products.





The
      Chinese jewelry industry has recently experienced growth due to a series of
      governmental reforms, an increase in income levels and growth in the urban
      population in China. The industry is also highly competitive, and the Company’s
      competitors include domestic and foreign jewelry manufacturers, wholesalers,
      and
      importers who may operate on a national, regional and local scale. Many of
      the
      Company’s competitors have substantially greater financial, technical and
      marketing resources and personnel than the Company. As the Company believes
      competition is largely based on quality, service, and pricing, its strategy
      is
      to provide competitively priced, moderate- to high-quality products to the
      high-volume retail jewelry market. The Company also intends to enter into the
      jewelry retail industry, which is also highly competitive. Many of the Company’s
      potential competitors in the retail industry will have larger customer bases,
      longer operating histories and significantly greater financial, technical,
      marketing and other resources. It may be difficult for a newcomer to enter
      into
      the retail industry, but the Company believes that its established production
      and wholesale distribution business will facilitate its entrance into the retail
      market.




22





The
      Company would need to raise additional capital as required to match its
      expansion plan. The Company anticipates that it would need approximately $40.0
      million in additional capital to execute its retail plan for the coming two
      years. If the Company is able to obtain the additional capital, a substantial
      portion of it, approximately $20.0 million, would be used to acquire raw
      materials. A smaller portion of the additional capital, approximately $16.0
      million, would be used for the opening or acquiring of retail outlets.
      Approximately $2.0 million of the additional capital would be used to acquire
      components and additional toolings while the remaining portion of the additional
      capital would be applied to working capital for labor to manufacture jewelry
      and
      marketing and promotional activities.





**Corporate
      History**





Fuqi
      was
      originally incorporated in the State of Arizona on September 3, 2004 as VT
      Marketing Services, Inc. The Company was a wholly-owned subsidiary of Visitalk
      Capital Corporation (“ *VCC* ”),
      and
      was formed as part of the implementation of the Chapter 11 reorganization plan
      (the “ *Visitalk
      Plan* ”)
      of
      visitalk.com, Inc. (“V *isitalk.com* ”).
      Visitalk.com filed for Chapter 11 Bankruptcy in November 2000. The Visitalk
      Plan
      became effective on September 17, 2004 (the “ *Effective
      Date* ”).
      On
      September 22, 2004, Visitalk.com merged into VCC, which was authorized as the
      reorganized debtor under the Visitalk Plan. As part of the Visitalk Plan, the
      Company issued shares of its common stock and warrants to purchase shares of
      its
      common stock that were distributed to creditors and claimants of Visitalk.com.
      The Company’s original business was to use Visitalk.com’s technology to
      facilitate peer-to-peer marketing activities. On July 21, 2006, the Company
      sold
      1,368,761 shares of common stock (post Reverse Split) to BayPeak, LLC. As part
      of this transaction (the “ *Bay
      Peak Sale* ”),
      the
      Company abandoned its peer-to-peer marketing business, and began to seek
      companies in Asia with potential, in particular companies based in China, to
      acquire. The shares issued in the Bay Peak Sale represented 75% of the Company’s
      outstanding shares at the time of issuance. On July 28, 2006, Visitalk.com
      was
      granted its Final Decree by the Bankruptcy Court. On November 6, 2006, the
      Company conducted a reverse stock split of its shares common stock and issued
      one share for each 15.43 shares of its common stock then outstanding (the
“ *Reverse
      Split* ”).
      No
      shareholder was reversed below 100 shares in the Reverse Split and the then
      outstanding Plan Warrants were not affected by the Reverse Split. On November
      8,
      2006, the Company changed its state of incorporation from Arizona to
      Nevada.





On
      November 20, 2006, the Company entered into a share exchange agreement with
      Yu
      Kwai Chong, who is the sole shareholder of Fuqi BVI pursuant to which the
      Company agreed to acquire all of the issued and outstanding capital stock of
      Fuqi BVI (the “ *Exchange
      Transaction* ”).
      The
      Exchange Transaction closed on November 22, 2006 and, per the terms of the
      share
      exchange agreement (the “ *Share
      Exchange Agreement* ”),
      the
      Company issued an aggregate of 18,886,666 shares of its common stock (post
      Reverse Split) in exchange for all of the issued and outstanding securities
      of
      Fuqi BVI. Pursuant to the Share Exchange Agreement, BayPeak agreed to cancel
      8,761 shares of common stock.





On
      December 8, 2006, the Company changed its corporate name from “VT Marketing
      Services, Inc.” to “Fuqi International, Inc.” and reincorporated from the State
      of Nevada to the State of Delaware.





For
      financial accounting purposes, the Exchange Transaction was treated as a reverse
      acquisition by Fuqi BVI, under the purchase method of accounting, and was
      treated as a recapitalization with Fuqi BVI as the acquirer. Accordingly, the
      Company’s historical financial statements have been prepared to give retroactive
      effect to the reverse acquisition completed on November 22, 2006, and represent
      the operations of Fuqi BVI and its wholly-owned subsidiary, Shenzhen Fuqi
      Jewelry Co., Ltd. (“Fuqi China”), a company established under the laws of the
      People's Republic of China. Upon the acquisition of Fuqi BVI, the Company’s sole
      business operations became that of Fuqi BVI.





**Critical
      Accounting Policies, Estimates and Assumptions**





Management's
      discussion and analysis of results of operations and financial condition are
      based upon the Company’s consolidated financial statements. These statements
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America. These principles require management to make
      certain estimates and assumptions that affect amounts reported and disclosed
      in
      the financial statements and related notes. The most significant estimates
      and
      assumptions include valuation of inventories, provisions for income taxes and
      allowance for doubtful accounts, the recoverability of the long-lived assets.
      Actual results could differ from these estimates. Periodically, the review
      all
      significant estimates and assumptions affecting the financial statements and
      records the effect of any necessary adjustments.




23





The
      following critical accounting policies rely upon assumptions and estimates
      and
      were used in the preparation of the Company’s consolidated financial
      statements:





***Revenue
      Recognition.*** Revenue
      is recognized upon delivery and acceptance of jewelry products by the Company’s
      customers, provided that the other conditions of sales are satisfied: (i)
      persuasive evidence of an arrangement exists; (ii) delivery has occurred, upon
      shipment when title passes, or services have been rendered; (iii) the Company’s
      price to the buyer is fixed or determinable; and (iv) collectibility is
      reasonably assured.





***Currency
      Reporting.***  Amounts
      reported are stated in
      U.S.
      Dollars, unless stated otherwise. The Company’s functional currency is
      reported in Renminbi ("RMB"). Foreign currency transactions (outside PRC) are
      translated into RMB according to the prevailing exchange rate at the transaction
      dates. Assets and liabilities denominated in foreign currencies at the balance
      sheet dates are translated into RMB at period-end exchange rates. The Company’s
      functional currency is RMB. For the purpose of preparing the consolidated
      financial statements, the consolidated balance sheets of the Company have been
      translated into U.S. dollars at the current rates as of end of the respective
      period and the statements of operations have
      been
      translated into U.S. dollars at the weighted average rates during the periods
      the transactions were recognized. The resulting translation gain adjustments
      are
      recorded as other comprehensive income in the statements of income and
      comprehensive income and as a separate component of statements of shareholders'
      equity.





***Allowance
      for Doubtful Accounts.*** The
      Company maintains an allowance for doubtful accounts for estimated losses
      resulting from the inability of its customers to make required payments.
      Allowance for doubtful accounts is based on the Company’s assessment of the
      collectibility of specific customer accounts, the aging of accounts receivable,
      its history of bad debts, and the general condition of the industry. If a major
      customer's credit worthiness deteriorates, or the Company’s customers' actual
      defaults exceed historical experience, the Company’s estimates could change and
      impact its reported results. The Company has not been experiencing any
      significant amount of bad debt in the past.





***Inventory.*** Inventories are stated at lower of cost (using the first-in, first-out method)
      or market. The Company continually evaluates the composition of its inventories
      assessing slow-moving and ongoing products. The Company’s products contain gold
      and platinum material which will not become obsolete and accordingly the Company
      did not provide any reserve for slow-moving and obsolete inventory.




24




**Results
      of Operations**





The
      following table sets forth the consolidated statements of operations of the
      Company for the years ended December 31, 2006, 2005 and 2004 U.S.
      dollars:




**Years
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004*****(in
                thousands)*****Net
                sales**
            
            $
            92,409
            
            $
            72,580
            
            $
            56,765**Cost
                of sales**
            
            
            83,619
            
            
            64,964
            
            
            50,862**Gross
                profit**
            
            
            8,790
            
            
            7,616
            
            
            5,903**Operating
                expenses:**Selling
                and marketing
            
            
            490
            
            
            624
            
            
            549General
                and administrative
            
            
            794
            
            
            671
            
            
            1,006Total
                operating expenses
            
            
            1,284
            
            
            1,295
            
            
            1,555**Income
                from operations**
            
            
            7,506
            
            
            6,321
            
            
            4,348**Other
                income (expenses):**Interest
                expense
            
            
            (799
            )
            
            (498
            )
            
            (100
            )Interest
                income
            
            
            70
            
            
            -
            
            
            -Loss
                on disposal of fixed assets
            
            
            -
            
            
            -
            
            
            (45
            )Miscellaneous
            
            
            13
            
            
            (1
            )
            
            4Total
                other expenses
            
            
            (716
            )
            
            (499
            )
            
            (141
            )**Income
                before provision for income taxes**
            
            
            6,790
            
            
            5,822
            
            
            4,207**Provision
                for income taxes**
            
            
            995
            
            
            452
            
            
            359**Net
                income**
            
            
            5,795
            
            
            5,370
            
            
            3,848**Other
                comprehensive income -**foreign
                currency translation adjustments
            
            
            288
            
            
            143
            
            
            -**Comprehensive
                income**
            
            $
            6,083
            
            $
            5,513
            
            $
            3,848





25




**Years
      Ended December 31, 2006 and 2005**





Net
      sales
      for the year ended December 31, 2006 increased to $92.4 million, an increase
      of
      $19.8 million, or 27.3%, compared to net sales of $72.6 million for the year
      ended December 31, 2005. The increase in net sales was primarily the result
      of
      an increase in the Company’s prices, which was the result of an increase in the
      price of precious metals, and a change in product mix. In 2006, the Company
      sold
      572,557 grams platinum jewelry, an increase of 97,519 grams, or 20.5%, compared
      to 475,038 grams sold in 2005. The sales price per gram for platinum jewelry
      was
      higher than that of gold. The Company believes that the change in product mix
      was the combined effect of narrowing price gap between platinum and gold and
      marketing efforts.




Sales
      for
      the years ended December 31, 2006 and 2005 were comprised of the following
      (expressed in millions of dollars):




**Year
                Ended December 31,****2006**
            
            
            **2005****Amount
                in $**
            
            
            **%**
            
            
            **Amount
                in $**
            
            
            **%****Platinum**
            
            
            21.0
            
            
            22.7
            
            
            13.2
            
            
            18.2**Gold**
            
            
            43.6
            
            
            47.2
            
            
            34.9
            
            
            48.1**K-gold
                and Studded Jewelry**
            
            
            27.8
            
            
            30.1
            
            
            24.5
            
            
            33.7**Total**
            
            
            92.4
            
            
            100.0
            
            
            72.6
            
            
            100.0




Cost
      of
      sales is mainly comprised of costs of raw materials, primarily gold and
      platinum, in addition to direct manufacturing costs and factory overhead, which
      accounted for approximately 1% of the cost of sales for the year December 31,
      2006. Cost of sales for the year ended December 31, 2006 increased to $83.6
      million, an increase of $18.6 million, or 28.6%, compared to cost of sales
      of
      $65.0 million for the year 2005. The increase was primarily due to the increase
      in net sales for year ended December 31, 2006, and the percentage of the
      increase in cost of sales was relatively close to the increase in net sales.
      The
      small difference in change in percentage was mainly generated by more labor
      hours for processing platinum.





Gross
      profit for the year ended December 31, 2006 increased to $8.8 million, an
      increase of $1.2 million, or 15.8%, compared to $7.6 million for the same period
      in 2005. The increase in gross profit resulted primarily from the increase
      in
      net sales, which resulted from an increase in precious metal prices. However,
      gross profit margin decreased to 9.5% for year ended December 31, 2006, compared
      to 10.5% for the same period in 2005. The decrease in gross profit margin was
      mainly attributed to the Company’s intended reduction in its margin to attract
      more sales in order to reduce the adverse effects caused by wide fluctuation
      of
      precious metal prices during the second and the third quarters in 2006. There
      was a general decrease in total demand caused by wide fluctuation in precious
      metal prices. The Company decreased its margin to encourage retailers to
      replenish their inventory through increased buying during the period of
      uncertain fluctuations in the prices of precious metal prices. However, the
      Company did not experience a significant effect in attracting sales by lowering
      its gross margin and the Company reinstated its normal gross margin rates in
      the
      fourth quarter of 2006.





Selling
      and marketing expenses are primarily comprised of business taxes, advertising
      expenses, traveling expenses, production costs of marketing materials, insurance
      and delivery expenses. Selling and marketing expenses for the year ended
      December 31, 2006 were $490,191, a decrease of $133,940, or 21.5%, as compared
      to $624,131 for the year ended December 31, 2005. The decrease in selling and
      marketing expenses was primarily due to the Company’s more targeted and focused
      marketing efforts. The Company expects a higher selling and marketing expenses
      due to higher business taxes in line with increase of sales. In addition, the
      Company expects to spend more on advertising expenses in an attempt to
      strengthen brand awareness and establish and maintain a strong market
      position.





General
      and administrative expenses consist primarily of payroll compensation, benefits
      and travel expenses for the Company’s staff, professional fees such as
      accountants and financial advisors, depreciation expenses, as well as
      administrative office expenses. General and administrative expenses for the
      year
      ended December 31, 2006 were $793,453, an increase of $122,262, or 18.2%, as
      compared to $671,191 for the same period in 2005. The increase in general and
      administrative expenses was mainly due to costs and fees incurred in connection
      with a reverse merger with a U.S. corporation. The Company expects its general
      and administrative expenses will increase due to the various additional legal,
      accounting and other requirements applicable to a public company in the United
      States and those incremental costs being incurred in retail establishments
      and
      operations. The Company expects general and administrative expenses will be
      higher because more professional costs will be incurred to improve the Company’s
      ability to meet requirements of a public company in the US.




26





Interest
      expenses were approximately $799,000 for the year ended December 31, 2006,
      an
      increase of $301,000, or 60.4%, as compared to $498,000 for year ended December
      31, 2005. The increase in interest expense was primarily a result of the
      Company’s increase in interest rate of short term bank financing for the year
      ended December 31, 2006.





Provision
      for income tax expense was approximately $995,000 for the year ended December
      31, 2006, an increase of $542,000, or 119.6%, as compared to approximately
      $453,000 for the same period in 2005. The increase was primarily due to the
      increase in the Company’s operating income for the year ended December 31, 2006.
      Companies in China are generally subject to a 30% state enterprise income tax
      and a 3% national income tax. The Company’s subsidiary, Fuqi China, enjoyed a
      reduced enterprise income tax rate of 15%, which is granted to all enterprises
      operating in Shenzhen Special Economic Zone. Prior to 2006, the Company was
      under the preferential income tax rate of 7.5% in 2005 and 2004 due to its
      status of being a new business. That status expired effective January 1, 2006.
      Because of the recent announcement in income tax rate restructure, the Company
      will be subject to an income tax rate of 25%. However, the impacts will depend
      on the timing for Shenzhen city to apply the new tax rate.





