**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-K**





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




For
      the
      fiscal year ended: December 31, 2007




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




For
      the
      transition period from __________ to ____________




Commission
      File Number: 000-52383


**Fuqi
      International, Inc.**


*(Exact
      name of registrant as specified in its charter)*





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





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





REGISTRANT’S
      TELEPHONE NUMBER, INCLUDING AREA CODE: **+86(755)2580-1888**





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









**Title
                of Each Class**
            **Name
                of Each Exchange on Which Registered**Common
                Stock, $0.001 par value
            NASDAQ
                Global Market





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




None.




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





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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days. Yes x No 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, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
                accelerated filer o
            Accelerated filer oNon-accelerated
                filer x
            Smaller reporting company o*(Do not check if a 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 x





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant on December 31, 2007 (the last business day
      of
      the registrant’s most recently completed fiscal year), was $80,919,190 based on
      the closing price of the registrant’s common stock on The Nasdaq Global Market
      of $8.30 per share. The
      registrant’s common stock commenced trading on The Nasdaq Global Market on
      October 23, 2007.


There
      were 20,924,843 shares of common stock outstanding as of March 28,
      2008.





DOCUMENTS
      INCORPORATED BY REFERENCE: The information required by Part III of Form 10-Kis
      incorporated by reference from the Registrant's definitive proxy statement
      on
      Schedule 14A that will be filed no later than the end of the 120-day period
      following the Registrant's fiscal year end, or, if the Registrant's definitive
      proxy statement is not filed within that time, the information will be filed
      as
      part of an amendment to this Annual Report on Form 10-K/A, not later than the
      end of the 120-day period.









**FUQI
      INTERNATIONAL, INC.**




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




**For
      the Fiscal Year Ended December 31, 2007**


**ITEM**
            
            
            
            ******Page****PART
                I**Item
                1.
            
            Business
            
            1Item
                1A.
            
            Risk
                Factors
            
            8Item
                1B.
            
            Unresolved
                Staff Comments
            
            19Item
                2.
            
            Properties
            
            19Item
                3.
            
            Legal
                Proceedings
            
            19Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            19**PART
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            19Item
                6.
            
            Selected
                Financial Data
            
            21Item
                7.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            22Item
                7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            34Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            35Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            35Item
                9A.
            
            Controls
                and Procedures
            
            35Item
                9B.
            
            Other
                Information
            
            35**PART
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            37Item
                11.
            
            Executive
                Compensation
            
            37Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            37Item
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            38Item
                14.
            
            Principal
                Accounting Fees and Services
            
            38**PART
                IV**Item
                15.
            
            Exhibits
                and Financial Statement Schedules
            
            38Signatures
            
            39









**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**




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




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




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




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




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




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




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




·
            Competition
                from the Company’s competitors;




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




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




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




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




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




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




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









**PART
      I**




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




Our
      company, Fuqi International, Inc., operates through our wholly-owned subsidiary,
      Fuqi International Holdings Co., Ltd., a British Virgin Islands corporation
      (“Fuqi BVI”) and its wholly-owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd., a
      company established under the laws of China (“Fuqi China”). Fuqi International,
      Inc. effected a reverse merger transaction in November 2006 that resulted in
      our
      current corporate structure and subsequently reincorporated in Delaware on
      December 8, 2006. For further information concerning our reverse merger
      transaction, see “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations — Corporate History.”




**Overview**




We
      are a
      leading designer of high quality precious metal jewelry in China, developing,
      promoting, and selling a broad range of products to the Chinese luxury goods
      market. Our products consist of a range of unique styles and designs made from
      precious metals such as platinum, gold, and Karat gold (K-gold), as well as
      diamonds and other precious stones. Our design database presently contains
      over
      28,000 unique products. We continuously innovate and change our designs based
      upon consumer trends in China. By continuously creating new designs and rapidly
      bringing them to market, we believe we are able to differentiate ourselves
      from
      our competitors and strengthen our brand identity.




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




We
      have
      historically sold our products directly to distributors, retailers and other
      wholesalers, who then sell our products to consumers through both retail
      counters located in department stores and in traditional stand-alone jewelry
      stores. We sell our products to our customers at price points that reflect
      the
      market price of the base material, plus a mark-up reflecting our design fees
      and
      processing fees. Typically this markup ranges from 8% to 14%. Our customers
      then
      further mark up our products to the consumers up to an additional 30%. Our
      target price points are primarily designed to appeal to China’s growing middle
      class.




In
      order
      to capitalize on the substantial growth in consumer spending on luxury goods
      in
      China and to capture the margin appreciation from direct sales to the consumer,
      we recently initiated a retail strategy in 2007 in product categories where
      we
      believe we will not compete with our existing sales channels. Our retail
      strategy focuses on finished gemstone jewelry, which we previously provided
      only
      on a custom-order basis and which has historically represented only a nominal
      percentage of our overall sales.




We
      intend
      to open new retail locations by leasing unoccupied space, acquiring existing
      leases from third parties and/or acquiring the existing jewelry operations
      of
      third parties that occupy retail space. During 2008, we intend to open and/or
      acquire 60 to 80 retail counters and open 8 to 10 retail stores in
      municipalities and provincial capitals throughout China. In January 2008, we
      agreed upon the terms to acquire two jewelry companies, Shanghai Tian Mei
      Jewelry Co. Ltd. and Beijing Yinzhong Tian Mei Jewelry Co. Ltd., collectively
      known as “Temix.” Temix has a total of about 50 jewelry counters and retail
      stores located in the Beijing and Shanghai regions. Our proposed acquisition
      includes obtaining all of Temix’s stores, counters, and leases registered trade
      name, exchange membership, and inventories.




We
      believe our expansion into the retail market will provide us with:




·
            direct
                access to the consumer market, allowing us to respond more rapidly
                to
                changing consumer tastes;




·
            an
                opportunity to grow our revenue base as we roll out our retail strategy;




·
            improved
                net margins from higher markups in the retail market; and




·
            increased
                brand awareness.




Our
      company is headquartered in the city of Shenzhen, in southern China, where
      we
      have a large-scale production base that includes a modern factory of more than
      53,000 square feet, a dedicated senior design, sales and marketing team, and
      we
      have approximately 540 employees, including approximately 350 company-trained
      production workers and 60 production trainees. We believe our current facilities
      provide adequate space for our planned expansion of our production lines, which
      will include diamond and other finished gemstone jewelry.




1




**China
      Jewelry Industry**




China’s
      market for jewelry and other luxury goods is expanding rapidly, due in part
      to
      the country’s rapid economic growth. According to the National Bureau of
      Statistics of China, China’s real gross domestic product, or GDP, grew by 11.4%,
      11.1%, and 10.4% in 2007, 2006 and 2005, respectively. Economic growth in China
      has led to greater levels of personal disposable income and increased spending
      among China’s expanding middle-class consumer base. According to Economist
      Intelligence Unit (EIU), private consumption has grown at a 9% compound annual
      growth rate, or CAGR, over the last decade.




Currently,
      China is the world's third-largest consumer of luxury goods. With higher minimum
      wages, expanded welfare payments and reduced income taxes, China’s 1.3 billion
      consumers are more able than ever to afford luxury items. China's younger
      generations, in particular, have bought into consumerism more than their
      predecessors and been lured by flashy products and high-end merchandise marketed
      to the wealthy, upper-middle and middle-market consumers.




The
      jewelry industry in China has grown at an annual rate of over 10 percent since
      the 1980’s and is expected to be the largest market in the world by
      2010 . I n
      2005,
      domestic sales of jewelry in China amounted to RMB 140 billion, which is
      approximately US$19.8 billion, and the industry earned $5.49 billion worth
      of
      foreign exchange for China through exports. In 2007, the growth in China’s
      jewelry industry was higher than its general economic growth and China became
      the second largest gold consumer in the world, only after India.




**Our
      Strategies**




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




***Aggressively
      pursue new wholesale distribution channels***




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




***Establish
      and expand our retail market footprint***




We
      have
      developed and are executing a retail sales plan aimed at gaining market share
      in
      the growing consumer market in China. We intend to acquire leases and open
      new
      stores in markets that we believe have a sufficient concentration of our target
      customers. Our retail expansion program is designed to reach new and existing
      customers through the opening of new retail locations and through the
      introduction of new jewelry designs. Retail locations will be determined on
      the
      basis of various factors, including geographic location, demographic studies
      and
      other jewelry stores or counters in the vicinity of a retail location.




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




We
      intend
      to open new retail locations by leasing unoccupied space, acquiring existing
      leases from third parties and/or acquiring the existing jewelry operations
      of
      third parties that occupy retail space. In December 2007, we employed an
      experienced senior marketing executive who has over 26 years of experience
      in
      the retail industry to assist in the expansion of our retail operations. We
      have
      also recruited experienced craftsmen, who have worked for foreign jewelry
      manufacturers for our new studded jewelry production line. During
      2008, we intend to open and/or acquire 60 to 80 retail counters and open 8
      to 10
      retail stores in municipalities and provincial capitals throughout
      China.




2




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




·
            *large
                pool of potential consumers*—
                China has a large population including a rapidly expanding middle-class
                consumer base.




·
            *changing
                consumer preferences*—
                we believe that Chinese consumers are embracing a more Western view
                of
                jewelry as a fashion accessory while also valuing the more traditional
                view of jewelry as an investment.




·
            *growing
                jewelry market*—
                China’s jewelry market has experienced significant year-on-year
                growth.




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




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




·
            *increased
                profit potential*—
                we believe that the retail market is a viable method to increase
                our sales
                profitability and market exposure.




In
      January 2008, we agreed upon the terms to acquire two jewelry companies,
      Shanghai Tian Mei Jewelry Co. Ltd. and Beijing Yinzhong Tian Mei Jewelry Co.
      Ltd., collectively known as “Temix.” Temix
      is
      a branded jewelry store chain with 50 outlets located primarily in the Beijing
      and Shanghai regions. Out of the 50 outlets, there are 5 stand alone stores
      and
      45 counters located in department stores. Our
      proposed acquisition includes obtaining all of Temix’s stores, counters, and
      leases registered trade name, exchange membership, and inventories. The
      products sold in these outlets are primarily diamond and gemstone jewelry,
      including ruby and jade and karat gold. The purchase price for Temix will be
      approximately $18.5 million, with approximately $9.5 million being paid in
      cash
      and the remaining being paid in securities. Temix was founded by Mr. Chujian
      Huang, who is the Chief Executive Officer of Temix and a 15-year veteran in
      China’s jewelry industry, particularly in the Yangtze Delta region. Mr. Huang
      will become a full time employee of Fuqi upon the closing of the acquisition
      and
      be responsible for managing the Temix chain. The acquisition is subject to
      execution of a definitive agreement and various closing conditions contained
      therein, including receiving certain regulatory approvals. We expect the
      acquisition to be completed in the second quarter of fiscal 2008.




***Expand
      existing and new product offerings***




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




Our
      product series include the following:




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




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




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




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




Many
      of
      our designs are originated by our in-house designers. They are educated at
      art
      schools or colleges in China and have gained an average of three to five years
      of experience from other jewelry companies. In generating new design ideas,
      our
      designers research and study designs that are popular in China and worldwide.
      Our designers conduct design and market research through various forms,
      including trade expositions, industrial magazines and the Internet. They also
      receive feedback from, and respond to, our customers. We continuously design
      and
      produce new styles of jewelry and currently carry more than 28,000 product
      styles, which are growing at a rate of approximately 3,600 styles per annum.
      We
      assign serial numbers to each of our products styles, and we maintain an
      information management system utilizing a product database.




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




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




3




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




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




***Enhance
      marketing and promotion efforts to increase brand awareness***




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




**Product
      Pricing**




The
      wholesale pricing of our products is based on three primary components: price
      of
      raw materials used, processing fee, and design fee. The price of the raw
      materials for our jewelry highly depends on the spot price of the raw materials
      (e.g., gold and platinum) at the time the jewelry is sold. The amount charged
      as
      a design fee is determined by management based on various criteria, including
      market conditions, and production complexity, popularity and uniqueness of
      the
      design. Management meets on a monthly basis to determine the design fees charge
      rate, which generally ranges from 6% to 11% of price of raw materials. The
      processing fee ranges from 2% to 3% of the price for the raw materials. We
      pay
      business tax on our design fee. We also pay a value added tax on the raw
      materials and processing fee, which we bill to our customers and remit to the
      local tax authority on a monthly basis. The sales amounts reported in the
      statements of income are net of the value added tax. The invoices that we
      provide to our wholesale customers itemize these raw material costs and design
      and processing fees that make up the total cost charged to them. The retail
      mark
      up from the wholesale price is approximately 30%, depending on the complexity
      of
      design and other factors.




**Credit
      Terms**




We
      offer
      certain of our customers credit terms for payment. We typically grant credit
      to
      a customer if the customer has been in existence for at least five years and/or
      has been doing business with us for at least three years. We attempt to minimize
      credit risk by reviewing a customer’s credit history before extending credit and
      by continually monitoring the customer’s credit exposure. We maintain an
      allowance for doubtful accounts for estimated losses resulting from the
      inability of our customers to make required payments. Allowance for doubtful
      accounts is based on our assessment of the collectability of specific customer
      accounts, the aging of accounts receivable, our history of bad debts, and the
      general condition of the industry. If a major customer’s credit worthiness
      deteriorates, or our customers’ actual defaults exceed historical experience,
      our estimates could change and impact our reported results. We have not
      experienced any significant amount of bad debt in the past.




**Manufacturing**




We
      have a
      large-scale production base that includes a modern factory of more than 53,000
      square feet, a dedicated senior design team, and approximately
      350 company-trained
      production workers. We recently analyzed and refined our production procedures
      to increase efficiency and reduced the number of trained workers by
      approximately 15%. Since 2003, we have held an ISO 9001 accreditation, which
      is
      an international standard of quality. The International Organization for
      Standardization (ISO)
      (http://www.iso.org/iso/en/iso9000-14000/understand/inbrief.html) defines the
      ISO 9000 quality management system as one of international references for
      quality management requirements in business-to-business dealings. An
      organization being accredited by an independent assessment organization has
      to
      fulfill:




·
            the
                customer’s quality requirements,




4




·
            applicable
                regulatory requirements, while aiming to enhance customer satisfaction,
                and




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




The
      ISO
      9000 quality management system is well recognized by People’s Republic of China
      (“PRC”)’s governmental bodies and businesses. This accreditation can serve as a
      basis for our customers to determine the minimum standard of quality assurance
      that we achieve. We believe that this accreditation also indicates to our
      customers that we are running an effective system to track quality issues and
      possible rework progress of our products. In January 2007, we also achieved
      the
      ISO 14000 accreditation. ISO 14000 is an environmental management system in
      which the organization being accredited has to (i) minimize harmful effects
      on
      the environment caused by its activities, and (ii) achieve continual improvement
      of its environmental performance.




We
      estimate our maximum annual output capacity of gold jewelry, other rare and
      precious metal jewelry, K-gold jewelry and inlaid jewelry to be approximately
      30
      tons, 15 tons, 5 tons and 60,000 pieces, respectively.




**Sales
      and Marketing**




We
      rely
      on our sales and marketing division, which is located at our executive offices
      in Shenzhen, China for the distribution of our products in China. We sell our
      products primarily to our national and provincial distributors that resell
      our
      products to end customers through their own distribution networks, which are
      typically composed of local distributors and retail outlets. Our distribution
      network currently includes 30 provincial distributors and more than 700
      direct-sales distributors. These distributors sell our products to local
      distributors, over 1,000 retail outlets and directly to end users in China.




Our
      marketing and distribution strategy is to screen and identify the strongest
      customers in each distribution channel and to focus on our design and sales
      efforts towards the largest and fastest growing retailers and distributors.
      We
      maintain a broad base of customers and concentrate our efforts on department
      stores, wholesalers, national jewelry chains, fine jewelers, and stores that
      sell fashionable jewelry. We also work closely with our major customers and
      attempt to adjust our product strategies and structure based on customer
      feedback in order to decrease the likelihood of overstocked, undesired products.




Our
      products are mainly designed for the middle income class in China, with an
      emphasis on young women. Approximately 50% of our designs are for 20 to 40
      year
      old women, 5% of our designs are for new-born children, 20% of our designs
      are
      for middle-aged men and 25% of our designs are for middle to older-aged women.
      Our products are sold in China at average retail prices equivalent to $200
      to
      $300, including tax. At present, approximately 5 to 6% of our products are
      marketed on a private label basis, but we anticipate that this percentage will
      decrease as we continue to develop the “Fuqi” brand.




We
      continue to invest in our brand and our marketing ability in order to increase
      demand for our products. During the past several years, we have carried out
      a
      brand development strategy based on product quality and design excellence.
      We
      have participated in various marketing activities and exhibitions to promote
      our
      products and brand. For example, in 2004, we were the laurel sponsor for
      multiple beauty pageants, including the “Miss Intercontinental Final” and the
“Miss China Universe.” As a laurel sponsor, we designed and crafted the laurels
      and/or batons that were presented to a contest winner, in addition to the
      contest’s second and third place runner-ups. We have also sponsored numerous
      beauty contests such as:




·
            the
                Final of Miss Global of WTO;




·
            the
                17th World Miss University Contest;




·
            the
                1st China Miss University Contest; and




·
            China
                Final of Miss World.




We
      believe that the laurels and batons created in connection with our sponsorship
      of beauty contests provided us an opportunity to showcase our design and
      craftsmanship ability, in addition to strengthening our brand recognition.




We
      have
      received various governmental awards with respect to our brand, including
      recognition by the China Light Product Quality Assurance Center as a “Chinese
      Famous Brand,” which is reserved for the top ten most recognized brands of the
      jewelry industry in China. We have also received other recognitions, including,
      from the Gems & Jewelry Trade Association of China as a “Famous Brand in the
      China Jewelry Industry”, from Committee of Shenzhen Famous Brand Accreditation
      as a “Shenzhen Well-known Brand”, from the Shenzhen City Enterprises Evaluation
      Association as one of the “Shenzhen 300 enterprises with Ultimate Growth” and
      from Moody United Certification Ltd as “China Quality Promise Credit Management
      Enterprise (Brand)”. In October 2007, “Fuqi” was recognized as a “China Top
      Brand” by General Administration of Quality Supervision, Inspection and
      Quarantine of the People's Republic of China. We believe that governmental
      awards and other forms of recognition raise brand recognition for our products.




5




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




**Supply
      of Raw Materials**




We
      are a
      full member of the Shanghai Gold Exchange and a standing council member of
      the
      Shenzhen Gold Association of China. The Shanghai Gold Exchange is our primary
      supply source for precious metals used in our jewelry offerings.




We
      maintain our supply of raw materials at our warehouse in Shenzhen, China. We
      purchase large volumes of precious metals approximately five times per month
      from the Shanghai Gold Exchange in advance and in anticipation of orders
      resulting from our marketing programs. When we make purchases on the Shanghai
      Gold Exchange, the Exchange issues a receipt to us that we can redeem for
      precious metals at various commercial banks in Shenzhen.




To
      minimize the risk of storage and devaluation, we only purchase pre-cut
      gemstones, including ruby and jade, upon customers’ requests. We do not have a
      designated supplier for these pre-cut stones. When a customer places an order
      that requires pre-cut stones, we purchase the pre-cut stones as required from
      local supplies in Shenzhen.




**Competition**




The
      jewelry production industry is highly competitive, and our competitors include
      domestic and foreign jewelry manufacturers, wholesalers, and importers who
      may
      operate on a national, regional and local scale. Many of our competitors have
      substantially greater financial, technical and marketing resources and personnel
      than us. Our strategy is to provide competitively priced, high-quality products
      to the high-volume retail jewelry market. We believe competition is largely
      based on quality, service, pricing, and established customer relationships.




In
      2007,
      we entered into the retail jewelry industry, which is also highly competitive.
      Many of our potential competitors in the retail industry have larger customer
      bases, longer operating histories and significantly greater financial,
      technical, marketing and other resources. Most of these retailers, including
      Chow Sang Sang Group, Luk Fook Jewelry, TSL Jewelry and Hang Fung Gold
      Technology, have numerous branches set up across China and may have secured
      the
      most desirable locations for retail stores. It may be difficult for a newcomer
      to enter into and expand in the retail industry, but based on our extensive
      analysis, market review, and planning, we believe that our established
      production and wholesale distribution business will facilitate our entrance
      into
      and expansion in the retail market.




**Major
      Customers**




During
      the years ended December 31, 2007 and 2006, there were no single customers
      that
      generated more than 10% of the total sales. During the year ended December
      31,
      2005 approximately 15% of the Company’s sales were generated from one customer,
      Beijing Hua Shang Rui Lin Trading Co., Ltd.




**Seasonality**




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




**Government
      Regulations**




We
      are
      subject to various laws and regulations in the PRC, affecting all aspects of
      our
      business. In April 2001, the Shenzhen Business Bureau granted our wholly-owned
      subsidiary, Fuqi China, the right to operate for a period of ten years from
      the
      date of inception. On May 17, 2006, we converted Fuqi China into a
      wholly-foreign-owned enterprise, or WFOE, and formally transferred the ownership
      of Fuqi China from the founder, Mr. Yu Kwai Chong, to Fuqi BVI. Neither this
      transfer nor the Reverse Merger changed our business plan. The right to operate
      as a WFOE expires 30 years from the date of establishment but, based on current
      PRC legislation, this right is renewable by application. A WFOE can only conduct
      business within its approved business scope, which appears on its business
      license. Our license permits us to design, manufacture, sell and market jewelry
      products to department stores throughout the PRC, and allows us to engage in
      the
      retail distribution of our products. Any further amendment to the scope of
      our
      business will require additional applications and government approval. We cannot
      assure you that we will be able to obtain the necessary government approval
      for
      any change or expansion of our business.




6




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




We
      have
      also been granted independent import and export rights. These rights permit
      us
      to import and export jewelry in and out of China. With the relatively lower
      cost
      of production in China, we intend to expand into overseas markets after the
      launch of our China-based retail plan. We do not currently have plans to import
      jewelry into China.




Our
      production facilities in Shenzhen are subject to environmental regulation by
      the
      Environmental Protection Bureau of Shenzhen. We hold all requisite operating
      permits from the Environmental Protection Bureau. Our permits confirm that
      we
      are in compliance with local regulations governing waste production and disposal
      and that our production facilities meet the public safety regulations regarding
      refuse, emissions, lights, noise and radiation. To date, we have never been
      cited for any environmental violations.




