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 MARCH 31,
                  2007.
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE TRANSITION PERIOD FROM _________ TO
                  __________
 
 COMMISSION
        FILE NUMBER: 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 x No o.
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No
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  o
              Accelerated
                  filer o
              Non-accelerated filer x
 
 The
        number of shares of Common Stock of the Registrant, par value $.006 per share,
        outstanding on May 4, 2007, was 21,674,503.
  Transitional
        Small business Disclosure Format (Check one): Yes o; No o.
 
  1
  **FUSHI
        INTERNATIONAL INC.**
 **INDEX
        TO MARCH 31, 2006 FORM 10-Q**
 
 Page**Part
                  I - Financial Information**Item
                  1 - Financial Statements
              
              3Consolidated
                  Balance Sheets as of March 31, 2007 (unaudited) and December 31,
                  2006
              
              3Consolidated
                  Statements of Income and Other Comprehensive Income for the three
                  months
                  ended March 31, 2007 (unaudited) and March 31, 2006
                  (unaudited)
              
              4Consolidated
                  Statements of Cash Flows for the three months ended March 31, 2007
                  (unaudited) and March 31, 2006 (unaudited)
              
              5Notes
                  to the Consolidated Financial Statements (unaudited)
              
              6Item
                  2 - Management's Discussion and Analysis of Results of Operations
                  and
                  Financial Condition
              
              24Item
                  3 - Qualitative
                  and Quanitative Disclosures Regarding Market Risk
              
              34Item 4
                  - Controls and Procedures
              
              35**Part
                  II - Other Information**Item
                  6 - Exhibits
              
              35Signature
                  Page
              
              36
  2
  **PART
        I. FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 FUSHI
                    INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                    BALANCE SHEETSAS
                    OF MARCH 31, 2007 AND DECEMBER 31, 2006A
                    S S E T S
 March
                    31,
                
                Decemeber
                    31,2007
                
                2006(Unaudited)CURRENT
                    ASSETS:Cash
                
                $
                72,786,330
                
                $
                20,493,551Cash
                    - restricted
                
                
                5,749,800
                
                
                -Accounts
                    receivable, trade
                
                
                9,723,584
                
                
                7,042,408Inventories
                
                
                7,800,998
                
                
                7,403,116Other
                    receivables and prepaid expenses
                
                
                2,100,301
                
                
                497,380Advances
                    to suppliers
                
                
                3,270,885
                
                
                3,390,917Total
                    current assets
                
                
                101,431,898
                
                
                38,827,372PLANT
                    AND EQUIPMENT, net
                
                
                50,562,884
                
                
                47,256,475OTHER
                    ASSETS:Advances
                    to suppliers, noncurrent
                
                
                9,305,839
                
                
                4,559,357Intangible
                    asset, net
                
                
                5,517,194
                
                
                5,518,931Deferred
                    loan expense
                
                
                3,450,411
                
                
                -Total
                    other assets
                
                
                18,273,444
                
                
                10,078,288Total
                    assets
                
                $
                170,268,226
                
                $
                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
                
                $
                1,343,008
                
                $
                1,055,684Liquidated
                    damage payable
                
                
                -
                
                
                1,466,250Short
                    term bank loans
                
                
                9,971,500
                
                
                12,504,135Note
                    payable
                
                
                8,288,000
                
                
                -Other
                    payables and accrued liabilities
                
                
                1,232,507
                
                
                321,276Customer
                    deposits
                
                
                610,134
                
                
                531,065Taxes
                    payable
                
                
                863,717
                
                
                982,345Loan
                    from shareholder
                
                
                4,004,253
                
                
                3,911,256Total
                    current liabilities
                
                
                26,313,119
                
                
                20,772,011LONG
                    TERM LIABILITIES:Long
                    term bank loans
                
                
                10,360,000
                
                
                10,256,000Notes
                    Payable
                
                
                60,000,000
                
                
                -70,360,000
                
                
                10,256,000Total
                    liabilities
                
                
                96,673,119
                
                
                31,028,011SHAREHOLDERS'
                    EQUITY:Preferred
                    stock, $0.001 par value, 5,000,000 shares authorized, none outstanding
                    as
                    of March 31, 2007 and December 31, 2006, respectively
                
                
                -
                
                
                -Common
                    stock, $0.006 par value, 100,000,000 shares authorized,20,625,802
                    and 20,046,162 shares issued and outstanding as of March 31,
                    2007 and
                    December 31, 2006, respectively
                
                
                123,755
                
                
                120,277Additional
                    paid in capital
                
                
                31,944,866
                
                
                29,364,955Statutory
                    reserves
                
                
                5,181,443
                
                
                4,452,467Retained
                    earnings
                
                
                32,742,459
                
                
                28,496,702Accumulated
                    other comprehensive income
                
                
                3,602,584
                
                
                2,699,723Total
                    shareholders' equity
                
                
                73,595,107
                
                
                65,134,124Total
                    liabilities and shareholders' equity
                
                $
                170,268,226
                
                $
                96,162,135
  3
  FUSHI
                    INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF INCOME ANDOTHER
                    COMPREHENSIVE INCOMEFOR
                    THE THREE MONTHS ENDED MARCH 31, 2007 AND
                    2006
  2007
                
                2006(Unaudited)
                
                (Unaudited)REVENUES
                
                $
                21,137,917
                
                $
                14,590,143COST
                    OF GOODS SOLD
                
                
                13,452,737
                
                
                9,321,561GROSS
                    PROFIT
                
                
                7,685,180
                
                
                5,268,582OPERATING
                    EXPENSESelling
                    expenses
                
                
                175,194
                
                
                116,620General
                    and administrative expenses
                
                
                1,441,002
                
                
                756,521Total
                    operating expense
                
                
                1,616,196
                
                
                873,141INCOME
                    FROM OPERATIONS
                
                
                6,068,984
                
                
                4,395,441OTHER
                    INCOME (EXPENSE)Interest
                    income
                
                
                191,210
                
                
                11,012Interest
                    expense
                
                
                (1,282,072
                )
                
                (250,106
                )Other
                    income
                
                
                62,110
                
                
                91,547Other
                    expense
                
                
                (65,499
                )
                
                (25,298
                )Total
                    other expense
                
                
                (1,094,251
                )
                
                (172,845
                )INCOME
                    BEFORE INCOME TAXES
                
                
                4,974,733
                
                
                4,222,596PROVISION
                    FOR INCOME TAXES
                
                
                -
                
                
                456,680NET
                    INCOME
                
                
                4,974,733
                
                
                3,765,916OTHER
                    COMPREHENSIVE INCOMEForeign
                    currency translation adjustment
                
                
                902,861
                
                
                395,620COMPREHENSIVE
                    INCOME
                
                $
                5,877,594
                
                $
                4,161,536NET
                    INCOME PER SHARE-BASIC
                
                $
                0.24
                
                $
                0.20BASIC
                    WEIGHTED AVERAGE NUMBER OF SHARES
                
                
                20,507,096
                
                
                18,474,527NET
                    INCOME PER SHARE-DILUTED
                
                $
                0.21
                
                $
                0.19DILUTED
                    WEIGHTED AVERAGE NUMBER OF SHARES
                
                
                23,824,495
                
                
                19,532,120
  4
  FUSHI
                    INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF CASH FLOWSFOR
                    THE THREE MONTHS ENDED MARCH 31, 2007 AND
                    2006
  2007
                
                2006(Unaudited)
                
                (Unaudited)CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                4,974,733
                
                $
                3,765,916Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Depreciation
                
                
                301,596
                
                
                438,374Amortization
                    of intangibles
                
                
                57,483
                
                
                55,696Amortization
                    of loan commission
                
                
                149,589
                
                
                -Change
                    in operating assets and liabilities:(Increase)
                    decrease in assets:Accounts
                    receivable
                
                
                (2,599,888
                )
                
