UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2010

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

Commission File Number 000-52988

Master Silicon Carbide Industries, Inc.

(Exact name of registrant as specified in its charter)

Nevada		01-0728141
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

558 Lime Rock Road, Lakeville, Connecticut 06039

(Address of principal executive offices)

Registrant’s telephone number, including area code (860)-435-7000

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value.

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large Accelerated filer	o Accelerated filer
o Non-accelerated filer	þ Smaller reporting company

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

As of March 31, 2011, there was no established public market for the Registrant’s common stock, par value $0.001 per share (the “Common Stock”). The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (1,107,843 shares on March 31, 2011, based on an assumed market value per share of $1.0038) was $1,112,053. The Company is currently quoted on the Over-the-Counter Bulletin Board (“OTC-BB”) under the symbol “MAST.” The assumed market value of the shares is based on: (i) the price for shares of the registrant’s Series A Convertible Preferred Stock paid by an investor in a private placement consummated on September 2, 2008 and the rate at which our Series A Convertible Preferred Stock may be converted into our Common Stock; and (ii) the price for shares of the registrant’s Series B Convertible Preferred Stock paid by an investor in a private placement consummated on September 21, 2009, and the rate at which our Series B Convertible Preferred Stock may be converted into our Common Stock. In addition, for purposes of the computation of the aggregate market value of shares held by non-affiliates, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the Registrant.

As of March 31, 2011, there were 3,418,648 shares of the Registrant’s Common Stock issued and outstanding.

Master Silicon Carbide Industries, Inc.

Form 10-K

Table of Contents

		Page
PART I

Item 1.	Business	3
Item 2.	Description of Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Removed and Reserved

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6.	Selected Financial Data	9
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	15
Item 8.	Financial Statements and Supplementary Data	15
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	15
Item 9A(T).	Controls and Procedures	15
Item 9B.	Other Information	15

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	15
Item 11.	Executive Compensation	18
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	19
Item 13.	Certain Relationships and Related Transactions, and Director Independence	20
Item 14.	Principal Accounting Fees and Services	21

PART IV
		21
Item 15.	Exhibits, Financial Statement Schedules

Signatures		23

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with the financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. Certain statements made in this discussion are "forward-looking statements." Forward-looking statements can be identified by terminology such as "may", "will", "should", "expects", "intends", "anticipates", "believes", "estimates", "predicts", or "continue" or the negative of these terms or other comparable terminology and include, without limitation, statements below regarding the Company's intended business plans and anticipated financial results. Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, the Company's ability to obtain necessary financing; the competitive environment generally and in the Company's specific market areas; changes in technology; the availability of and the terms of financing; inflation; changes in costs and availability of goods and services; economic conditions in general and in the Company's specific market areas; demographic changes; changes in federal, state, provincial, and /or local government law and regulations affecting the technology; changes in operating strategy or development plans; and the ability of the Company to attract and retain qualified personnel for its operations. Although the Company believes that expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any forward-looking statements after the date of this report to conform such statements to actual results.

The "Company", "we," "us," and "our," refer to (i) Master Silicon Carbide Industries, Inc. (formerly Paragon SemiTech USA, Inc.); (ii) Yili Carborundum USA, Inc. (“ Yili US ”); (iii) C3 Capital, Limited (“ C3 Capital ”); and (iv) Yili Master Carborundum Production Co., Ltd. (“ Yili China ”).

Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan (also known as the renminbi). According to the currency exchange website www.xe.com, as of March 29, 2011, US$1.00 = 6.56195 yuan; 1 yuan=US $0.15239.

PART I

ITEM 1. BUSINESS

Our History

The Company was originally incorporated on May 21, 2007, in the State of Delaware, as Paragon SemiTech USA, Inc. and later changed its name into “Master Silicon Carbide Industries, Inc.” on November 12, 2008. It was reincorporated to the State of Nevada on November 2, 2009. The Company is currently quoted on the OTC-BB under the symbol “MAST.” Through a series of transactions in 2008 described immediately below, the Company acquired substantially the business and assets of Yili Master Carborundum Production Co., Ltd. (“Yili China”), a manufacturer of silicon carbide in People’s Republic of China (the “PRC”).

Our current corporate structure is set forth in the following chart:

* On August 7, 2008, C3 Capital entered into an agreement to purchase 90% of the equity interests in Ehe China from Mr. Zhigang Gao for RMB900,000. Such purchase price has not been paid as of the date of this Annual Report. The remaining 10% of the equity interest of Ehe China is owned by Changchun Master Industries Co., Ltd, which is controlled by Zhigang Gao.

** Pursuant to a certain memorandum of understanding among C3 Capital, Mr. Zhigang Gao and Mr. Ping Li, dated August 25, 2008, C3 Capital is entitled to acquire 100% of Quartz Mine China, an entity to be formed in China (the “Option”). Such Option is to be effective upon the completion of the registration of Quartz Mine China with its local Industry and Commerce Bureau in China and shall expire on the earlier date of the following: (i) whenever C3 Capital terminates such Option; or (ii) 18 months after Quartz Mine obtains all necessary permissions and approvals for its operation from the Chinese government. Quartz Mine China has not been set up as of the date of this Annual Report. Once it is formed, we plan to purchase through Quartz Mine China the mining rights for a quartz mine in Wenquan County of Xinjiang Uygur Autonomous Region of the PRC.

Business Operations

Overview

Through our indirectly wholly-owned operating subsidiary Yili Master Carborundum Production Co., Ltd. (“Yili China”), we manufacture and sell in China mostly high quality “green” silicon carbide and some lower-quality “black” silicon carbide (together, hereinafter referred to as “ SiC ”), a non-metallic compound that is widely used in industries such as semiconductors, solar energy, ceramics, abrasives and optoelectronics.

Yili China was formed in April 2005 and commenced production in January 2006. Its present SiC production capacity is 25,500 tons per annum. The Company, through Yili China, sold an aggregate of 10,337 tons of green SiC and 295 tons of black SiC during the fiscal year ended December 31, 2010 and an aggregate of 1,205 tons of green SiC and 1,044 tons of black SiC during the fiscal year ended December 31, 2009.

Our Products

SiC is an extremely hard, chemically inert, and heat-resistant substance which has high thermal conductivity, resistance to abrasion, and strength at high temperatures. It is a non-metallic compound that has special chemical properties and a level of hardness that is similar to diamonds, is produced by smelting (the process of extracting a metal from its ore) quartz sand and refinery coke at temperatures ranging from approximately 1,600 to 2,500 degrees centigrade in a graphite electric resistance furnace.

Because of these characteristics, SiC is widely used in many growing industries in the PRC. For example, pure SiC is a natural semiconductor and thus efforts are underway to explore the possibility of replacing silicon with SiC in the semiconductor industry. SiC is most widely utilized in the solar energy (photovoltaic) industry, where it is used in precision cutting, pressure blasting, wire-sawing, and surface preparation, in addition to other processes. SiC is also used in many other industries, including the production of refractory materials and industrial ceramics as well as in the automobile, electronics, steel and nuclear industries. The PRC’s current annual demand for SiC is approximately 535,000 tons and currently available supply within the PRC is less than 535,000 tons. We believe that as the industries requiring SiC continue to grow, demand should continue to rise.

Manufacturing Process

Although a small amount of SiC can be found naturally, the vast majority of SiC is man-made. We produce SiC by smelting quartz sand and refinery coke at temperatures ranging from approximately 1,600 to 2,500 degrees centigrade in a graphite electric resistance furnace. The material formed in the furnace varies in purity, according to the distance from the graphite resistor heat source. Colorless, pale yellow and green crystals (“green” SiC) have the highest purity and are found closest to the heat source. The color changes to blue and black at greater distance from the resistor and the darker crystals are less pure (“black” SiC). After initial processing, SiC crystals can be crushed into grains with granulation equipment and filtered using vibrating sieve machines. SiC can be further processed into fine powders so that it can be used in the production of industrial ceramic products. Most of the Company’s revenues come from the sale of green SiC.

Facilities

Yili China currently owns and operates SiC production lines with transformer capacity of 4,600 kilovolt-amperes with corollary established production equipment and infrastructure at Yining County, Kazak Autonomous Prefecture, Xinjiang Uygur Autonomous Region of the PRC.

In addition, the Company owns production lines with an aggregate production capacity of SiC of 25,500 tons per year in Yili Hasake Autonomous State of Xinjiang Autonomous Region. The construction of the first, second, and third production lines were finished in November of 2009 and March and November of 2010, respectively. The three new lines commenced operating in May and June of 2010 and January of 2011, respectively. Subject to further approval of the Board of Directors of the Company, we may plan to construct a powder production line and a granulation workshop in Yili.

The Company is also planning a 34,000-ton green SiC project with four furnaces in Ehe of the Aletai Area of Xinjiang Uygur Autonomous Region of the PRC pending governmental permissions and approvals (the “Ehe New Project”). The Company selected the site for the project because of its proximity to sources of electricity, petroleum coke and quartz. We will need to raise additional financing to commence and complete this project and there can be no assurance that such financing will be available, or if available, that it will be available on acceptable terms.

Principal Suppliers and Sources of Raw Materials

The manufacturing of our product requires two main components as raw materials, along with electricity: quartz and petroleum coke. We have ready access to sufficient sources of raw materials, and we believe that we will not in the future be required to rely on any single supplier to operate.

Silicon is the principal component of SiC and is extracted from quartz. The Company purchases quartz in the form of quartz-silicon pebbles from local suppliers and from local farmers and peasants who collect the pebbles from the bed of the Erchis River in Xinjiang. Because the pebbles are collected without the permission of the PRC Government, we are seeking to complete the purchase of the equity interests of Quartz Mine China, which has confirmed reserves of approximately 667,800 tons of quartz and has additional estimated reserves of 554,300 tons of quartz. If such rights are obtained and the Company completes the purchase, the Company intends to construct a mine to recover quartz from the property commencing in or around May 2012. It currently costs approximately $10.00 to mine one ton of quartz. Our management estimates that the mine can satisfy the Company’s raw material needs for quartz for the next ten years. Quartz Mine China has not yet been set up as of the date of this Annual Report.

Petroleum coke is provided to the Company by China National Petroleum Corporation, through its various refineries and branches, as well as China Petroleum and Chemical Corporation. Our production facility and smelters are located very close to the Karamai oil field, one of the four major oil fields in China, with approximately 5 million tons of annual petroleum coke output, which far exceeds the Company’s needs for petroleum coke for its SiC production. Therefore, the Company has access to a cost-effective supply of petroleum coke and pays minimal transportation costs.

The Company’s source of electricity is the Hydropower Center of the Yili River Construction and Management Bureau of the Xinjiang Water Department. Hydropower production can be up to 50% less in the winter drought season. However, based on the Company’s past experience and its relationships with its supplier, the Company anticipates that its supplier will be able to, and will, supply to the Company all of the Company’s requirements for electricity throughout all seasons of the year. The Company believes that it has a competitive advantage because most of its competitors rely on electricity generated by coal burning power plants, whereas the electricity supply for the Company’s production is supported by hydropower plants, which is less costly and more environmentally friendly. The average price to the Company for electricity is approximately 0.265RMB/kwh for hydropower, while the average cost for coal-generated electricity paid by the Company’s competitors is not less than 0.38RMB/kwh.

	Item	Percentage
Yihe Hydro Center	Electricity	100%
Xinjiang Jufeng Trading Co., Ltd	Petrol coke	35%
Altay Zhengxin mine Co., Ltd	Quartz	100%

Principal Customers

The following table sets forth our five largest customers, in terms of revenues of the aggregate of green SiC and black SiC we sold to them during the fiscal years ended December 31, 2010 and 2009. Our five largest customers accounted for an aggregate of 61.5% in the products we sold in 2010.

Fiscal Year 2010:

Customer’s Name	Revenues		Percent in Total Products We Sold
Jiangsu Dayang Silicon Powder Co., Ltd		2,664,676		20.6	%
Guiqing Silicon Powder Co., Ltd		1,539,393		11.9	%
Henan Kangtai Silicon Powder Co., Ltd		1,528,450		11.8	%
Jiangsu Jinsha Silicon Powder Co., Ltd		1,157,219		8.9	%
Zaozhuang Xinfa Grinding Co., Ltd		1,067,742		8.3	%
Total		7,957,481		61.5	%

Fiscal Year 2009:

Customer’s Name	Revenues		Percent in Total Products We Sold
Urumqi Tianlide Industry and Trading Co., Ltd		232,762		13.1	%
Zhoucun Silicon Carbide Co., Ltd		183,253		10.3	%
Shuangyashan Poly Silicon Carbide Co., Ltd		145,806		8.2	%
Xuchang Dongfang Grinding Co., Ltd		141,136		7.9	%
Tengzhou grinding medium Co., Ltd		118,577		6.7	%
Total		821,534		46.3	%

Marketing

The Company established a marketing department after it began to expand its SiC production capacity since October 2008. In April, 2010, the Company set up a sales office and hired three sales persons in Zhengzhou of Henan Province. The Company deploys a relatively direct marketing strategy by conducting extensive market research and sending our sales personnel to visit and communicate with customers in person. This approach also enables the Company to quickly obtain customers’ feedback on its products therefore to improve the quality of its products. The Company also has engaged an advertising agency to promote the Company’s products in the industry. In addition, the Company believes that it has a good reputation in the industry through its participation in the China Abrasives Industry Association, seminars, conferences and other contacts.

