UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





(MARK
      ONE)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE QUARTERLY PERIOD ENDED September 30,
                2007.





 ̈
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE TRANSITION PERIOD FROM _________ TO
                __________





COMMISSION
      FILE NUMBER: 0-19276





**Fushi
      International, Inc.**


(EXACT
        NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)





**NEVADA**
            
            **13-3140715**(STATE
                OR OTHER JURISDICTION OF
              INCORPORATION
                OR ORGANIZATION
            
            (I.R.S.
                EMPLOYER IDENFIFICATION NO.)




**1
      Shuang Qiang Road, Jinzhou, Dalian, People’s Republic of China
      116100**





(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)





ISSUER
      'S
      TELEPHONE NUMBER, INCLUDING AREA CODE: **011-86-411-8770-3333**











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 oNo o.





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes oNo x.





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
      Act).





Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated
      filer x





The
      number of shares of Common Stock of the Registrant, par value $.006 per share,
      outstanding on November 12, 2007, was 25,168,223.





Transitional
      Small business Disclosure Format (Check one): Yes o; No o.





**FUSHI
                  INTERNATIONAL, INC.****INDEX
                  TO SEPTEMBER 30, 2007 FORM
                  10-Q**
  PagePart
                  I - Financial Information
              
              
              2Item
                  1 - Financial Statements
              
              
              2Consolidated
                  Balance Sheets as of September 30, 2007 (unaudited)
              
              
              2and
                  December 31, 2006Consolidated
                  Statements of Income and Other Comprehensive Income for
              
              
              3the
                  three months and nine months ended September 30, 2007 and 2006
                  (unaudited)Consolidated
                  Statements of Cash Flows for the nine months ended
                  September
              
              
              430,
                  2007 and 2006 (unaudited)Notes
                  to the Consolidated Financial Statements (unaudited)
              
              
              5Item
                  2 Management's Discussion and Analysis of Results of
              
              
              30Operations
                  and Financial ConditionItem
                  3 Quantitative and Qualitative Disclosure about Market
                  Risk
              
              
              42Item
                  4 Controls and Procedures
              
              
              44Item
                  6 Exhibits
              
              
              44Signature
                  Page
              
              
              45








FUSHI
      INTERNATIONAL, INC. AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      SEPTEMBER 30, 2007 AND DECEMBER 31, 2006





September
                30,
            
            December
                31,2007
            
            2006(Unaudited)A
                S S E T SCURRENT
                ASSETS:Cash
            
            $
            46,032,832
            
            $
            20,493,551Accounts
                receivable, trade
            
            
            12,869,254
            
            
            7,042,408Inventories
            
            
            12,988,190
            
            
            7,403,116Notes
                receivables
            
            
            106,720
            
            
            -Other
                receivables and prepaid expenses
            
            
            1,834,819
            
            
            497,380Advances
                to suppliers
            
            
            9,246,772
            
            
            3,390,917Cross
                currency hedge receivable
            
            
            286,245
            
            
            -Total
                current assets
            
            
            83,364,832
            
            
            38,827,372PLANT
                AND EQUIPMENT, net
            
            
            55,896,662
            
            
            47,256,475OTHER
                ASSETS:Prepayment
                on land use right
            
            
            4,196,583
            
            
            -Investment
                deposit
            
            
            3,000,000
            
            
            -Advances
                to suppliers, noncurrent
            
            
            31,012,693
            
            
            4,559,357Intangible
                asset, net of accumulated amortization
            
            
            5,564,471
            
            
            5,518,931Deferred
                loan expense
            
            
            3,123,496
            
            
            -Total
                other assets
            
            
            46,897,243
            
            
            10,078,288Total
                assets
            
            $
            186,158,737
            
            $
            96,162,135L
                I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T
                YCURRENT
                LIABILITIES:Accounts
                payable, trade
            
            $
            1,038,447
            
            $
            1,055,684Liquidated
                damage payable
            
            
            -
            
            
            1,466,250Other
                payables and accrued liabilities
            
            
            898,780
            
            
            321,276Customer
                deposits
            
            
            349,557
            
            
            531,065Taxes
                payable
            
            
            840,863
            
            
            982,345Short
                term bank loans
            
            
            11,872,600
            
            
            12,504,135Current
                portion of long term bank loans
            
            
            10,672,000
            
            
            -Loan
                from shareholder
            
            
            -
            
            
            3,911,256Total
                current liabilities
            
            
            25,672,247
            
            
            20,772,011LONG
                TERM LIABILITIES:Long
                term bank loans, net of current portion
            
            
            -
            
            
            10,256,000Notes
                Payable
            
            
            60,000,000
            
            
            -Fair
                value of derivative instrument
            
            
            4,610,090
            
            
            -Total
                liabilities
            
            
            90,282,337
            
            
            31,028,011SHAREHOLDERS'
                EQUITY:Preferred
                stock,$0.001 par value, 5,000,000 shares authorized, no outstanding
                asof
                September 30, 2007 and December 31, 2006.
            
            
            -
            
            
            -Common
                stock,$0.006 par value, 100,000,000 shares authorized, 22,382,223
                and20,046,162
                shares issued and outstanding as of September 30, 2007 andDecember
                31, 2006, respectively.
            
            
            134,294
            
            
            120,277Additional
                paid in capital
            
            
            40,811,997
            
            
            29,364,955Deferred
                stock option compensation
            
            
            (1,566,383
            )
            
            -Statutory
                reserves
            
            
            7,184,454
            
            
            4,452,467Retained
                earnings
            
            
            45,955,432
            
            
            28,496,702Accumulated
                other comprehensive income
            
            
            3,356,606
            
            
            2,699,723Total
                shareholders' equity
            
            
            95,876,400
            
            
            65,134,124Total
                liabilities and shareholders' equity
            
            $
            186,158,737
            
            $
            96,162,135





The
      accompanying notes are an integral part of this statement





2




FUSHI
      INTERNATIONAL, INC. AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF INCOME AND


OTHER
      COMPREHENSIVE INCOME


FOR
      THE
      THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006


(UNAUDITED)








Three
                months ended
              September
                30,
            
            Nine
                months ended
              September
                30,2007
            
            2006
            
            2007
            
            2006REVENUES
            
            $
            32,014,592
            
            $
            12,956,092
            
            $
            79,238,417
            
            $
            45,881,256COST
                OF GOODS SOLD
            
            
            21,481,175
            
            
            8,955,882
            
            
            51,367,707
            
            
            28,477,095GROSS
                PROFIT
            
            
            10,533,417
            
            
            4,000,210
            
            
            27,870,710
            
            
            17,404,161OPERATING
                EXPENSESelling
                expenses
            
            
            189,625
            
            
            152,045
            
            
            558,735
            
            
            401,294General
                and administrative expenses
            
            
            1,609,612
            
            
            775,459
            
            
            5,079,188
            
            
            2,262,160Total
                operating expense
            
            
            1,799,237
            
            
            927,504
            
            
            5,637,923
            
            
            2,663,454INCOME
                FROM OPERATIONS
            
            
            8,734,180
            
            
            3,072,706
            
            
            22,232,787
            
            
            14,740,707OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            565,383
            
            
            30,344
            
            
            1,074,837
            
            
            42,775Interest
                expense
            
            
            (1,361,261
            )
            
            (318,608
            )
            
            (4,309,376
            )
            
            (832,172
            )Gain
                on derivative instrument
            
            
            286,245
            
            
            -
            
            
            1,088,768
            
            
            -Other
                income
            
            
            14,077
            
            
            236,002
            
            
            188,693
            
            
            556,724Other
                expense
            
            
            (5,298
            )
            
            (119,302
            )
            
            (84,992
            )
            
            (258,152
            )Registration
                rights penalty
            
            
            -
            
            
            (1,466,250
            )
            
            -
            
            
            (1,466,250
            )Total
                other expense
            
            
            (500,854
            )
            
            (1,637,814
            )
            
            (2,042,070
            )
            
            (1,957,075
            )INCOME
                BEFORE INCOME TAXES
            
            
            8,233,326
            
            
            1,434,892
            
            
            20,190,717
            
            
            12,783,632PROVISION
                FOR INCOME TAXES
            
            
            -
            
            
            -
            
            
            -
            
            
            396,553NET
                INCOME
            
            
            8,233,326
            
            
            1,434,892
            
            
            20,190,717
            
            
            12,387,079OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            2,250,423
            
            
            629,327
            
            
            5,266,973
            
            
            1,107,923Change
                in fair value of derivative instrument
            
            
            (3,738,571
            )
            
            -
            
            
            (4,610,090
            )
            
            -COMPREHENSIVE
                INCOME
            
            $
            6,745,178
            
            $
            2,064,219
            
            $
            20,847,600
            
            $
            13,495,002BASICEarnings
                per share
            
            $
            0.37
            
            $
            0.07
            
            $
            0.94
            
            $
            0.62Weighted
                average number of shares
            
            
            22,263,618
            
            
            19,932,129
            
            
            21,422,610
            
            
            19,907,105DILUTEDEarnings
                per share
            
            $
            0.33
            
            $
            0.06
            
            $
            0.85
            
            $
            0.55Weighted
                average number of shares
            
            
            25,454,871
            
            
            22,761,228
            
            
            24,335,426
            
            
            22,612,369





The
      accompanying notes are an integral part of this statement




3




FUSHI
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      NINE MONTHS ENDED SEPTEMBER 30, 2007 and 2006


(UNAUDITED)


2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              20,190,717
              
              $
              12,387,079Adjustments
                  to reconcile net income to cash provided by (used in) operating
                  activities:Depreciation
              
              
              2,029,646
              
              
              1,545,520Amortization
                  of intangibles
              
              
              174,627
              
              
              167,062Amortization
                  of loan commission
              
              
              491,178
              
              
              -Amortization
                  of stock option compensation
              
              
              887,080
              
              
              -Gain
                  on derivative instrument
              
              
              (1,088,768
              )
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (5,426,757
              )
              
              (1,323,834
              )Inventories
              
              
              (5,175,451
              )
              
              (1,879,011
              )Other
                  receivables and prepayments
              
              
              (1,306,764
              )
              
              (3,300,663
              )Due
                  from related parties
              
              
              -
              
              
              3,352,072Notes
                  receivables
              
              
              (104,512
              )
              
              -Advance
                  to suppliers
              
              
              (5,600,003
              )
              
              -Accounts
                  payable
              
              
              (58,813
              )
              
              (783,559
              )Other
                  payables and accrued liabilities
              
              
              570,231
              
              
              (481,156
              )Customer
                  deposits
              
              
              (198,848
              )
              
              423,141Taxes
                  payable
              
              
              (177,576
              )
              
              (3,158,993
              )Liquidated
                  damage payable
              
              
              -
              
              
              1,466,250Net
                  cash provided by operating activities
              
              
              5,205,987
              
              
              8,413,908CASH
                  FLOWS FROM INVESTING ACTIVITIES:Payment
                  for Investment deposit
              
              
              (3,000,000
              )
              
              -Proceeds
                  from derivative instrument
              
              
              802,523
              
              
              -Advance
                  for purchase of land use right
              
              
              (4,109,757
              )
              
              -Purchase
                  of property and equipment
              
              
              (8,613,889
              )
              
              (9,286,833
              )Advances
                  for purchase of equipment
              
              
              (25,724,917
              )
              
              -Net
                  cash used in investing activities
              
              
              (40,646,040
              )
              
              (9,286,833
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Loan
                  from shareholder
              
              
              -
              
              
              4,450,000Repayment
                  to shareholders
              
              
              (3,985,698
              )
              
              -Proceeds
                  from bank loans
              
              
              11,546,600
              
              
              18,259,578Payments
                  on bank loans
              
              
              (12,507,240
              )
              
              (13,747,800
              )Net
                  proceeds from convertible notes
              
              
              56,400,000
              
              
              -Proceeds
                  from exercise of stock warrants
              
              
              7,541,346
              
              
              15,800Net
                  cash provided by financing activities
              
              
              58,995,008
              
              
              8,977,578EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              1,984,326
              
              
              680,276INCREASE
                  IN CASH
              
              
              25,539,281
              
              
              8,784,929CASH,
                  beginning of period
              
              
              20,493,551
              
              
              6,163,670CASH,
                  end of period
              
              $
              46,032,832
              
              $
              14,948,599





The
      accompanying notes are an integral part of this statement





4




FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 **Note
        1 - Organization**
 
 Fushi
        International, Inc. was incorporated under the name of M, Inc. in the state
        of
        Nevada on October 6, 1982. The name was changed to Parallel Technologies,
        Inc.
        (“Parallel”) on June 3, 1991 and changed to Fushi International, Inc. (“Fushi
        International”) on January 30, 2006. On December 13, 2005, Fushi International
        acquired Diversified Product Inspections, Inc. (“DPI”) and its wholly owned
        subsidiary, Dalian Diversified Product Inspections Bimetallic Cable Co.,
        Ltd.
        (“Dalian DPI”).
 
 DPI
        is
        engaged in the manufacturing and selling of copper clad aluminum and steel
        wire,
        both of which are bimetallic composite wire products that are principally
        used
        for network signal transmission cable, cable television wire and other
        applications. Dalian DPI commenced business on December 28, 2005. Dalian
        Fushi
        Bimetallic Manufacturing Company Limited (“Dalian Fushi”) is a 100% variable
        interest, non-operating entity of the Company. The business activities of
        Dalian
        Fushi were the same as those of Dalian DPI.
 
 DPI
        and
        Dalian DPI changed their names to Fushi Holdings, Inc. (“Fushi Holdings”) and
        Fushi International (Dalian) Bimetallic Cable Co., Ltd (Fushi International
        (Dalian)) on November 29, 2006 and December 26, 2006,
        respectively.
 
 Fushi
        International, Fushi
        Holdings , Fushi
        International (Dalian) and
        Dalian Fushi are hereinafter referred to as “the Company”.
 
 **Note
        2 – Summary
        of significant accounting policies**
 
 Principles
        of consolidation
 
 The
        accompanying consolidated financial statements include the financial statements
        of Fushi International and it’s wholly owned subsidiaries, Fushi
        Holdings , Fushi
        International (Dalian)   and
        its
        100% variable interest entity Dalian Fushi. All significant inter-company
        transactions and balances have been eliminated in consolidation.
 
 Consolidation
        of variable interest entity
 
 In
        accordance with Interpretation No. 46R, Consolidation of Variable Interest
        Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
        that lack sufficient equity to finance their activities without additional
        financial support from other parties or whose equity holders lack adequate
        decision making ability. All VIEs with which the Company is involved must
        be
        evaluated to determine the primary beneficiary of the risks and rewards of
        the
        VIE. The primary beneficiary is required to consolidate the VIE for financial
        reporting purposes.
 