                (3,278,593
                )Inventories
                
                
                (321,590
                )
                
                (3,285,593
                )Other
                    receivables
                
                
                (1,495,482
                )
                
                399,174Increase
                    (decrease) in liabilities:Accounts
                    payable
                
                
                275,573
                
                
                2,182,533Other
                    payables and accrued liabilities
                
                
                904,538
                
                
                1,305,146Customer
                    deposits
                
                
                73,405
                
                
                -Other
                    taxes payable
                
                
                (128,103
                )
                
                505,580Income
                    taxes payable
                
                
                -
                
                
                (1,921,003
                )Net
                    cash provided by operating activities
                
                
                2,191,854
                
                
                167,230CASH
                    FLOWS FROM INVESTING ACTIVITIES:Change
                    in restricted cash
                
                
                (5,728,044
                )
                
                -Purchase
                    of property and equipment
                
                
                (3,118,108
                )
                
                (769,597
                )Advances
                    for purchase of equipment
                
                
                (4,682,463
                )
                
                -Net
                    cash used in investing activities
                
                
                (13,528,615
                )
                
                (769,597
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Due
                    from related companies
                
                
                -
                
                
                707,979Proceeds
                    from bank loans
                
                
                14,263,112
                
                
                9,875,000Payments
                    on bank loans
                
                
                (8,655,841
                )
                
                (7,496,902
                )Net
                    proceeds from convertible notes
                
                
                56,400,000
                
                
                -Issuance
                    of common stock
                
                
                1,826
                
                
                -Proceeds
                    from warrants exercised
                
                
                1,115,313
                
                
                (78,725
                )Net
                    cash provided by financing activities
                
                
                63,124,410
                
                
                3,007,352EFFECT
                    OF EXCHANGE RATE ON CASH
                
                
                505,130
                
                
                (115,849
                )INCREASE
                    IN CASH
                
                
                52,292,727
                
                
                2,289,136CASH,
                    beginning of period
                
                
                20,493,551
                
                
                6,163,670CASH,
                    end of period
                
                $
                72,786,330
                
                $
                8,452,806SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:Cash
                    paid for interest expense
                
                $
                341,027
                
                $
                319,784Cash
                    paid for income taxes
                
                $
                -
                
                $
                2,396,100
 5
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (Unaudited)
  **Note
          1 - Organization**
 
 Fushi
          International, Inc. (formerly Parallel Technologies, 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. During 1995, Parallel ceased all business operations and disposed
          of all
          assets, liabilities and operating activities. Since the fiscal year ended
          December 31, 1995, Parallel had no business operations, assets or liabilities,
          until December 13, 2005, when it acquired Diversified Product Inspections,
          Inc.
          (“DPI”) and its wholly owned subsidiary, Dalian Diversified Product Inspections
          Bimetallic Cable Co., Ltd. (“Dalian DPI”).
 
 DPI
          was incorporated on September 22, 2005 in the state of Delaware. Through
          its
          wholly owned subsidiary, Dalian DPI incorporated in the People's Republic
          of
          China (“PRC”) as a wholly owned foreign limited liability company on September
          24, 2005. 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”) was incorporated
          on January 16, 2002 in the PRC as a limited liability company. The business
          activities of Dalian Fushi are the same with those of Dalian DPI. Dalian
          Fushi
          is a 100% variable interest entity of the Company.
 
 On
          December 13, 2005, Parallel consummated a Plan of Exchange (“the Agreement”)
          with the shareholders of DPI pursuant to which Parallel issued 784,575.16
          shares
          of newly designated Series A Convertible Preferred Stock to the stockholders
          of
          DPI for all the issued and outstanding stock of DPI.
 
 The
          merger of Parallel and DPI was treated for accounting purposes as a reverse
          merger and recapitalization by DPI (“the accounting acquirer”) and
          re-organization by Parallel (“the accounting acquiree”). The financial
          statements have been prepared as if the reorganization had occurred
          retroactively.
 
 Accordingly,
          the financial statements include the following:
  (1)
                The
                    balance sheet consists of the net assets of the acquirer at historical
                    cost and the net assets of the acquiree at historical
                    cost
 
 (2)
                The
                    statement of operations includes the operations of the acquirer
                    for the
                    periodspresented
                    and the operations of the acquiree from the date of the
                    merger.
 
 On
          the same date, Dalian DPI entered into a series of agreements (collectively
          known as the Restructuring Agreements) with Dalian Fushi and the shareholders
          of
          Dalian Fushi in which Dalian DPI will take over the management of the business
          activities of Dalian Fushi and will hold a 100% variable interest in Dalian
          Fushi.
 
 As
          both companies are under common control, this has been accounted for as
          a
          reorganization of entities and the financial statements have been prepared
          as if
          the reorganization had occurred retroactively.
 
 6
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (Unaudited)
 
 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.
 
 On
          December 13, 2005 Fushi
          International (Dalian) entered
          into the Restructuring Agreements with Dalian Fushi and its shareholders
          in
          which Fushi International (Dalian) took over the management of the business
          activities of Dalian Fushi. The Restructuring Agreements consist of the
          following agreements:
 
 a)
                Dalian
                    Fushi leased toFushi
                    International (Dalian)land and 5 production lines which are the only assets of Dalian
                    Fushi.
 
 b)
                First
                    and second patent contracts in which 4 patents in use and 1 pending
                    registration patents are transferred from Dalian Fushi to Fushi
                    International (Dalian) for $14,870.
 
 c)
                Trademark
                    authorization in which the trademark "Fushi" registered in the
                    name of a
                    stockholder was transferred to Fushi International (Dalian) free
                    of
                    charge.
 
 d)
                Entrusted
                    management contract in which the shareholders of Dalian Fushi
                    entrusted
                    the business operation of Dalian Fushi and its management to
                    Fushi
                    International (Dalian) at a monthly management fee. The monthly
                    management
                    fee shall be the monthly net income earned by Dalian Fushi. Fushi
                    International (Dalian) shall assume all the operation risks out
                    of the
                    entrusted management of Dalian Fushi and bear all the losses
                    incurred by
                    Dalian Fushi.
 
 7
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (Unaudited)
 
 e)
                Shareholders'
                    voting proxy agreement in which Dalian Fushi appointed Board
                    of Directors
                    of Fushi International (Dalian) as their proxy to vote on all
                    matters that
                    require Dalian Fushi shareholders'
                    approval.
 
 f)
                Exclusive
                    Option Agreement in which Dalian Fushi shareholders granted Fushi
                    International (Dalian) an irrecoverable option to acquire Dalian
                    Fushi's
                    equity and remaining assets.
 
 g)
                Share
                    Pledge Agreement in which Dalian Fushi shareholders pledged all
                    their
                    equity interests in Dalian Fushi to guarantee Fushi International
                    (Dalian)’s rights and benefits under the Restructuring
                    Agreements.
 
 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 .
 
 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 collectability is reasonably assured. Payments received before all
          of the
          relevant criteria for revenue recognition are recorded as customer
          deposits.
 
 Advertising
          costs
 
 Advertising
          costs for the three months ended March 31, 2007 and 2006 were $4,698 and
          $8,644
          respectively, and are expensed as incurred.
 
 Foreign
          currency translation and 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).
 
 
 8
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          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
          year.
          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.
 
 Translation
          adjustments resulting from this process included in accumulated other
          comprehensive income in the consolidated statement of shareholders’ equity
          amounted to $3,602,584 and $2,699,723 as of March 31, 2007 and December
          31,
          2006, respectively. The balance sheet amounts with the exception of equity
          at
          March 31, 2007 and December 31, 2006 were translated at 7.72 and 7.80 RMB
          to
          $1.00 USD. The equity accounts were stated at their historical rate. The
          average
          translation rates applied to income statement accounts and cash flows for
          the
          three months ended March 31, 2007 and 2006 were 7.75 and 8.05 RMB to $1.00
          USD,
          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.
 