**Employees**




We
      have
      approximately 540 employees, including approximately 350 company-trained
      production workers and 60 production trainees. We recently analyzed and refined
      our production procedures to increase efficiency and reduced the number of
      trained workers by approximately 15%. In 2008, we began recruiting skilled
      laborers to fill vacancies for our new diamond line products. Our employees
      are
      part of a labor association that represents employees with respect to labor
      disputes and other employee matters. We have never experienced a work stoppage
      or a labor dispute that has interfered with our operations. We believe our
      relationship with our employees is good.




We
      are
      required to contribute a portion of our employees’ total salaries to the Chinese
      government’s social insurance funds, including medical insurance, unemployment
      insurance and job injuries insurance, and a housing assistance fund, in
      accordance with relevant regulations. Total contributions to the funds are
      approximately $46,000, $34,000 and $30,000 for the years ended December 31,
      2007, 2006 and 2005, respectively. We expect that the amount of our contribution
      to the government’s social insurance funds will increase in the future as we
      expand our workforce and operations. We also provide housing facilities for
      our
      employees. At present, approximately 95% of our employees live in
      company-provided housing facilities.




Effective
      January 1, 2008, PRC introduced a new labor contract law that enhances rights
      for the nation's workers, including open-ended work contracts and severance
      pay.
      The legislation requires employers to provide written contracts to their
      workers, restricts the use of temporary laborers and makes it harder to lay
      off
      employees. It also requires that employees with short-term contracts become
      full-time employees with lifetime benefits after a short-term contract is
      renewed twice. Although the new labor contract law would increase our labor
      costs, we do not anticipate there will be any significantly effects on our
      overall profitability in the near future since such amount was historically
      not
      material to our operating cost. Management anticipates this may be a step toward
      improving candidate retention for skilled workers.




**Available
      Information**




Our
      principal executive offices are located at 5/F., Block 1, Shi Hua Industrial
      Zone, Cui Zhu Road North, Shenzhen, 518019, People’s Republic of China. Our
      telephone number is +86 (755) 2580-1888. Our Internet address is www.fuqi.com.cn .
      We make
      available free of charge on or through our Internet Website our annual reports
      on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
      and
      amendments to those reports filed or furnished pursuant to Section 13(a) or
      15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
      after we electronically file such material with, or furnish it to, the
      Securities and Exchange Commission.




7




**ITEM
      1A: RISK FACTORS**




Any
      investment in our common stock involves a high degree of risk. Potential
      investors should carefully consider the material risks described below and
      all
      of the information contained in this Form 10-K before deciding whether to
      purchase any of our securities. Our business, financial condition or results
      of
      operations could be materially adversely affected by these risks if any of
      them
      actually occur. Some of these factors have affected our financial condition
      and
      operating results in the past or are currently affecting our company. This
      filing also contains forward-looking statements that involve risks and
      uncertainties. Our actual results could differ materially from those anticipated
      in these forward-looking statements as a result of certain factors, including
      the risks faced described below and elsewhere in this Form 10-K.




**Risks
      Related To Our Operations**




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




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




While
      the
      Chinese economy has experienced rapid growth in recent years, such growth has
      been uneven among various sectors of the economy and in different geographical
      areas of the country. Also, many observers believe that this rapid growth cannot
      continue at its current pace and that an economic correction may be imminent.
      Rapid economic growth can also lead to growth in the money supply and rising
      inflation. During the past two decades, the rate of inflation in China has
      been
      as high as approximately 20% and China has experienced deflation as low as
      minus
      2%. If prices for our products rise at a rate that is insufficient to compensate
      for the rise in the costs of supplies such as raw materials, it may have an
      adverse effect on our profitability. In order to control inflation in the past,
      the PRC government has imposed controls on bank credits, limits on loans for
      fixed assets and restrictions on state bank lending. The implementation of
      such
      policies may impede economic growth. In October 2004, the People’s Bank of
      China, the PRC’s central bank, raised interest rates for the first time in
      nearly a decade and indicated in a statement that the measure was prompted
      by
      inflationary concerns in the Chinese economy. During 2007, the interest rate
      was
      increased from 5.67% to 7.83%. Repeated rises in interest rates by the central
      bank could slow economic activity in China which could, in turn, materially
      increase our costs and also reduce demand for our products.




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




The
      jewelry industry generally is affected by fluctuations in the price and supply
      of diamonds, gold, platinum and, to a lesser extent, other precious and
      semi-precious metals and stones. In the past, we have not hedged our requirement
      for gold, platinum or other raw materials through the use of options, forward
      contracts or outright commodity purchasing, but we commenced to engage in such
      hedging in the fourth quarter of 2007. A significant disruption in our supply
      of
      gold, platinum, or other commodities could decrease our production and shipping
      levels, materially increase our operating costs and materially adversely affect
      our profit margins. Shortages of gold, platinum, or other commodities, or
      interruptions in transportation systems, labor strikes, work stoppages, war,
      acts of terrorism, or other interruptions to or difficulties in the employment
      of labor or transportation in the markets in which we purchase our raw
      materials, may adversely affect our ability to maintain production of our
      products and sustain profitability. Although we generally attempt to pass
      increased commodity prices to our customers, there may be circumstances in
      which
      we are not able to do so. In addition, if we were to experience a significant
      or
      prolonged shortage of gold, platinum, or other commodities, we would be unable
      to meet our production schedules and to ship products to our customers in timely
      fashion, which would adversely affect our sales, margins and customer relations.
      Furthermore, the value of our inventory may be affected by commodity prices.
      We
      record the value of our inventory at the lower of cost (using the first-in,
      first-out method) or market. As a result, decreases in the market value of
      precious metals such as gold and platinum would result in a lower stated value
      of our inventory, which may require us to take a charge for the decrease in
      the
      value of our inventory.




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




A
      significant percentage of our total sales are made in the northeast region
      of
      China, particularly in the provinces of Liaoning,
      Jilin and Heilongjiang, and the city of Beijing .
      For the
      years ended December 31, 2007 and 2006, approximately 51.1% and 44.9% of
      revenues, respectively, was generated from this area. Our concentration of
      sales
      in this area heightens our exposure to adverse developments related to
      competition, as well as economic and demographic changes in this region. Our
      geographic concentration might result in a material adverse effect on our
      business, financial condition or results of operations in the
      future.




8




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




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




·
            identify
                suitable counter and store locations, the availability of which is
                outside
                our control;




·
            purchase
                and negotiate acceptable lease
                terms;




·
            prepare
                counters and stores for opening within
                budget;




·
            source
                sufficient levels of inventory at acceptable costs to meet the needs
                of
                new counters and stores;




·
            hire,
                train and retain personnel;




·
            secure
                required governmental permits and
                approvals;




·
            successfully
                integrate new counters and stores into our existing
                operations;




·
            contain
                payroll costs; and




·
            generate
                sufficient operating cash flows or secure adequate capital on commercially
                reasonable terms to fund our expansion
                plans.




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




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




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




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




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




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




9




We
      may
      seek additional funding through public or private financing or through
      collaborative arrangements with strategic partners.




You
      should also be aware that in the future:




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




·
            Any
                available additional financing may not be adequate to meet our goals;
                and




·
            Any
                equity financing would result in dilution to
                stockholders.




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




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




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




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




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




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




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




10




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




We
      intend
      to conduct a growth strategy into retail distribution of our products that
      we
      believe will result in rapid growth, which will place significant demands on
      our
      managerial, operational and financial resources. Any significant growth in
      the
      market for our current wholesale business and our planned retail distribution
      would require us to expand our employee base for managerial, operational,
      financial, and other purposes. During any growth, we may face problems related
      to our operational and financial systems and controls, including quality control
      and delivery and service capabilities. We would also need to continue to expand,
      train and manage our employee base. We currently have approximately 540
      employees, which include approximately 350 company-trained workers and 60
      production trainees, and, at that size, a rapid increase in the number of our
      employees would be difficult to manage. Continued future growth will impose
      significant added responsibilities upon the members of management to identify,
      recruit, maintain, integrate, and motivate new employees. If we are able to
      expand our retail business, we would need to train or hire additional employees
      with retail experience.




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




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




Our
      business has become increasingly dependent on the performance of our
      distributors. During the years ended December 31, 2007, 2006, and 2005, 16%,
      13%, and 10%, respectively, of our net revenues were generated through our
      distributors. We currently have 103 distributors. Our largest distributor
      accounted for approximately 7% and 4% of our gross revenues in 2007 and 2006.
      We
      do not maintain long-term contracts with our distributors. Maintaining
      relationships with existing distributors and replacing any distributor may
      be
      difficult or time consuming. Our failure to maintain good relationships with
      our
      distributors could materially disrupt our distribution business and harm our
      net
      revenues.




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




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




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




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




11




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




Our
      success is, to a certain extent, attributable to the management, sales and
      marketing, and operational and technical expertise of certain key personnel.
      Each of our named executive officers, including our Chief Executive Officer,
      Mr.
      Yu Kwai Chong, performs key functions in the operation of our business. There
      can be no assurance that we will be able to retain these officers or that such
      personnel may not receive and/or accept competing offers of employment. The
      loss
      of a significant number of these employees could have a material adverse effect
      upon our business, financial condition, and results of operations. We do not
      maintain key-man life insurance for any of our senior management.




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




Our
      notes
      payable to banks for short-term borrowings as of December 31, 2007, December
      31,
      2006 were $17.1 million and $14.1 million, respectively, and bore weighted
      average interest rates of 6.68% and 6.14%, respectively. Generally, these
      short-term bank loans mature in one year or less and contain no specific renewal
      terms. However, in China it is customary practice for banks and borrowers to
      negotiate roll-overs or renewals of short-term borrowings on an on-going basis
      shortly before they mature. Although we have renewed our short-term borrowings
      in the past, we cannot assure you that we will be able to renew these loans
      in
      the future as they mature. In particular, a substantial portion of our
      short-term borrowings are arranged or guaranteed by Mr. Yu Kwai Chong, our
      controlling stockholder, or one of his affiliated companies. Since Mr. Chong
      ceased to be our sole stockholder in November 2006, he may be less inclined
      to
      guarantee our bank borrowings. If we are unable to obtain renewals of these
      loans or sufficient alternative funding on reasonable terms from banks or other
      parties, we will have to repay these borrowings with the cash on our balance
      sheet or cash generated by our future operations, if any. We cannot assure
      you
      that our business will generate sufficient cash flow from operations to repay
      these borrowings.




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




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




·
            vulnerability
                of our business to a general economic downturn in
                China;




·
            fluctuation
                and unpredictability of costs related to the gold, platinum and precious
                metals and other commodities used to manufacture our
                products;




·
            seasonality
                of our business;




·
            changes
                in the laws of the PRC that affect our
                operations;




·
            our
                recent entry into the retail jewelry
                market;




·
            competition
                from our competitors;




·
            our
                ability to obtain all necessary government certifications and/or
                licenses
                to conduct our business; and




·
            development
                of a public trading market for our
                securities.




**Risks
      Related To Doing Business In China**




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




Our
      business operations may be adversely affected by the current and future
      political environment in the PRC. The Chinese government exerts substantial
      influence and control over the manner in which we must conduct our business
      activities. Our ability to operate in China may be adversely affected by changes
      in Chinese laws and regulations, including those relating to taxation, import
      and export tariffs, raw materials, environmental regulations, land use rights,
      property and other matters. Under the current government leadership, the
      government of the PRC has been pursuing economic reform policies that encourage
      private economic activity and greater economic decentralization. There is no
      assurance, however, that the government of the PRC will continue to pursue
      these
      policies, or that it will not significantly alter these policies from time
      to
      time without notice.




12




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




The
      PRC’s
      legal system is a civil law system based on written statutes. Unlike the common
      law system prevalent in the United States, decided legal cases have little
      value
      as precedent in China. There are substantial uncertainties regarding the
      interpretation and application of PRC laws and regulations, including but not
      limited to the laws and regulations governing our business, or the enforcement
      and performance of our arrangements with customers in the event of the
      imposition of statutory liens, death, bankruptcy or criminal proceedings. The
      Chinese government has been developing a comprehensive system of commercial
      laws, and considerable progress has been made in introducing laws and
      regulations dealing with economic matters such as foreign investment, corporate
      organization and governance, commerce, taxation and trade. However, because
      these laws and regulations are relatively new, and because of the limited volume
      of published cases and judicial interpretation and their lack of force as
      precedents, interpretation and enforcement of these laws and regulations involve
      significant uncertainties. New laws and regulations that affect existing and
      proposed future businesses may also be applied retroactively.




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




·
            levying
                fines;




·
            revoking
                our business license, other licenses or
                authorities;




·
            requiring
                that we restructure our ownership or operations;
                and




·
            requiring
                that we discontinue some or all of our
                business.




**A
        recent increase in the rate of inflation in the PRC could negatively affect
        our
        profitability and growth.**
 
 While
        the
        PRC economy has experienced rapid growth, such growth has been uneven among
        various sectors of the economy and in different geographical areas of the
        country. Rapid economic growth can lead to growth in the money supply and
        rising
        inflation. According to the National Bureau of Statistics of China, the
        inflation rate in China reached a high point of 4.8% in 2007 as compared
        to the
        past several years. The inflation rate in China was 1.8% in 2005 and 1.5%
        in
        2006. The inflation rate is expected to continue to increase in 2008. Many
        of
        our operating expenses were increased and are also expected to increase with
        inflation. If prices for our products rise at a rate that is insufficient
        to
        compensate for the rise in the costs of supplies, it may have an adverse
        effect
        on profitability. In order to control inflation in the past, the PRC government
        has imposed controls on bank credits, limits on loans for fixed assets and
        restrictions on state bank lending. The implementation of such policies may
        impede economic growth.




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




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




**We
      will not be able to complete an acquisition of prospective acquisition targets
      in the PRC unless their financial statements are able to be reconciled to U.S.
      generally accepted accounting principles in a timely
      manner.**




Companies
      based in the PRC may not have properly kept financial books and records that
      may
      be reconciled with U.S. generally accepted accounting principles. If we attempt
      to acquire a significant PRC target company and/or its assets, we would be
      required to obtain or prepare financial statements of the target that are
      prepared in accordance with and reconciled to U.S. generally accepted accounting
      principles. Federal securities laws require that a business combination meeting
      certain financial significance tests require the public acquirer to prepare
      and
      file historical and/or pro forma financial statement disclosure with the SEC.
      These financial statements must be prepared in accordance with, or be reconciled
      to U.S. generally accepted accounting principles and the historical financial
      statements must be audited in accordance with the standards of the Public
      Company Accounting Oversight Board (United States), or PCAOB. If a proposed
      acquisition target does not have financial statements that have been prepared
      in
      accordance with, or that can be reconciled to, U.S. generally accepted
      accounting principles and audited in accordance with the standards of the PCAOB,
      we will not be able to acquire that proposed acquisition target. These financial
      statement requirements may limit the pool of potential acquisition targets
      with
      which we may acquire and hinder our ability to expand our retail operations.
      Furthermore, if we consummate an acquisition and are unable to timely file
      audited financial statements and/or pro forma financial information required
      by
      the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use
      the SEC’s short-form registration statement on Form S-3 to raise capital, if we
      are otherwise eligible to use a Form S-3. If we are ineligible to use a Form
      S-3, the process of raising capital may be more expensive and time consuming
      and
      the terms of any offering transaction may not be as favorable as they would
      have
      been if we were eligible to use Form S-3.




13




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




The
      PRC
      State Administration of Foreign Exchange, or “SAFE,” issued a public notice in
      November 2005, known as Circular 75, concerning the use of offshore holding
      companies in mergers and acquisitions in China. The public notice provides
      that
      if an offshore company controlled by PRC residents intends to acquire a PRC
      company, such acquisition will be subject to registration with the relevant
      foreign exchange authorities. The public notice also suggests that registration
      with the relevant foreign exchange authorities is required for any sale or
      transfer by the PRC residents of shares in an offshore holding company that
      owns
      an onshore company. The PRC residents must each submit a registration form
      to
      the local SAFE branch with respect to their ownership interests in the offshore
      company, and must also file an amendment to such registration if the offshore
      company experiences material events, such as changes in the share capital,
      share
      transfer, mergers and acquisitions, spin-off transactions or use of assets
      in
      China to guarantee offshore obligations.




On
      August
      8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned
      Assets Supervision and Administration Commission of the State Council, the
      State
      Administration of Taxation, the State Administration for Industry and Commerce,
      the China Securities Regulatory Commission and SAFE, released a substantially
      amended version of the Provisions for Foreign Investors to Merge with or Acquire
      Domestic Enterprises (the “Revised M&A Regulations”), which took effect
      September 8, 2006. These new rules significantly revised China’s regulatory
      framework governing onshore-to-offshore restructurings and foreign acquisitions
      of domestic enterprises. These new rules signify greater PRC government
      attention to cross-border merger, acquisition and other investment activities,
      by confirming MOFCOM as a key regulator for issues related to mergers and
      acquisitions in China and requiring MOFCOM approval of a broad range of merger,
      acquisition and investment transactions. Further, the new rules establish
      reporting requirements for acquisition of control by foreigners of companies
      in
      key industries, and reinforce the ability of the Chinese government to monitor
      and prohibit foreign control transactions in key industries.




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




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




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




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




14




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




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


**Because
        our funds are held in banks which do not provide insurance, the failure of
        any
        bank in which we deposit our funds could affect our ability to continue in
        business.**
 
 Banks
        and
        other financial institutions in the PRC do not provide insurance for funds
        held
        on deposit. A significant portion of our assets are in the form of cash
        deposited with banks in the PRC, and in the event of a bank failure, we may
        not
        have access to our funds on deposit. Depending upon the amount of money we
        maintain in a bank that fails, our inability to have access to our cash could
        impair our operations, and, if we are not able to access funds to pay our
        suppliers, employees and other creditors, we may be unable to continue in
        business.


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




Our
      subsidiary, Fuqi China, is subject to a reduced enterprise income tax rate
      of
      15%, which is granted to all enterprises operating in the Shenzhen Special
      Economic Zone. In 2004 and 2005, Fuqi China enjoyed a preferential income tax
      rate of 7.5% due to its status as a new business. That status expired effective
      January 1, 2006. The expiration of the preferential tax treatment has increased
      our tax liabilities and reduced our profitability. Additionally, on March 16,
      2007, the National People’s Congress of China enacted a new PRC Enterprise
      Income Tax Law, under which foreign invested enterprises and domestic companies
      will be subject to enterprise income tax at a uniform rate of 25%. The new
      law
      will become effective on January 1, 2008. During the transition period for
      enterprises established before March 16, the tax rate will be gradually
      increased starting in 2008 and be equal to the new tax rate in 2012. We believe
      that our profitability will be negatively affected in the near future as a
      result of the new EIT Law. Any future increase in the enterprise income tax
      rate
      applicable to us or other adverse tax treatments could increase our tax
      liabilities and reduce our net income.




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




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




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




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




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




·
            quarantines
                or closures of our manufacturing facilities or the retail outlets,
                which
                would severely disrupt our
                operations,




·
            the
                sickness or death of our key officers and employees,
                and




·
            a
                general slowdown in the Chinese
                economy.




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




15




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




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




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




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




**Risks
      Related To Our Capital Structure**




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




As
      of
      December 31, 2007, Mr. Yu Kwai Chong, our Chief Executive Officer and our
      largest stockholder, beneficially owns or control approximately 53.4% of our
      outstanding shares. Mr. Chong possesses significant influence over us, giving
      him the ability, among other things, to elect all or a majority of the Board
      of
      Directors and to approve significant corporate transactions. Such stock
      ownership and control may also have the effect of delaying or preventing a
      future change in control, impeding a merger, consolidation, takeover or other
      business combination, or discouraging a potential acquirer from making a tender
      offer or otherwise attempting to obtain control of our company. Without the
      consent of Mr. Chong, we could be prevented from entering into potentially
      beneficial transactions if they conflict with our major stockholder’s interests.
      The interests of this stockholder may differ from the interests of our other
      stockholders.




**Our
      stock price is volatile and you might not be able to resell your securities
      at
      or above the price you have paid.**




Since
      our
      initial public offering and listing of our common stock on the Nasdaq Global
      Market on October 23, 2007, the price at which our common stock had traded
      has
      been volatile, with a high and low sales price of $11.75 and $6.02,
      respectively, as through March 20, 2008. You might not be able to sell the
      shares of our common stock at or above the price you have paid. The stock market
      has experienced extreme volatility that often has been unrelated to the
      performance of its listed companies. Moreover, only a limited number of our
      shares are traded each day, which could increase the volatility of the price
      of
      our stock. These market fluctuations might cause our stock price to fall
      regardless of our performance. The market price of our common stock might
      fluctuate significantly in response to many factors, some of which are beyond
      our control, including the following:




·
            actual
                or anticipated fluctuations in our annual and quarterly results of
                operations;




·
            changes
                in securities analysts’ expectations;




·
            variations
                in our operating results, which could cause us to fail to meet analysts’
                or investors’ expectations;




·
            announcements
                by our competitors or us of significant new products, contracts,
                acquisitions, strategic partnerships, joint ventures or capital
                commitments;




·
            conditions
                and trends in our industry;




·
            general
                market, economic, industry and political conditions;




·
            changes
                in market values of comparable companies;




16




·
            additions
                or departures of key personnel;




·
            stock
                market price and volume fluctuations attributable to inconsistent
                trading
                volume levels; and




·
            future
                sales of equity or debt securities, including sales which dilute
                existing
                investors.




**The
      sale or availability for sale of substantial amounts of our common stock could
      adversely affect its market price.**




The
      market price of our Common Stock could decline as a result of sales of a large
      number of shares of our common stock in the market or the perception that these
      sales could occur. These sales, or the possibility that these sales may occur,
      also might make it more difficult for us to sell equity securities in the future
      at a time and at a price that we deem appropriate.




As
      of
      March 15, 2008, we had 20,924,843 shares of Common Stock outstanding, and
      approximately 9,740,000 were freely tradable without further restriction under
      the Securities Act of 1933, as amended, by persons other than our affiliates
      (within the meaning of Rule 144 under the Securities Act). In addition, our
      certificate of incorporation permits the issuance of up to approximately
      79,075,157 additional shares of common stock. Thus, we have the ability to
      issue
      substantial amounts of common stock in the future, which would dilute the
      percentage ownership held by the existing investors.




In
      connection with the public offering that we conducted on October 23, 2007,
      in
      which we issued 7,033,816 shares of freely tradable common stock, we, each
      of
      our directors and senior officers, and each holder of 5% or more of our common
      stock agreed, with limited exceptions, that we and they will not, without the
      prior written consent of the offering’s underwriter, through April 20, 2008,
      among other things, directly or indirectly, offer to sell, sell or otherwise
      dispose of any of shares of our common stock or file a registration statement
      with the SEC. After the lock-up agreements, up to 11,184,066 of the shares
      that
      had been locked up will be eligible for future sale in the public market at
      prescribed times pursuant to Rule 144 under the Securities Act, or otherwise,
      sales of a significant number of these shares of common stock in the public
      market could reduce the market price of the common stock.