 The
        Company has concluded that Dalian Fushi is a VIE and that the Company is
        the
        primary beneficiary. Under the requirements of FASB Interpretation No. 46
        (R),
        Consolidation of Variable Interest Entities, an interpretation of ARB No.
        51
        ("FIN 46"), the Company consolidated the financial statements of Dalian Fushi,
        a
        VIE of Fushi
        International (Dalian) .
        As both
        companies are under common control, the financial statements have been prepared
        as if the transaction had occurred retroactively .
  5
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Basis
        of presentation
  The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with accounting principles generally accepted in the United States
        of
        America for interim financial information and pursuant to the rules and
        regulations of the Securities and Exchange Commission. Accordingly, they
        do not
        include all of the information and footnotes required by generally accepted
        accounting principles for complete financial statements.
 
 In
        the
        opinion of management, the unaudited consolidated financial statements contain
        all adjustments consisting only of normal recurring accruals considered
        necessary to present fairly the Company's financial position at September
        30, 2007 ,
        the
        results of operations for the three and nine months ended September
        30, 2007 and
        2006, and cash flows for the nine months ended September
        30, 2007 and
        2006. The results for the nine months ended September
        30, 2007 are not
        necessarily indicative of the results to be expected for the entire fiscal
        year
        ending December
        31, 2007 .
 
 These
        financial statements should be read in conjunction with the Company's annual
        report on Form 10-KSB as filed with the Securities and Exchange
        Commission.
 
 Use
        of
        estimates
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates.
 
 Revenue
        recognition
  The
        Company's revenue recognition policies are in compliance with Staff Accounting
        Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
        customers when a formal arrangement exists, the price is fixed or determinable,
        the delivery is completed, no other significant obligations of the Company
        exist
        and collectibility is reasonably assured. Payments received before all of
        the
        relevant criteria for revenue recognition are recorded as customer
        deposits.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs which totaled $ 358,597 and
        $286,759 for the nine months ended September
        30, 2007 and
        2006, respectively, and $85,804 and $92,154 for the three months ended September
        30, 2007 and
        2006, respectively.
 
 Advertising
        costs
 
 Advertising
        costs for the nine months ended September
        30, 2007 and 2006
        were $84,056 and
        $10,780 respectively, and for the three months ended September
        30, 2007 and 2006
        were $61,133 and $2,451, respectively. These costs are expensed as
        incurred.
 
 Other
        comprehensive income
 
 The
        reporting currency of the Company is the US dollar. The functional currency
        of
        Fushi International and Fushi Holdings is the US dollar. The functional currency
        of Fushi
        International (Dalian) and
        Dalian Fushi is Renminbi (RMB).
  6
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 For
        the
        subsidiaries whose functional currencies are RMB, all assets and liabilities
        accounts were translated at the exchange rate on the balance sheet date;
        stockholder's equity are translated at the historical rates and items in
        the
        statement of operations items are translated at the average rate for the
        period.
        Translation adjustments resulting from this process are included in accumulated
        other comprehensive income in the statement of shareholders’ equity. The
        resulting translation gains and losses that arise from exchange rate
        fluctuations on transactions denominated in a currency other than the functional
        currency are included in the results of operations as incurred. Items in
        the
        cash flow statement are translated at the average exchange rate for the
        period.
 
 Translation
        adjustments resulting from this process included in accumulated other
        comprehensive income in the consolidated statement of shareholders’ equity
        amounted to $3,356,606 and $2,699,723 as of September
        30, 2007 and December
        31, 2006 ,
        respectively. Assets and liabilities at September
        30, 2007 and
        December 31, 2006 were translated at 7.50 and 7.80 RMB to $1.00 USD,
        respectively. The average translation rates applied to income statement accounts
        and statement of cash flows for the nine months ended September
        30, 2007 and 2006
        were 7.65 and 8.00 RMB to $1.00 USD, and for the three months ended September
        30, 2007 and 2006
        were 7.57 and 7.98 respectively. As a result, amounts related to assets and
        liabilities reported on the statement of cash flows will not necessarily
        agree
        with changes in the corresponding balances on the balance sheet.
 
 Concentration
        of risks
 
 The
        Company considers all highly liquid investments with original maturities
        of
        three months or less at the time of purchase to be cash equivalents, for
        cash
        flow statement purposes. Cash includes cash on hand and demand deposits in
        accounts maintained with state owned banks within the PRC and the United
        States.
        Certain f inancial
        instruments, which subject the Company to concentration of credit risk, consist
        of cash. The Company maintains balances at financial institutions which,
        from
        time to time, may exceed Federal Deposit Insurance Corporation insured limits
        for the banks located in the Unites States. Balances at financial institutions
        or state owned banks within the PRC are not covered by insurance. As of September
        30, 2007 and  December
        31, 2006 ,
        the
        Company had deposits in excess of federally insured limits total of
        $45,806,653.57 and $20,195,702,
        respectively. The
        Company has not experienced any losses in such accounts and believes it is
        not
        exposed to any significant risks on its cash in bank accounts.
 
 Five
        major customers accounted for 28% and 30% of the sales for the nine months
        ended September
        30, 2007 and
        2006, respectively and for 27% and 30%f of the sales for the three months
        ended
        September 30, 2007 and 2006, respectively. Total receivable balance due from
        these customers at September
        30, 2007 and
        December 31, 2006 amounted to $3,189,494 and $3,978,701,
        respectively.
 
 Five
        major suppliers provided approximately 96% and 94% of the Company’s purchases of
        raw materials for the nine months ended September
        30, 2007 and
        2006, respectively, and approximately 95% and 94% of the purchases for the
        three
        months ended September 30, 2007 and 2006, respectively. Advances to these
        vendors amounted to $9,877,729 and $4,314,271 at September 30, 2007 and December
        31, 2006, respectively.
  7
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 The
        Company's operations are carried out in the PRC. Accordingly, the Company's
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environments in the PRC, and by the general
        state
        of the PRC's economy. The Company's operations in the PRC are subject to
        specific considerations and significant risks not typically associated with
        companies in the North America and Western Europe. These include risks
        associated with, among others, the political, economic and legal environments
        and foreign currency exchange. The Company's results may be adversely affected
        by changes in governmental policies with respect to laws and regulations,
        anti-inflationary measures, currency conversion and remittance abroad, and
        rates
        and methods of taxation, among other things.
 
 Accounts
        receivables and allowance for doubtful accounts
 
 Management
        regularly reviews aging of receivables and changes in payment trends by its
        customers, and records a reserve when they believe collection of amounts
        due are
        at risk. Accounts considered uncollectible are written off. At September
        30, 2007 ,
        management concluded no reserves were necessary. The Company had accounts
        receivable of $ 12,869,254 and
        $7,042,408 as of September
        30, 2007 and December
        31, 2006 ,
        respectively.
  Inventories
  Inventories
        are stated at the lower of cost or market using a weighted average method.
        Inventories consist of raw materials, work in process, finished goods and
        supplies. Raw materials consist of copper, aluminum and steel used in
        production. The cost of finished goods included direct costs of raw materials
        as
        well as direct labor used in production. Indirect production costs such as
        utilities and indirect labor related to production such as assembling, shipping
        and handling costs are also included in the cost of inventory.
 
 The
        Company reviews its inventory regularly for possible obsolete goods or to
        determine if any reserves are necessary for potential obsolescence. As of September
        30, 2007 ,
        the
        Company determined that no reserves are necessary.
 
 Financial
        instruments
 
 The
        Company analyzes all financial instruments with features of both liabilities
        and
        equity under SFAS 150, “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock.” The convertible preferred shares issued in 2005 and the
        convertible noted issued in 2007 did not require bifurcation or result in
        liability accounting. Additionally, the Company analyzes registration rights
        agreements associated with any equity instruments issued to determine if
        penalties triggered for late filing should be accrued under FSP EITF 00-19-2,
        “Accounting for Registration Payment Arrangements.”
  8
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Fair
        value of financial instruments
  Statement
        of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
        Value of Financial Instruments” requires disclosure of the fair value of
        financial instruments held by the Company. SFAS 107 defines the fair value
        of
        financial instruments as the amount at which the instrument could be exchanged
        in a current transaction between willing parties. The Company considers the
        carrying amount of cash, accounts receivable, other receivables, accounts
        payable, accrued liabilities, and long term debts to approximate their fair
        values because of the short period of time between the origination of such
        instruments and their expected realization and their current market rate
        of
        interest. Hedging instruments are carried at fair value.
 
 Derivative
        Instrument
 
 The
        Company uses a cross currency hedge, a derivative financial instrument, to
        hedge
        the risk of rising interest rates on their variable interest rate debt. This
        type of derivative financial instrument is known as a cash flow hedge. The
        Company accounts for this interest rate swap in accordance with FAS No. 133,
        “Accounting for Derivatives Instruments and Hedging Activity,” which requires
        the derivative to be carried on the balance sheet at fair value and to meet
        certain documentary and analytical requirements to qualify for hedge accounting
        treatment. The above derivative qualifies for hedge accounting under FAS
        133
        and, accordingly, changes in the fair value effective portion is reported
        in
        accumulated other comprehensive income, net of related income tax effects.
        Amounts included in accumulated other comprehensive income are reclassified
        into
        earnings when the hedged transaction effects earnings.
 
 At
        the
        inception of the transaction, the Company documents the relationship between
        hedging instruments and hedged items, as well as its risk management objective
        and the strategy for undertaking various hedge transactions. This process
        includes linking all derivatives designated to specific firm commitments
        of
        forecast transactions. The Company also documents its assessment, both at
        inception and on an ongoing basis, of whether the derivative financial
        instruments that are used in hedging transactions are highly effective in
        offsetting changes in fair values or cash flows of hedged items. Any portion
        deemed ineffective is recorded in earnings with the effective portion reflected
        in accumulated other comprehensive. Changes in the fair values of derivative
        financial instruments accounted for as cash flow hedges, to the extent they
        qualify for hedge accounting, are recorded in accumulated other comprehensive
        income. As of September
        30, 2007 ,
        the
        fair value of the derivative instrument amounted to $ 4,610,090 .
 
 Stock-Based
        Compensation
 
 The
        Company adopted Statement of Financial Accounting Standards No. 123R,
“Share-Based Payments”. This Statement requires a public entity to measure the
        cost of services received in exchange for an award of equity instruments
        based
        on the grant-date fair value of the award .That cost will be recognized over
        the
        period during which services received. Stock compensation for stock granted
        to
        non-employees has been determined in accordance with SFAS 123R and the Emerging
        Issues Task Force consensus Issue No. 96-18, "Accounting for Equity Instruments
        that are issued to Other than Employees for Acquiring, or in Conjunction
        with
        Selling Goods or Services" ("EITF 96-18"), as the fair value of the
        consideration received or the fair value of equity instruments issued, whichever
        is more reliably measured.
  9
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Plant
        and equipment, net
  Plant
        and
        equipment are stated at cost. Expenditures for maintenance and repairs are
        charged to earnings as incurred; additions, renewals and betterments are
        capitalized. When property and equipment are retired or otherwise disposed
        of,
        the related cost and accumulated depreciation are removed from the respective
        accounts, and any gain or loss is included in operations. Depreciation of
        property and equipment is provided using the straight-line method for
        substantially all assets with estimated lives as follows:
 
 Estimated Useful LifeBuildings
              
              
              20-30
                  yearsMachinery
                  and equipment
              
              
              10-15
                  yearsOther
                  equipment
              
              
              5
                  yearsTransportation
                  equipment
              
              
              5
                  years
 
 Construction
        in progress represents the costs incurred in connection with the construction
        of
        buildings or new additions to the Company’s plant facilities. No depreciation is
        provided for construction in progress until such time as the assets are
        completed and are placed into service. The Company borrowed $ 10,672,000 to fund
        additions to the plant. Interest capitalized as of September
        30, 2007 and
        December 31, 2006 amounted to $482,085 and $282,641 ,
        respectively .
 
 The
        Company periodically evaluates the carrying value of long-lived assets in
        accordance with SFAS 144. When estimated cash flows generated by those assets
        are less than the carrying amounts of the asset, the Company recognizes an
        impairment loss. Based on its review, the Company believes that, as of September
        30, 2007 ,
        there
        were no impairments of its long-lived assets.
 
 Intangible
        assets
 
 Intangible
        assets consist of land use rights and patents. The Company amortizes the
        land
        use rights on a straight line basis over 50 years and patents over 7-15 years.
 
 The
        Company evaluates intangible assets for impairment periodically and whenever
        events or changes in circumstances indicate that the carrying value may not
        be
        recoverable from its estimated future cash flows. Recoverability of intangible
        assets, other long-lived assets, and goodwill is measured by comparing their
        net
        book value to the related projected undiscounted cash flows from these assets,
        considering a number of factors including past operating results, budgets,
        economic projections, market trends and product development cycles. If the
        net
        book value of the asset exceeds the related undiscounted cash flows, the
        asset
        is considered impaired, and a second test is performed to measure the amount
        of
        impairment loss. As of September
        30, 2007 ,
        no
        impairment of intangible assets had been incurred.
 
 Research
        and development
 
 Research
        and development expenses include salaries, consultant fees, supplies and
        materials, as well as costs related to other overhead such as facilities,
        utilities and other departmental expenses. The costs we incur with respect
        to
        internally developed technology and engineering services are included in
        research and development expenses as incurred as they do not directly relate
        to
        any particular licensee, license agreement or licenses fee.
  10
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Research
        and development costs are recorded in selling and general and administrative
        expenses. Research and development costs were $105,810 and $140,788 for the
        nine
        months ended September
        30, 2007 and
        2006, respectively, and amounted to $ 48,798 and $56,192 for the three months
        ended September
        30, 2007 and
        2006, respectively.
 
 Earning
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share excludes
        dilution and is computed by dividing income available to common stockholders
        by
        the weighted average common shares outstanding during the period. Diluted
        earnings per share takes into account the potential dilution that could occur
        if
        securities or other contracts to issue common stock were exercised and converted
        into common stock using the treasury method.
 
 Income
        taxes
 
 The
        Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
        for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred
        income tax liabilities and assets for the expected future tax consequences
        of
        temporary differences between income tax basis and financial reporting basis
        of
        assets and liabilities. Provision for income taxes consist of taxes currently
        due plus deferred taxes. The Company adopted FASB Interpretation 48, “Accounting
        for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax
        position is recognized as a benefit only if it is “more likely than not” that
        the tax position would be sustained in a tax examination, with a tax examination
        being presumed to occur. The amount recognized is the largest amount of tax
        benefit that is greater than 50% likely of being realized on examination.
        For
        tax positions not meeting the “more likely than not” test, no tax benefit is
        recorded. The adoption had no effect on the Company’s financial
        statements.
 
 Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized. Deferred tax is calculated at the tax rates that are expected
        to apply to the period when the asset is realized or the liability is settled.
        Deferred tax is charged or credited in the income statement, except when
        it
        related to items credited or charged directly to equity, in which case the
        deferred tax is also dealt with in equity. Deferred tax assets and liabilities
        are offset when they relate to income taxes levied by the same taxation
        authority and the Company intends to settle its current tax assets and
        liabilities on a net basis. There are no deferred tax amounts at September
        30, 2007 .
  11
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Value
        added tax
  Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (“VAT”). All of the Company’s products that are sold in the PRC are subject to a
        Chinese value-added tax at a rate of 17% of the gross sales price. This VAT
        may
        be offset by VAT paid by the Company on raw materials and other materials
        included in the cost of producing their finished product. The Company recorded
        VAT Payable and VAT receivable net of payments in the financial statements.
        The
        VAT tax return is filed offsetting the payables against the
        receivables.
 