 Cash
          and concentration of risk
 
 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 March
          31,
          2007 and December
          31, 2006, the Company had deposits in excess of federally insured limits
          total
          of $72,471,090 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.
 
 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 March 31,
          2007,
          management concluded no reserves were necessary. The Company had accounts
          receivable of $9,723,584 and $7,042,408 as of March 31, 2007 and December
          31,
          2006, respectively.
 
 
 9
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (Unaudited)
  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 March
          31, 2007, the Company has determined that no reserves are
          necessary.
 
 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.
 
 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
                  20-30yearsMachinery
                      and equipment
                  10-15
                      yearsOther
                      equipment
                  5yearsTransportation
                      equipment
                  5years
  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 $10,036,000
          to fund
          additions to the plant. Interest capitalized for the three months ended
          March
          31, 2007 and December 31, 2006 was $75,518 and 282,641 ,
          respectively .
 
 
 10
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2007
 (Unaudited)
 
 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
          March 31,
          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 March 31, 2007, no impairment of intangible assets
          has
          been recorded.
 
 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.
 
 Research
          and development costs are recorded in selling and general and administrative
          expenses. Research and development costs were $34,965 and $29,786 for the
          three
          months ended March 31, 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.
 
 
 11
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 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.
 
 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 March 31, 2007.
 
 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
          affect on the Company’s financial statements.
 
 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.
 
 Derivative
 
 The
          Company adopted SFAS No 133, “Accounting for Derivative Instruments and Hedging
          Activities” in relation to its long term convertible notes. The Company has
          valued the conversion features of the notes accordingly and determined
          the
          conversion feature of the notes does not require bifurcation.
 
 12
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 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
          February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued
          Statement of Financial Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value
          Option for Financial Assets and Financials Liabilities — Including an Amendment
          of FASB Statement No. 115. This standard permits measurement of certain
          financial assets and financial liabilities at fair value. If the fair value
          option is elected, the unrealized gains and losses are reported in earnings
          at
          each reporting date. Generally, the fair value option may be elected on
          an
          instrument-by-instrument basis, as long as it is applied to the instrument
          in
          its entirety. The fair value option election is irrevocable, unless a new
          election date occurs. SFAS No. 159 requires prospective application and
          also
          establishes certain additional presentation and disclosure requirements.
          The
          standard is effective as of the beginning of the fiscal year that begins
          after
          November 15, 2007. The Company is currently evaluating the provisions
          of SFAS No. 159 to determine the potential impact, if any, the adoption
          will
          have on the Company’s financial statements.
 
 **Note
          4 - Additional product sales information**
  The Company’s
          revenues by geographic area, namely the Chinese domestic market and
          international market, are as follows:
  March
                      31, 2007
                  
                  March
                      31, 2006(Unaudited)
                  
                  (Unaudited)Domestic
                      China
                  
                  $
                  20,763,863
                  
                  $
                  13,967,802Other
                      foreign countries
                  
                  
                  374,054
                  
                  
                  622,341Total
                      sales
                  
                  $
                  21,137,917
                  
                  $
                  14,590,143
 
 13
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 **Note
          5 - Inventories**
 
 Inventories
          consisted of the following:
 March
                      31, 2007
                  
                  December
                      31, 2006(Unaudited)Raw
                      materials
                  
                  $
                  6,593,613
                  
                  $
                  5,380,640Work
                      in process
                  
                  
                  666,312
                  
                  
                  242,350Finished
                      goods
                  
                  
                  374,192
                  
                  
                  1,736,507Packaging
                      materials
                  
                  
                  5,215
                  
                  
                  14,727Semi
                      finished goods
                  
                  
                  161,666
                  
                  
                  28,892Totals
                  
                  $
                  7,800,998
                  
                  $
                  7,403,116
  **Note
            6 - Plant and equipment**
 
 Plant
          and equipment consisted of the following:
  March
                      31, 2007
                  
                  December
                      31, 2006(Unaudited)Buildings
                      and improvements
                  
                  $
                  19,000,325
                  
                  $
                  18,809,588Transportation
                      equipment
                  
                  
                  2,585,686
                  
                  
                  2,559,806Machinery
                  
                  
                  9,129,257
                  
                  
                  8,814,271Equipments
                  
                  
                  362,089
                  
                  
                  415,083Construction
                      in progress
                  
                  
                  25,621,676
                  
                  
                  22,110,429Totals
                  
                  
                  56,699,033
                  
                  
                  52,709,177Less
                      accumulated depreciation
                  
                  
                  (6,136,149
                  )
                  
                  (5,452,702
                  )Totals
                  
                  $
                  50,562,884
                  
                  $
                  47,256,475
 Depreciation
          expense for the three months ending March 31, 2007 and 2006 amounted to
          $301,596
          and $438,374, respectively.
 
 Interest
          capitalized as of March 31, 2007 and December 31, 2006 was $75,518 and
          $282,641,
          respectively
 
 **Note
          7 - 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 $3,270,885 and $3,390,917 for inventory and $9,305,839 and
          $4,559,357 for equipment purchases as of March 31, 2007 and December 31,
          2006,
          respectively.
 
 **Note
          8 - Major customers and suppliers**
 
 Six
          major
          customers accounted for 43% and 41% of the sales for the three months ended
          March 31, 2007 and 2006, respectively. Total receivable balance due from
          these
          customers at March 31, 2007 and 2006 amounted to $4,173,508 and $3,200,484
          respectively.
 
 14
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 
 Four
          major suppliers provided approximately 87% and 83% of the Company’s purchases of
          raw materials for the three months ended March 31, 2007 and 2006, respectively.
          Accounts payable to these vendors amounted to $3,111,556 and $3,178,527,
          respectively.
 
 **Note
          9 - Intangible assets**
 
 Intangible
          assets consist of land use rights and patents. All land in the People’s Republic
          of China is government owned and cannot be sold to any individual or company.
          However, the government grants the user a “land use right” (the Right) to use
          the land. The Company amortizes the Right on a straight line basis over
          50
          years.
 
 Intangible
          assets consisted of the following:
  March
                      31, 2007
                  
                  December
                      31, 2006(Unaudited)Patents
                  
                  $
                  1,396,010
                  
                  $
                  1,381,996Land
                      use rights
                  
                  
                  5,187,641
                  
                  
                  5,135,5646,583,651
                  
                  
                  6,517,560Less:
                      accumulated amortization
                  
                  
                  (1,066,457
                  )
                  
                  (998,629
                  )Total
                  
                  $
                  5,517,194
                  
                  $
                  5,518,931
  Amortization
          expense for the three months ended March 31, 2007 and 2006 amounted to
          $57,483
          and $55,696, respectively.
 
 **Note
          10 - 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 a 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 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 fist 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 three months ended March
          31,
          2007. The provision for income taxes for the period ended March 31 consisted
          of
          the following:
 
 15
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 March
                      31, 2007
                  
                  March
                      31, 2006(Unaudited)
                  
                  (Unaudited)Provision
                      for China income tax
                  
                  $
                  -
                  
                  $
                  415,164Provision
                      for China local tax
                  
                  
                  -
                  
                  
                  41,516Total
                      provision for income taxes
                  
                  $
                  -
                  
                  $
                  456,680
 The
          following table reconciles the U.S. statutory rates to the Company’s effective
          tax rate for the years ended March 31:
  March
                      31, 2007
                  
                  March
                      31, 2006(Unaudited)
                  
                  (Unaudited)U.S.
                      Statutory rates
                  
                  
                  34.0
                  %
                  
                  34.0
                  %Foreign
                      income not recoginized 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 year ended March 31, 2007 amounted to $1,641,662.
          The net effect on earnings per share had the income tax been applied would
          decrease basic earnings per share from $0.24 to $0.16 and diluted earning
          per
          share from $0.21 to $0.14.
 
