**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM 10-Q**




**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





OR





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




FOR
      THE
      TRANSITION PERIOD FROM    _____________   TO
      _______________





**Commission
      File Number:**


**000-52383**


**Fuqi
      International, Inc.**


*(Exact
      name of small business issuer as specified in its charter)*





**Delaware**
              *(State
                or other jurisdiction of incorporation*
              *or
                organization)*
            
            **20-1579407**
              *(I.R.S.
                Employer Identification No.)***5/F.,
                Block 1, Shi Hua Industrial Zone,**
              **Cui
                Zhu Road North, Shenzhen, 518019,**
              **People’s
                Republic of China**
              *(Address
                of principal executive offices)*
            
            **N/A**
              *(Zip
                Code)*





**86
      (755) 2580-1888**


*(Registrant’s
      telephone number, including area code)*





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
      (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.


Yes x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx




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





As
      of
      August 15, 2007 the registrant had issued and outstanding 21,692,503 shares
      of
      common stock, par value $.001 per share.









**FUQI
      INTERNATIONAL, INC.**


**FORM
      10-Q QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





PART I
                : FINANCIAL INFORMATION
            
            
            PageITEM
                1 — FINANCIAL STATEMENTS
            
            
            1Condensed
                Consolidated Balance Sheets as of June 30, 2007 (unaudited) and
                December 31, 2006
            
            
            2Condensed
                Consolidated Statements of Income and Comprehensive Income for the
                Three
                Months and Six Months Ended June 30, 2007 and 2006
                (unaudited)
            
            
            3Condensed
                Consolidated Statement of Cash Flows for the Six Months Ended  June
                30, 2007 and 2006 (unaudited)
            
            
            4Notes
                To Condensed Consolidated Financial Statements (unaudited)
            
            
            5ITEM
                2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATION
            
            
            13ITEM
                3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
                RISK
            
            
            22ITEM
                4 — CONTROLS AND PROCEDURES
            
            
            23PART II
                : OTHER INFORMATIONITEM
                1 — LEGAL PROCEEDINGS
            
            
            24ITEM
                1A — RISK FACTORS
            
            
            24ITEM
                2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            
            
            37ITEM
                3 — DEFAULTS UPON SENIOR SECURITIES
            
            
            37ITEM
                4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            
            37ITEM
                5 — OTHER INFORMATION
            
            
            37ITEM
                6 — EXHIBITS
            
            
            37SIGNATURES
            
            
            38









**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1 - FINANCIAL STATEMENTS**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America for interim financial information and with the
      instructions to Form 10-Q. Accordingly, they do not include all of the
      information and footnotes required by generally accepted accounting principles
      for complete financial statements. The accompanying unaudited financial
      statements reflect all adjustments that, in the opinion of management, are
      considered necessary for a fair presentation of the financial position, results
      of operations, and cash flows for the periods presented. The results of
      operations for such periods are not necessarily indicative of the results
      expected for the full fiscal year or for any future period. The accompanying
      unaudited condensed consolidated financial statements should be read in
      conjunction with the audited financial statements of Fuqi International, Inc.
      included in the Form 10-K for the fiscal year ended December 31, 2006 as filed
      with the Securities and Exchange Commission on April 17, 2007.




1




**Fuqi
                International, Inc.****Condensed
                Consolidated Balance Sheets****June
                30,****2007**
            
            **December
                31,****(Unaudited)**
            
            **2006****Assets****Current
                assets:**Cash
            
            $
            8,493,504
            
            $
            13,354,981Restricted
                cash
            
            
            393,933
            
            
            -Accounts
                receivable, net of allowance for doubtful accounts of $299,000 for
                June
                30, 2007 and $195,000 for December 31, 2006
            
            
            10,872,015
            
            
            9,363,397Refundable
                value added taxes
            
            
            1,948,517
            
            
            -Inventories
            
            
            20,795,528
            
            
            6,066,213Prepaid
                expenses
            
            
            129,871
            
            
            89,362Deposits
            
            
            101,859
            
            
            -Deposits
                related to borrowings on notes payable
            
            
            -
            
            
            736,358Deferred
                taxes
            
            
            52,262
            
            
            29,198Total
                current assets
            
            
            42,787,489
            
            
            29,639,509**Property,
                equipment, and improvements,****net**
            
            
            1,234,947
            
            
            1,354,313**Deposits**
            
            
            93,717
            
            
            91,398**Other
                assets**
            
            
            39,040
            
            
            40,122$
            44,155,193
            
            $
            31,125,342**Liabilities
                and Stockholders' Equity****Current
                liabilities:**Notes
                payable
            
            $
            15,100,781
            
            $
            14,086,852Line
                of credit
            
            
            1,313,111
            
            
            -Accounts
                payable and accrued liabilities
            
            
            1,272,431
            
            
            215,092Accrued
                business tax
            
            
            1,353,490
            
            
            1,084,078Accrued
                estimated penalties
            
            
            1,147,594
            
            
            1,119,201Accrued
                value added taxes
            
            
            -
            
            
            133,010Customer
                deposits
            
            
            3,257,192
            
            
            1,234,424Inventory
                loan payable
            
            
            723,169
            
            
            -Due
                to stockholder
            
            
            -
            
            
            422,909Income
                tax payable
            
            
            2,600,459
            
            
            1,884,837Total
                current liabilities
            
            
            26,768,227
            
            
            20,180,403**Stockholders'
                equity:**Preferred
                stock, $0.001 par value, 5,000,000 shares authorized, none issued
                and
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 100,000,000 shares authorized, shares issued
                and
                outstanding -
              21,692,503
                shares as of June 30, 2007 and 20,715,384 shares as of December 31,
                2006
            
