424B4 1 v091058_424b4.htm

Filed Pursuant to Rule 424(b)(4)
File Nos. 333-144290 and 333-146872

[GRAPHIC MISSING]

7,033,816 SHARES

FUQI INTERNATIONAL, INC.

COMMON STOCK

This is our initial public offering of shares of our common stock. We are offering 7,033,816 shares. The public offering price of our common stock is $9.00 per share.

Currently no public market exists for shares of our common stock. The Nasdaq Global Market has approved the listing of our common stock under the ticker symbol “FUQI,” subject to official notice of issuance.

Investing in our common stock involves risks.
See “Risk Factors” beginning on page 7 of this prospectus.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

   
  Per Share   Total
Public offering price   $ 9.00     $ 63,304,344  
Underwriting discounts and commissions   $ 0.63     $ 4,431,304  
Proceeds, before expenses, to Fuqi International, Inc.   $ 8.37     $ 58,873,040  

Fuqi International, Inc. has granted the underwriters a 30-day option to purchase up to an additional 1,055,072 shares of common stock to cover over-allotments.

Merriman Curhan Ford & Co.

Brean Murray, Carret & Co.

The date of this Prospectus is October 23, 2007


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You should rely only on information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. In this but the information may have changed since that date. Unless the context otherwise requires, the terms “we,” the “Company,” “us,” or “Fuqi” refer to Fuqi International, Inc., a Delaware corporation, and its predecessors and wholly-owned subsidiaries.

TABLE OF CONTENTS

 
  Page
Prospectus Summary     1  
Summary Consolidated Financial Data     6  
Risk Factors     7  
Special Note Regarding Forward-Looking Statements     21  
Use of Proceeds     22  
Dividend Policy     22  
Market Information     22  
Capitalization     23  
Dilution     24  
Selected Consolidated Financial Data     24  
Management’s Discussion and Analysis of Financial Condition and Results of Operations     27  
Business     43  
Management     54  
Certain Relationships and Related Transactions     66  
Beneficial Ownership of Certain Beneficial Owners and Management     68  
Description of Securities     69  
Shares Eligible for Future Sale     72  
Underwriting     74  
Legal Matters     77  
Experts     77  
Additional Information     77  
Index to Financial Statements     F-1  

“Fuqi” and the “Fuqi” logo are our registered trademarks. Other trademarks, trade names and service marks used in this prospectus are the property of their respective owners

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PROSPECTUS SUMMARY

Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading “Risk Factors” beginning on page 7. Unless the context otherwise requires, the terms “we,” the “Company,” “us,” or “Fuqi” refer to Fuqi International, Inc., a Delaware corporation, and its predecessors and wholly-owned subsidiaries.

Overview

We are a leading designer of high quality precious metal jewelry in China, developing, promoting, and selling a broad range of products to the rapidly expanding Chinese luxury goods market. According to Global Industry Analysts, Inc., or GIA, China’s jewelry industry grew to $14 billion in 2005 and China is expected to lead global jewelry processing and consumption by 2010.

Our products consist of a range of unique styles and designs made from precious metals such as gold, platinum, and Karat gold (K-gold), as well as diamonds and other precious stones. Our design database presently contains over 20,000 unique products. We continuously innovate and change our designs based upon consumer trends in China. By continuously creating new designs and rapidly bringing them to market, we believe we are able to differentiate ourselves from our competitors and strengthen our brand identity.

Our nationwide distribution network and significant relationships with retailers allow us to test-market, promote and sell our products in almost every province in China. We believe our vertically integrated direct sales operations, which include product development, sales and marketing, and order fulfillment and delivery, allow us to effectively reach consumers and maximize sales throughout China.

We have historically sold our products directly to distributors, retailers and other wholesalers, who then sell our products to consumers through both retail counters located in department stores and in traditional stand-alone jewelry stores. We sell our products to our customers at price points that reflect the market price of the base material, plus a mark-up reflecting our design fees and processing fees. Typically this markup ranges from 10 – 12%. Our customers then further mark up our products to the consumers, up to an additional 30%. Our target price points are primarily designed to appeal to China’s growing middle class.

In order to capitalize on the substantial growth in consumer spending on luxury goods in China and capture the margin appreciation from direct sales to consumers, we recently initiated a retail strategy in product categories where we believe we will not compete with our existing sales channels. Our retail strategy will focus on finished gemstone jewelry, which we previously provided only on a custom-order basis and which has historically represented only a nominal percentage of our overall sales.

We intend to open new retail locations by leasing unoccupied space, acquiring existing leases from third parties and/or acquiring the existing jewelry operations of third parties that occupy retail space. During 2007, we intend to open 20 retail counters and 2 retail stores in municipalities and provincial capitals throughout China. In 2008, we plan to open 60 to 80 retail counters and 8 to 10 retail stores. We believe our expansion into the retail market will provide us with:

direct access to the consumer market, allowing us to respond more rapidly to changing consumer tastes;
an opportunity to grow our revenue base as we roll out our retail strategy;
improved net margins from higher markups in the retail market; and
increased brand awareness.

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Our company is headquartered in the city of Shenzhen, in southern China, where we have a large-scale production base that includes a modern factory of more than 53,000 square feet, a dedicated senior design, sales and marketing team, and more than 600 company-trained employees. We believe our current facilities provide adequate space for our planned expansion of our production lines, which will include diamond and other finished gemstone jewelry.

Our sales grew at an average rate of 57% per annum, reaching $92.4 million in 2006, from $15.2 million in 2002. To date, the increase in our sales has occurred organically, without the acquisition of other companies. Our income from operations grew from $1.0 million in 2002 to $7.5 million in 2006, while our net income grew from $1.0 million in 2002 to $5.8 million in 2006.

Industry Background and Trends

China’s market for jewelry and other luxury goods is expanding rapidly, due in part to the country’s rapid economic growth. According to the Economist Intelligence Unit (EIU), China’s real gross domestic product, or GDP, grew by 10.1%, 10.4% and 10.7% in 2004, 2005 and 2006, respectively. Economic growth in China has led to greater levels of personal disposable income and increased spending among China’s expanding consumer base. According to the EIU, private consumption has grown at a 9% compound annual growth rate, or CAGR, over the last decade. According to Global Industry Analysts, Inc. (GIA), the precious jewelry market in China has increased by 35% from 2001, reaching $14.9 billion in 2006. The total market size for precious jewelry is expected to exceed $18.2 billion in 2010.

We believe that China’s jewelry market will continue to grow as the Chinese economy expands and develops. Because gold has long been a symbol of wealth and prosperity in China, demand for jewelry, particularly gold jewelry, is firmly embedded in the country’s culture. The jewelry market is currently benefiting from rising consumer spending and rapid urbanization of the Chinese population. We believe jewelry companies like ours, with developed distribution networks, high quality products and attractive designs, are well-positioned to build their brands and capture increasingly large shares of the growing jewelry market.

Our Strengths, Strategies and Challenges

We believe our competitive strengths consist of our:

experienced management team;
leading market position;
well-established distribution channels;
proven product design and manufacturing capabilities;
extensive design database with over 20,000 product styles; and
customer service expertise.

Notwithstanding our competitive strengths, we expect to face certain risks and uncertainties, including:

challenges of expanding our business beyond wholesale distribution into the retail market;
our ability to identify market trends and to develop and introduce new products in response to those trends;
changes in economic conditions in China that may affect discretionary consumer spending;
fluctuations in the price of raw materials;
our ability to respond to competitive market conditions;

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our ability to develop our product brands; and
uncertainties with respect to the PRC legal and regulatory environments.

Our goal is to be the leading vertically-integrated designer, manufacturer, and retailer of jewelry in China. We intend to achieve our goal by implementing the following strategies:

strengthen our existing wholesale distribution channels;
establish and expand our retail market footprint;
expand existing and new product offerings; and
increase marketing and promotion efforts to enhance brand awareness.

Corporate Information

Our company, Fuqi International, Inc., operates through our 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., a company established under the laws of China (“Fuqi China”). Fuqi International, Inc. effected a reverse merger transaction in November 2006 that resulted in our current corporate structure and subsequently reincorporated in Delaware on December 8, 2006. For further information concerning our reverse merger transaction, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Corporate History” on page 28 of this prospectus.

Our principal executive offices are located at 5/F., Block 1, Shi Hua Industrial Zone, Cui Zhu Road North, Shenzhen, 518019, People’s Republic of China. Our telephone number is +86 (755) 2580-1888. Our website is located at www.fuqi.com.cn. Information contained on, or that can be accessed through, our website is not part of this prospectus.

Conventions That Apply to This Prospectus

Unless we indicate otherwise, references in this prospectus to:

“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;
“common stock” are to our shares of common stock, par value $0.001 per share;
“RMB” and “Renminbi” are to the legal currency of China; and
“$,” “US$” and “U.S. dollars” are to the legal currency of the United States.

Unless the context indicates otherwise, “we,” “us,” “our company” and “our” refer to Fuqi International, Inc. and its predecessors and wholly-owned subsidiaries.

Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option.

This prospectus contains translations of certain RMB amounts into U.S. dollars. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in RMB per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of June 29, 2007 which was RMB 7.6120 to $1.00. For purposes of preparing our consolidated financial statements, our consolidated balance sheets have been translated from RMB to U.S. dollars at the official rates published by the People’s Bank of China as of June 30, 2007, and as of December 31, 2006 and 2005 and the statements of income have been translated from RMB to U.S. dollars at the weighted average of such rates during the periods in which the transactions were recognized. We make no representation that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. See “Risk Factors — Risks Related to This Offering and Our Shares — Restrictions on the

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convertibility of RMB into foreign currency may limit our ability to make dividends or other payments in U.S. dollars or fund possible business activities outside China.” On September 28, 2007, the noon buying rate was RMB 7.4928 to $1.00.

Recent Developments

On October 2, 2007 we mailed an information statement to our stockholders announcing that our Board of Directors and our stockholders have approved an amendment to our Certificate of Incorporation to effect a reverse stock split of all our issued and outstanding shares of common stock in the range of 1.1:1 to 2.5:1, as determined in the sole discretion of our Board of Directors (the “Reverse Stock Split”). To effect the Reverse Stock Split, we would file the amendment to the Certificate of Incorporation with the Secretary of the State of Delaware, which would not be done sooner than 20 days after the information statement was mailed to our stockholders. Our Board of Directors had the discretion to elect, as it determined to be in the best interest of our company and stockholders, to effect the Reverse Stock Split at any exchange ratio within the range. The Board, in its sole discretion, could have also elected not to implement the Reverse Stock Split. The number of issued and outstanding shares of our common stock would be reduced in accordance with the selected exchange ratio for the Reverse Stock Split and there would be a similar reduction in the shares authorized under the Fuqi International, Inc. 2007 Equity Incentive Plan, which we adopted immediately prior to effecting the Reverse Stock Split. The par value and number of authorized shares of our common stock will remain unchanged. On August 23, 2007, our board of directors approved a Reverse Split that will be at a ratio of 1.69:1 and on October 22, 2007, we effected the Reverse Stock Split at the 1.69:1 ratio. All references to number of shares and per share amounts included in this prospectus gives effect to this such ratio of the Reverse Stock Split. The number of shares and per share amounts included in the consolidated financial statements and the accompanying notes, included in the F- section have been adjusted to reflect the reverse stock split retroactively. All outstanding shares and earnings per share information contained in this prospectus gives effect to this ratio of the Reverse Stock Split.