Seasonality of Business

The Company’s business is not subject to seasonal trends.

Backlogs

As of December 31, 2010, the Company had no order or supply backlogs.

Competition

There are over 100 manufacturers of SiC in China. The Company believes that Xinjiang Longhai Silicon Carbide Co., Ltd (“Longhai”) located in the Xinjiang province of the PRC and Gui Qiang Silicon Carbide Co., Ltd. (“Gui Qiang”) located in Qinghai Province, are the Company’s major competitors. Longhai and Gui Qiang are, respectively, the largest and the second largest green SiC producers in China, with respective market share of approximately 20% and 15% for the fiscal year 2010.

As smelting is an important process to the production of different types of SiC, the construction of smelters becomes the key factor of defining the competitive position of an SiC manufacturer. Several fundamental issues will continue to constrain the construction of SiC smelters for the foreseeable future. First, the SiC production landscape in China is dominated by small and inefficient players. SiC smelters are large, expensive facilities that require a great deal of capital to construct. We believe that these small manufacturers lack the capital and scale necessary to rapidly construct smelters to meet the market demand for SiC. Second, recent implementation of new environmental regulatory measures has made government approval of new construction difficult to obtain.

SiC production is an industry with high barriers to entry, and therefore, is relatively exclusive. The Company principally faces competition from companies such as Longhai and Gui Qiang, but does not anticipate competition from new companies in the near future.

With respect to its strategy to compete with larger SiC players, the Company always positions itself by utilizing what we believe are its unique competitive advantages described below.

Cheap Raw Materials

As set forth above, the three main cost components of SiC production are (in order or price with highest first) petroleum coke, electricity, and quartz. Due to the close proximity of four major oil fields that annually produce approximately 5 million tons of petroleum coke, the Company has access to a cost-effective supply of petroleum coke and pays minimal transportation costs. The Company also has access to cheap electricity due to its proximity to local hydroelectric facilities. The Company’s cost of 0.265 RMB/kwh represents an approximate 30% discount to that of the Company’s main competitor, Gui Qiang. Last, the Company’s operating facility is located near properties in Aletai in Xinjiang Uygur Autonomous Region of the PRC, which has confirmed reserves of 667,800 tons of quartz and has additional estimated reserves of 554,300 tons of quartz based on a geographical report issued by Xinjiang Nonferrous Metal Geographical Survey Team Technology Commission on August 30, 2003. The Company has entered into a Memorandum of Understanding with Zhigang Gao and Ping Li for an option to purchase for $50,000 the equity interests of Quartz Mine China, an entity to be formed by them which will seek, and expects to obtain from the PRC government, exploration and mining rights to such property. The Company anticipates that if such rights are obtained (of which there can be no assurance) and the Company exercises its option to acquire the equity interests in Quartz Mine China, the Company will have sufficient quartz for its production of SiC for the next ten years.

Intellectual Capital / Technology

The Company has an experienced team of management and technical staff. Additionally, the Company has developed several proprietary techniques utilized in the smelting process. One such technique involves the use of the Company’s discoveries in carbon monoxide gas recovery technology - the Company can capture carbon monoxide created during the smelting process and use it to reduce its fuel costs. The Company intends to register this technology as a patent in the future.

Support from local government and businesses

Through Yili China the Company maintains a meaningful relationship with local government and business in Xinjiang Province, PRC. Yili China is the first business entity that operated in the Yining East Industrial Park of Xinjiang Uygur Autonomous Region of the PRC, and the Company’s management team has been closely working with the local government since 2005. The Company has received support and assistance from local businesses. Yili China has already obtained permission to construct its proposed SiC processing facility in Xinjiang. Further, the Company’s relatively remote location in Xinjiang Province coupled with such Province’s low population density reduces the risk of potential regulatory constraints impeding the Company’s further expansion in the future.

Intellectual Property

Patents

The Company believes that it has proprietary know-how regarding the construction and operation of furnaces that will enable it to reduce costs and increase productivity in the smelting process through waste heat recovery, effluent recycling and exhaust reduction techniques. The Company does not believe that it would be advantageous to it to disclose such technology and has therefore chosen not to apply for a patent or patents regarding such technology.

Trademarks

The Company presently does not have any trademarks, although it intends to apply for a trademark in the PRC regarding its name and logo.

Research and Development

Please refer to the “Intellectual Capital / Technology” under the Section “Competition” herein for details of the Company’s research and development activities. The Company has no expenses for its research and development for the years ended December 31, 2010 and 2009.

Government Regulation

The Company is or will be subject to laws, rules and regulations of the PRC and local governments regarding the discharge of waste materials into the environment, the operation of its mining operations and the quality of its products. SiC manufacturing is a restricted industry under the PRC Catalogue for the Guidance of Foreign Investment Industries and other relevant regulations. Annual production of SiC cannot exceed an approved amount. Currently, we have approved amount of 30,000 tons each year and we may be able to apply for an increase in the approved amount if the Company plans to expand.

Environmental Compliance

The Company always adopts an environmentally friendly strategy in its production and development. The Company’s production of SiC is supported by hydropower plants, which are more cost-effective and less pollutant than most of the coal burning power plants. The Company has also developed a technique that can capture carbon monoxide created during the smelting process and use it to reduce its fuel costs.

Our current production facilities have passed the environmental protection review by the Environmental Protection Bureau of Yining County of Yili Hasake Autonomous State of Xinjiang Uygur Autonomous Region (the “Yining Environmental Protection Bureau”) in October of 2007. The Yining Environmental Protection Bureau allocated certain permissible emission amounts of SO2 (i.e. sulfur dioxide) and CODcr (i.e. chemical oxygen demand) to each of the manufacturers under its jurisdiction. So far, the Company has controlled its emission of SO2 and CODcr far below permissible levels, and we have not violated any environmental regulations.

Employees

As of March 17, 2011, we had 365 employees, of whom 77 were executive and administrative personnel and 288 were manufacturing personnel.

ITEM 2. DESCRIPTION OF PROPERTIES

Our operating facilities are located at Zone A, Industry Zone of Yining County of Yili Hasake Autonomous State under Xinjiang Uygur Autonomous Region of the PRC. On October 28, 2008, the Company paid $790,934 to obtain the land use right for fifty years for nearly 107,214 square meters of land where our operating facilities are located. In this location we have built three new production lines, each line is composed of 6 furnaces, and we have constructed factory buildings covering an area of approximately 32,000 square meters, as well as an employee’s dormitory building with a construction area of 3,751 square meters. Our office building of 4,167 square meters is still under construction. We also own and keep in the facility new equipment for our new production lines, which include the following:

Item	Unit
5 ton crane	3
110KV transformer	1
Automatic raw material supply system	3

ITEM 3. LEGAL PROCEEDINGS

As of the date of this Report, the Company was not a party to any pending or threatened legal proceeding.

ITEM 4. REMOVED AND RESERVED

PART II

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

Market Information

As of the date of this Annual Report, we had three classes of equity securities: (i) Common Stock, par value $.001 per share, 3,418,648 shares of which were outstanding as of March 31, 2011; (ii) Series A Convertible Preferred Stock, par value $.001 per share, 996,186 shares of which were outstanding as of March 31, 2011; and (iii) Series B Convertible Preferred Stock, par value $.001 per share, 920,267 shares of which were outstanding as of March 31, 2011. We also had warrants to purchase 2,490,465 shares of common stock issued and outstanding as of March 31, 2011. Our Common Stock was approved for quotation on the OTC-BB on September 1, 2009. Our Common Stock is currently quoted on the OTC-BB under the symbol “MAST.” However, since September 1, 2009 there has been no trading of our Common Stock.

Stockholders

As of March 31, 2011, there were approximately 43 holders of record of our Common Stock.

Dividends

Common Stock

We have never paid dividends on our Common Stock. We plan to retain future earnings, if any, for use in our business, and do not anticipate paying dividends on our Common Stock in the foreseeable future.

Series A Convertible Preferred Stock

Pursuant to the Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated August 18, 2009 (which replaces certain Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated August 12, 2009 of the Company’s Delaware predecessor, hereinafter, the “Certificate of Designation of Series A Stock”), the holders of our Series A Stock are entitled to dividends payable at the rate of six percent (6%) per annum of the then effective liquidation preference of the Series A Stock. Dividends begin to accrue on the date of issuance of the Series A Stock and are payable quarterly in arrears, on January 1, April 1, July 1 and October 1 of each year. The Certificate of Designation of Series A Stock is incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2008.

As of December 31, 2010, we issued to the Series A Stock holders a total of 1,243,615 shares of our Common Stock. As of the date of this Report, the Company has issued an aggregate of 1,393,048 shares of Common Stock as dividends to the holders of Series A Stock.

Series B Convertible Preferred Stock

Holders of our Series B Stock are not entitled to dividends pursuant to the Certificate of Designations of Series B Stock.

Securities Authorized for Issuance under Equity Compensation Plans

The Company does not have any equity compensation plans under which our securities may be issued as of the date of this Report.

ITEM 6.

SELECTED FINANCIAL DATA

Not applicable

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Annual Report on Form 10-K.

Certain statements in this Report, and the documents incorporated by reference herein, constitute forward-looking statements. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

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

The "Company", "we," "us," and "our," refer to (i) Master Silicon Carbide Industries, Inc. (formerly Paragon SemiTech USA, Inc.); (ii) Yili Carborundum USA, Inc. (“Yili US”); (iii) C3 Capital, Limited (“C3 Capital”); and (iv) Yili Master Carborundum Production Co., Ltd. (“Yili China”).

Overview

Through our indirectly wholly-owned operating subsidiary Yili China, we produce and sell in China high quality “green” silicon carbide and lower-quality “black” silicon carbide (together, hereinafter referred to as “SiC”). SiC is a non-metallic compound that has special chemical properties and a level of hardness that is similar to diamonds, is produced by smelting (the process of extracting a metal from its ore) quartz sand and refinery coke at temperatures ranging from approximately 1,600 to 2,500 degrees centigrade in a graphite electric resistance furnace.

The Company’s present SiC production capacity is 25,500 tons per annum. The construction of the three new production lines was finished in 2010. Two lines began production during 2010, and the third line began trial production at the end of 2010. The capacity of each line is 8,500 tons per annum.

Results of Operations for the Fiscal Years ended December 31, 2010 and 2009

The following tables and analysis show the operating results of the Company for the fiscal years ended December 31, 2010 and 2009.

	Fiscal Year Ended December 31, 2010		Fiscal Year Ended December 31, 2009			Percentage change
Revenues	$	12,948,096	$	1,775,559		629%
Cost of revenues		9,803,074		1,841,836		432%

Gross profit (loss)		3,145,022		(66,277	)	(4,845%)

General and administrative expenses		2,935,460		1,646,794		78%

Total operating expenses		2,935,460		1,646,794		78%

Profit (loss) from operations		209,562		(1,713,071	)	(112%)

Interest income		101,186		64,051		58%
Other income (expenses)		7,386		490		1,407%

Total other income (expenses)		108,572		64,541		68%

Profit (loss) before income taxes		318,134		(1,648,530	)	(119%)

Income tax provision		85,155		39,526		115%

Net profit (loss)	$	232,979	$	(1,688,056	)	(114%)

Net Revenues

We generated sales revenues of $12,948,096 and $1,775,559 for the fiscal years ended December 31, 2010 and 2009, respectively. The total revenues of fiscal years 2010 and 2009 include the following:

Item	Fiscal Year Ended December 31, 2010	Fiscal Year Ended December 31, 2009	Percentage change
Green silicon:
Selling volume (ton)	10,337	1,205	758%
Average price in US dollars	1,232.78	918.68	34%
Subtotal	12,743,283	1,107,013	1,051%

Black silicon:
Selling volume (ton)	295	1,044	(72%)
Average price in US dollars	694.28	640.37	8%
Subtotal	204,813	668,546	(69%)

Total	12,948,096	1,775,559	629%

The Company added three new 8,500-ton production lines in 2010. The construction of the three lines was finished in November of 2009, March and November of 2010, respectively. The total output of the three new silicon carbide production lines in 2010 was 12,083 tons per annum. During the same period of last year, the total output of the old line was only 2,375 tons.

Compared to the same period last year, the market prices of green SiC and black SiC have increased due to the recovery of the silicon carbide industry from the global economic recession in 2009. The market prices of green SiC and black SiC increased by 34% and 8% in years 2010 and 2009, respectively. The market prices of green SiC were $1,261 and $1,275 per ton in January and February of 2011, respectively. Based on this data, management believes that the price of SiC will be stable in 2011.