 Recently
        issued accounting pronouncements
 
 In
        June
        2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF No.
        06-3, How Taxes Collected from Customers and Remitted to Governmental
        Authorities Should Be Presented in the Income Statement (EITF No. 06-3).
        EITF
        No. 06-3 permits that such taxes may be presented on either a gross basis
        or a
        net basis as long as that presentation is used consistently. The adoption
        of
        EITF No. 06-3 on January 1, 2007 did not impact our consolidated financial
        statements. We present the taxes within the scope of EITF No. 06-3 on a net
        basis.
 
 In
        September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. However, for some entities, the application
        of this
        Statement will change current practice. This Statement is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those fiscal years. Management is currently
        evaluating the effect of this pronouncement on financial
        statements.
 
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. Management
        is
        currently evaluating the effect of this pronouncement on financial
        statements.
 
 Reclassifications
 
 Certain
        prior period amounts have been reclassified to conform to the current period
        presentation. These reclassifications have no effect on net income or cash
        flows.
 
 **Note
        3 – Additional product sales information**
 
 The Company’s
        revenues by geographic area, namely the Chinese domestic market and
        international market, are as follows:
  12
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 For
                  the three months ended
              
              For
                  the nine months endedSeptember
                  30,
                2007
              
              September
                  30,
                2006
              
              September
                  30,
                2007
              
              September
                  30,
                2006(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)Domestic
                  China
              
              $
              31,838,291
              
              $
              12,361,267
              
              $
              77,769,677
              
              $
              44,388,962Other
                  foreign countries
              
              
              176,301
              
              
              594,825
              
              
              1,468,740
              
              
              1,492,294Total
                  sales
              
              $
              32,014,592
              
              $
              12,956,092
              
              $
              79,238,417
              
              $
              45,881,256
  **Note
        4 – Inventories**
 
 Inventories
        consisted of the following:
 
 September 30, 2007
                (Unaudited)
              
              December 31, 2006Raw
                  materials
              
              $
              11,122,229
              
              $
              5,380,640Work
                  in process
              
              
              1,246,715
              
              
              242,350Finished
                  goods
              
              
              339,592
              
              
              1,736,507Packaging
                  materials
              
              
              20,274
              
              
              14,727Semi
                  finished goods
              
              
              259,380
              
              
              28,892Totals
              
              $
              12,988,190
              
              $
              7,403,116
 
 **Note
        5 – Plant and equipment**
 
 Plant
        and
        equipment consisted of the following:
 
 September 30, 2007
                (Unaudited)
              
              December 31, 2006Buildings
                  and improvements
              
              $
              29,690,287
              
              $
              18,809,588Transportation
                  equipment
              
              
              3,657,681
              
              
              2,559,806Machinery
              
              
              10,640,480
              
              
              8,814,271Equipments
              
              
              502,274
              
              
              415,083Construction
                  in progress
              
              
              19,152,338
              
              
              22,110,429Totals
              
              
              63,643,060
              
              
              52,709,177Less
                  accumulated depreciation
              
              
              (7,746,398
              )
              
              (5,452,702
              )Totals
              
              $
              55,896,662
              
              $
              47,256,475
 
 Depreciation
        expense for the nine months ended September
        30, 2007 and 2006
        amounted to $2,029,646 and $1,545,520, and for the three months ended September
        30, 2007 and 2006
        amounted to $1,092,690 and $500,329, respectively.
  A
        total
        of $482,085 has been capitalized into construction in progress as of September
        30, 2007 .
  13
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 **Note
        6 – Advances to suppliers**
 
 Advances
        on inventory purchases are monies deposited or advanced to outside vendors
        on
        future inventory and equipment purchases. Most of the Company’s vendors require
        a certain amount of money to be deposited with them as a guarantee that the
        Company will receive their purchases on a timely basis. The advances to
        suppliers were $ 9,246,772 and
        $3,390,917 for inventory and $ 31,012,693 and
        $4,559,357 for equipment purchases as of September
        30, 2007 and December
        31, 2006 ,
        respectively.
 
 **Note
        7 – Intangible assets**
 
 Intangible
        assets consisted of the following:
 
 September 30, 2007
                (Unaudited)
              
              December 31, 2006Patents
              
              $
              1,438,052
              
              $
              1,381,996Land
                  use rights
              
              
              5,343,871
              
              
              5,135,5646,781,923
              
              
              6,517,560Less:
                  accumulated amortization
              
              
              (1,217,452
              )
              
              (998,629
              )Total
              
              $
              5,564,471
              
              $
              5,518,931
 
 Amortization
        expense for the nine months ended September
        30, 2007 and 2006
        amounted to $ 174,627 and
        $167,062, and for the three months ended September
        30, 2007 and 2006
        amounted to $59,020 and $55,999, respectively.
 
 **Note
        8 – Income taxes**
 
 Under
        the
        existing Income Tax Laws of PRC, the Company is generally subject to an income
        tax at an effective rate of 33% (30% state income taxes plus 3% local income
        taxes) on income reported in the statutory financial statements after
        appropriate tax adjustments. For enterprise that qualifies as a "new or
        high-technology enterprise" or a “Foreign Invested Enterprise (“FIE”) located in
        the old town of an inshore open city, it subject to an income tax rate of
        24%.
 
 In
        addition, if the enterprise is located in a specially designated region where
        it
        allows foreign enterprises a two-year income tax exemption and a 50% income
        tax
        reduction for the following three years.
 
 The
        Company’s wholly owned subsidiary, Fushi International (Dalian), is a foreign
        limited liability company and located in the old town of an inshore open
        city.
        The Company has income tax exemption for the years ended December 31, 2006
        and
        2007 and 50% income tax reduction for the years ended December 31, 2008,
        2009
        and 2010.
 
 Dalian
        Fushi was incorporated in the PRC and is subject to PRC income tax. Dalian
        Fushi
        located its factory in a special economic region in Dalian, PRC and qualified
        as
        a "new or high-technology enterprise" who is allowed a two year income tax
        exemption beginning in 2002, the first year after they became profitable,
        and a
        50% income tax reduction for the following three years, 2004 through 2006.
        Dalian Fushi has incurred operation loss for the nine months ended September
        30, 2007 .
        No
        provision for income taxes were taken for the nine months ended September
        30, 2007 and 2006
  14
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the nine months ended:
 
 September 30, 2007(Unaudited)
              
              September 30, 2006(Unaudited)U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              33.0
              
              
              33.0China
                  income tax exemption
              
              
              (33.0
              )
              
              (18.0
              )Total
                  provision for income taxes
              
              
              -
              %
              
              15.0
              %
 
 The
        estimated tax savings for the nine months ended September
        30, 2007 and 2006
        amounted to $9,015,557 and $543,991, respectively, and amounted to $3,537,439
        and $0 for the three months ended September 30, 2007 and 2006. The net effect
        on
        earnings per share had the income tax been applied would decrease basic earnings
        per share from $0.94 to $0.52 and $0.62 to $0.59 for the nine months ended
        September 30, 2007 and 2006, respectively, and would decrease basic earnings
        for
        share from $0.37 to $0.21 and $0.07 to $0.07 for the three months ended
        September 30, 2007 and 2006, respectively.
 
 Beginning
        January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law will replace
        the existing laws for Domestic Enterprises (“DES”) and Foreign Invested
        Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate
        currently applicable to both DES and FIEs. The two years tax exemption, three
        years 50% tax reduction tax holiday for production-oriented FIEs will be
        eliminated. The Company is currently evaluating the effect of the new EIT
        law
        will have on its financial position.
 
 Fushi
        International, Inc. and Fushi Holdings were incorporated in the United States
        and have incurred net operating losses for income tax purposes the nine months
        ended September
        30, 2007 .
        The net
        operating loss carry forwards for United States income taxes amounted to
        $2,725,893 which may be available to reduce future years’ taxable income. These
        carry forwards will expire, if not utilized, through 2025 and 2027. Management
        believes that the realization of the benefits from these losses appears
        uncertain due to the Company’ limited operating history and continuing losses
        for United States income tax purposes. Accordingly, the Company has provided
        a
        100% valuation allowance on the deferred tax asset benefit to reduce the
        asset
        to zero. The valuation allowance at September
        30, 2007 was
        $1,284,185. Management will review this valuation allowance periodically
        and
        make adjustments as warranted.
 
 Value
        Added Tax
 
 VAT
        on
        sales and VAT on purchases amounted to $13,291,003 and $8,995,172 for the
        nine
        months ended September
        30, 2007 and
        $6,937,964 and $6,339,799 for the nine months ended September
        30, 2006 ,
        respectively. Sales and purchases are recorded net of VAT collected and paid
        as
        the Company acts as an agent for the government. VAT taxes are not impacted
        by
        the income tax holiday.
  15
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Taxes
        payable consisted of the following:
  September 30, 2007
                (Unaudited)
              
              December 31, 2006VAT
              
              $
              840,863
              
              $
              607,968Others
              
              
              -
              
              
              374,377Total
                  taxes payable
              
              $
              840,863
              
              $
              982,345
 
 **Note
        9 - Loan from shareholder**
 
 In
        September 2006, one of the Company's shareholders advanced
        $4,450,000  to
        the
        Company for operations. The balance as of September
        30, 2007 and December
        31, 2006 was $0,
        and $3,911,256, respectively. This loan was non-interest bearing, unsecured
        and
        fully paid off by the Company during the third quarter of 2007 **.**
 
 **Note
        10 - Liquidated damage payable**
 
 The
        Company was obligated to make efforts to file a registration statement with
        the
        SEC for the registration of the common stock issued upon the conversion of
        the
        series B convertible preferred stock to be declared effective by the SEC
        within
        90 days and not later than 120 days from the date of its initial filling.
        After
        the 120 th day of
        the initial filing and for each 30-calendar day period thereafter in which
        the
        registration statement fails to be declared effective, the Company shall
        issue
        to each investor a number of shares of common stock equal to 3% of such
        investor's shares covered by such registration statement at that time.
 
 The
        Company accrued $1,466,250 as liquidated damages payable and expensed that
        amount in the year ended December 31, 2006. This amount accrued is based
        on the
        penalties due between May 14, 2006 through August 2, 2006 and it is valued
        at
        $5.75 per share, the highest bid on August 2, 2006, the date of the registration
        statement was declared effective. In January 2007, the Company issued 255,000
        shares of common stock to the investors as payment for the liquidated damages.
 
 **Note
        11 - Short term bank loans**
 
 Short
        term bank loans represent amounts due to various banks and are due on demand
        or
        normally within one year. These loans generally can be renewed with the banks.
        Short term bank loans consisted of the following:
  16
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 September 30,2007
              
              December 31,
                2006(Unaudited)Dalian
                  Commercial Bank Sahekou Branch, due May 15, 2007 annual interest
                  at
                  6.338%, secured by the Company’s land use right and
                  building.
              
              $
              -
              
              $
              974,320Bank
                  of China Dalian Xinhaiwan Branch, due March 11, 2007 annual interest
                  at
                  5.94%, secured by the Company’s land use right and
                  building.
              
              
              -
              
              
              3,846,000Bank
                  of China Dalian Xinhaiwan Branch, due February 22, 2007 annual
                  interest at
                  6.547%, secured by the Company’s land use right and
                  building.
              
              
              -
              
              
              2,564,000Bank
                  of China Dalian Xinhaiwan Branch,due March 27, 2007 annual interest
                  at
                  6.547%, secured by the Company’s land use right and
                  building
              
              
              -
              
              
              2,179,400Bank
                  of China Dalian Xinhaiwan Branch, due April 21, 2007 annual interest
                  at
                  6.732%, secured by the Company’s land use right and
                  building.
              
              
              -
              
              
              2,820,400ShenZhen
                  Development Bank, Dalian Branch various due dates and interest
                  rates,
                  secured by export letter of credits.
              
              
              -
              
              
              120,015Bank
                  of China Dalian Xinhaiwan Branch, due October 8, 2007 annual interest
                  at
                  6.732%, secured by the Company’s land use right and
                  building.
              
              
              4,002,000
              
              
              -Bank
                  of China Dalian Xinhaiwan Branch due December 19, 2007 annual interest
                  at
                  7.029%, secured by the Company’s land use right and
                  building.
              
              
              2,321,160
              
              
              -Bank
                  of China, Xinghaiwan Branch, due March 28, 2008, annual interest
                  at
                  7.227%, secured by the Company’s land use right and
                  building.
              
              
              2,614,640
              
              
              -Bank
                  of China, Xinghaiwan Branch, due February 15, 2008, annual interest
                  at
                  7.029%, secured by the Company’s land use right and
                  building.
              
              
              2,934,800Total
              
              $
              11,872,600
              
              $
              12,504,135
 
 Total
        interest expense on the short term loans for the nine months ended September
        30, 2007 and 2006
        amounted to $884,942 and $745,762, respectively, and for the three months
        ended September
        30, 2007 and 2006
        amounted to $349,355 and $312,913, respectively.
 
 **Note
        12 – Long term bank loans**
 
 Long
        term
        debts are loans borrowed from banks which are mainly used for the purpose
        of
        purchasing additions to the plant and equipment and consisted of the following
        at:
 
 September 30,
                2007
              
              December 31,
                2006(Unaudited)ICBC,
                  Dalian JinZhou BranchDue
                  April 10, 2008, annual interest at 5.58%, secured by the Company’s land
                  use right and building
              
              $
              5,336,000
              
              $
              5,128,000ICBC,
                  Dalian JinZhou BranchDue
                  April 10, 2008, annual interest at 5.58%, secured by the Company’s land
                  use right and building
              
              
              5,336,000
              
              
              5,128,000Minus
                  : current maturities
              
              
              (10,672,000
              )
              
              -Long
                  term debt - less current maturities
              
              $
              -
              
              $
              10,256,000
  17
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Interest
        incurred on the long term loans for the nine months ended September
        30, 2007 and 2006
        was $434,587 and $415,758. Interest for the three months ended September
        30, 2007 and 2006
        was 147,420 and 139,875. At September 30, 2007, these two bank loans are
        due
        within one year and were reclassified as current liabilities **.**
 
 **Note
        13 – Long term notes payable**
 
 On
        January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered
        into a Notes Purchase Agreement. On January 29, 2007, the Company closed a
        $60 million financing with Citadel.  In this transaction, Citadel purchased
        (i) floating rate $40 million principal amount (less 3% Notes Discount and
        4%
        commission for proceeds of $37,200,000) of guaranteed senior secured
        floating rate notes (“HY Notes”) due 2012 and (ii) $20 million principal amount
        (less 4% commission for proceeds of $19,200,000) of the Company’s 3% senior
        secured convertible notes (“Convertible Notes”) due 2012, which are convertible
        into shares of the Company's common stock at an initial conversion price
        of
        $7.00 per share. The HY Notes and Convertible Notes are secured by the
        shares of the Company's wholly-owned subsidiary, FHI. Citadel was also granted
        certain corporate governance rights over the Company and its subsidiaries. 
The floating rate notes bear interest at LIBOR (approximately 5.3% at September
        30, 2007) + 7% and changes to LIBOR + 5.6% permanently upon successful
        completion of Qualifying IPO within eighteen months from January 24, 2007.
        The
        interest on the variable and fixed rate notes are payable semi-annually in
        arrears in January and July. See below for discussion of swap agreement changing
        variable interest to 8.3% fixed.
 