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The Offering

Common stock we are offering    
    7,033,816 shares(1)
Common stock outstanding after the offering    
    19,869,771 shares(2)
Use of proceeds    
    We intend to use the net proceeds from this offering for general corporate purposes, including expansion of our retail operations, expansion of our production lines, and general working capital purposes. See “Use of Proceeds” on page 22 for more information on the use of proceeds.
Risk factors    
    Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 7.
Proposed trading symbol    
    FUQI

(1) Excludes up to 1,055,072 shares that may be sold upon exercise of the underwriters’ over-allotment option.
(2) Based on 12,835,955 shares of common stock issued and outstanding as of September 28, 2007. Excludes 2,366,864 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following consolidated statements of operations data for each of the five years ended December 31, 2006, and the balance sheet data as of December 31, 2006, 2005, 2004, 2003 and 2002 are derived from our audited consolidated financial statements, which, except for 2003 and 2002, are included elsewhere in this prospectus. The following summary consolidated statement of operations data for the six months ended June 30, 2007 and 2006 and unaudited condensed consolidated balance sheet data as of June 30, 2007 are derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, our unaudited condensed consolidated financial statements include all adjustments, consisting principally of normal recurring accruals, that management considers necessary for a fair presentation of the financial position and the results of operations for these periods. Historical results are not necessarily indicative of the results of operations for future periods. 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 our consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated Statement of Operations Data:

             
  Six Months Ended June 30,   Years Ended December 31,
     2007   2006   2006   2005   2004   2003   2002
     (Unaudited)                         
     (In Thousands, Except Share and per Share Amounts)
Net sales   $ 54,241       48,524     $ 92,409     $ 72,580     $ 56,765     $ 29,501     $ 15,226  
Cost of sales     48,024       44,094       83,619       64,964       50,862       26,019       13,592  
Gross profit     6,217       4,430       8,790       7,616       5,903       3,482       1,634  
Operating expenses     1,542       784       1,284       1,295       1,555       1,257       589  
Income from operations     4,675       3,646       7,506       6,321       4,348       2,225       1,045  
Other income (expenses)     (570 )      (388 )      (716 )      (499 )      (141 )      41       49  
Income before provision for income taxes     4,105       3,258       6,790       5,822       4,207       2,266       1,094  
Provision for income taxes     733       470       995       452       359       193       81  
Net income     3,372       2,788       5,795       5,370       3,848       2,073       1,013  
Other comprehensive income –  foreign currency translation adjustments     314       71       288       143                    
Comprehensive income   $ 3,686     $ 2,859     $ 6,083     $ 5,513     $ 3,848     $ 2,073     $ 1,013  
Earnings per share – basic   $ 0.27     $ 0.25     $ 0.51     $ 0.48     $ 0.34     $ 0.19     $ 0.09  
Earnings per share – diluted   $ 0.22     $ 0.25     $ 0.50     $ 0.48     $ 0.34     $ 0.19     $ 0.09  
Weighted average number of
common shares – basic
    12,324,705       11,175,543       11,260,544       11,175,543       11,175,543       11,175,543       11,175,543  
Weighted average number of
common shares – diluted
    15,393,332       11,175,543       11,631,459       11,175,543       11,175,543       11,175,543       11,175,543  

Consolidated Balance Sheet Data:

           
  As of
June 30,
2007
  As of December 31,
     2006   2005   2004   2003   2002
     (Unaudited)
     (In Thousands)
Cash   $ 8,494     $ 13,355     $ 71     $ 256     $ 1,294     $ 235  
Total assets     44,155       31,125       28,115       11,230       8,579       9,097  
Total liabilities     26,768       20,180       20,508       8,535       5,756       8,660  
Total stockholders’ equity     17,387       10,945       7,607       2,695       2,823       437  

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the material risks described below and all of the information contained in this prospectus before deciding whether to purchase any of our securities. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. The trading price of our securities 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 our financial condition and operating results in the past or are currently affecting us. This filing also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this registration statement.

Risks Related To Our Operations

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

The success of our 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 rates, the level of consumers’ disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation in regional and local markets in China where we manufacture and sell our 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.

While the Chinese economy has experienced rapid growth in recent years, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Also, many observers believe that this rapid growth cannot continue at its current pace and that an economic correction may be imminent. Rapid economic growth can also lead to growth in the money supply and rising inflation. During the past two decades, 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 our 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 our 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 and May 2007, the People’s Bank of China raised the interest rate again. Repeated rises in interest rates by the central bank could slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

Most of our 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 our 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, we have not hedged our requirement for gold, platinum or other raw materials through the use of options, forward contracts or outright commodity purchasing, but we intend to engage in such hedging in the future, depending on our available resources. A significant disruption in our supply of gold, platinum, or other commodities could decrease our production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of gold, platinum, or 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 we purchase our raw materials, may adversely affect our ability to maintain production of our products and sustain profitability. Although we generally attempt to pass increased commodity prices to our customers, there may be circumstances in which we are not able to do so. In

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addition, if we were to experience a significant or prolonged shortage of gold, platinum, or other commodities, we would be unable to meet our production schedules and to ship products to our customers in timely fashion, which would adversely affect our sales, margins and customer relations. Furthermore, the value of our inventory may be affected by commodity prices. We record the value of our inventory at the lower of cost (using the first-in, first-out method) or market. As a result, decreases in the market value of precious metals such as gold and platinum would result in a lower stated value of our inventory, which may require us to take a charge for the decrease in the value of our inventory.

Due to the geographic concentration of our sales in the northeast region of China, our results of operations and financial condition are subject to fluctuations in regional economic conditions.

A significant percentage of our total sales are made in the northeast region of China, particularly in the provinces of Liaoning, Jilin and Heilongjiang, and the city of Beijing. For the six months ended June 30, 2007 and the year ended December 31, 2006, approximately 45.7% and 44.9% of revenues, respectively, was generated from this area. Our concentration of sales in this area heightens our exposure to adverse developments related to competition, as well as economic and demographic changes in this region. Our geographic concentration might result in a material adverse effect on our business, financial condition or results of operations in the future.

Our retail expansion strategy depends on our ability to open and operate a certain number of new counters and stores each year, which could strain our resources and cause the performance of our existing operations to suffer.

We have historically been engaged only in the manufacture and wholesale distribution of jewelry products and have only recently begun retail operations. Our retail expansion strategy will largely depend on our ability to find sites for, open and operate new retail locations successfully. Our ability to open and operate new retail locations successfully depends on several factors, including, among others, our ability to:

identify suitable counter and store locations, the availability of which is outside our control;
purchase and negotiate acceptable lease terms;
prepare counters and stores for opening within budget;
source sufficient levels of inventory at acceptable costs to meet the needs of new counters and stores;
hire, train and retain personnel;
secure required governmental permits and approvals;
successfully integrate new counters and stores into our existing operations;
contain payroll costs; and
generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund our expansion plans.

Any failure to successfully open and operate new retail counters and stores could have a material adverse effect on our results of operations. In addition, our proposed retail expansion program will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our business less effectively, which, in turn, could cause deterioration in the financial performance of our overall business.

It is not our intention to open new retail counters and stores that materially cannibalize the sales of our existing distributors. However, as with most growing retail operations, there can be no assurance that sales cannibalization will not inadvertently occur or become more significant in the future as we gradually increase our presence in existing markets over time to maximize our competitive position and financial performance in each market.

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Competition in the jewelry industry could cause us to lose market share, thereby materially adversely affecting our business, results of operations and financial condition.

The jewelry industry in China is highly fragmented and very competitive. We believe that the market may become even more competitive as the industry grows and/or consolidates. We compete with local jewelry manufacturers and large foreign multinational companies that offer products that are similar to ours. Some of these competitors have larger local or regional customer bases, more locations, more brand equity, and substantially greater financial, marketing and other resources than we have. As a result of this increasing competition, we could lose market share, thereby materially adversely affecting our business, results of operations and financial condition.

We 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, we may not be able to maintain or expand our business.

We expect that the net proceeds from this offering, together with cash generated from operations, will be sufficient to fund our projected operations for at least the next 12 months. We expect to expend significant resources to commence our planned retail distribution of our manufactured jewelry in China. We will require substantial funds in order to finance our planned retail distribution, fund operating expenses, to develop manufacturing, marketing and sales capabilities and to cover public company costs. In addition to the funds required to open retail locations, additional working capital will be needed to operate retail locations due to longer sales and collection cycles and higher inventory levels required to support retail stores. We also expect to require substantial funds to change our product mix to include more platinum products. Without these funds, we may not be able to meet these goals. Also, we expect our general and administrative costs to substantially increase due to higher salaries to be paid to our executive officers further to employment agreements we intend to enter into, which will come into effect on the effective date of this offering. See “Executive Compensation — Compensation Discussion and Analysis.”

We 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:

We 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 our goals; and
Any equity financing would result in dilution to stockholders.

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

Our ability to maintain or increase our revenue could be harmed if we are unable to strengthen and maintain our brand image.

We believe that primary factors in determining customer buying decisions in China’s jewelry sector include price, confidence in the merchandise sold, and the level and quality of customer service. The ability to differentiate our products from competitors by our brand-based marketing strategies is a key factor in attracting consumers, and if our strategies and efforts to promote our brand, such as television and magazine advertising and beauty contest sponsorships, fail to garner brand recognition, our ability to generate revenue may suffer. If we are unable to differentiate our products, our ability to sell our products wholesale and our planned sale of products retail will be adversely affected. If we fail to anticipate, identify or react appropriately or in a timely manner to customer buying decisions, we could experience reduced consumer acceptance of our products, a diminished brand image, higher markdowns, and costs to recast overstocked jewelry. These factors could result in lower selling prices

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and sales volumes for our products, which could adversely affect our financial condition and results of operations. This risk is particularly acute because we rely on a limited demographic customer base for a large percentage of our sales.

There is only one source in China for us to obtain the precious metals used in our jewelry products; accordingly, any interruptions of our arrangement with this source would disrupt our ability to fill customer orders and substantially affect our ability to continue our business operations.

Under PRC law, supply of precious metals such as platinum, gold, and silver are highly regulated by certain government agencies. Shanghai Gold Exchange is the only source of supply in China for precious metals used in our jewelry products. We are required to obtain several membership and approval certificates from government agencies in order to do business involving precious metals. We may be required to renew such memberships and to obtain approval certificates periodically. The loss of or inability to renew our membership relationship with the Shanghai Gold Exchange, or its inability to furnish precious metals to us as anticipated in terms of cost, quality, and timeliness, would adversely affect our ability to fill customer orders in accordance with our required delivery, quality, and performance requirements. If this were to occur, we would not have any alternative suppliers in China to obtain our raw materials from, which would result in a decline in revenue and revenue potential and risk the continuation of our business operations.

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

We depend 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 we fail to anticipate, identify or react appropriately to changes in styles and trends, we could experience excess inventories, higher than normal markdowns or an inability to sell our products. If such a situation exists, we may need to incur additional costs to recast our products to fit the demand, recovering only the value of raw material and all labor invested in the product would be lost.

Our failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.

We intend to conduct a growth strategy into retail distribution of our products that we believe will result in rapid growth, which will place significant demands on our managerial, operational and financial resources. Any significant growth in the market for our current wholesale business and our planned retail distribution would require us to expand our employee base for managerial, operational, financial, and other purposes. During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capabilities. We would also need to continue to expand, train and manage our employee base. We currently have approximately 600 full-time employees, and, at that size, a rapid increase in the number of our 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 we are able to expand our retail business, we would need to train or hire additional employees with retail experience.

Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we 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. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure you that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.

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We rely on our distribution network for a significant portion of our revenues. Failure to maintain good distributor relations could materially disrupt our distribution business and harm our net revenues.

Our business has become increasingly dependent on the performance of our distributors. During the six months ended June 30, 2007 and the years ended December 31, 2006, 2005 and 2004, 20%, 13%, 10% and 14%, respectively, of our net revenues were generated through our distributors. We currently have 136 distributors. Our largest distributor accounted for approximately 4% and 2% of our gross revenues in 2006 and 2005. We do not maintain long-term contracts with our distributors. Maintaining relationships with existing distributors and replacing any distributor may be difficult or time consuming. Our failure to maintain good relationships with our distributors could materially disrupt our distribution business and harm our net revenues.

We must maintain a relatively large inventory of our raw materials and jewelry products to support customer delivery requirements, and if this inventory is lost due to theft, our results of operations would be negatively impacted.

We purchase large volumes of precious metals approximately five times per month and store significant quantities of raw materials and jewelry products at our warehouse and show room in Shenzhen, China. Although we have an inventory security system in place, in the past we have experienced minor inventory theft at, or in transit to or from, certain of these facilities. We may be subject to future significant inventory losses due to third-party or employee theft from our warehouses or other forms of theft. The implementation of security measures beyond those that we already utilize, which include metal detectors for employees, security cameras, and alarm systems in our warehouse, would increase our operating costs. Also, any such losses of inventory could exceed the limits of, or be subject to an exclusion from, coverage under our insurance policies. Claims filed by us under our insurance policies could lead to increases in the insurance premiums payable by us or the termination of coverage under the relevant policy.

Substantial defaults by our customers on accounts receivable could have a material adverse affect on our liquidity and results of operations.

A substantial portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make payments in a timely manner, our liquidity and results of operations could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations. In addition, as we increase our presence in the retail market, we expect the aging of our accounts receivable generated from sales through retail counters to increase as department stores typically defer payments to us of cash receipts collected by them on our behalf. A significant deterioration in our ability to collect on accounts receivable could affect our cash flow and working capital position and could also impact the cost or availability of financing available to us.

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of our named executive officers, including our Chief Executive Officer, Mr. Yu Kwai Chong, performs key functions in the operation of our business. There can be no assurance that we 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 our business, financial condition, and results of operations. We do not maintain key-man life insurance for any of our senior management.

We have significant outstanding short-term borrowings, and we may not be able to obtain extensions when they mature.

Our notes payable to banks for short-term borrowings as of June 30, 2007, December 31, 2006 and 2005 were $16.4 million, $14.1 million, $12.4 million, respectively, and bore weighted average

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interest rates of 6.67%, 6.14%, and 5.32%, respectively. Of these outstanding borrowings, $8.7 million, $11.5 million and $13.0 million were arranged or guaranteed by our controlling stockholder, Mr. Yu Kwai Chong, as of June 30, 2007, December 31, 2006 and 2005, respectively. In addition, we have short-term borrowings from Mr. Chong, the outstanding amount of which was $0 and $422,909 and as of June 30, 2007 and December 31, 2006, respectively.