Because the output of our SiC increased substantially in 2010, the Company sold 10,337 tons of green SiC and 295 tons of black SiC in year 2010. The Company only sold 1,025 tons of green SiC and 1,044 tons of black SiC in year 2009. The sales volume of green SiC in 2010 increased by nearly 758%, compared to the same period last year. Since the selling price of the green SiC also increased by nearly 34%, the Company’s net revenue reached $12,948,096 and increased by 629%, compared to the net revenue of $1,775,559 in year 2009.

Cost of Goods Sold

Cost of goods sold is primarily comprised of the costs of our raw materials and packaging materials, direct labor, manufacturing overhead expenses, depreciation, amortization, inventory count loss and freight charges. The raw materials include quartz, petrol coke and electricity power. These materials generally account for 8%, 60% and 32% of total raw material costs. Our cost of goods sold for the fiscal years ended December 31, 2010 and 2009 were $9,803,074 and $1,841,836, respectively.

During 2010, the construction of our three new 8,500-ton production lines was finished and two of our new lines began to produce green SiC in 2010 and the third line began producing in January 2011. Even though it took a few months for trial production and technical improvement, the Company still produced nearly 12,083 tons of SiC in 2010, compared to roughly 2,375 tons of SiC produced in 2009. Because we apply advanced technology to these new lines, the efficiency and effectiveness of new lines has been greatly improved. For the new lines, a unit of SiC only consumes approximately 1.8 tons of quartz and 1.54 tons of petrol coke, whereas the old lines would require roughly 2.21 tons and 1.82 tons, respectively. Therefore, the average production costs in year 2010 are nearly 15% lower than the same period last year, even though the price of petrol coke, one of the raw materials, increased by 20% in 2010.

Gross Profit

During the fiscal year ended December 31, 2010, we had gross profit of $3,145,022 and the gross profit margin was approximately 24.29%. In the same period last year, we had a gross loss of $66,277. The increase of our profit is mainly due to the following three reasons: (1) the Company produced and sold more SiC; (2) the selling price of green SiC increased by a significant amount in the fiscal year of 2010; and (3) the quantity of the consumed raw materials per unit of SiC manufactured was much lower than the comparable period in 2009.

General and Administrative Expenses

Our operating and administrative expenses consist primarily of freight, related salaries, professional fees, depreciation and travel expenses. Operating and administrative expenses were $2,935,460 for the fiscal year ended December 31, 2010, as compared to $1,646,794 for the prior year, an increase of $1,288,666. This increase was mainly due to increased operating expenses such as new employee’s salaries and welfare, increased freight fees and travel expenses due to Yili China’s expanding production and sales.

	Fiscal Year Ended December 31, 2010		Fiscal Year Ended December 31, 2009		Percentage change
G&A
Stock-based compensation	$	-	$	74,700		(100	%)
Shipping and outbound freight fee		1,045,042		188,383		455	%
Professional fees		153,092		208,047		(26	%)
Travel expenses		109,347		59,176		85	%
Products tax and related taxes		47,131		99,544		(53	%
Welfare and benefits		710,634		429,737		65	%
Social insurance		33,233		32,774		1	%
Depreciation expenses		39,504		25,052		58	%
Amortization expenses		25,148		28,759		(13	%)
Public Relations expenses		50,334		42,886		17	%
Motor car expenses		52,206		37,328		40	%
Office expenses		403,813		226,612		78	%
Interest		56,750		-
Provision for bad debts		52,290		50,245		4	%
Others		156,936		143,551		9	%
Total	$	2,935,460	$	1,646,794		78	%

Operating Profit

Our operating profit was $209,562 for the fiscal year ended December 31, 2010, as compared to a loss of $1,713,071 for 2009, an increase of $1,922,633. Our increase in operating profits for the fiscal year ended December 31, 2010 was mainly due to revenues generated from the sales of our product that was produced by the new production lines.

Income Taxes

Our business operations are solely conducted by our subsidiaries incorporated in the PRC and we were governed by the PRC Enterprise Income Tax Laws. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with the Income Tax Laws, a PRC domestic company is subject to enterprise income tax at the rate of 25% and value added tax at the rate of 17% for most of the goods sold.

Incorporated in Xinjiang province in 2005, Yili China is subject to enterprise income tax at the rate of 25%. Income tax provision for Yili China during the 2010 fiscal year was $85,155.

Net Profit

Net profit for the fiscal year ended December 31, 2010 was $232,979, compared to a loss of $1,688,056 for 2009. Such increase of net profit of $1,921,035 is a result of the increase in the revenues generated by the Company for the fiscal year of 2010 exceeding the aggregate increase of expenses and costs. Since two new 8,500-ton production lines were in full capacity production in 2010, the production cost of green SiC was lower than last year. Production costs in 2010 were lower than the year before primarily because we are producing more tons and we are using newer and more efficient equipment. The efficiency and effectiveness of the new lines has greatly improved our cost savings. Due to our newly expanded production and sales, the general and administrative expenses have increased. The Company made a small net profit for the fiscal year ended December 31, 2010 compared to a net loss for the same period last year.

Liquidity and Capital Resources

As of December 31, 2010, we had cash and cash equivalents of $1,987,041. Compared to 2009,cash and cash equivalents decreased by $4,207,006, most of which most was used for the construction and the purchase of equipment for the three new production lines.

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

	Fiscal Year Ended December 31, 2010			Fiscal Year Ended December 31, 2009			Percentage change
Net cash provided by (used in) operating activities	$	(795,894	)	$	(2,885,172	)		(72	%)
Net cash used in investing activities		(6,399,399	)		(9,194,698	)		(30	%)
Net cash provided by (used in) financing activities		2,969,200			11,454,297			(74	%)
Effect of exchange rate changes on cash		19,087			1,670			1,043	%
Net increase (decrease) in cash and cash equivalents		(4,207,006	)		(623,903	)		574	%
Cash and cash equivalents, beginning of period		6,194,047			6,817,950			(9	%)
Cash and cash equivalents, end of period	$	1,987,041		$	6,194,047			(68	%)

Operating Activities

Net cash used in operating activities was $795,894 for the fiscal year ended December 31, 2010, compared to an amount of $2,885,172 net cash that was used in operating activities in 2009. The decrease of net cash used in operating activities was mainly due to the fact that the Company sold more green SiC than the same period last year, which resulted in more cash provided by operating activities. The Company spent more cash on the purchase of raw materials during the fiscal year of 2010, yet gained more cash from the sales of SiC products. Therefore, the total cash used in operating activities was lower than same period of last year. During 2010, the Company’s total revenues increased by nearly 628%.

Investing Activities

Net cash used in investing activities for the fiscal year ended December 31, 2010 was $6,399,399, compared to an amount of $9,194,698 net cash that was used in investing activities for 2009. On February 10, 2010, the Company made a loan of $1,000,000 to China Silicon Corporation (“CSC”) on an unsecured basis at an annual rate of 6% for a term of one year. On April 14, 2010, the Company extended another loan (the “Second Loan”) of $1,172,500 to CSC. The Second Loan was made to fund CSC’s working capital. The Second Loan is interest free and was repaid on April 21, 2010. The rest of the cash was used for the construction of new production lines including construction costs and new equipment purchase. Besides the $1,000,000 loan made to CSC, the Company invested the rest of the money for the construction of the new lines. Since the construction of the first and the second lines was finished in 2010, we had less cash used in investing activities than last year. The Company spent $5,399,399 in building the new lines in 2010 and $10,054,126 in 2009.

Financing Activities

Net cash provided by financing activities for the fiscal year ended December 31, 2010 totaled $2,969,200, compared to $11,454,297 in 2009. The net cash provided by financing activities for the fiscal year of 2010 was mainly attributable to a bank loan of $2,954,428 that the Company received on January 4, 2010 from Bank of China. However, on November 12, 2009, the Company received gross proceeds of $10,000,000 by selling to China Hand Fund I, LLC and/or its successor and assigns a promissory convertible note, which was automatically converted into 920,267 shares of the Series B Convertible Preferred Stock of the Company.

Inventories

Inventories consisted of the following as of December 31, 2010 and 2009:

	31-Dec-10		31-Dec-09
Raw materials	$	306,249	$	471,690
Finished goods		2,352,406		462,314
Work in progress		316,541		67,281
Total	$	2,975,196	$	1,001,285

Our raw materials mainly include quartz and petrol coke, which account for more than 95% of total raw materials. Quartz comes from local mining companies and individual collectors. Quartz in Xinjiang province is 99.99% pure. Petrol coke comes from the Sinopec Group which is the biggest petrol company in China. We have not, in recent years, experienced any significant shortages of manufactured raw materials and normally do not carry inventories of these items in excess of what is reasonably required to meet our production and shipping schedules. Compared with the amount of December 31, 2009, the increase of inventories is mainly attributable to the largely increased finished goods as a result of the operation of our three new production lines in operation in 2010.

Property and Equipment

The following is a summary of property and equipment at December 31, 2010 and 2009:

	31-Dec-10			31-Dec-09
Buildings		6,480,400			243,972
Machinery and equipment		5,135,138			614,565
Motor vehicles		299,417			236,933
Office equipment		96,572			45,691
Less: accumulated depreciation		(634,569	)		(141,792	)
Property and equipment, net		11,376,958			999,369

We lease our office space at both 558 Lime Rock Road, Lakeville, Connecticut and 420 Lexington Avenue, Suite 860, New York, NY from Kuhns Brothers, Inc. and its affiliates (“Kuhns Brothers”). Our Chairman and CEO, Mr. Kuhns, is a controlling shareholder, President, CEO and Chairman of Kuhns Brothers. The lease commenced on September 1, 2008 for a term of one year with a monthly rent of $7,500, and such lease was extended for a year with the same rate of rent until August 31, 2010. On September 1, 2010, we extended the lease with the same rate of rent for another one year.

Our operating facilities are located at Zone A, Industry Zone of Yining County of Yili Hasake Autonomous State under Xinjiang Uygur Autonomous Region of the PRC. On October 28, 2008, the Company paid $790,934 to obtain the land use right for fifty years for nearly 107,214 square meters of land where our operating facilities are located. On such property, we have constructed temporary factory buildings covering an area of approximately 2,600 square meters, as well as our office building of 350 square meters and an employee’s dormitory building with a construction area of 350 square meters. The land on which all the buildings are located has an area of approximately 33,333 square meters. The purchase of such land use right is to satisfy the need of our ongoing construction of our new furnaces and to expand our operations.

Accounts Payable

Accounts payable amounted to $2,586,381 and $1,257,657 as of December 31, 2010 and 2009, respectively. Accounts payable primarily resulted from our purchases of raw materials and equipment. The increase of $1,328,724 in accounts payable was mainly due to our increased purchase of raw materials, including quartz, petrol coke and electricity. Also, at the same time, the prices of both petro coke and electricity have increased more than 10% in 2010. Our biggest supplier is Yihe Hydro Center, the payables to which accounted for more than 20% of the total amount of accounts payable as of December 31, 2010.

Critical Accounting Policies and Estimates

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

Revenue Recognition

Product sales are recognized when the products are shipped and title has passed. Sales revenue represents the invoiced value of goods, net of a value added tax (“VAT”). All of the Company's products that are sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing its finished products.

Property, Plant and Equipment

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

Bad Debts

The Company's business operations are conducted in the People's Republic of China. The Company extends unsecured credit only to its relatively large customers with a good credit history. Management reviews its accounts receivable on a regular basis to determine if the bad debt allowance is adequate at each period-end. Because we only extend trade credits to our largest customers, who tend to be well-established and large sized businesses, and we have not experienced any write-off of accounts receivable in the past. However, to be conservative, we record some bad debt allowance if accounts receivable is more than one year.

Off-Balance Sheet Arrangements

The Company has not engaged in any off-balance sheet transactions since its inception.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated audited financial statements for the years ended December 31, 2010 and 2009, together with the report of the independent certified public accounting firm thereon and the notes thereto, are presented beginning at page F-1.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A (T).

CONTROLS AND PROCEDURES EVALUATION OF INTERNAL CONTROLS AND PROCEDURES

Not applicable

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following are the officers and directors of the Company as of March 31, 2011. Some of our directors are residents of the People’s Republic of China (the “PRC”). As a result, it may be difficult for investors to effect service of process within the United States upon them or to enforce judgments obtained in the United States courts against them in the PRC.