            
            21,693
            
            
            20,715Additional
                paid in capital
            
            
            9,958,174
            
            
            7,203,673Accumulated
                foreign currency translation adjustments
            
            
            746,485
            
            
            432,125Retained
                earnings
            
            
            6,660,614
            
            
            3,288,426Total
                stockholders' equity
            
            
            17,386,966
            
            
            10,944,939$
            44,155,193
            
            $
            31,125,342







**The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.**




2




**Fuqi
                International, Inc.**
              **Condensed
                Consolidated Statements of Income and Comprehensive Income
                (Unaudited)****Three
                Months Ended**
              **June****30**,
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Net
                sales**
            
            $
            26,280,696
            
            $
            24,220,335
            
            $
            54,240,965
            
            $
            48,523,940**Cost
                of sales**
            
            
            23,227,434
            
            
            23,007,011
            
            
            48,023,583
            
            
            44,093,624**Gross
                profit**
            
            
            3,053,262
            
            
            1,213,324
            
            
            6,217,382
            
            
            4,430,316**Operating
                expenses:**Selling
                and marketing
            
            
            186,816
            
            
            109,600
            
            
            380,573
            
            
            215,860General
                and administrative
            
            
            740,086
            
            
            299,724
            
            
            1,161,598
            
            
            568,197Total
                operating expenses
            
            
            926,902
            
            
            409,324
            
            
            1,542,171
            
            
            784,057**Income
                from operations**
            
            
            2,126,360
            
            
            804,000
            
            
            4,675,211
            
            
            3,646,259**Other
                income (expenses):**Interest
                expense
            
            
            (282,609
            )
            
            (189,819
            )
            
            (529,776
            )
            
            (400,234
            )Interest
                Income
            
            
            3,009
            
            
            -
            
            
            3,009
            
            
            -Change
                of fair value on inventory loan payable
            
            
            (7,214
            )
            
            -
            
            
            (48,375
            )
            
            -Miscellaneous
            
            
            5,614
            
            
            15
            
            
            5,614
            
            
            12,453Total
                other expenses
            
            
            (281,200
            )
            
            (189,804
            )
            
            (569,528
            )
            
            (387,781
            )**Income
                before provision for income taxes**
            
            
            1,845,160
            
            
            614,196
            
            
            4,105,683
            
            
            3,258,478**Provision
                for income taxes**
            
            
            356,176
            
            
            100,062
            
            
            733,495
            
            
            469,903**Net
                income**
            
            
            1,488,984
            
            
            514,134
            
            
            3,372,188
            
            
            2,788,575**Other
                comprehensive income**-
                foreign currency translation adjustments
            
            
            204,300
            
            
            13,793
            
            
            314,360
            
            
            70,609**Comprehensive
                income**
            
            $
            1,693,284
            
            $
            527,927
            
            $
            3,686,548
            
            $
            2,859,184**Earnings
                per share - basic**
            
            $
            0.07
            
            $
            0.03
            
            $
            0.16
            
            $
            0.15**Earnings
                per share - diluted**
            
            $
            0.06
            
            $
            0.03
            
            $
            0.13
            
            $
            0.15**Weighted
                average number of common shares -  basic**
            
            
            20,940,873
            
            
            18,886,666
            
            
            20,828,751
            
            
            18,886,666**Weighted
                average number of common shares - diluted**
            
            
            25,453,673
            
            
            18,886,666
            
            
            26,014,731
            
            
            18,886,666






**The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.**




3




**Fuqi
                International, Inc.****Condensed
                Consolidated Statements of Cash Flows (Unaudited)****Increase
                (Decrease) in Cash****Six
                Months Ended**
              **June
                30,****2007**
            
            **2006****Cash
                flows provided by operating activities:**Net
                income
            
            $
            3,372,188
            
            $
            2,788,575**Adjustments
                to reconcile net income to net cash used for operating
                activities:**Depreciation
                and amortization
            
            
            160,147
            
            
            151,758Change
                of fair value on inventory loan payable
            
            
            48,375
            
            
            -Bad
                debt
            
            
            98,650
            
            
            100,872**Changes
                in operating assets and liabilities:**Accounts
                receivable
            
            
            (1,355,124
            )
            
            (3,601,695
            )Refundable
                value added taxes
            
            
            (2,060,952
            )
            
            (610,090
            )Inventories
            
            
            (14,407,983
            )
            
            (5,209,187
            )Prepaid
                expenses
            
            
            (37,803
            )
            
            (18,753
            )Deposits
                - short term
            
            
            644,507
            
            
            (186,800
            )Deferred
                taxes
            
            
            (22,066
            )
            
            (37,983
            )Other
                current assets
            
            
            -
            
            
            2,156Deposits
            
            
            -
            
            
            18,680Other
                assets
            
            
            2,076
            
            
            (22,931
            )Accounts
                payable, accrued expenses, accrued business tax and accrued
                penalties
            