Generally, these short-term bank loans mature in one year or less and contain no specific renewal terms. However, in China it is customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term borrowings on an on-going basis shortly before they mature. Although we have renewed our short-term borrowings in the past, we cannot assure you that we will be able to renew these loans in the future as they mature. In particular, a substantial portion of our short-term borrowings are arranged or guaranteed by Mr. Yu Kwai Chong, our controlling stockholder, or one of his affiliated companies. Since Mr. Chong ceased to be our sole stockholder in November 2006, he may be less inclined to guarantee our bank borrowings. If we are unable to obtain renewals of these loans or sufficient alternative funding on reasonable terms from banks or other parties, we will have to repay these borrowings with the cash on our balance sheet or cash generated by our future operations, if any. We cannot assure you that our business will generate sufficient cash flow from operations to repay these borrowings.

Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.

Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:

vulnerability of our business to a general economic downturn in China;
fluctuation and unpredictability of costs related to the gold, platinum and precious metals and other commodities used to manufacture our products;
seasonality of our business;
changes in the laws of the PRC that affect our operations;
our recent entry into the retail jewelry market;
competition from our competitors;
our ability to obtain all necessary government certifications and/or licenses to conduct our business; and
development of a public trading market for our securities after this offering;

Risks Related To Doing Business In China

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

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and

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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.

Our 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 our 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 precedent 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 our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or 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.

Our principal operating subsidiary, Fuqi China, is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:

levying fines;
revoking our business license, other licenses or authorities;
requiring that we restructure our ownership or operations; and
requiring that we discontinue some or all of our business.

The scope of our business license in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.

Our principal operating subsidiary, Fuqi China, is a wholly foreign-owned enterprise organized under PRC law, commonly known as a WFOE. A WFOE can only conduct business within its approved business scope, which ultimately appears on its business license. Our license permits us to design, manufacture, sell and market jewelry products to department stores throughout the PRC and to engage in the retail distribution of our products. Any amendment to the scope of our business requires further application and government approval. In order for us to expand our business beyond the scope of our license, we will be required to enter into a negotiation with the authorities for the approval to expand the scope of our business. We cannot assure you that Fuqi China will be able to obtain the necessary government approval for any change or expansion of our business scope.

Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC, for this offering and the listing and trading of our common stock could have a material adverse effect on our business, operating results, reputation and trading price of our common stock, and may also create uncertainties for this offering.

The PRC State Administration of Foreign Exchange, or “SAFE,” issued a public notice in November 2005, known as Circular 75, concerning the use of offshore holding companies in mergers

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and acquisitions in China. The public notice provides that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to registration with the relevant foreign exchange authorities. The public notice also suggests that registration with the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of shares in an offshore holding company that owns an onshore company. The PRC residents must each submit a registration form to the local SAFE branch with respect to their 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 transactions or use of assets in China to guarantee offshore obligations.

On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the “Revised M&A Regulations”), which took effect September 8, 2006. These new rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of 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.

Among other things, the revised M&A Regulations include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement. Our PRC counsel, Shujin Law Firm, has advised us that because we completed our onshore-to-offshore restructuring before September 8, 2006, the effective date of the new regulation, it is not necessary for us to submit the application to the CSRC for its approval, and the listing and trading of our common stock does not require CSRC approval.

If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval was required for this offering, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Common Stock. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the common stock offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.

Also, if later the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our common stock. Furthermore, published news reports in China recently indicated that the CSRC may have curtailed or suspended overseas listings

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for Chinese private companies. These news reports have created further uncertainty regarding the approach that the CSRC and other PRC regulators may take with respect to transactions such as this offering.

It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of Circular 75 and the Revised M&A Regulations. It is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure that our domestic and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance.

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

As our ultimate holding company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with our company, 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. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

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

Our subsidiary, Fuqi China, is subject to a reduced enterprise income tax rate of 15%, which is granted to all enterprises operating in the Shenzhen Special Economic Zone. In 2004 and 2005, Fuqi China enjoyed a preferential income tax rate of 7.5% due to its status as a new business. That status expired effective January 1, 2006. The expiration of the preferential tax treatment has increased our tax liabilities and reduced our 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, we cannot reasonably estimate the financial impact of the new tax law to us at this time. Any future increase in the enterprise income tax rate applicable to us or other adverse tax treatments, could increase our tax liabilities and reduce our net income.

If we make equity compensation grants to persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans for our directors and employees and other parties under PRC law.

On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company, such as our company, after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.

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Upon the closing of this offering, we intend to make numerous stock option grants under our equity incentive plan to our officers and directors, some of whom are PRC citizens and may be required to register with SAFE. In addition to our officers and directors that receive option grants at the close of this offering, future participants of our equity incentive plan or any other equity compensation plan we may adopt who are PRC citizens may be required to register with SAFE. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our business operations may be adversely affected.

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

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

quarantines or closures of our manufacturing facilities or the retail outlets, which would severely disrupt our operations,
the sickness or death of our key officers and employees, and
a general slowdown in the Chinese economy.

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

Because our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which we are 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 our middle and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training. In addition, we may need to rely on a new and developing communication infrastructure to efficiently transfer our information from retail nodes to our headquarters. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls, which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.

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 us or our management.

All of our current operations, including the manufacturing and distribution of jewelry, are conducted in China. Moreover, most of our 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 us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any

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state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.

Risks Related To This Offering and Our Shares

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.

The assumed public offering price will be substantially higher than the net tangible book value per share of our outstanding shares of common stock. As a result, investors purchasing shares of our common stock in this offering will incur immediate dilution of $5.20 per share, based on the initial public offering price of $9.00 per share. Investors purchasing shares of our common stock in this offering will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities.

We will be controlled by one stockholder after this offering, whose interests may differ from those of other stockholders. As a result, we could be prevented from entering into potentially beneficial transactions if they conflict with our major stockholder’s interests.

Mr. Yu Kwai Chong, our Chief Executive Officer and our largest stockholder, will beneficially own or control approximately 56.2% of our outstanding shares after giving effect to this offering. Mr. Chong possesses significant influence over us, giving him the ability, among other things, to elect all or 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 discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. Without the consent of Mr. Chong, we could be prevented from entering into potentially beneficial transactions if they conflict with our major stockholder’s interests. The interests of this stockholder may differ from the interests of our other stockholders.

We may allocate the proceeds of this offering in ways that you or other stockholders may not approve.

We intend to use the net proceeds from this offering for general corporate purposes, including expansion of our retail network, expansion of our production lines, and general working capital purposes. In addition, we may use a portion of the net proceeds of this offering to invest in or acquire new businesses through mergers, stock or asset purchases, joint ventures and/or other strategic relationships, although we have no present commitments or agreements with respect to any such material acquisition or investment. Our management will have broad discretion in the application of the net proceeds from this offering and may apply them in ways not approved by you or other stockholders. Failure by our management to apply these funds effectively could adversely affect our ability to continue to maintain and expand our business.

An active trading market for our shares may not develop.

Prior to this offering, there has been no public market for our common stock. The Nasdaq Global Market has approved the listing of our common stock under the ticker symbol “FUQI,” subject to official notice of issuance. However, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering. You may not be able to sell any shares of common stock that you purchase in the offering at or above the initial public offering price.

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

We are 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 our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records

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

In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our 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 our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock. Our public accountants, Stonefield Josephson, Inc., identified that our accounting for certain significant transactions were incorrectly calculated or incorrectly recorded. Our public accountants informed us that these adjustments reflected significant deficiencies in our internal controls over accounting and financial reporting for the year ended December 31, 2006. We are in the process of improving our internal controls in an effort to improve our control processes and procedures with training programs that will commence later in 2007; however, there can be no guarantee that we will be successful in our attempts to correct our significant deficiencies.

Restrictions on the convertibility of RMB into foreign currency may limit our ability to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

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

Because our revenues are generated in RMB and our results are reported in U.S. dollars, devaluation of the RMB could negatively impact our results of operations.

The value of RMB is subject to changes in China’s governmental policies and to international economic and political developments. In January, 1994, the PRC government implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and

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financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. This modification has resulted in an approximate 7.3% appreciation of the RMB against the U.S. dollar from July 21, 2005 to May 2, 2007. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further fluctuations of the exchange rate of RMB against the U.S. dollar, including possible devaluations. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the U.S. dollar could negatively impact our results of operations.

Sales of a substantial number of shares of our common stock following this offering may adversely affect the market price of our common stock and the issuance of additional shares will dilute all other stockholdings.

Sales of a substantial number of shares of our common stock in the public market or otherwise following this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock. After completion of this offering, our existing stockholders will own approximately 64.6% of our common stock assuming there is no exercise of the underwriters’ over-allotment option.

After completion of this offering, there will be approximately 19,869,771 shares of our common stock outstanding. Of our outstanding shares, the shares of common stock sold in this offering will be freely tradable in the public market, except for any shares sold to our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). In addition, our certificate of incorporation permits the issuance of up to approximately 80,130,229 additional shares of common stock after this offering. Thus, we have the ability to issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase our shares in this offering. See “Shares Eligible for Future Sale” on page 72 of this prospectus for further information regarding circumstances under which additional shares of our common stock may be sold.

We, each of our directors and senior officers, and each holder of 5% or more of our common stock have agreed, with limited exceptions, that we and they will not, without the prior written consent of the Merriman Curhan Ford & Co. on behalf of the underwriters, during the period ending 180 days after the date of this prospectus, among other things, directly or indirectly, offer to sell, sell or otherwise dispose of any of shares of our common stock or file a registration statement with the SEC relating to the offering of any shares of our common stock.

After the lock-up agreements pertaining to this offering expire 180 days from the date of this prospectus unless waived earlier by Merriman Curhan Ford & Co., up to 11,184,066 of the shares that had been locked up will be eligible for future sale in the public market at prescribed times pursuant to Rule 144 under the Securities Act, or otherwise. Sales of a significant number of these shares of common stock in the public market could reduce the market price of the common stock.

A total of 2,366,864 shares registered under a registration statement on Form S-8 to be filed by us after the consummation of this offering also will be available for sale into the public markets, subject to the vesting of restricted stock and to the exercise of any future issued options, if any.

Furthermore, shares of our common stock are held by Bay Peak LLC, which was a promoter of VT Marketing Services, our predecessor, and may not be sold by this promoter pursuant to Rule 144 under the Securities Act. The position of the staff of the Division of Corporation Finance of the Securities and Exchange Commission is that any such resale transaction under Rule 144 would appear to be designed to distribute or redistribute such shares to the public without coming within the registration requirements of the Securities Act. Therefore, Bay Peak can only resell the shares it holds as of the date hereof through a registration statement filed under the Securities Act. Further to a registration rights agreement with Bay Peak LLC, we agreed to register shares of our common stock held by it upon request after the expiration of the 180-day lock-up period commencing from the date of this prospectus

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if we are then eligible to use Form S-3 and if such shares are not then saleable under Rule 144. Bay Peak LLC’s registration rights are subject to the lock-up agreement it entered into with Merriman Curhan Ford & Co. that expires 180 days from the date of this prospectus, unless waived earlier. There is a risk that such sales pursuant to a registration statement filed under the Securities Act would have a depressive effect on the market price of our securities in any market which may develop for our securities. If Bay Peak LLC did not hold these shares, there would not be the same risk of a depressive effect on the price of the shares you hold.

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors sole source of gain, if any, will depend on capital appreciation, if any.

We do not plan to declare or pay any further cash dividends on our shares of common stock in the foreseeable future and we currently intend to retain any future earnings for funding growth. Prior to the reverse merger we effected with VT Marketing Services, the predecessor of Fuqi International, Inc. (the “Reverse Merger”) in November 2006, we were wholly-owned by our founder and Chief Executive Officer, Mr. Yu Kwai Chong. During the years ended December 31, 2006, 2005, and 2004, we paid cash dividends of $2.7 million, $5.4 million, and $4.0 million, respectively, to Mr. Chong as our sole stockholder prior to the Reverse Merger. We currently have no intention to declare further dividends in the foreseeable future. Payment of dividends is further restricted under the provisions of our existing loan agreements, which prohibit Fuqi China from paying any dividends or making any other distributions to Fuqi BVI without the consent of the lenders. As a result, you should not rely on an investment in our securities if you require the investment to produce dividend income. Capital appreciation, if any, of our shares may be your sole source of gain for the foreseeable future. Moreover, you may not be able to resell your shares in our company at or above the price you paid for them.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The information contained in this prospectus, including in the documents incorporated by reference into this prospectus, 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 our and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition and results of operations. 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 prospectus are based on our management’s current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our 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 our business to a general economic downturn in China;
Fluctuation and unpredictability of costs related the gold, platinum and precious metals and other commodities used to make our products;
Changes in the laws of the PRC that affect our operations;
Our recent entry into the retail jewelry market;
Competition from our competitors;
Any recurrence of severe acute respiratory syndrome (SARS) or Avian Flu;
Our ability to obtain all necessary government certifications and/or licenses to conduct our business;
Development of a public trading market for our securities after this offering;
The cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and
The other factors referenced in this registration statement, 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. We undertake 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.

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of common stock offered by us will be approximately $58.2 million based on the public offering price of $9.00 per share, after deducting estimated underwriters’ discounts and commissions and our payment of estimated offering expenses. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $67.0 million. Unless otherwise indicated, we assume there is no over-allotment for disclosure purposes.