Further,
      effective February 15, 2008, the SEC revised Rule 144, which provides a safe
      harbor for the resale of restricted securities, shortening applicable holding
      periods and easing other restrictions and requirements for resales by our
      non-affiliates, thereby enabling an increased number of our outstanding
      restricted securities to be resold sooner in the public market. Sales of
      substantial amounts of our stock at any one time or from time to time by the
      investors to whom we have issued them, or even the availability of these shares
      for sale, could cause the market price of our common stock to
      decline.




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




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




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




17




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




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




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




The
      value
      of RMB is subject to changes in China’s governmental policies and to
      international economic and political developments. In January, 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange
      rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system
      by
      which the exchange rates are determined. This modification has resulted in
      an
      approximate 9.93% appreciation of the RMB against the U.S. dollar from July
      21,
      2005 to December 31, 2007. While the international reaction to the RMB
      revaluation has generally been positive, there remains significant international
      pressure on the PRC government to adopt an even more flexible currency policy,
      which could result in further fluctuations of the exchange rate of RMB against
      the U.S. dollar, including possible devaluations. As all of our net revenues
      are
      recorded in RMB, any future devaluation of RMB against the U.S. dollar could
      negatively impact our results of operations.




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




We
      do not
      plan to declare or pay any further cash dividends on our shares of common stock
      in the foreseeable future and we currently intend to retain any future earnings
      for funding growth. Prior to the reverse merger we effected with VT Marketing
      Services, the predecessor of Fuqi International, Inc. (the “Reverse Merger”) in
      November 2006, we were wholly-owned by our founder and Chief Executive Officer,
      Mr. Yu Kwai Chong. During the years ended December 31, 2007, 2006, and 2005,
      we
      paid cash dividends of $0, $2.7 million, and $5.4 million, respectively, to
      Mr.
      Chong as our sole stockholder prior to the Reverse Merger. We currently have
      no
      intention to declare further dividends in the foreseeable future. Payment of
      dividends is further restricted under the provisions of our existing loan
      agreements, which prohibit Fuqi China from paying any dividends or making any
      other distributions to Fuqi BVI without the consent of the lenders. As a result,
      you should not rely on an investment in our securities if you require the
      investment to produce dividend income. Capital appreciation, if any, of our
      shares may be your sole source of gain for the foreseeable future. Moreover,
      you
      may not be able to resell your shares in our company at or above the price
      you
      paid for them.





18




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




Not
      applicable.




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




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




Our
      jewelry production facility is located in Shenzhen, China and, including office
      spaces, consists of approximately 66,000 square feet of building space. We
      own
      approximately 33,000 square feet of this space indirectly through our Chairman,
      Yu Kwai Chong, and his wife, both of whom hold the property in trust for our
      benefit. The remaining 33,000 square feet has been leased by us from Shenzhen
      Jin Tong Hai Enterprises Ltd, since July 2005. We use the space for production
      facilities, offices and showrooms. Pursuant to the terms of the lease, we lease
      the space for approximately $120,000 per annum. The lease agreement will
      terminate in June 2010. We have the right to renew the lease prior to its
      termination. At the time of renewal, the lease amount will be renegotiated,
      and
      based on the current industrial leasing market, we expect that the lease amount
      will be increased by approximately 35% in the year 2010.




In
      October 2007, we entered into a lease agreement for a 400-square-feet corporate
      office in San Jose, California. This office lease has a term of two years,
      expiring in October 2009. Monthly rent for this lease is $720.




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




We
      are
      not involved in any material legal proceedings, nor are we aware of any
      potential or threatened material litigation, or any asserted claims that may
      result in material litigation or other legal proceedings.




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




No
      matter
      was submitted to a vote of our security holders during the fourth quarter of
      the
      fiscal year ended December 31, 2007.




**PART
      II**




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




**Market
      Information**




Prior
      to
      October 23, 2007, our shares of common stock were not listed or quoted for
      trading on any national securities exchange or national quotation system. On
      October 23, 2007, we completed the initial public offering and our common stock
      began trading on the NASDAQ Global Market under the symbol “FUQI”. The low and
      high sales price for our common stock, as reported by NASDAQ, since October
      23,
      2007 to the fiscal year end December 31, 2007 was $6.02 and $11.75,
      respectively. The closing price of our common stock on March 24, 2008 on the
      NASDAQ was $6.78. As of March 15, 2008, we had approximately 201 common
      stockholders of record.




The
      stock
      market in general has experienced extreme stock price fluctuations in the past
      few years. In some cases, these fluctuations have been unrelated to the
      operating performance of the affected companies. Many companies have experienced
      dramatic volatility in the market prices of their common stock. We believe
      that
      a number of factors, both within and outside its control, could cause the price
      of our common stock to fluctuate, perhaps substantially. Factors such as the
      following could have a significant adverse impact on the market price of its
      common stock:


·
            Our ability to obtain additional financing and,
              if
              available, the terms and conditions of the
              financing;


·
            Our
                financial position and results of
                operations;


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




19




·
            Announcements
                of innovations or new products or services by we or our
                competitors;


·
            Federal
                and state governmental regulatory actions and the impact of such
                requirements on our business;


·
            The
                development of litigation against us;


·
            Period-to-period
                fluctuations in our operating results;


·
            Changes
                in estimates of our performance by any securities
                analysts;


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


·
            Changes
                in interest rates;


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


·
            Investor
                perceptions of our company; and


·
            General
                economic and other national
                conditions.




**Recent
      Sales of Unregistered Securities**




None.




**Dividends**




The
      Company has not paid or does not expect to declare or pay any cash dividends
      on
      its common stock in the foreseeable future, and it currently intends to retain
      future earnings, if any, to finance the expansion of its business. The decision
      whether to pay cash dividends on the Company’s common stock will be made by the
      Company’s board of directors, in their discretion, and will depend on its
      financial condition, operating results, capital requirements and other factors
      that the board of directors considers significant. Payment of dividends by
      Fuqi
      China is further restricted under the provisions of our existing loan
      agreements, which prohibit Fuqi China from paying any dividends or making any
      other distributions to Fuqi BVI without the consent of the lenders.




The
      Company’s wholly-owned subsidiary, Fuqi China, prior to merger with the Company,
      paid cash dividends of $0, $2,739,726, and $5,421,687 during the years ended
      December 31, 2007, 2006 and 2005, respectively. Each of these dividends was
      paid
      by the Company’s subsidiary to Mr. Chong, as its sole stockholder, which offset
      partially the amounts due to the Company’s subsidiary by Mr. Chong.




**Transfer
      Agent and Registrar**




The
      transfer agent and registrar for our common stock is Computershare Trust
      Company, Inc.




**Equity
      Compensation Plan Information**




Our
      equity compensation plan information is provided as set forth in Part III,
      Item
      11 herein.




20






**SELECTED
      CONSOLIDATED FINANCIAL DATA**




The
      following consolidated statements of income data for each of the five years
      ended December 31, 2007 and the consolidated balance sheet data as of December
      31, 2007, 2006, 2005, 2004, and 2003 are derived from our audited consolidated
      financial statements. Historical results are not necessarily indicative of
      the
      results of operations for future years. The following data is qualified in
      its
      entirety by and should be read in conjunction with “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and our consolidated
      financial statements and related notes included elsewhere in this Form
      10-K.




**Consolidated
      Statement of Income Data:**


**Years
                  Ended December 31,****2007**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003***(In
                  Thousands, Except Share Amounts and Earnings per
                  Share)***Net
                  sales**
              
              $
              145,559
              
              $
              92,409
              
              $
              72,580
              
              $
              56,765
              
              $
              29,501**Cost
                  of sales**
              
              
              129,045
              
              
              83,619
              
              
              64,964
              
              
              50,862
              
              
              26,019**Gross
                  profit**
              
              
              16,514
              
              
              8,790
              
              
              7,616
              
              
              5,903
              
              
              3,482**Operating
                  expenses**Selling
                  and marketing
              
              
              1,105
              
              
              490
              
              
              624
              
              
              549
              
              
              251General
                  and administrative
              
              
              2,919
              
              
              794
              
              
              671
              
              
              1,006
              
              
              1,006Total
                  operating expenses
              
              
              4,024
              
              
              1,284
              
              
              1,295
              
              
              1,555
              
              
              1,257**Income
                  from operations**
              
              
              12,490
              
              
              7,506
              
              
              6,321
              
              
              4,348
              
              
              2,225**Other
                  income (expenses):**Interest
                  expense
              
              
              (1,239
              )
              
              (799
              )
              
              (498
              )
              
              (100
              )
              
              —Interest
                  income
              
              
              166
              
              
              70
              
              
              —
              
              
              —
              
              
              1Change
                  of fair value on inventory loan payable
              
              
              (46
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Loss
                  on disposal of fixed assets
              
              
              —
              
              
              —
              
              
              —
              
              
              (45
              )
              
              —Exemption
                  of tax liabilities and estimated penalty payable
              
              
              4,162
              
              
              —
              
              
              —
              
              
              —
              
              
              —Miscellaneous
              
              
              80
              
              
              13
              
              
              (1
              )
              
              4
              
              
              40Total
                  other income (expenses)
              
              
              3,123
              
              
              (716
              )
              
              (499
              )
              
              (141
              )
              
              41**Income
                  before provision for income taxes**
              
              
              15,613
              
              
              6,790
              
              
              5,822
              
              
              4,207
              
              
              2,266**Provision
                  for income taxes**
              
              
              2,097
              
              
              995
              
              
              452
              
              
              359
              
              
              193**Net
                  income**
              
              
              13,516
              
              
              5,795
              
              
              5,370
              
              
              3,848
              
              
              2,073**Other
                  comprehensive income - foreign currency translation
                  adjustments**
              
              
              2,553
              
              
              288
              
              
              143
              
              
              —
              
              
              —**Comprehensive
                  income**
              
              $
              16,069
              
              $
              6,083
              
              $
              5,513
              
              $
              3,848
              
              $
              2,073**Earnings
                  per share - basic**
              
              $
              0.96
              
              $
              0.51
              
              $
              0.48
              
              $
              0.34
              
              $
              0.19**Earnings
                  per share - diluted**
              
              $
              0.86
              
              $
              0.50
              
              $
              0.48
              
              $
              0.34
              
              $
              0.19**Dividend
                  per share - basic**
              
              $
              —
              
              $
              0.24
              
              $
              0.49
              
              $
              0.35
              
              $
              0.15**Dividend
                  per share - diluted**
              
              $
              —
              
              $
              0.24
              
              $
              0.49
              
              $
              0.35
              
              $
              0.15**Weighted
                  average number of common shares - basic**
              
              
              14,105,791
              
              
              11,260,544
              
              
              11,175,543
              
              
              11,175,543
              
              
              11,175,543**Weighted
                  average number of common shares - diluted**
              
              
              15,627,494
              
              
              11,631,459
              
              
              11,175,543
              
              
              11,175,543
              
              
              11,175,543




**Consolidated
      Balance Sheet Data:**




**As
                  of December 31,****2007**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**(In
                  Thousands)Cash
              
              $
              63,294
              
              $
              13,355
              
              $
              71
              
              $
              256
              
              $
              1,294Total
                  assets
              
              
              122,715
              
              
              31,125
              
              
              28,115
              
              
              11,230
              
              
              8,579Total
                  liabilities
              
              
              25,455
              
              
              20,180
              
              
              20,508
              
              
              8,535
              
              
              5,756Total
                  stockholders’ equity
              
              
              97,260
              
              
              10,945
              
              
              7,607
              
              
              2,695
              
              
              2,823
  21




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**




*The
      following discussion contains forward-looking statements that involve risks
      and
      uncertainties. Forward-looking statements include, but are not limited to,
      statements regarding future events, our plans and expectations and financial
      projections. Our actual results could differ materially from those discussed
      herein. Factors that could cause or contribute to such differences include,
      but
      are not limited to, those discussed elsewhere in this Form 10-K. See “Risk
      Factors” beginning on page 8. Unless the context otherwise requires, the terms
“we,” the “Company,” “us,” or “Fuqi” refers to Fuqi International, Inc. and our
      wholly-owned subsidiaries.*




**Overview**




We
      are a
      leading designer of high quality precious metal jewelry in China, developing,
      promoting, and selling a broad range of products in the large and rapidly
      expanding Chinese luxury goods market. Our products consist of a range of unique
      styles and designs made from precious metals such as platinum, gold, and Karat
      gold (K-gold), as well as diamonds and other precious stones. We continuously
      innovate and change our designs based upon consumer trends in China. By
      continuously creating new designs and rapidly bringing them to market, we are
      able to differentiate ourselves from our competitors and strengthen our brand
      identity. Our design database presently contains over 28,000 unique
      products.




We
      have
      historically sold our products directly to distributors, retailers and other
      wholesalers, who then sell our products to consumers through both retail
      counters located in department stores and in other traditional stand-alone
      jewelry stores. In the coastal cities of China, we believe the demand for
      platinum and gem stone products has been increasing. In order to capitalize
      on
      the growth in demand, we intend to develop platinum as one of the primary metals
      from which our jewelry is manufactured. In 2006, we began to shift our product
      line to produce more platinum jewelry and we intend to invest in the development
      of a new production line to produce finished gemstone platinum jewelry. The
      production lead time of platinum products, starting from purchase of raw
      materials and ending with finished products, is about six to eight days, while
      the lead time for gold products is about two to four days. Lead time also varies
      on the complexity of production and design of our products. As such, we
      anticipate that more working capital will be needed to support this shift of
      product mix.




Our
      wholesale prices are based on the spot prices of the raw material that make
      up
      our products, with the spot price measured at the time our products are sold.
      Similarly, the value of our inventory on hand is based on spot prices of the
      raw
      materials that make up the inventory. We record the value of our inventory
      at
      the lower of cost (using the first-in, first-out method) or market. Our gross
      margin is therefore affected by changes in the price of raw materials. The
      increase in our net sales for the year ended December 31, 2007 and the value
      of
      inventory as of December 31, 2007 was due in part to the general increase in
      the
      market value of precious metals. Any fluctuation in the spot price of precious
      metal would result in a change in our wholesales revenue and our gross margin,
      as our sales price is based, in part, on the spot price of the precious metal
      contained in the product sold. We cannot predict and foresee the volatility
      of
      the market value of precious metals in the future. We closely monitor the market
      price of precious metals and we intend to commence the use of hedge tools to
      minimize our exposure to fluctuations of precious metal prices. We do not
      conduct any trading or speculating of these precious metals.




In
      order
      to capitalize on the substantial growth in consumer spending within the luxury
      goods category and to capture the margin appreciation from direct sales to
      the
      consumer, we, in 2007, initiated a retail strategy. In April 2007, we executed
      transfer and operation agreements to obtain operating rights for five jewelry
      retail counters in department stores located in Beijing and Tianjin region.
      On
      October 28, 2007, after the transferor was not able to complete the transfer
      of
      these five counters in a reasonable period of time, we entered into a
      cancellation agreement to terminate the transfer transaction effective November
      30, 2007. Subsequent to the cancellation agreement, we entered into agreements
      with two department stores in Shenyang to open retail counters. As of December
      31, 2007, we held a total of six retail counters in two department stores
      located in Shenyang. Total retail sales generated by our counters for the year
      ended December 31, 2007 was approximately $1,245,000. In 2008, we intend to
      open
      and/or acquire 60 to 80 retail counters and 8 to 10 retail stores. Our retail
      operations are discussed more fully below under the caption “Retail
      Operations.”




By
      initiating our retail strategy, we intend to enhance our profitability in 2008
      and further develop our brand reputation. We intend to produce jewelry that
      appeals to younger, urban consumers who have more buying power. We believe
      our
      new retail strategy creates a significant opportunity for us to both improve
      our
      return on capital and increase shareholder value. There are, however, risks
      related to our planned expansion. Our retail expansion strategy will largely
      depend on our ability to find sites for, open and operate new retail locations
      successfully. Our ability to open and operate new retail locations successfully
      depends on several factors, including, among others, our ability to identify
      suitable counter and store locations, the availability of which is outside
      our
      control; purchase and negotiate acceptable lease terms; prepare counters and
      stores for opening within budget; source sufficient levels of inventory at
      acceptable costs to meet the needs of new counters and stores; secure required
      governmental permits and approvals; successfully integrate new counters and
      stores into our existing operations; and generate sufficient operating cash
      flows or secure adequate capital on commercially reasonable terms to fund our
      expansion plans. Any failure to successfully open and operate new retail
      counters and stores could have a material adverse effect on our results of
      operations in the future. In addition, our retail expansion program will place
      increased demands on our operational, managerial and administrative resources.
      These increased demands could cause us to operate our business less effectively,
      which, in turn, could cause deterioration in the financial performance of our
      overall business.




22




**Recent
      Events**




***Business
      Acquisition***




In
      January 2008, we agreed upon the terms to acquire two jewelry companies,
      Shanghai Tian Mei Jewelry Co. Ltd. and Beijing Yinzhong Tian Mei Jewelry Co.
      Ltd., collectively known as “Temix.” Temix is a branded jewelry store chain with
      50 outlets located primarily in the Beijing and Shanghai regions. Out of the
      50
      outlets, there are 5 stand alone stores and 45 counters located in department
      stores. Our proposed acquisition includes obtaining all of Temix’s stores,
      counters, leases, registered trade name, exchange membership, and inventories.
      The products sold in these outlets are primarily diamond and gemstone jewelry,
      including ruby and jade and karat gold. The purchase price for Temix will be
      approximately $18.5 million, with approximately $9.5 million being paid in
      cash
      and the remaining being paid in securities. The number of our shares to be
      issued will be subject to the achievement of certain revenue and net income
      performance targets over a three-year period. Temix was founded by Mr. Chujian
      Huang, who is the Chief Executive Officer of Temix and a 15-year veteran in
      China’s jewelry industry, particularly in the Yangtze Delta region. Mr. Huang
      will become a full time employee of Fuqi upon the closing of the acquisition
      and
      be responsible for managing the Temix chain. We expect the acquisition to be
      completed in latter part of the second quarter of fiscal 2008. The acquisition
      is subject to execution of a definitive agreement and various closing conditions
      contained therein, including receiving certain regulatory
      approvals.




We
      anticipate this addition to our existing wholesale business represents a
      strategic opportunity for us to further penetrate an attractive consumer
      demographic, diversify our business operations, improve our sales and margin
      performance and expand our presence at the retail level. Temix is a well-known,
      young, white collar brand in Beijing and Shanghai and we believe that we can
      strengthen the performance at each outlet by better capitalizing Temix counters
      and stores to ensure they have an appropriate level of inventory, a mix of
      fashionable jewelry designs and strong brand promotion.




***Initial
      Public Offering***




On
      October 23, 2007, we completed our initial public offering of 7,033,816 shares
      of common stock at a per share price of $9.00. On October 25, 2007, the
      underwriters elected to fully exercise their over-allotment option to purchase
      an additional 1,055,072 shares of our common stock. In total, including the
      over-allotment shares, we sold 8,088,888 shares of our common stock at $9.00
      per
      share. The shares offered were listed and traded on the NASDAQ Global Market
      under the ticker symbol “FUQI”. After underwriting discounts and commissions and
      offering costs, we received net proceeds of approximately $67.0 million. The
      proceeds were intended for use for general corporate purposes, including
      expansion of our retail operations, enhancement of our product lines, and for
      general working capital purposes .




***Reverse
      Stock Split***




On
      August
      23, 2007, our Board of Directors unanimously authorized a 1.69-to-1 reverse
      stock split of our common stock. The reverse stock split became effective on
      October 22, 2007. All references to shares in the consolidated financial
      statements and the accompanying notes, including but not limited to the number
      of shares and per share amounts, unless otherwise noted, have been adjusted
      to
      reflect the reverse stock split retroactively.




**Corporate
      History**




We
      operate through our wholly-owned subsidiary Fuqi International Holdings Co.,
      Ltd., a British Virgin Islands corporation (“Fuqi BVI”) and its wholly-owned
      subsidiary, Shenzhen Fuqi Jewelry Co., Ltd., (“Fuqi China”) a company
      established under the laws of the People’s Republic of China. Our company’s
      principal office is in the city of Shenzhen, in southern China, where we have
      a
      large-scale production base that includes a modern factory of more than 53,000
      square feet, a dedicated senior design, sales and marketing team, and
      approximately 540 employees, including approximately 350 company-trained
      production workers and 60 production trainees. We believe our current facilities
      provide adequate space for our planned expansion of our production lines, which
      will include diamond and other finished gemstone jewelry.




23




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




For
      financial accounting purposes, the Reverse Merger was treated as a reverse
      acquisition by Fuqi BVI, under the purchase method of accounting, and was
      treated as a recapitalization with Fuqi BVI as the accounting acquirer.
      Accordingly, our historical financial statements have been prepared to give
      retroactive effect to the reverse acquisition completed on November 22, 2006,
      and represent the operations of Fuqi BVI and its wholly-owned subsidiary, Fuqi
      China.




**Critical
      Accounting Policies, Estimates and Assumptions**




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




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




***Revenue
      Recognition***




Wholesale
      revenue is recognized upon delivery and acceptance of jewelry products by our
      customers while the retail revenue is recognized upon receipt and acceptance
      of
      jewelry products by our customers, provided in each case that the other
      conditions of sales are satisfied: (i) persuasive evidence of an arrangement
      exists; (ii) delivery has occurred, upon shipment when title passes, or services
      have been rendered; (iii) our price to the buyer is fixed or determinable;
      and
      (iv) collectibility is reasonably assured.




***Currency
      Reporting***




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




***Allowance
      for Doubtful Accounts***




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




24




***Inventory***




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




***Taxation***




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




Under
      current tax laws in China, the usual statutory income tax rate applicable to
      PRC
      companies is 33%. Fuqi China currently enjoys a reduced enterprise income tax
      rate of 15%, which is granted to all enterprises operating in the Shenzhen
      Special Economic Zone. Prior to 2006, we were under the preferential income
      tax
      rate of 7.5% in 2005, due to our status of being a new business. That status
      expired effective January 1, 2006. Our effective income tax rates for the years
      ended December 31, 2007, 2006 and 2005 were 13.4%, 14.7% and 7.8%, respectively.