            
            1,282,050
            
            
            186,652Inventory
                loan receivable
            
            
            -
            
            
            691,363Inventory
                loan payable
            
            
            666,487
            
            
            -Customer
                deposits
            
            
            1,968,574
            
            
            258,716Income
                tax payable
            
            
            660,133
            
            
            373,463Net
                cash used for operating activities
            
            
            (8,980,741
            )
            
            (5,115,204
            )**Cash
                flows provided by (used for) investing
                activities:**Purchase
                of property, equipment and improvements
            
            
            (8,189
            )
            
            (20,135
            )Disbursements
                on loans to stockholder
            
            
            -
            
            
            (50,827,042
            )Proceeds
                from collections on loans to stockholder
            
            
            -
            
            
            56,638,097Decrease
                (Increase) in restricted cash
            
            
            (389,408
            )
            
            -Net
                cash provided by (used for) investing activities
            
            
            (397,597
            )
            
            5,790,920**Cash
                flows provided by (used for) financing
                activities:**Proceeds
                from short-term borrowing
            
            
            1,947,040
            
            
            -Proceeds
                from exercise of warrants, net of financing cost
            
            
            2,755,479
            
            
            -Proceeds
                from loans borrowed from stockholder
            
            
            203,506
            
            
            -Repayments
                to loans payable to stockholder
            
            
            (642,295
            )
            
            -Net
                cash provided by (used for) financing activities
            
            
            4,263,730
            
            
            -**Effect
                of exchange rate changes on cash**
            
            
            253,131
            
            
            208,092**Net
                increase (decrease) in cash**
            
            
            (4,861,477
            )
            
            883,808**Cash,**beginning
                of the period
            
            
            13,354,981
            
            
            71,479**Cash,**end
                of the period
            
            $
            8,493,504
            
            $
            955,287**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            510,756
            
            $
            376,006Income
                taxes paid
            
            $
            95,428
            
            $
            126,457Non-cash
                activities:Decrease
                in due from stockholder for dividend declared and paid
            
            $
            -
            
            $
            2,739,726







**The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.**




4




**Fuqi
      International, Inc.**


**Notes
      to Condensed Consolidated Financial Statements (Unaudited)**






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





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




Fuqi
      International, Inc. (‘Fuqi” or “the Company”), formerly VT Marketing Services,
      Inc. (“VTM”), was originally incorporated in the State of Arizona on September
      3, 2004 as a wholly-owned subsidiary of Visitalk Capital Corporation (“VCC”),
      and was formed as part of the implementation of the Chapter 11 reorganization
      plan (the “Visitalk Plan”) of visitalk.com, Inc. (“Visitalk.com”). Visitalk.com
      filed for Chapter 11 Bankruptcy in November 2000. The Visitalk Plan became
      effective on September 17, 2004. On September 22, 2004, Visitalk.com merged
      into
      VCC, which was authorized as the reorganized debtor under the Visitalk
      Plan.




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





The
      accompanying condensed consolidated balance sheet as of June 30, 2007, the
      condensed consolidated statements of income for the three months and six months
      ended June 30, 2007 and June 30, 2006, and the condensed consolidated statements
      of cash flows for the six months ended June 30, 2007 and June 30, 2006 are
      unaudited and do not include all of the information and footnotes required
      by
      accounting principles generally accepted in the United States of America for
      complete financial statements. In our opinion, these consolidated financial
      statements reflect all adjustments which are of a normal recurring nature and
      which are necessary to present fairly the financial position of Fuqi as of
      June
      30, 2007 and the results of operations for the three months and six months
      ended
      June 30, 2007 and 2006 and the cash flows for the six month periods ended June
      30, 2007 and 2006. The results of operations for the three months and six months
      ended June 30, 2007 are not necessarily indicative of the results which may
      be
      expected for the entire fiscal year. The preparation of condensed consolidated
      financial statements in conformity with accounting principles generally accepted
      in the United States of America requires us 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 revenue and expenses during the reporting period. Actual
      results could differ from those estimates.




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


**Cost
      of Sales**





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





**Operating
      Costs:**





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





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





5





**Revenue
      Recognition**





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





·  Persuasive
      evidence of an arrangement exists;


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


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


·  Collectibility
      is reasonably assured.





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





**Currency
      Reporting**





Amounts
      reported in the accompanying condensed consolidated financial statements and
      disclosures are stated in U.S. Dollars, unless stated otherwise. The functional
      currency of the Company is the Renminbi (“RMB”). Foreign currency transactions
      (outside PRC) during three months and six months ended June 30, 2007 and 2006
      are translated into RMB according to the prevailing exchange rate at the
      transaction dates. Assets and liabilities denominated in foreign currencies
      at
      the balance sheet dates are translated into RMB at period-end and year-end
      exchange rates.





The
      Company’s functional currency is RMB. For the purpose of preparing the condensed
      consolidated financial statements, the condensed consolidated balance sheets
      of
      the Company have been translated into U.S. dollars at the current rates as
      of
      June 30, 2007 and 2006 and the condensed consolidated statements of income
      have
      been translated into U.S. dollars at the weighted average rates during the
      periods the transactions were recognized.





The
      resulting translation gain adjustments are recorded as other comprehensive
      income in the condensed consolidated statements of income and comprehensive
      income.