 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 three
          months
          ended March 31, 2007. The net operating loss carry forwards for United
          States
          income taxes amounted to $4,071,997 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 March
          31, 2007 was $1,384,479. The net change in the valuation allowance for
          the three
          month period ended March 31, 2007 was an increase of $508,420. Management
          will
          review this valuation allowance periodically and make adjustments as
          warranted.
 
 
 16
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 Value
          Added Tax
 
 VAT
          on
          sales and VAT on purchases amounted to $1,896,386 and $3,637,680 for the
          three
          months ended March 31, 2007 and $1,656,482 and $1,728,761 for the three
          months
          ended March 31, 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.
 
 Taxes
          payable consisted of the following:
 March
                      31, 2007
                  
                  December
                      31, 2006(Unaudited)VAT
                  
                  $
                  495,392
                  
                  $
                  607,968Others
                  
                  
                  368,325
                  
                  
                  374,377Total
                      taxes payable
                  
                  $
                  863,717
                  
                  $
                  982,345
 **Note
          11 - Loan from shareholder**
 
 In
          September 2006, one of the Company's shareholders advanced
          $4,451,328  to
          the Company for operations. This amount has been reduced by a receivable
          due
          from the same shareholder in the amount of $540,072. The balance as of
          March 31,
          2007 and December 31, 2006 was $4,004,253 and $3,911,256, respectively.
          This
          loan is non-interest bearing, unsecured and is payable on demand **.**
 
 **Note
          12 - 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 is based on the
          shares
          accrued from May 14, 2006 through August 2, 2006 and it is valued at the
          highest
          bid on August 2, 2006, the date of the registration statement to be declared
          effective, which is at $5.75 per common stock share. In January 2007, the
          Company issued 255,000 shares of common stock at $0.006 par value to the
          investors as payment for the liquidated damages.
 
 **Note
          13 - 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:
 
 17
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 March
                      31, 2007
                  
                  December
                      31, 2006(Unaudited)Dalian
                      Commercial Bank Sahekou Branchdue
                      May 15, 2007 annual interestat
                      6.338%, secured by the Companyland
                      use right and building
                  
                  $
                  984,200
                  
                  $
                  974,320Bank
                      of China Dalian Xinhaiwen Branchdue
                      March 11, 2007 annual interestat
                      5.94%, secured by the Companyland
                      use right and building
                  
                  
                  -
                  
                  
                  3,846,000Bank
                      of China Dalian Xinhaiwen Branchdue
                      February 22, 2007 annual interestat
                      6.547%, secured by the Companyland
                      use right and building
                  
                  
                  -
                  
                  
                  2,564,000Bank
                      of China Dalian Xinhaiwen Branchdue
                      March 27, 2007 annual interestat
                      6.547%, secured by the Companyland
                      use right and building
                  
                  
                  -
                  
                  
                  2,179,400Bank
                      of China Dalian Xinhaiwen Branchdue
                      April 21, 2007 annual interestat
                      6.732%, secured by the Companyland
                      use right and building
                  
                  
                  2,849,000
                  
                  
                  2,820,400ShenZhen
                      Development Bank, Dalian Branchvarious
                      due dates and interest rates,secured
                      by export letter of credits
                  
                  
                  -
                  
                  
                  120,015Bank
                      of China Dalian Xinhaiwen Branchdue
                      October 8, 2007 annual interestat
                      6.732%, secured by the Companyland
                      use right and building
                  
                  
                  3,885,000
                  
                  
                  -Bank
                      of China Dalian Xinhaiwen Branchdue
                      December 19, 2007 annual interestat
                      7.029%, secured by the Companyland
                      use right and building
                  
                  
                  2,253,300
                  
                  
                  -Total
                  
                  $
                  9,971,500
                  
                  $
                  12,504,135
 Total
          interest expense of the short term loans for the three months ending March
          31,
          2007 and 2006 amounted to $196,505 and $319,784, respectively.
 
 The
          Company has paid off its short term loans of $2,849,000 in April 2007 and
          obtained a new short term loan in the same amount at annual interest rate
          of
          7.029% which is due in February 2008.
 
 18
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 **Note
          14 - Short term notes payable**
 
 Short-term
          notes payable are lines of credit extended by the banks. When purchasing
          raw
          materials, the Company often issues a short term note payable to the vendor.
          This short term note payable is guaranteed by the bank for its complete
          face
          value. The banks require the Company to deposit 100% of the note amount
          at the
          bank as a guarantee deposit which is classified on the balance sheet as
          restricted cash
 
 The
          Company had $8,288,000 and $0 short term notes payable outstanding as of
          March
          31, 2007 and 2006, respectively.
 
 **Note
          15 - 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:
 
 March
                    31, 2006
                
                December
                    31, 2006(Unaudited)ICBC,
                    Dalian JinZhou BranchDue
                    April 10, 2008, annaul interestat
                    5.58%, secured by the Companyland
                    use right and building
                
                $
                5,180,000
                
                $
                5,128,000ICBC,
                    Dalian JinZhou BranchDue
                    April 10, 2008, annaul interestat
                    5.58%, secured by the Companyland
                    use right and building
                
                
                5,180,000
                
                
                5,128,000Totals
                
                $
                10,360,000
                
                $
                10,256,000
 Interest
          incurred on the long term loans as of March 31, 2007 and December 31, 2006
          was
          $144,522 and $572,284; of which capitalized interest amounted to $75,518
          and
          $282,641, respectively
 
 **Note
          16 - 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) $40 million principal amount (less 3% Notes Discount and 4% of 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. These notes are secured by the shares of the Company's wholly-owned
          subsidiary, Fushi Holdings Inc., (“FHI”) (formerly, Diversified Product
          Inspections, Inc, known as “DPI”), a Delaware corporation. Citadel was also
          granted certain corporate governance rights over the Company and its
          subsidiaries.
 
 
 19
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 Management
          has 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 so 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, Fushi International
          (Dalian)
          Bimetallic Cable Co., Ltd. (formerly, Dalian Diversified Product Inspections
          Bimetallic Cable Co., Ltd., known as “Dalian DPI”), a wholly-owned subsidiary of
          FHI (“FID”), 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.
 
 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
          thereunder.
 
 Additional
          3.3% of principal amount of the convertible note, applies to failure to
          maintain
          listing on certain Nasdaq markets as of July 24, 2008, payable by July
          31, 2008
          and additional Interest of 3% will be applied if no Qualifying IPO has
          occurred
          on or before July 24, 2008.
 
 As
          of
          March 31, 2007, the Company has a total of $60,000,000 long term notes
          payable
          outstanding. Deferred commission amounted to $3,450,411 and interest expense
          for
          the three months ended March 31, 2007 amounted to $1,016,400.
 
 **Note
          17 - Supplemental disclosure of cash flow information**
 
 
 20
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 Income
          taxes paid amounted to $0 and $2,396,100 for the three months ended March
          31
          2007 and 2006, respectively. Interest paid for the three months ended March
          31,
          2007 and 2006 amounted to $341,027 and $319,784, respectively
 
 The
          Company has issued 255,000 shares of common stock at $0.006 par pursuant
          to
          liquated damage payable as disclosed in note 12.
 
 Non
          cash
          financing activity included $3,600,000 loan commission, net of loan proceeds,
          of
          which $149,589 was amortized for the three months ended March 31,
          2007.
 