Name	Age	Position/Title With the Company

John D. Kuhns	61	President, Chief Executive Officer and Director

Mary E. Fellows	49	Executive Vice President, Secretary and Director

Lin Han	40	Chief Financial Officer

James Tie Li	43	Director

Shadron Stastney	42	Director

Yousu Lin	58	Director

Zhigang Gao	41	Director

The business background of our directors and officers is as follows:

Mr. John D. Kuhns was appointed the Company’s Chief Executive Officer, President and Chief Financial Officer (interim) on September 2, 2008 and the Company’s director and Chairman of the Board of Directors, effective on September 26, 2008. Mr. Kuhns has over 30 years of experience in the hydroelectric power, power technology and alternative energy industry. From 1981 to 1988, Mr. Kuhns built Catalyst Energy, one of the first publicly traded independent power producers in the United States, as the Company’s founder, President and Chief Executive Officer. While running Catalyst Energy, he acquired Chinese hydroelectric generating equipment for use in the United States. He furthered his development experience in China as Chairman and Chief Executive Officer at the New World Power Corporation from 1992 to 1996, where he developed and financed hydroelectric projects in China as well as Argentina, Costa Rica and Mexico. While at New World Power Corporation, he formed a joint venture with Wuhan Steam Turbine, a State-Owned Enterprise owned by the City of Wuhan in China, to develop hydroelectric projects in Asia, including the PRC. Mr. Kuhns is the owner of 100% of the membership interests and the sole manager of New World Power, LLC. Mr. Kuhns has additional transaction experience in China as a controlling shareholder, President, CEO, a director and Chairman of Kuhns Brothers, Inc., an investment banking firm which he founded in 1986 specializing in providing financing for power technology ventures, and, more recently, industrial and infrastructure companies operating within the PRC. Mr. Kuhns received a Bachelor of Arts degree in Sociology and in Fine Arts from Georgetown University; a Master of Fine Arts degree from the University of Chicago; and a Master's of Business Administration degree from the Harvard Business School.

Ms. Mary E. Fellows was appointed as the Company’s Executive Vice President and Secretary on September 2, 2008 and a Company director, effective on September 26, 2008. Ms. Fellows has been a Partner and Executive Vice President of Kuhns Brothers, Inc., a boutique investment bank since 1997. She served as Director of Corporate Administration and Corporate Secretary of the New World Power Corporation from 1996 to 1999, with responsibilities in the company's financing and merger and acquisition activities. She served as Corporate Secretary to the Solar Electric Light Company from 1997 to 2002. Additionally, Ms. Fellows served as Co-Chairman of the Distributed Power Company, a company with investments in solar information publications, including the photovoltaic industry's leading newsletter and market survey, and was a director of GenSelf Corporation from 2003 to 2006. Ms. Fellows received a Bachelor of Science degree (Alpha Chi) from Teikyo Post University.

Mr. Lin Han, age 39, was appointed as the Company’s Chief Financial Officer on October 28, 2009. He is also currently serving as part-time Chief Financial Officer of China Board Mill Corporation, a Delaware corporation with its Chinese operating subsidiary engaged in the production of wooden boards. Previously, he served as Chief Financial Officer of TOPCON (China) Corporation, the Chinese partner of a Japanese public company listed on the Tokyo exchange and engaged in the business of manufacturing and sales of optical devices from June 2007 until September 2008. From February 2006 through May 2007, Mr. Han worked as the Senior Manager of Fortis Intertrust (Beijing) Co., Ltd., a consulting firm based in Beijing China. Mr. Han also worked for China Electronic Appliance Corp., a Chinese state-owned company in the business of production and sales of electronic parts, as a Deputy Financial Director from October 2003 to December 2005. Mr. Han graduated from University of Surrey with a degree of Master of Business Administration (“MBA”), and he received a bachelor degree in Auditing from the Capital University of Economics and Business in Beijing in 1994. Mr. Han is a Certified Public Accountant in China.

Mr. James Tie Li has been appointed as a Company director since September 26, 2008. Mr. Li has extensive investment banking and entrepreneur experience in the U.S. and China. He was the founder and senior executive with a number of start-up companies in China including China Hydroelectric Corporation. He has been a consultant to Kuhns Brothers, Inc., advising on corporate finance, valuation and acquisition matters related to the firm’s China-related equity financing transactions since 2006. He was also the founder of Columbia China Capital Group, a U.S. based boutique investment firm advising Asian firms in mergers and acquisitions, public listing and growth strategy since 2002. Mr. Li obtained his Master of Business Administration degree from the Columbia University Graduate School of Business and a Bachelor of Science degree in accounting from City University of New York. He is a Chartered Financial Analyst and a Certified Public Accountant licensed in the State of New Jersey.

Mr. Zhigang Gao has been appointed as a Company director since September 26, 2008. Mr. Gao has been the manager of Yili China, the chairman of Changchun Master Industries Co., Ltd. (“Changchun Master”), the controlling shareholder prior to the Company’s purchase (through C3 Capital) of Yili China, and the president of Xinjiang Ehe Mining and Metallurgy Co., Ltd. Mr. Gao has been engaged in the applied research of SiC, silicon, organic silicon and preparation of polycrystalline silicon material for many years. In all the enterprises Mr. Gao has been managing, he is the main technology leader. He is an expert in the field of SiC and semiconductor materials in China. Mr. Gao holds a bachelor’s degree and a master's degree in chemistry from Northeast Normal University in China.

Dr. Yousu Lin has been appointed as a Company director since September 26, 2008. Dr. Lin is an accomplished financier of numerous government projects in the PRC and has been involved in the financial activities of, and provided advice on, the construction of the Three Gorges Project, the largest hydroelectric project in the world. In addition to the Three Gorges Project, Dr. Lin has also consulted on the Xiaolangdi Project, a large hydroelectric project on the Yellow River and the Wanjiazhai Project, a project to divert water from the Yellow River into Shanxi Province. He has also been a consultant in other governmental projects including the Tianjin Subway and the Beijing Olympics. In addition to these large government projects, Dr. Lin has also been involved in smaller scale construction projects with groups of private investors. Dr. Lin received his Ph.D. and Master of the Arts from Australian National University and his Bachelor of the Arts degree from Beijing Foreign Language University.

Mr. Shadron Lee Stastney has been appointed as a Company director since September 26, 2008. Since June 2004, Mr. Stastney has been a partner at Vicis Capital, LLC, an investment management firm. Vicis Capital, LLC is the managing partner of Vicis Capital Master Fund, one of our principal shareholders. From July 2001 to May 2004, Mr. Stastney served as Managing Director of Victus Capital, LP, an investment management firm. Mr. Stastney holds a Bachelor of Arts degree from the University of North Dakota and a Juris Doctor from the Yale Law School.

Family Relationships

There are no family relationships among any of the Company’s present directors and officers, except that Hong Zhao, the former director and the former Chief Financial Officer and Secretary of the Company, is the wife of James Tie Li.

Committees of the Company’s Board of Directors

We do not have a standing nominating, compensation or audit committee. Rather, the board of directors performs the functions of these committees. James Tie Li qualifies as a financial expert within the meaning of Item 407(d)(5) of Regulation S-K. We do not believe it is necessary for the board of directors to appoint such committees, because the volume of matters that come before the board of directors for consideration is sufficiently small so as to permit our directors to give sufficient time and attention to such matters. The Company intends to establish the referenced three committees in the future to improve the Company’s internal control and governance. Mr. Shad Stastney would qualify as “independent directors” under NASDAQ Stock Market Rule 5605(a)(2).

We do not currently have procedures by which our security holders may recommend nominees to our Board of Directors. In considering candidates for membership on the Board of Directors, the Board of Directors will take into consideration the needs of the Board of Directors and the candidate’s qualifications. The Board will request such information as:

The name and address of the proposed candidate;

The proposed candidate’s resume or a listing of his or her qualification to be director of the Company;

A description of any relationship that could affect such person qualifying as an independent director, including identifying all other public company board and committee memberships;

A confirmation of such person’s willingness to act as director if selected by the Board of Directors; and

Any information about the proposed candidate that would, under the federal proxy rules, be required to be included in the Company’s proxy statement if such person were a nominee.

Once a person has been identified by the Board of Directors as a potential candidate, the Board of Directors may collect and review publicly available information regarding the person to assess whether the person should be considered further. Generally, if the person expresses a willingness to be considered to serve on the Board of Directors and the Board of Directors believes that the candidate has the potential to be a good candidate, the Board of Directors would seek to gather information from or about the candidate, including through one or more interviews as appropriate and review his or her accomplishments and qualifications generally, including in light of any other candidates that the Board of Directors may be considering. The Board of Directors’ evaluation process does not vary based on whether the candidate is recommended by a shareholder.

The Board of Directors will, from time to time, seek to identify potential candidates for director nominees and will consider potential candidates proposed by the Board of Directors and by management of the Company.

The Company does not currently have a process for security holders to send communications to the Board.

Section 16(a) Beneficial Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and persons who own more than 10% of the Company’s Common Stock to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the “SEC”). Directors, executive officers and greater than 10% stockholders are required by SEC rules to furnish the Company with copies of Section 16(a) forms they file.

Below is the information with respect to failures of directors, officers and/or beneficial owners of more than ten percent of any class of equity securities of the Company to timely file reports under Section 16(a) during fiscal year 2010:

Name	Date of Reporting Event	Required Filing Date	Date of Filing
John D. Kuhns	7/1/2010	7/5/2010	3/9/2011
John D. Kuhns	10/1/2010	10/5/2010	3/9/2011
Mary E. Fellows	7/1/2010	7/5/2010	3/9/2011
Mary E. Fellows	10/1/2010	10/5/2010	3/9/2011
Dr. Yousu Lin	7/1/2010	7/5/2010	3/9/2011
Dr. Yousu Lin	10/1/2010	10/5/2010	3/9/2011

Code of Ethics

We have not yet adopted a Code of Ethics for our executive officers. We intend to adopt a Code of Ethics applying to such persons during the fiscal year ending December 31, 2011.

ITEM 11.

EXECUTIVE COMPENSATION

Executive Compensation

The following Summary Compensation Table sets forth the compensation of the named executive officers of the Company for the years ended December 31, 2010 and 2009:

Name and principal position	Year	Salary ($)		Bonus ($)	Stock awards ($)		Option awards ($)		Non-equity incentive plan compensation ($)		Change in pension value and nonqualified compensation earnings ($)		All other compensation (4)		Total ($)
John D. Kuhns (1)	2010		175,000			-		-		-		-		-		175,000
	2009		175,000			-		-		-		-				175,000
Mary E. Fellows (2)	2010		100,000			-		-		-		-				100,000
	2009		100,000			-		-		-		-				100,000
Lin Han (3)	2010		52,941			-		-		-		-				52,941
	2009		52,941			-		-				-				52,941

(1) Mr. Kuhns is currently Chief Executive Officer, President and a director of the Company. He was appointed as the Company’s interim Chief Financial Officer from 09/02/2008 through October 28, 2008.

(2) Ms. Fellows is currently Executive Vice President, Secretary and a director of the Company.

(3) Mr. Han is currently Chief Financial Officer of the Company.

Employment Agreements

None of our employees was subject to a written employment agreement during the year ended December 31, 2010.

Director Compensation

Our Directors do not receive compensation for serving as a Director, but they are entitled to reimbursement for their travel expenses.

Grants of Plan-Based Awards

No plan-based awards were granted to any of our named executive officers during the fiscal year ended December 31, 2010.

Outstanding Equity Awards at Fiscal Year End

No unexercised options or warrants were held by any of our named executive officers as of December 31, 2010. No equity awards were made during the fiscal year ended December 31, 2010.

Pension Benefits

No named executive officers received or held pension benefits during the fiscal year ended December 31, 2010.

Nonqualified Deferred Compensation

No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal year ended December 31, 2010.

Potential Payments upon Termination or Change in Control

Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 2010, we did not have a standing compensation committee. Our Board of Directors was responsible for the functions that would otherwise be handled by the compensation committee. All directors participated in deliberations concerning executive officer compensation, including directors who were also executive officers.

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

The following tables set forth information regarding the beneficial ownership of the Company’s Common Stock as of March 31, 2011 by (x) each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s Common Stock, (y) the executive officers of the Company and (z) the directors and executive officers of the Company as a group. Unless otherwise noted, each person or company named in the tables has sole voting and investment power with respect to the shares that he or it beneficially owns. As of the date of this Report, there were outstanding 3,418,648 shares of Common Stock, 996,186 shares of Series A Stock, 920,267 shares of Series B Stock and warrants to purchase 2,490,465 shares of Common Stock.