**Basic
      and Diluted Earnings Per Share**





In
      accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
      per common share is computed by dividing net earnings (loss) available to common
      stockholders by the weighted average number of common shares outstanding.
      Diluted earnings (loss) per common share is computed similarly to basic earnings
      (loss) per common share, except that the denominator is increased to include
      the
      number of additional common shares that would have been outstanding if the
      potential common shares had been issued and if the additional common shares
      were
      dilutive. As of December 31, 2006, the Company had common stock equivalents
      of
      16,846,982 shares upon the exercise of the plan warrants. The Company delivered
      a notice of redemption to the warrant holders in May 2007, and all of the
      warrants were either exercised or redeemed and cancelled in June 2007. The
      computation of dilutive potential common shares for the periods is shown as
      follows:





Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,2007
            
            2006
            
            2007
            
            2006Basic
                weighted average shares
            
            
            20,940,873
            
            
            18,886,666
            
            
            20,828,751
            
            
            18,886,666Effect
                of dilutive securities - warrants
            
            
            4,512,800
            
            
            -
            
            
            5,185,980
            
            
            -Dilutive
                potential common shares
            
            
            25,453,673
            
            
            18,886,666
            
            
            26,014,731
            
            
            18,886,666




6




**Inventory
      Loan Payable**





During
      the six months ended June 30, 2007, the Company borrowed from a non-related
      entity, at a cost of approximately $663,974, platinum raw materials for
      production use. Per the terms of the agreement, the Company is obligated to
      return the same quantity of platinum in August 2007. The loan payable was stated
      at fair value of $723,169 as of June 30, 2007 which was determined based on
      the
      quoted market price listed by the Shanghai Gold Exchange. The net increase
      of
      fair value in the amount of $7,214 and $48,375 was reported as change of fair
      value on inventory loan payable in the accompanying condensed consolidated
      statements of income and comprehensive income for the three months and six
      months ended June 30, 2007, respectively.





**New
      Accounting Pronouncements**




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




**Restricted
      Cash**





The
      Company committed to loan a total of $2,820,513 to two related parties in
      2006. Per the agreements with the bank through which the loan was to be made,
      the Company was required to maintain $2,820,513 in the bank to cover these
      loans
      when drawn by these entities. The agreements with the bank expired during 2006,
      and accordingly the cash balance was no longer restricted as of December 31,
      2006.





As
      of
      June 30, 2007, the Company was required to maintain a fixed deposit of $393,933
      as a condition to borrow under a bank loan agreement. The amount was classified
      as restricted cash as of June 30, 2007.


**(2)**
            **Inventories:**


A
      summary
      of inventory is as follows:


June
                30,
              2007
            
            December
                31,
              2006Raw
                materials
            
            $
            17,409,764
            
            $
            743Work
                in process
            
            
            1,748,181
            
            
            3,917,795Finished
                goods - Wholesale operation
            
            
            636,740
            
            
            2,147,675Finished
                goods - Retail operation
            
            
            1,002,843
            
            
            -$
            20,795,528
            
            $
            6,066,213




7


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


A
      summary
      is as follows:


June
                30,
              2007
            
            December
                31,
              2006Production
                equipment
            
            $
            979,305
            
            $
            950,479Computers
            
            
            15,777
            
            
            14,976Office
                equipment and furniture
            
            
            107,010
            
            
            101,289Automobiles
            
            
            261,306
            
            
            254,841Leasehold
                improvements
            
            
            392,678
            
            
            382,963Building
            
            
            559,090
            
            
            545,2572,315,166
            
            
            2,249,805Less
                accumulated depreciation and amortization
            
            
            1,080,219
            
            
            895,492$
            1,234,947
            
            $
            1,354,313





Depreciation
      and amortization expense for property, equipment, and improvements amounted
      to
      approximately $102,952 and $71,360 for the three months ended June 30, 2007
      and
      2006, respectively, and $160,147 and $151,758 for the six months ended June
      30,
      2007 and 2006, respectively.






**(4)**
            **Operation
                Rights Transfer Agreement:**





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




The
      Company obtained temporary operation rights from the Transferor to operate
      these
      counters from May 1, 2007. The Transferor is in the progress of negotiating
      the transfer of operation rights to the Company with these department stores.
      As
      of August 13, 2007, the Company has not yet received formal operation rights
      transfer agreements but has received verbal confirmations from the department
      stores.






**(5)**
            **Line
                of Credit:**





In
      February 2007, the Company entered into a facility line of credit with a bank.
      Under the terms of the agreement, the Company can borrow a maximum amount of
      $1,969,667 and each of the borrowings cannot be less than $131,311 and has
      a
      maximum borrowing period of 90 days. This facility line of credit expires in
      February 2012 and is secured by an affiliated company and certain real
      properties owned by an affiliated company. Interest is charged at 1.2 times
      the
      bank’s prime rate (6.804% to 7.02% at June 30, 2007). The facility line of
      credit agreement has certain conditions for the Company to fulfill prior to
      the
      withdrawals and to continue to borrow from the bank, including execution of
      the
      fixed deposit agreement and maintaining approximately $657,000 (RMB 5,000,000)
      in fixed deposit with this bank. The bank has allowed the Company to draw on
      the
      line of credit without fulfilling these conditions. The facility line of credit
      agreement also has certain restrictions and covenants with which the
      Company must comply during the terms of the agreement. The outstanding
      balance as of June 30, 2007 was $1,311,111.