We intend to use the net proceeds from this offering for general corporate purposes, including approximately $16.0 million to expand our retail operations, $3.8 million to expand our product lines, and $38.4 million for general working capital purposes.

The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount of net proceeds raised in this offering, the amount of cash generated by our operations and other factors described in the section entitled “Risk Factors” beginning on page 7 of this prospectus. As a result, our management will have broad discretion to allocate the net proceeds from this offering. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and we currently intend to retain any future earnings for funding growth. Prior to the Reverse Merger, which was effected in November 2006, we were wholly-owned by our founder and Chief Executive Officer. During the years ended December 31, 2006, 2005, and 2004, we paid cash dividends of $2.7 million, $5.4 million, and $4.0 million, respectively, to our sole stockholder prior to the Reverse Merger. We currently have no intention to declare further dividends in the foreseeable future. Payment of dividends is further restricted under the provisions of our existing loan agreements. As a result, you should not rely on an investment in our securities if you require dividend income. Capital appreciation, if any, of our shares may be your sole source of gain for the foreseeable future.

Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our operating results, future earnings, capital requirements, financial condition and future prospects and other factors our board of directors may deem relevant.

MARKET INFORMATION

The Nasdaq Global Market has approved the listing of our common stock under the ticker symbol "FUQI", subject to official notice of issuance. As of August 15, 2007, we had approximately 219 common stockholders of record.

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CAPITALIZATION

The following table summarizes our capitalization as of June 30, 2007, on an actual basis and as adjusted basis to reflect our receipt of estimated net proceeds from the sale of 7,033,816 shares of common stock (excluding the 1,055,072 shares which the underwriters have the option to purchase to cover over-allotments, if any) in this offering at the public offering price of $9.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. The number of our shares of common stock shown above to be outstanding after this offering is based on 12,835,955 shares outstanding as of June 30, 2007.

You should read this table in conjunction with “Use of Proceeds,” “Summary Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

   
  June 30, 2007
     Actual   As Adjusted
     (In Thousands)
Stockholders’ Equity:
                 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2007   $     $  
Common stock, $0.001 par value, 100,000,000 shares authorized, 12,835,955 shares outstanding at June 30, 2007, and 19,869,771 shares issued and outstanding on an as-adjusted basis at June 30, 2007(1)     13       20  
Additional paid in capital     9,967       68,133  
Accumulated foreign currency translation adjustments     746       746  
Retained earnings     6,661       6,661  
Total stockholders’ equity   $ 17,387     $ 75,560  
Total capitalization   $ 17,387     $ 75,560  

(1) The number of our shares of common stock shown above to be outstanding after this offering is based on 12,835,955 shares outstanding as of June 30, 2007. This information excludes 2,366,864 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan.

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DILUTION

If you invest in our shares of common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the net tangible book value per share of common stock immediately after this offering.

Investors participating in this offering will incur immediate, substantial dilution. Our net tangible book value as of June 30, 2007 was $17.4 million, or $1.36 per share based on 12,835,955 shares of common stock outstanding. Assuming the sale by us of 7,033,816 shares of common stock offered in this offering at the public offering price of $9.00 per share, and after deducting the estimated underwriting discount and commissions and estimated offering expenses, our as adjusted net tangible book value as of June 30, 2007 would have been $75.6 million, or $3.80 per share. This represents an immediate increase in net tangible book value of $2.44 per share to our existing stockholders and an immediate dilution of $5.20 per share to the new investors purchasing shares of common stock in this offering.

The following table illustrates this per share dilution:

   
Public offering price per share            $ 9.00  
Net tangible book value per share as of June 30, 2007   $ 1.36           
Increase per share attributable to new public investors   $ 2.44        
Pro forma net tangible book value per share after this offering         $ 3.80  
Dilution per share to new public investors         $ 5.20  

The following table sets forth, on an as adjusted basis as of June 30, 2007, the difference between the number of shares of common stock purchased from Fuqi International, Inc., the total cash consideration paid, and the average price per share paid by our existing stockholders and by new public investors before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, using the public offering price of $9.00 per share of common stock:

         
  Shares Purchased   Total Cash Consideration
     Number   Percent   Amount
(In Thousands)
  Percent   Average Price Per Share
Existing stockholders     12,835,955       64.6 %    $ 17,387       21.5 %    $ 1.35  
New investors     7,033,816       35.4 %    $ 63,304       78.5 %    $ 9.00  
Total     19,869,771       100.0 %    $ 80,691       100 %       

The total consideration amount for shares of common stock held by our existing stockholders includes total cash paid for our outstanding shares of common stock as of June 30, 2007 and excludes the value of securities that we have issued for services. If the underwriters’ over-allotment option of 1,055,072 shares of common stock is exercised in full, the number of shares held by existing stockholders will be reduced to 61.3% of the total number of shares to be outstanding after this offering; and the number of shares held by the new investors will be increased to 8,088,888 shares, or 38.7%, of the total number of shares of common stock outstanding after this offering.

The discussion and tables above are based on 12,835,955 shares of common stock issued and outstanding as of June 30, 2007. This information excludes 2,366,864 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

SELECTED CONSOLIDATED FINANCIAL DATA

The following consolidated statements of operations data for each of the five years ended December 31, 2006, and the balance sheet data as of December 31, 2006, 2005, 2004, 2003 and 2002 are

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derived from our audited consolidated financial statements, which, except for 2003 and 2002, are included elsewhere in this prospectus. The following summary unaudited condensed consolidated statement of operations data for the six months ended June 30, 2007 and 2006 and unaudited condensed consolidated balance sheet data as of June 30, 2007 is derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, our unaudited condensed consolidated financial statements include all adjustments, consisting principally of normal recurring accruals, that management considers necessary for a fair presentation of the financial position and the results of operations for these periods. Historical results are not necessarily indicative of the results of operations for future periods. 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 our consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated Statement of Operations Data:

             
  Six Months Ended June 30,   Years Ended December 31,
     2007   2006   2006   2005   2004   2003   2002
     (Unaudited)
       (In Thousands, Except Share and per Share Amount)  
Net sales   $ 54,241     $ 48,524     $ 92,409     $ 72,580     $ 56,765     $ 29,501     $ 15,226  
Cost of sales     48,024       44,094       83,619       64,964       50,862       26,019       13,592  
Gross profit     6,217       4,430       8,790       7,616       5,903       3,482       1,634  
Operating expenses                                                               
Selling and marketing     381       216       490       624       549       251       199  
General and
administrative
    1,161       568       794       671       1,006       1,006       390  
Total operating expenses     1,542       784       1,284       1,295       1,555       1,257       589  
Income from operations     4,675       3,646       7,506       6,321       4,348       2,225       1,045  
Other income (expenses):
                                                              
Interest expense     (530 )      (400 )      (799 )      (498 )      (100 )             
Interest income     3             70                   1       1  
Change of fair value on inventory loan payable     (48 )                                     
Loss on disposal of fixed assets                             (45 )             
Miscellaneous     5       12       13       (1 )      4       40       48  
Total other income (expenses)     (570 )      (388 )      (716 )      (499 )      (141 )      41       49  
Income before provision for income taxes     4,105       3,258       6,790       5,822       4,207       2,266       1,094  
Provision for income taxes     733       470       995       452       359       193       81  
Net income     3,372       2,788       5,795       5,370       3,848       2,073       1,013  
Other comprehensive income – foreign currency translation adjustments     314       71       288       143                    
Comprehensive income   $ 3,686     $ 2,859     $ 6,083     $ 5,513     $ 3,848     $ 2,073     $ 1,013  
Earnings per share – basic   $ 0.27     $ 0.25     $ 0.51     $ 0.48     $ 0.34     $ 0.19     $ 0.09  
Earnings per share –  diluted   $ 0.22     $ 0.25     $ 0.50     $ 0.48     $ 0.34     $ 0.19     $ 0.09  
Dividend per share – basic   $     $ 0.24     $ 0.24     $ 0.49     $ 0.35     $ 0.15     $ 0.08  
Dividend per share –  diluted   $     $ 0.24     $ 0.24     $ 0.49     $ 0.35     $ 0.15     $ 0.08  
Weighted average number of common shares –  basic     12,324,705       11,175,543       11,260,544       11,175,543       11,175,543       11,175,543       11,175,543  
Weighted average number of common shares –  diluted     15,393,332       11,175,543       11,631,459       11,175,543       11,175,543       11,175,543       11,175,543  

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Consolidated Balance Sheet Data:

           
  As of
June 30,
2007
  As of December 31,
     2006   2005   2004   2003   2002
     (Unaudited)                         
          (In Thousands)
Cash   $ 8,494     $ 13,355     $ 71     $ 256     $ 1,294     $ 235  
Total assets     44,155       31,125       28,115       11,230       8,579       9,097  
Total liabilities     26,768       20,180       20,508       8,535       5,756       8,660  
Total stockholders’ equity     17,387       10,945       7,607       2,695       2,823       437  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION 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, our plans and expectations and financial projections. Our 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 prospectus. See “Risk Factors” beginning on page 7. Unless the context otherwise requires, the terms “we,” the “Company,” “us,” or “Fuqi” refers to Fuqi International, Inc. and our wholly-owned subsidiaries.

Overview

We are a leading designer of high quality precious metal jewelry in China, developing, promoting, and selling a broad range of products in the large and rapidly expanding Chinese luxury goods market. Our products consist of a range of unique styles and designs made from precious metals such as platinum, gold, and Karat gold (K-gold), as well as diamonds and other precious stones. We continuously innovate and change our designs based upon consumer trends in China. By continuously creating new designs and rapidly bringing them to market, we are able to differentiate ourselves from our competitors and strengthen our brand identity. Our design database presently contains over 20,000 unique products.

We have historically sold our products directly to distributors, retailers and other wholesalers, who then sell our products to consumers through both retail counters located in department stores and in other traditional stand-alone jewelry stores. We sell our products to our customers at a price point which reflects the market price of the base material, plus a mark-up reflecting our design fees and processing fees. Typically this markup ranges from 10-12%. Our customers then further mark-up our product to the consumer up to an additional 30%.

In order to capitalize on the substantial growth in consumer spending within the luxury goods category and to capture the margin appreciation from direct sales to the consumer, we recently initiated a retail strategy in product categories where we believe we will not be in competition with our existing sales channels. Our retail strategy will focus on finished gemstone jewelry, which we previously provided only on a custom order basis and which has historically represented only a nominal percentage of our overall sales. Gemstone products usually have a longer turnover period of at least four to six months but offer higher margins. We intend to analyze sales data at all our retail outlets and determine the best product mix for each outlet in order to achieve the highest sales revenue and gross margins.

We expect to expend significant resources to commence our planned retail distribution of our manufactured jewelry in China. We will require substantial funds in order to finance our planned retail distribution, fund operating expenses, to develop manufacturing, marketing and sales capabilities and to cover public company costs. In addition to the funds required to open retail locations, additional working capital will be needed to operate retail locations due to longer sales and collection cycles and higher inventory levels required to support retail stores. We also expect to require substantial funds to change our product mix to include more platinum products. Without these funds, we may not be able to meet these goals. Also, we expect our general and administrative costs to substantially increase due to higher salaries to be paid to our executive officers further to employment agreements we intend to enter into, which will come into effect on the effective date of this offering.

A substantial portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make payments in a timely manner, our liquidity and results of operations could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations. In addition, as we increase our presence in the retail market, we expect the aging of our accounts receivable generated from sales through retail counters to increase as department stores typically defer

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payments to us of cash receipts collected by them on our behalf. A significant deterioration in our ability to collect on accounts receivable could affect our cash flow and working capital position and could also impact the cost or availability of financing available to us.

In the coastal cities of China, we believe the demand for platinum and gem stone products has been increasing. In order to capitalize on the growth in demand, we intend to develop platinum as one of the primary metals from which our jewelry is manufactured. In 2006, we began to shift our product line to produce more platinum jewelry and we intend to invest in the development of a new production line to produce finished gemstone platinum jewelry. The production cycle of platinum products is five to seven days, while the cycle for gold products is about two days. As such, we anticipate that more working capital will be needed to support this shift of product mix.

Our company is headquartered in the city of Shenzhen, in southern China, where we have a large-scale production base that includes a modern factory of more than 53,000 square feet, a dedicated senior design, sales and marketing team, and more than 600 company trained employees. We believe our current facilities provide adequate space for our planned expansion of our production lines, which will include diamond and other finished gemstone jewelry.

Corporate History

We operate through our 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.