Title of Class	Name and Address of Beneficial Owners	Amount and Nature of Beneficial Ownership (1)			Percent of Class (2)
Common Stock	New World Power, LLC 558 Lime Rock Road Lime Rock, Connecticut 06039		2,377,027	(3)		42.78	%
Common Stock	John D. Kuhns 558 Lime Rock Road Lime Rock, Connecticut 06039		2,377,027	(3)(4)		42.78	%
Common Stock	Mary E. Fellows 558 Lime Rock Road Lime Rock, Connecticut 06039		792,150	(5)		19.18	%
Common Stock	Zhigang Gao The High-tech Building 9F, No.3003 Qianjing Street High-tech Development Zone in Changchun City PRC, 130024		925,000	(9)		27.06	%
Common Stock	Dr. Yousu Lin c/o 558 Lime Rock Road Lime Rock, Connecticut 06039		792,150	(6)		19.18	%
Common Stock	Vicis Capital Master Fund 126 East 56th St. 7th Fl, New York, NY 10022		19,014,833	(7)		88.66	%
Common Stock	James Tie Li 22 Berkshire Way, East Brunswick, NJ 08816		0	(8)		—
Common Stock	Shad Stastney 126 East 56th St. 7th Fl, New York, NY 10022		0			—
Common Stock	Hong Zhao 22 Berkshire Way, East Brunswick, NJ 08816		675,000	(8)		19.74	%
Common Stock	Lin Han A3 Yong’anli, No.1 Building A, 23rd Fl., Jianguomenwai Ave., Chaoyang District, Beijing, China 100022		0			—
Common Stock	All officers and directors as a group (7 persons)		4,886,327	(10)		69.99	%

Series A Preferred	New World Power, LLC 558 Lime Rock Road Lime Rock, Connecticut 06039		171,028			17.17	%
Series A Preferred	John D. Kuhns 558 Lime Rock Road Lime Rock, Connecticut 06039		171,028			17.17	%
Series A Preferred	Mary E. Fellows 558 Lime Rock Road		56,997			5.72	%
Series A Preferred	Dr. Yousu Lin c/o 558 Lime Rock Road Lime Rock, Connecticut 06039		56,997			5.72	%
Series A Preferred	Vicis Capital Master Fund 126 East 56th St. 7th Fl, New York, NY 10022		705,993			70.87	%
Series A Preferred	All officers and directors as a group (3 persons)		285,022			28.61	%

Series B Preferred	Vicis Capital Master Fund 126 East 56th St. 7th Fl, New York, NY 10022		920,267			100	%

(1) Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days.

(2) The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of unissued shares as to which such person has the right to acquire voting and/or investment power within 60 days. The number of shares shown includes outstanding shares of Common Stock owned as of the date of this report by the person indicated. The total number of shares of our Common Stock outstanding on the date of this report was 3,418,648 shares.

(3) Includes (i) an aggregate of 1,710,277 shares of Common Stock issuable upon conversion of an aggregate 171,028 shares of Series A Stock which are immediately convertible into Common Stock at the option of New World Power, LLC; and (ii) 427,569 shares of Common Stock issuable upon exercise of immediately exercisable warrants held by New World Power, LLC.

(4) Mr. Kuhns is the owner of 100% of the membership interests and the sole manager of New World Power, LLC and therefore controls such company and, by virtue of such control, may be deemed to beneficially own all of the Company’s securities that are owned by New World Power, LLC.

(5) Includes (i) an aggregate of 569,971 shares of Common Stock issuable upon conversion of an aggregate 56,997 shares of Series A Stock which are immediately convertible into Common Stock at the option of Ms. Fellows; and (ii) 142,493 shares of Common Stock issuable upon exercise of immediately exercisable warrants held by Ms. Fellows.

(6) Includes (i) an aggregate of 569,971 shares of Common Stock issuable upon conversion of an aggregate 56,997 shares of Series A Stock which are immediately convertible into Common Stock at the option of Dr. Lin; and (ii) 142,493 shares of Common Stock issuable upon exercise of immediately exercisable warrants held by Dr. Lin.

(7) Includes (i) an aggregate of 7,059,929 shares of Common Stock issuable upon conversion of an aggregate 705,993 shares of Series A Stock which are immediately convertible into Common Stock at the option of Vicis Capital Master Fund; (ii) an aggregate of 9,202,670 shares of Common Stock issuable upon conversion of an aggregate 920,267 shares of Series B Stock which are immediately convertible into Common Stock at the option of Vicis Capital Master Fund; and (iii) 1,764,982 shares of Common Stock issuable upon exercise of immediately exercisable warrants held by Vicis Capital Master Fund.

(8) The share number disclosed herein does not include 675,000 shares of Common Stock owned by Ms. Hong Zhao, wife of James Tie Li, who is our former CFO.

(9) Includes a total of 925,000 shares of Common Stock issued to Mr. Gao.

(10) Includes an aggregate of (i) 1,323,553 shares of Common Stock that have been issued; (ii) 2,850,219 shares of Common Stock issuable upon conversion of an aggregate 285,022 shares of Series A Stock which are immediately convertible into Common Stock at the option of such persons; and (iii) 712,555 shares of Common Stock issuable upon the exercise of immediately exercisable warrants held by such persons. The shares disclosed herein do not include 675,000 shares of Common Stock owned by Ms. Hong Zhao, wife of James Tie Li, who is our former CFO.

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

Certain Relationships and Related Transactions

We do not have an established policy regarding related transactions.

We lease our office space at both 558 Lime Rock Road, Lakeville, Connecticut and 420 Lexington Avenue, Suite 860, New York, NY from Kuhns Brothers, Inc. and its affiliates (“Kuhns Brothers”). Our Chairman and CEO, Mr. Kuhns, is a controlling shareholder, President, CEO, a director and Chairman of Kuhns Brothers. The lease commenced on September 1, 2008 for a term of one year with a monthly rent of $7,500, and such lease was extended for a year with the same rate of rent until August 31, 2010. On September 1, 2010, we extended the lease with the same rate of rent for another one year.

On January 1, 2010, the Company entered into a Management Service Agreement, where the Company shall pay Kuhns Brothers an annual management fee of one hundred and fifty thousand dollars ($150,000) starting from January 2010. The management fee was paid on a monthly basis ($12,500 per month) on the first day of each month. The Company paid the total management fee of $150,000 in 2010.

On September 17, 2008, Changchun Master Industries Co., Ltd. (“Changchun Master Company”) whose controlling stockholder is Zhigang Gao, our director, made a loan to Yili China in the amount of RMB 3,790,000 (or approximately $579,156.47 based on the exchange rate as of RMB1 = US$0.152812 on March 31, 2011) for the purpose of Yili China’s facility construction. Such loan is non-interest bearing, unsecured, and is payable on demand. The loan was due on September 15, 2009 and it was renewed for another year with similar terms and will continue to be renewed on a yearly basis with no set expiration date.

Aside from the loan, Changchun Master Company also advanced approximately $307,592 to Yili China for certain operating expenses from September 2, 2008 through December 31, 2009. As a result, the Company owed Changchun Master Company $886,748 as of December 31, 2010.

On February 10, 2010, the Company signed a loan agreement with China Silicon Corporation, a Delaware corporation (“CSC”) to extend a loan of $1,000,000 to fund CSC’s working capital needs. The interest rate of this loan is six percent (6%) per annum. CSC agreed to pay to the Company the principal sum of $1,000,000 and interest on December 31, 2010, but had not yet done so as of the date of this Annual Report. The Company is currently in discussions with CSC to have the principal and the accrued interest of loan repaid as soon as possible. This is a related party transaction since the Company and CSC share a majority shareholder, certain officers and directors.

On April 14, 2010, the Company extended a second loan (the “Second Loan”) of $1,172,500 to CSC to fund its working capital. The Second Loan was interest free and was repaid on April 21, 2010. A copy of the loan agreement for the Second Loan, dated April 14, 2010 is filed herewith.

Director Independence

We do not have a standing nominating, compensation or audit committee. Rather, the board of directors performs the functions of these committees. We do not believe it is necessary for the board of directors to appoint such committees, because the volume of matters that come before the board of directors for consideration is not so substantial that our directors are usually allowed sufficient time and attention to such matters. Additionally, because the Company’s Common Stock is not currently listed for trading or quotation on a national securities exchange, we are not required to have such committees. Mr. Shad Stastney would qualify as an “independent director” under NASDAQ Stock Market Rule 5605(a)(2). James Tie Li can qualify as a financial expert on the board of directors under the definition of Item 407(d)(5) of Regulation S-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following lists the fees billed by our auditors, Child, Van Wagoner & Bradshaw, PLLC, for the years ended December 31, 2010 and 2009:

	Fiscal Year Ended December 31, 2010		Fiscal Year Ended December 31, 2009
Audit Fees	$	60,000	$	70,000
Audit Related Fees		21,000		14,000
Tax Fees		4,800		4,750
All Other Fees		--		--

ITEM 15.

EXHIBITS

Number		Description

2.1		Agreement and Plan of Merger dated September 30, 2009. Incorporated by reference to Exhibit A to the Company’s Information Statement filed with the SEC on October 13, 2009 (the “Information Statement”);

3.1		Articles of Incorporation of the Company filed with the Nevada Secretary of State on June 26, 2009. Incorporated by reference to Exhibit C to the Information Statement;

3.2		By-laws of the Company. Incorporated by reference to Exhibit D to the Information Statement;

3.3		Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock. Incorporated by reference to Exhibit E to the Information Statement;

3.4		Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock. Incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K filed with the SEC on October 27, 2009 ( the “October 27, 2009 8-K”);

3.5		Certificate of Correction to the Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock; *

4.1		Form of warrant issued to the investor in the September 2, 2008 private placement. Incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed with the SEC on September 8, 2008 (the “September 8, 2008 8-K”);

4.2		Specimen of Common Stock Certificate. Incorporated by reference to Exhibit 4.2 to the Company’s annual report of fiscal year ended June 30, 2009;

4.3		Specimen of Series A Convertible Preferred Stock Certificate. Incorporated by reference to Exhibit 4.3 to the Company’s Transition Report for the period ended December 31, 2009;

4.4		Specimen of Series B Convertible Preferred Stock Certificate. Incorporated by reference to Exhibit 4.4 to the Company’s Transition Report for the period ended December 31, 2009;

4.5		Consent and Waiver Agreement, dated November 2, 2009, between the Company and the holders of Series A Stock. Incorporated by reference to Exhibit 4.5 to the Company’s Transition Report for the period ended December 31, 2009;

10.1		Memorandum of Understanding by and among C3 Capital, Mr. Zhigang Gao and Mr. Ping Li. Incorporated by reference to Exhibit 10.5 to the September 8, 2008 8-K;

10.2		Note Purchase Agreement dated September 21, 2009, between the Company and The China Hand Fund I, LLC. Incorporated by reference to Exhibit 10.1 to the October 27, 2009 8-K;

10.3		Convertible Note of the Company, dated September 21, 2009. Incorporated by reference to Exhibit 10.2 to the October 27, 2009 8-K;

10.4		Office Space and Infrastructure Sharing Agreement, dated September 1, 2010;*

10.5		Loan Agreement, dated February 10, 2010, between the Company and China Silicon Corporation. Incorporated by reference to Exhibit 10.5 to the Company’s Transition Report for the period ended December 31, 2009;

10.6		Loan Agreement, dated April 14, 2010, between the Company and China Silicon Corporation;*

10.7		Management Services Agreement, dated January 1, 2010, between the Company and Kuhns Brothers;*

21.1		List of Subsidiaries;*

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;*

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;*

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith

SIGNATURES

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

	MASTER SILICON CARBIDE INDUSTRIES, INC.

Date: March 31, 2011	By:	/s/ John D. Kuhns
		John D. Kuhns, Chief Executive Officer
		(principal executive officer)

	By:	/s/ Lin Han
		Chief Financial Officer (Principal Accounting and Financial Officer)

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

/s/ John D. Kuhns
John D. Kuhns
Chief Executive Officer (Principal Executive Officer) and Director

/s/ Mary E. Fellows
Mary E. Fellows Executive Vice President, Secretary and Director

/s/ Shad Stastney
Shad Stastney Director

/s/ Zhigang Gao
Zhigang Gao Director

PART I – FINANCIAL INFORMATION

Item 1. Financial Information

Master Silicon Carbide Industries, Inc.

December 31, 2010

Index to Consolidated Financial Statements

Contents	Page(s)

Consolidated Balance Sheets	F-3

Consolidated Statements of Operations and Comprehensive Profit (Loss)	F-4

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)	F-5

Consolidated Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-7 to F-20

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of

Master Silicon Carbide Industries, Inc.