 Management
        completed its review of the accounting for the transactions and has concluded
        that the conversion option does not qualify as an embedded derivative under
        FAS
        133 nor does it qualify for beneficial conversion treatment under EITF 98-5
        and
        00-27.
 
 Neither
        the Notes nor the Common Stock issuable upon conversion of the Convertible
        Notes have been registered under the U.S. Securities Act of 1933, as amended,
        nor is the Company obligated to register them.
 
 As
        security for the Notes, the Company and The Bank of New York, as collateral
        agent, entered into a share pledge agreement, dated January 25, 2007 (the
        "Share
        Pledge Agreement"), to guarantee the Notes with all of the shares of common
        stock of FHI held by the Company as collateral. The Company owns 100% of
        the
        FHI, which is pledged as collateral on the notes.
 
 In
        connection with the transaction, the Company, FHI, Dalian DPI, Dalian Fushi,
        Li
        Fu, our Chairman and Chief Executive Officer, Mathus Yue Yang, our President,
        Chris Wenbing Wang, our Chief Financial Officer and Citadel entered into
        an
        Investor Rights Agreement dated January 25, 2007. Pursuant to the Investor
        Rights Agreement, Citadel was granted, among other things and subject to
        certain
        conditions, the right to designate up to certain number of the Company's
        board
        of directors, a right of first refusal with respect to any financing sought
        by
        the Company and the right to approve the Company's annual business plan and
        budget. In addition, pursuant to the Investor Rights Agreement, Messrs. Fu,
        Yang
        and Wang agreed to a non-competition covenant relating to their employment
        and
        ability to engage in a business that is competitive with the Company's business
        for five years.
  18
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 The
        HY
        Notes and the Convertible Notes were issued pursuant to indentures, each
        dated
        January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
        together, the "Indentures") among the Company, the FHI, as guarantor, and
        The
        Bank of New York, as trustee for the Notes. Pursuant to the Indentures, FHI
        has
        agreed, and all of the Company's other existing and future domestic subsidiaries
        are obligated, to guarantee, on a senior secured basis, to the holders of
        the
        Notes and the trustee the payment and performance of the Company's obligations
        there under.
 
 Additionally,
        if there is no NASDAQ listing by the eighteenth month from the issue date
        of the
        Notes, the Company must pay liquidated damage in the amount of 3.3% of the
        principal amount of the Notes. The Company’s shares of common stock commenced
        trading on the Nasdaq Global Market on August 31, 2007. Additional Interest
        of
        3% will be applied if no Qualifying IPO has occurred on or before July 24,
        2008.
 
 The
        indenture, notes purchase agreement and investor rights agreement related
        to the
        Notes contain various covenants that may limit the Company’s discretion in
        operating its business. In particular, the Company is limited in its ability
        to
        merge, consolidate or transfer substantially all of its assets, issue stock
        of
        its subsidiaries, incur additional debt and create liens on assets to secure
        debt. In addition, the Company is required to comply with certain financial
        covenants, including maintenance of a fixed charge coverage ratio of at least
        2.0 and maintenance of a leverage ratio not exceeding 5.5. Management believes
        the Company was in compliance with all of these covenants as of September
        30, 2007 .
 
 As
        of September
        30, 2007 ,
        the
        Company has a total of $60,000,000 long term notes payable outstanding. Deferred
        commission amounted to $ 3,123,496 and
        interest expense for the nine and three months ended September
        30, 2007 amounted
        to $ 491,178 and
        $162,082 **,** respectively **.**
 
 **Note
        14 – Derivative instrument**
 
 The
        Company's operations are exposed to a variety of global market risks, including
        the effect of changing interest rates. This exposure is managed, in part,
        with
        the use of financial derivatives. The Company uses financial derivatives
        only to
        hedge exposures in the ordinary course of business and dose not invest in
        derivative instruments for speculative purposes.
 
 On
        April
        10, 2007, effective January 24, 2007, the Company entered into a cross currency
        swap transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”)
        on the $40 million HY notes which converts the LIBOR + 7% per annum USD
        variable interest rate to an 8.3% per annum RMB fixed interest rate. The
        agreement was deemed effective January 24, 2007. The
        Swap
        requires semi-annual payment in arrears on July 24 and January 24 and matures
        earlier of (1) cash settlement defined as early termination; or (2) January
        24,
        2012, at which point the Swap requires an exchange of RMB and USD based
        principals. Under
        the terms of the cross currency swap, the Company receives variable interest
        rate payments in USD and makes fixed interest rate payments in RMB with
        settlement netted in USD, thereby creating the equivalent of fixed-rate debt.
        MLCS requires the Company to deposit $1,000,000 with them to secure the
        agreement. The deposit may be increased to $3,000,000 if the exchange rate
        for
        RMB to USD falls below 6.5, and to $5,000,000 if the exchange rate falls
        below
        5.5. This swap is designated and qualified as a cash flow hedge. As of September
        30, 2007, the Company has not placed the $1,000,000 deposit with MLCS.
  19
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Since
        its
        effective date, the fair value of this swap agreement changed to a payable
        of
        $452,632 on March 31, 2007, $871,519 on June 30, 2007, and $4,610,090 on September
        30, 2007 respectively. For
        the
        nine months ended September
        30, 2007 ,
        changes
        in fair value of the Swap resulted in an increase in the liability and a
        loss to
        other comprehensive income of $4,610,090, net of taxes. On July 24, 2007,
        the
        first interest payment date, the Company received cash in the amount of $802,523
        from MLCS, which was recorded as a gain from derivative transactions. As
        of September
        30, 2007 ,
        the
        Company had cross currency hedge receivable amounting to $286,245. For nine
        months ended September
        30, 2007 ,
        there
        were no amounts recorded in the consolidated statement of income in relation
        to
        this interest rate swap related to ineffectiveness.
 
 **Note
        15 – Investment**
 
 On
        July
        18, 2007, the Company, Copperweld Bimetallics, Inc. and David S. Jones entered
        into a non-binding Memorandum of Understanding. Pursuant to the Memorandum
        of
        Understanding and certain agreements signed, Fushi extended secured bridge
        funding to Copperweld Bimetallics, Inc, in an amount of three million dollars.
 
 On
        September 25, 2007, the Company entered into a LLC Membership Interest Purchase
        Agreement (the “Purchase Agreement”) with David S. Jones (the “Seller”),
        pursuant to which the Company agreed to purchase all of the issued and
        outstanding membership interests of Copperweld Holdings, LLC (“Copperweld”), the
        sole member of Copperweld Bimetallics, LLC, and all of the issued and
        outstanding membership interests of International Manufacturing Equipment
        Suppliers, LLC. The transaction is valued at $22.5 Million, including the
        assumption of debt and is subject to adjustment based upon Copperweld’s net
        working capital at closing.
 
 A
        portion
        of the purchase price will be deposited in escrow at closing to secure the
        indemnification obligations of the Seller. The Purchase Agreement also contains
        customary representations, warranties and covenants.
 
 The
        Company subsequently completed the transaction on October 29, 2007.
 
 **Note
        16 – Supplemental disclosure of cash flow information**
 
 Income
        taxes paid amounted to $0 and $4,044,883 for the nine months ended September
        30, 2007 and
        2006, respectively. Interest paid for the nine months ended September
        30, 2007 and 2006
        amounted to $3,860,845 and $1,049,037, respectively.
  784,575
        shares of Series A preferred stock and 216,000 shares of Series B preferred
        stock were converted into 19,818,718 shares of common stock during
        2006.
  20
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 On
        January 5, 2007, the Company has issued 255,000 shares of common stock in
        payment of liquated damage payable as disclosed in note 10.
  In
        January 2007 $3.6 million in loan commissions and discount was netted
        against $60 million in loan proceeds.
 
 On
        May
        21, 2007 and June 17, 2007, 500,000 and 150,000 options were granted to
        executives and directors in exchange for two year services,
        respectively.
 
 **Note
        17 – Accumulated other comprehensive income**
 
 The
        components of accumulated other comprehensive income as follows:
 
 Accumulated
                  other comprehensive income:
              
              AmountBalance
                  at December 31, 2005
              
              $
              775,895Foreign
                  currency translation gain
              
              
              1,923,828Balance
                  atDecember
                  31, 2006
              
              
              2,699,723Foreign
                  currency translation gain
              
              
              5,266,973Fair
                  value of cross currency hedge on March 30, 2007
              
              
              (452,632
              )Change
                  in fair value of derivative instrument
              
              
              (4,157,458
              )Balance
                  atSeptember
                  30, 2007
              
              $
              3,356,606
 
 **Note
        18 - Earnings per share**
 
 The
        following demonstrates the calculation for earnings per share:
 
 Three
                  months ended
                September
                  30,
              
              Nine
                  months ended
                September
                  30,2007
              
              2006
              
              2007
              
              2006(Unaudited)Net
                  income for basic earnings per share
              
              $
              8,233,326
              
              $
              1,434,892
              
              $
              20,190,717
              
              $
              12,387,079Add:
                  Interest expense for convertible note
              
              
              150,000
              
              
              -
              
              
              400,000
              
              
              -Net
                  income for diluted earnings per share
              
              $
              8,383,326
              
              $
              1,434,892
              
              $
              20,590,717
              
              $
              12,387,079Weighted
                  average shares used in basic computation
              
              
              22,263,618
              
              
              19,932,129
              
              
              21,422,610
              
              
              19,907,105Diluted
                  effect of warrants and convertible note
              
              
              3,191,253
              
              
              2,829,099
              
              
              2,912,816
              
              
              2,705,264Weighted
                  average shares used in diluted computation
              
              
              25,454,871
              
              
              22,761,228
              
              
              24,335,426
              
              
              22,612,369Earnings
                  per shareBasic
              
              $
              0.37
              
              $
              0.07
              
              $
              0.94
              
              $
              0.62Diluted
              
              $
              0.33
              
              $
              0.06
              
              $
              0.85
              
              $
              0.55
 
 21
  FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 All
        warrants have been included in the diluted earnings per share calculation.
        The
        $20,000,000 of the Company’s 3% senior secured convertible notes at a conversion
        price of $7 has been included in the diluted earnings per share
        calculation.
 
 **Note
        19 - Shareholders' Equity**
  (A)
                  Reverse
                      stock split
 
 On
        January 30, 2006, the Company effected a 245.27:1 reverse stock split.  All
        share and per share amounts have been retroactively restated throughout these
        financial statements to reflect the effect of the reverse split.
 
 (B)
                  Series
                      A and Series B Convertible Preferred
                      Stock
 
 The
        Series A and Series B Convertible Preferred Stock (“Series A and B Stock”) were
        automatically converted into common stock upon the effectiveness of the reverse
        split on January 30, 2006 under the certificates of designation for Series
        A and
        B Stock.
 
 (C)
                        Following
                            the reverse stock split and as of December 2006, the
                            Company had
                            outstanding:
  (1)
                  20,046,162
                      shares of common stock, par value
                      $.006.
 (2)
              Warrants
                  purchasing 2,056,015 shares of common stock at an exercise price
                  of $3.67
                  per share, expire December 2010.
 (3)
              Warrants
                  purchasing 424,929 shares of common stock with exercise prices
                  of $3.11
                  per share, expires December 2011.
 (D)
                    During
                        the nine months of 2007, the following activities were recorded
                        :
 
 (1)
              255,000
                  shares of common stock at $0.006 par value were issued pursuant
                  to
                  liquidated damage payable that was recorded in
                  2006.
 
 (2)
                2,056,015
                    shares of warrants were exercised for common stock. The warrants
                    were
                    initially issued on January 30, 2006 and were each exercisable
                    for one
                    share of the Company’s common stock at $3.67 per share. As of September
                    30, 2007, all warrants with exercise price of $3.67 were exercised.
 
 (3)
              3,739
                  shares of warrants were exercised for common stock. The warrants
                  were
                  initially issued on January 30, 2006 and were each exercisable
                  for one
                  share of the Company’s common stock at $3.11per
                  share.
 
 The
        Company has 421,190, warrants exercisable at $3.11 outstanding as of September
        30, 2007 and the
        following is a summary of the warrant activities:
  22
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Number
                  of
                Warrants
                  Outstanding
              
              Number
                  of
                Warrants
                Exercisable
              
              Weighted-
                Average
                Exercise
                Price
              
              Average
                Remaining
                Contractual
                LifeBalance
                  at January 1, 2006
              
              
              2,629,929
              
              
              2,629,929
              
              $
              3.47
              
              
              5.11
                  yearsGranted
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              148,985
              
              
              148,985
              
              $
              1.70
              
              
              -Balance
                  at December 31, 2006
              
              
              2,480,944
              
              
              2,480,944
              
              $
              3.58
              
              
              4.12
                  yearsGranted
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (2,059,754
              )
              
              (2,059,754
              )
              $
              3.67Balance
                  atSeptember
                  30, 2007
              
              
              421,190
              
              
              421,190
              
              $
              3.11
              
              
              3.46
                  years
 
 **Note
        20 – Stock options based compensation**
 
 On
        May 21
        and June 7, 2007, the Company issued 500,000 and 150,000 options to four
        executives and three independent directors, respectively, for a service period
        of two years starting from the grant date. The vesting period is two
        years.
 
 The
        fair
        values of stock options granted to the executives and the independent directors
        were estimated at the date of grant using the Black-Scholes option-pricing
        model
        with the following assumptions:
  23
  
 **Expected**
                **Life**
              
              **Expected**
                **Volatility**
              
              **Dividend**
                **Yield**
              
              **Risk Free**
                **Interest Rate**
              
              **Grant**
                **Date**
                **Fair Value**Executives
              
              
              2.0
                  yrs
              
              
              50
              %
              
              0
              %
              
              4.57
              %
              $
              3.81Independent
                  Directors
              
              
              2.0yrs
              
              
              50
              %
              
              0
              %
              
              4.57
              %
              $
              3.64
 
 -   Although
        historical volatility is generally useful in estimating expected volatility,
        the
        Company’s share price exhibited abnormal level of volatility (133%) from January
        30, 2006, the first day of trade after completing reverse stock split, to
        June
        29, 2007.  After the reverse split, the shares were thinly traded, creating
        extremely volatile price movements.  By contrast, for the 180 days up-to
        June 29, 2007, the Company’s trading volume increased and the share price
        appears to have stabilized.  Therefore, the Company estimated its expected
        volatility for the granted stock options on the 180-day historical volatility,
        which is 44.75%, and added additional minor volatility for planned expansion
        of
        activities over the next two years, to result in the expected volatility
        of 50%
        used in the calculation.
 