Net
      income increased to $5.8 million for year ended December 31, 2006 from $5.4
      million for the year ended December 31, 2005, an increase of $0.4 million,
      or
      7.4%. The Company believes that, taking into account the increase of expenses
      should be able to maintain the net income to sales ratio of 2007 as that of
      2006.





Other
      comprehensive income was $288,000 during 2006, an increase of $144,000 or 100%,
      as compared to $144,000 during 2005. The China government maintained a
      relatively fixed exchange rate against U.S. dollars until the end of the third
      quarter of 2005. The China government exchange rate continued to appreciate
      during the year ended December 31, 2006.





**Years
      Ended December 31, 2005 and 2004**





Net
      sales
      for the year ended December 31, 2005 increased to $72.6 million, an increase
      of
      $15.8 million, or 27.9%, compared to net sales of $56.8 million for the year
      ended December 31, 2004. The increase in net sales was primarily the result
      of
      an increase in the  quantity of
      jewelry that the Company sold, which increased
      primarily because it lengthened the accounts receivable period.





Sales
      for
      the years ended December 31, 2005 and 2004 were comprised of the following
      (expressed in million of dollars):




**Year
                Ended December 31,****2005**
            
            
            **2004****Amount
                in $**
            
            
            **%**
            
            
            **Amount
                in $**
            
            
            **%****Platinum**
            
            
            13.2
            
            
            18.2
            
            
            9.3
            
            
            16.4**Gold**
            
            
            34.9
            
            
            48.1
            
            
            26.3
            
            
            46.3**K-gold
                and Studded Jewelry**
            
            
            24.5
            
            
            33.7
            
            
            21.2
            
            
            37.3**Total**
            
            
            72.6
            
            
            100.0
            
            
            56.8
            
            
            100.0




Cost
      of
      sales for the year ended December 31, 2005 increased to $65.0 million, an
      increase of $14.1 million, or 27.7%, compared to cost of sales of $50.9 million
      for the year ended December 31, 2004. The increase was primarily due to the
      increase in net sales for the year ended December 31, 2005, and the percentage
      of the increase in cost of sales was relatively level with the increase in
      net
      sales. To
      the
      extent that inflation effected the cost of raw materials, the extra cost caused
      by inflation was shifted to customers. The increase in cost of sales is in
      proportion to the increase in net sales. The
      Compan y
      obtained short term bank financings to acquire raw materials to meet the
      demands.




27





Gross
      profit for the year ended December 31, 2005 increased to $7.6 million, an
      increase of $1.7 million, or 28.8%, compared to $5.9 million for the year ended
      December 31, 2004. The increase in gross profit resulted primarily from the
      increase in net sales. Gross profit margin remained relatively stable at 10.5%
      for the year ended December 31, 2005, compared to 10.4% for the year ended
      December 31, 2004.





Selling
      and marketing expenses for the year ended December 31, 2005 were $624,000,
      an
      increase of $75,000, or 13.7%, as compared to $549,000 for the year ended
      December 31, 2004. The increase in selling and marketing expenses was primarily
      due to the increase of promotion and advertising activities.





General
      and administrative expenses for the year ended December 31, 2005 were $671,000,
      a decrease of $335,000, or 33.3%, as compared to $1,006,000 for the year ended
      December 31, 2004. The decrease in general and administrative expenses was
      mainly due to a decrease in legal and professional fees in the year ended
      December 31, 2005 as majority of the audit fees for the historical financial
      statement were incurred in 2005. In addition the Company accrued estimated
      penalties on unpaid business taxes related to the cash revenues in 2004. The
      Company settled the outstanding taxes amount with the tax authority during
      2006
      and as a result, no penalties were assessed. Accordingly, no penalties were
      accrued for the year of 2005.





Interest
      expenses were approximately $498,000 for the year ended December 31, 2005,
      an
      increase of $398,000, or 398%, as compared to $100,000 for year ended December
      31, 2004. The increase in interest expense was primarily a result of increased
      bank loans borrowed in the year ended December 31, 2005.





Provision
      for income tax expense was approximately $452,000 for the year ended December
      31, 2005, an increase of $93,000, or 25.9%, as compared to approximately
      $359,000 for the year ended December 31, 2004. The increase was primarily due
      to
      the increase in the Company’s operating income for the year ended December 31,
      2005.





Other
      comprehensive income increased by $143,000 during 2005 compared to $0 during
      2004. The China government maintained a relatively fixed exchange rate against
      U.S. dollars until the end of the third quarter of 2005 and therefore there
      were
      no adjustments related to foreign currency translations during 2004.





Net
      income increased to $5.4 million for the year ended December 31, 2005 from
      $3.8
      million for the year ended December 31, 2004, an increase of $1.6 million,
      or
      42%.





**Liquidity
      and Capital Resources**





At
      December 31, 2006, Fuqi had retained earnings of $3,288,426 and had cash of
      $13,354,981. Fuqi has historically financed its operations with cash flows
      generated from operations, as well as through the borrowing of long term or
      short term bank loans. The Company uses its inventory as a guarantee to
      loans.





The
      Company currently has current loan p ayables
      in an aggregate amount of $14,086,852, which consists of (i) a note for
      $1,280,623 with an interest rate of 5.76% that matured in January 2007, (ii)
      two
      notes for $2,561,246 with an interest rate of 5.85% that is due in February
      2007, (iii) four notes for $3,841,869 with an interest rate of 5.832% that
      is
      due in January 2007, (iv) a note for $1,280,623 with an interest rate of 6.138%
      that is due in March 2007, (v) a note for $960,467 with an interest rate of
      6.732% that is due in July 2007, (vi) a note for $960,467 with an interest
      rate
      of 6.732% that is due in September 2007, (vii) a note for $1,024,498 with an
      interest rate of 6.426% that is due in September 2007, (viii) a note for
      $896,436 with an interest rate of 6.426% that is due in October 2007 and (ix)
      a
      note for $1,280,623 with an interest rate of 6.732% that is due in December
      2007. The Company’s loans are secured by inventory, real property and/or
      guaranteed by the Company’s affiliates.





Net
      cash
      provided by operating activities was $4.0 million for the year ended December
      31, 2006, compared to net cash provided by operations of $3.2 million for the
      same period in 2005. Net cash provided increased by $0.8 million primarily
      because of (i) the utilization of VAT refundable of $0.4 million, (ii) decrease
      in inventory of $0.1 million and (iii) recovery of inventory loan receivable
      of
      $0.7 million, in addition to a change in prepaid expenses. During 2006, precious
      metal prices fluctuated widely from the second quarter to end of third quarter.
      As a result, most of the customers did not purchase in the same pattern of
      the
      previous year, the Company’s jewelry stock moved slowly, and its level of
      inventory increased to a high level prior to the extended holidays in China
      (such as the Labor Day and the National Day). During this period, the timeliness
      of the Company’s receipt of payment was also affected. As a result, the
      Company experienced a use of cash of $2.8 million by accounts receivable and of $1.6
      million by decreased sales deposits. Since the Company does not use hedging
      tools for precious metals, it continued to acquire some inventory when the
      price
      had dropped to a lower level. The Company believed, however, that its customers
      and the market did not have sufficient inventory to meet the demand in the
      fourth quarter of 2006, which is the highest sales season of the year, and
      that
      most of the Company’s inventory was sold in the fourth quarter.




28





Net
      cash
      provided by investing activities amounted to $9.6 million for the year ended
      December 31, 2006, compared to net cash used for investing activities of $17.9
      million for the year ended December 31, 2005. The change is because the major
      shareholder repaid his advance to the Company. The grossed up amount of the
      advance to the shareholder was approximately $58 million during the year ended
      December 31, 2006.





Net
      cash
      used for financing activities amounted to $595,000 for the year ended December
      31, 2006, compared to net cash provided by financing activities of $14.6 million
      for the year ended December 31, 2005. The change was primarily a result of
      the
      Company taking its short-term bank loans in 2005 and while no new loans were
      taken out in 2006.





The
      Company believes that its current cash and cash flow from operations will be
      sufficient to meet its anticipated cash needs, including its cash needs for
      working capital, for the next 12 months for its wholesale business. The Company
      may, however, require additional cash resources due to changing business
      conditions or other future developments, including any investments or
      acquisitions the Company may decide to pursue.





Fuqi
      intends to establish a retail sales plan aimed at gaining market share in the
      growing consumer market in China. Fuqi intends to open retail stores throughout
      China, initially, and in Hong Kong and the United States in the future. During
      2007, Fuqi intends to open and/or acquire 20 retail counters and open 2 retail
      stores in municipalities and provincial capitals throughout China. In 2008,
      the Company plans to acquire an additional 6 to 7 retail stores and acquire
      40
      to 50 counters, while opening 2 to 3 stores and 20 to 30 counters in that year.
      The Company has identified various locations for its retail outlets and the
      Company is currently negotiating the acquisition of leases of such locations
      without acquiring the existing business. The Company’s Chinese legal counsel is
      preparing a letter of intent with preliminary acquisition terms to be entered
      into with sellers with respect to five of these locations. Assuming that
      negotiations continue at their current pace without unanticipated delay, the
      Company believes that the letters of intent for these five stores and counters
      will be entered into in April 2007 and acquired in May 2007. There can be no
      assurances that the negotiations and acquisition will continue in a timely
      manner or at all.





The
      Company would need to raise additional capital as required to match its
      expansion plan. The Company anticipates that it would need approximately $40.0
      million in additional capital to execute its retail plan for the coming two
      years. If the Company is able to obtain the additional capital, a substantial
      portion of it, approximately $20.0 million, would be used to acquire raw
      materials. A smaller portion of the additional capital, approximately $16.0
      million, would be used for the opening or acquiring of retail outlets.
      Approximately $2.0 million of the additional capital would be used to acquire
      components and additional toolings while the remaining portion of the additional
      capital would be applied to working capital for labor to manufacture jewelry
      and
      marketing and promotional activities. Additional
      capital for this objective would be required that is in excess of the Company’s
      liquidity, requiring the Company to raise additional capital through an equity
      offering or secured or unsecured debt financing. The availability of additional
      capital resources will depend on prevailing market conditions, interest rates,
      and its existing financial position and results of operations.





The
      following table describes the Company’s contractual commitments and obligations
      as of December 31, 2006 (in thousands):





**Contractual
                obligations**
            
            **Payments
                due by period (in $)****Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than 5 years**Lease
                of Plant
            
            
            460,499
            
            
            164,201
            
            
            238,670
            
            
            57,628
            
            
            —





**Seasonality**





The
      Company’s business is seasonal in nature. The Company’s sales and net income are
      traditionally higher in the fourth calendar quarter than the rest of the year. The
      primary factors that affect the seasonal changes in the Company’s business
      operations are holidays and traditional Chinese festivals. In the fourth
      quarter, retailers often experience increased sales due to the golden week
      of
      Chinese National Day, Christmas and New Year’s Day. In addition, jewelry
      retailers commonly stock up from wholesalers to prepare for potentially higher
      sales during the period before Chinese New Year, which is a peak season of
      marriage and newborns in China. This seasonal trend in our business occurred
      during 2005; however, there was a slight deviation in during 2006. During fiscal
      2006, a larger portion of the Company’s sales was generated during the first
      quarter, with net income of $2.3 million for the first quarter of 2006, as
      compared to net income of $0.4 million, $0.9 million and $2.1 million for the
      second, third and forth calendar quarters, respectively. During
      fiscal 2005, the Company had net income of $2.1 million for the fourth quarter,
      as compared to net income of $1.3 million, $0.6 million and $1.3 million for
      the
      first, second and third calendar quarters, respectively, of 2005. The Company
      believes that deviation in 2006 was related to customers
      speculating the direction of precious metal prices and holding their orders
      longer until their inventory levels were too low to meet the peak season. The
      Company believes that, in 2007, the seasonality of the Company’s business
      seasonality will return to normal.




29





**Off-Balance
      Sheet Transactions**





The
      Company has no material off-balance sheet transactions.





**New
      Accounting Pronouncements**





In
      February 2006, the Financial Accounting Standards Board issued SFAS No. 155,
      "Accounting for Certain Hybrid Financial Instruments -- an amendment of FASB
      Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for certain
      hybrid financial instruments, eliminates the FASB's interim guidance which
      provides that beneficial interests in securitized financial assets are not
      subject to the provisions of SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities," and eliminates the restriction on the
      passive derivative instruments that a qualifying special-purpose entity may
      hold. SFAS No. 155 is effective for all financial instruments acquired or issued
      after the beginning of an entity's first fiscal year that begins after September
      15, 2006, however, early adoption is permitted for instruments acquired or
      issued after the beginning of an entity's fiscal year in 2006. The Company
      is
      evaluating the impact of this new pronouncement to its financial position and
      results of operations or cash flows.





In
      March
      2006, the FASB issued SFAS No. 156 (“FAS 156”), “Accounting for Servicing of
      Financial Assets—An Amendment of FASB Statement No. 140.” Among other
      requirements, FAS 156 requires a company to recognize a servicing asset or
      servicing liability when it undertakes an obligation to service a financial
      asset by entering into a servicing contract under certain situations. Under
      FAS
      156 an election can also be made for subsequent fair value measurement of
      servicing assets and servicing liabilities by class, thus simplifying the
      accounting and provide for income statement recognition of potential offsetting
      changes in the fair value of servicing assets, servicing liabilities and related
      derivative instruments. The Statement will be effect beginning the first fiscal
      year that begins after September 15, 2006. The Company does not expect the
      adoption of FAS 156 will have a material impact on the Company’s financial
      position or results of operations.





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes." This interpretation requires companies to determine whether
      it is
      more likely than not that a tax position will be sustained upon examination
      by
      the appropriate taxing authorities before any part of the benefit can be
      recorded in the financial statements. FIN 48 provides guidance on
      de-recognition, classification, accounting in interim periods and disclosure
      requirements for tax contingencies. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The differences between the amounts
      recognized in the statements of financial position prior to the adoption of
      FIN
      48 and the amounts reported after adoption will be accounted for as a
      cumulative-effect adjustment recorded to the beginning balance of retained
      earnings. The Company is evaluating the impact of this new pronouncement to
      the
      Company’s financial position and results of operations or cash
      flows.





In
      September 2006, the FASB issued Statement No. 157, "Fair Value Measurements."
      SFAS 157 defines fair value, establishes a framework and gives guidance
      regarding the methods used for measuring fair value, and expands disclosures
      about fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company is evaluating the impact of this new
      pronouncement to its financial position and results of operations or cash
      flows.





In
      September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 132(R)." SFAS 158 requires companies to
      recognize the overfunded or underfunded status of a defined benefit
      post-retirement plan as an asset or liability in its balance sheet and to
      recognize changes in that funded status in the year in which the changes occur
      through comprehensive income, effective for fiscal years ending after December
      15, 2006. SFAS 158 also requires companies to measure the funded status of
      the
      plan as of the date of its fiscal year-end, with limited exceptions, effective
      for fiscal years ending after December 15, 2008. The Company does not expect
      the
      adoption of SFAS 158 will have a material impact on the Company’s financial
      position or results of operations, as its does not currently have any defined
      benefit pension or other post-retirement plans.