Connecticut, USA

We have audited the accompanying consolidated balance sheets of Master Silicon Carbide Industries, Inc. (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive profit (loss), changes in stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Master Silicon Carbide Industries, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has cash flow constraints, an accumulated deficit, and has suffered recurring losses from operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Child, Van Wagoner & Bradshaw, PLLC

Salt Lake City, Utah

March 31, 2011

F-2

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In US Dollars)


	December 31,			December 31,
	2010			2009
ASSETS

Current assets:
Cash and cash equivalents	$	1,987,041		$	6,194,047
Notes receivable		364,051			30,875
Accounts receivable, net		1,532,896			74,400
Tax refundable		120,909			617,380
Inventories		2,975,196			1,001,285
Prepaid expenses		307,690			62,723

Total current assets		7,287,783			7,980,710

Deposits-fixed assets		2,028,936			3,859,366
Other receivables		46,562			28,530
Amount due from related party		1,000,000			-
Property, plant and equipment, net		11,376,958			999,369
Construction in progress		4,415,703			7,555,461
Intangible assets, net		1,416,650			1,428,078

Total assets	$	27,572,592		$	21,851,514

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities	$	2,586,381		$	1,257,657
Tax payable		91,534			-
Advance from customers		565,196			113,189
Other payables		209,288			142,718
Amount due to related parties		886,748			860,060
Dividends accrued		150,000			150,000

Total current liabilities		4,489,147			2,523,624

Technology payable		15,100			-
Long-term loans		4,529,875			1,464,515

Total liabilities		9,034,122			3,988,139

Redeemable Preferred Stock-A ($0.001 par value, 996,186 shares issued)
liquidation preference of $10.038 per share		10,000,000			9,466,295

Redeemable Preferred Stock-B ($0.001 par value, 920,267 shares issued)
liquidation preference of $10.8664 per share		10,000,000			10,000,000

Stockholders’ equity (deficit):
Common stock, $0.001 par value, 100,000,000 shares authorized;
3,269,215 and 2,671,483 shares issued and outstanding, respectively		3,269			2,671
Additional paid-in capital		4,646,926			4,047,524
Retained (deficit)		(6,562,995	)		(5,662,269	)
Accumulated other comprehensive income		451,270			9,154

Total stockholders’ equity (deficit)		(1,461,530	)		(1,602,920	)

Total liabilities, redeemable preferred stock and stockholders' equity (deficit)	$	27,572,592		$	21,851,514

See accompanying notes to consolidated financial statements

F-3

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE PROFIT (LOSS)

(In US Dollars)

	For The Years Ended
	2010			2009

Revenues:
Revenues	$	12,948,096		$	1,775,559
Cost of revenues		9,803,074			1,841,836

Gross profit (loss)		3,145,022			(66,277	)

General and administrative expenses		2,935,460			1,646,794

Total operating expenses		2,935,460			1,646,794

Profit (loss) from operations		209,562			(1,713,071	)

Interest income		101,186			64,051
Other income		7,386			490

Total other income		108,572			64,541

Profit (loss) before income taxes		318,134			(1,648,530	)

Income tax provision		85,155			39,526

Net Profit (loss)	$	232,979		$	(1,688,056	)

Accretion on redeemable preferred stock	$	533,705		$	533,712

Dividends on preferred stock		600,000			600,000

Net loss attributable to common stockholders	$	(900,726	)	$	(2,821,768	)

Comprehensive profit (loss):

Net profit (Loss)	$	232,979		$	(1,688,056	)

Foreign currency translation adjustment		442,116			(7,367	)

Comprehensive profit (loss)	$	675,095		$	(1,695,423	)

Basic net profit (loss) per share	$	(0.30	)	$	(1.17	)

Diluted net profit (loss) per share	$	(0.30	)	$	(1.17	)

Weighted average common shares outstanding:
Basic		3,044,861			2,421,047
Diluted		22,209,391			12,408,728

See accompanying notes to consolidated financial statements

F-4

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(In US Dollars)

	Common Stock, $0.001 Par Value				Additional Paid-in			Retained Earnings			Accumulated Other Comprehensive
	Shares		Amount		Capital			(Deficit)			Income (Loss)		Total
Balance as of December 31, 2008		1,973,751	$	1,974	$	2,594,676		$	(414,020	)	$	-	$	2,157,730
Conversion of Series A preferred stock dividend on January 1, 2009		149,433		149		149,851								150,000
Exercise of warrant for 40,000 shares of common stock at exercise price of $.001														400
Par Value on February 9, 2009		40,000		40		360
Series A preferred stock dividend on March 31, 2009									(150,000	)				(150,000	)
Series A preferred stock beneficial conversion						1,245,036			(1,245,036	)				-
Offering cost						(83,089	)							(83,089	)
Accrete debt discount									(444,760	)				(444,760	)
Conversion of Series A preferred stock dividend on April 1, 2009		149,433		150		149,850								150,000
Exercise of warrant for 60,000 shares of common stock at exercise price of $.001														600
Par Value on May 12, 2009		60,000		60		540
Series A preferred stock dividend on June 30, 2009									(150,000	)				(150,000	)
Foreign currency translation gain												5,401		5,401
Net loss for the year									(2,025,807	)				(2,025,807	)
Conversion of Series A preferred stock dividend on July 1, 2009		149,433		149		149,850								149,999
Series A preferred stock dividend on September 30, 2009						(150,000	)							(150,000	)
Conversion of Series A preferred stock dividend on October 1, 2009		149,433		149		149,850								149,999
Series A preferred stock dividend on December 31, 2009						(150,000	)							(150,000	)
Amortization of deferred compensation														24,900
Series B financing cost						(9,400	)							(9,400	)
Accrete debt discount									(266,856	)				(266,856	)
Foreign currency translation gain												3,753		3,753
Net loss for the year									(965,790	)				(965,790	)
Balance as of December 31, 2009		2,671,483	$	2,671	$	4,047,524		$	(5,662,269	)	$	9,154	$	(1,602,920	)
Accrete debt discount on March 31, 2010									(133,428	)				(133,428	)
Conversion of Series A preferred stock dividend on January 1, 2010		149,433		150		149,850								150,000
Series A preferred stock dividend on March 31, 2010									(150,000	)				(150,000	)
Conversion of Series A preferred stock dividend on April 1, 2010		149,433		150		149,850								150,000
Series A preferred stock dividend on June 30, 2010									(150,000	)				(150,000	)
Accrete debt discount on June 30, 2010									(133,428	)				(133,428	)
Conversion of Series A preferred stock dividend on July 1, 2010		149,433		149		149,851								150,000
Series A preferred stock dividend on September 30, 2010									(150,000	)				(150,000	)
Accrete debt discount on September 30, 2010									(133,425	)				(133,425	)
Conversion of Series A preferred stock dividend on October 1, 2010		149,433		149		149,851								150,000
Series A preferred stock dividend on December 31, 2010									(150,000	)				(150,000	)
Accrete debt discount on December 31, 2010									(133,424	)				(133,424	)
Foreign currency translation gain												442,116		442,116
Net income for the year									232,979					232,979
Balance as of Dec 31, 2010		3,269,215	$	3,269	$	4,646,926		$	(6,562,995	)	$	451,270	$	(1,461,530	)

See accompanying notes to consolidated financial statements

F-5

MASTER SILICON CARBIDE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In US Dollars)

	For The Years Ended
	2010			2009

Cash flows from operating activities:
Net profit (loss)	$	232,979		$	(1,688,056	)
Adjustments to reconcile net profit (loss) to net cash
provided by (used in) operating activities:
Depreciation		477,787			116,471
Stock based compensation		-			74,700
Amortization		43,572			51,761
Allowance for bad debt		38,416			-
Changes in operating assets and liabilities:
Notes receivable - trade		(325,683	)		(82,629	)
Accounts receivable		(1,463,025	)		(18,625	)
Other receivables		(16,775	)		69,865
Prepaid expenses		(237,815	)		(94,421	)
Inventories		(1,900,710	)		(261,937	)
Accounts payable and accrued liabilities		1,269,196			231,796
Other current liabilities		55,478			52,805
Advance from customers		438,769			(717,741	)
Taxes refundable		(118,287	)		(619,161	)
Taxes payable		710,204			-

Net cash provided by (used in) operating activities		(795,894	)		(2,885,172	)

Cash flows from investing activities:
Deposits - fixed assets and construction in progress		(5,399,399	)		(10,054,126	)
Advances to related parties receivable		(2,172,500	)		-
Proceeds from related parties receivables		1,172,500			859,428

Net cash used in investing activities		(6,399,399	)		(9,194,698	)

Cash flows from financing activities:
Proceeds from loans		2,969,200			11,454,515
Due to related parties		-			(218	)

Net cash provided by (used in) financing activities		2,969,200			11,454,297

Effect of exchange rate changes on cash		19,087			1,670

Net increase (decrease) in cash and cash equivalents		(4,207,006	)		(623,903	)

Cash and cash equivalents, beginning of year		6,194,047			6,817,950

Cash and cash equivalents, end of year	$	1,987,041		$	6,194,047

Supplemental disclosures of cash flow information:
Cash paid for interest		-			-
Cash paid for taxes		2,011			-

Noncash investing and financing activities:

Conversion of Series A preferred stock dividend		600,000			600,000
Construction in progress moved to fixed assets		10,375,653			-

See accompanying notes to consolidated financial statements

F-6

Master Silicon Carbide Industries, Inc.

December 31, 2010

Notes to the Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND OPERATIONS

Paragon SemiTech USA Incorporated (“Paragon New Jersey”) was incorporated on April 10, 2002 under the laws of the State of New Jersey.

Master Silicon Carbide Industries, Inc., formerly Paragon SemiTech USA, Inc. was incorporated on May 21, 2007 under the laws of the State of Delaware. Prior to September 27, 2007, the date of merger with Paragon New Jersey, the Company was inactive. On September 2, 2008, Paragon SemiTech USA, Inc., through the acquisition of C3 Capital, Limited, a company incorporated in the Territory of the British Virgin Islands (“BVI”), acquired all of the equity interests in Yili Master Carborundum Production Co., Ltd. On November 12, 2008, Paragon SemiTech USA, Inc. changed its name to Master Silicon Carbide Industries, Inc. (“Master” or the “Company”). The Company believes that the new name will better identify the Company with the business conducted by its indirectly wholly-owned subsidiary in China, Yili Master Carborundum Production Co., Ltd., namely, the production and distribution of silicon carbide.

C3 Capital, Limited (“C3 Capital”), an international business company, was formed on July 26, 2005 in the British Virgin Islands by the Company. C3 Capital was inactive prior to September 2, 2008, the date of acquisition of Yili Master Carborundum Production Co., Ltd.

Yili Master Carborundum Production Co., Ltd. (“Yili China”) was incorporated on August 10, 1993 in the People’s Republic of China (“PRC”).

Master engages in the development, manufacturing and distribution of silicon carbide.

Merger of Paragon New Jersey

On September 27, 2007, the Company entered into a Reorganization and Stock Purchase Agreement (the “Reorganization Agreement”) with Paragon New Jersey. Pursuant to the Reorganization Agreement, the Company issued 675,000 shares of its common stock at the time representing approximately 81.82% of the issued and outstanding shares of its common stock for the acquisition of all of the outstanding capital stock of Paragon New Jersey. As a result of the ownership interests of the former shareholder of Paragon New Jersey, for financial statement reporting purposes, the merger between the Company and Paragon New Jersey has been treated as a reverse acquisition with Paragon New Jersey deemed the accounting acquirer and the Company deemed the accounting acquiree under the purchase method of accounting in accordance with “Business Combinations” (“FASB ASC 805”). The reverse merger is deemed a capital transaction and the net assets of Paragon New Jersey (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Paragon New Jersey which are recorded at historical cost.

Merger of C3 Capital, Limited

On September 2, 2008, pursuant to a Stock Purchase Agreement entered into by the parties and consummated on such date, Yili Carborundum USA, Inc. (“Yili US”), a recently formed Delaware corporation which is wholly-owned by the Company, a Delaware corporation (hereafter referred to as the “Company”, “we” or “us”, as applicable), acquired from Mr. Tie Li, for a cash purchase price of $10,000, all of the outstanding capital stock of C3 Capital, Limited, a company incorporated in the British Virgin Islands (“C3 Capital”). C3 Capital in turn has an agreement to purchase all of the equity interests of Yili Master Carborundum Production Co., Ltd. (“Yili China”), a wholly-owned foreign enterprise (“WOFE”) in the People’s Republic of China (the “PRC”) (“Yili China”), pursuant to which the Company paid $555,096 in cash for the acquisition of the equity interests of Yili China with the proceeds of the Private Placement (as defined below) closed on September 2, 2008. In addition, C3 Capital entered into (i) an agreement to purchase 90% of the equity interests in Xinjiang Ehe Mining and Metallurgy Co., Ltd., a corporation incorporated under the laws of the PRC on August 7, 2008 (“Ehe China”) from Mr. Zhigang Gao; and (ii) a Memorandum of Understanding with Mr. Zhigang Gao and Mr. Ping Li, for an option to purchase the assets to be secured by Xinjiang Paragon Master Mining Co., Ltd., a corporation to be formed under the laws of the PRC (“Quartz Mine China”). Ehe China and Quartz Mine China are currently inactive with no assets or operations. Ehe China intends to build a 40,000 ton green silicon carbide project in the Aletai Area of Xinjiang Uygur Autonomous Region of the PRC pending governmental permissions and approvals, and Quartz Mine China intends to obtain the exploration and mining rights for a quartz mine in Wenquan County of Xinjiang Uygur Autonomous Region of the PRC.

F-7

Dissolution of Paragon New Jersey

On March 26, 2009, pursuant to the authorization of Master Silicon Carbide Industries, Inc., the sole shareholder, Paragon New Jersey was dissolved. The corporation has no assets, has ceased doing business and does not intend to recommence doing business, and has not made any distribution of cash or property to the shareholders within the last 24 months and does not intend to have any distribution following its dissolution.