8





**(6)**
            **Notes
                Payable:**




As
      of
      June 30, 2007 and December 31, 2006, outstanding notes payable to the bank
      consisted of loan agreements that are covered by a Maximum Banking Facility
      Agreement dated August 24, 2006 with this bank. Under the agreement, maximum
      facility amount, which was $13,131,114 at June 30, 2007 and $12,806,229 at
      December 31, 2006 (RMB100,000,000), is secured by the Company’s inventories. The
      Bank Facility Agreement has certain restrictions and covenants. The Company
      has
      been in compliance with these restrictions and covenants since the execution
      of
      the Agreement. As of June 30, 2007 and December 31, 2006, the Company had
      outstanding loan balances with this bank totaling $13,131,114 and $12,806,229,
      respectively.





The
      outstanding notes payable balances of the loan agreements consist of the
      followings:





June
                30,
              2007
            
            December
                31,
              2006A
                note payable with interest at a rate of 5.76%, secured by the Company’s
                inventories and certain real estate properties owned by an affiliated
                company, matured in January 2007. The loan was repaid.
            
            
            -
            
            $
            1,280,623Two
                notes payable with interest at a rate of 5.85%, guaranteed by affiliated
                companies and personally guaranteed by the controlling stockholder,
                matured in February 2007. The loan was repaid.
            
            
            -
            
            
            2,561,246Four
                notes payable with interest at a rate of 5.832%, secured by the Company’s
                inventories and certain real estate properties owned by an affiliated
                company and guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matured in January 2007. The loan
                was
                repaid.
            
            
            -
            
            
            3,841,869A
                note payable with interest at a rate of 6.138%, guaranteed by affiliated
                companies and secured by certain real estate properties owned by
                an
                affiliated company, matured in March 2007. The loan was
                repaid.
            
            
            -
            
            
            1,280,623A
                note payable with interest at a rate of 6.732%, guaranteed by affiliated
                companies and secured by the Company’s inventories and certain real estate
                properties owned by an affiliated company and personally guaranteed
                by the
                stockholder, matures in July 2007. The loan was repaid.
            
            
            -
            
            
            960,467A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in September 2007. The loan
                was
                repaid.
            
            
            -
            
            
            960,467A
                note payable with interest at a rate of 6.426%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in September 2007. The loan
                was
                repaid.
            
            
            -
            
            
            1,024,498A
                note payable with interest at a rate of 6.426%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in October 2007. The loan was
                repaid.
            
            
            -
            
            
            896,436A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matures in December 2007. The loan
                was
                repaid.
            
            
            -
            
            
            1,280,623A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in July 2007.
            
            
            984,835
            
            
            -




9




A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in September 2007.
            
            
            984,835
            
            
            -A
                note payable with interest at a rate of 6.426%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in September 2007.
            
            
            1,050,489
            
            
            -A
                note payable with interest at a rate of 6.426%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in October 2007.
            
            
            919,178
            
            
            -A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matures in December 2007.
            
            
            1,313,111
            
            
            -A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in January 2008.
            
            
            1,772,700
            
            
            -A
                note payable with interest at a rate of 6.4728%, secured by the Company’s
                inventories and certain real estate properties owned by affiliated
                companies, guaranteed by affiliated companies and personally guaranteed
                by
                the controlling stockholder, matures in July 2007.
            
            
            853,522
            
            
            -A
                note payable with interest at a rate of 6.4728%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matures in July 2007.
            
            
            1,313,111
            
            
            -A
                note payable with interest at a rate of 6.4728%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matures in July 2007.
            
            
            1,313,111
            
            
            -A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matures in October 2007.
            
            
            1,313,111
            
            
            -A
                note payable with interest at a rate of 6.732%, guaranteed by affiliated
                companies, matures in January 2008.
            
            
            1,969,667
            
            
            -A
                note payable with interest at a rate of 6.732%, secured by the Company’s
                inventories, guaranteed by affiliated companies and personally guaranteed
                by the controlling stockholder, matures in November 2007.
            
            
            1,313,111
            
            
            -$
            15,100,781
            
            $
            14,086,852






**(7)**
            **Equity
                Financing**





In
      accordance with the Visitalk Plan, the Company issued six series of common
      stock
      purchase warrants allowing holders to purchase additional shares of common
      stock
      (“Plan Warrants”). Each Plan Warrant provides for the purchase of one share of
      common stock and is callable by the Company for a price of $.0001 per warrant
      at
      any time. The Plan Warrants are governed by a Warrant Agreement. In connection
      with the execution of the Share Exchange Agreement on November 20, 2006, four
      series of the Plan Warrants (series A, B, D and F) were called and expired.
      In
      substance, three of Visitalk Plan’s warrants were exchanged for each of the
      Company’s warrants.





Pursuant
      to the terms of the Warrant Agreement and Visitalk Plan, the Company delivered
      a
      notice of redemption to the warrant holders in May 2007, and upon expiration
      of
      the call period on June 8, 2007, series C warrants had been exercised for
      977,119 shares of the Company’s common stock for total gross proceeds from
      conversion of $2,931,360. The
      remaining unexercised warrants were redeemed at $0.0001 per share by the
      Company. All
      other
      remaining Plan Warrants expired unexercised. No warrants remained outstanding
      after the closing of the call.