30





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), “Financial
      Statements - Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements ”.
      SAB
      108 provides guidance on how prior year misstatements should be taken into
      consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year's financial
      statements are materially misstated. SAB 108 provides that once a current year
      misstatement has been quantified, the guidance in SAB No. 99, “ Financial
      Statements - Materiality”, should
      be applied to determine whether the misstatement is material and should result
      in an adjustment to the financial statements. Under certain circumstances,
      prior
      year financial statements will not have to be restated and the effects of
      initially applying SAB 108 on prior years will be recorded as a cumulative
      effect adjustment to beginning Retained Earnings on January 1, 2006, with
      disclosure of the items included in the cumulative effect. The Company does
      not
      expect the application of the provisions of SAB 108 to have a material impact,
      if any, on the consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”. The objective of this statement is
      to improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. This Statement is expected by the board to expand the use of fair
      value measurement, which is consistent with the Board's long-term measurement
      objectives for accounting for financial instruments. This statement is effective
      for fiscal years beginning after November 15, 2007. The Company is currently
      evaluating the impact of adopting this statement; however, the Company does
      not
      expect the adoption of this provision to have a material effect on its financial
      position, results of operations or cash flows.





**Change
      in Accountants**





After
      the
      close of the Share Exchange, on November 22, 2006, the Company dismissed
      Epstein, Weber & Conover, P.L.C. ("EWC") as its independent registered
      public accounting firm following the change in control of the Company in
      connection with the Share Exchange. The Company engaged EWC to audit its
      financial statements for the year ended December 31, 2005 and 2004. The report
      of EWC on the financial statements of the Company for the fiscal years ended
      December 31, 2005 and 2004 did not contain any adverse opinion or disclaimer
      of
      opinion and was not qualified or modified as to uncertainty, audit scope, or
      accounting principle, except for an explanatory paragraph relative to the
      Company’s ability to continue as a going concern. While EWC was engaged by the
      Company, there were no disagreements with EWC on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      or
      procedure with respect to the Company, which disagreements if not resolved
      to
      the satisfaction of EWC would have caused it to make reference to the subject
      matter of the disagreements in connection with its report on the Company’s
      financial statements for the fiscal years ended December 31, 2005 and 2004.
      The
      Company engaged Stonefield Josephson, Inc., which served as Fuqi China’s
      independent registered certified public accountants for the fiscal years ended
      December 31, 2005, 2004 and 2003, as the Company’s independent registered public
      accounting firm as of November 22, 2006, the close of the Share
      Exchange.




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK** ****





*Foreign
      Currency Risk.* The
      functional currencies of the Company are Renminbi (RMB). Substantially all
      of
      the Company’s operations are conducted in the PRC. The Company’s sales and
      purchases are conducted within the PRC in RMB. Conversion of RMB into foreign
      currencies is regulated by the People’s Bank of China through a unified floating
      exchange rate system. Although the PRC government has stated its intention
      to
      support the value of the RMB, there can be no assurance that such exchange
      rate
      will not again become volatile or that the RMB will not devalue significantly
      against the U.S. dollar. Exchange rate fluctuations may adversely affect the
      value, in U.S. dollar terms, of the Company’s net assets and income derived from
      its operations in the PRC. In addition, the RMB is not freely convertible into
      foreign currency and all foreign exchange transactions must take place through
      authorized institutions.




31





*Credit
      Risk* .
      The
      Company’s product revenues are concentrated in production and sales of fine
      jewelry products, which are highly competitive with frequent changes in styles
      and fashion. Significant customer preference changes in the industry or customer
      requirements, or the emergence of competitive products with better marketing
      strategies and more well-known brand name, could adversely affect the Company’s
      operating results. Financial instruments that potentially subject the Company
      to
      concentration of credit risk consist principally of trade accounts receivable.
      The credit risk in the accounts receivable is mitigated by the fact that the
      Company performs ongoing credit evaluations of its customers’ financial
      condition and that accounts receivable are primarily derived from large
      credit-worthy companies throughout the PRC. In addition, the Company has
      attempted to diversify its customer base. Historically, the Company has not
      experienced significant losses related to trade receivables. Generally, no
      collateral is required.





*Country
      Risk.* Substantially
      all of the Company’s business, assets and operations are located and conducted
      in China. While China’s economy has experienced significant growth in the past
      twenty years, growth has been uneven, both geographically and among various
      sectors of the economy. The Chinese government has implemented various measures
      to encourage economic growth and guide the allocation of resources. Some of
      these measures benefit the overall economy of China, but may also have a
      negative effect on the Company. For example, the Company’s operating results and
      financial condition may be adversely affected by government control over capital
      investments or changes in tax regulations applicable to the Company. If there
      are any changes in any policies by the Chinese government and the Company’s
      business is negatively affected as a result, then its financial results,
      including its ability to generate revenues and profits, will also be negatively
      affected.





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




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      information required by this Item 8 is incorporated by reference to information
      begins on Page F-1 of this Form 10-K.




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





None.





**ITEM
      9A. CONTROLS AND PROCEDURES**





Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in the reports filed or submitted under the Securities Exchange Act
      of
      1934, as amended (“Exchange Act”) is recorded, processed, summarized and
      reported, within the time period specified in the Securities and Exchange
      Commission’s (“SEC”) rules and forms. Disclosure controls and procedures
      include, without limitation, controls and procedures designed to ensure that
      information required to be disclosed in the reports filed under the Exchange
      Act
      is accumulated and communicated to management, including the Company’s Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required disclosure.





The
      Company’s Chief Executive Officer and Chief Financial Officer, in consultation
      with its other members of management and advisors as appropriate, performed
      an
      evaluation of the effectiveness of our disclosure controls and procedures as
      defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon
      that
      evaluation, the Company’s Chief Executive Officer and its Chief Financial
      Officer concluded that its disclosure controls and procedures are effective
      in
      alerting them in a timely fashion to all material information required to be
      included in its periodic filings with the SEC. However, the Company’s
      independent auditors have identified significant deficiencies that the Company
      is currently working to correct. The significant deficiencies are described
      below in that subsection captioned "Significant Deficiencies In Disclosure
      Controls And Procedures Or Internal Controls".




32





**Changes
      In Internal Control Over Financial Reporting**





The
      term
“Internal Control Over Financial Reporting” is defined as a process designed by,
      or under the supervision of, the Company’s Chief Executive Officer and Principal
      Financial Officer, and effected by its board of directors, management and other
      personnel, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with accounting principles generally accepted in the
      United States.





On
      November 20, 2006, the Company entered into a share exchange agreement with
      Yu
      Kwai Chong, who is the sole shareholder of Fuqi BVI pursuant to which the
      Company agreed to acquire all of the issued and outstanding capital stock of
      Fuqi BVI (the “Exchange Transaction”). The Exchange Transaction closed on
      November 22, 2006 and, per the terms of the share exchange agreement (the “Share
      Exchange Agreement”) Fuqi BVI became the Company’s wholly-owned subsidiary and
      the Company’s sole business operations became that of Fuqi BVI. Also as a result
      of the Share Exchange, the internal control over financial reporting utilized
      by
      Fuqi BVI prior to the Share Exchange became the internal control over financial
      reporting of the Company. This change in internal control over financial
      reporting occurred during our last fiscal quarter and has materially affected,
      or is reasonably likely to materially affect, the Company’s internal control
      over financial reporting. Other than the foregoing and except as noted below
      in
      that subsection captioned "Significant Deficiencies In Disclosure Controls
      And
      Procedures Or Internal Controls", there were no changes in its internal control
      over financial reporting identified in connection with its evaluation of these
      controls during the quarter ended December 31, 2006, there have been no changes
      in the Company’s internal control over financial reporting identified in
      connection with the evaluation required by paragraph (d) Rule 13a-15 or 15d-15
      under the Exchange Act that occurred during the quarter ended December 31,
      2006
      that has materially affected, or is reasonably likely to affect, the Company’s
      internal control over financial reporting.





**Significant
      Deficiencies In Disclosure Controls And Procedures Or Internal
      Controls**





The
      Company’s independent auditors, Stonefield Josephson, Inc., identified that its
      accounting on certain significant transactions were incorrectly calculated
      or
      incorrectly recorded. During the course of the audit field work, its independent
      auditors discovered these errors. The independent auditors discussed these
      matters with the Company’s Chief Financial Officer, and it subsequently
      reevaluated the transactions and recorded the necessary adjustments. The
      auditors believe that these adjustments reflected significant deficiencies
      in
      the Company’s internal controls over accounting and financial reporting. The
      Company is in the process of improving its internal controls in an effort to
      improve is control processes and procedures with training programs that will
      start in the second quarter of 2007. Management and directors will continue
      to
      work with its auditors and other outside advisors to ensure that the Company’s
      controls and procedures are adequate and effective.




**ITEM
      9B. OTHER INFORMATION**




None.




**PART
      III**


**ITEM
        10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
        GOVERNANCE**





The
      following individuals constitute the Company’s board of directors and executive
      management:





Name
            
            Age
            
            PositionYu
                Kwai Chong
            
            47
            
            President,
                Chief Executive Officer and Chairman of the BoardChing
                Wan Wong
            
            39
            
            Chief
                Financial Officer and DirectorLie
                Xi Zhuang
            
            39
            
            Chief
                Operating Officer and Director





**Yu
      Kwai Chong**





Mr.
      Chong
      is the founder of the Company and has been its President, Chief Executive
      Officer and Chairman of the Board of Directors since inception in April 2001.
      As
      CEO, Mr. Chong is responsible for the strategic planning, marketing and overall
      growth of the Company. In addition, Mr. Chong currently holds a directorship
      position at a number of private companies in China, including Shenzhen Rongxing
      (Group) Limited, Guangdong Grand Heaven Information Security Systems Engineering
      Co., Ltd., Shenzhen Xinke Investment Co., Ltd., Shenzhen Laiyongchu Alcohol
      Distillery Co., Ltd., Shenzhen Professional Rugged Computer Co., Ltd., and
      Shenzhen Union Broadband Communication Co., Ltd. These companies engage in
      businesses that range from investment management, IT engineering to computer
      and
      communication equipment management.




33





**Ching
      Wan Wong**





Mr.
      Wong
      has been the Company’s Chief Financing Officer (CFO) since the inception of Fuqi
      BVI in January 2004. From April 2002 to the present, Mr. Wong worked as a tax
      consultant at the Guandong Yuexin Registered Tax Agent Co., Ltd. From September
      2000 to March 2002, Mr. Wong served as the finance director of MindShare China,
      a communications firm. Mr. Wong received his Bachelor of Business Administration
      from the Chinese University of Hong Kong and his Bachelor of Commerce from
      University of Southern Queensland. He is a registered accountant in Australia,
      Hong Kong, and Canada, and has taken the position of CFO in China for a
      multinational media company and is experienced in international financial
      management.





**Lie
      Xi Zhuang**





Mr.
      Zhuang is a co-founder and Chief Operating Officer of Fuqi China with the
      responsibility for production management and cost control. Prior to founding
      Fuqi China in January 2004, Mr. Zhuang was the Business Manager of Shenzhen
      Ping
      Shen Gold and Silver Jewelry Co., Ltd. since 1997, and from 1993 to 1997, Mr.
      Zhuang was the Business Manager of Shenzhen Gao De Gold and Silver Jewelry
      Company. Mr. Zhuang was certified with a Higher Diploma in Management by Hunan
      Xiang Tan University.





**Family
      Relationships**





There
      are
      no family relationships among the individuals comprising the Company’s board of
      directors.





**Director
      Compensation**





The
      Company does not currently have an established policy to provide compensation
      to
      members of its Board of Directors for their services in that capacity. The
      Company intends to develop such a policy in the near future.





**The
      Board of Directors and Committees**





The
      Company’s Board of Directors does not maintain a separate audit, nominating or
      compensation committee. Functions customarily performed by such committees
      are
      performed by our Board of Directors as a whole. The Company is not required
      to
      maintain such committees under the rules applicable to companies that do not
      have securities listed or quoted on a national securities exchange or national
      quotation system. The Company is also not currently required to maintain
      independent members of its Board of Directors. If the Company is successful
      in
      listing its common stock on the NASDAQ, the Company would be required to have,
      prior to listing, independent directors and an independent audit committee
      formed, in compliance with the requirements for listing on the American Stock
      Exchange and in compliance with Rule 10A-3 of the Securities Exchange Act of
      1934. The Company intends to independent directors and create board committees
      in the near future.





**Section
      16(a) Beneficial Ownership Reporting Compliance.**





The
      Company’s securities are currently registered under Section 12 of the Securities
      Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a-2,
      the
      Company’s directors and officers and holders of 10% or more of its common stock
      are currently required to file statements of beneficial ownership with regards
      to their ownership of equity securities under Sections 13 or 16 of the Exchange
      Act. The Company’s current officers, directors and beneficial holders of 10% or
      more of its equity securities became subject to such requirement and to date,
      based solely upon a review of Forms 3, 4 and 5 and any amendments thereto
      furnished to the Company during its most recent fiscal year, none of the
      Company’s officers or directors has failed to file on a timely basis, as
      disclosed in the above forms, reports required by Section 16(a) of the Exchange
      Act during the most recent fiscal year.





**Code
      of Ethics.**





As
      of
      December 31, 2006, the had not yet to adopt a Code of Business Conduct and
      Ethics applicable to its principal executive officer, principal financial
      officer, principal accounting officer or controller, or persons performing
      similar functions. The Board of Directors of the Company is currently reviewing
      drafts of a Code of Business Conduct and Ethics that will be applicable to
      all
      directors, officers and executive employees, including the Chief Executive
      Officer and Chief Financial Officer.




34




**ITEM
      11. EXECUTIVE COMPENSATION** ****





**Compensation
      Discussion And Analysis**





Prior
      to
      the Share Exchange on November 22, 2006, the Company was engaged in businesses
      unrelated to its current operations. The officers and directors of the Company
      prior to the Share Exchange are no longer employed by or affiliated with the
      Company. Phillip Cory Roberts, the Company’s president during 2006 prior to
      Share Exchange, received no compensation or other perquisites for serving in
      such capacity.





The
      Company’s Chairman, Chief Executive Officer, and President, Yu Kwai Chong,
      determined the compensation for the Company’s current executive officers that
      was earned and paid in fiscal 2006. The compensation consisted solely of each
      executive officers salary. None of the Company’s current executive officers
      received cash bonuses during the fiscal years of 2006, 2005 and
      2004.





The
      Company believes that the current salaries paid to its Chief Executive Officer,
      Chief Financial Officer and Chief Operating Officer during 2006, 2005, and
      2004
      is indicative of the fair value of the services provided to the Company, as
      measured by the local market in China. Once or soon after the Company has become
      a company with securities publicly traded in the United States, it intends
      to
      substantially increase the annual compensation to its Chief Executive Officer,
      Chief Financial Officer and Chief Operating Officer. Prior to the compensation
      increases that are anticipated for the Company’s executive officers, the Board
      will establish a compensation committee of independent directors that will
      develop a compensation program for the Company’s executive officers for fiscal
      2007 and thereafter to determine the proper levels and nature of executive
      compensation to achieve the objectives of the Company as described below. The
      reasons for the substantially higher compensation is based on the increased
      amount of responsibilities to be assumed by each of these executives after
      the
      Company becomes a public listed company. In addition, the Company expects to
      seek to enter into long term employment contracts with its executive officers,
      after its securities are traded on a U.S. exchange, to increase stability of
      the
      Company. The Company also expects to expand the scope of its compensation,
      such
      as the possibility of granting options to executive officers and tying
      compensation to predetermined performance goals.





The
      Company’s board of directors has not yet developed or considered a compensation
      program for its executive officers for fiscal 2007 and beyond. It is expected
      that the Company’s board will seek to establish a compensation program for
      executive officers that will be designed to attract, as needed, individuals
      with
      the skills necessary for it achieves its business plan, to motivate those
      individuals, to reward those individuals fairly over time, and to retain those
      individuals who continue to perform at or above the levels that the Company
      expects. The Company also expects that its executive compensation program will
      be designed to afford its executive officers a sense of ownership in the Company
      and overall entrepreneurial spirit, and to link rewards to measurable company
      and individual performance.