 **Note
          18 - Earnings per share**
 
 The
          following demonstrates the calculation for earnings per share:
 March
                      31, 2006
                  
                  December
                      31, 2006(Unaudited)Net
                      income for basic earnings per share
                  
                  $
                  4,974,733
                  
                  $
                  3,765,916Add:
                      Interest expense for convertible note
                  
                  
                  110,000
                  
                  
                  -Net
                      income for diluted earnings per share
                  
                  
                  5,084,733Weighted
                      average shares used in basic computation
                  
                  
                  20,507,096
                  
                  
                  18,474,527Diluted
                      effect of warrants and convertible note
                  
                  
                  3,317,400
                  
                  
                  1,057,593Weighted
                      average shares used in diluted computation
                  
                  
                  23,824,496
                  
                  
                  19,532,120Earnings
                      per shareBasic
                  
                  $
                  0.24
                  
                  $
                  0.20Diluted
                  
                  $
                  0.21
                  
                  $
                  0.19
  **Note
          19 - Shareholders' Equity**
  (A)
                  Reverse
                      stock split
  On
          January 30, 2006, the Company affected 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
                          Stocks
 
 The
          Series A and Series B Convertible Preferred Stocks (“Series A and B Stocks”)
          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 Stocks.
 (C)
                      Series
                            A and Series B Convertible Preferred
                            Stocks
 (1)
                20,046,162
                    shares of common stock, par value
                    $.006.
 
 (2)
                Warrants
                    purchasing 2,056,015 shares of common stock at an initial exercise
                    price
                    of $3.67 per share, expires December
                    2010.
 
 
 21
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 (3)
                Warrants
                    purchasing 424,929 shares of common stock with exercise prices
                    of $3.11
                    per share, expires December 2011.
 (D)
                        Series
                              A and Series B Convertible Preferred
                              Stocks
 (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)
                Warrants
                    were exercised for 304,389 shares of 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.
 
 The
          Company has 1,751,626 warrants exercisable at $3.67 and 424,929, warrants
          exercisable at $3.11 outstanding as of March 31, 2007 and the following
          is a
          summary of the warrant activities:
 Number
                      of
                    Warrants
                    Outstanding
                  Number
                      of
                    Warrants
                    Exercisable
                  Weighted-
                    Average
                    Exercise
                      Price
                  Average
                    Remaining
                    Contractual
                    LifeBalance
                        at December 31, 2006
                  2,480,944
                  2,480,944
                  $3.57
                  3.95
                      yearsGrantedForfeitedExercised
                  (304,389)
                  (304,389)
                  $3.67Balance
                      at March 31, 2007
                  2,176,555
                  2,176,555
                  $3.56
                  3.70
                      years
 **Note
          20 - 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.
 
 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 three months ended March 31, 2007, the Company transferred
          $728,976 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.
 
 
 22
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
            31,
            2007
 (Unaudited)
 **Note
          21 - Current vulnerability due to certain concentrations**
 
 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.
 
 **Note
          22 - 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 US$420,000
          for
          past due commission. The Company claims that the plaintiff did not render
          services as stipulated in the agreement and believes any negative outcome
          of
          this litigation is highly unlikely.
 
 On
          December 11, 2006, the Company has been named a defendant of an action
          filed in
          the United States District Court of a disputed contract agreement. The
          Company
          believes the claim is without merit and does not anticipate any negative
          outcome
          of this case.
 
 23
 **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 since no one
        can
        accurately predict the future. 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. (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**
 
 We
        are
        engaged, through our indirectly wholly-owned operating subsidiary Fushi
        International (Dalian), in the manufacture and sale of bimetallic composite
        wire
        products, principally copper clad aluminum wires ("CCA"). Copper Clad Aluminum
        is an electrical conductor which has an outer sleeve of copper metallurgically
        bonded to a solid aluminum core. Normally using 70% less copper than
        conventional copper wire, but offering materially the same utility and
        functionality, CCA is a cost effective substitute for solid copper wire in
        a
        wide variety of applications such as coaxial cable for cable television and
        various video and data applications, signal transmission lines for
        telecommunication networks, distribution lines for electricity, wire components
        for electronic instruments and devices, utilities, building wire and other
        industrial wires.
 
 Copper
        prices, which have increased over the past several years, have varied
        significantly and may vary significantly in the future because the copper
        industry is highly volatile and cyclical in nature. This affects our business
        both positively and negatively - as our products are a substitute for pure
        copper wire, higher prices increase demand, while lower copper prices can
        decrease demand. As lower copper containing bimetallic products continue
        to take
        copper out of end uses as a substitute, we are encouraged by the global outlook
        for our products. Particularly in China, we believe market conditions should
        support aggressive revenue growth from sales volume standpoint. Pricing
        effectiveness in response to volatility in principal raw materials such as
        copper and aluminum could have a major impact on our sales, profitability,
        and
        financials results.
 
 The
        principal elements of competition in the bimetallic industry are, in our
        opinion, production capacity, working capital sufficiency, pricing, product
        availability, and quality. We believe that we have attained a leadership
        position with respect to all of these factors.
 
 **HIGHLIGHTS**
  24
  ·
              For
                  the quarter ended March 31, 2007, total net revenues increased
                  by
                  44.9% to $21.1 million from $14.6 million compared to the quarter
                  ended March 31, 2006.
  ·
              Net
                  income increased by 32.1% to $5.0 million from $3.8
                  million.
  ·
              Basic
                  and diluted earnings per share increased 20.0% and 10.5% respectively
                  to
                  $0.24 and $0.21. Total basic weighted-average numbers of shares
                  outstanding used to calculate Basic EPS were 20.5 million and 18.5
                  million
                  for the quarter ended March 31, 2007 and the quarter ended March
                  31, 2006,
                  respectively. Total diluted weighted-average numbers of shares
                  outstanding
                  used to calculate Diluted EPS were 23.8 million and 19.5 million,
                  respectively, for the two corresponding periods.
  In
        the
        three months ended March 31, 2007, we have experienced, and expect to continue
        to experience, broadly based, robust revenue growth due to higher average
        selling prices and higher sales volume driven by numerous factors including
        volatile copper price, strong market demand, new and expanded application
        of our
        products, government and industry initiatives, and as a result, accelerated
        substitution for solid copper in telecom cable, magnet wires, and power cable.
        In addition, during the quarter, we were able to substantially pass along
        higher
        raw material costs to our customers therefore maintaining our gross and net
        margins.
 
 We
        believe that the following trends will impact us and our financial performance
        for the remainder of 2007: increased competition may tend to negatively impact
        pricing and product profitability, but we believe we can benefit from our
        significantly expanded manufacturing capacity and a substantially enlarged
        market. Strategies we are in the process of implementing include:
 
 ·
              In
                  existing markets, backed by 100% to 150% planned increase in the
                  number of
                  production lines, we intend to significantly strengthen our leadership
                  position through economies of scale and adopting aggressive pricing
                  strategies, possibly sacrificing individual order profitability
                  on
                  temporary basis, to continue our momentum and gain additional market
                  share.
  ·
              In
                  newly entered markets, such as flat wire for electrical transformers,
                  our
                  expanded capacity will allow us to achieve a dominant market share
                  as a
                  first mover. Since no competition has presently succeeded in entering
                  this
                  market due to quality and technical barriers, we believe we can
                  enjoy a
                  very high level of profits in this market. This will also make
                  up for
                  reduced profits in the other markets and allow us to have improved
                  product
                  mix and overall sales and margin expansion.
  Going
        forward, our goal is to become a leader in the bimetallic industry, both
        in
        China and internationally. Set forth below are our measures and strategies:
  ·
              Capital
                  Expenditure. We intend to significantly increase our manufacturing
                  capacity to address market opportunities. Current facilities are
                  sufficient for three-fold increase in capacity with only capital
                  expenditure needed for new lines.
  ·
              Working
                  Capital. High volatility on raw material prices calls for major
                  working
                  capital commitment. Together with improved cash cycle management,
                  we
                  believe our $72 million cash position provides a solid foundation
                  for
                  expansion.
  ·
              Cost
                  reduction and margin expansion.We
                  will strive to maintain and expand our profit margins by improving
                  our
                  production ability, enhancing equipment management, optimizing
                  the process
                  and products structure, perfecting the supplier system, and reducing
                  production cost.****
 25
 ·
              Research
                  and Development. By partnering with the China Optical and Electronic
                  Association and other domestic research institutions and leveraging
                  our
                  strong R&D capability, we plan to further strengthen our competitive
                  position and gain increased market share in the
                  PRC.
  ·
              Domestic
                  and international expansion. We plan to continue to focus on the
                  robust
                  PRC market while expanding and enhancing our sales, distribution
                  and
                  customer support capabilities for international
                  sales.
  ·
              Raw
                  materials. We plan to mitigate the risk of increases in raw material
                  price
                  volatility through effective requirements planning, working closely
                  with
                  key suppliers to obtain the best possible pricing and delivery
                  terms and
                  implementing timely price adjustment wherever
                  warranted.
  ·
              Acquisitions/
                  Strategic alliance. We are reviewing strategic investments, acquisitions
                  and/or strategic relationships with companies that can substantially
                  broaden our customer base and expand our distribution capability.
                  Our
                  acquisition targets will include companies that:
  (i)
              Can
                  be easily integrated into product manufacturing and corporate
                  management;
  (ii)
              Have
                  strong joint venture partners that would become major customers;
  (iii)
              Can
                  broaden our customer base and allow us to penetrate new markets,
                  and
  (iv)
              Are
                  located geographically closer to our target
                  customers.
  The
        following table shows, for the periods indicated, information derived from
        our
        statements of income, expressed as a percentage of sales for the period
        presented.
 1Q
                  2007
              