 -   Expected
        dividend yield of zero: the company has never paid a dividend and does not
        anticipate paying dividends in the foreseeable future.
 -   Risk-free
        interest rate of 4.57%:  the risk-free interest rate was based on U.S.
        Treasury yields with a remaining term that corresponds to the expected term
        of
        the option.
 -   Expected
        life:  Because the Company has no historical share option exercise
        experience to estimate future exercise patterns, the expected life was
        determined using the simplified method as these awards meet the definition
        of
        "plain-vanilla" options under the rules prescribed by Staff Accounting Bulletin
        No. 107.
  24
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 The
        fair
        value of the stock option grant to the executives was $3.81 per share on
        the
        date of grant.  The fair value of the stock option grant to the independent
        directors was $3.64 per share on the date of grant.
 
 Stock
        compensation expense is recognized based on awards expected to vest, and
        there
        were no estimated forfeitures as the Company has a short history of issuing
        options. SFAS No. 123R requires forfeitures to be estimated at the time of
        grant and revised in subsequent periods, if necessary, if actual forfeitures
        differ from those estimates.
 
 The
        500,000 executive options and 150,000 director options had fair value of
        approximately $1,906,957 and $546,506 respectively. The Company recognized
        $887,080 of compensation in general and administrative expenses for the nine
        months ended September 30, 2007.
 
 As
        of September
        30, 2007 ,
        the
        total compensation cost related to stock options not yet recognized was
        $1,566,383 and will be recognized over the weighted average life of
        2 years.
 
 The
        following is a summary of the stock options activity:
 
 Number
                  of
                Options
                Outstanding
              
              Weighted-
                Average
                Exercise
                Price
              
              Aggregate
                Intrinsic
                ValueBalance
                  at December 31, 2006
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              650,000
              
              $
              12.17
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -Balance
                  atSeptember
                  30, 2007
              
              
              650,000
              
              $
              12.17
              
              $
              1,155,000
 
 Following
        is a summary of the status of options outstanding at September
        30, 2007 :
 
 Outstanding
                  Option
              
              Exercisable
                  OptionsExercise
                Price
              
              Number
              
              Average
                Remaining
                Contractual
                Life
              
              Average
                Exercise
                Price
              
              Number
              
              Weighted
                Average
                Exercise
                Price$12.30
              
              
              500,000
              
              
              1.64
                  years
              
              
              $12.30
              
              
              183,335
              
              
              $12.30$11.75
              
              
              150,000
              
              
              1.71years
              
              
              $11.75
              
              
              51,561
              
              
              $11.75Total
              
              
              650,000
              
              
              
              
              
              
              
              
              234,896
 
 **Note
        21 – Statutory reserves**
 The
        laws
        and regulations of the People’s Republic of China require that before a
        Sino-foreign cooperative joint venture enterprise distributes profits to
        its
        partners, it must first satisfy all tax liabilities, provide for losses in
        previous years, and make allocations, in proportions determined at the
        discretion of the board of directors, after the statutory reserve. Statutory
        reserves represent restricted retained earnings.
  25
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 Surplus
        reserve fund
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For the nine months ended September
        30, 2007 the
        Company transferred $2,731,987 representing 10% of the year’s net income
        determined in accordance with PRC accounting rules and regulations, to this
        reserve.
 The
        surplus reserve fund is non-distributable other than during liquidation and
        can
        be used to fund previous years’ losses, if any, and may be utilized for business
        expansion or converted into share capital by issuing new shares to existing
        shareholders in proportion to their shareholding or by increasing the par
        value
        of the shares currently held by them, provided that the remaining reserve
        balance after such issue is not less than 25% of the registered
        capital.
 
 **Note
        22 – Employee pension**
 
 The
        employee pension in the Company generally includes two parts: the first to
        be
        paid by the Company is 20% of the employee’s actual salary in the prior year.
        The other part, paid by the employee, is 8% of the actual salary. The Company
        made $21,473 contributions of employment benefits, including pension in the
        period ended September 30, 2007. The Company made $20,375 in contributions
        of
        employment benefits, including pension in the period ended September 30,
        2006.
 
 **Note
        23 – Commitments and contingencies**
 
 On
        September 19, 2006, the
        Company has been named a defendant in a pending litigation that was filed
        at the
        China International Economic and Trade Arbitration Commission over a disputed
        investment consulting agreement. The damage claimed amounts to $420,000 for
        past
        due commission. The Company claimed that the plaintiff did not render services
        as stipulated in the agreement. During the third quarter of 2007, the Company
        resolved the litigation by an one time payment of $200,000 as final settlement
        to the arbitration.
 
 On
        December 11, 2006, the Company has been named a defendant of an action filed
        in
        a United States District Court related to a disputed contract agreement.
        The
        Company believes the claim is without merit and does not anticipate any negative
        outcome of this case.
 
 As
        discussed in Note 14, the Company entered into a swap agreement that required
        a
        $1,000,000 deposit to secure the transaction. If the exchange rate for RMB
        to US
        Dollars drops below certain levels, the Company will be required to deposit
        up
        to $5,000,000. As of September 30, 2007, the Company has not deposited the
        $1,000,000 with MLCS to secure the agreement.
  26
 
 FUSHI
        INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
 
 **Note
        24 – Subsequent Events**
 
 On
        September 25, 2007, the Company entered into a purchase agreement to purchase
        all of the issued and outstanding membership interests of Copperweld Holdings
        and all of the issued and outstanding membership interest of International
        Manufacturing Equipment Suppliers, LLC as discussed in Note 15. The transaction
        is valued at $22.5 Million and includes assumption of debt clauses subject
        to
        adjustment. The transactions was completed on October 29, 2007.
 
 On
        October 26, 2007, the Company entered into a Security Purchase Agreement
        with a
        number of institutional investors (“the “Investors”) providing for the sale to
        the Investors of up to an aggregate of 2,786,000 shares of the Company’s common
        stock for an aggregate purchase price of up to $39,004,000 (or $14 per share)
        (the “Financing”). On October 30, 2007, the Company closed the Financing..
 
 27




**Item
      1A. RISK FACTORS.**





The
      following risk factors relating to the acquisition of Copperweld Bimetallics,
      LLC are in addition to those previously disclosed by us. The risk factors
      include but are not limited to:





***The
      anticipated benefits of the Copperweld transaction may not be realized.***





We
      entered into the Copperweld acquisition agreement with the expectation that
      the
      acquisition will result in a number of benefits to us including, among other
      things:





·
            enhanced
                revenues;


·
            broader
                product offering;


·
            significant
                savings on capital expenditures;


·
            expansion
                of our global distribution and manufacturing capabilities;


·
            operational
                improvements;


·
            production
                rationalization; and


·
            diversification
                of our customer base.





Achieving
      the anticipated benefits of the Copperweld acquisition is subject to a number
      of
      uncertainties, including,





·
            whether
                we can successfully integrate our business with Copperweld's business
                in
                an efficient and effective manner;


·
            the
                reaction of our existing or potential competitors to the transaction;
                and


·
            general
                competitive factors in the marketplace.





Failure
      to achieve these anticipated benefits could result in increased costs, decreases
      in the amount of expected revenues and diversion of management's time and energy
      and could materially impact our business, financial condition and operating
      results.





***The
      anticipated synergies and cost savings of the Copperweld transaction may not
      be
      realized.***





The
      success of the combined company after the Copperweld acquisition will depend,
      in
      part, on our ability to realize the anticipated growth opportunities, cost
      savings, production rationalization, profitability enhancement, streamlining
      overheads and operating structure to optimize efficiency, building upon best
      practices in technology and manufacturing, reassessment of the inventory and
      supplier base to insure the availability of products at competitive prices.
      We
      cannot provide any assurance that these anticipated synergies and cost savings
      can be achieved in the amounts or during the periods expected. Further, we
      cannot provide any assurance that these actions can be completed without
      disruption to our business, that they can be completed in a short period of
      time
      or that anticipated improvements in operating performance can be
      achieved.





***There
      may be difficulty integrating Fushi's and Copperweld's businesses and
      substantial costs may be incurred in connection with the integration.***





Achieving
      the anticipated benefits of the Copperweld acquisition will depend on the
      successful integration of Fushi’s and Copperweld's products, services,
      operations, personnel, technology and facilities in a timely and efficient
      manner. Although neither Fushi nor Copperweld anticipates material difficulties
      in connection with such integration, the possibility exists that such
      difficulties could be experienced in connection with the acquisition, especially
      given the cultural difference, time zone difference, and language difference.
      The time and expense associated with converting the businesses of Fushi and
      Copperweld to a common platform may exceed our expectations and limit or delay
      the intended benefits of the transaction. Similarly, the process of reallocating
      machinery and capacity, combining sales, marketing and manufacturing forces,
      consolidating administrative functions, and coordinating product and service
      offerings could take longer, cost more, and provide fewer benefits than
      initially projected. To the extent any of these events occurs, the benefits
      of
      the transaction may be reduced.





28




Integrating
      our business with that of Copperweld can be a complex, time-consuming and
      expensive process. Before the acquisition, Fushi and Copperweld operated
      independently, each with its own business, products, customers, employees,
      culture and systems. Fushi may face substantial difficulties, costs and delays
      in integrating the two businesses. These difficulties, costs and delays may
      include:





·
            Costs
                and delays in moving additional capacity from Fayetteville, TN to
                Dalian,
                China;


·
            Costs
                and delays in implementing common systems and procedures;


·
            Difficulties
                in combining research and development teams and processes;


·
            Potential
                difficulty in combining the separate product technologies of Fushi
                and
                Copperweld;


·
            Perceived
                adverse changes in product offerings available to customers or in
                customer
                service standards, whether or not these changes do, in fact, occur;


·
            Difficulty
                comparing financial reports due to differing financial and/or internal
                reporting systems;


·
            Diversion
                of management resources from the business;


·
            The
                inability to retain existing customers of each company;


·
            Reduction
                or loss of customer orders due to the potential for market confusion,
                hesitation and delay;


·
            Challenges
                in retaining and integrating management and other key employees of
                Fushi
                and Copperweld;


·
            Difficulty
                in coordinating operations in an effective and efficient manner;
                and


·
            The
                inability to achieve the synergies anticipated to be realized from
                the
                acquisition on the timeline presently anticipated, or at all.





After
      the
      acquisition, we may seek to combine certain operations and functions using
      common information and communication systems, operating procedures, financial
      controls and human resource practices, including training, professional
      development and benefit programs. We may be unsuccessful in implementing the
      integration of these systems and processes in a timely and efficient manner.
      Any
      one or all of these factors may cause increased operating costs, worse than
      anticipated financial performance or the loss of customers and employees. Many
      of these factors are also outside of our control.





***The
      announcement and consummation of the acquisition may result in a loss of key
      personnel of Fushi and/or Copperweld.***





Fushi
      and
      Copperweld both depend on the services of their key personnel. Current and
      prospective employees of Fushi and Copperweld may, either before or after the
      acquisition, experience uncertainty about their future roles with Fushi after
      the acquisition, which may affect the performance of such personnel adversely
      and the ability of each company to retain and attract key personnel. The loss
      of
      the services of one or more of these key employees or the inability of Fushi
      or
      Copperweld to attract, train, and retain qualified employees could result in
      the
      loss of customers or otherwise inhibit the ability of Fushi to integrate and
      grow the combined businesses effectively after the acquisition.





***The
      announcement and consummation of the acquisition may result in a loss of
      customers of Copperweld and/or Fushi.***





Some
      customers may seek alternative sources of product and/or service after the
      announcement of the acquisition due to, among other reasons, a desire not to
      do
      business with us after the acquisition or perceived concerns that we may not
      continue to support and develop certain products. Difficulties in combining
      operations could also result in the loss of, or potential disputes or litigation
      with, customers. Any steps by management to counter such potential increased
      customer attrition may not be effective. Failure by management to retain
      customers could result in worse than anticipated financial
      performance.





29




***There
      may be unknown risks inherent in our acquisition of Copperweld, which could
      result in a material adverse effect on our business.***





Although
      we have conducted due diligence with respect to the acquisition, we may not
      be
      aware of all of the risks associated with Copperweld. Any discovery of adverse
      information concerning Copperweld since we acquired the entity could have a
      material adverse effect on our business, financial condition and results of
      operations. While we are entitled to seek indemnification in certain
      circumstances, successfully asserting indemnification or enforcing such
      indemnification could be costly and time consuming or may not be successful
      at
      all.




***Copperweld
      has not achieved profitability.***





Prior
      to
      its acquisition by us, Copperweld incurred losses for the entire time it
      operated as a stand-alone business. The combined company’s ability for the
      Fayetteville, TN location to generate significant revenues and make profits
      is
      dependent in large part on its ability to move more value-added production
      in
      house, reduce manufacturing related costs such as labor, manage its growth
      related expenses, make additional capital expenditure, expand its customer
      base,
      increase sales of its current products to existing customers, enter into
      additional supply and manage its working capital and other financial resources.
      We cannot provide any assurance that improved profitability can be achieved
      at
      the Fayetteville location in the amounts or during the periods expected.





**Item
      2.** **** **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




**DISCLAIMER
      REGARDING FORWARD-LOOKING STATEMENTS**




Certain
      statements in this report, including statements in the following discussion,
      which are not statements of historical fact, may be deemed to be
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995 which are basically statements about the future.
      For that reason, these statements involve risk and uncertainty as future events
      cannot be accurately predicted. Words such as “plans,” “intends,” “will,”
“hopes,” “seeks,” “believes,” “anticipates,” “expects,” and the like, often
      identify such forward-looking statements, but are not the only indication that
      a
      statement is a forward-looking statement. Such forward-looking statements
      include statements concerning our plans and objectives with respect to the
      present and future operations of Fushi International, Inc. and its subsidiaries
      and affiliates (the “Company,” “we” or “us”), and statements which express or
      imply that such present and future operations will or may produce revenues,
      income or profits. Numerous factors and future events could cause the Company
      to
      change such plans and objectives, or fail to successfully implement such plans
      or achieve such objectives, or cause such present and future operations to
      fail
      to produce revenues, income or profits. Therefore, the reader is advised that
      the following discussion should be considered in light of the discussion of
      risks and other factors contained in this report on Form 10-Q and in the
      Company’s other filings with the Securities and Exchange Commission. No
      statements contained in the following discussion should be construed as a
      guarantee or assurance of future performance or future results. These
      forward-looking statements are made as of November 14, 2006; the date of the
      filing of this Form 10-Q and the Company undertakes no responsibility to
      update these forward-looking statements.