On November 20, 2006, Fuqi BVI entered into a share exchange agreement with VT Marketing Services, Inc. (“VT”) and Mr. Yu Kwai Chong, who is our current Chief Executive Officer and Chairman of the Board of the Directors, to effect a reverse merger transaction (the “Reverse Merger”). Pursuant to the Reverse Merger, Mr. Chong, as the sole shareholder of Fuqi BVI, agreed to exchange all of his shares of Fuqi BVI for shares of VT and VT agreed to acquire all of the issued and outstanding capital stock of Fuqi BVI. VT was formed as part of the implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of visitalk.com, Inc., which became effective on September 17, 2004. The Reverse Merger closed on November 22, 2006 and VT issued an aggregate of 11,175,543 shares of common stock in exchange for all of the issued and outstanding securities of Fuqi BVI. Upon the close of the Reverse Merger, VT became the 100% parent of Fuqi BVI and assumed the operations of Fuqi BVI and its subsidiary as its sole business. On November 8, 2006, VT reincorporated from Arizona to Nevada and on December 8, 2006, after the Reverse Merger, VT reincorporated from the Nevada to Delaware and changed its corporate name from “VT Marketing Services, Inc.” to “Fuqi International, Inc.” The transactions contemplated by the Reverse Merger were intended to be a “tax-free” transaction pursuant to the provisions of Section 351 of the Internal Revenue Code of 1986, as amended.

For financial accounting purposes, the Reverse Merger 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, our 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, Fuqi China.

Critical Accounting Policies, Estimates and Assumptions

Management’s discussion and analysis of results of operations and financial condition are based upon our 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, allowance for doubtful accounts, and the recoverability of the long-lived assets. Actual results could differ from these estimates. Periodically, we review all significant estimates and assumptions affecting the financial statements and record the effect of any necessary adjustments.

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

Revenue Recognition. Wholesale revenue is recognized upon delivery and acceptance of jewelry products by our customers while the retail revenue is recognized upon receipt and acceptance of jewelry products by our customers, provided in each case 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) our 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. Our functional currency is the RMB. Foreign currency transactions (outside the 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. For the purpose of preparing the consolidated financial statements, the consolidated balance sheets of our company have been translated into U.S. dollars at the current rates as of the end of the respective periods and the consolidated statements of income 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 stockholders’ equity.

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

Inventory. Inventories are stated at the lower of cost (using the first-in, first-out method) or market. We continually evaluate the composition of our inventories assessing slow-moving and ongoing products. Our products contain gold and platinum material which will not become obsolete and accordingly we do not make any reserve for slow-moving and obsolete inventory.

Taxation

We are incorporated in the State of Delaware, and our wholly owned subsidiary, Fuqi BVI, is a British Virgin Islands company. We are subject to franchise taxes in Delaware but we are not subject to taxation in the British Virgin Islands and not currently subject to U.S. federal income taxes. Fuqi BVI’s wholly-owned subsidiary, Fuqi China, is a PRC company.

Under current tax laws in China, the usual statutory income tax rate applicable to PRC companies is 33%. Fuqi China currently enjoys a reduced enterprise income tax rate of 15%, which is granted to all enterprises operating in the Shenzhen Special Economic Zone. Prior to 2006, we were under the preferential income tax rate of 7.5% in 2005 and 2004, due to our status of being a new business. That status expired effective January 1, 2006. Our effective income tax rates for the six months ended June 30, 2007 and the years ended December 31, 2006 and 2005 were 17.9%, 14.7% and 7.8%, respectively. On March 16, 2007, the National People’s Congress of China enacted a new PRC Enterprise Income Tax Law, under which foreign invested enterprises and domestic companies will be subject to enterprise income tax at a uniform rate of 25%. The new law will become effective on January 1, 2008. We anticipate that as a result of the new EIT law, our income tax rates will rise to 25%, which could adversely affect our financial condition and results of operations. See “Risk Factors — Risks Related to Doing Business in China. We had enjoyed certain preferential tax concessions and the loss of these preferential tax concessions may cause our tax liabilities to increase and our profitability to decline.”

We are also subject to a 5% business tax on our design fees and a 17% value added tax on the processing fee. The 5% business tax is borne by us while the 17% value added tax is a component of the prices that we charge our customers. The sum of the design fee, processing fee, and the market price of

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raw materials used to manufacture our products is the wholesale price at which we sell our products. We treat the business tax as a sales-related expense and thus report it under selling and marketing in our statements of operations. See “Business — Pricing” for additional information.

We failed to report a cumulative amount of approximately $26 million in cash revenues related to design fees for the period from the inception of Fuqi China in 2001 to June 30, 2007. In April 2006, the Shenzhen local tax department levied a $1.8 million assessment against us for unpaid business taxes, fees, and income taxes related to these unreported cash revenues up to the period from inception to December 31, 2005. The assessment was originally due at the end of April 2006 and subject to 0.05% per day of interest and penalties thereafter. On April 28, 2006, we filed for an extension of the deadline to remit these outstanding taxes payable to December 20, 2006, and the extension request was approved by the tax department in July 2006. On December 28, 2006, Shenzhen City Tax Bureau granted a further extension to us from December 20, 2006 to April 25, 2007.

On April 25, 2007, we appointed a registered tax agent to apply on behalf of our company for a special reduction or exemption for the unpaid tax liabilities for the period from inception to December 31, 2006. On May 14, 2007, we received a notice from the Shenzhen tax department accepting our application for a tax reduction or exemption and were granted an additional period to remit our outstanding tax liabilities until August 9, 2007. The tax department agreed not to assess any interest and penalties during this review process until August 9, 2007. As of June 30, 2007, we had an accrual of approximately $3.8 million in tax liabilities representing business tax and fees of 5.2% and income tax on the unreported design revenues since inception and an accrual of approximately $1.1 million in estimated penalties. On August 10, 2007, we received a notice from the tax department conditionally agreeing to exempt our tax liabilities in the amount of approximately $3 million on unreported design fee income for the period from inception of our operations in 2001 to December 31, 2006, provided that our common stock is successfully listed on a major overseas stock exchange within 180 days from the date of the tax notice. Due to the contingent nature of this notice, we will maintain our accrued liabilities for these taxes and penalties in our consolidated balance sheet until the conditions of the notice are fully met.

Impact of Recent Currency Exchange Rate Increase

We use the U.S. dollar as the reporting currency for our financial statements. Our operations are conducted through our PRC operating subsidiary, Fuqi China, and our functional currency is the RMB. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar and, as a result, the RMB has appreciated against the U.S. dollar by approximately 7.3% from 1:8.27 on July 21, 2005 to 1:7.71 on May 2, 2007. In converting our RMB income statement amounts into U.S. dollars we used the following RMB/$ exchange rates: 8.3 for 2004, 8.1963 for 2005, 7.959 for 2006 and 7.704 for the six months ended June 30, 2007. Our operating results in 2005 and 2006 have benefited, and our financial results for the balance of 2007 are likely to benefit, as a result of appreciation of the RMB against the U.S. dollar. There is no guarantee that we will benefit from the exchange rate in the future and our operations may suffer if a less favorable exchange rate develops.

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Results of Operations

The following table sets forth our consolidated statements of operations by amount and as a percentage of total net sales for the six months ended June 30, 2007 and 2006 (unaudited) and the years ended December 31, 2006, 2005 and 2004 in U.S. dollars:

                   
                   
  Six Months Ended June 30,   Years Ended December 31,
     2007   2006   2006   2005   2004
     In
Dollars
  Percent of
Revenue
  In
Dollars
  Percent of
Revenue
  In
Dollars
  Percent of
Revenue
  In
Dollars
  Percent of
Revenue
  In
Dollars
  Percent of
Revenue
       (Unaudited)                                                        
 
    (In Thousands, Except Share Amounts and Earnings per Share)  
Net sales   $ 54,241       100.0 %    $ 48,524       100.0 %    $ 92,409       100.0 %    $ 72,580       100.0 %    $ 56,765       100.0 % 
Cost of sales     48,024       88.5       44,094       90.9       83,619       90.5       64,964       89.5       50,862       89.6  
Gross profit     6,217       11.5       4,430       9.1       8,790       9.5       7,616       10.5       5,903       10.4  
Operating expenses
                                                                                         
Selling and marketing     381       0.7       216       0.4       490       0.5       624       0.9       549       1.0  
General and
administrative
    1,161       2.2       568       1.2       794       0.9       671       0.9       1,006       1.7  
Total operating expenses     1,542       2.8       784       1.6       1,284       1.4       1,295       1.8       1,555       2.7  
Income from operations     4,675       8.7       3,646       7.5       7,506       8.1       6,321       8.7       4,348       7.7  
Other income (expenses):
                                                                                         
Interest expense     (530 )      (1.0 )      (400 )      (0.8 )      (799 )      (0.8 )      (498 )      (0.7 )      (100 )      (0.2 ) 
Interest income     3                            70       0.1                          
Change of fair value
on inventory loan
payable
    (48 )      (0.1 )                                                 
Loss on disposal of fixed assets                                                     (45 )      (0.1 ) 
Miscellaneous     5             12             13             (1 )            4        
Total other income (expenses)     (570 )      1.1       (388 )      (0.8 )      (716 )      (0.7 )      (499 )      (0.7 )      (141 )      (0.3 ) 
Income before provision for income taxes     4,105       7.6       3,258       6.7       6,790       7.4       5,822       8.0       4,207       7.4  
Provision for income taxes     733       1.4       470       1.0       995       1.1       452       0.6       359       0.6  
Net income     3,372       6.2       2,788       5.7       5,795       6.3       5,370       7.4       3,848       6.8  
Other comprehensive income –  foreign currency translation adjustments     314       0.6       71       0.2       288       0.3       143       0.2              
Comprehensive income   $ 3,686       6.8     $ 2,859       5.9     $ 6,083       6.6     $ 5,513       7.6     $ 3,848       6.8  
Earnings per share – basic   $ 0.27           $ 0.25           $ 0.51           $ 0.48           $ 0.34        
Earnings per share – diluted   $ 0.22           $ 0.25           $ 0.50           $ 0.48           $ 0.34        
Dividend per share – basic   $           $ 0.24           $ 0.24           $ 0.49           $ 0.35        
Dividend per share – diluted   $           $ 0.24           $ 0.24           $ 0.49           $ 0.35        
Weighted average
number of common shares – basic
    12,234,705             11,175,543             11,260,544             11,175,543             11,175,543        
Weighted average
number of common shares – diluted
    15,393,332             11,175,543             11,631,459             11,175,543             11,175,543        

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Six Months Ended June 30, 2007 and 2006

Net sales, which consist of gross sales net of returns, for the six months ended June 30, 2007 increased to $54.2 million, an increase of $5.7 million, or 11.8%, from net sales of $48.5 million for the six months ended June 30, 2006. The increase in net sales was primarily the result of an increase in our prices, which included the price of precious metals, our processing fees and our design fees.

Net sales for the six months ended June 30, 2007 and 2006 were comprised of the following:

       
  Six Months Ended June 30,
  2007   2006
  Amount in Millions   Percentage   Amount in Millions   Percentage
Platinum   $ 12.0       22.1 %    $ 10.0       20.6 % 
Gold     28.2       52.0       22.1       45.6  
K-gold and Studded Jewelry     14.0       25.9       16.4       33.8  
Total   $ 54.2       100.0 %    $ 48.5       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. Cost of sales for the six months ended June 30, 2007 increased to $48.0 million, an increase of $3.9 million, or 8.8%, from $44.1 million for the same period in 2006. The increase was primarily due to the increase in the cost of raw materials for the six months ended June 30, 2007.

Gross profit for the six months ended June 30, 2007 increased to $6.2 million, an increase of $1.8 million, or 40.9%, from $4.4 million for the same period in 2006. The gross margin for the six months ended June 30, 2007 was 11.5%, compared to 9.1% for the same period in 2006. The increase in the gross margin for the six months ended June 30, 2007 as compared to the same period in 2006 was primarily due our higher sales prices during the three months ended June 30, 2007, as compared to the reduced sales prices in the same period in 2006, which were lowered in an attempt to generate more sales volume.

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 six months ended June 30, 2007 were approximately $381,000, an increase of $165,000, or 76.39%, from $216,000 for the same period in 2006. The increase in selling and marketing expenses was primarily due to our extended advertising campaign during Chinese New Year, an increase in electricity fees, an increase in insurance coverage for product delivery, and an increase in retail related expenses.

General and administrative expenses consist primarily of payroll expenses, benefits and travel expenses for our staff, professional fees including audit, accounting, legal and financial advisory, depreciation expenses, and general office expenses. General and administrative expenses for the six months ended June 30, 2007 were $1.2 million, an increase of $0.6 million, or 100%, from $0.6 million for the same period in 2006. The increase in general and administrative expenses was primarily due to an increase of professional fees incurred as a result of being a publicly reporting company in the United States. In addition, we granted our Chief Financial Officer a one-time discretionary bonus of $89,411 in connection with the exercise of warrants during the second quarter of 2007.

Interest expenses were approximately $530,000 for the six months ended June 30, 2007, an increase of $130,000, or 32.5%, from $400,000 for same period in 2006. The increase in interest expense was primarily a result of our increases in short term bank financing and increases in interest rates for the six months ended June 30, 2007.

Provision for income tax expense was approximately $733,000 for the six months ended June 30, 2007, an increase of $263,000, or 56%, from approximately $470,000 for the same period in 2006. The increase was primarily due to an increase in the taxable income for the six months ended June 30, 2007.

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Net income increased to $3.4 million for the six months ended June 30, 2007 from $2.8 million for the six months ended June 30, 2006, an increase of $0.6 million, or 21.43%.