In
      addition, the Company’s board of directors does not currently have a
      compensation committee. The Company anticipates that its board of directors
      will
      establish a compensation committee in fiscal 2007 that will be comprised of
      non-employee members of its board of directors. The Company’s current
      expectation is that the compensation committee of its board of directors will
      perform, at least annually, a strategic review of the compensation program
      for
      its executive officers to determine whether it provides adequate incentives
      and
      motivation to its executive officers and whether it adequately compensates
      its
      executive officers relative to comparable officers in other companies with
      which
      the Company competes for executives. Those companies may or may not be public
      companies or companies located in the PRC or even, in all cases, companies
      in
      the jewelry business.





**Summary
      Compensation Table**




The
      following table sets forth information concerning the compensation for the
      three
      fiscal years ended December 31, 2006, 2005, and 2004 of the principal executive
      officer, principal financial officer, in addition to, as applicable, the
      Company’s three most highly compensated officers whose annual compensation
      exceeded $100,000, and up to two additional individuals for whom disclosure
      would have been required but for the fact that the individual was not serving
      as
      an executive officer of the Company at the end of the last fiscal year
      (collectively, the “Named Executive Officers”).




35




**Name
                and Position**
            
            
            **Year**
            
            
            **Salary($)**
            
            
            **All
                Other**
              **Compensation
                ($**)****
            
            
            **Total**
              **($)**Yu
                Kwai Chong
            
            
            2006
            
            $
            7,384
            
            $
            31,400(1)(2
            )
            $
            38,784President,
                CEO and
            
            
            2005
            
            
            5,000
            
            
            31,400(1)(2
            )
            
            36,400Chairman
                of the Board
            
            
            2004
            
            
            4,000
            
            
            —(1
            )
            
            4,000Ching
                Wan Wong
            
            
            2006
            
            
            56,410
            
            
            —
            
            
            56,410Chief
                Financial Officer
            
            
            2005
            
            
            8,000
            
            
            —
            
            
            8,0002004
            
            
            37,000
            
            
            —
            
            
            37,000Phillip
                Cory Roberts(3)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —Former
                President
            
            
            2005
            
            
            —
            
            
            —
            
            
            —2004
            
            
            —
            
            
            —
            
            
            —




(1)
            Excludes
                dividends paid to Mr. Chong, as the sole stockholder of Fuqi’s subsidiary,
                totaling $2,739,726, $5,421,687, $3,975,904, during the years ended
                December 31, 2006, 2005, and 2004, respectively.





(2)
            The
                Company acquired a new company car costing about $157,000 for the
                use by
                Mr. Chong in 2005.





(3)
            Mr.
                Roberts resigned from all positions with the Company upon the close
                of the
                Share Exchange on November 22,
                2006.




**Employment
      Agreements**





The
      Company does not currently have employment agreements with any of its named
      executed officers.





**Director
      Compensation**




Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
                ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)All
                Directors (total of 3 persons)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




For
      the
      year ended December 31, 2006, none of the members of the Company’s Board of
      Directors received compensation for his or her service as a director. The
      Company does not currently have an established policy to provide compensation
      to
      members of its Board of Directors for their services in that capacity. The
      Company intends to develop such a policy in the near future.





**Grants
      of Plan-Based Awards in 2006**





There
      were no option grants in 2006.





**Outstanding
      Equity Awards at 2006 Fiscal Year-End**





There
      were no option exercises or options outstanding in 2006.





**Option
      Exercises and Stock Vested in Fiscal 2006**





There
      were no option exercises or stock vested in 2006.




36





**Equity
      Incentive Plans**





In
      November 2006, the Company’s stockholders approved an equity incentive plan
      (“2006 EIP”) for employees, non-employee directors and other service providers
      covering 3,000,000 shares of common stock. Prior to this, the Company had an
      approved 2004 Equity Incentive Plan, which was replaced by the 2006 EIP. No
      options are currently outstanding under either plan. Any options to be granted
      under the 2006 EIP may be either “incentive stock options,” as defined in
      Section 422A of the Internal Revenue Code, or “nonqualified stock options,”
subject to Section 83 of the Internal Revenue Code, at the discretion of the
      Company’s board of directors and as reflected in the terms of the written option
      agreement. The option price shall not be less than 100% of the fair market
      value
      of the optioned common stock on the date the option is granted. The option
      price
      shall not be less than 110% of the fair market value of the optioned common
      stock for an optionee holding at the time of grant, more than 10% of the total
      combined voting power of all classes of the Company’s stock. Options become
      exercisable based on the discretion of the Company’s board of directors and must
      be exercised within ten years of the date of grant.




**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      following table provides current information regarding compensation plans,
      including individual compensation arrangements, under which equity securities
      of
      the Company are authorized for issuance.


**Number
                    of Securities to be**
                  **issued
                    upon**
                  **exercise
                    of**
                  **outstanding
                    options,**
              
              **Weighted-
                      average**
                    **exercise
                      price of**
                    **outstanding
                      options,**
              
              **Number
                        of securities**
                      **remaining
                        available**
                      **for
                        future**
                      **issuance
                        under equity**
                      **compensation**
                      **plans
                        (excluding**
                      **securities
                        reflected****Plan
                  Category**
              
              **warrants
                  and rights**
              
              **warrants
                  and rights**
              
              **in
                  column (a)****(a)**
              
              **(b)**
              
              **(c)**Equity
                  compensation plans approved by security holders
              
              
              —
              
              $
              —
              
              
              3,000,000(1
              )Equity
                  compensation plans not approved by security holders
              
              
              —
              
              $
              —
              
              
              —Total
              
              
              —
              
              $
              —
              
              
              3,000,000





(1)
            Represents
                options available for grant under the Company’s 2006
                EIP.




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





Beneficial
      ownership is determined in accordance with the rules of the SEC. In computing
      the number of shares beneficially owned by a person and the percentage of
      ownership of that person, shares of common stock subject to options and warrants
      held by that person that are currently exercisable or become exercisable within
      60 days of the filing date of this Form 10-K are deemed outstanding even if
      they
      have not actually been exercised. Those shares, however, are not deemed
      outstanding for the purpose of computing the percentage ownership of any other
      person.





The
      following table sets forth certain information with respect to beneficial
      ownership of the Company’s common stock based on 20,715,384 issued and
      outstanding shares of common stock, by:




·
            Each
                person known to be the beneficial owner of 5% or more of the outstanding
                common stock of the Company;





·
            Each
                executive officer;





·
            Each
                director; and





·
            All
                of the executive officers and directors as a
                group.




37




Unless
      otherwise indicated, the persons and entities named in the table have sole
      voting and sole investment power with respect to the shares set forth opposite
      the stockholder’s name, subject to community property laws, where applicable.
      Unless otherwise indicated, the address of each stockholder listed in the table
      is c/o Fuqi International, Inc., 5/F., Block 1, Shi Hua Industrial Zone, Cui
      Zhu
      Road North, Shenzhen 518019, People’s Republic of China.





**Name
                and Address of Beneficial Owner**
            
            **Title**
            
            **Beneficially
                Owned**
              **Post-Share
                Exchange**
            
            **Percent
                of Class*****Directors
                and Executive Officers***Yu
                Kwai Chong
            
            
            President,
                Chief Executive Officer and Chairman of the Board
            
            
            18,886,666
            
            
            91.2
            %Lie
                Xi Zhuang
            
            
            Chief
                Operating Officer and Director
            
            
            —
            
            
            —Ching
                Wan Wong
            
            
            Chief
                Financial Officer and Director
            
            
            —
            
            
            —Officers
                and Directors as a group (total of 3 persons)
            
            
            
            
            
            18,886,666
            
            
            91.2
            %***5%
                or more Stockholders***Bay
                Peak LLC (1)
              169
                Bolsa Ave.
              Mill
                Valley, California 94941
            
            
            
            
            
            1,360,000
            
            
            6.6
            %




(1)
      Phillip Cory Roberts has voting and investment control over the shares held
      by
      Bay Peak LLC.




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





**Fuqi
      BVI Share Exchange Agreement**





On
      November 22, 2006, pursuant to the Share Exchange Agreement, the Company
      acquired all of the outstanding capital stock of Fuqi BVI, in a stock for stock
      exchange. The Company issued to Yu Kwai Chong, who is the sole Fuqi BVI
      stockholder, 18,886,666 shares of common stock in exchange for all of the issued
      and outstanding shares of capital stock of Fuqi BVI. The new shares issued
      to
      the Fuqi BVI stockholder represented 91.2% of the Company’s voting capital stock
      immediately after the Exchange Transaction. Mr. Chong is also the Chairman
      of
      Fuqi BVI and the Company’s Chief Executive Officer and Chairman of the Board.
      Prior to the effective date of the Exchange Transaction, the Company was
      controlled by Bay Peak. Bay Peak is the Company’s second largest stockholder and
      owns approximately 6.6% of the Company’s issued and outstanding shares of common
      stock.





**Transactions
      with Bay Peak**





On
      July
      21, 2006, the Company sold 1,368,761 shares of common stock (post Reverse Split)
      to BayPeak, LLC, of which 8,761 shares were subsequently cancelled upon the
      close of the Share Exchange. As part of this transaction (the “Bay Peak Sale”),
      the Company abandoned its peer-to-peer marketing business, which was transferred
      to VCC, and began to seek companies in Asia with potential, in particular
      companies based in China, to acquire. The shares issued in the Bay Peak Sale
      represented 75% of the Company’s outstanding shares. Certain affiliates of Bay
      Peak became executive officers and directors of the Company after the Bay Peak
      Sale, all of which resigned upon the closing of the Share Exchange on November
      22, 2006.




38





**Yu
      Kwai Chong**




Yu
      Kwai
      Chong, who is the Company’s largest shareholder, President, Chief Executive
      Officer and Chairman of the Board and was the principal executive officer and
      sole shareholder of Fuqi BVI prior to the Share Exchange, has conducted various
      related party transactions with Fuqi BVI in the past. These transactions
      include:





·
            Fuqi
                BVI earned certain cash revenues from its customers that were subsequently
                collected by Mr. Chong. During the years ended December 31, 2006,
                2005 and
                2004,total
                cash revenues amounted to $5,896,354, $6,100,298, and $4,505,023
                and the
                amounts collected by its stockholder totaled $2,878,209, $6,100,298
                and
                $4,505,023, respectively. Beginning December 2006, this stockholder
                is no
                longer collecting cash revenue on behalf of the Company and all the
                cash
                revenues are deposited through the Company’s bank accounts.These revenues were included in the total sales amounts in the
                consolidated financial statements for the years ended December 31,
                2006,
                2005 and 2004 included in this Form
                10-K.





·
            The
                Company’s stockholder made non-interest bearing advances to the Company or
                borrowed from the Company since the inception of its operations.
                The
                Company borrowed $23,545,485, $0, and $24,140,472 from the stockholder
                and
                repaid $23,130,562, $0, and $29,577,058 during the years ended December
                31, 2006, 2005, and 2004. The Company advanced $51,529,693, $90,007,069,
                and $546,203 to the stockholder, and repaid $58,409,847, $75,644,023,
                and
                $0, during the years ended December 31, 2006, 2005, and 2004,
                respectively.





·
            The
                Company borrowed $0, $0, and $2,767,538 and repaid $0, $0, and $3,976,071
                during the years ended December 31, 2005, 2004 and 2003,
                respectively.





·
            The
                Company’s stockholder made non-interest bearing advances to the Company or
                borrowed from the Company since the inception of its operations.
                The
                Company advanced $14,363,046 and $5,982,789 to this stockholder during
                the
                years ended December 31, 2005 and 2004
                respectively.





·
            The
                Company declared dividends to its stockholder totaling $2,739,726,
                $5,421,687 and $3,975,904 during the years ended December 31, 2006,
                2005
                and 2004, respectively, which offset the amounts due from this
                stockholder.





·
            The
                Company has a total payable of $422,909 due to this stockholder as
                of
                December 31, 2006. Outstanding amounts included in due from stockholder
                totaled $9,487,562 as of December 31, 2005.





The
      Company did not charge any interest on receivable from nor pay any interest
      on
      amount due to unaffiliated parties. The
      Company believes that Mr. Chong and Fuqi
      BVI arrangements are at fair market value and are on terms comparable to those
      that
      would have been reached in arm's-length negotiations had the parties been
      unaffiliated at the time of the negotiations.




**Director
      Independence**





See
      Item
      10 “Directors, Officers and Corporation Governance” for a discussion of board
      member independence.




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





The
      following table presents fees, including reimbursements for expenses, for
      professional audit services rendered by Stonefield Josephson, Inc. for the
      audits of the Company’s annual financial statements and interim reviews of the
      Company’s quarterly financial statements for the years ended December 31, 2006
      and December 31, 2005 and fees billed for other services rendered by Stonefield
      Josephson, Inc. during those periods. The Company’s predecessor auditors,
      Epstein, Weber & Conover, P.L.C., did not provide any services in relations
      with the audits of the accompanying audited financial statements for the years
      ended December 31, 2006 and 2005 and the reviews of the interim financial
      statements included in the notes of the financial statements. Accordingly,
      their
      fees for other services were not included.




39





Year
                ended December 31,2006
            
            2005Audit
                Fees(1)
            
            $
            161,155
            
            $
            90,925Audit-Related
                Fees(2)
            
            
            10,770
            
            
            -Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            171,925
            
            $
            90,925




(1)
      Audit
      Fees consist of fees billed for professional services rendered for the audit
      of
      the Company's consolidated annual financial statements and review of the interim
      consolidated financial statements included in quarterly reports and services
      that are normally provided by Stonefield Josephson, Inc. in connection with
      statutory and regulatory filings or engagements, including the Form 10 that
      the
      Company has filed with the Securities and Exchange Commission.





(2)
      Audit-Related Fees consist of fees billed for assurance and related services
      that are reasonably related to the performance of the audit or review of the
      Company's consolidated financial statements and are not reported under "Audit
      Fees."




40




**PART
      IV**




**ITEM
        15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





1.
      Financial Statements: See “Index to Consolidated Financial Statements” in Part
      II, Item 8 of this annual report on Form 10-K.





2.
      Financial Statement Schedule: See “Schedule II—Valuation and Qualifying
      Accounts” below in this Item 15 of this annual report on Form 10-K.





3.
      Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed
      or incorporated by reference as part of this


Form
      10-K.




SCHEDULE
                IIFuqi
                International, Inc.Valuation
                and Qualifying Accounts and ReservesYears
                Ended December 31, 2006, 2005 and
                2004




Balance
                at the Beginning
              ofthe
                Year
            
            Charge
                to
              Costand
              Expenses
            
            Deductions
            
            Balance
                at
              theEnd
                of
              the
                YearAllowance
                for Doubtful Accounts:Year
                ended December 31, 2004
            
            $
            347,000
            
            $
            -
            
            $
            (60,000
            )
            $
            287,000Year
                ended December 31, 2005
            
            
            287,000
            
            
            15,000
            
            
            -
            
            
            302,000Year
                ended December 31, 2006
            
            
            302,000
            
            
            -
            
            
            (107,000
            )
            
            195,000




41




**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, in the City of Shenzhen, People’s
      Republic of China, on April 17, 2007.