The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with the financial statements and
      accompanying notes and the other financial information appearing in Part I,
      Item 1 and elsewhere in this report.





**OVERVIEW**





During
      the quarter ended September 30, 2007, we continued to see robust customer demand
      across a broad mix of end markets and we continued to have good success with
      strategic initiatives. Those initiatives include adding new customers, enhancing
      product offerings, particularly in specialized and high-margin applications,
      improving productivity, and continuing to make progress in the development
      of
      power cable and flat wire applications.




30




Highlights
      for the quarter include an increase of 127.8% in sales volume and an increase
      of
      2.0% in gross profit margin, resulting in net revenue growth of 147.1%,
      comparing to the third quarter of fiscal 2006. Our net profits increased by
      473.8% to $8.2 million, representing a net margin of 25.7%, and earnings per
      share on diluted basis of $0.33.





Our
      product is primarily used as a substitute for copper due to cost savings and
      other benefits. Our quarterly results of operations fluctuate as a result of
      a
      number of factors, including fluctuation in the demand for, and shipments of,
      our products and changes in the prices of raw material commodity prices,
      primarily copper. The prices of copper and aluminum have historically been
      subject to volatility. We generally attempt to pass along to our customers
      changes in the prices of copper and other raw materials, although there are
      timing delays of varying lengths depending upon the volatility of metals prices,
      the type of product, competitive conditions and particular customer
      arrangements. In terms of historical pricing methodology, we generally price
      our
      products to earn a fixed dollar margin per metric ton of goods sold, which
      effectively mitigates the effects of copper price volatility on our gross
      profit. In addition, existing inventory purchased at previously lower prices
      and
      sold as prices increase would result in a higher gross profit margin.
      Conversely, a decrease in commodity prices in a short period of time would
      have
      the opposite effect, negatively affecting financial results. While the Company
      experienced some modest margin decline in certain segments due to the stability
      of copper prices and increased competition, overall, we have been able to
      maintain gross profit margins at above 32%. Further, although raw material
      prices fluctuate over time, which caused monthly variation in the costs of
      raw
      material purchases, the fluctuations tend to be short term, making forecasting
      operating results and performance on annual and long term basis much easier
      to
      do than on quarterly basis.





Factors
      driving and affecting operations results, among others, include the variations
      in the mix of products, production capacity and utilization, working capital
      sufficiency, product availability, quality, and particular customer
      arrangements. From time to time, we consider acquisition opportunities that
      could materially increase the size of our business operations.





With
      respect to the overall business outlook for the remainder of 2007, we anticipate
      sales growth to continue to be aggressive and broadly based, principally due
      to
      expanding market sizes, sustainable product profitability, and momentum to
      gain
      additional market share.





*Recent
      development*





As
      previously reported in our Current Reports on Form 8-K filed on September 26,
      2007 and October 31, 2007, on September 25, 2007, we entered into an LLC
      Membership Interest Purchase Agreement (the “Purchase Agreement”) with David S.
      Jones (“Seller”), pursuant to which we agreed to purchase all of the issued and
      outstanding membership interests of Copperweld Holdings, LLC (“Copperweld”), the
      sole member of Copperweld Bimetallics, LLC, and all of the issued and
      outstanding membership interests of International Manufacturing Equipment
      Suppliers, LLC. The transaction was valued at $22.5 million, including the
      assumption of debt and is subject to adjustment based upon Copperweld’s net
      working capital at closing.





As
      previously reported in our Current Reports on Form 8-K filed on October 26
      and
      30, 2007, on October 30, 2007, we completed the sale, pursuant to a Securities
      Purchase Agreement with a number of institutional investors, of an aggregate
      of
      2,786,000 shares of our common stock for an aggregate purchase price of
      $39,004,000 (or $14 per Share). We financed the acquisition with the proceeds
      from the sale of common stock.




At
      closing of the acquisition, a portion of the purchase price ($2.25 million)
      was
      deposited in escrow to secure the indemnification obligations of the Seller.





31




Copperweld
      Bimetallics, LLC, a leading manufacturer of bimetallic wire, is based in
      Fayetteville, Tennessee and produces a range of products for use in
      communications, utility, transportation, and industrial applications in both
      the
      U.S. and international markets. A second manufacturing location in Telford,
      England principally services the growing European market. Copperweld® is a
      registered trademark for the company's copper clad steel (“CCS”) and copper clad
      aluminum (“CCA”) wires, which combine the conductivity and corrosion resistance
      of copper with the strength and relatively low cost of steel and aluminum.
      Copperweld has approximately 130 employees and for the twelve months ended
      June
      30, 2007, generated approximately $70.0 million in revenue.





We
      believe that the acquisition provides a number of strategic benefits. In
      summary, it establishes the combined business as the leading supplier of
      bimetallic products worldwide. In particular, the Copperweld acquisition:





·
            Diversifies
                our end markets,enlarges
                our geographic coverage,adds new products to our portfolio and expands our customer base.As
                we continue to expand production, we believe we will further strengthen
                our market leading positions in the U.S. and China, and facilitate
                expansion into new markets such as India, South East Asia, South
                America,
                and Eastern Europe.





·
            Provides
                substantial additional capacity to move to Dalian which saves significant
                on capital expenditures going forward. It creates a global manufacturing
                and distribution base across which we can efficiently allocate production.
                As a result, we will have increased operational flexibility that
                can
                reduce lead times and improve our responsiveness to customers' needs.





·
            Generates
                opportunities for operational synergies, cost savings through capitalizing
                on joint purchasing opportunities, joint research and development
                and
                engineering, rationalization of production, working capital management
                and
                reduction in overhead costs, as well as increasing productivity and
                maximizing efficiency by implementing best practices in technology
                and
                manufacturing.





·
            Builds
                upon the “Copperweld” brand which is the best in the industry, leading
                bimetallic technology (including exclusive worldwide rights to proprietary
                manufacturing technologies) and the highest quality products todrive
                higher selling prices and margin improvements.




·
            Provides
                additional depth to our existing management team by adding two senior
                executives (Chief Operating Officer and Financial Controller) with
                a
                combined 50 plus years of industry and finance experience and a
                proven track record in developing and sustaining efficient
                operations.





**RESULTS
      OF OPERATIONS**


**THREE
      MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006**





**Selected
      Financial Data:** **(In
      thousands, except EPS)**


For
                  the three months endedIncrease/
                (Decrease)
              
              September 30, 2007
              
              September 30, 2006Net
                  sales
              
              
              147.1%
              
              
              $32,015
              
              
              $12,956Gross
                  Profit
              
              
              163.3%
              
              
              10,533
              
              
              4,000Operating
                  Income
              
              
              184.3%
              
              
              8,734
              
              
              3,073Net
                  income
              
              
              473.8%
              
              
              8,233
              
              
              1,435*Gross
                  Margins*
              
              
              
              
              
              *32.9*%
              
              
              *30.9*%*Net
                  Margins*
              
              
              
              
              
              *25.7*%
              
              
              *11.1*%EPS-
                  Basic
              
              
              413.7%
              
              
              0.37
              
              
              0.07EPS-
                  Diluted
              
              
              423.5%
              
              
              0.33
              
              
              0.06




32




**Price
                  and Production Metrics:**Avg.
                  Copper Price (Changjiang, China)
              
              
              (5.1
              )%
              
              RMB
              65,331
              
              RMB
              
              68,814Avg.
                  Aluminum Price (Changjiang, China)
              
              
              (1.1
              )%
              
              RMB
              19,672
              
              RMB
              
              19,890CCA
                  Average Selling Price/ton
              
              
              0.9
              %
              
              US$
              6,304
              
              US$
              
              6,247




Sales
                  Volume (tons)
              
              
              127.8
              %
              
              
              5,074
              
              
              
              2,227Avg.
                  # of Production Lines
              
              
              
              
              
              
              35
              
              
              
              20Capacity
                  (tons/2- regular shifts)
              
              
              75.0
              %
              
              
              5250
              
              
              
              3,000Utilization
              
              
              
              
              
              
              96.7
              %
              
              
              74.2
              %





**Net
      Sales**





For
      the
      three-month period ended September 30, 2007, net sales were $32.0 million,
      compared to $13.0 million in the same period in 2006, representing an increase
      of $19.0 million or 147.1%. Our sales increase was primarily attributable
      to a 128.2% volume increase and 0.9% average selling price increase. The sales
      volume maintained strength, which was primarily driven by expanded manufacturing
      capacity and the continued increase of demand from vertical end markets such
      as
      electromagnetic wire, braided wire, distribution and coils. In an effort to
      improve our product mix, we are currently developing power cable application
      and
      flat wire applications for transformers.




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





**3Q
                2007**shipment (tons)
            
            % of total salesCo-axial
                Cable
            
            
            3,019
            
            
            59.51%Magnet
                and Special Coated Wire
            
            
            969
            
            
            19.11%Flat
                Wire
            
            
            271
            
            
            5.34%Shielded
                Wire
            
            
            815
            
            
            16.04%Total
            
            
            5,074
            
            
            100.00%








The
      following table sets forth the revenue contribution by geography:





**3Q
                2007**
            
            **3Q
                2006**Domestic
                China
            
            
            99.4%
            
            
            95.4%International
            
            
            0.6%
            
            
            4.6%




33




The
      following table sets forth our five largest customers for the third quarter
      of
      2007 and 2006, respectively:





**FIVE
                LARGEST CUSTOMERS**
            
            **% of Net Sales for the**
              **three months ended**
              **September 30, 2007**
            
            **% of Net Sales for the**
              **three months ended
                September 30, 2006**Danyang
                Lihua. Electronics Co., Ltd.
            
            
            6.45%
            
            
            N/AZhuhai
                Hansheng Industrial Co., Ltd
            
            
            5.57%
            
            
            6.19%ACOME
                Xintai Cable Co., Ltd.
            
            
            5.13%
            
            
            5.32%Jiangxi
                Lianchuang Photoelectricity Science Co.
            
            
            4.95%
            
            
            6.73%Yantai
                Xinmou Cable Co., Ltd
            
            
            4.81%
            
            
            N/ATaizhou
                Yihua Specialty Electric Co., Ltd.
            
            
            N/A
            
            
            6.20%Shantou
                Jinqiao Cable Co., Ltd.
            
            
            N/A
            
            
            5.83%**Five
                Largest Customers as % of Total:**
            
            
            **26.91%**
            
            
            **30.27%**





During
      the three months ended September 30, 2007, we continued to diversify our
      customer base. Our five largest customers accounted for 26.9% of total sales,
      down 3.4% compared to 30.27% for the quarter ended September 30, 2006.





As
      of
      September 30, 2007, the receivable balance due from these five customers
      represented 27.35% of total accounts receivable, down 28.03% from 55.38% as
      compared to corresponding period in 2006. We routinely extend unsecured credit
      to large or regular customers with good credit history. Management reviews
      its
      accounts receivable on a regular basis to determine if the allowance for
      doubtful accounts is adequate at each quarter-end. We only extend 30 to 90
      day
      trade credit to our largest customers, which tend to be well-established and
      large businesses, and we have not seen any accounts receivable go uncollected
      beyond 90 days or experienced any write-off of accounts receivable in the past.
      Thus, we elected not to make any provision for doubtful accounts and consider
      all accounts receivable collectable.





As
      we
      expand our business and seek to further diversify our customer base, product
      mix
      and geographic presence, especially as we proceed with the integration of the
      Copperweld acquisition, we anticipate that our overall customer composition
      and
      our largest customers will change from time to time. Our ability to increase
      sales, maintain and potentially expand operating and net margins largely depends
      on whether we are able to pass raw material price increases along to our
      customers, among other factors. Over the long term, we believe sales growth
      can
      continue to be aggressive and broadly based principally due to increased
      conversion market visibility, expanding market sizes, product profitability,
      and
      momentum to gain additional market shares.  Our ability to meet increased
      customer demand for our products will depend on whether we have sufficient
      production capacity, among other factors.





**Cost
      of Goods Sold**





Cost
      of
      Goods Sold was $21.5 million for the three months ended September 30, 2007,
      compared to $9.0 million for the three months ended September 30, 2006,
      representing an increase of $12.5 million or 139.9%. Cost of Goods Sold measured
      by percentage of net sales was 67.1%, compared to 69.1% for the prior year.
      While average copper spot price decreased by 5.1% when comparing the two
      periods, from RMB68,814 per ton ($9,175) to RMB 65,331 per ton ($8,711) at
      the
      Shanghai Changjiang Market, which is the reference price we use to make copper
      purchases, average cost of sales per ton increased to $4,230 in the third
      quarter of 2007, by $208, or 5.2%, from $4,022 in the third quarter of 2006.
      This was primarily due to inflationary pressure on raw materials other than
      copper and aluminum used in manufacturing and higher freight and energy costs.
      Total raw material costs amounted to $20.6 million, accounting for 95.8% of
      Cost
      of Goods Sold during the third quarter of 2007. By comparison, raw material
      costs totaled $8.4 million, accounting for 93.3% of Cost of Sales during the
      third quarter of 2006.




Cost
      of
      Goods Sold principally consists of the cost of raw materials, labor, utilities,
      manufacturing costs, manufacturing related depreciation, machinery maintenance
      costs, purchasing and receiving costs, inspection costs, shipping and handling
      costs, and other fixed costs.





34




The
      following table sets forth the percentage of raw material purchases from our
      five largest suppliers:




**Five
                Largest Suppliers**
            
            **% of Purchase for the Three Months**
              **Ended September 30, 2007**Dalian
                Guojia Enterprises
            
            
            9.71
            %Beijing
                Golden Eagle Huichuang Copper Co.
            
            
            33.77
            %Baotou
                Aluminum Co., Ltd
            
            
            18.20
            %Dalian
                Zhonghe Trading Co.
            
            
            16.61
            %Harbin
                Electric Cable Co.
            
            
            17.11
            %**Five
                largest suppliers as % of total purchase:**
            
            
            **95.4**
            **%**





The
      five
      largest raw material suppliers provided 95.4% of the Company’s purchase of raw
      materials for the three-month period ended September 30, 2007.





**Gross
      margin**





Gross
      profit for the three months ended September 30, 2007 was $10.5 million, up
      163.3% from gross profit of approximately $4.0 million for the corresponding
      period in the prior year. This was primarily driven by expanded manufacturing
      capacity, which caused a sharp increase of production volume. The gross margin
      increased to 32.9% from 30.9% year-over-year, principally due to improved
      product mix and a rise in the inventory gains realized from the fluctuations
      in
      copper prices.





The
      Company’s recent operating results have been both positively and negatively
      affected by the rise in raw material prices, primarily copper. As current
      inventory purchase costs increase due to higher raw material prices, the
      Company’s RMB mark-up to customers remains relatively constant. This resulted in
      higher sales revenue amount and gross profit amount but lower gross margins.
      On
      the other hand, due to the lag in working through our inventory layers, existing
      inventory purchased at previously lower prices and sold as prices increase
      would
      result in a higher gross profit margin. Conversely, a decrease in commodity
      prices in a short period of time would have the opposite effect, negatively
      affecting results.