Other comprehensive income, which consists of gains from foreign exchange translations, was approximately $314,000 for the six months ended June 30, 2007, an increase of $243,000, or 342.3%, from $71,000 for the six months ended June 30, 2006. The increase was a result of continuous appreciation of the RMB exchange rate against the U.S. dollar.

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 our prices, which was the result of an increase in the price of precious metals, and a change in product mix. We sold more platinum jewelry during the year ended December 31, 2006 as compared to 2005.

Net sales for the years ended December 31, 2006 and 2005 were comprised of the following:

       
  Year Ended December 31,
  2006   2005
  Amount in Millions   Percentage   Amount in Millions   Percentage
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 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, with the percentage increase in cost of sales in line with the increase in net sales. The small difference in the percentage change was mainly due to increased labor costs required 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 attributable to our decision to reduce prices in the third quarter of 2006 in an effort to attract more sales.

Selling and marketing expenses for the year ended December 31, 2006 were $490,000, a decrease of $134,000, or 21.5%, as compared to $624,000 for the year ended December 31, 2005. The decrease in selling and marketing expenses was primarily due to our more targeted and focused marketing efforts in 2006.

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 the Reverse Merger between Fuqi BVI and the predecessor of our current Delaware-incorporated holding company.

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 an increase in interest rates for short term bank financing for the year ended December 31, 2006.

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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 our operating income for the year ended December 31, 2006.

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%.

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

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 27.8%, 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 we sold in 2005, which we believe increased primarily because of our marketing activities and favorable credit terms that we made available to our customers.

Net sales for the year ended December 31, 2005 and 2004 were comprised of the following:

       
  Year Ended December 31,
  2005   2004
  Amount in Millions   Percentage   Amount in Millions   Percentage
Platinum   $ 13.2       18.2 %    $ 7.1       12.5 % 
Gold     34.9       48.1       25.8       45.4  
K-gold and Studded Jewelry     24.5       33.7       23.9       42.1  
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, with the percentage increase in cost of sales in line with the increase in net sales.

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 was 10.5% for the year ended December 31, 2005 and 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 an increase in our promotional 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. In 2004, we unsuccessfully attempted a Reverse Merger and costs associated with this transaction accounted for higher general and administrative expenses in the year ended December 31, 2004. In addition, we accrued estimated penalties in the amount of $1.1 million on unpaid business taxes related to cash revenues since 2004.

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 our increased use of bank financings in 2005 to acquire raw materials.

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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 our operating income for the year ended December 31, 2005.

Other comprehensive income increased to $143,000 during 2005, compared to $0 during 2004. The PRC government maintained a relatively fixed exchange rate against the U.S. dollar until the end of the third quarter of 2005. 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%.

Quarterly Comparisons

The following table presents the unaudited consolidated statements of operations data for each of ten fiscal quarters through June 30, 2007, in dollars. In management’s opinion, this unaudited information has been prepared on the same basis as our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the unaudited information for the quarters presented. The results of operations for any quarter are not necessarily indicative of results that we might achieve for any subsequent periods. In addition, our operating results have in the past and may in the future fluctuate significantly as a result of many factors, including the seasonality of our business and the unpredictable fluctuation of prices of precious metals. Consequently, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful, and as a result, you should not rely on them as an indication of future performance.

                   
                   
Amounts in Thousands (Unaudited)
     June 30,
2007
  Mar. 31,
2007
  Dec. 31,
2006
  Sep. 30,
2006
  June 30,
2006
  Mar. 31,
2006
  Dec. 31,
2005
  Sep. 30,
2005
  June 30,
2005
  Mar. 31,
2005
Net sales   $ 26,281     $ 27,960     $ 24,802     $ 19,083     $ 24,220     $ 24,304     $ 20,652     $ 16,013     $ 14,910     $ 21,005  
Cost of sales     23,228       24,796       21,868       17,657       23,007       21,087       17,802       14,141       13,892       19,129  
Gross profit     3,053       3,164       2,934       1,426       1,213       3,217       2,850       1,872       1,018       1,876  
Operating expenses:
                                                                                         
Selling and marketing     187       194       162       112       110       106       182       128       109       205  
General and administrative     740       421       149       77       299       269       155       231       150       135  
Total operating expenses     927       615       311       189       409       375       337       359       259       340  
Income from operations     2,126       2,549       2,623       1,237       804       2,842       2,513       1,513       759       1,536  
Other income (expenses):
  
 
Interest expense     (283 )      (247 )      (222 )      (177 )      (190 )      (210 )      (182 )      (140 )      (98 )      (78 ) 
Interest income     3             70                                            
Change of fair value on inventory loan payable     (7 )      (41 )                                                 
Loss on disposal of fixed assets                                                            
Miscellaneous     6             1                   12             (1 )             
Total other expenses     (281 )      (288 )      (151 )      (177 )      (190 )      (198 )      (182 )      (141 )      (98 )      (78 ) 
Income before provision for income taxes     1,845       2,261       2,472       1,060       614       2,644       2,331       1,372       661       1,458  
Provision for income taxes     356       378       370       155       100       370       190       103       47       112  
Net income     1,489       1,883       2,102       905       514       2,274       2,141       1,269       614       1,346  
Other comprehensive income –  foreign currency translation adjustments     204       110       122       95       14       57       (100 )      243              
Comprehensive income   $ 1,693     $ 1,993     $ 2,224     $ 1,000     $ 528     $ 2,331     $ 2,041     $ 1,512     $ 614     $ 1,346  

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Liquidity and Capital Resources

At June 30, 2007, we had retained earnings of $6.7 million and had cash of $8.5 million. We have historically financed our operations with cash flows generated from operations, as well as through the borrowing of long-term or short-term bank loans. In addition, we have borrowed from our controlling stockholder, Mr. Yu Kwai Chong, for short term working capital requirements.

At June 30, 2007, we had outstanding facility lines of credit and short-term notes payables with banks in an aggregate amount of $16.4 million, consisting of $15.1 million in short-term notes payable to banks and $1.3 million in facility lines of credit. Our loans are secured by inventory, real property and/or guaranteed by our affiliates and our controlling stockholder.

We have a general banking facility line of credit with Agricultural Bank of China pursuant to a Maximum Banking Facility Agreement dated August 24, 2006. The terms of the agreement enable us to borrow up to a maximum facility amount of $13.1 million. Maturity dates for each withdrawal typically range from three to six months and are agreed to by the parties at the time of withdrawal. As of June 30, 2007, we had $13.1 million outstanding under the facility, with interest rates ranging from 6.426% to 6.732%. In addition, we have a line of credit and a bank loan from China Construction Bank and DBS Bank. As of June 30, 2007, we had $3.3 million outstanding with interest rates ranging from 6.732% to 7.02% from the DBS Bank line of credit and a bank loan from China Construction Bank. Amounts borrowed under the banking facility lines of credit are secured by our inventory, real property, and/or guaranteed by our affiliates and our controlling stockholder and have certain restrictions and covenants. We do not guarantee any indebtedness of our affiliates. The amounts outstanding under these lines of credit and bank loans are presented in our financial statements as notes payable and line of credit. For additional information, see Note 5 and Note 6 to our consolidated financial statements contained in this prospectus.

Prior to the Reverse Merger, our then sole stockholder, Mr. Yu Kwai Chong, who is also our President, Chief Executive Officer and Chairman of the Board, made loans to us on a regular basis to meet short term financing needs of our company. Typically, these advances were in amounts ranging from $30,000 to $5.5 million, with no more than $10.0 million outstanding at any time. We did not pay interest on any of these advances. During the same period, Mr. Chong borrowed from our company primarily to fund personal liquidity needs. Since the closing of the Reverse Merger, at which time Mr. Chong ceased to be our sole stockholder, we have not engaged in any cash advance transactions with Mr. Chong and will not engage in these transactions in the future. Prior to the Reverse Merger, effective in November 2006, we paid dividends to our then sole stockholder, Mr. Chong. During the years ended December 31, 2006, 2005 and 2004, we paid cash dividends of $2.7 million, $5.4 million, and $4.0 million, respectively, to Mr. Chong. We currently have no intention to declare further dividends in the foreseeable future. Payment of dividends is further restricted under the provisions of our existing loan agreements.

On our consolidated statements of cash flows, we recorded advances by Mr. Chong to us and related repayments to him as financing activities, and advances by us to Mr. Chong and related repayments by him as investing activities. Advances and repayments were not subject to written loan agreements; the advances were partially repaid within three months while the remaining portions were repaid over three months. In accordance with FAS 95, we present the gross amounts of the advances and repayments in our consolidated statements of cash flows.

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The following table sets forth a summary of our cash flows for the periods indicated:

         
  Six Months Ended June 30,   Years Ended December 31,
  2007   2006   2006   2005   2004
  (Unaudited)   (Unaudited)     
  (In Thousands)
Net cash provided by (used for) operating activities   $ (8,981 )    $ (5,115 )    $ 4,037     $ 3,202     $ 2,270  
Net cash provided by (used for) investing activities     (397 )      5,791       9,613       (17,928 )      (1,103 ) 
Net cash provided by (used for) financing activities     4,264             (595 )      14,622       (2,205 ) 
Effect of exchange rate changes on cash     253       208       229       (81 )       
Net increase (decrease) in cash   $ (4,861 )    $ 884     $ 13,284     $ (185 )    $ (1,038 ) 
Cash at beginning of period     13,355       71       71       256       1,294  
Cash at end of period   $ 8,494     $ 955     $ 13,355     $ 71     $ 256  

Net cash provided by (used for) operating activities. Net cash used for operating activities was $9.0 million for the six months ended June 30, 2007, compared to net cash used for operations of $5.1 million for the same period in 2006. The $3.9 million increase was primarily due to an increase in inventory in the amount of $14.4 million during the six months ended June 30, 2007 compared to an increase of $5.2 million during the same period in 2006, in addition to an increase of refundable value added taxes in the amount of $2.1 million during the first half of 2007 compared to an increase of $610,000 in the same period in 2006. 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) increase 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.

Net cash provided by (used for) investing activities. Net cash used for investing activities amounted to approximately $398,000 for the six months ended June 30, 2007, compared to net cash provided by investing activities of $5.8 million for the six months ended June 30, 2006. The change was due to an increase in restricted cash of approximately $390,000, in addition to the absence of loans and related repayments between our controlling stockholder and us, as had occurred during the six months ended June 30, 2006. 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 was due to a net repayment of $6.9 million (the amount of repayments over advances) in 2006 by our majority stockholder, Mr. Yu Kwai Chong, compared to a net advance of $14.4 million (the amount of advances over repayments) to this stockholder in 2005.

Net cash provided by (used for) financing activities. Net cash provided by financing activities amounted to $4.3 million for the six months ended June 30, 2007, compared to net cash used for financing activities of $0 million for the six months ended June 30, 2006. The increase of cash provided was primarily a result of the additional borrowings of $1.9 million from the facility line of credit we entered into in February 2007, in addition to net proceeds of $2.8 million from the exercise of warrants that occurred during the second quarter of 2007. 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 our use of short-term and long-term bank financing in a total amount of $8.8 million in 2005. In addition, we borrowed a net amount of $415,000 from Mr. Yu Kwai Chong in 2006 compared to $0 in 2005. We also received $4.8 million in capital contributions from Mr. Chong in 2005 compared to $0 in 2006.

We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital, for the next 12 months. We may,

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however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue.

We intend to expand our retail operations in order to capitalize on the growing consumer market in China. We intend to open new retail locations by leasing unoccupied space, acquiring existing leases from third parties and/or acquiring the existing jewelry operations of third parties that occupy retail space. While we are still in the process of determining all the steps necessary to implement our retail expansion, it will largely depend on our ability to find sites for, open and operate new retail locations successfully, which depends on, among other things, our ability to: (i) identify suitable counter and store locations; (ii) purchase and negotiate acceptable lease terms; (iii) prepare counters and stores for opening within budget; (iv) source sufficient levels of inventory at acceptable costs to meet the needs of new counters and stores; (v) hire, train and retain personnel, and (vi) secure required governmental permits and approvals.

In April 2007, we entered into a transfer agreement with an unrelated party (the “Transferor”), which has operation agreements with department stores for five jewelry retail counters. Under the terms of the agreement, the Transferor agreed to assign all of the operation rights to us for a fee of $400,000. The fee is payable in three separate installments. The first payment of $120,000 is due upon completion of the transfer of the operation rights by the department stores to us. The second installment of $120,000 is due within 30 days after the remittance of the first installment while the final installment of $160,000 is due within 90 days after the remittance of the first installment. We obtained temporary operation rights from the Transferor to operate these counters from May 1, 2007. The Transferor is in the progress of negotiating the transfer of operation rights to us with these department stores. As of August 13, 2007, we have not yet received formal operation rights transfer agreements but have received verbal confirmations from the department stores. We have also commenced negotiations with an individual to potentially serve as director of our retail operations.