Reincorporation

On November 2, 2009, Master Silicon Carbide Industries, Inc. (the “Registrant”), formerly a Delaware corporation, completed its reincorporation in Nevada by a merger of the Registrant with and into its wholly-owned subsidiary, Master Silicon Carbide Industries, Inc., a newly formed Nevada corporation (the “Reincorporation”). The Reincorporation effected a change in the Registrant’s legal domicile from Delaware to Nevada. The Registrant’s business, assets, liabilities, and headquarters were unchanged as a result of the Reincorporation and the directors and officers of the Registrant prior to the Reincorporation continued to serve the Registrant after the reincorporation. In addition, the Registrant’s stockholders automatically became stockholders of Master Silicon Carbide Industries, Inc. on a share-for-share basis.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This basis differs from that used in the statutory accounts of the operating subsidiaries of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

The consolidated financial statements include (i) the accounts of the Company and (ii) the accounts of its consolidated subsidiaries, C3 Capital, Limited and Yili China. All inter-company balances and transactions have been eliminated.

These consolidated financial statements have been prepared on a going concern basis. The Company has incurred losses since inception resulting in an accumulated deficit of $6,562,995. The Company’s ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to address the going concern issue by funding future operations through the sale of equity capital.

Business combination

In accordance with FASB ASC 805 “Business Combinations”, the Company allocates the purchase price of acquired entities to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values.

Management makes estimates of fair values based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from revenues, customer relationships, key management and market positions, assumptions about the period of time the acquired trade names will continue to be used in the Company’s combined product portfolio, and discount rates used to establish fair value. These estimates are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Significant estimates include the estimated useful lives of property and equipment. Actual results could differ from those estimates.

F-8

Cash and cash equivalents

For purposes of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits held by banks. Deposits held in financial institutions in the PRC are not insured by any government entity or agency.

As of December 31, 2010, the cash balance in financial institutions in the United States was $1,813,674. Accounts at these financial institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At December 31, 2010, the Company had deposits that were in excess of the FDIC insurance limit.

Accounts receivable

Trade accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense if any is included in general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure to its customers.

Inventories

The Company values inventories, consisting of finished goods, work in process and raw materials, at the lower of cost or market. Cost is determined on the weighted average cost method. Cost of work in process and finished goods comprises direct labor, direct materials, direct production cost and an allocated portion of production overhead. The Company follows FASB ASC 330-10-30 “Inventory-Overall-Initial Measurement” for the allocation of production costs and charges to inventories. The Company allocates fixed production overheads to inventories based on the normal capacity of the production facilities expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Judgment is required to determine when a production level is abnormally low (that is, outside the range of expected variation in production). Factors that might be anticipated to cause an abnormally low production level include significantly reduced demand, labor and materials shortages, and unplanned facility or equipment down time. The actual level of production may be used if it approximates normal capacity. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of abnormally low production or idle plant and unallocated overheads of underutilized or idle capacity of the production facilities are recognized as period costs in the period in which they are incurred rather than as a portion of the inventory cost.

The Company regularly reviews raw materials and finished goods inventories on hand and, when necessary, records a provision for excess or obsolete inventories based primarily on current selling price and sales prices of confirmed backlog orders. As of December 31, 2010, the Company determined reserves for obsolescence were immaterial.

Property, plant and equipment

Property, plant and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property, plant and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets’ estimated useful lives ranging from five (5) years to twenty (20) years:

Furniture and office equipment	5 years
Motor vehicles	5-10 years
Machinery and equipment	10 years
Building	20 years

Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

F-9

Land use right

Land use right represents the cost to obtain the right to use certain land in the PRC. Land use right is carried at cost and amortized on a straight-line basis over the life of the right of approximately fifty (50) years. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts. Land use right is included in intangible assets on the Balance Sheet.

Impairment of long-lived assets

The Company follows FASB ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets” for its long-lived assets. The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company determined that there were no impairments of long-lived assets as of December 31, 2010.

Redeemable preferred stock

On September 2, 2008, the Company completed the sale to China Hand Fund I, LLC and/or its designees or assignees of 996,186 units for total proceeds of $10,000,000, each unit consisting of one share of the Company’s Series A Convertible Preferred Stock and one three year warrant to purchase 2.5 shares of the Company’s common stock (after the 1:10 reverse split). The preferred stock pays annual dividends of 6% regardless of the Company’s profitability, which dividend may be paid in common stock at the option of the Company. Each preferred share is convertible into ten shares of common stock. After December 30, 2010, the Company may be required to redeem for cash the outstanding preferred stock, if not previously converted by the holders, for $1.0038 per share plus accrued but unpaid dividends. Because the preferred stock contains a redemption feature outside the control of the Company, it is classified outside of stockholders’ equity in accordance with EITF Topic D-98.

In accordance with FASB ASC 470-20-25, “Debt-Debt with Conversion Options-Recognition”, the Company allocated the proceeds received between the preferred stock and the warrants. The resulting discount from the face amount of the preferred stock is being amortized using the effective interest method over the period to the required redemption date. After allocating a portion of the proceeds to the warrants, the effective conversion price of the preferred stock was lower than the market price at the date of issuance and therefore a beneficial conversion feature was recorded. The dividends on the preferred stock, together with the periodic accretion of the preferred stock to its redemption value, are charged to retained earnings.

On September 21, 2009, the Company entered into a Note Purchase Agreement with Vicis Capital Master Fund and/or its successor and assigns, an accredited investor (the “Investor”) where in consideration of $10,000,000, the Investor purchased from the Company a convertible promissory note in a principal amount of $10,000,000, (the “Note”). The Note was due on December 31, 2009, and was automatically convertible into 920,267 shares of the Series B Convertible Preferred Stock of Master Silicon Carbide Industries, Inc., a Nevada corporation (“MSCI Nevada”), within three business days after the Company merged into MSCI Nevada, completing the Company’s reincorporation from Delaware to Nevada on or around November 2, 2009 (the “Reincorporation”). Each preferred share is convertible into ten shares of common stock. After December 31, 2011, the Company may be required to redeem for cash the outstanding preferred stock, if not previously converted by the holders, for $1.087 per share. Because the preferred stock contains a redemption feature outside the control of the Company, it is classified outside of stockholders’ equity in accordance with EITF Topic D-98.

Fair value of financial instruments

The Company follows FASB ASC 825-10-50-10 “Financial Instruments-Overall-Disclosure” for its financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, prepayments and other current assets, accounts payable, customer deposits, taxes payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments.

F-10

Revenue recognition

The Company follows the guidance of the United States Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition” (“SAB No. 101”), as amended by SAB No. 104 (“SAB No. 104”) for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company derives the majority of its revenue from sales contracts with customers with revenues being generated upon the shipment of goods. Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by a warehouse shipping log as well as a signed bill of lading from the trucking or rail company and title transfers upon shipment, based on free on board (“FOB”) destination; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

Shipping and handling costs

The Company accounts for shipping and handling fees in accordance with FASB ASC 705 “Cost of Sales and Services”. Shipping and handling costs related to costs of raw materials purchased is included in cost of revenue. While amounts charged to customers for shipping product are included in revenues, the related outbound freight costs are included in expenses as incurred.

Research and development

Research and development costs are charged to expense as incurred. Research and development costs consist primarily of remuneration for research and development staff, depreciation and maintenance expenses of research and development equipment and material and testing costs for research and development. There is no research and development costs for the fiscal year 2010 and 2009.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the fiscal year ended December 31, 2010 and 2009 are $66,525.21 and 8,201.28, respectively.

Stock-based compensation

The Company adopted the fair value recognition provisions of FASB ASC 718“Compensation-Stock Compensation”.

We made the following estimates and assumptions in determining fair value:

Valuation and Amortization Method – We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Ø	Expected Term – The expected term represents the weighted-average period that our stock-based awards are expected to be outstanding. We applied the “Simplified Method” as defined in the Securities and Exchange Commission’s Staff Accounting Bulletins No. 107 and 110.

Ø	Expected Volatility – The expected volatility is calculated by considering, among other things, the expected volatilities of public companies engaged in similar industries.

Ø	Expected Dividend – The Black-Scholes valuation model calls for a single expected dividend yield as an input.

Ø	Risk-Free Interest Rate – The Company bases the risk-free interest rate on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent remaining term.

Income taxes

The Company accounts for income taxes under FASB ASC 740 “Income Taxes”. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

F-11

The Company adopted the provisions of FASB ASC 740. The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FASB ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of FASB ASC 740.

Segment reporting

FASB ASC 280, “Segment Reporting” requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

In accordance with FASB ASC 280, the Company has reviewed its business activities and determined that multiple segments do not exist that need to be reported.

Foreign currency translation

Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with FASB ASC 830 “Foreign Currency Matters” and are included in determining net income or loss.

The financial records of the subsidiaries are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency of those subsidiaries. The parent’s functional currency is U.S. dollars. Assets and liabilities are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Foreign currency translation gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining accumulated other comprehensive income in the statement of stockholders’ equity.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Commencing July 21, 2005, China adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per US dollar to approximately RMB 8.11 per US dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of the US dollar against the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

Unless otherwise noted, the rate presented below per U.S. $1.00 was the noon buying rate for RMB in New York City as reported by the Federal Reserve Bank of New York on the date of its balance sheets contained in these consolidated financial statements. Management believes that the difference between RMB vs. US$ exchange rate quoted by the PBOC and RMB vs. US$ exchange rate reported by the Federal Reserve Bank of New York were immaterial. Translations do not imply that the RMB amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars. Translation of amounts from RMB into United States dollars (“US$”) has been made at the following exchange rates for the respective periods:

December 31, 2010
Balance sheet		RMB 6.6227 to US$1.00
Statement of operations and comprehensive profit (loss)		RMB 6.7695 to US$1.00

December 31, 2009
Balance sheet		RMB 6.8282 to US$1.00
Statement of operations and comprehensive profit (loss)		RMB 6.8310 to US$1.00

F-12

Comprehensive income (loss)

The Company has adopted FASB ASC 220 “Comprehensive Income”. This statement establishes rules for the reporting of comprehensive income (loss) and its components. Comprehensive income (loss), for the Company, consists of net income (loss) and foreign currency translation adjustments and is presented in the Statements of Operations and Comprehensive Profit (Loss) and Stockholders’ Equity.

Net profit (loss) per common share

Net profit (loss) per common share is computed pursuant to FASB ASC 260 “Earnings per Share”. Basic net profit (loss) per common share is computed by dividing net profit (loss) attributable to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted net profit (loss) per common share is computed by dividing net profit (loss) attributable to common shareholders by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period to reflect the potential dilution that could occur from common shares issuable through common stock equivalents.

	For fiscal year ended			For fiscal year ended
	December 31, 2010			December 31, 2009
Numerator for basic net profit
(loss) per share - Profit (loss)
attributable to common	$	(900,726	)	$	(2,821,768	)
shareholders
Numerator for diluted net profit
(loss) per share - Profit (loss)	$	232,979		$	(1,688,056	)
attributable to common
shareholders
Denominator for basic net profit
(loss) per share - Weighted		3,044,861			2,421,047
average shares of common stock
outstanding
Denominator for diluted net
profit (loss) per share -
Weighted average shares of		22,209,391			12,408,728
common stock outstanding
Basic net Profit (loss) per share	$	(0.30	)	$	(1.17	)
Diluted net Profit (loss) per share	$	(0.30	)	$	(1.17	)

The following table shows the weighted-average number of potentially dilutive shares for the fiscal year ended December 31, 2010 and 2009:

	For fiscal year ended		For fiscal year ended
	December 31, 2010		December 31, 2009
Series A preferred stock		9,961,860		9,961,860
Series B preferred stock		9,202,670		-
Warrants		-		25,821
Total		19,164,530		9,987,681

Common Stock

As of December 31, 2010, the Company had 3,269,215 shares of Common Stock issued and outstanding.

On September 2, 2008, the Company issued to Mr. Zhigang Gao an aggregate of 925,000 shares of Common Stock as an inducement for Mr. Gao’s entry into an employment agreement with either the Company or Yili China, as the case may be, to serve as an executive officer of Yili China. The fair value of these common shares was equal to $925,000 and these shares were treated as stock compensation cost after acquisition of Yili China.

F-13

On November 12, 2008, the Company effectuated a 1 for 10 reverse split on its outstanding Common Stock, par value $0.001 (the “Reverse Split”). Immediately after the Reverse Split, there were approximately a total of 1,925,600 shares of Common Stock outstanding. Such Reverse Split, however, does not reduce the number of shares of Common Stock that the Company was authorized to issue. All references to Common Stock in these financial statements are to post-Reverse Split shares.

On February 9, 2009, the Company issued an aggregate of 40,000 shares of Common Stock to a designee of Columbia China Capital Group, Inc. as a result of the exercise of warrants for 40,000 shares of Common Stock at an exercise price of $.001.

On May 12, 2009, the Company issued an aggregate of 60,000 shares of Common Stock to a designee of Columbia China Capital Group, Inc. as a result of the exercise of warrants for 60,000 shares of Common Stock at an exercise price of $.001.

From September 2, 2008 through December 31, 2010, an aggregate of 1,243,615 shares of Common Stock were issued to the holders of Series A Preferred Stock as dividends.

Dividend

During the fourth quarter of 2010, the Company accrued $150,000 in dividends pursuant to the Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated August 29, 2008. During the fiscal year of 2010, the Company issued 597,732 shares of common stock, or $600,000 at a fair market value of Common Stock, as payment of the dividend of Series A Preferred Stock. As of December 31, 2010, dividend payable remains $150,000 unpaid.