A
      majority of our sales are pursuant to a pricing formula that is based on the
      Shanghai Changjiang spot prices of copper and aluminum. The demand for our
      products is highly correlated to, and the attractiveness of our products is
      considerably affected by, the price ratio between copper and aluminum.
      Year-over-year, spot price of copper has escalated rapidly and has been subject
      to significant volatility. The average quarterly spot prices per ton of copper
      and aluminum for COMEX, LME and Shanghai Changjiang Market of PRC, along with
      related gross margins of our company, for the periods indicated, are summarized
      as follows:




3Q'06
            
            4Q'06
            
            1Q’07
            
            2Q'07
            
            3Q'07Avg.
                COMEX Cu ($/ton)
            
            
            7,080
            
            
            6,380
            
            
            5,400
            
            
            6,920
            
            
            7,789Avg.
                COMEX Al ($/ton)
            
            
            2,230
            
            
            2,452
            
            
            2,445
            
            
            2,490
            
            
            2,517*Comex
                Cu/Al*
            
            
            *3.17*
            
            
            *2.60*
            
            
            *2.21*
            
            
            *2.78*
            
            
            *3.09*Avg.
                LME Cu ($/ton)
            
            
            6,960
            
            
            6,420
            
            
            5,380
            
            
            6,940
            
            
            7,840Avg.
                LME Al ($/ton)
            
            
            2,292
            
            
            2,473
            
            
            2,503
            
            
            2,482
            
            
            2,553*LME
                Cu/Al*
            
            
            *3.04*
            
            
            *2.60*
            
            
            *2.15*
            
            
            *2.78*
            
            
            *3.07*Avg.
                Changjiang Cu (RMB/ton)
            
            
            68,814
            
            
            67,318
            
            
            60,757
            
            
            65,830
            
            
            65,331Avg.
                Changjiang Al (RMB/ton)
            
            
            19,890
            
            
            21,288
            
            
            19,307
            
            
            20,334
            
            
            19,672*Changjiang
                Cu/Al*
            
            
            *3.46*
            
            
            *3.16*
            
            
            *3.15*
            
            
            *3.24*
            
            
            *3.32****Gross
                Margin***
            
            
            ***30.9***
            ***%***
            
            ***33.1***
            ***%***
            
            ***36.4***
            ***%***
            
            ***37.0***
            ***%***
            
            ***32.9***
            ***%***




35




We
      anticipate that the gross margins for future quarters will continue to fluctuate
      due to several factors, including, continued raw-material price volatility,
      changes in the relative mix of our products, pricing dynamics especially changes
      in mark-up, among other things. As exhibited by our historical profitability
      pattern, although fluctuating raw material prices caused monthly variation
      in
      the costs of raw material purchases, the fluctuations tend to be short term,
      making forecasting operating results and performance on annual and long term
      basis much easier to do than on quarterly basis. Consequently, it is more
      meaningful to focus on annual rather than interim financial and operating
      results.





Overall,
      as we continue to focus on enhancing profitability, with positive and negative
      effects mentioned above offsetting each other, we expect the gross margins
      to
      stabilize in a range of 33% to 38% on an annual basis.





**Selling,
      General and Administrative Expenses**




Selling
      expenses, which principally include sales related staff salary and welfare,
      travel expenses, and sales commissions, were $189,625 for the three months
      ended
      September 30, 2007, compared to $152,045 for the three months ended 2006,
      representing an increase of 24.7%. As a percentage of net sales, selling
      expenses decreased from 1.2% to 0.6% of the total sales due to positive results
      from cost saving initiatives. General and administrative expenses, as a
      percentage of net sales, decreased to 5.3% for the three months ended September
      30 2007, compared with 6.0% for the three months ended September 30 2006.
      Factors which caused this decrease were cost savings and improved production
      efficiency, partially offset by higher professional fee costs related to
      Sarbanes-Oxley compliance and other requirements as a public company. Also
      included in the general and administrative expenses for the third quarter of
      2007 was share-based compensation expense under SFAS 123(R), which was $337,270,
      equivalent to 1.1% of net revenues. The research and development expenses of
      $105,810, which was included in general and administrative expenses, decreased
      by $34,918, as compared to the three months ended September 30, 2006.





**Interest
      Expense**





Interest
      expense was $1.4 million for the three months ended September 30, 2007, compared
      to $0.3 million for the three months ended September 30, 2006, representing
      a
      366.7% increase. The sharp increase is largely due to the accrued interest
      for
      our $60 million hybrid financing closed in January, 2007, partially offset
      by
      lower average short term bank loan levels on our revolving credit
      facility.





**Income
      tax**





Fushi
      International, Inc. is a company incorporated in the State of Nevada and Fushi
      Holdings, Inc., our wholly owned subsidiary, is a company incorporated in the
      State of Delaware. We conduct substantially all our operations through our
      PRC
      operating subsidiaries. Although we are subject to United States taxation,
      we do
      not anticipate incurring significant United States income tax liability through
      the year 2008.




·
            we
                did not conduct any material business or maintain any branch office
                in the
                United States during the three months ended September 30,
                2007,


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


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




36




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




PRC
      Enterprise income tax




In
      the
      three months ended September 30, 2007, our business operations were solely
      conducted by our subsidiaries incorporated in the PRC. PRC enterprise income
      tax
      is calculated based on taxable income determined under PRC accounting
      principles. In accordance with “Income Tax Law of China for Enterprises with
      Foreign Investment and Foreign Enterprises,” or the Income Tax Law, “Foreign
      Invested Enterprises”, or FIEs, established in the PRC are generally subject to
      an “Enterprise Income Tax”, or EIT, rate of 33%. PRC domestic companies are
      governed by the Enterprise Income Tax Laws of the PRC and are also generally
      subject to an EIT rate of 33%. However, the Income Tax Laws provide certain
      favorable tax treatment to a company that qualifies as a "New or High-technology
      Enterprise" or a “Foreign Invested Enterprise ” located
      in the old town of an inshore open city”. Additionally, the governments at the
      provincial, municipal and local levels can provide many tax incentives and
      abatements based on a number of programs at each level.




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





Dalian
      Fushi, a 100%
      variable interest, non-operating subsidiary, was incorporated in the PRC and is subject to PRC income tax which
      is computed according to the relevant laws and regulations in the PRC. Dalian
      Fushi's bimetallic composite conductor wire product was approved by Dalian
      Cit
      as a "high-tech" project. As a result, Dalian Fushi is a business entity that
      is
      qualified as a "new or high-technology enterprise," and is entitled to a
      two-year full exemption from the PRC enterprise income tax starting from its
      first year of operation, which expired on December 31, 2003, followed by a
      50%
      reduction and other favorable tax treatment for the succeeding three years,
      which expires on December 31, 2006. The provision for income taxes for the
      three
      months ended September 30, 2007 was zero as we didn’t have any operation under
      Dalian Fushi from the beginning of 2007.





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





On
      March 16, 2007, the National People’s Congress of China passed the new EIT
      Law, which will take effect as of January 1, 2008. The new EIT Law imposes
      a unified income tax rate of 25.0% on all domestic-invested enterprises and
      FIEs, such as our PRC operating subsidiaries, unless they qualify under certain
      limited exceptions. But the EIT Law permits companies to continue to enjoy
      their
      existing preferential tax treatments until such treatments expire in accordance
      with their current terms. We expect details of the transitional arrangement
      for
      the five-year period from January 1, 2008 to December 31, 2012
      applicable to enterprises approved for establishment prior to March 16,
      2007 to be set out in more detailed implementing rules to be adopted in the
      future. Any increase in our effective tax rate as a result of the above may
      adversely affect our operating results.





**Net
      Income**





Net
      income for the third quarter of 2007 was $8.2 million, or 25.7% of net
      revenue, compared to $1.4 million, or 11.1% of net revenue, in the same
      period last year, representing an increase of $6.8 million or 473.8%. The sharp
      increase is primarily due to i) substantial revenue increase; ii) gross
      margin improvement from 30.9% to 32.9%; iii) operating expense decrease as
      a
      percentage of revenue from 7.2% to 5.6%; iv) the one-time charge resulting
      from
      the issuance of the registration rights penalty shares valued
      at $1,466,250, the impact of which significantly lowered the net income and
      net margin for three months ended September 30, 2006.




37




Basic
      and
      diluted earnings per share (EPS) for the third quarter of 2007 were $0.37 and
      $0.33, respectively, compared to $0.07 and $0.06, in the same period last year,
      respectively. The weighted average shares outstanding for the three months
      ended
      September 30, 2007 to calculate basis and diluted EPS were 22.3 million and
      25.5
      million, respectively. The weighted average shares outstanding for the three
      months ended September 30, 2006 to calculate basis and diluted EPS were 19.9
      million and 22.8 million, respectively. Excluding share-based compensation
      expense, the basic and diluted EPS would be 0.38 and 0.34 for the third quarter
      of 2007.




The
      following table sets forth the computation of basic and diluted earnings per
      share:







For
                the three months endedSeptember 30, 2007
            
            September 30, 2006**EARNINGS**Net
                income
            
            $
            8,233,326
            
            $
            1,434,892**BASIC**Income
                applicable to common shareholders
            
            $
            8,233,326
            
            $
            1,434,892Basic
                weighted-average common stock outstanding
            
            
            22,263,618
            
            
            19,932,129Basic
                earnings per share
            
            $
            0.37
            
            $
            0.07**DILUTED**Income
                applicable to common shareholders
            
            $
            8,233,326
            
            $
            1,434,892Add:
                Interest expense for the Convertible Notes
            
            $
            150,000Adjusted
                income applicable to common shareholders
            
            $
            8,383,326
            
            $
            1,434,892Basic
                weighted-average common stock outstanding
            
            
            22,263,618
            
            
            19,932,129Effect
                of dilutive securities:Warrants
            
            
            319,699
            
            
            2,829,099Assumed
                conversion of 3% Senior Secured
            
            
            2,857,143Convertible
                Notes due 2012Stock
                Options
            
            
            14,411Diluted
                weighted-average common stocks outstanding
            
            
            25,454,871
            
            
            22,761,228Diluted
                earnings per share
            
            $
            0.33
            
            $
            0.06




**Foreign
      Currency Translation Gains**





In
      the
      three months ended September 30, 2007, the RMB steadily rose against the US
      dollar. As a result of the appreciation of the RMB, we recognized a foreign
      currency translation gain of $2.3 million. Given the uncertainty of exchange
      rate fluctuations, we cannot estimate the effect of these fluctuations on our
      future business, product pricing, results of operations or financial condition.
      See “Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation
      of the Renminbi may materially and adversely affect your investment.” in our
      Annual Report on Form 10-KSB for the year ended December 31, 2006.




38




Materially
      all of our revenues and a majority of our expenses in the first nine months
      of
      2007 were denominated in RMB. The income statement accounts and cash flow were
      translated for the nine months ended September 30, 2007 and 2006 at 1RMB Yuan
      to
      0.13064 USD (or 1 US$ to 7.655 RMB Yuan) and 1RMB Yuan to 0.12498 USD (or 1
      US$
      to 8.00 RMB Yuan), and for the three months ended September 30, 2007 and 2006
      were at 1RMB Yuan to 0.13246 USD (or 1US$ to 7.55 RMB Yuan) and 1RMB Yuan to
      0.12568 USD (or 1 US$ to 7.96 RMB Yuan), respectively. Balance sheet amounts
      with the exception of equity at September 30, 2007 were translated at 1 RMB
      Yuan
      to 0.13340 USD, or 1 USD to 7.50 RMB Yuan. The equity accounts were stated
      at
      their historical rate.





**NINE
      MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006**





**Highlights** **(In
      thousands, except EPS)**





For
                the nine months endedIncrease/
              (Decrease)
            
            September
                30, 2007
            
            September
                30, 2006Net
                sales
            
            
            72.7
            %
            $
            79,238
            
            $
            45,881Gross
                Profit
            
            
            60.1
            %
            
            27,871
            
            
            17,404Operating
                Income
            
            
            50.8
            %
            
            22,233
            
            
            14,741Net
                income
            
            
            57.9
            %
            
            20,191
            
            
            12,387*Gross
                Margins*
            
            
            
            
            
            *35.2*
            *%*
            
            *37.9*
            *%**Net
                Margins*
            
            
            
            
            
            *25.5*
            *%*
            
            *27.0*
            *%*EPS-
                Basic
            
            
            51.5
            %
            
            0.94
            
            
            0.62EPS-
                Diluted
            
            
            55.2
            %
            
            0.85
            
            
            0.55




**Net
      Sales**





Sales
      revenue increased $33.3 million, or 72.7%, to $79.2 million for the nine months
      ended September 30, 2007 from $45.9 million for the same period ended on
      September 30, 2006. This increase was mainly attributable to expanded capacity
      and as a result, increased product shipment.





**Gross
      Profit Margin**





We
      achieved gross profit of $27.9 million for the nine months ended September
      30,
      2007, up 60.1% from gross profit of approximately $17.4 million for the
      corresponding period in the prior year. The increase was principally due to
      55.3% volume increase as measured by tons shipped. Gross profit margin was
      35.2%, down 2.7% from 37.9% as compared to the corresponding period in 2006.
      This primarily reflected the impact of fluctuating quarterly gross margins
      driven by fluctuating raw material costs and changes in the mix of products
      sold. As we continue to focus on enhancing profitability, optimizing cost
      structure and expanding margins, we expect the gross margins to somewhat
      stabilize in the range between 33% and 38%.





**Operating
      Expenses**





The
      total
      operating expenses, for the nine months ended September 30, 2007, was $5.6
      million, or 7.1% of net sales. This represented an increase of $3.0 million,
      or
      111.7%, as compared to $2.7 million, or 5.8% of net sales for the nine months
      ended September 30, 2006. As a percentage of net sales, selling expenses dropped
      slightly from 0.9% to 0.7% and general and administrative expenses increased
      from 4.9% to 6.4%. Although we benefited from economics of scale and operational
      leverage, increase in operating expenses nevertheless outpaced revenue growth
      principally due to increased professional fees related to public company and
      non-cash share-based compensation expenses.





39




**Net
      Income**





Our
      net
      income was $20.2 million, or 25.5% of net sales, for the nine months ended
      September 30, 2007, as compared to $12.4 million, or 27.0% of net sales, for
      the
      nine months ended September 30, 2006. The decrease of net margin was primarily
      due to higher general and administrative expenses as a result of expansion
      initiatives and share-based compensation expense and higher interest expense
      associated with the issued senior notes in the first quarter of 2007. However,
      the increase of net income reflected continued expansion in sale revenue levels,
      continued strong demand for our products as a result of high copper price,
      and
      sustained profitability.