              1Q
                  2006Revenues
              100.0%
              
              100.0%Cost
                  of Goods Sold
              63.6%
              
              63.9%Gross
                  Profit
              36.4%
              
              36.1%Operating
                  expensesSelling
                  expenses
              0.8%
              
              0.8%General
                  and administrative expenses
              6.8%
              
              5.2%Total
                  operating expense
              7.6%
              
              6.0%Income
                  from operations
              28.7%
              
              30.1%Other
                  income (expense)Interest
                  income
              0.9%
              
              0.1%Interest
                  expense
              (6.1%)
              
              (1.7%)Other
                  income
              0.3%
              
              0.6%Other
                  expense
              (0.3%)
              
              (0.2%)Total
                  other (expense), net
              (5.2%)
              
              (1.2%)Income
                  before income taxes
              23.5%
              
              28.9%Provision
                  for income taxes
              0.0%
              
              3.1%Net
                  income
              23.5%
              
              25.8%
  26
  **SELECTED
        FINANCIAL DATA**( In
        thousands, except EPS amount):
 
 Increase/(Decrease)
              1Q
                  2007
              1Q
                  2006Net
                  sales
              44.9%
              $
                  21,138
              $
                  14,590Gross
                  Profit
              45.9%
              7,685
              5,269Operating
                  Income
              38.1
                  %
              6,069
              4,395Net
                  income
              32.1%
              4,975
              3,766EPS-
                  Basic
              20.0%
              0.24
              0.20EPS-
                  Diluted
              10.5%
              0.21
              0.19**Price
                  and Production Metrics:**Avg.
                  Copper Price (Changjiang, China)
              28.7%
              RMB
                  60,757
              RMB
                  47,218Avg.
                  Aluminum Price (Changjiang, China)
              (0.02%)
              RMB
                  19,307
              RMB
                  19,728CCA
                  Average Selling Price/ton
              24.7%
              US$
                  6,202
              US$
                  4,972Sales
                  Volume (tons)
              16.2%
              3,408
              2,934Avg.
                  # of Production Lines
              
              20
              20Capacity
                  (tons/2- regular shifts)
              
              3,000
              3,000Utilization
              
              113.6%
              97.8%
  **Net
        Sales**
 
 For
        the
        three-month period ended March 31, 2007, our net sales were $21.1 million,
        representing an increase of $6.5 million or 44.5% compared to the three months
        ended March 31, 2006. Our sales growth was primarily attributable to a 24.7%
        increase in the average selling price of product sold and 16.2% increase
        in the
        volume of bimetallic products sold. The average selling price improvement
        year-over-year resulted primarily from the increase of raw material prices,
        particularly copper prices. While business cycle and demand normally experience
        slowdown during the first quarter of a calendar due to the long Chinese New
        Year
        holiday, we maintained the positive sales momentum that began at the second
        quarter of 2006 and our sales volume increases were generally driven by
        over-capacity utilization and accelerated customer acceptance of bimetallic
        products as a low cost substitute for solid copper wire, among other things.
  27
  The
        following table breaks down application categories as percentage of total
        sales:
 
 **1Q
                  2007**sales
                  (tons)
              
              %
                  of total salesCo-axial
                  Cable
              1,967
              
              57.72%Magnet
                  and Special Enameled Wire
              567
              
              16.64%Shielded
                  Wire
              874
              
              25.65%Total
              3,408
              
              100.00%
  The
        following table sets forth the revenue contribution by geography:
 
 **1Q
                  2007**
              
              **1Q
                  2006**Domestic
                  China
              98.2%
              
              95.7%International
              1.8%
              
              4.3%
 
 The
        following table sets forth our five largest customers for the first quarter
        of
        2007 and 2006, respectively:
 FIVE
                  LARGEST CUSTOMERS
              %
                  of Net Sales for the three months ended
                March
                  31, 2007
              %
                  of Net Sales for the three months ended March 31, 2006Jiangxi
                  Lianchuang Photoelectricity Science Co.
              9.41%
              14.34%Leoni
                  (Changzhou) Electronics Co., Ltd.
              8.32%
              N/ATaizhou
                  Yihua Specialty Electric Co., Ltd.
              8.02%
              5.61%Zhuhai
                  Hansheng Industrial Co., Ltd
              6.65%
              6.71%Yantai
                  Xinmu Wire and Cable Co., Ltd.
              5.11%
              N/A%Shantou
                  Jinqiao Cable Co., Ltd.
              N/A
              7.88%ACOME
                  Xintai Cable CO., Ltd.
              N/A
              6.56**Five
                  Largest Customers as % of Total:**
              **37.51%**
              **41.10%**
  During
        the three months ended March 31, 2007, we continued to diversify our customer
        base. Our five largest customers accounted for 37.51% of total sales, down
        8.73%
        compared to 41.10% of the first quarter ended 2006.
 
 As
        of
        March 31, 2007, the receivable balance due from these five customers represented
        35.57% of total accounts receivables. 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
 
 **Cost
        of Goods Sold**
  28
 
 Cost
        of
        Goods Sold was $13.5 million for the three months ended March 31, 2007, compared
        to $9.3 million for the three months ended March 31, 2006, representing an
        increase of $4.2 million or 44.3%. Cost of Goods Sold measured by percentage
        of
        net sales was 63.6%, compared to 63.8% for the prior year. The slight drop
        in
        Cost of Goods Sold as a percentage of sales largely reflects our pricing
        success
        in passing on most of the increases in our principal raw material costs,
        especially the volatile copper price, to the customers. Average cost of sales
        per ton increased by $770 (24.2%) to $3,947 in the first quarter of 2007,
        from
        $3,177 in the first quarter of 2006. Total raw material costs amounted to
        $12.7
        million, accounting for 94.5% of Cost of Goods Sold during the first quarter
        of
        2007.
 
 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. The significant increase in Cost of Goods Sold
        was
        principally due to substantially increased production and sales volume resulting
        from strong demand and added capacity.
 
