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 JUNE 30, 2007.





oTRANSITION
      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 o 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 oNon-accelerated
      filer x




The
      number of shares of Common Stock of the Registrant, par value $.006 per share,
      outstanding on July 15, 2007, was 22,178,578.




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







**FUSHI
      INTERNATIONAL INC.**


**INDEX
      TO JUNE 30,2007 FORM 10-Q**




Page**Part
                  I - Financial Information**
              3Item
                  1 - Financial Statements
              3Consolidated
                  Balance Sheets as of June 30, 2007 (unaudited) and December 31,
                  2006
              3Consolidated
                  Statements of Income and Other Comprehensive Income for the three
                  months
                  and six monthsended
                  June 30, 2007 (unaudited) and June 30, 2006 (unaudited)
              4Consolidated
                  Statements of Cash Flows for the six months ended June 30, 2007
                  (unaudited) and June 30,2006
                  (unaudited)
              5Notes
                  to the Consolidated Financial Statements (unaudited)
              6Item
                  2 – Management's Discussion and Analysis of Results of Operations and
                  Financial Condition
              28Item
                  3 – Quantitative and Qualitative Disclosure about Market Risk
              41Item
                4 –
                Controls and Procedures
              42**Part
                  II - Other Information**
              43Item 4
                  – Submission of Matters to a Vote of Security
                  Holders
              43Item
                6 –
                Exhibits
              43Signature
                  Page
              44




2




**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


FUSHI
                    INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                    BALANCE SHEETSAS
                    OF JUNE 30, 2007 AND DECEMBER 31,
                    2006
  June
                    30,
                
                December
                    31,2007
                
                2006(Unaudited)ASSETSCURRENT
                    ASSETS:Cash
                
                $
                75,205,436
                
                $
                20,493,551Accounts
                    receivable, trade
                
                
                9,497,345
                
                
                7,042,408Inventories
                
                
                9,704,840
                
                
                7,403,116Notes
                    receivables
                
                
                176,210
                
                
                -Other
                    receivables and prepaid expenses
                
                
                1,096,741
                
                
                497,380Advances
                    to suppliers
                
                
                5,508,117
                
                
                3,390,917Total
                    current assets
                
                
                101,188,689
                
                
                38,827,372PLANT
                    AND EQUIPMENT, net
                
                
                54,065,998
                
                
                47,256,475OTHER
                    ASSETS:Advances
                    to suppliers, noncurrent
                
                
                10,453,486
                
                
                4,559,357Intangible
                    asset, net
                
                
                5,543,810
                
                
                5,518,931Deferred
                    loan expense
                
                
                3,270,904
                
                
                -Cross
                    Currency hedge receivable
                
                
                802,523
                
                
                -Total
                    other assets
                
                
                20,070,723
                
                
                10,078,288Total
                    assets
                
                $
                175,325,410
                
                $
                96,162,135LIABILITIES
                    AND SHAREHOLDERS' EQUITYCURRENT
                    LIABILITIES:Accounts
                    payable, trade
                
                $
                742,254
                
                $
                1,055,684Liquidated
                    damage payable
                
                
                -
                
                
                1,466,250Other
                    payables and accrued liabilities
                
                
                2,607,226
                
                
                321,276Customer
                    deposits
                
                
                -
                
                
                531,065Taxes
                    payable
                
                
                181,468
                
                
                982,345Short
                    term bank loans
                
                
                11,703,500
                
                
                12,504,135Current
                    portion of long term debt
                
                
                10,520,000
                
                
                -Loan
                    from shareholder
                
                
                557,520
                
                
                3,911,256Total
                    current liabilities
                
                
                26,311,968
                
                
                20,772,011LONG
                    TERM LIABILITIES:Long
                    term bank loans
                
                
                -
                
                
                10,256,000Notes
                    Payable
                
                
                60,000,000
                
                
                -Total
                    long term liabilities
                
                
                60,000,000
                
                
                10,256,000CROSS
                    CURRENCY HEDGE PAYABLE
                
                
                871,519
                
                
                -Total
                    liabilities
                
                
                87,183,487
                
                
                31,028,011SHAREHOLDERS'
                    EQUITY:Preferred
                    stock, $0.001 par value, 5,000,000 shares authorized, none outstanding
                    as
                    of
                  June
                    30, 2007 and December 31, 2006, respectively
                
                
                -
                
                
                -Common
                    stock, $0.006 par value, 100,000,000 shares authorized,
                  22,178,578
                    and 20,046,162 shares issued and outstanding as of June 30, 2007
                    and
                    December 31, 2006, respectively
                
                
                133,072
                
                
                120,277Additional
                    paid in capital
                
                
                40,065,842
                
                
                29,364,955Deferred
                    stock option compensation
                
                
                (1,808,305
                )
                
                -Statutory
                    reserves
                
                
                6,115,309
                
                
                4,452,467Retained
                    earnings
                
                
                38,791,251
                
                
                28,496,702Accumulated
                    other comprehensive income
                
                
                4,844,754
                
                
                2,699,723Total
                    shareholders' equity
                
                
                88,141,923
                
                
                65,134,124Total
                    liabilities and shareholders' equity
                
                $
                175,325,410
                
                $
                96,162,135
  3
  FUSHI
                    INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF INCOME ANDOTHER
                    COMPREHENSIVE INCOMEFOR
                    THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND
                    2006
  Three
                    months ended June 30,
                
                Six
                    months ended June 30,2007
                
                2006
                
                2007
                
                2006(Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)REVENUES
                
                $
                26,085,908
                
                $
                18,335,021
                
                $
                47,223,825
                
                $
                32,925,164COST
                    OF GOODS SOLD
                
                
                16,433,794
                
                
                10,199,652
                
                
                29,886,532
                
                
                19,521,213GROSS
                    PROFIT
                
                
                9,652,114
                
                
                8,135,369
                
                
                17,337,293
                
                
                13,403,951OPERATING
                    EXPENSESelling
                    expenses
                
                
                193,916
                
                
                132,629
                
                
                369,110
                
                
                249,249General
                    and administrative expenses
                
                
                2,028,574
                
                
                730,180
                
                
                3,469,576
                
                
                1,486,701Total
                    operating expense
                
                
                2,222,490
                
                
                862,809
                
                
                3,838,686
                
                
                1,735,950INCOME
                    FROM OPERATIONS
                
                
                7,429,624
                
                
                7,272,560
                
                
                13,498,607
                
                
                11,668,001OTHER
                    INCOME (EXPENSE)Interest
                    income
                
                
                318,244
                
                
                1,419
                
                
                509,454
                
                
                12,431Interest
                    expense
                
                
                (1,666,043
                )
                
                (263,458
                )
                
                (2,948,115
                )
                
                (513,564
                )Gain
                    on cross currency hedge
                
                
                802,523
                
                
                -
                
                
                802,523
                
                
                -Other
                    income
                
                
                112,506
                
                
                229,175
                
                
                174,616
                
                
                320,722Other
                    expense
                
                
                (14,195
                )
                
                (113,552
                )
                
                (79,694
                )
                
                (138,850
                )Total
                    other expense
                
                
                (446,965
                )
                
                (146,416
                )
                
                (1,541,216
                )
                
                (319,261
                )INCOME
                    BEFORE INCOME TAXES
                
                
                6,982,659
                
                
                7,126,144
                
                
                11,957,391
                
                
                11,348,740PROVISION
                    FOR INCOME TAXES
                
                
                -
                
                
                (60,064
                )
                
                -
                
                
                396,616NET
                    INCOME
                
                
                6,982,659
                
                
                7,186,208
                
                
                11,957,391
                
                
                10,952,124OTHER
                    COMPREHENSIVE INCOMEForeign
                    currency translation adjustment
                
                
                2,113,689
                
                
                722,695
                
                
                3,016,550
                
                
                1,118,315Cross
                    currency hedge adjustment
                
                
                (872,519
                )
                
                -
                
                
                (871,519
                )
                
                -COMPREHENSIVE
                    INCOME
                
                $
                8,223,829
                
                $
                7,908,903
                
                $
                14,102,422
                
                $
                12,070,439NET
                    INCOME PER SHARE-BASIC
                
                $
                0.32
                
                $
                0.36
                
                $
                0.57
                
                $
                0.55BASIC
                    WEIGHTED AVERAGE NUMBER OF SHARES
                
                
                21,487,056
                
                
                19,894,315
                
                
                21,116,447
                
                
                19,894,315NET
                    INCOME PER SHARE-DILUTED
                
                $
                0.28
                
                $
                0.34
                
                $
                0.49
                
                $
                0.51DILUTED
                    WEIGHTED AVERAGE NUMBER OF SHARES
                
                
                25,192,643
                
                
                21,434,692
                
                
                24,667,346
                
                
                21,434,692
  4
 FUSHI
                    INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF CASH FLOWSFOR
                    THE SIX MONTHS ENDED JUNE 30, 2007 AND
                    2006
  2007
                
                2006(Unaudited)
                
                (Unaudited)CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                11,957,391
                
                $
                10,952,124Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Depreciation
                
                
                936,956
                
                
                1,000,658Amortization
                    of intangibles
                
                
                115,590
                
                
                111,392Amortization
                    of loan commission
                
                
                329,096
                
                
                -Amortization
                    of stock option compensation
                
                
                645,158
                
                
                -Gain
                    on cross currency hedge
                
                
                (802,523
                )
                
                -Change
                    in operating assets and liabilities:(Increase)
                    decrease in assets:Accounts
                    receivable
                
                
                (2,242,709
                )
                
                (4,120,223
                )Inventories
                
                
                (2,082,422
                )
                
                (791,091
                )Other
                    receivables and prepayments
                
                
                (907,670
                )
                
                (6,857,149
                )Notes
                    receivables
                
                
                (173,811
                )
                
                -Advance
                    to suppliers
                
                
                (2,002,283
                )
                
                -Increase
                    (decrease) in liabilities:Accounts
                    payable
                
                
                (335,966
                )
                
                781,513Other
                    payables and accrued liabilities
                
                
                2,246,676
                
                
                283,392Customer
                    deposits
                
                
                (537,320
                )
                
                -Other
                    taxes payable
                
                
                (814,918
                )
                
                (2,544,011
                )Income
                    taxes payable
                
                
                -
                
                
                (3,629,850
                )Net
                    cash provided by (used in) operating activities
                
                
                6,331,245
                
                
                (4,813,245
                )CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of property and equipment
                
                
                (6,453,915
                )
                
                (5,057,136
                )Advances
                    for purchase of equipment
                
                
                (5,698,131
                )
                
                -Net
                    cash used in investing activities
                
                
                (12,152,046
                )
                
                (5,057,136
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Loan
                    from shareholder
                
                
                557,520
                
                
                42,720Repayment
                    to shareholders
                
                
                (4,004,253
                )
                