On
      March
      16, 2007, the National People’s Congress of China enacted a new PRC Enterprise
      Income Tax Law, under which foreign invested enterprises and domestic companies
      will be subject to enterprise income tax at a uniform rate of 25%. The new
      law
      will become effective on January 1, 2008. During the transition period for
      enterprises established before March 16, the tax rate will be gradually
      increased starting in 2008 and be equal to the new tax rate in 2012. We
      anticipate that as a result of the new EIT law, our income tax provision will
      increase, which could adversely affect our financial condition and results
      of
      operations. We had enjoyed certain preferential tax concessions and the loss
      of
      these preferential tax concessions may cause our tax liabilities to increase
      and
      our profitability to decline.




We
      are
      also subject to a 5% business tax on our design fees and a 17% value added
      tax
      on the processing fee. The 5% business tax is borne by us while the 17% value
      added tax is a component of the prices that we charge our customers. The sum
      of
      the design fee, processing fee, and the market price of raw materials used
      to
      manufacture our products is the wholesale price at which we sell our products.
      We treat the business tax as a sales-related expense and thus report it under
      selling and marketing in our statements of income.




From
      the
      inception of Fuqi China in 2001 to December 31, 2006, we failed to report a
      cumulative amount of approximately $26 million in cash revenues related to
      design fees. As of December 31, 2006, we had an accrual of approximately $3.8
      million in tax liabilities representing business tax and fees of 5.2% and income
      tax on the unreported design revenues since inception and an accrual of
      approximately $1.1 million in estimated penalties. In April 2006, the Shenzhen
      local tax department levied a $1.8 million assessment against us for unpaid
      business taxes, fees, and income taxes related to these unreported cash revenues
      up to the period from inception to December 31, 2005. The assessment was
      originally due at the end of April 2006 and subject to 0.05% per day of interest
      and penalties thereafter. On April 28, 2006, we filed for an extension of the
      deadline to remit these outstanding taxes payable to December 20, 2006, and
      the
      extension request was approved by the tax department in July 2006. On December
      28, 2006, Shenzhen City Tax Bureau granted a further extension to us from
      December 20, 2006 to April 25, 2007.




On
      April
      25, 2007, we appointed a registered tax agent to apply on behalf of our company
      for a special reduction or exemption for the unpaid tax liabilities for the
      period from inception to December 31, 2006. On May 14, 2007, we received a
      notice from the Shenzhen tax department accepting our application for a tax
      reduction or exemption and were granted an additional period to remit our
      outstanding tax liabilities until August 9, 2007. The tax department agreed
      not
      to assess any interest and penalties during this review process until August
      9,
      2007. On August 10, 2007, we received a notice from the tax department
      conditionally agreeing to fully exempt our tax liabilities in the amount of
      approximately $3 million on unreported design fee income for the period from
      inception of our operations in 2001 to December 31, 2006, provided that our
      common stock is successfully listed on a major overseas stock exchange within
      180 days from the date of the tax notic e.
      We
      fulfilled such condition in October 2007 and obtained acknowledgement from
      the
      Shenzhen tax department in November 2007. As a result, the accrued business
      and
      income tax liabilities, and the accrued estimated and penalties totaling $4.2
      million, was reversed
      and recorded as non-operating income in our consolidated statement of income
      for
      the year ended December 31, 200 7.




All
      of
      the design fee income for the year of 2007 has been properly reported and
      accounted for and has been fully paid by the tax filing deadline .




25




***Derivative
      Instruments***





During
      the forth quarter of 2007, we entered into certain gold future contracts with
      our supplier, Shanghai Gold Exchange. Gold futures offered by Shanghai Gold
      Exchange are designed for full members to hedge or to acquire inventory at
      a
      preset price. We utilized these future contracts to manage our consolidated
      exposure to changes in inventory values due to fluctuations in market prices
      and
      are not considered as hedges for accounting purpose. Our gold futures positions
      are marked to market at each reporting date and all unrealized gains and losses
      are recognized in earnings currently. These contract positions have not had
      a
      material effect on our consolidated financial position, results of operations,
      or cash flows.




***Stock-based
      Compensation***





In
      accordance with SFAS No. 123R, “Share-based Payment: An amendment of FASB
      Statement No. 123” (“SFAS 123R”), effective January 1, 2006, we are required to
      recognize compensation expense related to stock options granted to employees
      based on: (a) compensation cost for all share-based payments granted prior
      to,
      but not yet vested as of December 31, 2005, based on the grant date fair value
      estimated in accordance with SFAS No 123, “Accounting for Stock-Based
      Compensation” (“SFAS 123”), and (b) compensation cost for all share-based
      payments granted subsequent to December 31, 2005, based on the grant-date fair
      value estimated in accordance with the provisions of SFAS123R. 123R
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from initial
      estimates. We
      did
      not issue any stock options in 2005 and 2006 and had no outstanding options
      as
      of December 31, 2006. On
      October 26, 2007, we granted options to purchase a total of 1,320,000 shares
      of
      our common stock to two executives and four directors. We
      expect
      these options to be fully vested and therefore did not account for any
      forfeiture as the vesting periods of these options are relatively short. We
      use
      the Black-Scholes option-pricing model to value stock option awards and expensed
      the stock-based compensation based on the vesting periods.




**Results
      of Operations**




The
      following table sets forth certain financial information from our audited
      consolidated statements of income expressed as a percentage of revenues and
      should be read in conjunction with our consolidated financial statements and
      notes thereto included elsewhere in this Form 10-K.


**Years
                  Ended December 31,****2007**
              
              
              **2006**
              
              
              **2005****Net
                  sales**
              
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %**Cost
                  of sales**
              
              
              88.65
              %
              
              90.49
              %
              
              89.51
              %**Gross
                  profit**
              
              
              11.35
              %
              
              9.51
              %
              
              10.49
              %**Operating
                  expenses:**Selling
                  and marketing
              
              
              0.76
              %
              
              0.53
              %
              
              0.86
              %General
                  and administrative
              
              
              2.01
              %
              
              0.86
              %
              
              0.92
              %Total
                  operating expenses
              
              
              2.77
              %
              
              1.39
              %
              
              1.78
              %**Income
                  from operations**
              
              
              8.58
              %
              
              8.12
              %
              
              8.71
              %**Other
                  income (expense), net**
              
              
              2.15
              %
              
              -0.77
              %
              
              -0.69
              %**Income
                  before provision for income taxes**
              
              
              10.73
              %
              
              7.35
              %
              
              8.02
              %**Provision
                  for income taxes**
              
              
              1.44
              %
              
              1.08
              %
              
              0.62
              %**Net
                  income**
              
              
              9.29
              %
              
              6.27
              %
              
              7.40
              %




26




**Year
      Ended December 31, 2007 and 2006**




***Net
      sales***




Net
      sales, which consist of gross sales net of returns, for the year ended December
      31, 2007 increased to $146 million, an increase of $54 million, or 59%, from
      net
      sales of $92 million for the year ended December 31, 2006. The increase was
      primarily attributable to a combination of an increase in both selling price
      and
      sales volume. The selling price of our jewelry products is based on the market
      price of the precious metals (e.g., gold and platinum) in the periods when
      the
      products are sold. During 2007, the average price of gold and platinum increased
      by 9.94% and 9.33%, respectively, as compared with 2006. In addition, there
      was
      an increase of 34% in sales volume from approximately 4.4 tons for 2006 to
      5.9
      tons for 2007 as result of increase in jewelry products demand by our existing
      consumers and engaging of new customers. Sales volume of gold and platinum
      for
      the year ended December 31, 2007 increased by 39% and 28% to 5 tons and 736kg
      for 2007 from 3.6 tons and 573kg for 2006, respectively.




Net
      sales
      for the years ended December 31, 2007 and 2006 were comprised of the
      following:





**Years
                Ended December 31,****2007**
            
            **2006****Amount
                in Millions**
            
            **Percentage**
            
            **Amount
                in Millions**
            
            **Percentage****Platinum**
            
            $
            30.9
            
            
            21.2
            %
            $
            21.0
            
            
            22.7
            %**Gold**
            
            
            81.0
            
            
            55.8
            
            
            43.6
            
            
            47.2**K-gold
                and Studded Jewelry**
            
            
            33.7
            
            
            23.0
            
            
            27.8
            
            
            30.1**Total**
            
            $
            145.6
            
            
            100.0
            %
            $
            92.4
            
            
            100.0
            %




***Cost
      of sales***




Cost
      of
      sales is mainly comprised of costs of raw materials, primarily gold and
      platinum, in addition to direct manufacturing costs and factory overhead. Cost
      of sales for the year ended December 31, 2007 increased to $129 million, an
      increase of $45 million, or 54%, from $84 million for the same period in 2006.
      The increase in cost of sales, which was consistent with the increase in net
      sales, was primarily due to an increase in the cost of raw materials, which
      resulted from the increase in sales volume for the year ended December 31,
      2007.




***Gross
      profit***


Gross
        profit for the year ended December 31, 2007 increased to $16.5 million, an
        increase of $7.7 million, or 88%, from $8.8 million for 2006. Gross profit
        margin increased to 11.3% for year ended December 31, 2007, compared to 9.5%
        for
        the same period in 2006. The increase in profit margin was primarily derived
        from a general increase in the design fees of our products, which resulted
        primarily from an increase in design styles, an increase in brand awareness,
        and
        our receipt of various national awards during the year ended December 31,
        2007,
        partially offset by a slight decrease in profit margin during the fourth
        quarter
        of 2007, which was primarily related to a limited-time, promotional discount
        on
        our design fees and a fluctuation the price of raw materials. We hope that
        our
        gross margin increases in 2008 as we continue to expand our retail operations,
        including our proposed acquisition of Temix’s 50 retail stores, which is
        expected to close in the latter part of the second quarter of 2008. There
        can be
        no guarantee that the proposed acquisition of Temix will close or that we
        will
        experience an increase in margins.




***Selling
      and marketing expenses***




Selling
      and marketing expenses are primarily comprised of business taxes, advertising
      expenses, traveling expenses, production costs of marketing materials,
      insurance, and delivery expenses. Selling and marketing expenses for the year
      ended December 31, 2007 were approximately $1.1 million, an increase of $0.6
      million, or 124%, from $0.5 million for 2006. Selling and marketing expenses
      were 0.76% of net sales for the year ended December 31, 2007 compared to 0.53%
      for the prior year. The slight increase in selling and marketing expenses as
      a
      percentage of net sales was primarily due to our extended advertising campaign
      during Chinese New Year in 2007, an increase in utility cost, higher insurance
      premium for product delivery, and an increase in retail related
      expenses.




27




***General
      and administrative expenses***




General
      and administrative expenses consist primarily of payroll expenses, benefits
      and
      travel expenses for our staff, professional fees including audit, accounting,
      legal and financial advisory, depreciation expenses, and general office
      expenses. General and administrative expenses for the year ended December 31,
      2007 were $2.9 million, an increase of $2.1 million, or 263%, from $0.8 million
      for 2006. General and administrative expenses were 2.01% of net sales for the
      year ended December 31, 2007 compared to 0.86% for the prior year. The increase
      as a percentage of revenue was primarily due to an increase of legal and
      professional fees incurred as a result of being a publicly reporting company
      in
      the United States, expenses related to options granted, and increased salaries
      to certain executives under the employment agreements executed in October 2007.
      We anticipate general and administrative expense to increase in 2008 due to
      a
      full year effect of stock based compensation and compensation cost for our
      management executives and increase number of staff to support of our retail
      strategy.




***Other
      income (expense), net***




Other
      income, net was $3.1 million of income in 2007 compared to $0.7 million of
      expense in 2006. The increase was a result of the exemption of tax liabilities
      and estimated penalty payable of $4.2 million. See the section entitled
“Taxation,” above, for additional information.




***Provision
      for income tax***




Provision
      for income tax expense was approximately $2.1 million for the year ended
      December 31, 2007, an increase of $1.1 million, or 111%, from approximately
      $995,000 for 2006. The increase was primarily due to an increase in the taxable
      income for the year ended December 31, 2007.




***Net
      income***




As
      a
      result of the foregoing, net income increased to $13.5 million in 2007, an
      increase of 133% from $5.8 million in 2006.




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




***Net
      sales***




Net
      sales
      for the year ended December 31, 2006 increased to $92.4 million, an increase
      of
      $19.8 million, or 27.3%, compared to net sales of $72.6 million for the year
      ended December 31, 2005. The increase in net sales was primarily the result
      of
      an increase in our prices, which was the result of an increase in the price
      of
      precious metals, and a change in product mix. We sold more platinum jewelry
      during the year ended December 31, 2006 as compared to 2005.




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





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




28




***Cost
      of sales***




Cost
      of
      sales for the year ended December 31, 2006 increased to $83.6 million, an
      increase of $18.6 million, or 28.6%, compared to cost of sales of $65.0 million
      for the year 2005. The increase was primarily due to the increase in net sales
      for year ended December 31, 2006, with the percentage increase in cost of sales
      in line with the increase in net sales. The small difference in the percentage
      change was mainly due to increased labor costs required for processing
      platinum.




***Gross
      profit***




Gross
      profit for the year ended December 31, 2006 increased to $8.8 million, an
      increase of $1.2 million, or 15.8%, compared to $7.6 million for the same period
      in 2005. The increase in gross profit resulted primarily from the increase
      in
      net sales, which resulted from an increase in precious metal prices. However,
      gross profit margin decreased to 9.5% for year ended December 31, 2006, compared
      to 10.5% for the same period in 2005. Gross profit as a percentage of net sales
      for 2006 decreased by 0.98 basis points from 10.49% for 2005 to 9.51%. The
      decrease in gross profit margin was mainly attributable to our decision to
      reduce prices in the third quarter of 2006 in an effort to attract more
      sales.




***Selling
      and marketing expenses***




Selling
      and marketing expenses for the year ended December 31, 2006 were $490,000,
      a
      decrease of $134,000, or 21.5%, as compared to $624,000 for the year ended
      December 31, 2005. Selling and marketing expenses were 0.53% of revenues for
      the
      year ended December 31, 2006 compared to 0.86% for the prior year. The
      decrease in selling and marketing expenses was primarily due to our more
      targeted and focused marketing efforts in 2006.




***General
      and administrative expenses***




General
      and administrative expenses for the year ended December 31, 2006 were $793,000,
      an increase of $122,000, or 18.2%, as compared to $671,000 for the same period
      in 2005. The increase in general and administrative expenses was mainly due
      to
      costs and fees incurred in connection with the Reverse Merger between Fuqi
      BVI
      and the predecessor of our current Delaware-incorporated holding company.
      General and administrative expenses were 0.86% of revenues for the year ended
      December 31, 2006 compared to 0.92%for the prior year. The slight decrease
      in
      percentage of general and administrative expenses was mainly due to the fact
      that the overall costs increased at the lower rate than that of
      sales.




***Other
      income (expense), net***




Other
      income (expense), net was approximately $717,000 of expense in 2006 compared
      to
      approximately $499,000 of expense in 2005. The increase in expense was primarily
      a result of an
      increase of interest expenses by approximately $301,000, or 60.4%, from year
      2005 as a result of an increase in interest rates for short term bank financing
      for the year ended December 31, 2006.




***Provision
      of income tax***




Provision
      for income tax expense was approximately $995,000 for the year ended December
      31, 2006, an increase of $543,000, or 120%, as compared to approximately
      $452,000 for the same period in 2005. The increase was primarily due to the
      increase in our operating income for the year ended December 31,
      2006.




***Net
      income***




As
      a
      result of the foregoing, net income increased to $5.79 million in 2006, an
      increase of $0.4 million, or 7.4%, from $5.37 million in 2005.




**Quarterly
      Comparisons**





The
      following table presents the unaudited consolidated statements of income data
      for each of eight fiscal quarters through December 31, 2007, in dollars. The
      first quarter is from January 1 to March 31, the second quarter is from April
      1
      to June 30, the third quarter is from July 1 to September 30, and the fourth
      quarter is from October 1 to December 31. In management’s opinion, this
      unaudited information has been prepared on the same basis as our audited
      consolidated financial statements and includes all adjustments, consisting
      only
      of normal recurring adjustments, necessary for a fair presentation of the
      unaudited information for the quarters presented. The results of operations
      for
      any quarter are not necessarily indicative of results that we might achieve
      for
      any subsequent periods. In addition, our operating results have in the past
      and
      may in the future fluctuate significantly as a result of many factors, including
      the seasonality of our business and the unpredictable fluctuation of prices
      of
      precious metals. Consequently, we believe that period-to-period comparisons
      of
      our operating results may not necessarily be meaningful, and as a result, you
      should not rely on them as an indication of future performance.


29


**Fiscal
                Year 2007**
            
            **Fiscal
                Year 2006****Q4**
            
            **Q3**
            
            **Q2**
            
            **Q1**
            
            **Q4**
            
            **Q3**
            
            **Q2**
            
            **Q1****(in
                thousands, except for per share data)**Net
                sales
            
            $
            55,070
            
            $
            36,248
            
            $
            26,281
            
            $
            27,960
            
            $
            24,802
            
            $
            19,083
            
            $
            24,220
            
            $
            24,304Gross
                profit
            
            
            5,820
            
            
            4,477
            
            
            3,053
            
            
            3,164
            
            
            2,934
            
            
            1,426
            
            
            1,213
            
            
            3,217Net
                profit
            
            
            7,413
            
            
            2,730
            
            
            1,489
            
            
            1,883
            
            
            2,102
            
            
            905
            
            
            514
            
            
            2,274Earnings
                per share - basic
            
            
            0.39
            
            
            0.21
            
            
            0.12
            
            
            0.15
            
            
            0.18
            
            
            0.08
            
            
            0.05
            
            
            0.20Earnings
                per share - diluted
            
            
            0.39
            
            
            0.21
            
            
            0.10
            
            
            0.12
            
            
            0.15
            
            
            0.08
            
            
            0.05
            
            
            0.20




**Liquidity
      and Capital Resources**




At
      December 31, 2007, we had retained earnings of $16.8 million and cash and cash
      equivalents of $63 million. A substantial majority of our cash was derived
      from
      our initial public offering of a total of 8,088,888 shares of our common stock
      at $9.00 per share in October 2007. We intend to use such capital funding for
      expanding and financing our retail distribution, enhancing our product lines,
      and for general working capital for our retail operations. In connection with
      the intended acquisition of Temix, we paid approximately $685,000 in 2007 as
      deposit for such acquisition, which we have recorded in prepaid expenses and
      other assets in our consolidated balance sheet as of December 31, 2007. We
      anticipate paying an additional $8.7 million, of the $16.5 million total
      consideration, in cash to acquire Temix. We expect to close the acquisition,
      and
      pay the additional cash consideration, in the latter part of the second quarter
      of 2008. In 2008, we plan to open a total of 60 to 80 retail counters and 8
      to
      10 retail stores. Our retail operations are discussed more fully below under
      the
      caption “Retail Operations.”




At
      December 31, 2007, we had working capital of $95.6 million and no long term
      liabilities. Except for cash and cash equivalents, a majority of our net working
      capital consisted of inventory and accounts receivable, both of which increased
      by 389% and 155%, respectively, as of December 31, 2007 as compared to December
      31, 2006. Increase in inventory was a result of significant purchases of raw
      materials of precious metals incurred towards the end of 2007 upon receipt
      of
      capital funding from the public offering in October 2007. We do not conduct
      any
      trading of our raw materials of precious metals. Substantial increase of
      inventory was used for expanding our sales capabilities by accepting larger
      sales orders from our customers during the peak holiday season. Increases in
      accounts receivable was attributable to substantial increase in revenue
      generated in November and December, which is the beginning of our traditional
      peak season, and extending credit terms to some of our customers with high
      credit standings. We typically offer certain of our customers 30-days credit
      terms for payment. We maintain an allowance for doubtful accounts for estimated
      losses resulting from the inability of our customers to make required payments.
      Allowance for doubtful accounts is based on our assessment of the collectability
      of specific customer accounts, the aging of accounts receivable, our history
      of
      bad debts, and the general condition of the industry. If a major customer’s
      credit worthiness deteriorates, or our customers’ actual defaults exceed
      historical experience, our estimates could change and impact our reported
      results. We have not experienced any significant amount of bad debt since the
      inception of our operation.




We
      had
      outstanding facility lines of credit and short-term notes payables with banks
      in
      an aggregate amount of $17.1million, consisting of $15.7 million in short-term
      notes payable to banks and $1.37 million in facility lines of credit. Our loans
      are secured by inventory, real property and/or guaranteed by our affiliates
      and
      our controlling stockholder.




We
      have a
      general banking facility line of credit with Agricultural Bank of China pursuant
      to a Maximum Banking Facility Agreement dated August 24, 2006 which was renewed
      in September 2007. The terms of the agreement enable us to borrow up to a
      maximum facility amount of $13.7 million. Maturity dates for each withdrawal
      typically range from three to six months and are agreed to by the parties at
      the
      time of withdrawal. We executed notes payable with this bank under this facility
      line with terms ranging from five months to one year. As of December 31, 2007,
      we had $13.7 million outstanding under the facility, with interest rates ranging
      from 6.732% to 8.019%. In addition, we have a line of credit and a bank loan
      from China Construction Bank and DBS Bank. As of December 31 2007, we had a
      total of $3.4 million outstanding with interest rates ranging from 6.732% to
      7.776% from the DBS Bank line of credit and a bank loan from China Construction
      Bank. Amounts borrowed under the banking facility lines of credit and short-term
      notes payable are secured by our inventory, real property, and/or guaranteed
      by
      our affiliates and our controlling stockholder and have certain restrictions
      and
      covenants. We do not guarantee any indebtedness of our affiliates. The amounts
      outstanding under these lines of credit and short-term notes payable are
      presented in our financial statements as notes payable and line of credit.




30




Prior
      to
      the Reverse Merger, our then sole stockholder, Mr. Yu Kwai Chong, who is also
      our President, Chief Executive Officer and Chairman of the Board, made loans
      to
      us on a regular basis to meet short term financing needs of our company.
      Typically, these advances were in amounts ranging from $30,000 to $5.5 million,
      with no more than $10.0 million outstanding at any time. We did not pay interest
      on any of these advances. During the same period, Mr. Chong borrowed from our
      company primarily to fund personal liquidity needs. Since the closing of the
      Reverse Merger, at which time Mr. Chong ceased to be our sole stockholder,
      we
      have not engaged in any cash advance transactions with Mr. Chong and will not
      engage in these transactions in the future. Prior to the Reverse Merger,
      effective in November 2006, we paid dividends to our then sole stockholder,
      Mr.
      Chong. During the years ended December 31, 2007, 2006, and 2005, we paid cash
      dividends of $0, $2.7 million, and $5.4 million, respectively, to Mr. Chong.
      We
      currently have no intention to declare further dividends in the foreseeable
      future. Payment of dividends is further restricted under the provisions of
      our
      existing loan agreements.