Basic
      and
      diluted earnings per share (EPS) for the nine months ended September 30, 2007,
      were $0.94 and $0.85, respectively, compared to $0.62 and $0.55, in the same
      period last year, respectively. The weighted average shares outstanding for
      the
      nine months ended September 30, 2007 to calculate basis and diluted EPS were
      21.4 million and 24.3 million, respectively. The weighted average shares
      outstanding for the nine months ended September 30, 2006 to calculate basis
      and
      diluted EPS were 19.9 million and 22.6 million, respectively. Excluding
      share-based compensation expense, basic and diluted EPS would be $0.98 and
      $0.89, respectively, for the nine months ended September 30, 2007.





**LIQUIDITY
      AND CAPITAL RESOURCES**




We
      have
      historically financed our operations and capital expenditures principally
      through private sales of equity securities, a private placement of high yield
      senior notes and convertible senior notes, bank loans, and cash provided by
      operations. Specifically, from inception through September 30, 2007, our
      financing activities included the following:




-
              On
                  December 13 and December 28, 2005 in two closings, we raised $12
                  million
                  in gross proceeds through a private placement offering of our series
                  B
                  convertible preferred stock (the “Equity Financing”). We received
                  $9,930,412 in net proceeds after deducting placement agent discounts
                  and
                  commissions and payment of professional and other related expenses.
                  The
                  investors in this offering also received 2,125,000 warrants and
                  each
                  warrant granted the holder the right to purchase one additional
                  share of
                  our common stock at $3.67 per share.


-
              On
                  January 24, 2007, we raised $60 million in gross proceeds and $56.4
                  million in net proceeds, through the sale of high yield and convertible
                  senior notes. Details for this financing are discussed
                  below.


-
              Of
                  the 2,125,000 warrants issued in the Equity Financing, 68,985 were
                  exercised during the year ended December 31, 2006 and 304,389 were
                  exercised during the three months ended March 31, 2007. Pursuant
                  to
                  Section 2.5 (b) of the warrants, the Company called the exercise
                  of the
                  warrants outstanding on April 20, 2007 and all of the warrants
                  were
                  subsequently exercised.


-
              We
                  financed previous expansion through long term bank loans amounting
                  to RMB
                  80 million, interest rate at 5.58% per annum, with a maturity of
                  April,
                  2008. We also used short term bank loans and revolving facilities
                  to
                  finance our working capital needs.





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





40




In
      summary, our cash flows were:




For
                the nine months endedSeptember
                30, 2007
            
            September 30, 2006Net
                cash provided by operating activities
            
            $
            5,205,987
            
            $
            8,413,908Net
                cash used in investing activities
            
            
            (40,646,040
            )
            
            (9,286,833
            )Net
                cash provided by financing activities
            
            
            58,995,008
            
            
            8,977,578Effect
                of exchange rate on cash and cash equivalents
            
            
            1,984,326
            
            
            680,276Cash
                and cash equivalents at beginning of period
            
            
            20,493,551
            
            
            6,163,670Cash
                and cash equivalents at end of period
            
            $
            46,032,832
            
            $
            14,948,599





For
      the
      nine months ended September 30, 2007, net cash provided by operating activities
      was $5.2 million. This was primarily attributable to our net income of $20.1
      million, adjusted by an add-back of non-cash expenses mainly consisting of
      depreciation and amortization of $2.2 million and share-based compensation
      expense of $0.9 million, and a $17.5 million increase in working capital.
      Specifically, the working capital increase was primarily due to i) a $5.4
      million accounts receivable increase driven by revenue growth; ii) a $5.2
      million inventory increase, principally raw materials, to support planned
      expansion and sales growth; iii) a $5.6 million increase in advance to suppliers
      to secure price of copper; iv) a $1.3 million increase in other receivables
      and
      prepaid expenses, consisting primarily of prepayments for copper supplies in
      advance of shipment; partially offset by a $0.6 million increase in other
      payables and accrued liabilities.




For
      the
      nine months ended September 30, 2007, net cash used in investing activities
      was $40.6 million, and was primarily attributable to i) a $3.0 million secured
      bridge funding advanced to Copperweld Bimetallics; ii) a $4.1 million advance
      for purchase of land use rights; iii) a $34.3 million capital expenditure on
      improvement of property and purchase of new equipment and machinery including
      advances for purchase; partially offset by $0.8 million of proceeds from
      derivative instrument.





For
      the
      nine months ended September 30, 2007, net cash provided by financing
      activities was $59.0 million, which was primarily attributable to $56.4 million
      in net proceeds from the sale of high yield notes and convertible notes as
      described in our Current Report on Form 8-K filed on January 26, 2007, and
      $7.5
      million in proceeds from warrants exercises. We also rolled over maturing,
      short
      term working capital loans in the amount of $12.5 million and drew down $11.5
      million from our existing credit line facilities to meet working capital needs.
      Maturities for the working capital financing range from three to six months.
      We
      intend to renew these loans again when they become due. In addition, we repaid
      $3.9 million of loan from shareholder during the nine months ended September
      30,
      2007.





As
      of
      September 30, 2007, we had cash and cash equivalents of $46.0 million, up
      $31.1 million from $14.9 million at September 30, 2006.




For
      the
      remainder of 2007, as we proceed with integration of the Copperweld acquisition,
      we believe we can realize significant savings on capital expenditures. We
      anticipate that our working capital requirements may increase as a result of
      the
      expanded scale of the combined business, continued increases in sales and
      potential increases in the price of copper. We believe that our existing cash,
      cash equivalents and cash flows from operations, combined with availability
      under our revolving credit facility, will be sufficient to meet our presently
      anticipated future cash needs for at least the next 12 months. We may, however,
      require additional cash resources due to changed business conditions or other
      future developments, including any investments or acquisitions we may decide
      to
      pursue.




41





**CRITICAL
      ACCOUNTING POLICIES**




There
      have been no changes in our critical accounting policies or significant
      accounting estimates as disclosed in our 2006 Annual Report on Form 10-KSB
      (see Note 2 in the Notes to the Consolidated Financial Statements included
      elsewhere in this Form 10-Q).




**Item
      3.**  **Quantitative
      and Qualitative Disclosures about Market Risk**





***Commodity
      Price Risk***




Certain
      raw materials used by us are subject to price volatility caused by supply
      conditions, political and economic variables and other unpredictable factors.
      The primary purpose of our commodity price management activities is to manage
      the volatility associated with purchases of commodities in the normal course
      of
      business. We do not speculate on commodity prices.




We
      are
      exposed to price risk related to our purchase of copper used in the manufacture
      of our products. Our copper price management strategy involves the use of
      natural techniques, where possible, such as purchasing copper for future
      delivery at fixed prices. We did not have any commodity price derivatives or
      hedging arrangements outstanding at September 30, 2007 and did not employ any
      commodity price derivatives during the quarter then ended.




***Foreign
      Exchange Risk***





Our
      reporting currency is the Renminbi. Substantially all of our operations are
      conducted in the PRC, with the exception of our export business and limited
      overseas purchases of raw materials. Most of our sales and purchases are
      conducted within the PRC in Renminbi, which is the official currency of the
      PRC.
      As a result, the effect of the fluctuations of exchange rates is considered
      minimal to our business operations.




The
      PRC
      State Administration for Foreign Exchange, under the authority of the People’s
      Bank of China, controls the conversion of Renminbi into foreign currencies.
      The
      principal regulation governing foreign currency exchange in China is the Foreign
      Currency Administration Rules (1996), as amended, or the “Rules.” Under the
      Rules, once various procedural requirements are met, Renminbi is convertible
      for
      current account transactions, including trade and service-related foreign
      exchange transactions and dividend payments, but not for capital account
      transactions, including direct investment, loans or investments in securities
      outside China, without prior approval of the State Administration of Foreign
      Exchange of the People’s Republic of China, or its local counterparts.




Since
      July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
      currently the Renminbi exchange rate versus the U.S. dollar is restricted to
      a
      rise or fall of no more than 0.3% per day and the People’s Bank of China
      regularly intervenes in the foreign exchange market to prevent significant
      short-term fluctuations in the exchange rate, the Renminbi may appreciate or
      depreciate significantly in value against the U.S. dollar in the medium to
      long
      term. Moreover, it is possible that in the future, the PRC authorities may
      lift
      restrictions on fluctuations in the Renminbi exchange rate and lessen
      intervention in the foreign exchange market.




Any
      devaluation of the Renminbi against the U.S. dollar would consequently have
      an
      adverse effect on our financial performance and asset values when measured
      in
      terms of U.S. dollars. On the other hand, the appreciation of the Renminbi
      could
      make our customers’ products more expensive to purchase because many of our
      customers are involved in the export of goods, which may have an adverse impact
      on their sales. A decrease in sales by our customers could reduce our sales
      and
      revenues. In addition, from time to time we may have U.S. dollar denominated
      borrowings, and therefore a decoupling of the Renminbi many affect our financial
      performance in the future.




We
      recognized a foreign currency translation adjustment of approximately $2.3
      million and $5.3 million, for the three months and nine months ended September
      30, 2007, respectively.





42




***Interest
      Rate Risk***





We
      are
      primarily exposed to interest rate risk arising from 6 months LIBOR rate on
      which the interest rate for our HY Notes is based. If there was a hypothetical
      1% change in 6-month LIBOR interest rate, the net impact to earnings would
      be
      approximately $0.4 million on annualized basis.





In
      order
      to mitigate our exposure to volatility in interest rates and foreign currency
      exchange rates associated with the Guaranteed Senior Secured Floating Rate
      Notes
      due 2012 (HY Note), on April 10, 2007, the Company entered into a cross currency
      swap transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”).
      The Swap, with a notional principal value of $40 million, converts the
      LIBOR + 7% per annum USD variable interest rate to an 8.3% per annum RMB fixed
      interest rate. The agreement was deemed effective January 24, 2007. The Swap
      requires semi-annual payment in arrears on July 24 and January 24 and matures
      earlier of (1) cash settlement defined as early termination; or (2) January
      24,
      2012, at which point the Swap requires an exchange of RMB and USD based
      principals. Under the terms of the cross currency swap, the Company receives
      variable interest rate payments in USD and makes fixed interest rate payments
      in
      RMB with settlement netted in USD, thereby creating the equivalent of fixed-rate
      debt. The Company uses this derivative instrument only to hedge exposures in
      the
      ordinary course of business and does not invest in derivative instruments for
      speculative purposes.





The
      fair
      value of the Swap is determined with the assistance of third party provided
      calculations which reflect the present values of the difference between
      estimated future variable-rate receipts in USD and future fixed-rate payments
      in
      RMB. For the nine months ended September 30, 2007, changes in fair value of
      the
      Swap designated and effective as cash flow hedge resulted in an increase in
      the
      liability and a loss to other comprehensive income of $4.6 million, net of
      taxes. On July 24, 2007, the first interest payment date, the Company received
      cash in the amount of $802,523 from MLCS, which was recorded as a gain from
      derivative transactions. As of September 30, 2007, the Company had cross
      currency hedge receivable amounting to $286,245. For nine
      months ended September 30, 2007, there were no amounts recorded in the
      consolidated statement of income in relation to this interest rate swap related
      to ineffectiveness.





The
      Company also has outstanding senior debt that may be converted into the
      Company’s common stock. Accordingly, the price of its common stock may affect
      the fair value of the Company’s convertible debt. The estimated fair value of
      the Company’s outstanding convertible senior notes increased to $39.9 million at
      September 28, 2007 from $20 million at January 25, 2007, primarily due
      to the increase in the Company’s stock price during the eight months ended
      September 28, 2007. A hypothetical 10% decrease in the price of the
      Company’s common stock from the price at September 28, 2007 would have
      reduced the fair value of its then outstanding convertible senior notes by
      $3.99 million.




Changes
      in the market value of the Company’s debt do not affect the reported results of
      operations unless the Company is retiring such obligations prior to their
      maturity. This analysis did not consider the effects of a changed level of
      economic activity that could exist in such an environment and certain other
      factors. Further, this sensitivity analysis assumes no changes in the Company’s
      financial structure.




***Credit
      Risk***





We
      have
      not experienced significant credit risk, as most of our customers are long-term
      customers with excellent payment records. We review our accounts receivable
      on a
      regular basis to determine if the allowance for doubtful accounts is adequate
      at
      each quarter-end. We only extend 30 to 90 day trade credit to our largest
      customers, which tend to be well-established and large businesses, and we have
      not seen any accounts receivable go uncollected beyond 90 days or experienced
      any write-off of accounts receivable in the past.




43




***Inflation
      Risk***





In
      recent
      years, China has not experienced significant inflation, and thus inflation
      has
      not had a material impact on our results of operations. According to the
      National Bureau of Statistics of China (NBS) (www.stats.gov.cn), the change
      in
      Consumer Price Index (CPI) in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and
      2006, respectively. However, in the first nine month of 2007, according to
      NBS,
      CPI rose significantly at a monthly average rate of 4.4%. Especially during
      the
      months of August, September and October, CPI was up 6.5%, 6.2% and 6.5%,
      respectively. Inflationary factors, such as increases in the cost of our
      products and overhead costs, could impair our operating results. Although we
      do
      not believe that inflation has had a material impact on our financial position
      or results of operations to date, a high rate of inflation may have an adverse
      effect on our ability to maintain current levels of gross margin and selling,
      general and administrative expenses as a percentage of sales revenue if the
      selling prices of our products do not increase with these increased
      costs.




**Item
      4.**  **Controls
      and Procedures.**




(a)  *Evaluation
      of disclosure controls and procedures* .
      Our
      chief executive officer and our chief financial officer, after evaluating the
      effectiveness of the company’s “disclosure controls and procedures” (as defined
      in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules
      13a-15e and 15d-15e) as of the end of the period covered by this report (the
      “Evaluation Date”), have concluded that, as of the Evaluation Date, our
      disclosure controls and procedures were effective.




(b)  *Changes
      in internal controls* .
      During
      the fiscal quarter covered by this quarterly report, there was no change in
      our
      internal control over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect our internal control over financial
      reporting.





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control systems are met.
      Because of the inherent limitations in all control systems no evaluation of
      controls can provide absolute assurance that all control issues, if any, within
      a company have been detected. Such limitations include the fact that human
      judgment in decision-making can be faulty and that breakdowns in internal
      control can occur because of human failures, such as simple errors or mistakes
      or intentional circumvention of the established process.





**PART
      II**





**Item
      6.** **** **Exhibits**





(a)
      Exhibits





31.1 –
      Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





31.2 –
      Certification of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





32.1 –
      Certification of Chief Executive Officer and Chief Financial Officer pursuant
      to
      Section 906 of the Sarbanes-Oxley Act of 2002.


44





SIGNATURES





Pursuant
      to the requirements of the Securities Act of 1934, the Registrant has duly
      caused this report to be signed on its behalf by the undersigned there unto
      duly
      authorized.





FUSHI
                INTERNATIONAL, INC.Date: November
                13, 2007
            BY:Wenbing
                Chris WangChief
                Financial Officer




45


INDEX
      TO
      EXHIBITS





EXHIBIT
              NUMBER
            
            DESCRIPTION31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.





46