                -Due
                    to related companies
                
                
                -
                
                
                20,000Due
                    from related companies
                
                
                -
                
                
                3,323,528Proceeds
                    from bank loans
                
                
                11,546,600
                
                
                13,450,000Payments
                    on bank loans
                
                
                (12,628,669
                )
                
                (7,496,902
                )Net
                    proceeds from convertible notes
                
                
                56,400,000
                
                
                -Additional
                    paid in capital
                
                
                -
                
                
                (82,313
                )Proceeds
                    from warrants exercised
                
                
                6,793,969
                
                
                -Net
                    cash provided by financing activities
                
                
                58,665,167
                
                
                9,257,033EFFECT
                    OF EXCHANGE RATE ON CASH
                
                
                1,867,519
                
                
                (966,386
                )INCREASE
                    (DECREASE) IN CASH
                
                
                54,711,885
                
                
                (1,579,734
                )CASH,
                    beginning of period
                
                
                20,493,551
                
                
                6,163,670CASH,
                    end of period
                
                $
                75,205,436
                
                $
                4,583,936SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:Cash
                    paid for interest expense
                
                $
                691,963
                
                $
                655,951Cash
                    paid for income taxes
                
                $
                -
                
                $
                4,044,883
  5
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2007
 (Unaudited)
  **Note
        1 - Organization**
 
 Fushi
        International, Inc. was incorporated under the name of M, Inc. in the state
        of
        Nevada on October 6, 1982. The name was changed to Parallel Technologies,
        Inc.
        (“Parallel”) on June 3, 1991 and changed to Fushi International, Inc. (“Fushi
        International”) on January 30, 2006. On December 13, 2005, Fushi International
        acquired Diversified Product Inspections, Inc. (“DPI”) and its wholly owned
        subsidiary, Dalian Diversified Product Inspections Bimetallic Cable Co.,
        Ltd.
        (“Dalian DPI”).
 
 DPI
        is
        engaged in the manufacturing and selling of copper clad aluminum and steel
        wire,
        both of which are bimetallic composite wire products that are principally
        used
        for network signal transmission cable, cable television wire and other
        applications. Dalian DPI commenced business on December 28, 2005. Dalian
        Fushi
        Bimetallic Manufacturing Company Limited (“Dalian Fushi”) is a 100% variable
        interest entity of the Company. The business activities of Dalian Fushi are
        the
        same with those of Dalian DPI.
 
 DPI
        and
        Dalian DPI changed their names to Fushi Holdings, Inc. (“Fushi Holdings”) and
        Fushi International (Dalian) Bimetallic Cable Co., Ltd (Fushi International
        (Dalian)) on November 29, 2006 and December 26, 2006,
        respectively.
 
 Fushi
        International, Fushi
        Holdings , Fushi
        International (Dalian) and
        Dalian Fushi are hereinafter referred to as “the Company”.
 
 **Note
        2 - Summary of significant accounting policies**
 
 Principles
        of consolidation
 
 The
        accompanying consolidated financial statements include the financial statements
        of Fushi International and it’s wholly owned subsidiaries, Fushi
        Holdings , Fushi
        International (Dalian)   and
        its
        100% variable interest entity Dalian Fushi. All significant inter-company
        transactions and balances have been eliminated in consolidation.
 
 Basis
        of presentation
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with accounting principles generally accepted in the United States
        of
        America for interim financial information and pursuant to the rules and
        regulations of the Securities and Exchange Commission. Accordingly, they
        do not
        include all of the information and footnotes required by generally accepted
        accounting principles for complete financial statements.
 
 In
        the
        opinion of management, the unaudited consolidated financial statements contain
        all adjustments consisting only of normal recurring accruals considered
        necessary to present fairly the Company's financial position at June 30,
        2007,
        the results of operations for the three and six months ended June 30, 2007
        and
        2006, and cash flows for the six months ended June 30, 2007 and 2006. The
        results for the six months ended June 30, 2007 are not necessarily indicative
        of
        the results to be expected for the entire fiscal year ending December 31,
        2007.
  6
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (Unaudited)
 These
        financial statements should be read in conjunction with the Company's annual
        report on Form 10-KSB as filed with the Securities and Exchange
        Commission.
 
 Consolidation
        of variable interest entity
 
 In
        accordance with Interpretation No. 46R, Consolidation of Variable Interest
        Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
        that lack sufficient equity to finance their activities without additional
        financial support from other parties or whose equity holders lack adequate
        decision making ability. All VIEs with which the Company is involved must
        be
        evaluated to determine the primary beneficiary of the risks and rewards of
        the
        VIE. The primary beneficiary is required to consolidate the VIE for financial
        reporting purposes.
 
 The
        Company has concluded that Dalian Fushi is a VIE and that the Company is
        the
        primary beneficiary. Under the requirements of FASB Interpretation No. 46
        (R),
        Consolidation of Variable Interest Entities, an interpretation of ARB No.
        51
        ("FIN 46"), the Company consolidated the financial statements of Dalian Fushi,
        a
        VIE of Fushi
        International (Dalian) .
        As both
        companies are under common control, the financial statements have been prepared
        as if the transaction had occurred retroactively .
 
 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.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs which totaled $272,019 and $194,556 for
        the six
        months ended June 30, 2007 and 2006, respectively, and $128,100 and $112,684
        for
        the three months ended June 30, 2007 and 2006, respectively.
 
 Advertising
        costs
 
 Advertising
        costs for the six months ended June 30, 2007 and 2006 were $23,593 and $8,318
        respectively, and for the three months ended June 30, 2007 and 2006 were
        $18,895
        and $0, respectively. These costs are expensed as incurred.
 
 Other
        comprehensive income
 
 The
        reporting currency of the Company is the US dollar. The functional currency
        of
        Fushi International and Fushi Holdings is the US dollar. The functional currency
        of Fushi
        International (Dalian) and
        Dalian Fushi is Renminbi (RMB).
  7
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2007
 (Unaudited)
 For
        the
        subsidiaries whose functional currencies are RMB, all assets and liabilities
        accounts were translated at the exchange rate on the balance sheet date;
        stockholder's equity are translated at the historical rates and items in
        the
        statement of operations items are translated at the average rate for the
        period.
        Translation adjustments resulting from this process are included in accumulated
        other comprehensive income in the statement of shareholders’ equity. The
        resulting translation gains and losses that arise from exchange rate
        fluctuations on transactions denominated in a currency other than the functional
        currency are included in the results of operations as incurred. Items in
        the
        cash flow statement are translated at the average exchange rate for the
        period.
 
 Translation
        adjustments resulting from this process included in accumulated other
        comprehensive income in the consolidated statement of shareholders’ equity
        amounted to $4,844,754 and $2,699,723 as of June 30, 2007 and December 31,
        2006,
        respectively. Assets and liabilities at June 30, 2007 and December 31, 2006
        were
        translated at 7.60 and 7.80 RMB to $1.00 USD. The average translation rates
        applied to income statement accounts and statement of cash flows for the
        six
        months ended June 30, 2007 and 2006 were 7.71 and 8.05 RMB to $1.00 USD,
        and for
        the three months ended June 30, 2007 and 2006 were 7.69 and 8.02, 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.
 
 Changes
        in the fair values of derivative financial instruments accounted for as cash
        flow hedges, to the extent they qualify for hedge accounting, are recorded
        in
        accumulated other comprehensive income. As of March 30, 2007, $452,632 was
        recorded as a loss on the derivative investment in other comprehensive
        income/loss. As of June 30, 2007, net change in the fair value of the hedge
        totaled $418,887 and was recorded in other comprehensive income.
 
 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 June
        30,
        2007 and December
        31, 2006, the Company had deposits in excess of federally insured limits
        total
        of $75,005,436 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.
  8
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2007
 (Unaudited)
  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 June 30, 2007,
        management concluded no reserves were necessary. The Company had accounts
        receivable of $9,497,345 and $7,042,408 as of June 30, 2007 and December
        31,
        2006, respectively.
 
 Inventories
  Inventories
        are stated at the lower of cost or market using a weighted average method.
        Inventories consist of raw materials, work in process, finished goods and
        supplies. Raw materials consist of copper, aluminum and steel used in
        production. The cost of finished goods included direct costs of raw materials
        as
        well as direct labor used in production. Indirect production costs such as
        utilities and indirect labor related to production such as assembling, shipping
        and handling costs are also included in the cost of inventory.
 
 The
        Company reviews its inventory regularly for possible obsolete goods or to
        determine if any reserves are necessary for potential obsolescence. As of
        June
        30, 2007, the Company has determined that no reserves are
        necessary.
 
 Financial
        instruments
 
 The
        Company analyzes all financial instruments with features of both liabilities
        and
        equity under SFAS 150, “Accounting for Certain Financial Instruments with
        Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
        Derivative Financial Instruments Indexed to, and Potentially Settled in,
        a
        Company’s Own Stock.” The convertible preferred shares issued in 2005 and the
        convertible noted issued in 2007 did not require bifurcation or result in
        liability accounting. Additionally, the Company analyzes registration rights
        agreements associated with any equity instruments issued to determine if
        penalties triggered for late filing should be accrued under FSP EITF 00-19-2,
        “Accounting for Registration Payment Arrangements.”
 
 Statement
        of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
        Value of Financial Instruments” requires disclosure of the fair value of
        financial instruments held by the Company. SFAS 107 defines the fair value
        of
        financial instruments as the amount at which the instrument could be exchanged
        in a current transaction between willing parties. The Company considers the
        carrying amount of cash, accounts receivable, other receivables, accounts
        payable, accrued liabilities, and long term debts to approximate their fair
        values because of the short period of time between the origination of such
        instruments and their expected realization and their current market rate
        of
        interest. Hedging instruments are carried at fair value.
 
 Derivative
        Financial Instruments
 
 The
        Company uses a cross currency hedge, a derivative financial instrument, to
        hedge
        the risk of rising interest rates on their variable interest rate debt. This
        type of derivative financial instrument is known as a cash flow hedge. The
        Company accounts for this interest rate swap in accordance with FAS No. 133,
        “Accounting for Derivatives Instruments and Hedging Activity,” which requires
        the derivative to be carried on the balance sheet at fair value and to meet
        certain documentary and analytical requirements to qualify for hedge accounting
        treatment. The above derivative qualifies for hedge accounting under FAS
        133
        and, accordingly, changes in the fair value is reported in accumulated other
        comprehensive income, net of related income tax effects. Amounts included
        in
        accumulated other comprehensive income are reclassified into earnings when
        the
        hedged transaction effects earnings.
  9
 FUSHI
          INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2007
 (Unaudited)
 At
        the
        inception of the transaction, the Company documents the relationship between
        hedging instruments and hedged items, as well as its risk management objective
        and the strategy for undertaking various hedge transactions. This process
        includes linking all derivatives designated to specific firm commitments
        of
        forecast transactions. The Company also documents its assessment, both at
        inception and on an ongoing basis, of whether the derivative financial
        instruments that are used in hedging transactions are highly effective in
        offsetting changes in fair values or cash flows of hedged items.
 