10




The
      Company issued a total of 977,119 shares of common stock to existing warrant
      holders upon the exercise of warrants under the registration exemption offered
      under Section 1145(a)(1) of the United States Bankruptcy Code, as
      amended.






**(8)**
            **Related-Party
                Transactions:**





For
      the
      three months and six months ended June 30, 2006, the Company earned certain
      cash
      revenues from its customers that were subsequently collected by its controlling
      stockholder. Approximate cash revenues amounting to $1,415,982 and $2,735,571
      were collected by its controlling stockholder for the three months and six
      months ended June 30, 2006, respectively. Beginning December 2006, this
      controlling stockholder is no longer collecting cash revenue on behalf of the
      Company and all the cash revenues are deposited through the Company’s bank
      accounts.





Since
      the
      inception of the Company’s operations, the Company’s controlling stockholder
      frequently borrowed funds from the Company on a non-interest bearing basis.
      As
      of December 31, 2006, the Company discontinued such practice and the balance
      was
      repaid to the Company in full. In aggregate, the Company loaned $30,046,632
      and
      $50,827,042, during the three months and six months ended June 30, 2006,
      respectively, and collected $34,714,910 and $56,638,097 during the three months
      and six months ended June 30, 2006, respectively. The Company did not loan
      or
      collect any amounts to or from the controlling stockholder during the three
      or
      six months ended June 30, 2007. Outstanding balance due from the controlling
      stockholder was $0 as of June 30, 2007 and December 31, 2006.





The
      Company has borrowed from its controlling stockholder on a non-interest
      bearing basis to satisfy the Company’s short term capital needs since the
      inception of its operations. In aggregate, the Company borrowed $1,234 and
      $203,506 during the three months and six months ended June 30, 2007,
      respectively, and repaid $134,046 and $642,295 during the three months and
      six
      months ended June 30, 2007, respectively. The Company did not borrow or repay
      any amounts from or to the controlling stockholder during the three months
      and
      six months ended June 30, 2006. Outstanding loan payables to the controlling
      stockholder amounted to $0 and $422,909 as of June 30, 2007 and December 31,
      2006, respectively.





The
      Company declared and paid dividends of $2,739,726 to its controlling stockholder
      during the three months ended June 30, 2006, which offset the amounts due from
      this stockholder. Subsequent to the Share Exchange Agreement closed on November
      22, 2007, the Company did not declare or pay any dividends to its
      stockholders.







**(9)**
            **Income
                Taxes:**





The
      Company adopted the provisions of FASB Interpretation 48, *Accounting
      for Uncertainty in Income Taxes* ,
      on
      January 1, 2007. FIN 48 prescribes a recognition threshold and measurement
      attribute for financial statement recognition and measurement of a tax position
      taken or expected to be taken in a tax return, and also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Company has determined the impact
      of
      the adoption of FIN 48 is insignificant to the Company’s consolidated financial
      position, results of operations and cash flows.




The
      Company did not report certain cash revenues related to fees charged to its
      customers for product design. Such fee revenues are subject to business tax
      and
      service charges in China at an aggregate rate of 5.2%. The Company has
      not reported such revenues since the inception of its operations in 2001. The
      Company has recorded in its consolidated financial statements the tax
      liabilities representing business tax and fees of 5.2% and income tax on the
      unreported design revenues since the inception of its business in 2001. Per
      advice of the registered tax agent in China in 2004, the Company accrued 100%
      of
      unpaid tax amounts as the maximum penalties which could be assessed by the
      local
      tax department through the periods ended December 31, 2004.




11




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




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




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




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




On
      August
      10, 2007, the Company received a notice from the tax department that
      conditionally agreed to exempt the Company’s tax liabilities in the amount of
      approximately $3 million on unreported design fee income for the period from
      the
      inception of the Company’s operations in 2001 to December 31, 2006, provided
      that the Company’s common stock is successfully listed on a major overseas stock
      exchange within 180 days from the date of the tax notice.






**(10)**
            **Subsequent
                Event**





As
      indicated in Note 9, the Company received a notice on August 10, 2007 from
      the
      Shenzhen tax department that conditionally agreed to exempt the Company’s tax
      liabilities in the amount of approximately $3 million on unreported design
      fee
      income for the period from the inception of the Company’s operations in 2001 to
      December 31, 2006, provided that the Company’s common stock is successfully
      listed on a major overseas stock exchange within 180 days from the date of
      the
      tax notice.




12




**ITEM
      2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS**





The
      following discussion contains forward-looking statements that involve risks
      and
      uncertainties. Forward-looking statements include, but are not limited to,
      statements regarding future events, our plans and expectations and financial
      projections. The words “anticipated,” “believe,” “expect, “plan,” “intend,”
“seek,” “estimate,” “project,” “could,” “may,” and similar expressions are
      intended to identify forward-looking statements. Our actual results could differ
      materially from those discussed herein. Factors that could cause or contribute
      to such differences include, but are not limited to, those discussed elsewhere
      in this report and in our other filings with the Securities and Exchange
      Commission (“SEC”) and the “Risk Factors” section, below. Although we believe
      the expectations reflected in the forward-looking statements are reasonable,
      they relate only to events as of the date on which the statements are made,
      and
      our future results, levels of activity, performance or achievements may not
      meet
      these expectations. We do not intend to update any of the forward-looking
      statements after the date of this document to conform these statements to actual
      results or to changes in our expectations, except as required by law. Unless
      the
      context otherwise requires, the terms “we,” the “Company,” “us,” or “Fuqi”
refers to Fuqi International, Inc. and our wholly-owned
      subsidiaries.