**FUQI
                  INTERNATIONAL,
                  INC.**
              (Registrant)Dated:
              April 17, 2007
            
            /s/
              Yu
              Kwai ChongBy:
                Yu Kwai Chong
              Chief
                Executive Officer, President and
              Chairman
                of the Board
              (Principal
                Executive Officer)




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




**Signature**
            
            **Capacity**
            
            **Date**/s/
                Yu Kwai Chong
              By:
                  Yu Kwai Chong
            
            Chief
                Executive Officer, President and
              Chairman
                of the Board
              (Principal
                  Executive Officer)
            
            April
                17, 2007/s/
                Ching Wan Wong
              By:
                  Ching Wan Wong
            
            Chief
                Financial Officer and Director
              (Principal
                Financial and Accounting Officer)
            
            April
                17, 2007/s/
                Lie Xi Zhuang
              By:
                  Lie Xi Zhuang
            
            Chief
                Operating Officer and Director
            
            April
                17, 2007





42


**EXHIBIT
      INDEX**




ExhibitNumber
            
            Description2.1
            
            Exchange
                Agreement dated September 20, 2006 by and between the Registrant,
                Fuqi
                International Holdings Ltd., and Yu Kwai Chong (incorporated by reference
                to Exhibit 2.1 to the Registrant’s Registration Statement on Form 10 filed
                with the SEC on December 29, 2006).3.1
            
            Articles
                of Incorporation of the Registrant (incorporated by reference to
                Exhibit
                3.1 to the Registrant’s Registration Statement on Form 10 filed with the
                SEC on December 29, 2006).3.2
            
            Bylaws
                of the Registrant (incorporated by reference to Exhibit 3.2 to the
                Registrant’s Registration Statement on Form 10 filed with the SEC on
                December 29, 2006).10.1
            
            Plan
                Warrant Agreement (incorporated by reference to Exhibit 10.1 to the
                Registrant’s Registration Statement on Form 10 filed with the SEC on
                December 29, 2006).10.2
            
            2006
                Equity Incentive Plan (incorporated by reference to Exhibit 10.2
                to the
                Registrant’s Registration Statement on Form 10 filed with the SEC on
                December 29, 2006).10.3
            
            Real
                Property Lease dated May 8, 2005 (incorporated by reference to Exhibit
                10.3 to the Registrant’s Registration Statement on Form 10 filed with the
                SEC on December 29, 2006).16.1
            
            Letter
                from Epstein, Weber & Conover, P.L.C. to the Securities and Exchange
                Commission (incorporated by reference to Exhibit 16.1 to the Pre-Effective
                Amendment No. 1 to Registrant’s Registration Statement Form 10 filed with
                the SEC on February 14, 2007).21.1
            
            List
                of Subsidiaries of the Registrant (incorporated by reference to Exhibit
                21.1 to the Registrant’s Registration Statement on Form 10 filed with the
                SEC on December 29, 2006).31.1
            
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1*
            
            Certifications
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





*
            This
                exhibit shall not be deemed "filed" for purposes of Section 18 of
                the
                Securities Exchange Act of 1934 or otherwise subject to the liabilities
                of
                that section, nor shall it be deemed incorporated by reference in
                any
                filing under the Securities Act of 1933 or the Securities Exchange
                Act of
                1934, whether made before or after the date hereof and irrespective
                of any
                general incorporation language in any
                filings.




43




**FUQI
      INTERNATIONAL, INC.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006, 2005, AND 2004**


PageReport
                  of Independent Registered Public Accounting Firm
              
              F-2Financial
                  Statements:Consolidated
                  Balance Sheets as of December 31, 2006 and 2005
              
              F-3Consolidated
                  Statements of Income and Comprehensive Income for the years ended
                  December
                  31, 2006, 2005, and 2004
              
              F-4Consolidated
                  Statements of Stockholders' Equity for the years ended December
                  31, 2006,
                  2005 and 2004
              
              F-5Consolidated
                  Statements of Cash Flows for the years ended December 31, 2006,
                  2005 and
                  2004
              
              F-6Notes
                  to Consolidated Financial Statements
              
              F-7





F-1




**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors


Fuqi
      International, Inc.


Shenzhen,
      China





We
      have
      audited the accompanying consolidated balance sheets of Fuqi International,
      Inc.
      and subsidiaries as of December 31, 2006, and 2005 and the related
      consolidated statements of income and comprehensive income, stockholders' equity
      and cash flows for each of the three years in the period ended December 31,
      2006. Our audits also included the financial statement schedule listed in the
      Index at Item 15(a). These financial statements and schedule are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements and schedule 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 audits to obtain reasonable
      assurance about whether the financial statements are free of material
      misstatement. We were not engaged to perform an audit of the Company’s internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. **** Accordingly,
      we express no such opinion. An audit also includes examining, on a test basis,
      evidence supporting the amounts and disclosures in the financial statements,
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Fuqi International, Inc.
      and
      subsidiaries as of December 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2006 in conformity with accounting principles generally accepted
      in
      the United States of America. Also, in
      our
      opinion, the related financial statement schedule, when considered in relation
      to the basic financial statements taken as a whole, presents fairly in all
      material respects the information set forth therein.




As
      discussed in Note 1 to the consolidated financial statements, in 2006 the
      Company adopted Statement of Financial Accounting Standards No. 123 (Revised
      2004), Share-Based Payment.








/s/
      Stonefield Josephson, Inc.




Wanchai,
      Hong Kong


April
      12,
      2007





F-2


**Fuqi
                International, Inc.****Consolidated
                Balance Sheets**




December
                31,
            
            December
                31,2006
            
            2005**Assets****Current
                assets:**Cash
            
            $
            13,354,981
            
            $
            71,479Restricted
                cash
            
            
            -
            
            
            2,726,146Accounts
                receivable, net of allowance for doubtful accountsof
                $195,000 for 2006 and $302,000 for 2005
            
            
            9,363,397
            
            
            7,014,712Refundable
                value added taxes
            
            
            -
            
            
            253,749Inventories
            
            
            6,066,213
            
            
            5,762,053Inventory
                loan receivable
            
            
            -
            
            
            687,936Due
                from stockholder
            
            
            -
            
            
            9,487,562Prepaid
                expenses
            
            
            89,362
            
            
            115,525Deposits
                related to borrowings on notes payable/long term debt
            
            
            736,358
            
            
            340,768Deferred
                taxes
            
            
            29,198
            
            
            22,677Other
                current assets
            
            
            -
            
            
            2,145Total
                current assets
            
            
            29,639,509
            
            
            26,484,752**Property,
                equipment, and improvements,**net
            
            
            1,354,313
            
            
            1,545,621**Deposits**
            
            
            91,398
            
            
            80,545**Other
                assets**
            
            
            40,122
            
            
            3,807$
            31,125,342
            
            $
            28,114,725**Liabilities
                and Stockholders' Equity****Current
                liabilities:**Notes
                payable
            
            $
            14,086,852
            
            $
            12,391,574Accounts
                payable and accrued liabilities
            
            
            215,092
            
            
            261,585Accrued
                business tax
            
            
            1,084,078
            
            
            741,265Accrued
                estimated penalties
            
            
            1,119,201
            
            
            1,082,962Accrued
                value added taxes
            
            
            133,010
            
            
            -Customer
                deposits
            
            
            1,234,424
            
            
            2,786,776Loan
                payable, related party
            
            
            -
            
            
            991,326Due
                to Shareholder
            
            
            422,909
            
            
            -Income
                tax payable
            
            
            1,884,837
            
            
            1,013,537Total
                current liabilities
            
            
            20,180,403
            
            
            19,269,025**Long
                term debt**
            
            
            -
            
            
            1,239,157**Stockholders'
                equity:**Preferred
                stock, $0.001 par value, 5,000,000 shares
              authorized,
                none issued and outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 75,000,000 shares authorized,shares
                issued and outstanding - 20,715,384 shares for 2006.and
                18,886,666 shares for 2005
            
            
            20,724
            
            
            18,887Additional
                paid in capital
            
            
            7,203,664
            
            
            7,210,029Accumulated
                foreign currency translation adjustments
            
            
            432,125
            
            
            143,706Retained
                earnings
            
            
            3,288,426
            
            
            233,921Total
                stockholders' equity
            
            
            10,944,939
            
            
            7,606,543$
            31,125,342
            
            $
            28,114,725





**The
      accompanying notes form an integral part of these consolidated financial
      statements**





F-3





**Fuqi****International,
                Inc.****Consolidated
                Statements of Income and Comprehensive
                Income**




Year
                Ended
            
            Year
                Ended
            
            Year
                EndedDecember
                31,
            
            December
                31,
            
            December
                31,2006
            
            2005
            
            2004**Net
                sales**
            
            $
            92,408,539
            
            $
            72,580,171
            
            $
            56,764,822**Cost
                of sales**
            
            
            83,618,526
            
            
            64,963,978
            
            
            50,862,013**Gross
                profit**
            
            
            8,790,013
            
            
            7,616,193
            
            
            5,902,809**Operating
                expenses:**Selling
                and marketing
            
            
            490,191
            
            
            624,131
            
            
            549,047General
                and administrative
            
            
            793,453
            
            
            671,191
            
            
            1,006,117Total
                operating expenses
            
            
            1,283,644
            
            
            1,295,322
            
            
            1,555,164**Income
                from operations**
            
            
            7,506,369
            
            
            6,320,871
            
            
            4,347,645**Other
                income (expenses):**Interest
                expense
            
            
            (798,868
            )
            
            (497,901
            )
            
            (100,302
            )Interest
                income
            
            
            69,628
            
            
            -
            
            
            -Loss
                on disposal of fixed assets
            
            
            -
            
            
            -
            
            
            (44,831
            )Miscellaneous
            
            
            12,564
            
            
            (664
            )
            
            4,249Total
                other expenses
            
            
            (716,676
            )
            
            (498,565
            )
            
            (140,884
            )**Income
                before provision for income taxes**
            
            
            6,789,693
            
            
            5,822,306
            
            
            4,206,761**Provision
                for income taxes**
            
            
            995,462
            
            
            452,538
            
            
            358,396**Net
                income**
            
            
            5,794,231
            
            
            5,369,768
            
            
            3,848,365**Other
                comprehensive income**-
                foreign currencytranslation
                adjustments
            
            
            288,419
            
            
            143,706
            
            
            -**Comprehensive
                income**
            
            $
            6,082,650
            
            $
            5,513,474
            
            $
            3,848,365**Earnings
                per share - basic**
            
            $
            0.30
            
            $
            0.28
            
            $
            0.20**Earnings
                per share - diluted**
            
            $
            0.28
            
            $
            0.28
            
            $
            0.20**Weighted
                average number of common shares -****Basic**
            
            
            19,039,319
            
            
            18,886,666
            
            
            18,886,666**Weighted
                average number of common shares -****Diluted**
            
            
            20,830,407
            
            
            18,886,666
            
            
            18,886,666





**The
      accompanying notes form an integral part of these consolidated financial
      statements**





F-4




**Fuqi
                International, Inc.****Consolidated
                Statements of Stockholders' Equity****Years
                Ended December 31, 2006, 2005 and 2004**




Common
                StockShares
            
            Amount
            
            Additional
                Paid in Capital
            
            Other
                Comprehensive Income
            
            Retained
                Earnings
            
            Total
                Stockholders' EquityBalance,
                December 31, 2003
            
            
            18,886,666
            
            $
            18,887
            
            $
            2,390,752
            
            $
            -
            
            $
            413,379
            
            $
            2,823,018Dividend
                paid
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,975,904
            )
            
            (3,975,904
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,848,365
            
            
            3,848,365Balance,
                December 31, 2004
            
            
            18,886,666
            
            
            18,887
            
            
            2,390,752
            
            
            -
            
            
            285,840
            
            
            2,695,479Capital
                contributions
            
            
            -
            
            
            -
            
            
            4,819,277
            
            
            -
            
            
            -
            
            
            4,819,277Dividend
                paid
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,421,687
            )
            
            (5,421,687
            )Foreign
                currency translation adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            143,706
            
            
            -
            
            
            143,706Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,369,768
            
            
            5,369,768Balance,
                December 31, 2005
            
            
            18,886,666
            
            
            18,887
            
            
            7,210,029
            
            
            143,706
            
            
            233,921
            
            
            7,606,543Reverse
                acquisition of Fuqi BVI
            
            
            1,828,718
            
            
            1,837
            
            
            (6,365
            )
            
            -
            
            
            -
            
            
            (4,528
            )Dividend
                paid
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,739,726
            )
            
            (2,739,726
            )Foreign
                currency translation adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            288,419
            
            
            -
            
            
            288,419Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,794,231
            
            
            5,794,231Balance,
                December 31, 2006
            
            
            20,715,384
            
            $
            20,724
            
            $
            7,203,664
            
            $
            432,125
            
            $
            3,288,426
            
            $
            10,944,939




**The
      accompanying notes form an integral part of these consolidated financial
      statements**





F-5


**F****uqi
                International, Inc.****Consolidated
                Statement of Cash Flows****Increase
                (Decrease) in Cash**




Year
                Ended
            
            Year
                Ended
            
            Year
                EndedDecember
                31,
            
            December
                31,
            
            December
                31,2006
            
            2005
            
            2004**Cash
                flows provided by operating activities:**Net
                income
            
            $
            5,794,231
            
            $
            5,369,768
            
            $
            3,848,365**Adjustments
                to reconcile net income to net cash****provided
                by (used for) operating activities:**Depreciation
                and amortization
            
            
            326,852
            
            
            239,449
            
            
            184,740Loss
                on disposal of fixed assets
            
            
            -
            
            
            -
            
            
            44,831Bad
                debt
            
            
            (115,592
            )
            
            7,320
            
            
            (318,904
            )**Changes
                in operating assets and liabilities:**Accounts
                receivable
            
            
            (1,958,441
            )
            
            (2,277,877
            )
            
            (2,727,184
            )Refundable
                value added taxes
            
            
            387,787
            
            
            (192,867
            )
            
            325,763Inventories
            
            
            (109,243
            )
            
            (850,319
            )
            
            (159,309
            )Inventory
                loan receivable
            
            
            697,530
            
            
            (677,335
            )
            
            -Prepaid
                expenses
            
            
            (27,078
            )
            
            (102,994
            )
            
            (10,617
            )Deposits
                - short term
            
            
            (376,932
            )
            
            (335,517
            )
            
            -Deferred
                taxes
            
            
            (5,654
            )
            
            (488
            )
            
            22,410Other
                current assets
            
            
            2,175
            
            
            (2,112
            )
            
            -Deposits
                related to borrowings on notes payable/long term debt
            
            
            (8,004
            )
            
            (3,497
            )
            
            51,987Other
                assets
            
            
            (35,504
            )
            
            (3,748
            )
            
            -Accounts
                payable, accrued expenses, accrued businesstax
                and accrued estimated penalties
            
            
            257,800
            
            
            132,890
            
            
            1,001,123Customer
                deposits
            
            
            (1,614,529
            )
            
            1,491,538
            
            
            (291,573
            )Income
                tax payable
            
            
            821,571
            
            
            408,461
            
            
            299,159Net
                cash provided by operating activities
            
            
            4,036,969
            
            
            3,202,672
            
            
            2,270,791**Cash
                flows provided by (used for) investing
                activities:**Purchase
                of property, equipment and improvements
            
            
            (31,873
            )
            
            (838,959
            )
            
            (557,065
            )Disbursements
                on advances to stockholder
            
            
            (51,529,
                693
            )
            
            (90,007,069
            )
            
            (546,203
            )Proceeds
                from collections on advances to stockholder
            
            
            58,409,847
            
            
            75,644,023
            
            
            -Increase
                in restricted cash
            
            
            2,764,166
            
            
            (2,726,146
            )
            
            -Net
                cash provided by (used for) investing activities
            
            
            9,612,447
            
            
            (17,928,151
            )
            