 Stock-Based
        Compensation
 
 The
        Company adopted Statement of Financial Accounting Standards No. 123R,
“Share-Based Payments”. This Statement requires a public entity to measure the
        cost of services received in exchange for an award of equity instruments
        based
        on the grant-date fair value of the award .That cost will be recognized over
        the
        period during which services received. Stock compensation for stock granted
        to
        non-employees has been determined in accordance with SFAS 123R and the Emerging
        Issues Task Force consensus Issue No. 96-18, "Accounting for Equity Instruments
        that are issued to Other than Employees for Acquiring, or in Conjunction
        with
        Selling Goods or Services" ("EITF 96-18"), as the fair value of the
        consideration received or the fair value of equity instruments issued, whichever
        is more reliably measured.
 
 Plant
        and equipment, net
  Plant
        and
        equipment are stated at cost. Expenditures for maintenance and repairs are
        charged to earnings as incurred; additions, renewals and betterments are
        capitalized. When property and equipment are retired or otherwise disposed
        of,
        the related cost and accumulated depreciation are removed from the respective
        accounts, and any gain or loss is included in operations. Depreciation of
        property and equipment is provided using the straight-line method for
        substantially all assets with estimated lives as follows:
  Estimated
                    Useful LifeBuildings
                
                
                20-30
                    yearsMachinery
                    and equipment
                
                
                10-15
                    yearsOther
                    equipment
                
                
                5
                    yearsTransportation
                    equipment
                
                
                5
                    years
 Construction
        in progress represents the costs incurred in connection with the construction
        of
        buildings or new additions to the Company’s plant facilities.
 10
 FUSHI
            INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (Unaudited)
 No
        depreciation is provided for construction in progress until such time as
        the
        assets are completed and are placed into service. The Company borrowed
        $10,520,000 to fund additions to the plant. Interest capitalized for the
        six
        months ended June 30, 2007 and 2006 were $157,528 and $142,378 ,
        respectively .
 
 The
        Company periodically evaluates the carrying value of long-lived assets in
        accordance with SFAS 144. When estimated cash flows generated by those assets
        are less than the carrying amounts of the asset, the Company recognizes an
        impairment loss. Based on its review, the Company believes that, as of June
        30,
        2007, there were no impairments of its long-lived assets.
 
 Intangible
        assets
 
 Intangible
        assets consist of land use rights and patents. The Company amortizes the
        land
        use rights on a straight line basis over 50 years and patents over 7-15 years.
 
 The
        Company evaluates intangible assets for impairment periodically and whenever
        events or changes in circumstances indicate that the carrying value may not
        be
        recoverable from its estimated future cash flows. Recoverability of intangible
        assets, other long-lived assets, and goodwill is measured by comparing their
        net
        book value to the related projected undiscounted cash flows from these assets,
        considering a number of factors including past operating results, budgets,
        economic projections, market trends and product development cycles. If the
        net
        book value of the asset exceeds the related undiscounted cash flows, the
        asset
        is considered impaired, and a second test is performed to measure the amount
        of
        impairment loss. As of June 30, 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 $57,271 and $84,665 for the
        six
        months ended June 30, 2007 and 2006, respectively, and amounted to $ 22,306
        and
        $54,879 for the three months ended June 30, 2007 and 2006,
        respectively.
 
 Earning
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share excludes
        dilution and is computed by dividing income available to common stockholders
        by
        the weighted average common shares outstanding during the period.
 11
 FUSHI
              INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2007
 (Unaudited)
 Diluted
                earnings per share takes into account the potential dilution that
                could occur if
                securities or other contracts to issue common stock were exercised
                and converted
                into common stock using the treasury method.
 Income
        taxes
 
 The
        Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
        for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred
        income tax liabilities and assets for the expected future tax consequences
        of
        temporary differences between income tax basis and financial reporting basis
        of
        assets and liabilities. Provision for income taxes consist of taxes currently
        due plus deferred taxes.
 
 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 June 30, 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.
 12
 FUSHI
              INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              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.
 
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. Management
        is
        currently evaluating the effect of this pronouncement on financial
        statements.
 
 **Note
        4 - Additional product sales information**
  The Company’s
        revenues by geographic area, namely the Chinese domestic market and
        international market, are as follows:
  June
                    30, 2007
                
                June
                    30, 2006(Unaudited)
                
                (Unaudited)Domestic
                    China
                
                $
                45,938,181
                
                $
                32,031,345Other
                    foreign countries
                
                
                1,285,644
                
                
                893,819Total
                    sales
                
                $
                47,223,825
                
                $
                32,925,164
 13
 FUSHI
              INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2007
 (Unaudited)
 **Note
        5 - Inventories**
 
 Inventories
        consisted of the following:
 June
                    30, 2007
                
                December
                    31, 2006(Unaudited)Raw
                    materials
                
                $
                7,950,433
                
                $
                5,380,640Work
                    in process
                
                
                1,069,302
                
                
                242,350Finished
                    goods
                
                
                352,272
                
                
                1,736,507Packaging
                    materials
                
                
                11,571
                
                
                14,727Semi
                    finished goods
                
                
                321,262
                
                
                28,892Totals
                
                $
                9,704,840
                
                $
                7,403,116
 **Note
        6 - Plant and equipment**
 
 Plant
        and
        equipment consisted of the following:
  June
                    30, 2007
                
                December
                    31, 2006(Unaudited)Buildings
                    and improvements
                
                $
                19,326,896
                
                $
                18,809,588Transportation
                    equipment
                
                
                3,047,419
                
                
                2,559,806Machinery
                
                
                10,055,544
                
                
                8,814,271Equipments
                
                
                433,199
                
                
                415,083Construction
                    in progress
                
                
                28,077,425
                
                
                22,110,429Totals
                
                
                60,940,483
                
                
                52,709,177Less
                    accumulated depreciation
                
                
                (6,874,485
                )
                
                (5,452,702
                )Totals
                
                $
                54,065,998
                
                $
                47,256,475
  Depreciation
        expense for the six months ended June 30, 2007 and 2006 amounted to $936,956
        and
        $1,000,658, and for the three months ended June 30, 2007 and 2006 amounted
        to
        $635,360 and $562,284, respectively.
 
 Interest
        capitalized as of June 30, 2007 and December 31, 2006 was $157,528 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 $5,508,117 and $3,390,917 for inventory and $10,453,486 and
        $4,559,357 for equipment purchases as of June 30, 2007 and December 31, 2006,
        respectively.
 14
 FUSHI
                INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 **Note
        8 - Major customers and suppliers**
 
 Five
        major customers accounted for 31% and 35% of the sales for the six months
        ended
        June 30, 2007 and 2006, respectively. Total receivable balance due from these
        customers at June 30, 2007 and 2006 amounted to $3,159,065 and $4,080,212
        respectively.
 
 Five
        major suppliers provided approximately 93% and 91% of the Company’s purchases of
        raw materials for the six months ended June 30, 2007 and 2006, respectively.
        Advances to these vendors amounted to $2,821,935 and $5,771,021,
        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:
  June
                    30, 2007
                
                December
                    31, 2006(Unaudited)Patents
                
                $
                1,417,570
                
                $
                1,381,996Land
                    use rights
                
                
                5,267,758
                
                
                5,135,5646,685,328
                
                
                6,517,560Less:
                    accumulated amortization
                
                
                (1,141,518
                )
                
                (998,629
                )Total
                
                $
                5,543,810
                
                $
                5,518,931
  Amortization
        expense for the six months ended June 30, 2007 and 2006 amounted to $115,590
        and
        $111,392, and for the three months ended June 30, 2007 and 2006 amounted
        to
        $58,107 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.
 15
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 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 first year after they became profitable,
        and a
        50% income tax reduction for the following three years, 2004 through 2006.
        Dalian Fushi has incurred operation loss for the six months ended June 30,
        2007.
        No provision for income taxes were taken for the six months ended June 30,
        2007
        and 2006
 
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate for the years ended June 30:
  June
                    30, 2007
                
                June
                    30, 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 six months ended June 30, 2007 amounted to
        $548,738 The net effect on earnings per share had the income tax been applied
        would decrease basic earnings per share from $0.59 to $0.57 and diluted earning
        per share from $0.52 to $0.48.
 
 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. However, the new EIT Law permits companies to continue to enjoy
        their existing preferential tax treatments until such treatments expire in
        accordance with their current terms. The Company is currently evaluating
        the
        effect of the new EIT law will have on its future financial positions.
 
 Fushi
        International, Inc. and Fushi Holdings were incorporated in the United States
        and have incurred net operating losses for income tax purposes the six months
        ended June 30, 2007. The net operating loss carry forwards for United States
        income taxes amounted to $2,725,893 which may be available to reduce future
        years’ taxable income. These carry forwards will expire, if not utilized,
        through 2025 and 2027. Management believes that the realization of the benefits
        from these losses appears uncertain due to the Company’ limited operating
        history and continuing losses for United States income tax purposes.
        Accordingly, the Company has provided a 100% valuation allowance on the deferred
        tax asset benefit to reduce the asset to zero. The valuation allowance at
        June
        30, 2007 was $926,804. Management will review this valuation allowance
        periodically and make adjustments as warranted.
 16
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 Value
        Added Tax
 
 VAT
        on
        sales and VAT on purchases amounted to $7,841,691 and $5,297,848 for the
        six
        months ended June 30, 2007 and $4,687,393 and $2,829,041 for the six months
        ended June 30, 2006, respectively. Sales and purchases are recorded net of
        VAT
        collected and paid as the Company acts as an agent for the government. VAT
        taxes
        are not impacted by the income tax holiday.
 