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




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




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




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




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




**Years
                Ended December 31,****2007**
            
            
            **2006**
            
            
            **2005**(In
                Thousands)Net
                cash (used for) provided by operating activities
            
            $
            (21,737
            )
            $
            4,037
            
            $
            3,202Net
                cash (used for) provided by investing activities
            
            
            (768
            )
            
            9,613
            
            
            (17,928
            )Net
                cash provided by (used for) financing activities
            
            
            71,082
            
            
            (595
            )
            
            14,622Effect
                of exchange rate changes on cash
            
            
            1,362
            
            
            229
            
            
            (81
            )Net
                increase (decrease) in cash
            
            $
            49,939
            
            $
            13,284
            
            $
            (185
            )Cash
                at beginning of year
            
            
            13,355
            
            
            71
            
            
            256Cash
                at end of year
            
            $
            63,294
            
            $
            13,355
            
            $
            71




31




***Net
      cash (used for) provided by operating activities.*** Net cash
      used for operating activities was $21.7 million for the year ended December
      31,
      2007, compared to net cash provided by operations of $4.0 million for the same
      period in 2006. The $25.7 million decrease was primarily due to an increase
      in
      inventory in the amount of $22.2 million during the year ended December 31,
      2007
      compared to an increase of $109,000 during the same period in 2006, in addition
      to an increase of accounts receivable in the amount of $13.6 million during
      the
      year 2007 compared to an increase of $1.96 million in the same period in
      2006.




Net
      cash
      provided by operating activities was $4.0 million for the year ended December
      31, 2006, compared to net cash provided by operations of $3.2 million for the
      same period in 2005. Net cash provided increased by $0.8 million primarily
      because of (i) the utilization of VAT refundable of $0.4 million, (ii) increase
      in inventory of $0.1 million and (iii) recovery of inventory loan receivable
      of
      $0.7 million, in addition to a change in prepaid expenses.




***Net
      cash (used for) provided by investing activities.*** Net cash
      used for investing activities amounted to approximately $768,000 for the year
      ended December 31, 2007, compared to net cash provided by investing activities
      of $9.6 million for the year ended December 31, 2006. The change was due to
      an
      increase in restricted cash of approximately $395,000, in addition to the
      absence of loans and related repayments between our controlling stockholder
      and
      us, as had occurred during the year of 2006.




Net
      cash
      provided by investing activities amounted to $9.6 million for the year ended
      December 31, 2006, compared to net cash used for investing activities of $17.9
      million for the year ended December 31, 2005. The change was due to a net
      repayment of $6.9 million (the amount of repayments over advances) in 2006
      by
      our majority stockholder, Mr. Yu Kwai Chong, compared to a net advance of $14.4
      million (the amount of advances over repayments) to this stockholder in
      2005.




***Net
      cash provided by (used for) financing activities.*** Net cash
      provided by financing activities amounted to $71 million for the year ended
      December 31, 2007, compared to net cash used for financing activities of
      $595,000 for the same period of 2006. The increase of cash provided was
      primarily a result of net proceeds of $67 million raised from the initial public
      offering of 8,088,888 shares of our common stock, in addition to net proceeds
      of
      $2.8 million from the exercise of warrants that occurred during the second
      quarter of 2007.




***N*** et
      cash
      used for financing activities amounted to $595,000 for the year ended December
      31, 2006, compared to net cash provided by financing activities of $14.6 million
      for the year ended December 31, 2005. The change was primarily a result of
      our
      use of short-term and long-term bank financing in a total amount of $8.8 million
      in 2005. In addition, we borrowed a net amount of $415,000 from Mr. Yu Kwai
      Chong in 2006 compared to $0 in 2005. We also received $4.8 million in capital
      contributions from Mr. Chong in 2005 compared to $0 in 2006.




**Contractual
      obligations**




The
      following table describes our contractual commitments and obligations as of
      December 31, 200 7:


**Payments
                  due by Period (in $)****Contractual
                  Obligations**
              
              
              **Total**
              
              
              **Less
                  Than 1 Year**
              
              
              **1 - 3**
                **Years**
              
              
              **3 - 5**
                **Years**
              
              
              **More
                  Than**
                **5
                  Years**Short-term
                  borrowings
              
              $
              17,112,504
              
              $
              17,112,504
              
              $
              —
              
              $
              —
              
              $
              —Lease
                  of Plant & Office
              
              $
              323,865
              
              $
              131,850
              
              $
              192,015
              
              $
              —
              
              $
              —Lease
                  of Staff Dormitory
              
              $
              8,721
              
              $
              8,721
              
              
              —
              
              
              —
              
              
              —$
              17,445,090
              
              $
              17,253,075
              
              $
              192,015
              
              $
              —
              
              $
              —




**Employment
      Agreements of Executive Officers and** **New
      Labor Contract Law**




In
      October 2007, we entered into three-year employment contracts with our five
      executive officers each of which includes a fixed amount of annual salary and
      stock options to purchase the Company’s common stock. Details of each executive
      officer can be found herein in Part III, Item 11.




Effective
      January 1, 2008, PRC introduced a new labor contract law that enhances rights
      for the nation's workers, including open-ended work contracts and severance
      pay.
      The legislation requires employers to provide written contracts to their
      workers, restricts the use of temporary laborers and makes it harder to lay
      off
      employees. It also requires that employees with short-term contracts become
      full-time employees with lifetime benefits after a short-term contract is
      renewed twice. Although the new labor contract law would increase our labor
      costs, we do not anticipate there will be significantly affect on our overall
      profitability in the near future since such amount was historically not material
      to our operating cost. Management anticipates this may be a step toward
      improving candidate retention for skilled workers.




32




**Retail
      Operations**




In
      April
      2007, we entered into a transfer agreement with an unrelated party (the
“Transferor”), which has operation agreements with department stores for five
      jewelry retail counters. Under the terms of the agreement, the Transferor agreed
      to assign all of the operation rights to us for a fee of $400,000, which was
      payable in three separate installments. On October 28, 2007, after the
      Transferor was not able to complete the transfer of the counters, we entered
      into a cancellation agreement with the Transferor to terminate the transfer
      transaction as of November 30, 2007. Prior to the termination of the transfer,
      we had obtained temporary operation rights from the Transferor to operate these
      counters, and revenue derived from these five retail counters from the period
      of
      May to November 2007 amounted to $937,000. Pursuant to the cancellation
      agreement, we were not obligated to pay the $400,000 transfer fee of $400,000.
      All the inventory remained in the five counter stores at the last day of the
      operation was sold to the Transferor based on the pre-determined price. As
      of
      December 31, 2007, the outstanding balance due to the Transferor was
      approximately $204,000.




Subsequent
      to the cancellation agreement, in November 2007, we entered into one-year
      operating agreements to operate 6 retail jewelry counters at two department
      stores located in the Shenyang region. We agreed to pay the department stores
      a
      commission fee ranging 4.5% to 8% based on types of jewelry sales generated
      in
      these jewelry counters. Fees paid to the two department stores totaled $20,669
      in 2007 and are included in cost of sales expenses. We recognize revenues when
      the titles of the merchandises are transferred to the ultimate consumers. Sales
      generated from counters in these two department stores totaled $308,000 for
      the
      year ended December 31, 2007.




**Seasonality**




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




**Off-Balance
      Sheet Transactions**




We
      have
      no material off-balance sheet transactions.




**Impact
      of Recent Currency Exchange Rate Increase**




We
      use
      the U.S. dollar as the reporting currency for our financial statements. Our
      operations are conducted through our PRC operating subsidiary, Fuqi China,
      and
      our functional currency is the RMB. On July 21, 2005, the PRC government changed
      its policy of pegging the value of the RMB to the U.S. dollar and, as a result,
      the RMB has appreciated against the U.S. dollar by approximately 8.26% from
      1:8.27 on July 21, 2005 to 1:7.3046 on December 31, 2007. In converting our
      RMB
      income statement amounts into U.S. dollars we used the following RMB/$ exchange
      rates: 8.1963 for 2005, 7.959 for 2006 and 7.587 for 2007. Our operating results
      in 2005, 2006 and 2007 have benefited as a result of appreciation of the RMB
      against the U.S. dollar. There is no guarantee that we will benefit from the
      exchange rate in the future and our operations may suffer if a less favorable
      exchange rate develops. ****




**New
      Accounting Pronouncements**




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




33




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (SFAS 141(R)), which replaces SFAS No. 141, “Business
      Combinations.” SFAS 141(R) retains the underlying concepts of SFAS 141 in that
      all business combinations are still required to be accounted for at fair value
      under the acquisition method of accounting but SFAS 141(R) changed the method
      of
      applying the acquisition method in a number of significant aspects. Acquisition
      costs will generally be expensed as incurred; noncontrolling interests will
      be
      valued at fair value at the acquisition date; in-process research and
      development will be recorded at fair value as an indefinite-lived intangible
      asset at the acquisition date; restructuring costs associated with a business
      combination will generally be expensed subsequent to the acquisition date;
      and
      changes in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax expense. SFAS 141(R)
      is effective on a prospective basis for all business combinations for which
      the
      acquisition date is on or after the beginning of the first annual period
      subsequent to December 15, 2008, with the exception of the accounting for
      valuation allowances on deferred taxes and acquired tax contingencies. SFAS
      141(R) amends SFAS 109 such that adjustments made to valuation allowances on
      deferred taxes and acquired tax contingencies associated with acquisitions
      that
      closed prior to the effective date of SFAS 141(R) would also apply the
      provisions of SFAS 141(R). Early adoption is not permitted. We are currently
      evaluating the effects, if any, that SFAS 141(R) may not have significant
      effects on our financial statements.





In
      December 2007, the FASB issued Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements—an amendment of
      ARB No. 51.” This statement is effective for fiscal years, and interim
      periods within those fiscal years, beginning on or after December 15, 2008,
      with earlier adoption prohibited. This statement requires the recognition of
      a
      noncontrolling interest (minority interest) as equity in the consolidated
      financial statements and separate from the parent’s equity. The amount of net
      income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement. It also amends
      certain of ARB No. 51’s consolidation procedures for consistency with the
      requirements of SFAS 141(R) *.* This
      statement also includes expanded disclosure requirements regarding the interests
      of the parent and its noncontrolling interest. We are currently evaluating
      this
      new statement and anticipate that the statement will not have a significant
      impact on the reporting of our results of operations.




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




***Foreign
      Exchange Risk***




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




The
      value
      of RMB is subject to changes in China’s governmental policies and to
      international economic and political developments. In January, 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange
      rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system
      by
      which the exchange rates are determined. This modification has resulted in
      an
      approximate 9.93% appreciation of the RMB against the U.S. dollar from July
      21,
      2005 to December 31, 2007. While the international reaction to the RMB
      revaluation has generally been positive, there remains significant international
      pressure on the PRC government to adopt an even more flexible currency policy,
      which could result in further fluctuation of the exchange rate of RMB against
      the U.S. dollar. As all of our net revenues are recorded in RMB, any future
      devaluation of RMB against the dollar could negatively impact our results of
      operations.




34




***Interest
      Rate Risk***




As
      of
      December 31, 2007, we had $17.1 million outstanding under short term credit
      facilities from banks, with interest rates ranging from 6.732% to 8.02%. As
      all
      of these borrowings are short term borrowings, we believe our exposure to
      interest rate risk is not material. We do not use any derivative financial
      instruments to manage interest rate risks.




***Inflation***




According
      to the National Bureau of Statistics of China, the inflation rate in China
      reached a high point of 4.8% in 2007 as compared to the past several years.
      The
      inflation rate in China was 1.8% in 2005 and 1.5% in 2006. The inflation rate
      is
      expected to continue to increase in 2008. Many of our operating expenses were
      increased and are also expected to increase with inflation. In management's
      opinion, changes in revenues, net earnings and inventory valuation that have
      resulted from inflation and changing prices have not been material during the
      years presented. Managemen t
      does
      not expect that the effect of inflation on our overall operating costs will
      be
      greater for us than for our competitors within China.




***Commodity
      Price Sensitivity***




We
      are
      exposed to market risk in connection with our inventory balances, which are
      comprised primarily of gold, platinum and jewelry made from gold and platinum.
      Our inventories are stated at the lower of cost or market using the first in
      first out method. If there is a downward change in the market price of gold,
      we
      are required to mark-down the value of our inventory and record a loss in our
      statement of income. We have not ever experienced any significant losses due
      to
      changes in the market price of gold or platinum because the prices of gold
      and
      platinum have generally risen since our inception. We
      cannot
      predict the extent to which high raw material price levels will continue in
      the
      future. We do not have any long-term raw material purchase contracts.




In
      attempt to protect us against price increases of precious metals, we, in
      December 2007, entered into future purchase contracts with our supplier, the
      Shanghai Gold Exchange, to purchase raw material of gold. As of December 31,
      2007, the fair value of the future gold contracts outstanding was approximately
      $498,000 which was recorded as prepaid expenses. The change of its fair value
      of
      $79,000 was classified as miscellaneous income in the accompanying consolidated
      statements of income. The future contract was subsequently settled in January
      2008.




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




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




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




None .




**ITEM
      9A. CONTROLS AND PROCEDURES.**




**Disclosure
      Controls and Procedures**




As
      required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act,
      our
      management has carried out an evaluation, with the participation and under
      the
      supervision of our Chief Executive Officer and Chief Financial Officer, of
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of December 31, 2007. Disclosure controls and procedures refer
      to
      controls and other procedures designed to ensure that information required
      to be
      disclosed in the reports we file or submit under the Securities Exchange Act
      is
      recorded, processed, summarized and reported within the time periods specified
      in the rules and forms of the SEC and that such information is accumulated
      and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure. In designing and evaluating our disclosure controls and procedures,
      management recognizes that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving the
      desired control objectives, and management is required to apply its judgment
      in
      evaluating and implementing possible controls and procedures.




Management
      conducted its evaluation of disclosure controls and procedures under the
      supervision of our Chief Executive Officer and our chief financial officer.
      Based upon, and as of the date of this evaluation, our Chief Executive Officer
      and Chief Financial Officer concluded that our disclosure controls and
      procedures were effective.




35




**Management's
      Report on Internal Control over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies and procedures may deteriorate.




Our
      management has assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making its assessment, management used
      the
      criteria described in Internal Control - Integrated Framework, issued by the
      Committee of Sponsoring Organizations of the Treadway Commission, or
      COSO.




A
      significant deficiency (within the meaning of PCAOB Auditing Standard No. 5)
      is
      a deficiency, or a combination of deficiencies, in internal control over
      financial reporting that is less severe than material weakness, yet important
      enough to merit attention by those responsible for oversight of our financial
      reporting. The following significant deficiencies have been identified and
      included in our management’s assessment as of December 31, 2007:




1.
            We
                did not maintain effective controls over the financial closing process
                to
                ensure the accurate and timely preparation of local financial statements
                and financial data which is necessary for preparation of consolidated
                financial statements due to an insufficient complement of local financial
                and accounting staffs who are knowledgeable of local accounting rules
                to
                support the size of our company’s current organizational structure;
                and




2.
            We
                did not maintain effective internal audit function due to the lack
                of
                qualified internal auditors who are familiar with internal audit,
                and we
                did not implement adequate and proper supervisory review to ensure
                that
                the significant internal control deficiencies can be detected or
                prevented.




3.
            Our
                independent auditors, Stonefield Josephson, Inc., identified that
                our
                accounting on certain significant transactions were incorrectly calculated
                or incorrectly recorded. During the course of the audit field work,
                our
                independent auditors discovered these errors. The independent auditors
                discussed these matters with our Chief Financial Officer, and we
                subsequently reevaluated the transactions and recorded the necessary
                adjustments. The auditors believe that these adjustments reflected
                significant deficiencies in our internal controls over accounting
                and
                financial reporting.




Our
      management believes that none of these internal control deficiencies are
      identified as material weakness or has had a material effect on our financial
      condition or results of operations or caused our financial statements as of
      and
      for the year ended December 31, 2007 to contain a material
      misstatement.





This
      annual report on Form 10-K does not include an attestation report of our
      registered independent public accounting firm regarding management's assessment
      of our internal control over financial reporting. Management's report was not
      subject to audit by our registered independent public accounting firm pursuant
      to rules of the Securities and Exchange Commission that permit us to provide
      only management's report in this annual report. Beginning with the year ended
      December 31, 2008, Section 404 of the Sarbanes-Oxley Act will require our
      independent registered public accounting firm to provide an attestation report
      regarding management's assessment of our internal control over financial
      reporting as of the end of our fiscal year ended December 31, 2008 with our
      annual report on Form 10-K.




**Remediation
      Measures of Significant Deficiencies**




To
      remediate the first identified significant deficiency, we, in connection with
      the preparation of our annual report for 2007, implemented additional controls
      to accurately and consistently identify required adjustments through period-end
      account analysis and detailed reconciliation processes. We improved our closing
      process and we hired a US qualified accountant in January 2008 with relevant
      accounting experience, skills and knowledge in the preparation of financial
      statements under the requirements of US GAAP and financial reporting disclosure
      under the requirement of SEC rules, which will enhance the supervision control
      over financial data prepared by local financial and accounting
      staffs.




36




In
      addition, since
      2007, our management has or plans to implement the measures described below
      under the supervision and guidance of our audit committee to remediate such
      ineffectiveness and to strengthen our internal controls over financial
      reporting. As of the date of the filing, our management has implemented, or
      is
      in the process of implementing, the following measures:




1.
            We
                increased the level of interaction among our management, audit committee,
                independent auditors and other external
                advisors;




2.
            We
                recruited a Financial Controller, who will commence work in the latter
                part of the second quarter of 2008, to enhance financial reporting
                function of China operation;




3.
            We
                evaluated the sufficiency of local financial and accounting staff,
                and,
                based on that evaluation, we hired and continue to hire additional
                accounting staff;




4.
            We
                plan to re-evaluate the sufficiency of local financial and accounting
                staff upon the completion of our intended acquisition in retail business
                in 2008;




5.
            We
                are in the process of enhancing training programs on accounting principles
                and procedures for our existing
                staffs;




6.
            We
                are in the process of standardizing the monthly and quarterly data
                collection timetable and procedures, and assigning data collection
                responsibilities to designated
                personnel;




7.
            We
                are in the process of negotiating with a professional advisory firm
                on
                outsourcing part of our internal audit function;




8.
            We
                are negotiating employment terms with an internal audit
                staff accountant to assist us improve our internal audit
                function; and




9.
            We
                are in the process of recruiting a qualified and experienced internal
                auditor to implement the internal audit function, and we plan to
                provide
                additional training to this internal auditor on appropriate controls
                and
                procedures necessary to document and evaluate our internal control
                procedures.




We
      believe that we are taking the steps necessary for remediation of the
      significant deficiencies identified above, and we will continue to monitor
      the
      effectiveness of these steps and to make any changes that our management deems
      appropriate




**Changes
      in Internal Controls over Financial Reporting**




Other
      than the remediation
      measures we have been taking, there were no changes in our internal controls
      over financial reporting during the fourth quarter of fiscal 2007 that have
      materially affected, or are reasonably likely to materially affect our internal
      control over financial reportin g.




**ITEM
      9B. OTHER INFORMATION**


On
        October 10, 2007, we entered into a lease agreement for a 400-square-feet
        corporate office in San Jose, California. This office lease has a term of
        two
        years, expiring in October 2009. Monthly rent for this lease is $720. A copy
        of
        the lease is attached hereto as Exhibit
        10.16 .
 
 On
        February 20, 2008, we entered into a lease agreement for 817 square-feet
        of
        office space located in Hong Kong. The lease commenced on March 3, 2008 and
        expires on February 28, 2010. Monthly base rent is approximately $1,470,
        in
        addition to other monthly charges equal to approximately $373. A copy of
        the
        lease is attached hereto as Exhibit
        10.17 .


**PART
      I** **II**




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




The
      information required by this Item 10 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this Annual Report on Form 10-K/A,
      not
      later than the end of the 120-day period.




**ITEM
      11. EXECUTIVE COMPENSATION**




The
      information required by this Item 11 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this Annual Report on Form 10-K/A,
      not
      later than the end of the 120-day period.




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




The
      information required by this Item 12 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this Annual Report on Form 10-K/A,
      not
      later than the end of the 120-day period.




37




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      information required by this Item 13 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this Annual Report on Form 10-K/A,
      not
      later than the end of the 120-day period.




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




The
      information required by this Item 14 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this Annual Report on Form 10-K/A,
      not
      later than the end of the 120-day period.




**PART
      IV**




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





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





2.
      Financial Statement Schedule: See “Schedule II—Valuation and Qualifying
      Accounts” on page F-25 of the Financial Statements of this annual report on Form
      10-K.





3.
      Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed
      or incorporated by reference as part of this Form 10-K.





38


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, in the City of Shenzhen, People’s
      Republic of China, on March 28, 2008.