During 2007, we plan to open 20 retail counters and 2 retail stores in municipalities and provincial capitals throughout China. In 2008, we plan to open 60 to 80 retail counters and 8 to 10 retail stores. In addition to the funds required to open new retail locations, additional working capital will be needed to operate the retail locations due to longer sales and collection cycles and higher inventory levels required to support retail stores. We currently anticipate that we will need approximately $40 million in capital to execute our retail plan for the coming two years. We anticipate that a substantial portion of it, approximately $20 million, would be used to acquire new raw materials. A smaller portion of the additional capital, approximately $16 million, would be used for the opening of retail outlets. Approximately $2 million of the additional capital would be used to acquire new components and additional tooling, while the remaining portion of the additional capital would be applied to working capital for labor to manufacture jewelry and for marketing and promotional activities. Additional capital for this objective may be required that is in excess of our current resources, requiring us to raise additional capital through additional equity offerings or secured or unsecured debt financing. The availability of additional capital resources will depend on prevailing market conditions, interest rates, and our existing material financial position and results of operations. The foregoing amounts are only estimates, which may change based on our analysis and evaluations of changing market conditions.

Contractual obligations

The following table describes our contractual commitments and obligations as of June 30, 2007:

         
  Payments due by Period (in $)
Contractual Obligations   Total   Less Than 1 Year   1 – 3
Years
  3 – 5
Years
  More Than
5 Years
     (Unaudited)
Lease of Plant   $ 354,540     $ 118,180     $ 236,360     $     $  
Lease of Staff Dormitory     33,458       33,458                    
     $ 387,998     $ 151,638     $ 236,360     $     $  

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Seasonality

Our business is seasonal in nature. Our 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 our business operations are holidays and traditional Chinese festivals. In the fourth quarter, retailers often experience increased sales due to the week-long public holiday for Chinese National Day, as well as Christmas and New Year’s Day. In addition, jewelry retailers commonly stock up from wholesalers in the fourth quarter to prepare for potentially higher sales in the following quarter for Chinese New Year. This quarter is also a peak season for marriages and the birth of newborns in China, which have historically resulted in higher sales. This seasonal trend in our business occurred during 2004 and 2005. However, there was a slight variation during 2006. Because of rising precious metal prices in the fourth quarter of 2006, many customers delayed their orders until the first quarter of 2007, resulting in lower-than-expected sales volume in the fourth quarter of 2006, and higher than expected sales in the first quarter of 2007.

Off-Balance Sheet Transactions

We have no material off-balance sheet transactions.

New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board issued SFAS No. 155 (“FAS 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. We adopted FAS 155 in the quarter ended March 31, 2007 and such adoption does not have any material impact on our 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 providing 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 with the first fiscal year that begins after September 15, 2006. We adopted FAS 155 in the quarter ended March 31, 2007 and such adoption does not have any material impact on our financial position and results of operations or cash flows.

In June 2006, the FASB issued Interpretation No. 48 (“FIN48”), “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 adopted the provisions of FIN48 on January 1, 2007 and have determined the impact of the adoption of FIN 48 is insignificant to our consolidated financial position, results of operations and cash flows.

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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 our 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. We do not expect the adoption of SFAS 158 will have a material impact on our 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. We do not expect the application of the provisions of SAB 108 to have a material impact, if any, on our 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 FASB to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting this statement; however, we do not expect the adoption of this provision to have a material effect on our financial position, results of operations or cash flows.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk

We use the U.S. dollar as the reporting and functional currency for our financial statements. As we conduct our operations through our PRC subsidiary, the functional currency of our PRC subsidiary is RMB. Substantially all our revenue and related expenses, including cost of revenues and advertising expenses, are denominated and paid in RMB. Transactions in other currencies are recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are remeasured into RMB at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as other comprehensive income.

The value of RMB is subject to changes in China’s governmental policies and to international economic and political developments. In January, 1994, the PRC government implemented a unitary

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managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing a daily base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. This modification has resulted in an approximate 7.3% appreciation of the RMB against the U.S. dollar from July 21, 2005 to May 2, 2007. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further fluctuation of the exchange rate of RMB against the U.S. dollar. As all of our net revenues are recorded in RMB, any future devaluation of RMB against the dollar could negatively impact our results of operations.

Interest Rate Risk

As of June 30, 2007, we had $16.4 million outstanding under short term credit facilities from banks, with interest rates ranging from 6.426% to 6.732%. As all of these borrowings are short term borrowings, we believe our exposure to interest rate risk is not material. We do not use any derivative financial instruments to manage interest rate risks.

Inflation

In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, the change in Consumer Price Index in China was 3.9%, 1.8% and 3.4% in 2004, 2005 and 2006, respectively.

Commodity Price Sensitivity

We are exposed to market risk in connection with our inventory balances, which are comprised primarily of gold, platinum and jewelry made from gold and platinum. Our inventories are stated at the lower of cost or market using the first in first out method. If there is a downward change in the market price of gold, we are required to mark-down the value of our inventory and record a loss in our statement of operations. As of June 30, 2007, our inventory position was approximately $20.8 million, which consisted of gold and jewelry made from gold acquired at an average price of $18.34 per gram and platinum and jewelry made from platinum acquired at an average price of $36.24 per gram. On June 29, 2007, the prices of gold and platinum on the Shanghai Gold Exchange were $17.82 per gram and $36.13 per gram, respectively. Since our inception we have not experienced any losses due to changes in the market price of gold or platinum because the prices of gold and platinum have generally risen since our inception. Currently we do not hold any forward contracts or use any other derivative instruments to hedge our exposure to fluctuations in the price of gold. However, we intend to use such hedging strategies in the future.

Change in Accountants

On November 22, 2006, we dismissed Epstein, Weber & Conover, P.L.C. (“EWC”) as our independent registered public accounting firm following the change in control of our company in connection with the Reverse Merger. EWC conducted the audit of our predecessor company, VT Marketing Services, Inc. (“VT”), prior to the Reverse Merger for the financial statements for the years ended December 31, 2005 and 2004. The decision to change accountants was approved and ratified by our Board of Directors. The report of EWC on the financial statements of our predecessor company for the fiscal years ended December 31, 2005 and 2004 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principle, except for an explanatory paragraph relative to VT’s ability to continue as a going concern.

While EWC was engaged by us and our predecessor 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 our company, which disagreements if not resolved to the

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satisfaction of EWC would have caused it to make reference to the subject matter of the disagreements in connection with its report on our financial statements for the fiscal years ended December 31, 2005 and 2004.

Following the Reverse Merger, we 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 our independent registered public accounting firm.

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BUSINESS

Overview

We are a leading designer of high quality precious metal jewelry in China, developing, promoting, and selling a broad range of products to the rapidly expanding Chinese luxury goods market. According to Global Industry Analysts, Inc., or GIA, China’s jewelry industry grew to $14 billion in 2005 and China is expected to lead global jewelry processing and consumption by 2010.

Our products consist of a range of unique styles and designs made from precious metals such as platinum, gold, and Karat gold (K-gold), as well as diamonds and other precious stones. Our design database presently contains over 20,000 unique products. We continuously innovate and change our designs based upon consumer trends in China. By continuously creating new designs and rapidly bringing them to market, we believe we are able to differentiate ourselves from our competitors and strengthen our brand identity.

Our nationwide distribution network and significant relationships with retailers allow us to test-market, promote and sell our products in almost every province in China. We believe our vertically integrated direct sales operations, which include product development, sales and marketing, and order fulfillment and delivery, allow us to effectively reach consumers and maximize sales throughout China.

We have historically sold our products directly to distributors, retailers and other wholesalers, who then sell our products to consumers through both retail counters located in department stores and in traditional stand-alone jewelry stores. We sell our products to our customers at price points that reflect the market price of the base material, plus a mark-up reflecting our design fees and processing fees. Typically this markup ranges from 10-12%. Our customers then further mark up our products to the consumers up to an additional 30%. Our target price points are primarily designed to appeal to China’s growing middle class.

In order to capitalize on the substantial growth in consumer spending on luxury goods in China and to capture the margin appreciation from direct sales to the consumer, we recently initiated a retail strategy in product categories where we believe we will not compete with our existing sales channels. Our retail strategy will focus on finished gemstone jewelry, which we previously provided only on a custom-order basis and which has historically represented only a nominal percentage of our overall sales.

We intend to open new retail locations by leasing unoccupied space, acquiring existing leases from third parties and/or acquiring the existing jewelry operations of third parties that occupy retail space. During 2007, we intend to open 20 retail counters and 2 retail stores in municipalities and provincial capitals throughout China. In 2008, we plan to open 60 to 80 retail counters and 8 to 10 retail stores. We believe our expansion into the retail market will provide us with:

direct access to the consumer market, allowing us to respond more rapidly to changing consumer tastes;
an opportunity to grow our revenue base as we roll out our retail strategy;
improved net margins from higher markups in the retail market; and
increased brand awareness.

Our company is headquartered in the city of Shenzhen, in southern China, where we have a large-scale production base that includes a modern factory of more than 53,000 square feet, a dedicated senior design, sales and marketing team, and more than 600 company-trained employees. We believe our current facilities provide adequate space for our planned expansion of our production lines, which will include diamond and other finished gemstone jewelry.

Our sales grew at an average rate of 57% per annum, reaching $92.4 million in 2006, from $15.2 million in 2002. To date, the increase in our sales has occurred organically, without the acquisition of

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other companies. Our income from operations grew from $1.0 million in 2002 to $7.5 million in 2006, while our net income grew from $1.0 million in 2002 to $5.8 million in 2006.

Industry Background and Trends

China’s growing consumer market

China’s market for jewelry and other luxury goods is expanding rapidly, due in part to the country’s rapid economic growth. According to the EIU, China’s real gross domestic product, or GDP, grew by 10.1%, 10.4% and 10.7% in 2004, 2005 and 2006, respectively. Economic growth in China has led to greater levels of personal disposable income and increased spending among China’s expanding middle-class consumer base. According to EIU, private consumption has grown at a 9% compound annual growth rate, or CAGR, over the last decade.

Notwithstanding China’s rapid economic growth, with a population of 1.3 billion people, China’s economic output and consumption rates are still small on a per capita basis compared to developed countries. In 2006, China’s GDP per capita was $7,530, as compared to GDP per capita of $44,244 in the United States. Per capita disposable income in China has grown at a CAGR of 9.8% over the last decade, rising to $728 in 2006, as compared to $9,522.8 in the United States. We believe that, as China’s economy develops, disposable income and consumer spending levels will continue to catch up to those of developed countries like the United States.

The following table sets forth a summary of certain data regarding China’s economic growth for the years from 2002 to 2006.

           
  2002   2003   2004   2005   2006   CAGR
(2002 – 2006)
Nominal GDP at PPP
(in billions of US$)
  $ 6,089     $ 6,783     $ 7,642     $ 8,692     $ 9,901       13 % 
Real GDP per capita (in US$)     4,740       5,250       5,880       6,650       7,530       12 % 
Disposable income per capita     546       603       682       690       728       7 % 

Source: Economist Intelligence Unit.

The following table sets forth a summary of certain projections regarding China’s economic growth for the periods from 2007 to 2011.

           
  2007   2008   2009   2010   2011   CAGR
(2007 – 2011)
Total real GDP (in billions of US$)   $ 11,178     $ 12,538     $ 14,006     $ 15,536     $ 17,069       11 % 
Real GDP per capita (in US$)     8,448       12,538       1,0478       11,573       12,635       11 % 
Disposable income per capita     798       891       991       1,112       1,248       12 % 

Source: Economist Intelligence Unit.

China’s government has demonstrated on multiple occasions its commitment to continued economic growth. An underlying driver of economic policy in China is the need to achieve strong rates of growth in order to create jobs and reduce economic imbalances, particularly between urban and rural areas. The government has set a target of building a more equal society by 2020, largely by promoting development in rural areas and continuing its program of economic reforms. Income expanded for both urban and rural populations in 2006. According to the EIU, in 2006 disposable income per capita for urban residents averaged $1,475, an increase of 12% from 2005, while those of rural residents reached $449, an increase of 10% from 2005.

China’s growing jewelry market

Fueled by increased personal income, China’s market for precious metal jewelry and other luxury products has been experiencing rapid growth. According to GIA, the precious metal jewelry market in China has increased by 35% from 2001, reaching $14.9 billion in 2006. According to the same

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source, China is becoming one of the largest consumers of gold jewelry in the world by volume, consuming more than 198 tons of gold jewelry in 2002.

Gold is the largest segment in China’s precious jewelry market, followed by platinum and diamond jewelry. According to GIA, jewelry has become the third largest consumption item in China after automobiles and housing. The total market size for precious jewelry is expected to exceed $18.1 billion in 2010.

The following table sets forth actual and projected annual sales figures for China’s jewelry market:

     
  2001
(Actual)
  2006
(Estimated)
  2010
(Estimated)
  (In Millions)
Gold Jewelry   $ 4,924.2     $ 5,970.9     $ 6,875.6  
Diamond Jewelry     1,887.5       2,898.9       4,072.6  
Silver Jewelry     677.8       806.3       934.6  
Platinum Jewelry     2,111.8       3,608.2       4,458.0  
Other Jewelry     1,314.4       1,573.4       1,855.6  
Total   $ 10,915.7     $ 14,857.7     $ 18,196.4  

Source: Global Industry Analysts, Inc.