 Taxes
        payable consisted of the following:
  June
                    30, 2007
                
                December
                    31, 2006(Unaudited)VAT
                
                $
                181,468
                
                $
                607,968Others
                
                
                -
                
                
                374,377Total
                    taxes payable
                
                $
                181,468
                
                $
                982,345
  **Note
        11 - Loan from shareholder**
 
 In
        September 2006, one of the Company's shareholders advanced
        $4,450,000  to
        the
        Company for operations. The balance as of June 30, 2007 and December 31,
        2006
        was $557,520 and $3,911,256, respectively. This loan is non-interest bearing,
        unsecured and is payable in cash 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 accrued is based
        on the
        penalties due between May 14, 2006 through August 2, 2006 and it is valued
        at
        $5.75, the highest bid on August 2, 2006, the date of the registration statement
        was declared effective. In January 2007, the Company issued 255,000 shares
        of
        common stock to the investors as payment for the liquidated damages.
 17
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 **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:
  June
                                30, 2007
                            
                            December
                                31, 2006(Unaudited)Dalian
                                Commercial Bank Sahekou Branch due May 15, 2007 annual
                                interest at 6.338%,
                                secured by the Company land use right and building
                            
                            $
                            -
                            
                            $
                            974,320Bank
                                of China Dalian Xinhaiwen Branch,due March 11, 2007
                                annual interest at
                                5.94%, secured bythe
                                Company land use right and building
                            
                            
                            -
                            
                            
                            3,846,000Bank
                                of China Dalian Xinhaiwen Branch,due February 22,
                                2007 annual interest at
                                6.547%, secured bythe
                                Company land use right and building
                            
                            
                            -
                            
                            
                            2,564,000Bank
                                of China Dalian Xinhaiwen Branch,due March 27, 2007
                                annual interest at
                                6.547%, secured bythe
                                Company land use right and building
                            
                            
                            -
                            
                            
                            2,179,400Bank
                                of China Dalian Xinhaiwen Branch, due April 21, 2007annual
                                interest at 6.732%, secured bythe
                                Company land use right and building
                            
                            
                            -
                            
                            
                            2,820,400ShenZhen
                                Development Bank, Dalian Branchvarious
                                due dates and interest rates,secured
                                by export letter of credits
                            
                            
                            -
                            
                            
                            120,015Bank
                                of China Dalian Xinhaiwen Branch,due October 8, 2007
                                annual interest at
                                6.732%, secured bythe
                                Company land use right and building
                            
                            
                            3,945,000
                            
                            
                            -Bank
                                of China Dalian Xinhaiwen Branchdue
                                December 19, 2007 annual interestat
                                7.029%, secured by the Companyland
                                use right and building
                            
                            
                            2,288,100
                            
                            
                            -Bank
                                of China, Xinghaiwan BranchDue
                                March 28, 2008, annaul interestat
                                7.227%, secured by the Companyland
                                use right and building
                            
                            
                            2,577,400
                            
                            
                            -Bank
                                of China, Xinghaiwan BranchDue
                                Febuary 15, 2008, annaul interestat
                                7.029%, secured by the Companyland
                                use right and building
                            
                            
                            2,893,000Total
                            
                            $
                            11,703,500
                            
                            $
                            12,504,135
 Total
        interest expense on the short term loans for the six months ended June 30,
        2007
        and 2006 amounted to $399,589 and $484,265, and for the three months ended
        June
        30, 2007 and 2006 amounted to $203,084 and $164,481, respectively.
 18
 FUSHI
                INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 **Note
        14 - 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:
  June
                    30, 2007
                
                December
                    31, 2006(Unaudited)ICBC,
                    Dalian JinZhou BranchDue
                    April 10, 2008, annaul interest at 5.58%, secured by the Company
                    land use
                    right and building
                
                $
                5,260,000
                
                $
                5,128,000ICBC,
                    Dalian JinZhou BranchDue
                    April 10, 2008, annaul interest at 5.58%, secured by the Company
                    land use
                    right and building
                
                
                5,260,000
                
                
                5,128,000Minus
                    : current maturities
                
                
                (10,520,000
                )
                
                -Long
                    term debt - less current maturities
                
                $
                -
                
                $
                10,256,000
 Interest
        incurred on the long term loans for the six months ended June 30, 2007 and
        2006
        was $293,508 and $171,686, of which capitalized interest amounted to $157,528
        and $142,387, respectively. Interest for the three months ended June 30,
        2007
        was $148,986, of which $82,010 was capitalized. Those two bank loans are
        due
        within one year and were reclassified as current liabilities at June 30,
        2007.
 
 **Note
        15 - Long term notes payable**
 
 On
        January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered
        into a Notes Purchase Agreement. On January 29, 2007, the Company closed a
        $60 million financing with Citadel.  In this transaction, Citadel purchased
        (i) floating rate $40 million principal amount (less 3% Notes Discount and
        4%
        commission for proceeds of $37,200,000) of guaranteed senior secured
        floating rate notes (“HY notes”) due 2012 and (ii) $20 million principal amount
        (less 4% commission for proceeds of $19,200,000) of the Company’s 3% senior
        secured convertible notes (“Convertible notes”) due 2012, which are convertible
        into shares of the Company's common stock at an initial conversion price
        of
        $7.00 per share. These notes are secured by the shares of the Company's
        wholly-owned subsidiary, FHI. Citadel was also granted certain corporate
        governance rights over the Company and its subsidiaries.  The floating rate
        notes bear interest at LIBOR (approximately 5.3% at June 30, 2007) + 7% and
        changes to LIBOR + 5.6% permanently upon successful completion of Qualifying
        IPO
        within eighteen months from January 24, 2007. The interest on the variable
        and
        fixed rate notes are payable semi-annually in arrears in January and July.
        See
        below for discussion of swap agreement changing variable interest to 8.3%
        fixed.
 
 Management
        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.
 19
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 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, Dalian DPI, Dalian Fushi,
        Li
        Fu, our Chairman and Chief Executive Officer, Mathus Yue Yang, our President,
        Chris Wenbing Wang, our Chief Financial Officer and Citadel entered into
        an
        Investor Rights Agreement dated January 25, 2007. Pursuant to the Investor
        Rights Agreement, Citadel was granted, among other things and subject to
        certain
        conditions, the right to designate up to certain number of the Company's
        board
        of directors, a right of first refusal with respect to any financing sought
        by
        the Company and the right to approve the Company's annual business plan and
        budget. In addition, pursuant to the Investor Rights Agreement, Messrs. Fu,
        Yang
        and Wang agreed to a non-competition covenant relating to their employment
        and
        ability to engage in a business that is competitive with the Company's business
        for five years.
 
 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.
 
 The
        Company is required to comply with certain financial covenants, including
        maintenance of a fixed charge coverage ratio of at least 2.0 and maintenance
        of
        a leverage ratio not exceeding 5.5. Management believes the Company was in
        compliance with all of these covenants as of June 30, 2007.
 
 As
        of
        June 30, 2007, the Company has a total of $60,000,000 long term notes payable
        outstanding. Deferred commission amounted to $3,270,904 and interest expense
        for
        the three and six months ended June 30, 2007 amounted to $179,507and
        $329,096 **.**
 
 **Note
        16 - Derivative financial instruments**
 
 Cross
        currency hedge
  The
        Company's operations are exposed to a variety of global market risks, including
        the effect of changing interest rates. This exposure is managed, in part,
        with
        the use of financial derivatives. The Company uses financial derivatives
        only to
        hedge exposures in the ordinary course of business and dose not invest in
        derivative instruments for speculative purposes.
 20
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 To
          hedge
          exposures associated with the Guaranteed Senior Secured Floating Rate Notes
          due
          2012 (2012 Note),on April 10, 2007, the Company entered into a cross currency
          swap transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”) .
          The Swap, with a notional principal value of $40 million,converts the LIBOR
          + 7% per annum USD variable interest rate to a 8.3% per annum RMB fixed
          interest
          rate. The agreement was deemed effective January 24, 2007. The Swap
          requires semi-annual payment in arrears on July 24 and January 24 and matures
          earlier of (1) cash settlement defined as early termination; or (2) January
          24,
          2012, at which point the Swap requires an exchange of RMB and USD based
          principals. Under the terms of the cross currency swap, the Company receives
          variable interest rate payments in USD and makes fixed interest rate payments
          in
          RMB with settlement netted in USD, thereby creating the equivalent of fixed-rate
          debt. MLCS requires the Company to deposit $1,000,000 with them to secure
          the
          agreement. The deposit may be increased to $3,000,000 if the exchange rate
          for
          RMB to USD falls below 6.5, and to $5,000,000 if the exchange rate falls
          below
          5.5. This swap is designated and qualified as a cash flow hedge.
 
 Since
        its
        effective date, the fair value of this swap agreement changed to a payable
        of
        $452,632 on March 31, 2007, and a payable of $871,519 on June 30, 2007,
        respectively. For
        the
        six months ended June 30, 2007, changes in fair value of the Swap resulted
        in an
        increase in the liability and a loss to other comprehensive income of $871,519,
        net of taxes. As of June 30, 2007, the Company had cross currency hedge
        receivable amounting to $802,523, which was recorded as a gain from derivative
        transactions and received in July 2007 from MLCS. For six
        months ended June 30, 2007, there were no amounts recorded in the consolidated
        statement of income in relation to this interest rate swap related to
        ineffectiveness.
 
 **Note
        17 - Supplemental disclosure of cash flow information**
 
 Income
        taxes paid amounted to $0 and $4,044,883 for the six months ended June 30
        2007
        and 2006, respectively. Interest paid for the six months ended June 30, 2007
        and
        2006 amounted to $536,539 and $655,951, respectively
 
 784,575
        shares of Series A preferred stock and 216,000 shares of Series B preferred
        stock were converted into 19,818,718 shares of common stock during
        2006.
 
 The
        Company has issued 255,000 shares of common stock in payment of liquated
        damage
        payable as disclosed in note 12.
 
 $2,400,000
        in loan commission and $1,200,000 in loan discount were netted against $60
        million in loan proceeds.
 
 650,000
        options were granted to executives and directors in exchange for two year
        services.
 21
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 **Note
        18 - Accumulated other comprehensive income**
 
 The
        components of accumulated other comprehensive income as follows:
  Accumulated
                    other comprehensive income:Balance
                    at December 31, 2006
                
                $
                2,699,723Foreign
                    currency translation gain
                
                
                3,016,550Fair
                    value of cross currency hedge at April 10, 2007
                
                
                (452,632
                )Net
                    change during the period related to cross currency hed
                
                
                (418,887
                )Balance
                    at June 30, 2007
                
                $
                4,844,754
 **Note
        19 - Earnings per share**
 
 The
        following demonstrates the calculation for earnings per share:
  Three
                    months ended June 30
                
                Six
                    months ended June 30,2007
                
                2006
                
                2007
                
                2006(Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)Net
                    income for basic earnings per share
                
                $
                6,982,659
                
                $
                7,186,208
                
                $
                11,957,391
                
                $
                10,952,124Add:
                    Interest expense for convertible note
                
                
                150,000
                
                
                -
                
                
                250,000
                
                
                -Net
                    income for diluted earnings per share
                
                $
                7,132,659
                
                $
                7,186,208
                
                $
                12,207,391
                
                $
                10,952,124Weighted
                    average shares used in basic computation
                
                
                21,487,056
                
                
                19,894,315
                
                
                21,116,447
                
                
                19,894,315Diluted
                    effect of warrants and convertible note
                
                
                3,705,587
                
                
                1,540,377
                
                
                3,550,899
                
                
                1,540,377Weighted
                    average shares used in diluted computation
                
                
                25,192,643
                
                
                21,434,692
                
                
                24,667,346
                
                
                21,434,692Earnings
                    per shareBasic
                
                $
                0.32
                
                $
                0.36
                
                $
                0.57
                
                $
                0.55Diluted
                
                $
                0.28
                
                $
                0.34
                
                $
                0.49
                
                $
                0.51
 **Note
        20 - Shareholders' Equity**
 
 (A)
              Reverse
                  stock split
 
 On
        January 30, 2006, the Company effected a 245.27:1 reverse stock split.  All
        share and per share amounts have been retroactively restated throughout these
        financial statements to reflect the effect of the reverse split.
 