**FUQI
                INTERNATIONAL, INC.**By:
            /s/
                Yu Kwai ChongName
                Yu
                Kwai ChongTitle:Chief
                  Executive Officer and
                  President




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




SIGNATURE
            
            TITLE
            
            DATE/s/
                Yu Kwai Chong
            
            Chief
                Executive Officer and President (Principal Executive
                Officer)
            
            March
                28, 2008Yu
                Kwai Chong/s/
                Ching Wan Wong
            
            Chief
                Financial Officer and Director (Principal Financial Officer and Accounting
                Officer)
            
            March
                28, 2008Ching
                Wan Wong/s/
                Lie Xi Zhuang
            
            Chief
                Operating Officer and Director
            
            March
                28, 2008Lie
                Xi Zhuang/s/
                Hon. Lily Lee Chen
            
            Director
            
            March
                28, 2008Hon.
                Lily Lee Chen/s/
                Eileen B. Brody
            
            Director
            
            March
                28, 2008Eileen
                B. Brody/s/
                Victor A. Hollander
            
            Director
            
            March
                28, 2008Victor
                A. Hollander/s/
                Jeff Haiyong Liu
            
            Director
            
            March
                28, 2008Jeff
                Haiyong Liu




39


**EXHIBIT
      INDEX**





**Exhibit
                Number**
            
            **Description
                of Exhibit**2.1
            
            Share
                Exchange Agreement dated November 20, 2006 by and between Fuqi
                International, Inc., a Delaware corporation (f/k/a VT Marketing Services,
                Inc.) (the “Registrant”) and Fuqi International Holdings Ltd., a British
                Virgin Islands company (incorporated by reference from Exhibit 2.1
                to the
                Registrant’s Form 10 filed with the Securities and Exchange Commission on
                December 29, 2006).3.1
            
            Certificate
                of Incorporation of the Registrant (incorporated by reference from
                Exhibit
                3.1 to the Registrant’s Form 10 filed with the Securities and Exchange
                Commission on December 29, 2006).3.1(a)
            
            Amendment
                of the Certificate of Incorporation of the Registrant dated February
                21,
                2007 to increase authorized shares (incorporated by reference from
                Exhibit
                3.1(a) to the Registrant’s Form S-1/A (file no. 333-144290) filed with the
                Securities and Exchange Commission on August 28, 2007).3.2
            
            Bylaws
                of the Registrant (incorporated by reference from Exhibit 3.2 to
                the
                Registrant’s Form 10 filed with the Securities and Exchange Commission on
                December 29, 2006).4.1
            
            Specimen
                Common Stock Certificate (incorporated by reference from Exhibit
                4.1 to
                the Registrant’s Form S-1/A (file no. 333-144290) filed with the
                Securities and Exchange Commission on July 2, 2007).10.1
            
            Plan
                Warrant Agreement (incorporated by reference from Exhibit 10.1 to
                the
                Registrant’s Form 10 filed with the Securities and Exchange Commission on
                December 29, 2006).10.2
            
            2006
                Equity Incentive Plan (incorporated by reference from Exhibit 10.2
                to the
                Registrant’s Form 10 filed with the Securities and Exchange Commission on
                December 29, 2006).10.3
            
            Real
                Property Lease dated May 8, 2005 (incorporated by reference from
                Exhibit
                10.3 to the Registrant’s Form 10 filed with the Securities and Exchange
                Commission on December 29, 2006).10.4
            
            Employment
                Agreement dated August 30, 2007 entered into by and between the Company
                and Yu Kwai Chong (incorporated by reference from Exhibit 10.1 to
                the
                Registrant’s Form 8-K filed with the Securities and Exchange Commission on
                September 6, 2007).10.5
            
            Employment
                Agreement dated August 30, 2007 entered into by and between the Company
                and Ching Wan Wong (incorporated by reference from Exhibit 10.2 to
                the
                Registrant’s Form 8-K filed with the Securities and Exchange Commission on
                September 6, 2007).10.6
            
            Employment
                Agreement dated August 30, 2007 entered into by and between the Company
                and Lie Xi Zhuang (incorporated by reference from Exhibit 10.3 to
                the
                Registrant’s Form 8-K filed with the Securities and Exchange Commission on
                September 6, 2007).10.7
            
            Employment
                Agreement dated August 30, 2007 entered into by and between the Company
                and Heung Sang Fong (incorporated by reference from Exhibit 10.4
                to the
                Registrant’s Form 8-K filed with the Securities and Exchange Commission on
                September 6, 2007).10.8
            
            Employment
                Agreement dated August 30, 2007 entered into by and between the Company
                and Xi Zhou Zhuo (incorporated by reference from Exhibit 10.5 to
                the
                Registrant’s Form 8-K filed with the Securities and Exchange Commission on
                September 6, 2007).10.9
            
            Registration
                Rights Agreement dated September 18, 2007 entered into by and between
                the
                Company and Bay Peak, LLC (incorporated by reference from Exhibit
                10.9 to
                the Registrant’s Form S-1/A (file no. 333-144290) filed with the
                Securities and Exchange Commission on October 2, 2007).10.10
            
            Maximum
                General Facility Agreement dated September 27, 2007 entered into
                by and
                between the Company and Agriculture Bank of China (incorporated by
                reference from Exhibit 10.10 to the Registrant’s Form S-1/A (file no.
                333-144290) filed with the Securities and Exchange Commission on
                October
                2, 2007).10.11
            
            2007
                Equity Incentive Plan (incorporated by reference from Exhibit 99.1
                to the
                Registrant’s Form S-1/A (file no. 333-144290) filed with the Securities
                and Exchange Commission on August 28,
                2007).




40




**Exhibit
                Number**
            
            **Description
                of Exhibit**


10.12
            
            Form
                of Notice of Grant of Stock Option for the 2007 Equity Incentive
                Plan
                (incorporated by reference from Exhibit 99.2 to the Registrant’s Form
                S-1/A (file no. 333-144290) filed with the Securities and Exchange
                Commission on August 28, 2007).10.13
            
            Form
                of Stock Option Agreement (including Addendum) for the 2007 Equity
                Incentive Plan (incorporated by reference from Exhibit 99.3 to the
                Registrant’s Form S-1/A (file no. 333-144290) filed with the Securities
                and Exchange Commission on August 28, 2007).10.14
            
            Form
                of Stock Issuance Agreement (including Addendum) for the 2007 Equity
                Incentive Plan (incorporated by reference from Exhibit 99.4 to the
                Registrant’s Form S-1/A (file no. 333-144290) filed with the Securities
                and Exchange Commission on August 28, 2007).10.15
            
            Form
                of Stock Purchase Agreement (including Addendum) for the 2007 Equity
                Incentive Plan (incorporated by reference from Exhibit 99.5 to the
                Registrant’s Form S-1/A (file no. 333-144290) filed with the Securities
                and Exchange Commission on August 28, 2007).10.16
            
            Lease
                agreement dated October 10, 2007 for office space in San Jose,
                California.10.17
            
            Lease
                agreement dated February 20, 2008 for office space in Hong
                Kong.21.1
            
            List
                of Subsidiaries of the Registrant (incorporated by reference from
                Exhibit
                21.1 to the Registrant’s Form 10 filed with the Securities and Exchange
                Commission on December 29, 2006).31.1
            
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1*
            
            Certifications
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.







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




41




**FUQI
      INTERNATIONAL, INC.**




**CONSOLIDATED
      FINANCIAL STATEMEN** **TS**




**INDEX
      TO FINANCIAL STATEMENTS**


**Page**Report
                  of Independent Registered Public Accounting Firm
              
              
              F-2Financial
                  Statements:Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              
              F-3Consolidated
                  Statements of Income and Comprehensive Income for the years ended
                  December
                  31, 2007, 2006, and 2005
              
              
              F-4Consolidated
                  Statements of Stockholders’ Equity for the years ended December 31, 2007,
                  2006, and 2005
              
              
              F-5Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007,
                  2006, and
                  2005
              
              
              F-6Notes
                  to Consolidated Financial Statements
              
              
              F-8Schedule
                  II — Valuation and Qualifying Accounts and
                  Reserves
              
              
              F-25





F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors


Fuqi
      International, Inc.


Shenzhen,
      China




We
      have
      audited the accompanying consolidated balance sheets of Fuqi International,
      Inc.
      and subsidiaries as of December 31, 2007, and 2006 and the related consolidated
      statements of income and comprehensive income, stockholders’ equity and cash
      flows for each of the three years in the period ended December 31, 2007. Our
      audits also included the financial statement schedule listed on page F-25.
      These
      financial statements and schedule are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements and schedule based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. We were not engaged
      to
      perform an audit of the Company’s internal control over financial reporting. Our
      audits included consideration of internal control over financial reporting
      as a
      basis for designing audit procedures that are appropriate in the circumstances,
      but not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      as
      well as evaluating the overall financial statement presentation. We believe
      that
      our audits provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Fuqi International, Inc.
      and
      subsidiaries as of December 31, 2007 and 2006, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2007 in conformity with accounting principles generally accepted
      in
      the United States of America. Also, in our opinion, the related financial
      statement schedule, when considered in relation to the basic financial
      statements taken as a whole, presents fairly in all material respects the
      information set forth therein.






/s/
      Stonefield Josephson, Inc.




Wanchai,
      Hong Kong


March
      27,
      2008




F-2




**FUQI
      INTERNATIONAL, INC** **.**




**CONSOLIDATED
      BALANCE SHEETS**





**As
                of December 31,****2007**
            
            **2006****ASSETS****Current
                assets:**Cash
            
            $
            63,293,653
            
            $
            13,354,981Restricted
                cash
            
            
            410,700
            
            
            -Accounts
                receivable, net of allowance for doubtful accounts of $470,000 and
                $195,000 for 2007 and 2006
            
            
            23,864,141
            
            
            9,363,397Refundable
                value added taxes
            
            
            2,094,946
            
            
            -Inventories
            
            
            29,639,236
            
            
            6,066,213Prepaid
                expenses and other current assets
            
            
            1,700,432
            
            
            89,362Deposits
                related to borrowings on notes payable/ long term debt
            
            
            -
            
            
            736,358Deferred
                taxes
            
            
            79,402
            
            
            29,198Total
                current assets
            
            
            121,082,510
            
            
            29,639,509**Property,
                equipment, and improvements, net**
            
            
            1,495,861
            
            
            1,354,313**Deposits**
            
            
            97,706
            
            
            91,398**Other
                assets**
            
            
            38,513
            
            
            40,122$
            122,714,590
            
            $
            31,125,342**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Notes
                payable
            
            $
            15,743,504
            
            $
            14,086,852Line
                of credit
            
            
            1,369,000
            
            
            -Accounts
                payable and accrued liabilities
            
            
            662,662
            
            
            215,092Accrued
                business tax
            
            
            498,792
            
            
            1,084,078Accrued
                penalties
            
            
            -
            
            
            1,119,201Accrued
                value added taxes
            
            
            -
            
            
            133,010Customer
                deposits
            
            
            5,278,534
            
            
            1,234,424Income
                tax payable
            
            
            1,902,443
            
            
            1,884,837Due
                to stockholder
            
            
            -
            
            
            422,909Total
                current liabilities
            
            
            25,454,935
            
            
            20,180,403**STOCKHOLDERS'
                EQUITY**Preferred
                stock, $0.001 par value, 5,000,000 shares authorized, none issued
                and
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 100,000,000 shares authorized for 2007 and
                75,000,000 shares authorized for 2006, shares issued and outstanding
                -
                20,924,843 shares for 2007 and 12,257,624 shares for 2006
            
            
            20,925
            
            
            12,258Additional
                paid in capital
            
            
            77,449,355
            
            
            7,212,130Accumulated
                foreign currency translation adjustments
            
            
            2,985,035
            
            
            432,125Retained
                earnings
            
            
            16,804,340
            
            
            3,288,426Total
                stockholders' equity
            
            
            97,259,655
            
            
            10,944,939$
            122,714,590
            
            $
            31,125,342




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




F-3




**FUQI
      INTERNATIONAL, INC** **.**




**CONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**





**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005****Net
                sales**
            
            $
            145,558,667
            
            $
            92,408,539
            
            $
            72,580,171**Cost
                of sales**
            
            
            129,044,877
            
            
            83,618,526
            
            
            64,963,978**Gross
                profit**
            
            
            16,513,790
            
            
            8,790,013
            
            
            7,616,193**Operating
                expenses:**Selling
                and marketing
            
            
            1,105,168
            
            
            490,191
            
            
            624,131General
                and administrative
            
            
            2,919,140
            
            
            793,453
            
            
            671,191Total
                operating expenses
            
            
            4,024,308
            
            
            1,283,644
            
            
            1,295,322**Income
                from operations**
            
            
            12,489,482
            
            
            7,506,369
            
            
            6,320,871**Other
                income (expenses):**Interest
                expense
            
            
            (1,238,505
            )
            
            (798,868
            )
            
            (497,901
            )Interest
                income
            
            
            166,230
            
            
            69,628
            
            
            -Change
                of fair value of inventory loan payable
            
            
            (46,083
            )
            
            -
            
            
            -Exemption
                of tax liabilities and estimated penalty payable
            
            
            4,161,533
            
            
            -
            
            
            -Miscellaneous
            
            
            80,307
            
            
            12,564
            
            
            (664
            )Total
                other income (expenses)
            
            
            3,123,482
            
            
            (716,676
            )
            
            (498,565
            )**Income
                before provision for income taxes**
            
            
            15,612,964
            
            
            6,789,693
            
            
            5,822,306**Provision
                for income taxes**
            
            
            2,097,050
            
            
            995,462
            
            
            452,538**Net
                income**
            
            
            13,515,914
            
            
            5,794,231
            
            
            5,369,768**Other
                comprehensive income**-
                foreign currency translation adjustments
            
            
            2,552,910
            
            
            288,419
            
            
            143,706**Comprehensive
                income**
            
            $
            16,068,824
            
            $
            6,082,650
            
            $
            5,513,474**Earnings
                per share - basic**
            
            $
            0.96
            
            $
            0.51
            
            $
            0.48**Earnings
                per share - diluted**
            
            $
            0.86
            
            $
            0.50
            
            $
            0.48**Weighted
                average number of common shares - basic**
            
            
            14,105,791
            
            
            11,260,544
            
            
            11,175,543**Weighted
                average number of common shares- diluted**
            
            
            15,627,494
            
            
            11,631,549
            
            
            11,175,543




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




F-4




**FUQI
      INTERNATIONAL, IN** **C.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Years
      Ended December 31, 2007, 2006 and 2005**




**Common
                Stock****Shares**
            
            **Amount**
            
            **Additional**
              **Paid
                in**
              **Capital**
            
            **Other
                Comprehensive Income**
            
            **Retained
                Earnings**
            
            **Total
                Stockholders' Equity**Balance,
                December 31, 2004
            
            
            11,175,543
            
            $
            11,176
            
            $
            2,398,463
            
            $
            -
            
            $
            285,840
            
            $
            2,695,479Capital
                contributions
            
            
            -
            
            
            -
            
            
            4,819,277
            
            
            -
            
            
            -
            
            
            4,819,277Dividend
                paid
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,421,687
            )
            
            (5,421,687
            )Foreign
                currency translation adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            143,706
            
            
            -
            
            
            143,706Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,369,768
            
            
            5,369,768Balance,
                December 31, 2005
            
            
            11,175,543
            
            
            11,176
            
            
            7,217,740
            
            
            143,706
            
            
            233,921
            
            
            7,606,543Reverse
                acquisition of Fuqi BVI
            
            
            1,082,081
            
            
            1,082
            
            
            (5,610
            )
            
            -
            
            
            -
            
            
            (4,528
            )Dividend
                paid
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,739,726
            )
            
            (2,739,726
            )Foreign
                currency translation adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            288,419
            
            
            -
            
            
            288,419Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,794,231
            
            
            5,794,231Balance,
                December 31, 2006
            
            
            12,257,624
            
            
            12,258
            
            
            7,212,130
            
            
            432,125
            
            
            3,288,426
            
            
            10,944,939Issuance
                of common stock related to initial public offering, net of financing
                cost
            
            
            8,088,888
            
            
            8,089
            
            
            66,780,438
            
            
            -
            
            
            -
            
            
            66,788,527Issuance
                of common stock for exercise of stock warrants
            
            
            578,331
            
            
            578
            
            
            2,754,931
            
            
            -
            
            
            -
            
            
            2,755,509Fair
                value of stock options granted to executives and directors
            
            
            -
            
            
            -
            
            
            701,856
            
            
            -
            
            
            -
            
            
            701,856Foreign
                currency translation adjustments
            
            
            -
            
            
            -
            
            
            -
            
            
            2,552,910
            
            
            -
            
            
            2,552,910Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,515,914
            
            
            13,515,914Balance,
                December 31, 2007
            
            
            20,924,843
            
            $
            20,925
            
            $
            77,449,355
            
            $
            2,985,035
            
            $
            16,804,340
            
            $
            97,259,655




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




F-5




**FUQI
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Increase
      (Dec** **rease)
      in Ca** **sh**




**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005****Cash
                flows provided by operating activities:**Net
                income
            
            $
            13,515,914
            
            $
            5,794,231
            
            $
            5,369,768**Adjustments
                to reconcile net income to net cash****provided
                by (used for) operating activities:**Depreciation
                and amortization
            
            
            326,784
            
            
            326,852
            
            
            239,449Provision
                for bad debt
            
            
            251,746
            
            
            (115,592
            )
            
            7,320Stock
                based compensation
            
            
            701,856
            
            
            -
            
            
            -Exemption
                of tax liabilities and estimated penalty payable
            
            
            (4,161,534
            )
            
            -
            
            
            -**Changes
                in operating assets and liabilities:**Accounts
                receivable
            
            
            (13,590,622
            )
            
            (1,958,441
            )
            
            (2,277,877
            )Refundable
                value added taxes
            
            
            (2,153,866
            )
            
            387,787
            
            
            (192,867
            )Inventories
            
            
            (22,292,543
            )
            
            (109,243
            )
            
            (850,319
            )Inventory
                loan receivable
            
            
            -
            
            
            697,530
            
            
            (677,335
            )Prepaid
                expenses and other current assets
            
            
            (1,553,191
            )
            
            (24,903
            )
            
            (105,106
            )Deposits
                - short term
            
            
            757,875
            
            
            (376,932
            )
            
            (335,517
            )Deferred
                taxes
            
            
            (46,395
            )
            
            (5,654
            )
            
            (488
            )Deposits
                related to borrowings on notes payable/ long term debt
            
            
            -
            
            
            (8,004
            )
            
            (3,497
            )Other
                assets
            
            
            4,215
            
            
            (35,504
            )
            
            (3,748
            )Accounts
                payable, accrued expenses, accrued business taxes, and accrued estimated
                penalties
            
            
            906,006
            
            
            257,800
            
            
            132,890Customer
                deposits
            
            
            3,811,563
            
            
            (1,614,529
            )
            
            1,491,538Income
                tax payable
            
            
            1,785,619
            
            
            821,571
            
            
            408,461


Net
                cash provided by (used for) operating activities
            
            
            (21,736,573
            )
            
            4,036,969
            
            
            3,202,672




**Cash
                flows provided by (used for) investing
                activities:**Purchase
                of property, equipment and improvements
            
            
            (373,080
            )
            
            (31,873
            )
            
            (838,959
            )Disbursements
                on loans to stockholder
            
            
            -
            
            
            (51,529,693
            )
            
            (90,007,069
            )Proceeds
                from collections on loans to stockholder
            
            
            -
            
            
            58,409,847
            
            
            75,644,023Decrease
                (Increase) in restricted cash
            
            
            (395,413
            )
            
            2,764,166
            
            
            (2,726,146
            )Net
                cash (used for) provided by investing activities
            
            
            (768,493
            )
            
            9,612,447
            
            
            (17,928,151
            )




F-6




**FUQI
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Increase
      (Dec** **rease)
      in Cash - continued**





**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005****Cash
                flows provided by (used for) financing
                activities:**Proceeds
                from short-term borrowing
            
            $
            1,977,066
            
            $
            -
            
            $
            7,572,297Proceeds
                from exercise of warrants, net of financing cost
            
            
            2,755,509
            
            
            -
            
            
            -Proceeds
                from long-term debt
            
            
            -
            
            
            -
            
            
            1,239,157Reverse
                acquisition of Fuqi BVI
            
            
            -
            
            
            (4,528
            )
            
            -(Repayment
                to) loan from a related party
            
            
            -
            
            
            (1,005,151
            )
            
            991,326Proceeds
                from capital contribution
            
            
            -
            
            
            -
            
            
            4,819,277Issuance
                of common stock related to initial public offering, net of financing
                cost
            
            
            66,788,527
            
            
            -
            
            
            -Proceeds
                from loans borrowed from stockholder
            
            
            203,506
            
            
            23,545,485
            
            
            -Repayments
                to loans payable to stockholder
            
            
            (642,295
            )
            
            (23,130,562
            )
            
            -Net
                cash provided by (used for) financing activities
            
            
            71,082,313
            
            
            (594,756
            )
            
            14,622,057


**Effect
                  of exchange rate changes on cash**
              
              
              1,361,425
              
              
              228,842
              
              
              (80,775
              )**Net
                  increase (decrease) in cash**
              
              
              49,938,672
              
              
              13,283,502
              
              
              (184,197
              )**Cash,**beginning
                  of year
              
              
              13,354,981
              
              
              71,479
              
              
              255,676**Cash,**end
                  of year
              
              $
              63,293,653
              
              $
              13,354,981
              
              $
              71,479**Supplemental
                  disclosure of cash flow information:**Interest
                  paid
              
              $
              1,210,667
              
              $
              786,941
              
              $
              476,399Income
                  taxes paid
              
              $
              357,826
              
              $
              71,479
              
              $
              34,103**Non-cash
                  activities:**Decrease
                  in due from stockholder for dividend declared and paid
              
              $
              -
              
              $
              2,739,726
              
              $
              5,421,687




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




F-7


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


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





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




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




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




For
      financial accounting purposes, the Reverse Merger was treated as a reverse
      acquisition by Fuqi BVI, under the purchase method of accounting, and was
      treated as a recapitalization with Fuqi BVI as the accounting acquirer.
      Accordingly, our historical financial statements have been prepared to give
      retroactive effect to the reverse acquisition completed on November 22, 2006,
      and represent the operations of Fuqi BVI and its wholly-owned subsidiary, Fuqi
      China.





The
      Company currently operates in two divisions: (i) production and (ii) sales
      and
      marketing. The production division is responsible for all manufacturing of
      jewelry products, while the sales and marketing division is responsible for
      all
      of the selling and marketing functions of the products, including customer
      relationships and customer service. The Company has been selling its products
      to
      wholesalers and distributors since the inception of its operations. In April
      2007, the Company began to sell its products through retail counters in
      department stores. The Company grants credit to the majority of its wholesale
      and distribution customers, which are located throughout the People’s Republic
      of China (“PRC”), and the Company does not generally require
      collateral.





**Consolidation
      Policy:**





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





**Cost
      of Sales:**





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





**Operating
      Costs:**





Selling
      and marketing expenses include salaries and employee benefits, advertising,
      travel and entertainment, insurance, amortization of cost for operation rights
      acquired, and business taxes.




F-8


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**Revenue
      Recognition**





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





·
            persuasive
                evidence of an arrangement exists;


·
            delivery
                has occurred, upon shipment when title passes, or services have been
                rendered;


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


·
            collectibility
                is reasonably assured.




Value
      Added Taxes represent amounts collected on behalf of specific regulatory
      agencies that require remittance by a specified date. These amounts are
      collected at the time of sales and are detailed on invoices provided to
      customers. In compliance with the Emerging Issues Task Force consensus on issue
      number 06-03 (EITF 06-03), the Company accounts for value added taxes on a
      net
      basis.





**Currency
      Reporting**





The
      Company’s operations in China use the local currency - Renminbi (“RMB”) as their
      functional currency whereas amounts reported in the accompanying consolidated
      financial statements and disclosures are stated in United States Dollars, the
      reporting currency of the Company, unless stated otherwise. As such, the
      consolidated balance sheets of the Company have been translated into U.S.
      dollars at the current rates as of December 31, 2007 and 2006 and the
      consolidated statements of income have been translated into U.S. dollars at
      the
      weighted average rates during the periods the transactions were
      recognized.