Warrants

On September 2, 2008, we issued 2,490,465 warrants to the holder or its designees or assignees of Series A Convertible Preferred Stock (after the 1:10 reverse split). The exercise price on a post reverse split basis of this three year warrant is $1.25 per share. On February 9, 2009 and May 12, 2009, Columbia China Capital Group (“CCG”) exercised warrants for 40,000 and 60,000 shares of common stock. The outstanding warrants will be terminated on September 1, 2011. The following table summarized the warrant activity during the fiscal year of 2010 and 2009:

	Number of shares			Weighted average
				exercise price
Outstanding, December 31, 2008		2,590,465		$	1.20
Exercised		(100,000	)		0.01
Outstanding, December 31, 2009		2,490,465			1.25
Exercised		-			-
Outstanding, December 31, 2010		2,490,465		$	1.25

The Company issued warrants in connection with financing instruments. The Company analyzed the warrants in accordance with ASC Topic 815 to determine whether the warrants meet the definition of a derivative under ASC Topic 815 and, if so, whether the warrants meet the scope exception of ASC Topic 815, which is that contract issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of ASC Topic 815.

The warrants contain standard adjustment provisions upon stock dividend, stock split, stock combination, recapitalization, and a change of control transaction; the warrants do not have “down-round protection”. The warrants meet the conditions for equity classification pursuant to FASB ASC 815 “Derivatives and Hedging” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Therefore, these warrants were classified as permanent equity.

Recently issued accounting pronouncements

In June 2009, the FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.

F-14

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and Various other ASU’s No. 2009-2 through ASU No. 2011-01 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

Going Concern

As shown in the accompanying consolidated financial statements, the Company had an accumulated deficit incurred through December 31, 2010, which raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

The timing and amount of capital requirements will depend on a number of factors, including demand for products and services and the availability of opportunities for expansion through affiliations and other business relationships. Management intends to seek new capital from new equity securities issuances to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan.

NOTE 3 – NOTES RECEIVABLE

Notes receivable at December 31, 2010 and December 31, 2009 consisted of the following:

	31-Dec-10			31-Dec-09
Customer Name	Amount		Term	Amount		Term
Tengzhou Tongfeng Grinding
Medium Co., Ltd	$	15,100	5 months $		-
Tengzhou Shengtai Grinding Medium
Co., Ltd		53,845	6 months		-
Zaozhuang Xingfa Grinding Medium
Co., Ltd		37,749	2 months		-
Henan Kangtai Silicon Powder Co., Ltd		226,494	5 months		-
China Silicon Corporation		30,863	1 month		-
Jiangyin Huahong Silicon Powder
Co., Ltd		-			30,875	3 months
Total	$	364,051		$	30,875

NOTE 4 – ACCOUNTS RECEIVABLE

The Company accrued an allowance for bad debts related to its accounts receivable. The accounts receivable and allowance balances at December 31, 2010 and 2009 were as follows:

	31-Dec-10			31-Dec-09

Accounts receivable	$	1,579,750		$	81,758
Allowance for bad debts		(46,854	)		(7,358	)
Accounts receivable, net	$	1,532,896		$	74,400

F-15

NOTE 5 – INVENTORIES

Inventories at December 31, 2010 and December 31, 2009 consisted of the following:

	31-Dec-10		31-Dec-09

Raw materials	$	306,249	$	471,690
Finished goods		2,352,406		462,314
Work in progress		316,541		67,281
Total	$	2,975,196	$	1,001,285

NOTE 6 – RELATED PARTY

We lease our office space at both 558 Lime Rock Road, Lakeville, Connecticut and 420 Lexington Avenue, Suite 860, New York, NY from Kuhns Brothers, Inc. and its affiliates (“Kuhns Brothers”). Our Chairman and CEO, Mr. Kuhns, is a controlling shareholder, President, CEO and Chairman of Kuhns Brothers. The lease commenced on September 1, 2008 for a term of one year with a monthly rent of $7,500, and such lease was extended for a year with the same rate of rent after September 1, 2009. On September 1, 2010, we extended the lease with the same rate of rent for one year.

According to Management Service Agreement, the Company paid Kuhns Brothers an annual management fee of one hundred and fifty thousand dollars ($150,000) starting from January 2010. The management fee was paid on a monthly basis ($12,500 per month) on the first day of each month. The Company totally paid the management fee of $150,000 in 2010.

On February 10, 2010, the Company (“Creditor”) signed a loan agreement with China Silicon Corporation, a Delaware corporation (“Debtor” or “CSC”) to extend a loan of One Million U.S. Dollars (US $1,000,000) to Debtor to fund working capital needs. The actual controlling shareholder of Creditor and Debtor is the same one. The interest rate of this loan is six percent (6%) per annum. Debtor promised to pay to Creditor the principal sum of One Million U.S. Dollars on December 31, 2010. However, CSC has not yet paid off the note. Debtor delivered a promissory note of US $1,000,000 to Creditor. On April 14, 2010, the Company extended another loan (the “Second Loan”) of $1,172,500 to Debtor. The Second Loan was made to fund CSC’s working capital. The Second Loan is interest free and was repaid on April 21, 2010.

As of December 31, 2010 and December 31, 2009, the Company owed Changchun Master Company $886,748 and $860,060, respectively, whose stockholder is Zhigang Gao and who is the director of the Company. The loan payable is non-interest bearing, unsecured, and is payable on demand.

NOTE 7 – DEPOSITS – FIXED ASSETS

Deposits to purchase fixed assets included the deposits to establish the buildings and equipment for the three production lines. Deposits at December 31, 2010 and December 31, 2009 consisted of the following:

	31-Dec-10		31-Dec-09

Deposit for buildings	$	452,915	$	1,469,348
Deposit for equipment		1,576,021		2,390,018
Total	$	2,028,936	$	3,859,366

NOTE 8 – INTANGIBLE ASSETS

On October 28, 2008, the Company entered into an agreement with the Chinese government, whereby the Company paid RMB 5,403,579 to acquire the land use right and obtained a certificate of the land use right until October 27, 2058. The purchase price is being amortized over the term of the right of approximately fifty (50) years beginning on November 1, 2008 and amortization expense used in production is reported in cost of revenues.

F-16

Intangible assets at December 31, 2010 and December 31, 2009 consisted of the following:

	31-Dec-10			31-Dec-09

Land use right	$	815,918		$	790,934
Production license		709,258			688,214
Software		11,530			3,041
Less: accumulated amortization		(120,056	)		(54,111	)
Total	$	1,416,650		$	1,428,078

NOTE 9 – PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2010 and December 31, 2009 consisted of the following:

	31-Dec-10			31-Dec-09

Buildings	$	6,480,400		$	243,972
Machinery and equipment		5,135,138			614,565
Motor vehicles		299,417			236,933
Office equipment		96,572			45,691
Less: accumulated depreciation		(634,569	)		(141,792	)
Property and equipment, net	$	11,376,958		$	999,369

Depreciation related to property and equipment used in production is reported in cost of revenues. Depreciation expense for the fiscal year ended December 31, 2010 was $477,787, of which $39,504 was included in G&A expense and $438,283 was included in cost of revenue. During the same period of last year, depreciation expense was $116,471, of which $25,052 was included in G&A expense and $91,419 was included in cost of revenue.

NOTE 10 – CONSTRUCTION IN PROGRESS

Construction in progress consists of capitalized costs associated with the construction of production lines that are not yet in service and therefore not yet being depreciated. All facilities purchased for installation, self-made or subcontracted, are accounted for under construction-in-progress. Construction-in-progress is recorded at acquisition cost, including cost of facilities, installation expenses and the interest capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-progress is to be transferred to fixed assets.

	31-Dec-10		31-Dec-09

Buildings	$	2,469,145	$	1,235,278
Construction in progress		812,726		3,020,106
Equipment		775,382		2,586,123
Capitalized interest		75,422		17,730
Others		283,028		696,224
Total	$	4,415,703	$	7,555,461

Total capitalized interest for the fiscal year ended December 31, 2010 was $325,511. For the same period of last year, total capitalized interest was $17,730.

F-17

NOTE 11 – LONG-TERM LOANS

On October 23, 2009, Yili China borrowed a three-year long-term loan with principal of $1,509,958 from the Yili branch, Bank of China with an interest rate at 6.48% annually and the maturity date on October 21, 2012. On January 4, 2010, Yili China borrowed a three-year long-term loan with principal of $3,019,917 from the Yili branch, Bank of China with an interest rate at 6.48% annually and the maturity date on January 3, 2013. These loans are secured by the building, machinery and equipment of Yili China. The principal amount will be due at the maturity date.

	Interest			Maturity			Interest payments
	Rate			Date	Amount		2010		2011		2012		2013
Yili branch, Bank of China		6.48	%	22-Oct-12	$	1,509,958	$	97,845	$	97,845	$	79,349	$	-
Yili branch, Bank of China		6.48	%	3-Jan-13		3,019,917		195,691		195,691		195,691		1,631
					$	4,529,875	$	293,536	$	293,536	$	275,040	$	1,631

NOTE 12 – INCOME TAXES

USA

The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Company had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of December 31, 2010 and December 31, 2009. However, the Company has to pay corporate tax due to the rules of certain states.

BVI

C3 Capital, an international business company, was formed on July 26, 2005 in the British Virgin Islands by the Company. As a BVI company, C3 Capital does not have any income tax.

PRC

Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Yili China. The tax provision was $85,155 and $39,526, respectively, for the fiscal years ended December 31, 2010 and December 31, 2009.

F-18

	For fiscal year ended			For fiscal year ended
	December 31, 2010			December 31, 2009
Income (loss) before income tax
United States	$	(509,355	)	$	(642,667	)
China	$	829,415		$	(1,005,313	)
Total		320,060			(1,647,980	)
Provision for income taxes
Current income tax	$	85,155		$	39,526
Deferred income tax		-			-
Total	$	85,155			39,526
Effective worldwide tax rate		26.6	%		-2.4	%
Reconciliation of effective income tax rate
Stautory U.S. tax rate		34.0	%		34.0	%
Tax rate difference		-9.0	%		-9.0	%
Valuation allowance - US only		39.8	%		-9.7	%
Valuation allowance - PRC only		-			-15.3	%
PRC NOL utilized		-38.2	%		-
Other, net		-			-2.4	%
Effective worldwide tax rate		26.6	%		-2.4	%

During the fiscal year of 2010, the United States entity had a net operating loss of $509,355 for which no benefit was realized and a 100% valuation allowance was created. The valuation allowance ratio for the US side was 39.8%. At the same time, the Chinese entity had a net income before income tax of $829,415. The PRC tax authority allowed part of the PRC NOL to be used when calculating income tax. The PRC NOL utilized ratio was -38.2%.

During the fiscal year of 2009, the United States entity had a net operating loss of $642,667 for which no benefit was realized and a 100% valuation allowance was created. The valuation allowance ratio for the US side was -9.7%. At the same time, the PRC entity had a net operating loss of $1,005,313 for which no benefit was realized and a 100% valuation allowance was created. The valuation allowance ratio for the Chinese side was -15.3%.

No provision for deferred tax assets or liabilities has been made, since the Company had no material temporary differences between the tax bases of assets and liabilities and their carrying amounts.

There is no material unrecognized tax benefit as of December 31, 2010 and 2009.

Current tax of $85,155 for the fiscal year ended December 31, 2010 was paid for PRC income tax. Income tax for the fiscal year ended December 31, 2009 was $39,526 which was also paid for PRC income tax.

NOTE 13 – CUSTOMER CONCENTRATIONS

Customers, those with sale-percentages over 10%, have been listed as follows:

	31-Dec-10			31-Dec-09
Jiangsu Dayang Silicon Powder Co., Ltd		20.6	%
Guiqing Silicon Powder Co., Ltd		11.9	%
Henan Kangtai Silicon Powder Co., Ltd		11.8	%
Urumqi Tianlide Industry and Trading Co., Ltd					13.1	%
Zhoucun Silicon Carbide Co., Ltd					10.3	%

F-19

Vendors, those with purchasing-percentages over 10%, have been listed as follows:

	31-Dec-10			31-Dec-09
Yihe Hydro Center		31	%		35	%
Xinjiang Jufeng Trading Co., Ltd		21	%
Xingjiang Huayu Energy Co., Ltd		15	%
Karamay Rongtai Chemical Co., Ltd					12	%

NOTE 14 - FOREIGN OPERATIONS

Substantially all of the Company’s operations are carried out and substantially most of its assets are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency fluctuation and remittances and methods of taxation, among other things.

NOTE 15 – SUBSEQUENT EVENT

On January 1, 2011, an aggregate of 149,433 shares of Common Stock were issued to the holders of Series A Preferred Stock as dividends. The Company has evaluated subsequent events from the balance sheet date through when the report is issued.

F-20

Master Silicon Carbide Industries, Inc. 10-K