 (B)
              Series
                  A and Series B Convertible Preferred
                  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.
 22
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 (C)
              Following
                  the reverse stock split and as of December 2006, the Company had
                  outstanding:
 
 (1)
              20,046,162
                  shares of common stock, par value
                  $.006.
  (2)
              Warrants
                  purchasing 2,056,015 shares of common stock at an exercise price
                  of $3.67
                  per share, expires December 2010.
  (3)
              Warrants
                  purchasing 424,929 shares of common stock with exercise prices
                  of $3.11
                  per share, expires December 2011
 
 (D)
              During
                  the six months of 2007, the following activities were
                  recorded:
 
 (1)
              255,000
                  shares of common stock at $0.006 par value were issued pursuant
                  to
                  liquidated damage payable that was recorded in
                  2006.
 
 (2)
              1,853,427
                  shares of warrants were exercised for common stock. The warrants
                  were
                  initially issued on December 13, 2005 and were each exercisable
                  for one
                  share of the Company’s common stock at $3.67 per share. 202,588 shares of
                  warrants were forfeited on May 25,
                  2007.
 
 (3)
              3,739
                  shares of warrants were exercised for common stock. The warrants
                  were
                  initially issued on December 13, 2005 and were each exercisable
                  for one
                  share of the Company’s common stock at $3.11per
                  share.
 
 The
        Company has 421,190, warrants exercisable at $3.11 outstanding as of June
        30,
        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
                    yearsGranted
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                (202,588
                )
                
                (202,588
                )
                $
                3.67Exercised
                
                
                (1,857,166
                )
                
                (1,857,166
                )
                $
                3.67Balance
                    at June 30, 2007
                
                
                421,190
                
                
                421,190
                
                $
                3.11
                
                
                3.46
                    years
 **Note
        21 - Stock options based compensation**
 
 On
        May 21
        and June 7, 2007, the Company issued 500,000 and 150,000 options to four
        executives and three independent directors, respectively, for requisite service
        period of two years starting from the grant date. The vesting period is two
        years.
 23
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 The
        fair
        values of stock options grants to the executives and the independent directors
        were estimated at the date of grant using the Black-Scholes option-pricing
        model
        with the following assumptions:
  **Expected**
              
              **Expected**
              
              **Dividend**
              
              **Risk
                  Free Interest**
              
              **Grant
                  Date Fair****Life**
              
              **Volatility**
              
              **Yield**
              
              **Rate**
              
              **Value**Executive
              
              
              2.0yrs
              
              
              50
              %
              
              0
              %
              
              4.57
              %
              $
              3.81Independent
                  Director
              
              
              2.0yrs
              
              
              50
              %
              
              0
              %
              
              4.57
              %
              $
              3.64
 
 -   
        Although historical volatility is generally useful in estimating expected
        volatility, the Company’s share price exhibited abnormal level of volatility
        (133%) from January 30, 2006, the first day of trade after completing reverse
        stock split, to June 29, 2007.  After the reverse split, the shares were
        thinly traded, creating extremely volatile price movements.  By contrast,
        for the 180days up to June 29, 2007, the Company’s trading volume increased and
        the share price appears to have stabilized.  Therefore, the Company
        estimated its expected volatility for the granted stock options on the 180-day
        historical volatility, which is 44.75%, and added additional minor volatility
        for planned expansion of activities over the next two years, to result in
        the
        expected volatility of 50% used in the calculation.
  -   
        Expected dividend yield of zero: the company has never paid a dividend and
        does
        not anticipate paying dividends in the foreseeable future.
 
 -   
        Risk-free interest rate of 4.57%:  the risk-free interest rate was based on
        U.S. Treasury yields with a remaining term that corresponds to the expected
        term
        of the option.
 
 -   
        Expected life:  Because the Company has no historical share option exercise
        experience to estimate future exercise patterns, the expected life was
        determined using the simplified method as these awards meet the definition
        of
        "plain-vanilla" options under the rules prescribed by Staff Accounting Bulletin
        No. 107.
 
 The
        fair
        value of the stock option grant to the executives was $3.81 per share on
        the
        date of grant.  The fair value of the stock option grant to the independent
        directors was $3.64 per share on the date of grant.
 
 Stock
        compensation expense is recognized based on awards expected to vest, and
        there
        were no estimated forfeitures as the Company has a short history of issuing
        options. SFAS No. 123R requires forfeitures to be estimated at the time of
        grant and revised in subsequent periods, if necessary, if actual forfeitures
        differ from those estimates.
 
 The
        500,000 executive options and 150,000 director options had fair value of
        approximately $1,906,957and $546,506 respectively.  Total compensation
        expense associated with the option grants was $645,158 for the six months
        ended
        June 30, 2007.   The expense was recorded entirely as selling and
        administrative expenses.
 
 As
        of June 30, 2007, the total compensation cost related to stock options not
        yet
        recognized was $1.81 million and will be recognized over the weighted
        average life of 2 years.
 24
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 Following
        is a summary of the status of options outstanding at June 30, 2007:
  Outstanding
                    Option
                
                Exercisable
                    OptionsExercise
                    Price
                
                Number
                
                Average
                    Remaining Contractual Life
                
                Average
                    Exercise Price
                
                Number
                
                Weighted
                    Average Exercise Price$12.30
                
                
                500,000
                
                
                1.89
                    years
                
                $
                12.30
                
                
                133,336
                
                $
                12.30$11.75
                
                
                150,000
                
                
                1.94
                    years
                
                $
                11.75
                
                
                37,500
                
                $
                11.75
 **Note
        22 - 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 six months ended June 30, 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.
 
 **Note
        23 - 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.
 25
 FUSHI
                  INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES
                  TO
                  CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                  30,
                  2007
 (Unaudited)
 **Note
        24 - 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
        a United States District Court related to a disputed contract agreement.
        The
        Company believes the claim is without merit and does not anticipate any negative
        outcome of this case.
 
 As
        discussed in Note 16, the Company entered into a swap agreement that required
        a
        $1,000,000 deposit to secure the transaction. If the exchange rate for RMB
        to US
        Dollars drops below certain levels, the Company will be required to deposit
        up
        to $5,000,000.


26
  **Item
          1A.** **Risk
          Factors. The following risk factors are in addition to those previously
          disclosed by us.**
  ***Our
        rapid expansion could significantly strain our resources, management and
        operational infrastructure which could impair our ability to meet increased
        demand for our products and hurt our business results.***
  To
        accommodate our anticipated growth, we will need to expend capital resources
        and
        dedicate personnel to implement and upgrade our accounting, operational and
        internal management systems and enhance our record keeping and contract tracking
        system. Such measures will require us to dedicate additional financial resources
        and personnel to optimize our operational infrastructure and to recruit more
        personnel to train and manage our growing employee base. If we cannot
        successfully implement these measures efficiently and cost-effectively, we
        will
        be unable to satisfy the demand for our products, which will impair our revenue
        growth and hurt our overall financial performance.
  ***If
        we fail to accurately project market demand for our products, our business
        expansion plan could be jeopardized and our financial condition and results
        of
        operations will suffer.***
  We
        plan
        to increase our annual manufacturing capacity to meet an expected increase
        in
        demand for our products. Our decision to increase our manufacturing capacity
        was
        based primarily on our projected increases in our sales volume and growth
        in the
        size of the bimetallic market in China. If actual customer orders are less
        than
        our projected market demand, we will likely suffer overcapacity problems
        and may
        have to leave capacity idle, which may reduce our overall profitability and
        hurt
        our financial condition and results of operations.
  ***We
        face risks associated with future investments or acquisitions.***
  An
        important element of our growth strategy is to invest in or acquire businesses
        that will enable us, among other things, to expand our manufacturing capacity
        and the products we offer to our existing target customer base, broaden our
        distribution channel, and capitalize on opportunities to expand into new
        markets. However, we may be unable to identify suitable investment or
        acquisition candidates or may be unable to make these investments or
        acquisitions on commercially reasonable terms, if at all.
  If
        we
        complete an investment or acquisition, we may not realize the anticipated
        benefits from the transaction. Integrating an acquired business is distracting
        and time consuming, as well as a potentially expensive process. The successful
        integration of any acquired businesses require us to:
  •
              
              integrate
                  and retain key management, sales, research and development, production
                  and
                  other personnel;
 •
              
              incorporate
                  the acquired products or capabilities into our offerings from an
                  engineering, sales and marketing perspective;
 •
              
              coordinate
                  research and development efforts;
 •
              
              integrate
                  and support pre-existing supplier, distribution and customer
                  relationships; and
 •
              
              consolidate
                  duplicate facilities and functions and combine back office accounting,
                  order processing and support functions.
  Geographic
        distance between business operations, the compatibility of the technologies
        and
        operations being integrated and the disparate corporate cultures being combined
        also present significant challenges. Acquired businesses are likely to have
        different standards, controls, contracts, procedures and policies, making
        it
        more difficult to implement and harmonize company-wide financial, accounting,
        billing, information and other systems. Our focus on integrating operations
        may
        also distract attention from our day-to-day business and may disrupt key
        research and development, marketing or sales efforts. If we cannot overcome
        these challenges, we may not realize actual benefits from future acquisitions,
        which will impair our overall business results.
  ***If
        the bimetallic industry does not grow as we expect or grows at a slower speed
        than we expect, our sales and profitability may be materially adversely
        affected.***
  We
        derive
        most of our sales revenue from sales of our products in China. The continued
        development of our business depends, in large part, on continued growth in
        the
        bimetallic industry, especially the CCA market in China. Although China’s
        bimetallic industry has grown rapidly in the past, it may not continue to
        grow
        at the same growth rate in the future or at all. However, the developments
        in
        our industry are, to a large extent, outside of our control and any reduced
        demand for our products, any other downturn or other adverse changes in China’s
        bimetallic or related industries could severely harm our business.
  27


**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 August 14,
      2007; 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) Bimetallic Cable Co., Ltd. (“Fushi International
      (Dalian)”), in the manufacture and sale of bimetallic composite wire products,
      principally copper clad aluminum wires ("CCA"). CCA 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, electrical transformers, wire components for electronic instruments
      and devices, utilities, appliances, automotive, building wire and other
      industrial wires.