            (1,103,268
            )**Cash
                flows provided by (used for) financing
                activities:**Proceeds
                from short-term borrowing
            
            
            -
            
            
            7,572,297
            
            
            4,439,759Proceeds
                from long-term debt
            
            
            -
            
            
            1,239,157
            
            
            -Proceeds
                from loans borrowed from affiliate
            
            
            -
            
            
            -
            
            
            2,767,538Repayments
                to loans payable to affiliate
            
            
            -
            
            
            -
            
            
            (3,976,071
            )Loan
                from (repayment to) a related party
            
            
            (1,005,151
            )
            
            991,326
            
            
            -Proceeds
                from capital contribution
            
            
            -
            
            
            4,819,277
            
            
            -Reverse
                acquisition of Fuqi BVI
            
            
            (4,528
            )
            
            -
            
            
            -Proceeds
                from loans borrowed from stockholder
            
            
            23,545,485
            
            
            -
            
            
            24,140,472Repayments
                to loans payable to stockholder
            
            
            (23,130,562
            )
            
            -
            
            
            (29,577,058
            )Net
                cash provided by (used for) financing activities
            
            
            (594,756
            )
            
            14,622,057
            
            
            (2,205,360
            )**Effect
                of exchange rate changes on cash**
            
            
            228,842
            
            
            (80,775
            )
            
            -**Net
                increase (decrease) in cash**
            
            
            13,283,502
            
            
            (184,197
            )
            
            (1,037,837
            )**Cash,**beginning
                of year
            
            
            71,479
            
            
            255,676
            
            
            1,293,513**Cash,**end
                of year
            
            $
            13,354,981
            
            $
            71,479
            
            $
            255,676**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            786,941
            
            $
            476,399
            
            $
            100,302Income
                taxes paid
            
            $
            71,479
            
            $
            34,103
            
            $
            34,103**Non-cash
                activities:**Decrease
                in due from stockholder for dividend declared and paid
            
            $
            2,739,726
            
            $
            5,421,687
            
            $
            3,975,904




**The
      accompanying notes form an integral part of these consolidated financial
      statements**





F-6




**Notes
      to Consolidated Financial Statements**





**(1)**
            **Summary
                of Significant Accounting
                Policies:**





**Organization,
      Nature of Business and Basis of Presentation**





Fuqi
      International, Inc. (‘Fuqi” or “the Company”), formerly VT Marketing Services,
      Inc. (“VTM”), was originally incorporated in the State of Arizona on September
      3, 2004 as a wholly-owned subsidiary of Visitalk Capital Corporation (“VCC”),
      and was formed as part of the implementation of the Chapter 11
      reorganization plan (the “Visitalk Plan”) of visitalk.com, Inc.
      (“Visitalk.com”). Visitalk.com filed for Chapter 11 Bankruptcy in November 2000.
      The Visitalk Plan became effective on September 17, 2004 (the “Effective Date”).
      On September 22, 2004, Visitalk.com merged into VCC, which was authorized as
      the
      reorganized debtor under the Visitalk Plan.





The
      Company’s original business was to use Visitalk.com’s technology to facilitate
      peer-to-peer marketing activities. The Visitalk Plan authorized the Company
      to
      acquire certain technology rights from VCC on the Effective Date. To acquire
      these rights, VTM issued to VCC 324,044 shares of the Company’s common stock and
      common stock purchase warrants allowing holders to purchase additional shares
      of
      common stock (the “Plan Warrants”). The Visitalk Plan further authorized VCC to
      distribute 54,837 of the 324,044 shares of common stock to 240 creditors of
      Visitalk.com and all of the Plan Warrants to 645 claimants of Visitalk.com,
      in
      accordance with the Visitalk Plan. After the distribution of the shares of
      the
      Company’s common stock and Plan Warrants, but prior to the Bay Peak Sale,
      discussed below, VCC owned approximately 82.1% of issued and outstanding common
      stock.





On
      July
      21, 2006, VTM sold 1,368,761 shares of common stock (post Reverse Split
      described below) to BayPeak, LLC. As part of this transaction (the “Bay Peak
      Sale”), the Company abandoned its peer-to-peer marketing business, which was
      transferred to VCC, and began to seek companies in Asia with potential, in
      particular companies based in China, to acquire. The shares issued in the Bay
      Peak Sale represented 74.49% of the Company’s outstanding shares. On July 28,
      2006, Visitalk.com was granted its Final Decree by the Bankruptcy Court. On
      November 6, 2006, VTM conducted a reverse stock split of its shares common
      stock
      and issued one share for each 15.43 shares of common stock then outstanding
      (the
“Reverse Split”). No stockholder was reversed below 100 shares in the Reverse
      Split and the then outstanding Plan Warrants were not effected by the Reverse
      Split. On November 8, 2006, VTM changed its state of incorporation from Arizona
      to Nevada.





On
      November 20, 2006, VTM entered into a share exchange agreement with Yu Kwai
      Chong, who was the sole stockholder of Fuqi International Holdings Co.,
      Ltd., a British Virgin Islands corporation (“Fuqi BVI”) pursuant to which VTM
      agreed to acquire all of the issued and outstanding capital stock of Fuqi BVI
      (the “Exchange Transaction”). The Exchange Transaction closed on November 22,
      2006 and, per the terms of the share exchange agreement (the “Share Exchange
      Agreement”), VTM issued an aggregate of 18,886,666 shares of its common stock in
      exchange for all of the issued and outstanding securities of Fuqi BVI. Pursuant
      to the Share Exchange Agreement, BayPeak agreed to cancel 8,761 shares of common
      stock.





Immediately
      after the closing of the Exchange Transaction and Reverse Split, VTM had
      20,715,384 outstanding shares of common stock, and options and warrants to
      purchase 16,846,982 shares of common stock (see Note 9). Immediately after
      the
      Exchange Transaction and Reverse Split, the former Fuqi BVI stockholder held
      approximately 91.2% of its voting capital stock.





On
      December 8, 2006, VTM changed its corporate name from “VT Marketing Services,
      Inc.” to “Fuqi International, Inc.” and reincorporated from the State of Nevada
      to the State of Delaware.





F-7


VTM
      shares of common stock are not currently listed or quoted for trading on any
      national securities exchange or national quotation system. The transactions
      contemplated by the Share Exchange Agreement, as amended, were intended to
      be a
“tax-free” incorporation pursuant to the provisions of Section 368 of the
      Internal Revenue Code of 1986, as amended. All share information presented
      in
      the accompanying consolidated financial statements reflects the Reverse Split.





Fuqi
      BVI
      was incorporated under the laws of the British Virgin Islands on January 2,
      2004. Shenzhen Fuqi Jewelry Company Limited (“Shenzhen Fuqi”) was formed in the
      People’s Republic of China (the “PRC”) on April 2, 2001 as a limited liability
      corporation. Shenzhen Fuqi is the
      operating entity and has substantially all the assets and operations. Under
      the
      provision of the Company’s By-Laws, the Shenzhen Business Bureau granted to the
      Company the right to operate for a period of 10 years. The principal activities
      of the Company are designing, manufacturing, selling, and marketing of jewelry
      products to department stores throughout the PRC.





Prior
      to
      May 17, 2006, Fuqi BVI has minimal assets and no operations. On
      May
      17, 2006, Shenzhen Fuqi became a wholly-owned foreign enterprise of Fuqi BVI
      and
      this arrangement has been approved by the PRC government. Under
      the
      provision of the Company’s By-Laws, the Shenzhen Business Bureau granted to the
      Company the right to operate for a period of 35 years from the first date of
      incorporation in 2001 (an additional 25 years to operate). Subsequent
      to this transaction, Shenzhen Fuqi became the wholly owned subsidiary of Fuqi
      BVI and the stockholders of Shenzhen Fuqi became the stockholders of Fuqi BVI. For
      financial reporting purposes, the transaction is classified as a
      recapitalization of Shenzhen Fuqi and the historical financial statements of
      Shenzhen Fuqi are reported as Fuqi BVI’s historical financial statements.





Upon
      the
      completion of the transactions on May 17, 2006 and November 22, 2006, the
      Company owns 100% of Fuqi BVI which owns 100% of Shenzhen Fuqi, the operating
      entity of the Company. The accompanying consolidated financial statements were
      retroactively adjusted to reflect the effects of the two recapitalizations
      entered during 2006.





The
      Company currently operates in two divisions, production and sales and marketing.
      The production division is responsible for all manufacturing of jewelry
      products, while the sales and marketing division is responsible for all of
      the
      selling and marketing functions of the products including customer relationships
      and customer service. The Company grants credit to the majority of its
      customers, which are located throughout the PRC, and the Company does not
      generally require collateral.





**Consolidation
      Policy:**





The
      consolidated financial statements include the consolidated financial statements
      of Fuqi International and its wholly owned subsidiaries, Fuqi BVI and Shenzhen
      Fuqi. All significant intercompany accounts and transactions have been
      eliminated in preparation of the consolidated financial statements.





**Cost
      of Sales:**





Cost
      of
      sales includes raw material labor and overhead cost. Overhead costs consist
      of
      depreciation for improvements related to the factory and machinery and
      equipment, indirect labor, utilities, factory rent and warehouse costs. The
      Company did not incur any significant amount of inbound freight charges,
      purchasing and receiving costs since the Company’s raw material including
      primarily gold and platinum were picked up by the Company’s operation manager.
      All the costs related to the Company’s distribution network are included in the
      cost of sales.





F-8


**Operating
      Costs:**





Selling
      and marketing expenses include salaries and employee benefits, advertising,
      travel and entertainment, insurance and business taxes.




General
      and administrative expenses include management and office salaries and employee
      benefits, deprecation for office facility and office equipment, travel and
      entertainment, insurance, legal and accounting, consulting fees, workers’
compensation insurance, and other office expenses.








**Revenue
      Recognition**





Revenue
      is recognized upon delivery and acceptance of jewelry products by its customers,
      provided that the other conditions of sales, as established by the Securities
      and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104, are
      satisfied:





·  Persuasive
      evidence of an arrangement exists;




·  Delivery
      has occurred, upon shipment when title passes, or


services
      have been rendered;




·  The
      seller’s price to the buyer is fixed or determinable; and




·  Collectibility
      is reasonably assured.





**Currency
      Reporting**





Amounts
      reported in the accompanying consolidated financial statements and disclosures
      are stated in U.S. Dollars, unless stated otherwise. The functional currency
      of
      the Company, which accounted for most of the Company’s operations, is reported
      in Renminbi (“RMB”). Foreign currency transactions (outside PRC) during the
      years ended December 31, 2006, 2005 and 2004 are translated into RMB according
      to the prevailing exchange rate at the transaction dates. Assets and liabilities
      denominated in foreign currencies at the balance sheet dates are translated
      into
      RMB at year-end exchange rates.




The
      Company’s functional currency is RMB. For the purpose of preparing the
      consolidated financial statements, the consolidated balance sheets of the
      Company have been translated into U.S. dollars at the current rates as of
      December 31, 2006 and 2005 and the statements of income have been translated
      into U.S. dollars at the weighted average rates during the years the
      transactions were recognized.





The
      resulting translation gain adjustments are recorded as other comprehensive
      income in the consolidated statements of income and comprehensive income and
      as
      a separate component of consolidated statements of stockholders’
equity.





**Basic
      and Diluted Earnings Per Share**





In
      accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
      per common share is computed by dividing net earnings (loss) available to common
      stockholders by the weighted average number of common shares outstanding.
      Diluted earnings (loss) per common share is computed similarly to basic earnings
      (loss) per common share, except that the denominator is increased to include
      the
      number of additional common shares that would have been outstanding if the
      potential common shares had been issued and if the additional common shares
      were
      dilutive. As of December 31, 2006, the Company had common stock equivalents
      of
      16,846,982 shares upon the exercise of the plan warrants. The computation of
      dilutive potential common shares is shown as follows:





2006
            
            2005
            
            2004Basic
                weighted average shares
            
            
            19,030,319
            
            
            18,886,666
            
            
            18,886,666Effect
                of dilutive securities - warrants
            
            
            1,800,088
            
            
            -
            
            
            -Dilutive
                potential common shares
            
            
            20,830,407
            
            
            18,886,666
            
            
            18,886,666





F-9




**Share-Based
      Payment**




In
      accordance with SFAS No. 123R, “Share-based Payment: An amendment of FASB
      Statement No. 123” (“SFAS 123R”), effective January 1, 2006, the Company is
      required to recognize compensation expense related to stock options granted
      to
      employees based on: (a) compensation cost for all share-based payments granted
      prior to, but not vested as of December 31, 2005, based on the grant date fair
      value estimated in accordance with SFAS No 123, “Accounting for Stock-Based
      Compensation” (“SFAS 123”), and (b) compensation cost for all share-based
      payments granted subsequent to December 31, 2005, based on the grant-date fair
      value estimated in accordance with the provisions of SFAS 123R. The Company
      has
      not yet issued any options during the years ended December 31, 2006, 2005 and
      2004 and has no outstanding options as of December 31, 2006.




**Use
      of Estimates**





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities at the dates of the consolidated financial statements
      and
      the reported amounts of revenues and expenses during the reporting periods.
      Actual results could differ from those estimates.





**Cash**





For
      purposes of the consolidated statements of cash flows, cash equivalents include
      all highly liquid debt instruments with original maturities of three months
      or
      less which are not securing any corporate obligations. The Company had no cash
      equivalents at December 31, 2006 and 2005.





**Restricted
      Cash**





The
      Company committed to loan a total of $2,726,146 to three related parties in
      2005. Per the agreements with the bank, the Company was required to maintain
      $2,726,146 in the bank to cover these loans when they are drawn by these
      entities. As of December 31, 2005, the cash has not yet been drawn by these
      entities and the balance of the restricted amount was classified as restricted
      cash in the balance sheets. The agreements with the bank expired during
      2006.





The
      Company committed to loan a total of $2,820,513 to 2 related parties in 2006.
      Per the agreements with the bank, the Company was required to maintain
      $2,820,513 in the bank to cover these loans when they are drawn by these
      entities. The agreements with the bank expired during 2006,and accordingly
      the
      cash balance was no longer restricted as of December 31, 2006.




**Comprehensive
      Income**





Statement
      on Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive
      Income”, establishes standards for the reporting and display of comprehensive
      income and its components in the financial statements. For the years ended
      December 31, 2006, 2005, and 2004, other comprehensive income includes
      foreign currency translation adjustments.





F-10


**Fair
      Value Disclosures of Financial Instruments**





The
      Company has estimated the fair value amounts of its financial instruments using
      the available market information and valuation methodologies considered to
      be
      appropriate and has determined that the book value of the Company’s accounts
      receivable, refundable value added taxes, inventories, due from/to stockholder,
      notes payable, accounts payable and accrued expenses, accrued business tax,
      accrued penalties, customer deposits, and income tax payable at
      December 31, 2006 and 2005 approximate fair value.





**Accounts
      Receivable**





The
      Company provides an allowance for doubtful accounts equal to the estimated
      uncollectible amounts. The Company’s estimate is based on historical collection
      experience and a review of the current status of trade account receivable.
      It is
      reasonably possible that the Company’s estimate of the allowance for doubtful
      accounts will change. Accounts receivable are presented net of an allowance
      for
      doubtful accounts of approximately $195,000 and $302,000 at December 31, 2006
      and 2005, respectively.





**Concentration
      of Credit Risk**





The
      Company’s product revenues are concentrated in production and sales of fine
      jewelry products, which are highly competitive with frequent changes in styles
      and fashion. Significant customer preference changes in the industry or customer
      requirements, or the emergence of competitive products with better marketing
      strategies and more well-known brand name, could adversely affect the Company’s
      operating results.





Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      consist principally of trade accounts receivable from jewelry retailers located
      throughout China. The credit risk in the Company’s accounts receivable is
      mitigated by the fact that the Company performs ongoing credit evaluations
      of
      its customers’ financial condition and that accounts receivable are primarily
      derived from large credit-worthy companies throughout the PRC. In addition,
      the
      Company has a diversified customer base. Historically, the Company has not
      experienced significant losses related to trade receivables. Generally, no
      collateral is required.





**Major
      Customer**





During
      the year ended December 31, 2006, 9% of the Company sales were generated from
      one customer. Accounts receivable from this customer totaled $2,234,959, which
      represented 22% of the total accounts receivable as of December 31, 2006.
      During the year ended December 31, 2005, 15% of the Company sales were generated
      from one customer. Accounts receivable from this customer totaled $949,453,
      which represented 14% of the total accounts receivable as of December 31,
      2005.





**Major
      Supplier**





Under
      the
      PRC laws, supply of precious metals such as platinum, gold, and silver are
      highly regulated under certain government agencies. Shanghai Gold Exchange
      is
      the Company’s primary source of supply for its raw materials which consist of
      precious metals. The Company is required to obtain several membership and
      approval certificates from these government agencies in order to continue to
      do
      business involving precious metals. The Company may be required to renew such
      membership and to obtain approval certificates periodically. If the Company
      is
      unable to renew these periodic membership or approval certificates, it could
      materially affect the Company’s business operations. The Company was in good
      standing with these agencies as of December 31, 2006.





F-11


**Inventories**





Inventories
      are valued at the lower of cost (first-in, first-out) or fair market value
      method and include raw materials, work in process, and finished
      goods.





**Inventory
      Loan Receivable**





The
      Company entered into an agreement to loan certain gold raw material to a
      non-related party in December 2005. The raw material was returned in May 2006.
      The outstanding balance of inventory loan receivable was carrying at the
      historical purchase cost as of December 31, 2005.




**Property,
      Equipment and Improvements**





Property,
      equipment and improvements are valued at cost. Depreciation and amortization
      are
      computed on the straight-line method based on the estimated useful life of
      respective assets.





The
      estimated service lives of property, equipment, and improvements are as follows:


Production
              5
                  yearsOffice,
                  furniture and fixture
              5
                  yearsComputer
                  hardware
              5
                  yearsComputer
                  software
              5
                  yearsLeasehold
                  improvements
              2
                  -
                  4 yearsBuildings
              20
                  years





**Long-Lived
      Assets**





In
      accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
      “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived
      assets to be held and used are analyzed for impairment whenever events or
      changes in circumstances indicate that the carrying amount of an asset may
      not
      be recoverable. SFAS No. 144 relates to assets that can be amortized and the
      life can be determinable. The Company evaluates at each balance sheet dates
      whether events and circumstances have occurred that indicate possible
      impairment. If there are indications of impairment, the Company uses future
      undiscounted cash flows of the related assets or asset grouping over the
      remaining life in measuring whether the assets are recoverable. In the event
      such cash flows are not expected to be sufficient to recover the recorded asset
      values, the assets are written down to their estimated fair value. Long-lived
      assets to be disposed of are reported at the lower of carrying amount or fair
      value of asset less disposal costs. The Company determined that there was no
      impairment of long-lived assets as of December 31, 2006 and 2005.





**Advertising**





The
      Company expenses advertising costs when incurred. The Company incurred
      approximately $33,000, $132,000 and $60,000 of advertising expense for the
      years
      ended December 31, 2006, 2005, and 2004, respectively.





**Income
      Taxes**





Deferred
                tax assets and liabilities are recognized for the future tax consequences
                attributable to differences between the financial statement carrying
                amounts of existing assets and liabilities and their respective tax
                bases.
                Deferred tax assets, including tax loss and credit carryforwards,
                and
                liabilities are measured using enacted tax rates in the PRC expected
                to
                apply to taxable income in the years in which those temporary differences
                are expected to be recovered or settled. The effect on deferred tax
                assets
                and liabilities of a change in tax rates is recognized in income
                in the
                period that includes the enactment date. Deferred income tax expense
                represents the change during the period in the deferred tax assets
                and
                deferred tax liabilities. The components of the deferred tax assets
                and
                liabilities are individually classified as current and non-current
                based
                on their characteristics. Realization of the deferred tax asset is
                dependent on generating sufficient taxable income in future years.




F-12





**Segment
          Reporting**





Based
                on the Company’s integration and management strategies, the Company
                operated in a single business segment. All of the Company’s sales are
                generated in the PRC and substantially all of the Company’s assets are
                located in the PRC.




**New
      Accounting Pronouncements**





In
      February 2006, the Financial Accounting Standards Board issued SFAS No. 155,
      “Accounting for Certain Hybrid Financial Instruments -- an amendment of FASB
      Statements No. 133 and 140.” FAS No. 155 simplifies the accounting for certain
      hybrid financial instruments, eliminates the FASB's interim guidance which
      provides that beneficial interests in securitized financial assets are not
      subject to the provisions of SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities," and eliminates the restriction on the
      passive derivative instruments that a qualifying special-purpose entity may
      hold. SFAS No. 155 is effective for all financial instruments acquired or issued
      after the beginning of an entity's first fiscal year that begins after September
      15, 2006, however, early adoption is permitted for instruments acquired or
      issued after the beginning of an entity's fiscal year in 2006. The Company
      is
      evaluating the impact of this new pronouncement to its financial position and
      results of operations or cash flows.





In
      March
      2006, the FASB issued SFAS No. 156 (“FAS 156”), “Accounting for Servicing of
      Financial Assets—An Amendment of FASB Statement No. 140”. Among other
      requirements, FAS 156 requires a company to recognize a servicing asset or
      servicing liability when it undertakes an obligation to service a financial
      asset by entering into a servicing contract under certain situations. Under
      FAS
      156 an election can also be made for subsequent fair value measurement of
      servicing assets and servicing liabilities by class, thus simplifying the
      accounting and provide for income statement recognition of potential offsetting
      changes in the fair value of servicing assets, servicing liabilities and related
      derivative instruments. The Statement will be effective beginning the first
      fiscal year that begins after September 15, 2006. We do not expect the adoption
      of FAS 156 will have a material impact on the Company’s financial position or
      results of operations.




In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes”. This interpretation requires companies to determine whether it is
      more likely than not that a tax position will be sustained upon examination
      by
      the appropriate taxing authorities before any part of the benefit can be
      recorded in the financial statements. FIN 48 provides guidance on
      de-recognition, classification, accounting in interim periods and disclosure
      requirements for tax contingencies. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The differences between the amounts
      recognized in the statements of financial position prior to the adoption of
      FIN
      48 and the amounts reported after adoption will be accounted for as a
      cumulative-effect adjustment recorded to the beginning balance of retained
      earnings. We are evaluating the impact of this new pronouncement to the
      Company’s financial position and results of operations or cash
      flows.




In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”.
      SFAS 157 defines fair value, establishes a framework and gives guidance
      regarding the methods used for measuring fair value, and expands disclosures
      about fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. We are evaluating the impact of this new
      pronouncement to the Company’s financial position and results of operations or
      cash flows.




F-13


In
      September 2006, the FASB issued Statement No. 158, “Employers” Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires companies to
      recognize the overfunded or underfunded status of a defined benefit
      post-retirement plan as an asset or liability in its balance sheet and to
      recognize changes in that funded status in the year in which the changes occur
      through comprehensive income, effective for fiscal years ending after December
      15, 2006. SFAS 158 also requires companies to measure the funded status of
      the
      plan as of the date of its fiscal year-end, with limited exceptions, effective
      for fiscal years ending after December 15, 2008. We do not expect the adoption
      of SFAS 158 will have a material impact on the Company’s financial position or
      results of operations, as we do not currently have any defined benefit pension
      or other post-retirement plans.




In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), “Financial
      Statements - Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements ”.
      SAB
      108 provides guidance on how prior year misstatements should be taken into
      consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year's financial
      statements are materially misstated. SAB 108 provides that once a current year
      misstatement has been quantified, the guidance in SAB No. 99, “ Financial
      Statements - Materiality”, should
      be applied to determine whether the misstatement is material and should result
      in an adjustment to the financial statements. Under certain circumstances,
      prior
      year financial statements will not have to be restated and the effects of
      initially applying SAB 108 on prior years will be recorded as a cumulative
      effect adjustment to beginning Retained Earnings on January 1, 2006, with
      disclosure of the items included in the cumulative effect. The Company does
      not
      expect the application of the provisions of SAB 108 to have a material impact,
      if any, on the consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”. The objective of this statement is
      to improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. This Statement is expected by the board to expand the use of fair
      value measurement, which is consistent with the Board's long-term measurement
      objectives for accounting for financial instruments. This statement is effective
      for fiscal years beginning after November 15, 2007. The Company is currently
      evaluating the impact of adopting this statement; however, the Company does
      not
      expect the adoption of this provision to have a material effect on its financial
      position, results of operations or cash flows.




**Reclassifications**





Certain
      reclassifications have been made to the 2005 and 2004 consolidated financial
      statements to conform to the 2006 presentation.




**(2)**
            **Inventories:**





2006
            
            2005Raw
                materials
            
            $
            743
            
            $
            4,097,704Work
                in process
            
            
            3,917,795
            
            
            996,396Finished
                goods
            
            
            2,147,675
            
            
            667,953$
            6,066,213.
            
            $
            5,762,053.




F-14




**(3)**
            **Property,
                Equipment, and
                Improvements:**





A
      summary
      is as follows:





2006
            
            2005Production
                equipment
            
            $
            950,479
            
            $
            894,479Computers
            
            
            14,976
            
            
            12,246Office
                equipment and furniture
            
            
            101,289
            
            
            94,044Automobiles
            
            
            254,841
            
            
            246,589Leasehold
                improvements
            
            
            382,963
            
            
            314,801Building
            
            
            545,257
            
            
            527,6022,249,805
            
            
            2,089,761Less
                accumulated depreciation andamortization
            
            
            895,492
            
            
            544,140$
            1,354,313
            
            $
            1,545,621





Depreciation
      and amortization expense for property, equipment, and improvements amounted
      to
      approximately $327,000, $239,000 and $185,000, for the years ended December
      31,
      2006, 2005, and 2004, respectively.


F-15





**(4)**
            **Notes
                Payable:**




On
      December 31, 2006, outstanding notes payable to the bank consist of loan
      agreements which are covered by a Maximum Banking Facility Agreement dated
      August 24, 2006 with this bank. Under the agreement, maximum facility amounting
      $12,806,229 was secured by the Company’s inventories. As of December 31, 2006,
      the Company has outstanding loan balance with this bank totaling $12,806,229.
      Outstanding balances of the loan agreements consist of the
      followings:





2006
            
            2005Four
                notes payable to a bank, including interest at a rate of 5.22%, secured
                by
                the Company’s inventories and certain real estate properties owned by an
                affiliated company, matured in March 2006 and April 2006. The loan
                was
                repaid upon expiry
            
            
            -
            
            
            3,717,473Three
                notes payable to a bank, including interest at a rate of 5.22%, guaranteed
                by the Company’s inventories and personally guaranteed by the stockholder,
                matured in January 2006
            
            
            -
            
            
            2,478,314A
                note payable to a bank, including interest at a rate of 5.22%, guaranteed
                by the Company’s inventories and certain real estate properties owned by
                an affiliated company and personally guaranteed by the stockholder,
                matured in May 2006
            
            
            -
            
            
            1,239,157Two
                notes payable to a bank, including interest at a rate of 5.22%, guaranteed
                by the Company’s inventories and certain real estate properties owned by
                an affiliated company and personally guaranteed by the stockholder,
                matured in February 2006
            
            
            -
            
            
            2,478,315Two
                notes payable to a bank, including interest at a rate of 5.84%, guaranteed
                by the Company’s inventories and certain real estate properties owned by
                an affiliated company and personally guaranteed by the stockholder,
                matured in June 2006
            
            
            -
            
            
            2,478,315A
                note payable to a bank, including interest at a rate of 5.76%, secured
                by
                the Company’s inventories and certain real estate properties owned by an
                affiliated company, matured in January 2007. The loan was repaid
                upon
                expiry and was not renewed.
            
            
            1,280,623
            
            
            *-*Two
                notes payable to a bank, including interest at a rate of 5.85%, guaranteed
                by affiliated companies and personally guaranteed by the stockholder,
                matured in February 2007
            
            
            2,561,246
            
            
            *-*A
                note payable to a bank, including interest at a rate of 5.58%, guaranteed
                by affiliated companies and personally guaranteed by the stockholder,
                matured in February 2007
            
            
            1,280,623
            
            
            *-*Four
                notes payable to a bank, including interest at a rate of 5.832%,
                secured
                by the Company’s inventories and certain real estate properties owned by
                an affiliated company and guaranteed by affiliated companies and
                personally guaranteed by the stockholder, matured in January
                2007
            
            
            3,841,869
            
            
            *-*A
                note payable to a bank, including interest at a rate of 6.138%, guaranteed
                by affiliated companies and secured by certain real estate properties
                owned by an affiliated company, matured in March 2007
            
            
            1,280,623
            
            
            *-*A
                note payable to a bank, including interest at a rate of 6.732%, guaranteed
                by affiliated companies and secured by the Company’s inventories and
                certain real estate properties owned by an affiliated company and
                personally guaranteed by the stockholder, matured in July
                2007
            
            
            960,467
            
            
            *-*A
                note payable to a bank, including interest at a rate of 6.732%, secured
                by
                the Company’s inventories and certain real estate properties owned by the
                affiliated companies, guaranteed by affiliated companies and personally
                guaranteed by the stockholder, matured in September 2007
            
            
            960,467
            
            
            *-*A
                note payable to a bank, including interest at a rate of 6.426%, secured
                by
                the Company’s inventories and certain real estate properties owned by the
                affiliated companies, guaranteed by affiliated companies and personally
                guaranteed by the stockholder, matured in September 2007
            
            
            1,024,498
            
            
            *-*A
                note payable to a bank, including interest at a rate of 6.426%, secured
                by
                the Company’s inventories and certain real estate properties owned by the
                affiliated companies, guaranteed by affiliated companies and personally
                guaranteed by the stockholder, matured in October 2007
            
            
            896,436
            
            
            *-*A
                note payable to a bank, including interest at a rate of 6.732%, secured
                by
                the Company’s inventories, guaranteed by affiliated companies and
                personally guaranteed by the stockholder, matured in December
                2007
            
            
            1,280,623
            
            
            *-*$
            14,086,852
            
            $
            12,391,574





F-16





**(5)**
            **Loan
                Payable, Related Party:**





In
      December 2005, the Company received an unsecured non-interest bearing loan
      from
      a related party in the amount of $991,326. There was no formal written agreement
      entered between the Company and this related party. This loan is short-term
      in
      nature and was repaid in 2006.





**(6)**
            **Long
                Term Debt:**





In
      December 2004, the Company entered into a loan agreement with a bank with a
      loan
      amount of $1,204,819 (RMB10,000,000). The draw took place in January 2005 and
      therefore it has an outstanding balance of $0 as of December 31, 2004.
      Outstanding balance of this loan amounted to $1,280,623 as of December 31,
      2006.
      The loan bears interest at a rate of 5.76% per annum. The outstanding balance
      is
      secured by certain cash deposits, which were classified as Deposits related
      to
      borrowings on notes payable/long term debt in the accompanying consolidated
      balance sheets as of December 31, 2006 and 2005, certain real estate properties
      owned by an affiliate and is personally guaranteed by the stockholder of the
      Company. This loan was classified as note payable in the Balance Sheet as of
      December 31, 2005 and 2006 and this loan was repaid in January
      2007.