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





**Reverse
      Stock Split**





On
      August
      23, 2007, the Company’s Board of Directors unanimously authorized a 1.69-to-1
      reverse stock split of the Company’s common stock. The reverse stock split
      became effective on October 22, 2007. All references to shares in the
      consolidated financial statements and the accompanying notes, including but
      not
      limited to the number of shares and per share amounts, unless otherwise noted,
      have been adjusted to reflect the reverse stock split retroactively.




F-9


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**Basic
      and Diluted Earnings Per Share**





The
      basic
      earnings per common share is computed by dividing net income available to common
      stockholders by the weighted average number of common shares outstanding.
      Diluted income per common share is computed similarly to basic income per common
      share, except that the denominator is increased to include the number of
      additional common shares that would have been outstanding if the potential
      common shares had been issued and if the additional common shares were dilutive.
      In accordance with the Visitalk Plan (See Note 8), the Company issued six series
      of common stock purchase warrants allowing holders to purchase additional shares
      of common stock (“Plan Warrants”). As of December 31, 2007 and 2006, the Company
      had common stock equivalents of 0 and 9,968,628 shares, respectively, upon
      the
      exercise of the plan warrants. The Company delivered a notice of redemption
      to
      the warrant holders in May 2007, and all of the warrants were either exercised
      or redeemed and cancelled in June 2007. As of December 31, 2007 and 2006, the
      Company had common stock equivalents of 1,320,000 and 0, respectively, upon
      the
      exercise of the stock options which were excluded from the computation of
      diluted earnings per share as their effect is not dilutive. The computation
      of
      dilutive potential common shares for the periods is shown as
      follows:





**December
                31,******
            
            **2007**
            
            **2006**
            
            **2005******Basic
                weighted average shares
            
            
            14,105,791
            
            
            11,260,544
            
            
            11,175,543Effect
                of dilutive securities
            
            
            1,521,703
            
            
            370,915
            
            
            —Dilutive
                potential common shares
            
            
            15,627,494
            
            
            11,631,459
            
            
            11,175,543


**Share-Based
      Payment**





In
      accordance with SFAS No. 123R, “Share-based Payment: An amendment of FASB
      Statement No. 123” (“SFAS 123R”), effective January 1, 2006, the Company is
      required to recognize compensation expense related to stock options granted
      to
      employees based on: (a) compensation cost for all share-based payments granted
      prior to, but not yet vested as of December 31, 2005, based on the grant date
      fair value estimated in accordance with SFAS No 123, “Accounting for Stock-Based
      Compensation” (“SFAS 123”), and (b) compensation cost for all share-based
      payments granted subsequent to December 31, 2005, based on the grant-date fair
      value estimated in accordance with the provisions of SFAS123R. 123R
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from initial
      estimates. We
      did
      not issue any stock options in 2005 and 2006 and had no outstanding options
      as
      of December 31, 2006. On
      October 26, 2007, the Company granted options to purchase a total of 1,320,000
      shares of its common stock to two executives and four directors. The
      Company expects these options to be fully vested and therefore did not account
      for any forfeiture as the vesting periods of these options are relatively short.
      The Company uses the Black-Scholes option-pricing model to value stock option
      awards and expensed the stock-based compensation based on the vesting periods.




The
      fair
      value of these options was calculated using a Black-Scholes option pricing
      model
      using the following assumptions: (1) risk-free interest rates of 3.8% to
      4.0%, (2) an expected life of one to two years, (3) expected
      volatility of 28%, (4) expected forfeitures of 0%, and (5) a dividend
      yield of 0% .
      Because
      there was no public market or trading history at the time of the grant in
      October 2007 and in accordance with SFAS 123R, we computed the expected
      volatility based on the average historical volatilities of entities in the
      similar industries and sizes.  For
      the
      year ended December 31, 2007, approximately $702,000 was expensed related to
      the
      grant of these options.




**Use
      of Estimates**





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





**Cash**





For
      purposes of the consolidated statements of cash flows, cash equivalents include
      all highly liquid debt instruments with original maturities of three months
      or
      less which are not securing any corporate obligations. The Company had no cash
      equivalents at December 31, 2007 and 2006. As of December 31, 2007 and 2006,
      majority of the cash, including restricted cash, were in RMB dollars maintained
      by the PRC financial institutions under the Company’s wholly PRC subsidiary,
      Shenzhen Fuqi. Cash remittance in or out of PRC are subject to PRC foreign
      exchange control regulations pursuant to which PRC government approval is
      required for Fuqi China to receive funds from or distribute funds to outside
      PRC.





**Restricted
      Cash**





As
      of
      December 31, 2007 and 2006, the Company was required to maintain a fixed deposit
      of $410,700 and $0 respectively as a condition to borrow under a bank loan
      agreement. The amount was classified as restricted cash as of December 31,
      2007
      and 2006.




F-10


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**Comprehensive
      Income**





Statement
      on Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive
      Income,” establishes standards for the reporting and display of comprehensive
      income and its components in the financial statements. For the years ended
      December 31, 2007, 2006, and 2005, other comprehensive income includes foreign
      currency translation adjustments.





**Commitments
      and Contingencies**





Liabilities
      for loss contingencies arising from claims assessments and litigation and other
      sources are recorded when it is probable that a liability has been incurred
      and
      the amount of assessment can be realized. In the opinion of management, after
      consultation with legal counsel, there are no claims assessments and litigation
      against the Company.





**Fair
      Value Disclosures of Financial Instruments**





The
      Company has estimated the fair value amounts of its financial instruments using
      the available market information and valuation methodologies considered to
      be
      appropriate and has determined that the book value of the Company’s accounts
      receivable, refundable value added taxes, inventories, due from/to stockholder,
      notes payable, accounts payable and accrued expenses, accrued business tax,
      accrued penalties, customer deposits, and income tax payable at December 31,
      2007 and 2006 approximate fair value.





**Accounts
      Receivable**





The
      Company provides an allowance for doubtful accounts equal to the estimated
      uncollectible amounts. The Company’s estimate is based on historical collection
      experience and a review of the current status of trade accounts receivable.
      It
      is reasonably possible that the Company’s estimate of the allowance for doubtful
      accounts will change. Accounts receivable are presented net of an allowance
      for
      doubtful accounts of approximately $470,000 and $195,000 at December 31, 2007
      and 2006, respectively.





**Concentration
      of Credit Risk**





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





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





**Derivative
      Instruments**





SFAS
      No.
      133, “Accounting for Derivative Instruments and Hedging Activities”, establishes
      accounting and reporting standards for derivative instruments as either assets
      or liabilities in the statement of financial position based on their fair
      values. Changes in the fair values are required to be reported in earnings
      or
      other comprehensive income depending on the use of the derivative and whether
      it
      qualifies for hedge accounting. Derivative instruments are designated and
      accounted for as a hedge of a recognized asset or liability (fair value hedge),
      a hedge of a forecasted transaction (cas h
      flo w
      hedge)
      or a
      hedge of a foreign currency transaction (foreign currency hedge). For
      derivatives designated as effective cash flow hedges or foreign currency hedge,
      changes in fair values are recognized in other comprehensive income. Changes
      in
      fair values related to fair value hedges as well as the ineffective portion
      of
      cash flow hedges arerecognized
      in earnings. For derivatives not designated as a hedging instrument, changes
      in
      fair values are recognized in earnings in the period of change.





During
      the fourth quarter of 2007, the Company entered into certain gold future
      contracts with its supplier, Shanghai Gold Exchange. Gold futures offered by
      Shanghai Gold Exchange are designed for full members to hedge or to acquire
      inventory at a preset price. The Company utilized these future contracts to
      manage its consolidated exposure to changes in inventory values due to
      fluctuations in market prices and is not considered as hedges. The Company’s
      gold futures positions are marked to market at each reporting date and all
      unrealized gains and losses are recognized in earnings currently. These contract
      positions have not had a material effect on the Company’s consolidated financial
      position, results of operations, or cash flows.





F-11


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**Major
      Customer**




During
      the year ended December 31, 2007, 9.5% of the Company sales were generated
      from
      one customer, which had an outstanding sales deposit of $342,666 as of December
      31, 2007. During the year ended December 31, 2006, 9% of the Company sales
      were
      generated from one customer. Accounts receivable from this customer totaled
      $2,234,959, which represented 22% of the total accounts receivable as of
      December 31, 2006. During the year ended December 31, 2005, 15% of the Company
      sales were generated from one customer. Accounts receivable from this customer
      totaled $949,453, which represented 14% of the total accounts receivable as
      of
      December 31, 2005.





**Major
      Supplier**





Under
      PRC
      law, supply of precious metals such as platinum, gold, and silver are highly
      regulated under certain government agencies. The Shanghai Gold Exchange is
      the
      Company’s primary source of supply for its raw materials, which consist of
      precious metals. The Company is required to obtain several memberships and
      approval certificates from these government agencies in order to continue to
      do
      business involving precious metals. The Company may be required to renew such
      memberships and to obtain approval certificates periodically. If the Company
      is
      unable to renew these periodic membership or approval certificates, it could
      materially affect the Company’s business operations. The Company was in good
      standing with these agencies as of December 31, 2007 and 2006.





**Inventories**





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





**Property,
      Equipment and Improvements**





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




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


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




**Long-Lived
      Assets**





In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived
      assets to be held and used are analyzed for impairment whenever events or
      changes in circumstances indicate that the carrying amount of an asset may
      not
      be recoverable. SFAS No. 144 relates to assets that can be amortized and for
      which the life can be determinable. The Company evaluates at each balance sheet
      date whether events and circumstances have occurred that indicate possible
      impairment. If there are indications of impairment, the Company uses future
      undiscounted cash flows of the related assets or asset grouping over the
      remaining life in measuring whether the assets are recoverable. In the event
      such cash flows are not expected to be sufficient to recover the recorded asset
      values, the assets are written down to their estimated fair value. Long-lived
      assets to be disposed of are reported at the lower of the carrying amount or
      fair value of asset less disposal costs. The Company determined that there
      was
      no impairment of long-lived assets as of December 31, 2007 and
      2006.




F-12


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**Advertising**





The
      Company expenses advertising costs when incurred. The Company incurred
      approximately $177,000, $33,000, and $132,000 of advertising expense for the
      years ended December 31, 2007, 2006, and 2005, respectively.





**Income
      Taxes**





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





**Segment
      Reporting**





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




**New
      Accounting Pronouncements**





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





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (SFAS 141(R)), which replaces SFAS No. 141, “Business
      Combinations.” SFAS 141(R) retains the underlying concepts of SFAS 141 in that
      all business combinations are still required to be accounted for at fair value
      under the acquisition method of accounting but SFAS 141(R) changed the method
      of
      applying the acquisition method in a number of significant aspects. Acquisition
      costs will generally be expensed as incurred; noncontrolling interests will
      be
      valued at fair value at the acquisition date; in-process research and
      development will be recorded at fair value as an indefinite-lived intangible
      asset at the acquisition date; restructuring costs associated with a business
      combination will generally be expensed subsequent to the acquisition date;
      and
      changes in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax expense. SFAS 141(R)
      is effective on a prospective basis for all business combinations for which
      the
      acquisition date is on or after the beginning of the first annual period
      subsequent to December 15, 2008, with the exception of the accounting for
      valuation allowances on deferred taxes and acquired tax contingencies. SFAS
      141(R) amends SFAS 109 such that adjustments made to valuation allowances on
      deferred taxes and acquired tax contingencies associated with acquisitions
      that
      closed prior to the effective date of SFAS 141(R) would also apply the
      provisions of SFAS 141(R). Early adoption is not permitted. We are currently
      evaluating the effects, if any, that SFAS 141(R) may not have significant
      effects on our financial statements.





In
      December 2007, the FASB issued Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements—an amendment of
      ARB No. 51.” This statement is effective for fiscal years, and interim
      periods within those fiscal years, beginning on or after December 15, 2008,
      with earlier adoption prohibited. This statement requires the recognition of
      a
      noncontrolling interest (minority interest) as equity in the consolidated
      financial statements and separate from the parent’s equity. The amount of net
      income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement. It also amends
      certain of ARB No. 51’s consolidation procedures for consistency with the
      requirements of SFAS 141(R) *.* This
      statement also includes expanded disclosure requirements regarding the interests
      of the parent and its noncontrolling interest. We are currently evaluating
      this
      new statement and anticipate that the statement will not have a significant
      impact on the reporting of our results of operations.





F-13


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**(2)
      Inventories:**





A
      summary
      of inventory is as follows:





**December
                31,****2007**
            
            **2006**Raw
                Materials
            
            $
            61,570
            
            $
            743Work
                in progress
            
            
            12,588,152
            
            
            3,917,795Finished
                goods
            
            
            16,989,514
            
            
            2,147,675$
            29,639,236
            
            $
            6,066,213




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





A
      summary
      of property, equipment and improvements is as follows:





**December
                31,****2007**
            
            **2006**Production
                equipment
            
            $
            1,108,045
            
            $
            950,479Computers
            
            
            52,697
            
            
            14,976Office
                equipment and furniture
            
            
            114,403
            
            
            101,289Automobiles
            
            
            486,539
            
            
            254,841Leasehold
                improvement
            
            
            448,000
            
            
            382,963Building
            
            
            582,886
            
            
            545,2572,792,570
            
            
            2,249,805Less
                accumulated depreciation and amortization
            
            
            1,296,709
            
            
            895,492$
            1,495,861
            
            $
            1,354,313





Depreciation
      and amortization expense for property, equipment, and improvements amounted
      to
      approximately $327,000, $327,000, and $239,000 for the years ended December
      31,
      2007, 2006, and 2005, respectively.




**(4)
      Operation Agreements - Retail Jewelry Counters:**




In
      April
      2007, the Company entered into a transfer agreement with an unrelated party
      (the
“Transferor”), which has operation agreements with department stores for five
      jewelry retail counters. Under the terms of the agreement, the Transferor agreed
      to assign all of the operation rights to the Company for a fee of $400,000.
      The
      fee is payable in three separate installments. The first payment of $120,000
      is
      due upon completion of the transfer of the operation rights by the department
      stores to the Company. The second installment of $120,000 is due within 30
      days
      after the remittance of the first installment while the final installment of
      $160,000 is due within 90 days after the remittance of the first
      installment.




During
      the time of finalizing the transfer of operation rights by the department stores
      to the Company, the Company obtained temporary operation rights from the
      Transferor to operate these counters. Revenue derived from these five retail
      counters from the period of May to November 2007 (before execution of the
      cancellation agreement) amounted to $937,000.




F-14


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




On
      October 28, 2007, due to the operation rights not being properly transferred
      from the Transferor to the Company within a reasonable period of time, the
      Company entered into a cancellation agreement with the Transferor to terminate
      the transfer transaction effective November 30, 2007. Pursuant to the
      cancellation agreement, the Company was not obligated to pay the transfer fee
      of
      $400,000. All the inventory remained in the five counter stores at the last
      day
      of the operation was sold to the Transferor based on the pre-determined price.
      As of December 31, 2007, the outstanding balance due to the Transferor was
      approximately $204,000.




In
      November 2007, the Company entered into operating agreements to operate retail
      jewelry counters at two department stores located in Shenyang region. The
      agreement has a term of one year and expires in November 2008. In accordance
      to
      the terms of this agreement, the Company pays the department stores a commission
      fee ranging 4.5% to 8% based on types of jewelry sales generated in these
      jewelry counters. Fees paid to the two department stores totaled $20,669 in
      2007
      and are included in cost of sales expenses. Fuqi recognizes revenues when the
      titles of the merchandises are transferred to the ultimate consumers. Fuqi
      determines the product pricing, provides staff training at the counters,
      controls merchandising and display at the counters, manages inventory, and
      controls and pays for all the advertising and marketing campaign with respect
      to
      Fuqi merchandise. Sales generated from these two retail counters totaled
      $308,000 for the year ended December 31, 2007.




**(5)
      Line of Credit:**




In
      February 2007, the Company entered into a facility line of credit with a bank.
      Under the terms of the agreement, the Company can borrow a maximum amount of
      $2,053,501 (RMB 15,000,000) and each of the borrowings cannot be less than
      $136,900 and have a maturity of less than 90 days. This facility line of credit
      expires in February 2012 and is secured by an affiliated company and certain
      real properties owned by an affiliated company. Interest is charged at 1.2
      times
      the bank’s prime rate (7.776% at December 31, 2007). The facility line of credit
      agreement has certain conditions for the Company to fulfill prior to the
      withdrawals and to continue to borrow from the bank, including execution of
      the
      fixed deposit agreement and maintaining approximately $684,500 (RMB 5,000,000)
      in fixed deposit with this bank. During the year, the bank has allowed the
      Company to draw on the line of credit without fulfilling these conditions.
      The
      facility line of credit agreement also has certain restrictions and covenants
      with which the Company must comply during the terms of the agreement. The
      outstanding balance as of December 31, 2007 was $1,369,000. Subsequent to the
      year end, the facility line of credit agreement was amended under which the
      maximum borrowing amount was decreased to $1,369,000 (RMB 10,000,000) and the
      requirement of fixed deposit amounted $684,500 was removed.




**(6)
      Notes Payable:**




As
      of
      December 31, 2007 and 2006, outstanding notes payable to the bank consisted
      of
      loan agreements that are covered by a Maximum Banking Facility Agreement dated
      August 24, 2006 which was renewed on September 27 2007 with the Agricultural
      Bank of China under the agreement, the maximum facility amount, which was
      $13,690,000 and $12,806,229 (RMB100,000,000) at December 31, 2007 and 2006
      respectively, is secured by the Company’s inventories. The agreement has certain
      restrictions and covenants, including restriction on dividend payment. The
      Company has been in compliance with these restrictions and covenants since
      the
      execution of the agreement. As of December 31, 2007 and 2006, the Company had
      outstanding loan balances with this bank totaling $13,690,000 and $12,806,229,
      respectively.




2006
      Notes Payable also included a loan amounted $1,204,819 (RMB10,000,000) borrowed
      from Shenzhen Commercial Bank that bears interest at a rate of 5.76% per annum.
      The outstanding balance is secured by certain cash deposits, which were
      classified as Deposits related to borrowings on notes payable in the
      accompanying consolidated balance sheets as of December 31, 2006, certain real
      estate properties owned by an affiliate and is personally guaranteed by the
      controlling stockholder of the Company. As of December 31, 2006, the outstanding
      balance of the loan was $1,280,623 which was fully repaid in January
      2007.




In
      January 2007, the Company entered into a note payable with Construction Bank
      in
      the amount of $2,053,501 (RMB15,000,000) that bears interest at 1.1 times of
      prime rate. As of December 31, 2007, the outstanding balance of the loan was
      $2,053,501 which was fully repaid in January 2008 and was not
      renewed.




F-15


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
                31,****2007**
            
            **2006**A
                note payable with interest at a rate of 5.76%, secured by the Company’s
                inventories and certain real estate properties owned by an affiliated
                company, matured in January 2007. The loan was repaid.
            
            
            —
            
            
            1,280,623Two
                notes payable with interest at a rate of 5.85%, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matured in February 2007. The loan was
                repaid.
            
            
            —
            
            
            2,561,246Four
                notes payable with interest at a rate of 5.832%, secured by the Company’s
                inventories and certain real estate properties owned by an affiliated
                company and guaranteed by affiliated companies and personally guaranteed
                by the Company’s controlling stockholder, matured in January 2007. The
                loan was repaid.
            
            
            —
            
            
            3,841,869A
                note payable with interest at a rate of 6.138%, guaranteed by affiliated
                companies and secured by certain real estate properties owned by
                an
                affiliated company, matured in March 2007. The loan was
                repaid.
            
            
            —
            
            
            1,280,623A
                note payable with interest at a rate of 6.732%, guaranteed by affiliated
                companies and secured by the Company’s inventories and certain real estate
                properties owned by an affiliated company and personally guaranteed
                by the
                Company’s controlling stockholder, matured in July 2007. The loan was
                repaid.
            
            
            —
            
            
            960,467A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories and certain real estate properties owned by the affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matured in September 2007. The loan
                was repaid.
            
            
            —
            
            
            960,467A
                note payable with interest at a rate of 6.426%, secured by the Company’s
                inventories and certain real estate properties owned by the affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matured in September 2007. The loan
                was repaid.
            
            
            —
            
            
            1,024,498A
                note payable with interest at a rate of 6.426%, secured by the Company’s
                inventories and certain real estate properties owned by the affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matured in October 2007. The loan
                was repaid.
            
            
            —
            
            
            896,436A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the Company’s controlling stockholder, matured in December 2007. The
                loan was repaid.
            
            
            —
            
            
            1,280,623A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matures in January 2008. The loan
                was repaid.
            
            
            1,848,150
            
            
            —A
                note payable with interest at a rate of 6.732%, guaranteed by affiliated
                companies, matures in January 2008. The loan was repaid.
            
            
            2,053,501
            
            
            —A
                note payable with interest at a rate of 7.227%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matures in February 2008. The loan
                was repaid.
            
            
            1,026,750
            
            
            —A
                note payable with interest at a rate of 7.227%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matures in February 2008. The loan
                was repaid.
            
            
            889,850
            
            
            —




A
                note payable with interest at a rate of 6.030%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the Company’s controlling stockholder, matures in January 2008. The
                loan was repaid.
            
            
            1,369,000
            
            
            —A
                note payable with interest at a rate of 6.030%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the Company’s controlling stockholder, matures in February 2008. The loan
                was repaid.
            
            
            2,121,951
            
            
            —A
                note payable with interest at a rate of 8.019%, secured by the Company’s
                inventories and guaranteed by affiliated companies and personally
                guaranteed by the Company’s controlling stockholder, matures
                in October 2008.
            
            
            1,369,000
            
            
            —A
                note payable with interest at a rate of 8.019%, secured by the Company’s
                inventories, certain real estate properties owned by affiliated companies,
                guaranteed by affiliated companies and personally guaranteed by the
                Company’s controlling stockholder, matures in May
                2008.
            
            
            958,300
            
            
            —A
                note payable with interest at a rate of 8.019%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the Company’s controlling stockholder, matures in June
                2008.
            
            
            1,369,000
            
            
            —A
                note payable with interest at a rate of 7.29%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the Company’s controlling stockholder, matures in July
                2008.
            
            
            2,738,002
            
            
            —$
            15,743,504
            
            $
            14,086,852




F-16


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




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





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




The
      Company earned certain cash revenues from its customers that were subsequently
      collected by its controlling stockholder. Total cash revenues amounted to $0,
      $5,896,354, and $6,100,298 and the amounts collected by its controlling
      stockholder totaled $0, $3,018,144, and $6,100,298, respectively, for the years
      ended December 31, 2007, 2006, and 2005. Beginning December 2006, this
      stockholder is no longer collecting cash revenue on behalf of the Company and
      all the cash revenues are deposited through the Company’s bank
      accounts.