We
      manufacture all of our products at our 500,000 square foot manufacturing
      facilities in the City of Dalian, PRC. Virtually all of our products are sold
      to
      customers located in the PRC, or subsidiaries of multinational corporations
      in
      the PRC. Our largest customers include the PRC operations of U.S.-based Andrew
      Corporation, ACOME Xintai Cable, Ltd. and Leoni (Changzhou) Electronics Co.,
      Ltd.





Our
      quarterly results of operations may fluctuate as a result of a number of
      factors, including fluctuation in the demand for and shipments of our products
      and changes in the prices of raw materials, primarily copper. Copper prices
      exhibited greater than normal levels of volatility in 2006 and first six months
      of 2007. We normally purchase copper at the prevailing Shanghai Changjiang
      Metals Exchange (SCME) spot price. For the three months and six months ended
      June 30, 2007, copper strip costs accounted for approximately 50.01% and 50.23%
      of our raw material costs, respectively, or 47.73% and 48.02% of costs of goods
      sold, respectively. Our product is primarily used as a substitute for copper.
      When there is a large differential between the price of copper and aluminum,
      demand for our product increases, as do our margins. When the differential
      narrows, demand for our product may moderate, as will our margins. We generally
      attempt to pass along to our customers changes in the prices of copper and
      other
      raw materials. Our short-term and long-term profitability depends on our ability
      to effectively pass along price increases, among other factors. For further
      information, please see “Risk Factors” in our Annual Report on Form 10-KSB for
      the year ended December 31, 2006.




28





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





With
      respect to the overall business outlook for the remainder of 2007 and forward,
      we believe that high copper prices will keep demand strong. We anticipate sales
      growth to continue to be aggressive and broadly based, principally due to
      increased conversion market visibility, expanding market sizes, defensible
      product profitability, and momentum to gain additional market share.





**Recent
      Developments**





On
      July
      25, 2007, the Company held its Annual General Meeting of Shareholders. At the
      meeting, the shareholders elected Fu Li, Yue Yang, Feng Bai, Barry Raeburn,
      Jiping Hua as Directors of the Company.





The
      shareholders also approved and ratified the appointment of Moore
      Stephens Wurth Frazer and Torbet, LLC as the
      Company’s independent auditors for the fiscal year ending December 31,
      2007.




29




**Financial
      Highlights**




**Three
                    months ended June 30,**
                
                
                
                **Six
                    months ended June 30,****2007**
                
                
                
                **2006**
                
                
                
                **2007**
                
                
                
                **2006****(Unaudited)**
                
                
                
                **(Unaudited)**
                
                
                
                **(Unaudited)**
                
                
                
                **(Unaudited)**REVENUES
                
                $
                26,085,908
                
                
                100.0
                %
                $
                18,335,021
                
                
                100.0
                %
                $
                47,223,825
                
                
                100.0
                %
                $
                32,925,164
                
                
                100.0
                %COST
                    OF GOODS SOLD
                
                
                16,433,794
                
                
                63.0
                %
                
                10,199,652
                
                
                55.6
                %
                
                29,886,532
                
                
                63.3
                %
                
                19,521,213
                
                
                59.3
                %GROSS
                    PROFIT
                
                
                9,652,114
                
                
                37.0
                %
                
                8,135,369
                
                
                44.4
                %
                
                17,337,293
                
                
                36.7
                %
                
                13,403,951
                
                
                40.7
                %OPERATING
                    EXPENSESelling
                    expenses
                
                
                193,916
                
                
                0.7
                %
                
                132,629
                
                
                0.7
                %
                
                369,110
                
                
                0.8
                %
                
                249,249
                
                
                0.8
                %G
                    & A expenses
                
                
                2,028,574
                
                
                7.8
                %
                
                730,180
                
                
                4.0
                %
                
                3,469,576
                
                
                7.3
                %
                
                1,486,701
                
                
                4.5
                %Total
                    operating expense
                
                
                2,222,490
                
                
                8.5
                %
                
                862,809
                
                
                4.7
                %
                
                3,838,686
                
                
                8.1
                %
                
                1,735,950
                
                
                5.3
                %INCOME
                    FROM OPERATIONS
                
                
                7,429,624
                
                
                28.5
                %
                
                7,272,560
                
                
                39.7
                %
                
                13,498,607
                
                
                28.6
                %
                
                11,668,001
                
                
                35.4
                %OTHER
                    INCOME (EXPENSE)
                
                
                (446,965
                )
                
                -1.7
                %
                
                (146,416
                )
                
                -0.8
                %
                
                (1,541,216
                )
                
                -3.3
                %
                
                (319,261
                )
                
                -1.0
                %INCOME
                    BEFORE INCOME TAXES
                
                
                6,982,659
                
                
                26.8
                %
                
                7,126,144
                
                
                38.9
                %
                
                11,957,391
                
                
                25.3
                %
                
                11,348,740
                
                
                34.5
                %PROVISION
                    FOR INCOME TAXES
                
                
                -
                
                
                0.0
                %
                
                (60,064
                )
                
                -0.3
                %
                
                -
                
                
                0.0
                %
                
                396,616
                
                
                1.2
                %NET
                    INCOME
                
                $
                6,982,659
                
                
                26.8
                %
                $
                7,186,208
                
                
                39.2
                %
                $
                11,957,391
                
                
                25.3
                %
                $
                10,952,124
                
                
                33.3
                %




Strategies
      we are in the process of implementing include:





·
            In
                existing markets, backed by a 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. Because, to our knowledge, 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.
                We
                believe 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.








**RESULTS
      OF OPERATIONS**


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





Our
      business for the three months ended June 30, 2007 continued to demonstrate
      robust revenue growth. Despite comparison to a high net revenue and net profit
      base in the same period last year, which included benefits from quick and
      significant copper price increase, we managed to grow revenue by 42.3%. This
      was
      primarily driven by higher average selling prices and higher volumes shipped.
      Numerous factors contributed to our strong growth: volatile copper price, strong
      market demand, new and expanded applications for our products, government and
      industry initiatives, and specifically, accelerated substitution for solid
      copper in telecom cable, magnet wires, and more recently, power cable. In
      addition, during the quarter, we were able to pass along most of the higher
      raw
      material costs to our customers and therefore maintain our normal gross and
      net
      margins.




30





**Selected
      Financial Data:**




For
                  the three months ended
              
              Increase30-Jun-07
              
              30-Jun-06
              
              /(decrease)Net
                  Sales
              
              $
              26,085,908
              
              $
              18,335,021
              
              
              42.3%Gross
                  Profit
              
              
              9,652,114
              
              
              8,135,369
              
              
              18.6%Operating
                  Income
              
              
              7,429,624
              
              
              7,272,560
              
              
              2.2%Net
                  Income
              
              $
              6,982,659
              
              $
              7,186,208
              
              
              -2.8%*Gross
                  Margins*
              
              
              *37.00*
              *%*
              
              *44.40*
              *%**Net
                  Margins*
              
              
              *26.80*
              *%*
              
              *39.20*
              *%*EPS-
                  Basic
              
              $
              0.32
              
              $
              0.36
              
              
              -11.1%EPS-
                  Diluted
              
              $
              0.28
              
              $
              0.34
              
              
              -17.6%




For
                  the three months ended
              
              Increase**Price
                  and Production Metrics:**
              
              30-Jun-07
              
              30-Jun-06
              
              /(decrease)Avg.
                  Copper Price (Changjiang, China)- RMB/ton
              
              
              65,830
              
              
              65,172
              
              
              1.0%Avg.
                  Aluminum Price (Changjiang, China)- RMB/ton
              
              
              20,334
              
              
              20,741
              
              
              -2.0%CCA
                  Average Selling Price- USD/ton
              
              
              6,378
              
              
              6,132
              
              
              4.0%Shipment-
                  tons
              
              
              4,090
              
              
              2,990
              
              
              36.8%Avg.
                  # of Production Lines
              
              
              29
              
              
              20
              
              
              43.3%Capacity
                  (tons/2- regular shifts)
              
              
              4,300
              
              
              3,000
              
              
              43.3%Utilization
              
              
              95.1
              %
              
              99.7
              %
              
              -4.6%




**Net
      Sales**





Sales
      of
      $26.1 million in the second quarter of 2007 increased $7.8 million
      from $18.3 million in the same period in 2006. Our sales increase was primarily
      attributable to a 36.8% volume increase and 4% average selling price increase.
      The volume growth as measured in total tons shipped was driven by strong
      customer demand across a broader mix of end markets and supported by expanded
      manufacturing capacity. The average selling price improvement year-over-year
      resulted primarily from the increase of raw material prices, particularly copper
      prices.




31





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





**2Q
                2007**shipment
                (tons)
            
            %
                of total salesCo-axial
                Cable
            
            
            2,419
            
            
            59.1%Magnet
                and Special Enameled Wire
            
            
            661
            
            
            16.2%Shielded
                Wire
            
            
            1,010
            
            
            24.7%Total
            
            
            4,090
            
            
            100.00%




The
      following table sets forth the revenue contribution by geographic
      location:





**2Q 2007**
            
            **2Q 2006**Domestic
                China
            
            
            96.5%
            
            
            98.5%International
            
            
            3.5%
            
            
            1.5%




The
      following table sets forth information concerning our five largest customers
      for
      the second quarters of 2007 and 2006, respectively:





**FIVE
                LARGEST CUSTOMERS**
            **%
                of Net Sales for the**
              **three
                months ended**
              **June,
                2007**
            
            **%
                of Net Sales for**
              **the
                three months**
              **ended
                June 30, 2006**Jiangxi
                Lianchuang Photoelectricity Science Co.
            7.73%
            
            9.09%Taizhou
                Yihua Specialty Electric Co., Ltd.
            6.24%
            
            5.44%Leoni
                (Changzhou) Electronics Co., Ltd.
            6.00%
            
            N/AShantou
                Jinqiao Cable Co., Ltd.
            5.58%
            
            6.91%Zhuhai
                Hansheng Industrial Co., Ltd
            5.60%
            
            7.77%ACOME
                Xintai Cable CO., Ltd.
            N/A
            
            5.57%**Five
                Largest Customers as % of Total:**
            **31.15%**
            
            **34.78%**





During
      the three months ended June 30, 2007, we continued to diversify our customer
      base. Our five largest customers accounted for 31.2% of total sales, down 3.6%
      compared to 34.8% of the second quarter ended June 30, 2006.





As
      of
      June 30, 2007, the receivable balance due from these five customers represented
      34.0% of total accounts receivables, down 24.7% from 57.9% as compared to
      corresponding period in 2006. We routinely extend unsecured credit to large
      or
      regular customers with good credit history. Management reviews its accounts
      receivable on a regular basis to determine if the allowance for doubtful
      accounts is adequate at each quarter-end. We only extend 30 to 90 day trade
      credit to our largest customers, which tend to be well-established and large
      businesses, and we have not seen any accounts receivable go uncollected beyond
      90 days or experienced any write-off of accounts receivable in the past. Thus,
      we elected not to make any provision for doubtful accounts and consider all
      accounts receivable collectable.