 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
                  March 31, 2007**Dalian
                  Guojia Enterprise
              46.07%Beijing
                  Golden Eagle Huichuang Copper Co.
              26.59%Baotou
                  Aluminum Co., Ltd
              8.86%Liaoyang
                  Copper Co.
              5.32%Harbin
                  Electric Wire Co.
              4.96%Five
                  largest suppliers as % of total purchase:
              91.80%
 
 **Five
                  Largest Suppliers**
              **%
                  of Total Advance to Suppliers as of**
                **March
                  31, 2007**Dalian
                  Guojia Enterprise
              0.00%Beijing
                  Golden Eagle Huichuang Copper Co.
              16.69%Baotou
                  Aluminum Co., Ltd
              6.22%Liaoyang
                  Copper Co.
              0.00%Harbin
                  Electric Wire Co.
              1.78%Total:
              24.69%
 
 The
        five
        largest raw material suppliers provided 91.80% of the Company’s purchase of raw
        materials for the three-month period ended March 31, 2007. The Company’s advance
        to these suppliers was 24.69% as of March 31, 2007.
 
 **Gross
        margin**
 
 Gross
        profit for the three months ended March 31, 2007 was $7.7 million, up 45.9%
        from
        gross profit of approximately $5.3 million for the corresponding period in
        the
        prior year. As a percentage of net sales, gross profit increased slightly
        to
        36.4% from 36.1% year over year. Gross margin was positively impacted by
        higher
        average selling prices and the favorable effect of advance payments, which
        allowed us to lock in raw material prices at lower levels at the time of
        purchase, and to a lesser degree, negatively impacted by a minor decline
        in
        product markup due to price pressure.
 
 A
        majority of our sales are pursuant to a pricing formula that is based on
        the
        Shanghai Changjiang spot prices of copper and aluminum. While our revenue
        and
        cost of goods sold fluctuate with raw material prices, our profitability
        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 of China, along with related gross margins
        of
        our company, for the periods indicated are summarized as follows:
  29
  1Q'06
              2Q'06
              3Q'06
              4Q'06
              1Q’07Avg.
                  COMEX Cu (US$/ton)
              4,500
              6,740
              7,080
              6,380
              5,400Avg.
                  COMEX Al (US$/ton)
              2,243
              2,448
              2,230
              2,452
              2,445*Comex
                  Cu/Al*
              *2.01*
              *2.75*
              *3.17*
              *2.60*
              *2.21*Avg.
                  LME Cu (US$/ton)
              4,480
              6,540
              6,960
              6,420
              5,380Avg.
                  LME Al (US$/ton)
              2,216
              2,432
              2,292
              2,473
              2,503*LME
                  Cu/Al*
              *2.02*
              *2.69*
              *3.04*
              *2.60*
              *2.15*Avg.
                  Changjiang Cu (RMB/ton)
              47,218
              65,172
              68,814
              67,318
              60,757Avg.
                  Changjiang Al (RMB/ton)
              19,728
              20,741
              19,890
              21,288
              19,307*China
                  Changjiang Cu/Al*
              *2.39*
              *3.14*
              *3.46*
              *3.16*
              *3.15****Gross
                  Margin***
              ***36.1%***
              ***44.4%***
              ***30.9%***
              ***33.1%***
              ***36.4%***
 
 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, and the average selling prices
        for
        our products, among other things. As exhibited by our historical profitability
        pattern, although raw material prices fluctuate over time, which caused monthly
        variation in the costs of raw material purchases, the fluctuation 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.
 
 As
        we
        continue to focus on enhancing profitability, optimizing cost structure and
        expanding margins, we expect the gross margins to stabilize in the range
        between
        33% and 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 $175,194 for three months ended
        March 31, 2007, compared to $116,620 of the first quarter ended 2006,
        representing a 50.2% increase. As a percentage of net sales, selling expenses
        remained unchanged at 0.8% for the first quarter of 2007 compared to the
        three
        months ended March 31, 2006. General and administrative expenses, as a
        percentage of net sales, increased to 6.8% for the three months ended March
        31
        2007, compared with 5.2% for the three months ended March 31 2006. Factors
        which
        caused this increase were higher sales expenses to support sales growth,
        higher
        administrative and professional fee costs related to Sarbanes-Oxley compliance,
        and higher legal costs. The
        R&D expenses were
        $34,965 ,
        which is included in general and administrative expenses, increased by $5,179,
        as compared to three months ended March 31, 2006.
  During
        the first quarter of 2007, economics of scale and leverage of operating expenses
        benefited us. But as we prepare to ramp up production capacity and more
        aggressively address market opportunities, we anticipate an expansion of
        our
        sales force to better respond to the market. In addition, we expect that
        general
        and administrative expenses will increase for the foreseeable future as a
        result
        of our continued growth and the costs of complying with our reporting and
        other
        requirements as a public company. Depreciation will rise sharply in future
        quarters due to a significantly expanded asset base as we start to take delivery
        of the purchased machinery and equipment to increase capacity. Going forward,
        we
        anticipate that the G&A costs will initially increase at a faster pace than
        sales growth in the next three quarters as we gear up for the planned
        capacity-doubling expansion and then stabilize and decrease in terms of
        percentage of sales as we enter the next phase of development and benefit
        greatly from economics of scale and improved efficiency. We believe this
        will
        eventually contribute to net margin expansion.
  30
  **Interest
        Expense**
 
 Interest
        expense was $1,282,072 for the first quarter of 2007, compared to $250,106
        of
        the first quarter of 2006, representing a 412.6% increase. The sharp increase
        is
        largely due to the accrued interest for our $60 million hybrid financing
        partially offset by lower average short term bank loan levels on our revolving
        credit facility.
 
 **Income
        tax**
 
 Fushi
        International, Inc. (formerly Parallel Technologies, Inc.) is a company
        incorporated in the State of Nevada and Fushi Holdings, Inc.(formerly DPI)
        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 for the foreseeable future because:
  ·
              we
                  did not conduct any material business or maintain any branch office
                  in the
                  United States during the three months ended March 31,
                  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.
  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
        2006,
        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 rate of 33%. PRC domestic
        companies are governed by the Enterprise Income Tax Laws of the PRC and are
        also
        generally subject to an enterprise income tax 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 (“ FIE”)
        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 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. After December 31, 2006, we may consider
        available options under applicable PRC tax laws that would enable us to qualify
        for further preferential tax treatment. The provision for income taxes for
        the
        three months ended March 31, 2007 was nil as we didn’t take any operation under
        Dalian Fushi from the beginning of 2007.
  31
 
 Fushi
        International (Dalian) ( formerly Dalian DPI) 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. Dalian DPI 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, Dalian DPI
        was
        approved as a wholly foreign owned enterprise. This economic region allows
        Fushi
        International (Dalian) 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.
  **Net
        Income**
 
 Net
        income increased to approximately $5.0 million or 23.5% of net sales for
        the
        three months ended March 31, 2007, from approximately $3.8 million or 25.8%
        of
        net sales for the first quarter ended 2007, representing an increase of $1.2
        million or 32.1%. The bottomline increase is primarily due to i)
        substantial revenue increase, ii) sustained gross margin in spite of extremely
        volatile raw material prices; iii) partially offset by higher interest expenses
        incurred. Earnings per share were $0.21 versus $0.19 on a diluted basis.
  The
        following table sets forth the computation of basic and diluted earnings
        per
        share:
 
 For
                  the three
                months
                  ended**EARNINGS**
              
              31-Mar-07
              
              31-Mar-06Net
                  income
              
              $
              4,974,733
              
              $
              3,765,916Income
                  applicable to common shareholders
              
              $
              4,974,733
              
              $
              3,765,916**BASIC**Income
                  applicable to common shareholders
              
              $
              4,974,733
              
              $
              3,765,916Basic
                  weighted-average common stock outstanding
              
              
              20,507,096
              
              
              18,474,527Basic
                  earnings per share
              
              $
              0.24
              
              $
              0.20**DILUTED**Income
                  applicable to common shareholders
              
              $
              4,974,733
              
              $
              3,765,916Add:
                  Interest expense for the Convertible Notes
              
              $
              110,000Adjusted
                  income applicable to common shareholders
              
              $
              5,084,733Basic
                  weighted-average common stock outstanding
              