The
      Company’s controlling stockholder borrowed from the Company on a non-interest
      bearing and frequent basis since the inception of its operations. Since the
      end
      of 2006 and during 2007, the Company discontinued such practice and the
      receivable balance due from the controlling stockholder was repaid to the
      Company in full. For the years ended 31 December 2007, 2006 and 2005, the
      Company loaned an aggregate amount of $0, $51,529,693 and $90,007,069 to the
      controlling stockholder, and collected $0, $58,409,847, and $75,644,023,
      respectively. As at December 31, 2007 and 2006, the outstanding balance due
      from
      the controlling stockholder was $0.




The
      Company borrowed from its controlling stockholder at a non-interest bearing
      basis to satisfy the Company’s short term capital needs since the inception of
      its operations. The Company borrowed $203,506, $23,545,485, and $0 from the
      controlling stockholder and repaid $642,295, $23,130,562, $0 during the years
      ended December 31, 2007, 2006, and 2005. Outstanding loan payable to the
      controlling stockholder amounted to $0 and $422,909 as of December 31, 2007
      and
      2006, respectively.




The
      Company declared and paid dividends to its controlling stockholder, prior to
      the
      closing of the Share Exchange Agreement and Reverse Split, totaling $0,
      $2,739,726 and $5,421,678 for the years ended December 31, 2007, 2006, and
      2005
      which offset the amounts due from this stockholder.




**(8)
      Stockholders’ Equity:**




**(a)
      Common Stock**




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





On
      August
      23, 2007, the Company’s Board of Directors unanimously authorized a 1.69-to-1
      reverse stock split of the Company’s common stock. The reverse stock split
      became effective on October 22, 2007. All references to shares in the
      consolidated financial statements and the accompanying notes, including but
      not
      limited to the number of shares and per share amounts, unless otherwise noted,
      have been adjusted to reflect the reverse stock split retroactively. Previously
      awarded warrants to purchase the Company’s common shares have been also
      retroactively adjusted to reflect the reverse stock split.




On
      October 23, 2007, the Company publicly offered 7,033,816 shares of the Company’s
      common stock at $9.00 per share. On October 25, 2007, the Company’s underwriters
      elected to fully exercise their over-allotment option to purchase an additional
      1,055,072 shares of the Company’s common stock. In total, including the
      over-allotment shares, the Company sold 8,088,888 shares of the Company's common
      stock at $9.00 per share. The shares offered were listed and traded on the
      NASDAQ Global Market under the ticker symbol “FUQI”. After underwriting
      discounts and commissions and estimated offering costs, the Company received
      net
      proceeds of approximately $67.0 million




F-17


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**(b)
      Stock Options**




In
      November 2006, the Company’s stockholders approved an equity incentive plan
      (“2006 EIP”) for employees, non-employee directors and other service providers
      covering 1,775,148 shares of common stock. Prior to this, the Company had an
      approved 2004 Equity Incentive Plan, which was replaced by the 2006 EIP. Any
      options to be granted under the 2006 EIP may be either “incentive stock
      options,” as defined in Section 422A of the Internal Revenue Code, or
“nonqualified stock options,” subject to Section 83 of the Internal Revenue
      Code, at the discretion of the Company’s board of directors and as reflected in
      the terms of the written option agreement. In the case of incentive stock
      options, the option price shall not be less than 100% of the fair market value
      of the optioned common stock on the date the option is granted. In the case
      of
      incentive stock options, the option price shall not be less than 110% of the
      fair market value of the optioned common stock for an optionee holding at the
      time of grant, more than 10% of the total combined voting power of all classes
      of its stock. Options become exercisable based on the discretion of its board
      of
      directors and must be exercised within ten years of the date of
      grant.




On
      October 22, 2007, the Company’s Board of Directors adopted the 2007 Plan and the
      Company received the written consent of the holders of a majority of its
      outstanding common stock authorizing the 2007 Plan. Immediately prior to the
      adoption of the 2007 Plan, the Company cancelled and terminated its 2006 Equity
      Incentive Plan (``2006 Plan''). There were no options or other securities
      outstanding under the 2006 Plan at the time of termination and no future grants
      or issuance of securities may be made under the 2006 Plan.




On
      October 26, 2007, the Company granted each of its Chief Financial Officer and
      the Executive Vice President, Corporate Development, options to purchase 600,000
      shares of the Company’s common stock at $9.00 per share. Options to purchase
      200,000 shares of the Company’s common stock vested immediately upon grant and
      the remaining options to purchase 400,000 shares will vest in two equal annual
      installments over the 24-month period following the date of the grant.




On
      October 26, 2007, the Company also granted each of the Company’s four
      independent director’s options to purchase 30,000 shares of the Company’s common
      stock at $9.00 per share. Of the options granted to each of the directors,
      options to purchase 15,000 shares of common stock vested immediately upon grant
      and the remaining options to purchase 15,000 shares will vest in equal quarterly
      installments over the one-year period following the date of the grant.




Options
      granted for 2007 were valued in accordance with SFAS 123R. The fair value of
      each stock option is estimated on the date of grant during the year ended
      December 31, 2007 using the Black-Scholes pricing model that uses the
      assumptions noted in the following table:


Dividend
                  yield
              
              
              0.0
              %Expected
                  volatility
              
              
              28.0
              %Risk-free
                  interest rate
              
              
              3.8%
                  - 4
              %Expected
                  term (in years)
              
              
              1
                  - 2Forfeiture
                  rate
              
              
              0.0
              %Weighted
                  average fair value of stock options granted
              
              $
              0.86
                  - 1.37




The
      dividend yield is 0.0% since there is no history of paying dividends and the
      Company currently does not have plan to do so. Because
      there was no public market or trading history at the time of the grant in
      October 2007 and in accordance with SFAS 123R, we computed the expected
      volatility based on the average historical volatilities of entities in the
      similar industries and sizes. The
      risk-free interest rate is the treasury-bill rate for the period equal to the
      expected term based on the Treasury note strip principal rates as reported
      in
      the website of U.S Department of Treasury. The expected term is the average
      of
      the contractual term of the option and the vesting period. Forfeiture rate
      is
      determined based on the expected turnover rate of officers and directors whom
      granted stock options during the year.




F-18


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




A
      summary
      of stock option activity and related information for the year ended December
      31,
      2007 is as follows:





**Shares**
            
            **Weighted
                average exercise price**
            
            **Weighted
                average remaining contractual life**
              **(in
                years)**
            
            **Aggregate**
              **Intrinsic
                Value**Outstanding
                at beginning of year
            
            
            —
            
            
            —Granted
            
            
            1,320,000
            
            $
            9.00
            
            
            7.49Forfeited
                or Expired
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —Outstanding
                at year-end
            
            
            1,320,000
            
            $
            9.00
            
            
            7.49
            
            $
            —Option
                exercisable at year-end
            
            
            460,000
            
            $
            9.00
            
            
            7.49
            
            $
            —




A
      summary
      of the status of the Company’s nonvested shares as of December 31, 2007 and
      changes during the year ended December 31, 2007, is presented as
      below:





**Non-vested
                shares**
            
            **Shares**
            
            **Weighted-average
                grant-date fair value**Non-vested
                at beginning of year
            
            
            —
            
            
            —Granted
            
            
            1,320,000
            
            $
            1.33Vested
            
            
            (460,000
            )
            
            1.33Forfeited
            
            
            —
            
            
            —Non-vested
                at end-year
            
            
            860,000
            
            $
            $1.33




For
      the
      year ended December 31, 2007, approximately $702,000, representing the
      total fair value of shares vested was recognized as stock-based compensation
      expense under SFAS 123(R). As of December 31, 2007, there was
      approximately $1.1 million of total unrecognized compensation cost related
      to
      nonvested share-based compensation arrangements granted under the Plan. The
      cost
      is expected to be recognized over a weighted-average period of 1.2
      years.




**(c)
      Stock Purchase Warrants**




In
      accordance with the Visitalk Plan, the Company issued six series of common
      stock
      purchase warrants allowing holders to purchase additional shares of common
      stock
      (“Plan Warrants”). Each Plan Warrant provides for the purchase of one share of
      common stock and is callable by the Company for a price of $.0001 per warrant
      at
      any time. The Plan Warrants are governed by a Warrant Agreement. Currently,
      the
      Company is acting as the Warrant Agent but has the right to appoint an
      alternative Warrant Agent in accordance with the Visitalk Plan. The board of
      directors can extend the expiration date of the Plan Warrants or reduce the
      exercise price of any warrant on a temporary or permanent basis. The Company
      has
      actually issued 4,014,801 Plan Warrants in each series to 240 claimants under
      the Visitalk Plan. In connection with the execution of the Share Exchange
      Agreement on November 20, 2006 referred to in Note (1), four series of the
      Plan
      Warrants (series A, B, D and F) were called and expired. In substance, three
      of
      Visitalk Plan’s warrants were exchanged for each of the Company’s warrants. As
      of December 31, 2006, a total of 9,968,628 series C and series E warrants
      remained outstanding.




In
      May
      2007, the Company delivered a notice of redemption to the warrant holders
      pursuant to the terms of the Warrant Agreement and the Visitalk Plan. Upon
      expiration of the call period on June 8, 2007, series C warrants had been
      exercised for 578,177 shares of the Company’s common stock, for total gross
      proceeds from conversion of $2,931,360. The remaining unexercised warrants
      were
      redeemed at $0.0001 per share by the Company. No warrants remained outstanding
      after the closing of the call.




F-19


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company issued a total of 578,177 shares of common stock to existing warrant
      holders upon the exercise of warrants under the registration exemption offered
      under Section 1145(a)(1) of the United States Bankruptcy Code, as
      amended.




A
      summary
      of the Plan Warrants is as follow s:





**A
                & B**
              **Warrants**
            
            **C
                & D**
              **Warrants**
            
            **E
                & F**
              **Warrants**Warrants
                outstanding,
              December
                31, 2005
            
            
            9,968,628
            
            
            
            9,968,628
            
            
            
            9,968,628Granted
            
            
            —
            
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Expired
                or Forfeited
            
            
            (9,968,628
            )
            
            
            (4,984,314
            )
            
            
            (4,984,314
            )Warrants
                outstanding,
              December
                31, 2006
            
            
            —
            
            
            
            4,984,314
            
            
            
            4,984,314Granted
                (unaudited)
            
            
            —
            
            
            
            —
            
            
            
            —Exercised
                (unaudited)
            
            
            —
            
            
            
            (578,177
            )
            
            
            —Expired
                or Forfeited or redeemed
              (unaudited)
            
            
            —
            
            
            
            (4,406,137
            )
            
            
            (4,984,314
            )Warrants
                outstanding,
              December
                31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —Exercise
                Price
            
            
            N/A
            
            
            $
            5.07
            
            
            $
            6.76Expiration
                Date
            
            
            N/A
            
            
            
            August
                31, 2007
            
            
            
            August
                31, 2007




**(d) Dividend
      Payment Restrictions**




Substantially
      all of our retained earnings as well as net assets are attributable to the
      PRC
      wholly subsidiary, Shenzhen Fuqi. Payment of dividends by Shenzhen Fuqi is
      not
      permitted and restricted by the Maximum Banking Facility Agreement executed
      with
      Agricultural Bank as disclosed in Note 6.




**(9)
      Income Taxes:**




The
      Company adopted the provisions of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,* or
      FIN
      48, on January 1, 2007. This interpretation requires companies to determine
      whether it is more likely than not that a tax position will be sustained upon
      examination by the appropriate taxing authorities before any part of the benefit
      can be recorded in the financial statements.




Management,
      in conjunction with input from its U.S. and Chinese tax advisors, has performed
      an analysis of its tax positions, in accordance with FIN 48, and has determined
      that the Company has no material uncertain tax positions which are less than
      more-likely-than-not of being sustained for the full amount claimed, or to
      be
      claimed, on its applicable tax returns for the year ended December 31,
      2007.




The
      Company reversed the estimated interest and penalties payable related to
      unreported design fees as non-operating income related to the unreported design
      fee income prior to December 31, 2006. As of December 31, 2007, all the income
      has been fully reported to the tax department and all the prior unreported
      revenues have been settled.




F-20


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company’s income tax provision amounted to $2,097,050, $995,462, and $452,538,
      respectively, for the years ended December 31, 2007, 2006, and 2005 (an
      effective rate of 13.4% for 2007, 14.7% for 2006, and 7.8% for 2005). A
      reconciliation of the provision for income taxes, with amounts determined by
      applying the statutory U.S. federal income tax rate to income before income
      taxes, is as follows :




**Year
                  Ended December 31,******
              
              **2007**
              
              **2006**
              
              **2005**Computed
                  tax at federal statutory rate of 34%
              
              $
              5,308,408
              
              $
              2,308,496
              
              $
              1,979,589Tax
                  rate difference between US and PRC on foreign earnings
              
              
              (3,305,659
              )
              
              (1,290,042
              )
              
              (1,106,241
              )Effect
                  of tax holidays for new business
              
              
              —
              
              
              —
              
              
              (436,613
              )Effect
                  of statutory rate change
              
              
              (13,751
              )
              
              (22,992
              )
              
              —Additional
                  tax liabilities based on tax notice
              
              
              —
              
              
              —
              
              
              15,803Exemption
                  of business tax liabilities and estimated penalty payable
              
              
              (456,867
              )
              
              —
              
              
              —Other
              
              
              (112,893
              )
              
              —
              
              
              —Change
                  in Valuation Allowance
              
              
              677,812
              
              
              —
              
              
              —$
              2,097,050
              
              $
              995,462
              
              $
              452,538


**Year
                  Ended December 31,******
              
              **2007**
              
              **2006**
              
              **2005**Current
              
              $
              2,147,254
              
              $
              2,185,609
              
              $
              1,001,782Deferred
              
              
              (50,204
              )
              
              (46,214
              )
              
              (6,320
              )$
              2,097,050
              
              $
              2,139,395
              
              $
              995,462


**Year
                  Ended December 31,******
              
              **2007**
              
              **2006**
              
              **2005**Federal
              
              $
              800
              
              $
              —
              
              $
              —Foreign
              
              
              2,096,250
              
              
              995,462
              
              
              452,538$
              2,097,050
              
              $
              995,462
              
              $
              452,538




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




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




F-21


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




In
      April
      2006, the Shenzhen local tax department made an assessment of the total tax
      liabilities related to the cash revenues. Per the tax assessment notice dated
      April 24, 2006, the Company is obligated to pay a total of $1,754,802
      (RMB14,161,249) including business tax, fees and income taxes related to these
      cash revenues through December 31, 2005. If the Company did not pay off these
      tax liabilities by April 30, 2006, the Company would be subject to 0.05% per
      day
      of interest and penalties of the unpaid tax and fee liability amount from the
      due date (April 30, 2006).




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




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




On
      April
      25, 2007, the Company appointed its registered tax agent to apply on behalf
      of
      the Company for a special reduction or exemption for the unpaid tax liabilities
      for the period from inception to December 31, 2006. On May 14, 2007, the Company
      received a notice from the Shenzhen local tax department to accept the Company’s
      application for a tax reduction or exemption and was granted an additional
      period to remit its outstanding tax liabilities until August 9, 2007. The tax
      department agreed not to assess any interest and penalties during this review
      process until August 9, 2007. Accordingly, the Company did not accrue any
      interest and penalties related to these outstanding tax liabilities in the
      accompanying condensed consolidated financial statements.




On
      August
      10, 2007, the Company received a notice from the tax department conditionally
      agreeing to exempt the Company’s tax liabilities in the amount of approximately
      $3 million on unreported design fee income for the period from the inception
      of
      the Company’s operations in 2001 to December 31, 2006, provided that the
      Company’s common stock is successfully listed on a major overseas stock exchange
      within 180 days from the date of the tax notice. Due to such condition being
      fulfilled in October 2007 and acknowledged by the Shenzhen tax department in
      November 2007, the accrued business and income tax liabilities, and the accrued
      estimated and penalties totaling $4.2 million was fully reversed and recorded
      as
      non-operating income in the consolidated statement of income for the year ended
      December 31, 2007.




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


**Year
                  Ended December 31,******
              
              **2007**
              
              **2006**Deferred
                  tax assets:Allowance
                  for doubtful accounts
              
              $
              84,582
              
              $
              29,198Net
                  operating loss
              
              
              419,823
              
              
              —Stock-based
                  payment
              
              
              300,675
              
              
              —Other
              
              
              6,892
              
              
              —Total
                  deferred tax assets
              
              
              811,972
              
              
              29,198Deferred
                  tax liabilitiesState
                  deferred taxes
              
              
              (49,577
              )
              
              —Other
              
              
              (5,181
              )Total
                  deferred tax liabilities
              
              
              (54,758
              )
              
              —Net
                  deferred tax assets before valuation allowance:
              
              
              757,214
              
              
              29,198Valuation
                  allowance
              
              
              (677,812
              )
              
              —$
              79,402
              
              $
              29,198
 F-22


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company has established a valuation allowance against its net deferred tax
      assets, due to uncertainty regarding their future realization. In assessing
      the
      realizability of its deferred tax assets, management considers the scheduled
      reversal of deferred tax liabilities, projected future taxable income, and
      tax
      planning strategies. Based on the projections for future taxable income over
      the
      periods in which the deferred tax assets are realizable and the full utilization
      of the Company’s loss carryback potential, management concluded that a full
      valuation allowance on the deferred tax assets and liabilities of the Company’s
      US holding entity since the Company does not expect any net profits generated
      from this entity in the near future.




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


The
        Company intends to permanently reinvest the earnings of its foreign
        subsidiaries, as such no deferred taxes have been provided on such amounts
        under
        APB 23.


At
      December 31, 2007, the Company has available unused net operating losses
      carryforwards of $975,000 related to loss incurred after the reverse merger
      with
      Fuqi BVI in November 2006 that may be applied against future taxable income
      and
      will begin to expire in 2028 for federal and 2013 for California. Section 382
      of
      the Internal Revenue Code limits the use of net operating loss and tax credit
      carryforwards in certain situations where changes occur in the stock ownership
      of a company. In the event such ownership changes of the Company have occurred,
      the utilization of the carryforwards could be restricted.




Section
      382 of the Internal Revenue Code limits the use of net operating loss and tax
      credit carryforwards in certain situations where changes occur in the stock
      ownership of a company. In the event such ownership changes of the Company
      have
      occurred, the utilization of the carryforwards could be
      restricted.




**(10)
      Commitments:**




Employment
      Agreements




In
      October 2007, the Company entered into three-year employment contracts with
      the
      Company’s five executive officers each of which includes a fixed amount of
      annual salary and stock options to purchase the Company’s common stock. Details
      of each executive officer are summarized as follows:




·
            Yu
                Kwai Chong, our Chief Executive Officer, receives an annual salary
                of
                $200,000 and an automobile allowance of approximately $52,000 as
                well as
                stock options to be granted on an annual basis to acquire shares
                of the
                common stock with a market value of 2% of our annual profit,
                approximately, before tax, not exceeding $200,000. The stock options
                have
                a life of 10 years and its exercise price shall be equal to 110%
                of the
                fair market value of our common stock on the date of the
                grant.




·
            Ching
                Wan Wong, our Chief Financial Officer, receives an annual salary
                of
                $160,000 and is granted, on the effective date of the employment
                agreement, stock options with three-year terms to acquire 600,000
                shares
                of common stock at a per share exercise price of
                $9.00.




·
            Each
                of Lie Xi Zhang, our Chief Operating Officer, and Xi Zhou Zhuo, our
                Marketing Director, receives an annual salary of $120,000 and stock
                options to be granted on an annual basis to acquire shares of common
                stock
                with a market value of 1% of our annual profit before tax, not exceeding
                $120,000. The stock options have a life of 10 years and its exercise
                price
                shall be equal to 100% of the fair market value of our common stock
                on the
                date of the grant.




·
            Heung
                Sang Fong, our Vice President of Corporate Development, receives
                an annual
                salary of $120,000 and stock options with three-year terms to acquire
                600,000 shares of common stock at $9.00.




Pursuant
      to the employment contracts, either the Company or employee can terminate the
      employment with 60 to 90 days advance notice.




Facility
      Operating Leases




The
      Company leases certain facilities under various long-term noncancellable and
      month-to-month leases. These leases are accounted for as operating leases.
      Rent
      expense amounted to $171,160, $158,399, and $98,715 for the years ended 2007,
      2006 and 2005, respectively.




F-23


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




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





**Year
                Ending December 31,**2008
            
            $
            140,5712009
            
            
            130,4102010
            
            
            61,6052011
                or after
            
            
            -$
            332,586




**(11)
      Subsequent Events:**




Effective
      January 1, 2008, the National People’s Congress of China enacted a new PRC
      Enterprise Income Tax Law, under which foreign invested enterprises and domestic
      companies will be subject to enterprise income tax at a uniform rate of 25%.
      During the transition period for enterprises established before March 16, the
      tax rate will be gradually increased to coincide with the new tax rate within
      5
      years starting from 2008 and reaching the uniform rate of 25% in
      2012.




On
      January 17, 2008, the Company signed a Term Sheet with Mr. Chujian
      Huang , pursuant
      to which the Company will acquire 100% operating interest of two jewelry
      companies, Shanghai Tian Mei Jewelry Co. Ltd. and Beijing Yinzhong Tian Mei
      Jewelry Co. Ltd., collectively known as Temix. Total purchase price for Temix
      is
      approximately RMB 135 million (approximately USD$18.5 million, based on a
      conversion rate of 1 USD to 7.3RMB). $9.5 million of the purchase price will
      be
      paid in cash while the remaining price will be paid in restricted common stock.
      The number of the Company’s shares to be issued as part of this purchase price
      is subject to the achievement of certain revenue and net income performance
      targets over a three year period.




F-24


**FUQI
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


**SCHEDULE
      II**




**FUQI
      INTERNATIONAL, INC.**


**Valuation
      and Qualifying Accounts and Reserves**


**Years
      Ended December 31, 2007, 2006 and 2005**


**Balance
                  at the Beginning****of
                  the Year**
              
              **Provision
                  for bad debts**
              
              **Write
                  off and other deductions**
              
              **Balance
                  at****the
                  End****of
                  the Year**Allowance
                  for Doubtful Accounts:Year
                  ended December 31, 2005
              
              $
              287,000
              
              $
              15,000
              
              $
              —
              
              $
              302,000Year
                  ended December 31, 2006
              
              
              302,000
              
              
              —
              
              
              (107,000
              )
              
              195,000Year
                  ended December 31, 2007
              
              
              195,000
              
              
              275,000
              
              
              —
              
              
              470,000





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