**(7)**
            **Related-Party
                Transactions:**





The
      Company earned certain cash revenues from its customers that were subsequently
      collected by its stockholder. Total cash revenues amounted to $5,896,354,
      $6,100,298, and $4,505,023 and the amounts collected by its stockholder totaled
      $2,878,209, $6,100,298 and $4,505,023, respectively, for the years ended
      December 31, 2006, 2005 and 2004. Beginning December 2006, this stockholder
      is
      no longer collecting cash revenue on behalf of the Company and all the cash
      revenues are deposited through the Company’s bank accounts.





The
      Company’s stockholder made non-interest bearing advances to the Company or
      borrowed from the Company since the inception of its operations. The Company
      borrowed $23,545,485, $0, and $24,140,472 from the stockholder and repaid
      $23,130,562, $0, and $29,577,058 during the years ended December 31, 2006,
      2005,
      and 2004. The Company advanced $51,529,693, $90,007,069, and $546,203 to the
      stockholder, and repaid $58,409,847, $75,644,023, and $0, during the years
      ended
      December 31, 2006, 2005, and 2004, respectively.





The
      Company borrowed $0, $0, and $2,767,538 from an affiliate and repaid $0, $0,
      and
      $3,976,071 to this affiliate during the years ended December 31, 2006, 2005
      and
      2004, respectively.





The
      Company’s stockholder made non-interest bearing advances to the Company or
      borrowed from the Company since the inception of its operations. The Company
      advanced $14,363,046 and $5,982,789 to this stockholder during the years ended
      December 31, 2005 and 2004 respectively.





The
      Company declared and paid dividends to its stockholder, prior to the closing
      of
      the Share Exchange Agreement and Reverse Split, totaling $2,739,726, $5,421,687
      and $3,975,904 during the years ended December 31, 2006, 2005 and 2004,
      respectively, which offset the amounts due from this stockholder





F-17


The
      Company has a total payable of $422,909 due to this stockholder as of December
      31, 2006. Outstanding amounts included in due from stockholder totaled
      $9,487,562 as of December 31, 2005.





**(8)**
            **Equity
                Incentive Plan:**





In
      November 2006, the Company’s stockholders approved an equity incentive plan
      (“2006 EIP”) for employees, non-employee directors and other service providers
      covering 3,000,000 shares of common stock. Prior to this, the Company had an
      approved 2004 Equity Incentive Plan, which was replaced by the 2006 EIP. No
      options are currently outstanding under either plan. Any options to be granted
      under the 2006 EIP may be either “incentive stock options”, as defined in
      Section 422A of the Internal Revenue Code, or “nonqualified stock options”,
      subject to Section 83 of the Internal Revenue Code, at the discretion of its
      board of directors and as reflected in the terms of the written option
      agreement. The option price shall not be less than 100% of the fair market
      value
      of the optioned common stock on the date the option is granted. The option
      price
      shall not be less than 110% of the fair market value of the optioned common
      stock for an optionee holding at the time of grant, more than 10% of the total
      combined voting power of all classes of its stock. Options become exercisable
      based on the discretion of its board of directors and must be exercised within
      ten years of the date of grant.





**(9)**
            **Stock
                Purchase Warrants**




**Plan
        Warrants**





In
      accordance with the Visitalk Plan, the Company has issued six series of common
      stock purchase warrants allowing holders to purchase additional shares of common
      stock ("Plan Warrants"). Each Plan Warrant provides for the purchase of one
      share of common stock and is callable by the Company for a price of $.0001
      per
      warrant at any time. The Plan Warrants are governed by a Warrant Agreement.
      Currently, the Company is acting as the Warrant Agent but has the right to
      appoint an alternative Warrant Agent in accordance with the Visitalk Plan.
      The
      board of directors can extend the expiration date of the Plan Warrants or reduce
      the exercise price of any warrant on a temporary or permanent basis. The Company
      has actually issued 6,785,014 Plan Warrants in each series to 240 claimants
      under the Visitalk Plan. In addition, up to 2,050,395 Plan Warrants in each
      series may be issued to 405 additional claimants under the Visitalk Plan, but
      will be issued only if such claimants execute an assignment or release of claims
      against Visitalk.com as specified in the Visitalk Plan. In relations with the
      execution of the share exchange agreement on November 20, 2006 referred in
      Note
      (1), four series of the Plan Warrants (series A, B, D and F) were called and
      expired. In substance, three of Visitalk Plan’s warrants were exchanged for each
      of the Company’s warrant. As of December 31, 2006, a total of 33,693,964 series
      C and series E warrants remained outstanding.





A
      summary
      of the Plan Warrants outstanding is as follows:




A
                & B
              Warrants
            
            C
                & D
              Warrants
            
            E
                & F
              WarrantsWarrants
                outstanding, December 31, 2005
            
            
            16,846,982
            
            
            16,846,982
            
            
            16,846,982Granted
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Expired
                or Forfeited
            
            
            16,846,982
            
            
            8,423,491
            
            
            8,423,491Warrants
                outstanding, December 31, 2006
            
            
            -
            
            
            8,423,491
            
            
            8,423,491Exercise
                Price
            
            
            N/A
            
            $
            3.00
            
            $
            4.00Expiration
                Date
            
            
            N/A
            
            
            August
                31, 2007
            
            
            August
                31, 2007





F-18


**Contingent
      Warrant Agent Agreement**





Some
      holders of the Company's Plan Warrants have granted the Company the right to
      appoint a Contingent Warrant Agent. Such holders can reverse this election
      at
      their option. The Company requires that any such agent be a qualified
      broker-dealer. If such a Contingent Warrant Agent is appointed, the Company
      will
      agree to extend the expiration date of any Plan Warrants expiring through a
      call, in accordance with their terms or otherwise, but only for an additional
      30
      days. In such event, the Contingent Warrant Agent would have the right to sell
      or exercise any Plan Warrants, solely at the discretion of the Contingent
      Warrant Agent, and then distribute any proceeds received by the sale or exercise
      of such Plan Warrants pro rata to all holders of all expired Plan Warrants.
      As
      of December 31, 2006, no contingent warrant agent was
      appointed.





**(10)**
            **Income
                Taxes:**





The
      income tax provision amounted to $995,462 $452,538 and $358,396 respectively,
      for the years ended December 31, 2006, 2005, and 2004 (an effective rate of
      14.7% for 2006, 7.8% for 2005 and 8.5% for 2004). A reconciliation of the
      provision for income taxes with amounts determined by applying the statutory
      U.S. federal income tax rate to income before income taxes is as
      follows:





2006
            
            2005
            
            2004Computed
                tax at federal statutory rate of 34%
            
            $
            2,308,496
            
            $
            1,979,589
            
            $
            1,430,299Tax
                penalties
            
            
            -
            
            
            -
            
            
            85,821Tax
                rate difference between US and PRC on foreign earnings
            
            
            (1,290,042
            )
            
            (1,106,241
            )
            
            (799,285
            )Effect
                of tax holidays for new business
            
            
            -
            
            
            (436,613
            )
            
            (358,439
            )Effect
                of statutory rate change
            
            
            (22,992
            )
            
            -
            
            
            -Additional
                tax liabilities based on tax notice
            
            
            -
            
            
            15,803
            
            
            -$
            995,462
            
            $
            452,538
            
            $
            358,396








2006
            
            2005
            
            2004Current
            
            $
            1,001,782
            
            $
            451,427
            
            $
            335,986Deferred
            
            
            (6,320
            )
            
            1,111
            
            
            22,410$
            995,462
            
            $
            452,538
            
            $
            358,396







2006
            
            2005
            
            2004Federal
            
            $
            -
            
            $
            -
            
            $
            -Foreign
            
            
            995,462
            
            
            452,538
            
            
            358,396$
            995,462
            
            $
            452,538
            
            $
            358,396




F-19




The
      regular federal income tax in Shenzhen, China, is 15%. As a new business, the
      Company is exempted from paying any income taxes for the first two years of
      its
      operations (2 years from the inception of the business, years ended December
      31,
      2001 and 2002), and a discounted income tax rate of 7.5% of pretax income during
      third, fourth and fifth years of its operations (the three years ended December
      31, 2003, 2004 and 2005). Beginning January 1, 2006, the Company is subject
      to
      the regular rate of 15% on its pretax income.





The
      Company did not report certain cash revenues related to fees charged to its
      customers for product design. Such fee revenues are subject to business tax
      and
      service charge of a total of 5.2%. The Company has not reported such revenues
      since the inception of its operations in 2001. The Company recorded the tax
      liabilities representing business tax and fees of 5.2% and income tax on the
      unreported design revenues since the inception of its business in 2001. During
      the years ended December 31, 2006, 2005, and 2004, the Company recorded
      $312,002, $302,409, and $234,261, respectively, for business tax and fees and
      $900,118, $393,806, and $337,877, respectively, for income tax related to these
      revenues. In addition, per advice of the registered tax agent in China, the
      Company accrued 100% of unpaid tax amounts as the maximum penalties which could
      be assessed by the Tax Department through the periods ended December 31, 2004.





In
      April
      2006, the Shenzhen local tax department has made an assessment of the total
      tax
      liabilities related to the cash revenues. Per the tax assessment notice dated
      April 24, 2006, the Company is obligated to pay a total of $1,754,802
      (RMB14,161,249) including business tax, fees and income taxes related to these
      cash revenues. If the Company did not pay off these tax liabilities by April
      30,
      2006, the Company is subject to 0.05% per day of interest and penalties of
      the
      unpaid tax and fee liability amount from the due date (April 30, 2006).





On
      April
      28, 2006, the Company filed an extension to remit these outstanding tax payable
      to December 20, 2006 and was approved by the tax department in July 2006.





On
      December 28, 2006, Shenzhen City Tax Department granted a further extension
      to
      the Company to remit the tax liabilities from December 20, 2006 to April 25,
      2007. The Company will not be subject to any penalties and interest if all
      the
      outstanding taxes are remitted to the Tax Department prior to the revised due
      date on April 25, 2007).





The
      Company has accrued $1,754,802 as business and income tax payable and $1,082,962
      as accrued estimated penalties as of December 31, 2005, the full amount of
      the
      tax obligations per the tax assessments plus the estimated tax penalties
      previously accrued by the management at December 31, 2004. The related business
      tax and fees of 5.2% and income tax of 7.5% on the design revenues for 2006
      were
      accrued and are expected to be remitted by the extended due date set forth
      by
      the tax department.




Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company’s deferred tax assets and liabilities are as follows:





2006
            
            2005Deferred
                tax assets:Allowance
                for doubtful accounts
            
            $
            29,198
            
            $
            22,677Total
                deferred tax assets
            
            
            29,198
            
            
            22,677Total
                deferred tax liabilitiesNet
                deferred tax assets before valuation allowance:Valuation
                allowance
            
            
            -
            
            
            -$
            29,198.
            
            $
            22,677.




F-20


Realization
      of deferred tax assets is dependent on future earnings, if any, the timing
      and
      amount of which is uncertain.





**(11)**
            **Commitments:**





The
      Company leases certain facilities under various long-term noncancellable and
      month-to-month leases. These leases are accounted for as operating leases.
      Rent
      expense amounted to $158,399, $98,715, and $71,323 for the years ended 2006,
      2005 and 2004, respectively.





A
      summary
      of the future minimum annual rental commitments under the operating leases
      is as
      follows:





Year
                ending December 31,2007
            
            $
            164,2012008
            
            
            123,4142009
            
            
            115,2562010
            
            
            57,6282011
            
            
            -$
            460,499





**(12)**
            **Quarterly
                Information (Unaudited):**





The
      following table sets forth consolidated statements of operations for each of
      the
      Company’s last eight quarters. This quarterly information is unaudited and has
      been prepared on the same basis as the annual consolidated financial statements.
      In our opinion, this quarterly information reflects all adjustments necessary
      for a fair presentation of the periods presented. The operating results for
      any
      quarter are not necessarily indicative of results for any future
      period.


**Fiscal
                  Year 2006**
              
              **Fiscal
                  Year 2005****Q1(1)**
              
              **Q2(2)**
              
              **Q3(3)**
              
              **Q4(4)**
              
              **Q1(5)**
              
              **Q2(6)**
              
              **Q3(7)**
              
              **Q4(8)****(in
                  thousands, except for per share data)**Net
                  revenues
              
              $
              24,304
              
              $
              24,220
              
              $
              19,083
              
              $
              24,802
              
              $
              21,005
              
              $
              14,910
              
              $
              16,013
              
              $
              20,652Gross
                  profit
              
              
              3,222
              
              
              1,209
              
              
              1,426
              
              
              2,933
              
              
              1,876
              
              
              1,018
              
              
              1,872
              
              
              2,850Net
                  profit
              
              
              2,336
              
              
              452
              
              
              905
              
              
              2,101
              
              
              1,346
              
              
              614
              
              
              1,269
              
              
              2,141Earnings
                  per share - Basic
              
              
              0.12
              
              
              0.02
              
              
              0.05
              
              
              0.11
              
              
              0.07
              
              
              0.03
              
              
              0.07
              
              
              0.11Earnings
                  per share - Diluted
              
              
              0.12
              
              
              0.02
              
              
              0.05
              
              
              0.08
              
              
              0.07
              
              
              0.03
              
              
              0.07
              
              
              0.11




F-21


**(13)**
            **Proforma
                Information (Unaudited):**





The
      Company plans to increase the annual compensation of its Chief Executive
      Officer, Chief Financial Officer and Chief Operating officer upon its stock
      starts trading in late 2007 as more responsibilities will be taken by these
      executives after becoming a U.S. listed company. Proforma operating results
      for
      the years ended December 31, 2006, 2005, and 2004, as if historical compensation
      was recorded at the levels expected in the future, are as
      follows:





2006
            
            2005
            
            2004Net
                income - as reported
            
            $
            5,794,231
            
            $
            5,369,768
            
            $
            3,848,365Net
                income - proforma
            
            $
            5,315,125
            
            $
            5,059,893
            
            $
            3,459,680Earnings
                per share - Basic as reported
            
            $
            0.30
            
            $
            0.28
            
            $
            0.20Earnings
                per share - Basic proforma
            
            $
            0.28
            
            $
            0.27
            
            $
            0.18Earnings
                per share - Diluted as reported
            
            $
            0.28
            
            $
            0.28
            
            $
            0.20Earnings
                per share - Diluted proforma
            
            $
            0.26
            
            $
            0.27
            
            $
            0.18




**(14)**
            **Subsequent
                Events:**





The
      Company filed a Form 10 with the Securities Exchange Commission (“SEC”) on
      December 29, 2006 and filed the Form 10 Amendment 1 on February 12, 2007 to
      respond the comments from SEC. The Company became a public reporting company
      effective February 26, 2007.





On
      February 23, 2007, the Company filed an amendment on the certificate of
      incorporation to increase its authorized shares. Upon the amendment, the total
      number of shares of stock which the Corporation shall have the authority to
      issue shall be One Hundred and Five Million (105,000,000) shares. The
      Corporation shall be authorized to issue two classes of shares of stock,
      designated, “Common Stock” and “Preferred Stock”. The Corporation shall be
      authorized to issue One Hundred Million (100,000,000) shares of Common Stock,
      each share to have a par value of $.001 per share, and Five Million (5,000,000)
      shares of Preferred Stock, each share to have a par value of $.001 per
      share.




F-22