**Overview**





We
      are a
      leading designer of high quality precious metal jewelry in China, developing,
      promoting, and selling a broad range of products in the large and rapidly
      expanding Chinese luxury goods market. Our products consist of a range of unique
      styles and designs made from precious metals such as platinum, gold, and Karat
      gold (K-gold), as well as diamonds and other precious stones. We continuously
      innovate and change our designs based upon consumer trends in China. By
      continuously creating new designs and rapidly bringing them to market, we are
      able to differentiate ourselves from our competitors and strengthen our brand
      identity. Our design database presently contains over 20,000 unique
      products.





We
      have
      historically sold our products directly to distributors, retailers and other
      wholesalers, who then sell our products to consumers through both retail
      counters located in department stores and in other traditional stand-alone
      jewelry stores. We sell our products to our customers at a price point which
      reflects the market price of the base material, plus a mark-up reflecting our
      design fees and processing fees. Typically this markup ranges from 10-12%.
      Our
      customers then further mark-up our product to the consumer up to an additional
      30%.





In
      order
      to capitalize on the substantial growth in consumer spending within the luxury
      goods category and to capture the margin appreciation from direct sales to
      the
      consumer, we recently initiated a retail strategy in product categories where
      we
      believe we will not be in competition with our existing sales channels. Our
      retail strategy will focus on finished gemstone jewelry, which we previously
      provided only on a custom order basis and which has historically represented
      only a nominal percentage of our overall sales. Gemstone products usually have
      a
      longer turnover period of at least four to six months but offer higher margins.
      We intend to analyze sales data at all our retail outlets and determine the
      best
      product mix for each outlet in order to achieve the highest sales revenue and
      gross margins.





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




13




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





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





Our
      company is headquartered in the city of Shenzhen, in southern China, where
      we
      have a large-scale production base that includes a modern factory of more than
      53,000 square feet, a dedicated senior design, sales and marketing team, and
      more than 600 company trained employees. We believe our current facilities
      provide adequate space for our planned expansion of our production lines, which
      will include diamond and other finished gemstone jewelry.





**Corporate
      History**





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





On
      November 20, 2006, Fuqi BVI entered into a share exchange agreement with VT
      Marketing Services, Inc. (“VT”) and Mr. Yu Kwai Chong, who is our current Chief
      Executive Officer and Chairman of the Board of the Directors, to effect a
      reverse merger transaction (the “Reverse Merger”). Pursuant to the Reverse
      Merger, Mr. Chong, as the sole shareholder of Fuqi BVI, agreed to exchange
      all
      of his shares of Fuqi BVI for shares of VT and VT agreed to acquire all of
      the
      issued and outstanding capital stock of Fuqi BVI. VT was formed as part of
      the
      implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of
      visitalk.com, Inc., which became effective on September 17, 2004. The Reverse
      Merger closed on November 22, 2006 and VT issued an aggregate of 18,886,666
      shares of common stock in exchange for all of the issued and outstanding
      securities of Fuqi BVI. Upon the close of the Reverse Merger, VT became the
      100%
      parent of Fuqi BVI and assumed the operations of Fuqi BVI and its subsidiary
      as
      its sole business. On November 8, 2006, VT reincorporated from Arizona to Nevada
      and on December 8, 2006, after the Reverse Merger, VT reincorporated from the
      Nevada to Delaware and changed its corporate name from “VT Marketing Services,
      Inc.” to “Fuqi International, Inc.” The transactions contemplated by the Reverse
      Merger were intended to be a “tax-free” transaction pursuant to the provisions
      of Section 351 of the Internal Revenue Code of 1986, as amended.





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





**Critical
      Accounting Policies, Estimates and Assumptions**





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




14




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





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





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





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





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





**Taxation**





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





Under
      current tax laws in China, the usual statutory income tax rate applicable to
      PRC
      companies is 33%. Fuqi China currently enjoys a reduced enterprise income tax
      rate of 15%, which is granted to all enterprises operating in the Shenzhen
      Special Economic Zone. Prior to 2006, we were under the preferential income
      tax
      rate of 7.5% in 2005 and 2004, due to our status of being a new business. That
      status expired effective January 1, 2006. Our effective income tax rates for
      the
      three months ended June 30, 2007 and June 30, 2006, were 19.3% and 16.3%,
      respectively, and for the six months ended June 30, 2007 and June 30, 2006
      were
      17.9% and 14.4%, respectively. On March 16, 2007, the National People’s Congress
      of China enacted a new PRC Enterprise Income Tax Law, under which foreign
      invested enterprises and domestic companies will be subject to enterprise income
      tax at a uniform rate of 25%. The new law will become effective on January
      1,
      2008. We anticipate that as a result of the new EIT law, our income tax rates
      will rise to 25%, which could adversely affect our financial condition and
      results of operations. For additional information, see below at "Risk
      Factors--Risks Related to Doing Business in China-- *We
      had enjoyed certain preferential tax concessions and the loss of these
      preferential tax concessions may cause our tax liabilities to increase and
      our
      profitability to decline* ."