              
              20,507,096
              
              
              18,474,527Effect
                  of dilutive securities:Warrants
              
              
              1,190,522
              
              
              1,057,593Assumed
                  conversion of 3% Senior Secured
              
              
              2,126,878Convertible
                  Notes due 2012Diluted
                  weighted-average common stocks outstanding
              
              
              23,824,496
              
              
              19,532,120Diluted
                  earnings per share
              
              $
              0.21
              
              $
              0.19
 
 32
 
 **Foreign
        Currency Translation Gains**
 
 In
        the
        three months ended March 31, 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 $0.9 million. Given the uncertainty of exchange rate
        fluctuations, we cannot estimate the effect of these fluctuations on our
        future
        business, product pricing, results of operations or financial condition.
        See
“Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation
        of
        the Renminbi may materially and adversely affect your investment.”
  Materially
        all of our revenues and a majority of our expenses in the first quarter of
        2007
        were denominated in RMB Yuan. The income statement and cash flow accounts
        were
        translated at 1RMB Yuan to 0.12901 US$ (or 1US$ to 7.7513 RMB Yuan). Balance
        sheet amounts with the exception of equity at March 31, 2007 were translated
        at
        1 RMB Yuan to 0.12950 USD, or 1 USD to 7.7220 RMB Yuan. The equity accounts
        were
        stated at their historical rate.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  We
        have
        historically financed our working capital requirements and capital expenditures
        through cash flows from operations, bank loans and sales of its common stock.
        As
        is customary in the 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.
  As
        of
        March 31, 2007, we had approximately $72.8 million in cash, up $64.3 million
        from $8.5 million at March 31, 2006.
 
 For
        the
        three months ended March 31, 2007, cash provided by operating activities
        totaled
        $2.2 million. This was principally driven by a $5.0 million increase in
        earnings, partially offset by i) increased accounts receivable resulting
        from
        revenue growth; ii) inventory increase, principally raw materials, to support
        planned expansion and sales growth; iii) increase in other receivables and
        prepaid expenses, consisting primarily of prepayments for copper supplies
        in
        advance of shipment.
 
 Cash
        used
        in investing activities was approximately $13.5 million, primarily as a result
        of i) capital expenditure on new equipment and machinery including advances
        to
        machinery and equipment suppliers, as well as a buildout and improvement
        of the
        office building, all as part of our planned expansion; ii) restricted cash
        as
        backing of Bank Acceptance Bill.
  Financing
        activities provided net cash inflow of $63.1 million during 2006. We rolled
        over
        maturing, short term working capital loans and also drew down 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
        over again when they become due.
 
 On
        January 24, 2007, we entered into a Notes Purchase Agreements with Citadel
        Equity Fund Ltd and raised $60 million in gross proceeds through a hybrid
        financing, which consists of i) $40 million Guaranteed Senior Floating Rate
        Notes due 2012 (the “HY Notes”) with an initial interest rate of LIBOR plus 7.0%
        subject to 140bps step down upon qualifying event and ii) $20 million 3%
        Senior
        Secured Convertible Notes due 2012 (the “Convertible Notes”). We received $54.6
        million in net proceeds after deducting placement agent commission and notes
        discount which are included in “Deferred Loan Expenses” in the accompanying
        consolidated balance sheets. The applicable fees and expenses are amortized
        over
        the respective lives of the HY Notes and the Convertible Notes on a
        straight-line basis over 5 years, respectively. Amortization was $149,589
        for
        the three months ended March 31, 2007. In terms of use of proceeds, we intend
        to
        apply a substantial portion of the net proceeds from the financing to corporate
        expansion and general corporate purposes, including but not limited to, funding
        of working capital needs, purchase of new equipment to meet existing orders
        and
        to provide additional capacity for further expansion, and other general
        corporate purposes.
  33
  The
        HY
        Notes and Convertible Notes contains various customary affirmative and negative
        covenants and other provisions, including restrictions on the incurrence
        of
        additional debt, maintenance of a maximum leverage ratio, maintenance of
        a fixed
        charge coverage ratio, and minimum net worth. We were in compliance with
        all of
        these requirements as of March 31, 2007.
  As
        of
        March 31, 2007, we had the following long-term bank loans and short-term
        working
        capital financing outstanding with the following terms:
 
 Name
                  of lenders
              
              Date
                  of borrowing
              
              Date
                  of maturity
              
              Interest
                rate
                  per annum
              
              Borrowed
                  amount (RMB)
              
              Borrowed
                  amount (USD)LONG
                  TERM LOANSIndustrial
                  and Commercial
                Bank
                  of China (ICBC)
              
              
              2003.05.06
              
              
              2008.04.10
              
              
              5.580
              %
              
              40,000,000
              
              $
              5,180,000Industrial
                  and Commercial
                Bank
                  of China (ICBC)
              
              
              2003.05.17
              
              
              2008.04.10
              
              
              5.580
              %
              
              40,000,000
              
              $
              5,180,000Total
                  long term loans:
              
              80,000,000
              
              $
              10,360,000SHORT
                  TERM LOANSRevolving
                  credit line of RMB100MM for working capitalBank
                  of China
              
              
              2007.02.09
              
              
              2006.10.08
              
              
              6.732
              %
              
              30,000,000
              
              $
              3,885,000Bank
                  of China
              
              
              2006.09.22
              
              
              2007.4.21
              
              
              6.732
              %
              
              22,000,000
              
              $
              2,849,000Bank
                  of China
              
              
              2007.03.20
              
              
              2007.12.19
              
              
              7.029
              %
              
              17,400,000
              
              $
              2,253,300Commercial
                  Bank of Dalian City
              
              
              2006.05.16
              
              
              2007.05.15
              
              
              6.338
              %
              
              7,600,000
              
              $
              984,200Total
                  short term loans:
              
              RMB
                  77,000,000
              
              $
              9,971,500
  For
        the
        remainder of 2007, as we accelerate expansion, we expect continued capital
        expenditure for maintaining and adding manufacturing equipment. We also
        anticipate that our working capital requirements may increase during 2007
        as a
        result of 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, proceeds from the HY Notes and Convertible Notes, combined with
        availability under our revolving credit facility, will be sufficient to meet
        our
        presently anticipated future cash needs. We may, from time to time, borrow
        under
        our revolving credit facility or issue securities, if market conditions are
        favorable, to meet our future cash needs or to reduce our borrowing
        costs.
  **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).
  34
 **Item
          3.**  **Quantitative and Qualitative Disclosures About Market Risk**
 Market
            risks relating to our operations result primarily from commodity prices,
            currency exchange rates, interest rates, credit extended to customers,
            and
            inflation.
  ***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 March 31, 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. As of March 31, 2007, the
            exchange rate between RMB and U.S. dollar was $1 to RMB7.7232.
  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
            $0.9
            millionfor the quarter ended March 31, 2007. We do not currently engage in
            hedging activities, as such, we may in the future experience economic
            loss as a
            result of any foreign currency exchange rate fluctuations.
 
 ***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
            and cash
            flows would be approximately $0.4 million on annualized basis.
 
 We
            do not
            have significant interest rate risk associated with our revolving credit
            facilities, due to their short term nature, with fixed interest
            rates.
 
 As
            of
            March 31, 2007, we were not a party to any interest rate derivative instruments and
            believe our exposure to interest rate risk and other relevant market
            risks is
            not material.
  ***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.
 
 ***Inflation***
 In
            recent
            years, China has not experienced significant inflation, and thus inflation
            has
            not had a material impact on our results of operations. According to
            the
            National Bureau of Statistics of China, the change in Consumer Price
            Index in
            China was 3.9%, 1.8% and 1.5% in 2004, 2005 and 2006,
            respectively
  **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.
  35
 
 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:
                May 15, 2007
              By:
              /s/ Wenbing Chris WangWenbing
                  Chris Wang
                Chief
                  Financial Officer
 
 36
  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.




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