**Cost
      of Goods Sold**





Cost
      of
      Goods Sold was $16.4 million for the three months ended June 30, 2007, compared
      to $10.2 million for the three months ended June 30, 2006, representing an
      increase of $6.2 million or 61.1%. Cost of Goods Sold measured by percentage
      of
      net sales was 63.0%, compared to 55.6% for the prior year. While average SCME
      copper spot prices increased only marginally by 1%, when comparing the two
      periods, from RMB65,122 per ton ($8,147) to RMB 65,830 per ton ($8,229), average
      cost of sales per ton increased to $4,018 in the second quarter of 2007, by
      $607, or 17.8%, from $3,411 in the second quarter of 2006. The percentage
      mismatch was primarily due to a sharp increase in copper prices between the
      first and second quarters of 2006. The sharp increase in copper prices of
      approximately 51% resulted in substantially lower cost of goods sold as lower
      cost inventory acquired in the first quarter of 2006 was sold in the second
      quarter of 2006 with pricing based on the then prevailing raw material costs.
      In
      2007, spot market copper prices increased approximately 28% from the first
      quarter to the second quarter. As a result, we also benefited from the sell
      through of lower cost inventory acquired in the prior. However, the inventory
      gain in the second quarter of 2007 was lower than the gain in the corresponding
      period in 2006. In addition, increased depreciation costs directly related
      to
      manufacturing activities, utility costs, and shipping and handling costs also
      contributed to the COGS increase as a percentage of net revenue, partially
      offset by fixed costs spread over a higher revenue base.




32





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
      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
                June 30, 2007**Dalian
                Guojia Enterprise
            16.54%Beijing
                Golden Eagle Huichuang Copper Co.
            31.81%Baotou
                Aluminum Co., Ltd
            17.68%Dalian
                Zhonghe Trading Co.
            13.10%Harbin
                Electric Cable Co.
            14.18%**Five
                largest suppliers as % of total purchase:**
            **93.31%**





The
      five
      largest raw material suppliers provided 93.31% of our purchases of raw materials
      for the three-month period ended June 30, 2007.





**Gross
      margin**





Gross
      profit for the three months ended June 30, 2007 was $9.7 million, up 18.6%
      from
      gross profit of approximately $8.2 million for the corresponding period in
      the
      prior year. The gross margin decreased to 37.0% from 44.4% year-over-year,
      principally due to a decline in the inventory gains realized from the
      fluctuations of copper prices.





Our
      recent operating results have been both positively and negatively affected
      by
      the rise in raw material prices, primarily copper. As current inventory purchase
      costs increased due to higher raw material prices, our RMB mark-up to customers
      remained relatively constant. This resulted in higher sales revenue amounts
      and
      gross profit amounts but lower gross margins.





Due
      to
      the lag in working through our inventory layers, existing inventory purchased
      at
      previously lower prices and sold as prices increased resulted in higher gross
      profit margins. A decrease in commodity prices in a short period of time could
      have the opposite effect, negatively affecting results.





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




33




**2Q'06**
              
              **3Q'06**
              
              **4Q'06**
              
              **1Q'07**
              
              **2Q’07**Avg.
                  COMEX Cu (USD/ton)
              
              
              6,740
              
              
              7,080
              
              
              6,380
              
              
              5,400
              
              
              6,920Avg.
                  COMEX Al (USD/ton)
              
              
              2,448
              
              
              2,230
              
              
              2,452
              
              
              2,445
              
              
              2,490***Comex
                  Cu/Al***
              
              
              ***2.75***
              
              
              ***3.17***
              
              
              ***2.60***
              
              
              ***2.21***
              
              
              ***2.78***Avg.
                  LME Cu (USD/ton)
              
              
              6,540
              
              
              6,960
              
              
              6,420
              
              
              5,380
              
              
              6,940Avg.
                  LME Al (USD/ton)
              
              
              2,432
              
              
              2,292
              
              
              2,473
              
              
              2,503
              
              
              2,482***LME
                  Cu/Al***
              
              
              ***2.69***
              
              
              ***3.04***
              
              
              ***2.60***
              
              
              ***2.15***
              
              
              ***2.80***Avg.
                  SCME (RMB/ton)
              
              
              65,172
              
              
              68,814
              
              
              67,318
              
              
              60,757
              
              
              65,886Avg.
                  SCME Al (RMB/ton)
              
              
              20,741
              
              
              19,890
              
              
              21,288
              
              
              19,307
              
              
              20,312***China
                  SCME Cu/Al***
              
              
              ***3.14***
              
              
              ***3.46***
              
              
              ***3.16***
              
              
              ***3.15***
              
              
              ***3.24******Gross
                  Margins***
              
              
              ***44.4***
              ***%***
              
              ***30.9***
              ***%***
              
              ***33.1***
              ***%***
              
              ***36.4***
              ***%***
              
              ***37.0***
              ***%***





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





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





**Selling,
      General and Administrative Expenses**




Selling
      expenses, which principally include sales related staff salary and welfare,
      travel expenses, and sales commissions, were $193,916 for the three months
      ended
      June 30, 2007, compared to $132,629 for the three months ended 2006,
      representing an increase of 46.2%. As a percentage of net sales, selling
      expenses remained small and relatively unchanged at 0.7%. General and
      administrative expenses, as a percentage of net sales, increased to 7.8% for
      the
      three months ended June 30 2007, compared with 4.0% for the three months ended
      June 30 2006. Factors which caused this increase were higher administrative
      and
      professional fee costs related to Sarbanes-Oxley compliance and other
      requirements as a public company. Also included in the general and
      administrative expenses for the second quarter of 2007 was share-based
      compensation expense under SFAS 123(R), which was $645,158, equivalent to 2.5%
      of net revenues. Research and development expenses of $22,306, which were
      included in general and administrative expenses, decreased by $32,573, as
      compared to the six months ended June 30, 2006.




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. Depreciation will rise sharply in future quarters due to a
      significantly expanded asset base as we are starting 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 two 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.




34





**Interest
      Expense**





Interest
      expense was $1.7 million for the three months ended June 30, 2007, compared
      to
      $0.3 million for the three months ended June 30, 2006, representing a 532.4%
      increase. The sharp increase is largely due to the accrued interest due on
      the
      notes we sold in our $60 million hybrid financing during the quarter ended
      March
      31, 2007 (the Financing”). Interest
      expenses on our revolving credit facilities for the three months ended June
      30,
      2007 and 2006 amounted to $203,084 and $164,481, respectively.





**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 June 30,
                2007,


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


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




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”, or EIT, rate of 33%.
      PRC domestic companies are governed by the Enterprise Income Tax Laws of the
      PRC
      and are also generally subject to an EIT rate of 33%. However, the Income Tax
      Laws provide certain favorable tax treatment to a company that qualifies as
      a
      "New or High-technology Enterprise" or a “Foreign Invested
      Enterprise ” located
      in the old town of an inshore open city”. Additionally, the governments at the
      provincial, municipal and local levels can provide many tax incentives and
      abatements based on a number of programs at each level.




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





Dalian
      Fushi 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 expired on December 31, 2006. We are considering 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 June
      30, 2007 was zero as we did not conduct any operations under Dalian Fushi from
      the beginning of 2007.




35




Fushi
      International (Dalian) (formerly Dalian DPI) was incorporated in the PRC as
      an
      Foreign Invested Enterprise (“FIE”) and is subject to PRC income tax which is
      computed according to the relevant laws and regulations in the PRC. Fushi
      International (Dalian) 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.





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





**Net
      Income**





Net
      income for the second quarter of 2007 was $7.0 million, or 26.8% of net
      revenue, compared to $7.2 million, or 39.2% of net revenue, in the same
      period last year. The compressed net margin was due principally to i) a decline
      in the inventory gain from rising copper prices; ii) higher general and
      administrative expenses as a result of expansion initiatives and share-based
      compensation expense; iii) higher interest expense associated with senior notes
      issued in the Financing. Excluding non-cash charges for share-based compensation
      expense, the net margin would increase to 29.3%.




Basic
      and
      diluted earnings per share (EPS) for the second quarter of 2007 were $0.32
      and
      $0.28, respectively, compared to $0.36 and $0.34, in the same period last year,
      respectively. Excluding share-based compensation expense, the earnings per
      share
      on a diluted basis would have been 0.30 for the second quarter of
      2007. The weighted average shares outstanding used to calculate basic and
      diluted EPS were 21.5 million and 25.2 million, respectively.




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




For
                the three months ended**EARNINGS**
            
            30-Jun-07
            
            30-Jun-06Net
                income
            
            $
            6,982,659
            
            $
            7,186,208**BASIC**Income
                applicable to common shareholders
            
            $
            6,982,659
            
            $
            7,186,208Basic
                weighted-average common stock outstanding
            
            
            21,487,056
            
            
            19,894,315Basic
                earnings per share
            
            $
            0.32
            
            $
            0.36**DILUTED**Income
                applicable to common shareholders
            
            $
            6,982,659
            
            $
            7,186,208Add:
                Interest expense for the Convertible Notes
            
            $
            150,000Adjusted
                income applicable to common shareholders
            
            $
            7,132,659
            
            $
            7,186,208Basic
                weighted-average common stock outstanding
            
            
            21,487,056
            
            
            19,894,315Effect
                of dilutive securities:*Warrants
            
            
            848,587
            
            
            1,540,377Assumed
                conversion of 3% Senior Secured
            
            
            2,857,000Convertible
                Notes due 2012Diluted
                weighted-average common stocks outstanding
            
            
            25,192,643
            
            
            21,434,692Diluted
                earnings per share
            
            $
            0.28
            
            $
            0.34





*Stock
      option grants are not included due to anti-dilutive effect.




36





**Foreign
      Currency Translation Gains**





In
      the
      three months ended June 30, 2007, the RMB steadily rose against the US dollar.
      As a result of the appreciation of the RMB, we recognized a foreign currency
      translation gain of $2.1 million. Given the uncertainty of exchange rate
      fluctuations, we cannot estimate the effect of these fluctuations on our future
      business, product pricing, results of operations or financial condition. See
      “Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation
      of
      the Renminbi may materially and adversely affect your investment.” in our Annual
      Report on Form 10-KSB for the year ended December 31, 2006.