Other factors driving the growth of China’s jewelry market

In addition to the rapid growth of China’s overall economy and consumer base, we believe there are other favorable demographic, political and cultural trends driving the growth of China’s jewelry industry.

Favorable cultural trends. China’s demand for jewelry, particularly gold jewelry, is embedded in its cultural traditions. Gold has long been viewed as both a secure and accessible savings vehicle, and as a symbol of wealth and prosperity in Chinese culture. In addition, gold jewelry plays an important role in marriage ceremonies, child births and other major life events in China. Gold ornaments, often in the shapes of dragons, horses and other cultural icons, have long been a customary gift for newly married-couples and newly-born children in China. As China’s population becomes more urban, more westernized and more affluent, gold, platinum and other precious metal jewelry are becoming increasingly popular and affordable fashion accessories. With its estimated population of 1.3 billion, we believe that China’s current and future cultural trends will continue to provide us with a large addressable market.

Current fragmentation of the jewelry industry. Despite its large size and rapid expansion, China’s jewelry industry remains highly fragmented. The industry is currently comprised of a large number of regional designers, marketers and producers, with no clear market leaders. Leading international jewelry companies have generally targeted their sales and marketing efforts in China to the small, ultra-rich segment of the country’s population. We believe the current fragmentation in the jewelry industry has created significant growth and consolidation opportunities for companies like ours with developed distribution networks that offer high quality products to China’s growing middle class consumer base.

Favorable governmental policies. As China transitions from a planned economy to a more market-oriented economy, the government has taken numerous steps to privatize state-owned assets and facilitate the development of the country’s private enterprises. Numerous industry sectors have been affected by these efforts to deregulate the economy, including the jewelry industry. Since retailing is considered a strategic industry by the government, it encourages the establishment of retail chains and promotes the development of third-party logistics and distribution centers, all benefiting the jewelry industry. China’s entry into the World Trade Organization has led to lower tariffs, an easing of trade

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regulations, and the opening of China’s jewelry market to foreign investors. According to GIA, as a result of these factors, China is set to lead global jewelry processing and consumption by 2010.

Rapid Urbanization. According to the National Bureau of Statistics of China, China’s urban population as a percentage of total population increased from 17.9% in 1978 to 29.0% in 1995 and to 43.0% in 2005, and is projected to continue to grow rapidly. Rapid urbanization, in turn, is predicted to result in faster growth of consumer spending in urban areas, which already accounts for a disproportionately large amount of consumer spending. According to the National Bureau of Statistics, 78.3% of retail sales for consumer goods took place in urban areas in 2005. Retail sales in urban areas grew by 13.5% in 2005, compared to growth in rural areas of 10.8% over the same period. We believe that urbanization in China will provide us with increasing opportunities to develop our brand and market our products to an increasingly affluent consumer base.

Development of large cities and retail outlets. Rapid urbanization in China during the past several decades has resulted in the expansion of major cities and infrastructure throughout China. According to the China City Statistics Yearbook (2006), China had over 120 cities each with a population of over four million as of the end of 2005. The growth of China’s cities has lead to the growth of major retail facilities such as department stores and shopping malls. Jewelry retailers in China are typically based in department stores, where they lease a sales counter or a portion of the sales floor from the store owner. Increasingly, jewelry retailers are also establishing retail outlets in shopping malls and other urban retail centers. We believe the continued development of large cities and retail infrastructure in China will provide us with a broader distribution network and favorable locations for our own planned retail outlets.

Competitive Strengths

We believe that the following competitive strengths contribute to our success and differentiate us from our competitors.

Experienced management team

Our senior management team has extensive business and industry experience, having been at our company for an average of 10 years. Mr. Yu Kwai Chong, our principal stockholder and Chief Executive Officer, has almost 20 years of experience in China’s jewelry industry, which includes serving as a General Manager of Gao De, one of China’s first state-owned jewelry companies, from 1993 to 1996. Mr. Ching Wan Wong, our Chief Financial Officer, has over 15 years of industry experience, particularly in financial management of business operations. Mr. Lie Xi Zhuang, our Chief Operating Officer, has over 15 years of experience in manufacturing and operations. Mr. Xi Zhou Zhuo, our Marketing Director, has over 15 years of experience in sales of jewelry. Other members of our senior management team have significant experience with respect to other key aspects of our operations, including product design, manufacturing, and sales and marketing. Our co-founders, Mr. Chong and Mr. Zhuang have worked together for more than 15 years, which includes working together at Shenzhen Gao De Gold and Silver Jewelry Company prior to starting our company.

Leading market position

We have established a leading market position through our extensive retail relationships and the quality of our products. We believe that we are one of the first jewelry companies in China to successfully establish an integrated multi-channel sales and marketing platform utilizing a highly-trained in-house design team. Our distributors and retailers benefit from our integrated database of more than 20,000 product styles, which allows us to respond rapidly to market trends. Our success in style design, along with our constant focus on quality control, has enabled us to establish a reputation for high quality products. Our operating model, coupled with our modern manufacturing processes, has resulted in economies of scale, a low cost structure, and an ability to respond rapidly to customer demands.

Well-established wholesale distribution channels

We sell our jewelry to a well-established network of approximately 1,000 nationwide distributors, retailers and wholesale agencies, allowing us to penetrate customer markets throughout China.

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We concentrate our efforts on department stores, wholesalers, national jewelry chains, fine jewelers, and other stores that sell fashionable jewelry. Our relationship with many of our distributors extends from our inception in 2001. We also continue to screen and identify our strongest retail customers in each distribution channel and to focus our design and sales efforts towards the largest and fastest growing retailers and distributors. We work closely with our major customers and strive to adjust our product mix based on customer feedback in order to ensure high levels of customer satisfaction.

Proven product design and manufacturing capabilities

We employ a rigorous and systematic approach to product design and manufacturing. We employ a senior design team with members educated by top art schools or colleges in China, with an average of three to five years of experience. Our design team develops and tracks new ideas from a variety of sources, including direct customer feedback, trade shows, and industry conferences. We generally test the market potential and customer appeal of our new products and services through a wide out-reach program in specific regions prior to full commercial launch. We have a large-scale production base that includes a 53,000 square foot factory, a dedicated design, sales and marketing team, and more than 600 company-trained employees. Our production lines include automated jewelry processing equipment and procedures that we can rapidly modify to accommodate new designs and styles. We have received several accreditations from The International Organization for Standardization (ISO), including ISO 9000, ISO 9001 and ISO 14000, attesting to our quality management requirements, manufacturing safety, controls, procedures and environmental performance.

Extensive design database with over 20,000 product styles

We continuously design, test and produce new styles of jewelry and currently carry more than 20,000 product styles. We assign unique serial numbers to each of our products styles and maintain an information management system to archive and access our product designs. The system features image and data storage, as well as reference and tracking capabilities, allowing users to reference each design along with its technical, stylistic and other characteristics. We utilize the database at various stages of the design, manufacturing and distribution process, and continue to add to this database at the rate of approximately 3,600 designs per annum.

Customer service expertise

In order to ensure superior service and foster customer trust and loyalty, we provide customized design services, flexible delivery methods, and product feedback opportunities to our customers. Our sales representatives and marketing personnel undergo extensive training, providing them with the skills necessary to answer product and service-related questions, proactively educate potential customers about our products, and promptly resolve customer inquiries.

Our Strategies

Our goal is to be the leading vertically-integrated designer, manufacturer, and retailer of jewelry in China. We intend to achieve our goal by implementing the following strategies:

Aggressively pursue new wholesale distribution channels

We intend to broaden the scope of our distribution arrangements to increase sales penetration in targeted markets. We intend to select additional distributors based on their access to markets and retail outlets that are candidates for our jewelry products. Also, we believe that once we have established broad brand awareness, more distributors from remote areas will seek access to our products through our wholesale channel.

Establish and expand our retail market footprint

We have developed a retail sales plan aimed at gaining market share in the growing consumer market in China. We plan to acquire leases and open new stores in markets that we believe have a sufficient concentration of our target customers. Our retail expansion program is designed to reach new and existing customers through the opening of new retail locations and through the introduction

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of new jewelry designs. Retail locations will be determined on the basis of various factors, including geographic location, demographic studies and other jewelry stores or counters in the vicinity of a retail location.

Our retail expansion strategy is designed not to conflict with our existing distributors. For example, generally we sell our products to distributors who then sell them to department stores. The department stores display these products in a retail counter typically owned by the department stores. In most cases there are other counters in the department stores that sell non-competing products, such as gemstone jewelry, that are owned by third party companies. These third party counters are our target for the acquisition of leases, which means we will not compete with our distributors or with the development stores. Also, we initially plan to open stores at retail outlets not currently offering our products. In this way we hope to increase market penetration and maintain positive relationships with our distributors.

We intend to open new retail locations by leasing unoccupied space, acquiring existing leases from third parties and/or acquiring the existing jewelry operations of third parties that occupy retail space. During 2007, we intend to open 20 retail counters and 2 retail stores in municipalities and provincial capitals throughout China. In 2008, we plan to open 60 to 80 retail counters and 8 to 10 retail stores.

We believe that China represents an excellent retail sales opportunity for our own expansion into the retail market for various reasons that include:

large pool of potential consumers — China has a large population including a rapidly expanding middle-class consumer base.
changing consumer preferences — we believe that Chinese consumers are embracing a more Western view of jewelry as a fashion accessory while also valuing the more traditional view of jewelry as an investment.
growing jewelry market — China’s jewelry market has recently experienced significant growth. According to research done by India's Gems and Jewelry Export Promotion Council (GJEPC) in 2006, the Chinese gems and jewelry market is growing at the rate of 8-10% annually.
large retail market — China’s retail sales market is one of largest in the world.
favorable regulatory changes — as a member of the World Trade Organization (WTO), China has eliminated a number of restrictions on foreign ownership and operations 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 other major economic powers have generally been liberalized.
increased profit potential — We believe that entering into the retail market is a viable strategy to increase our sales profitability and market exposure. We believe the traditional retail market, with its significantly higher margins, presents substantial opportunities for companies, such as ours, that have integrated design, sales, marketing, and manufacturing capabilities and a diverse product portfolio.

Expand existing and new product offerings

Since the commencement of our jewelry operations in 2001, we have expanded our 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). We also manufacture jewelry with diamond and other precious stone inlays, in addition to gold coins and gold bars.

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Our 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.

Many of our designs are originated by our in-house designers. They are educated at 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, our designers research and study designs that are popular in China and worldwide. Our designers conduct design and market research through various forms, including trade expositions, industrial magazines and the Internet. They also receive feedback from, and respond to, our customers. We continuously design and produce new styles of jewelry and currently carry more than 20,000 product styles, which are growing at a rate of approximately 3,600 styles per annum. We assign serial numbers to each of our products styles, and we maintain an information management system utilizing a product database.

Since 2004, we have typically provided over three hundred new designs every month to our wholesale customers.

In the coastal cities of China, we believe the demand for platinum and gemstone products has been increasing. In order to capitalize on the growth of demand, we intend to develop platinum as the primary metal from which our jewelry is manufactured. In 2006, we began to shift our product line to produce more platinum jewelry and we intend to invest in the development of a new production line to produce studded platinum jewelry. The production cycle of platinum products is five to seven days while the cycle for gold products is about two days. As such, more working capital will be needed to support this shift of product mix.

As we expand into retail, we intend to expand new product offerings including diamond, jade, and other gem stone products. These products usually have a longer turnover period of at least four to six months but offer higher margins. We believe that it is critical for us to expand our product lines to include these products to be sold in our own retail outlets and to our wholesale customers. We will analyze sales data at all our retail outlets and determine the best product mix a particular outlet will carry to achieve the highest sales revenue.

Through these retail outlets, we intend to offer our full range of jewelry products to showcase and sell. Furthermore, we plan to design and manufacture a line of fine diamond, jade and gem stone jewelry to be sold primarily in our retail shops.

Enhance marketing and promotion efforts to increase brand awareness

We continue to devote our efforts towards brand development and utilize marketing concepts in an attempt to enhance the marketability of our products. During the past several years, we have carried out a brand development strategy based on product quality and design excellence. We intend to commence a national television advertising campaign and to promote our jewelry products in major magazines throughout China. We have also participated and intend to continue to participate in various exhibitions and similar promotional events to promote our products and brand. For example, in 2004, we were the laurel sponsor for multiple beauty pageants, including the “Miss Intercontinental Final” and the “Miss China Universe.”

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Pricing and Credit Terms

The wholesale pricing of our products is based on three primary components: cost of raw materials used, design fee, and processing fee. The cost of the raw materials for a piece of jewelry is based on the spot price of the raw materials used to make the product. The amount charged as a design fee is determined by management based on various factors, including market conditions and the type, complexity, and popularity of the design. Management meets on a monthly basis to set the design fees, which generally range from 5% to 10% of the product prices. The processing fee ranges from 2% to 3% of the product prices. We pay a 5% business tax on our design fee. We also pay a 17% value added tax on the processing fee, which we bill to our customers and remit to the local tax authority on a monthly basis. The sales amounts reported in the statements of income are net o