Materially
      all of our revenues and a majority of our expenses in the first six months
      of
      2007 were denominated in RMB. Our Statements of Operations and Cash Flow were
      translated for the six months ended June 30, 2007 and 2006 at RMB1.00 to US
      $0.12970 (or US $1.00 to RMB7.71) and RMB1.00 to US $0.12422 (or US $1.00 to
      RMB8.05), and for the three months ended June 30, 2007 and 2006 were at RMB1.00
      to US $ 0.13003 (US $1.00 to RMB7.69) and RMB1.00 to US $0.12468 (or US $1.00
      to
      RMB8.02), respectively. Balance sheet amounts with the exception of equity
      at
      June 30, 2007 were translated at RMB1.00 to US $0.13157, or US $1.00 to RMB7.60.
      The equity accounts were stated at their historical rate.





**SIX
      MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006**





**Financial
        Highlights**




For
                  the six months ended
              
              Increase30-Jun-07
              
              30-Jun-06
              
              /(decrease)Net
                  Sales
              
              $
              47,223,825
              
              $
              32,925,164
              
              
              43%Gross
                  Profit
              
              
              17,337,293
              
              
              13,403,951
              
              
              29%Operating
                  Income
              
              
              13,498,607
              
              
              11,668,001
              
              
              16%Net
                  Income
              
              
              11,957,391
              
              
              10,952,124
              
              
              9%*Gross
                  Margins*
              
              
              *36.70*
              *%*
              
              *40.70*
              *%**Net
                  Margins*
              
              
              *25.30*
              *%*
              
              *33.30*
              *%*EPS-
                  Basic
              
              
              $0.57
              
              
              $0.55
              
              
              3.6%EPS-
                  Diluted
              
              
              $0.49
              
              
              $0.51
              
              
              -3.9%




37





**Net
      Sales**





Sales
      revenue increased $14.3 million, or 43.4%, to $47.2 million for the six months
      ended June 30, 2007 from $32.9 million for the same period ended on June 30,
      2006. This increase was principally attributable to increased product shipment
      and higher selling prices driven by higher copper prices, increased market
      demand for our products, and expanded capacity.





**Gross
      Profit Margin**





We
      achieved gross profit of $17.3 million for the six months ended June 30, 2007,
      up 29.3% from gross profit of approximately $13.4 million for the corresponding
      period in the prior year. The increase was principally due to a 27.6% volume
      increase as measured by tons shipped. Gross profit margin was 36.7%, down 4%
      from 40.7% as compared to the corresponding period in 2006. While the gross
      margin remained relatively unchanged comparing the first quarter of the two
      corresponding periods, the second quarter last year benefited more from a sharp
      increase in copper pricesas described above, resulting in better than normal
      gross margin in the second quarter of 2006 overall. However, the inventory
      gain
      in the second quarter of 2007 was lower than the gain in the corresponding
      period in 2006. The impact of lower copper price gain on the gross margin for
      the three months ended June 30, 2007 was partially offset by improved product
      mix towards more fine wire products which carry higher profitability. Fine
      wire
      volume shipped in the first half of 2007 represented 14.4% of total volume
      shipped, as compared to 6.9% in the corresponding period last year.





**Operating
      Expenses**





We
      incurred total operating expenses of $3.84 million, or 8.1% of net sales, for
      the six months ended June 30, 2007. This represented an increase of $2.1
      million, or 121.1%, as compared to $1.7 million, or 5.3% of net sales for the
      six months ended June 30, 2006. As a percentage of net sales, selling expenses
      remained relatively unchanged at 0.8% and general and administrative expenses
      increased significantly from 4.5% to 7.3%. Although we benefited from economies
      of scale, the increase in operating expenses nevertheless outpaced revenue
      growth due to increased professional fees related to public company and non-cash
      share-based compensation expenses.





**Net
      Income**





Our
      net
      income was $12.0 million, or 25.3% of net sales, for the six months ended June
      30, 2007, as compared to $11.0 million, or 33.3% of net sales, for the six
      months ended June 30, 2006. The increase reflected continued expansion in sales
      revenue levels, continued strong demand for our products as a result of high
      copper prices and sustained profitability.





Basic
      and
      diluted earnings per share (EPS) for the six months ended June 30, 2007, were
      $0.57 and $0.49, respectively, compared to $0.55 and $0.51, in the same period
      last year, respectively. Excluding share-based compensation expense, the
      earnings per share on a diluted basis would have been 0.54 for the six months
      ended June 30, 2007. The weighted average shares outstanding used to calculate
      basic and diluted EPS for the comparative periods were 21.1 million and 24.7
      million, respectively.




38





**LIQUIDITY
        AND CAPITAL RESOURCES**
  We
        have
        historically financed our operations and capital expenditures principally
        through private sales of equity securities, the Financing in which we placed
        high yield senior notes and convertible senior notes, bank loans and cash
        provided by operations. In addition, the warrants remaining outstanding of
        the
        2,125,000 we sold as part of financings in December, 2005 became callable
        during
        the quarter ended June 30, 2007 because the trading price of our common stock
        exceeded $10.00 per share for 10 consecutive trading days. We took the necessary
        steps to call the remaining warrants And 1,549,038 warrants were subsequently
        exercised while 202,588 automatically expired by May 25, 2007. The aggregate
        proceeds received by us were approximately $6.8 million for the six months
        ended
        June 30, 2007.




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





In
      summary, our cash flows were:




For
                  the Six Months Ended29-Jun-07
              
              30-Jun-06Net
                  cash provided by (used in) operating activities
              
              $
              6,331,245.31
              
              $
              (4,813,245.00
              )Net
                  cash used in investing activities
              
              
              (12,152,046
              )
              
              (5,057,136
              )Net
                  cash provided by (used in) financing activities
              
              
              58,665,167
              
              
              9,257,033Effect
                  of exchange rate change on cash and cash equivalents
              
              
              1,867,519
              
              
              (966,386
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              54,711,885
              
              
              (1,579,734
              )Cash
                  and cash equivalents at beginning of period
              
              
              20,493,551
              
              
              6,163,670Cash
                  and cash equivalents at end of period
              
              $
              75,205,436.26
              
              $
              4,583,936.00




For
      the
      six months ended June 30, 2007, net cash provided by operating activities was
      $6.3 million. This was primarily attributable to our net income of $12.0
      million, adjusted by an add-back of non-cash expenses primarily consisting
      of
      depreciation and amortization of $1.4 million and share-based compensation
      expense of $0.7 million, and a $6.9 million increase in working capital.
      Specifically, the working capital increase was primarily due to (i) a $2.2
      million accounts receivable increase driven by revenue growth; (ii) a $2.1
      million inventory increase, principally raw materials, to support planned
      expansion and sales growth; (iii) a $2.0 million increase in advance to
      suppliers, consisting primarily of prepayments for copper supplies in advance
      of
      shipment; and (iv) a $2.2 million increase in other payables and accrued
      liabilities.




For
      the
      six months ended June 30, 2007, net cash used in investing activities was
      $12.2 million, and was primarily attributable to $6.5 million capital
      expenditure on new equipment and machinery including $5.7 million advances
      for
      purchase of equipment.




39





For
      the
      six months ended June 30, 2007, net cash provided by financing activities
      was $58.7 million, and was primarily attributable to $56.4 million net proceeds
      from the high yield notes and convertible notes and $6.8 million proceeds from
      warrants exercised. We also rolled over maturing, short term working capital
      loans in the amount of $12.6 million and drew down $11.5 million from our
      existing credit line facilities to meet working capital needs. Maturities for
      the working capital financing range from three to six months. We intend to
      renew
      these loans when they become due.





As
      of
      June 30, 2007, we had cash and cash equivalents of $75.2 million, up $70.6
      million from $4.6 million at June 30, 2006.





On
      January 24, 2007, in connection with the Financing, 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 $56.4 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 $329,096 for the six months ended June 30, 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.




The
      HY
      Notes and Convertible Notes contain customary affirmative and negative covenants
      and other provisions, including restrictions on the incurrence of additional
      debt, creation of liens, making restricted payments, paying dividends,
      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 June 30, 2007.




For
      the
      remainder of 2007, as we accelerate expansion, we expect continued capital
      expenditures for maintaining and adding manufacturing equipment. We also
      anticipate that our working capital requirements may increase during the balance
      of 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
      and
      proceeds from warrant exercise, combined with availability under our revolving
      credit facility, will be sufficient to meet our present anticipated future
      cash
      needs. We may, however, require additional cash resources due to changed
      business conditions or other future developments, including any investments
      or
      acquisitions we may decide to pursue.




**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).




40




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





***Commodity
      Price Risk***




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




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




***Foreign
      Exchange Risk***





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




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




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




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




We
      recognized a foreign currency translation adjustment of approximately $2.1
      million and $3.0 million, for the three months and six months ended June 30,
      2007, respectively.





***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.




41





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





The
      fair
      value of the Swap is determined with the assistance of third party provided
      calculations which reflect the present values of the difference between
      estimated future variable-rate receipts in USD and future fixed-rate payments
      in
      RMB. For the six months ended June 30, 2007, changes in fair value of the Swap
      designated and effective as cash flow hedge resulted in an increase in the
      liability and a loss to other comprehensive income of $871,519, net of taxes.
      As
      of June 30, 2007, the Company had cross currency hedge receivable amounting
      to
      $802,523, which was recorded as a gain from derivative transactions and
      subsequently received in July 2007 from MLCS.




***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.




42




**PART
      II**




**Item
      4.**  **Submission of Matters to a Vote of Security Holders**





On
      Wednesday, July 25, 2007 at 10:00 a.m., we held an Annual Meeting of
      Stockholders (“Annual Meeting”) at our executive offices.





The
      purpose of the Annual Meeting was:





1.
            To
                elect five members to our Board of Director to serve until their
                respective successors are elected and qualified;
                and





2.
            To
                ratify and approve Moore Stephens Wurth Frazer and Torbet, LLP, as
                our
                independent public accountants, to audit our financial statements
                for the
                fiscal ending December 31, 2007.





The
      five
      nominated directors were elected and Moore Stephens Wurth Frazer and Torbet,
      LLP
      was ratified and approved as out independent auditor.




Below
      is
      a breakdown of the votes cast in respect of the proposals:




Proposals
                for:
            
            For
            
            Against
            
            Withheld
            
            AbstentionsLi
                Fu as our director
            
            15,913,609
            
            —
            
            —
            
            —Mathus
                Yue Yang as our director
            
            15,913,609
            
            —
            
            —
            
            —Barry
                Raeburn as our director
            
            15,913,609
            
            —
            
            —
            
            —Jiping
                Hua as our director
            
            15,913,609
            
            —
            
            —
            
            —Feng
                Bai as our director
            
            15,913,609
            
            —
            
            —
            
            —Moore
                Stephens Wurth Frazer and Torbet LLP as our independent public
                accountant
            
            15,913,609
            
            —
            
            —
            
            —




**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.




43




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:
                August 14, 2007
            BY:
            /s/
                Wenbing Chris WangWenbing
                Chris WangChief
                Financial Officer




44




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.




45