15




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





We
      failed
      to report a cumulative amount of approximately $26 million in cash revenues
      related to design fees for the period from the inception of Fuqi China in 2001
      to June 30, 2007. In April 2006, the Shenzhen local tax department levied a
      $1.8
      million assessment against us for unpaid business taxes, fees, and income taxes
      related to these unreported cash revenues up to the period from inception to
      December 31, 2005. The assessment was originally due at the end of April 2006
      and subject to 0.05% per day of interest and penalties thereafter. On April
      28,
      2006, we filed for an extension of the deadline to remit these outstanding
      taxes
      payable to December 20, 2006, and the extension request was approved by the
      tax
      department in July 2006. On December 28, 2006, Shenzhen City Tax Bureau granted
      a further extension to us from December 20, 2006 to April 25, 2007.  On
      April
      25, 2007, we appointed a Registered Tax Agent to apply on behalf of the Company
      for a special reduction or exemption for the unpaid tax liabilities for the
      period from inception to December 31, 2006. On May 14, 2007, we received a
      notice from the Shenzhen tax department accepting our application for a tax
      reduction or exemption and were granted an additional period to remit our
      outstanding tax liabilities until August 9, 2007. The tax department agreed
      not
      to assess any interest and penalties during this review process until August
      9,
      2007. As of June 30, 2007, we had an accrual of approximately $3.8 million
      in
      tax liabilities representing business tax and fees of 5.2% and income tax on
      the
      unreported design revenues since inception. On August 10, 2007, we received
      a notice from the tax department that conditionally agreed to exempt our
      tax liabilities in the amount of approximately $3 million on unreported design
      fee income for the period from the inception of the Company’s operations in 2001
      to December 31, 2006, provided that the Company’s common stock is successfully
      listed on a major overseas stock exchange within 180 days from the date of
      the
      tax notice.





**Impact
      of Recent Currency Exchange Rate Increase**





We use
      the U.S. dollar as the reporting currency for our financial statements. Our
      operations are conducted through our PRC operating subsidiary, Fuqi China,
      and its functional currency is the RMB. On July 21, 2005, the PRC government
      changed its policy of pegging the value of the RMB to the U.S. dollar and,
      as a
      result, the RMB has appreciated against the U.S. dollar by approximately 7.3%
      from 1:8.27 on July 21, 2005 to 1:7.71 on May 2, 2007. In converting our RMB
      income statement amounts into U.S. dollars we used the following RMB/$ exchange
      rates: 7.751 and 7.704, respectively, for three months six months ended June
      30,
      2007, and 8.049 and 8.030, respectively, for three months and six months ended
      June 30, 2006. Our operating results have benefited, and our financial results
      for the balance of 2007 are likely to benefit, as a result of appreciation
      of
      the RMB against the U.S. dollar. There is no guarantee that we will benefit
      from
      the exchange rate in the future and our operations may suffer if a less
      favorable exchange rate develops.




16




**Results
      of Operations**





The
      following table sets forth our statements of operations for the three months
      and
      six months ended June 30, 2007 and 2006 unaudited):





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**In
                Dollars
            
            Percent
                of Revenue
            
            In
                Dollars
            
            Percent
                of Revenue
            
            In
                Dollars
            
            Percent
                of Revenue
            
            In
                Dollars
            
            Percent
                of Revenue***(unaudited)******(in
                thousands, except share amounts and earnings per
                share)*****Net
                sales**
            
            $
            26,280
            
            
            100.0
            %
            $
            24,220
            
            
            100.0
            %
            $
            54,241
            
            
            100.0
            %
            $
            48,524
            
            
            100.0
            %**Cost
                of sales**
            
            
            23,227
            
            
            88.4
            %
            
            23,007
            
            
            95.0
            %
            
            48,023
            
            
            88.5
            %
            
            44,094
            
            
            90.9
            %**Gross
                profit**
            
            
            3,053
            
            
            11.6
            %
            
            1,213
            
            
            5.0
            %
            
            6,217
            
            
            11.5
            %
            
            4,430
            
            
            9.1
            %**Operating
                expenses**Selling
                and marketing
            
            
            187
            
            
            0.7
            %
            
            110
            
            
            0.5
            %
            
            381
            
            
            0.7
            %
            
            216
            
            
            0.4
            %General
                and administrative
            
            
            740
            
            
            2.8
            %
            
            299
            
            
            1.2
            %
            
            1,161
            
            
            2.2
            %
            
            568
            
            
            1.2
            %Total
                operating expenses
            
            
            927
            
            
            3.5
            %
            
            409
            
            
            1.7
            %
            
            1,542
            
            
            2.8
            %
            
            784
            
            
            1.6
            %**Income
                from operations**
            
            
            2,126
            
            
            8.1
            %
            
            804
            
            
            3.3
            %
            
            4,675
            
            
            8.7
            %
            
            3,646
            
            
            7.5
            %**Other
                income (expenses):**Interest
                expense
            
            
            (283
            )
            
            (1.1
            %)
            
            (190
            )
            
            (0.8
            %)
            
            (530
            )
            
            (1.0
            %)
            
            (400
            )
            
            (0.8
            %)Interest
                income
            
            
            3
            
            
            0.0
            %
            
            -
            
            
            -
            
            
            3
            
            
            0.0
            %
            
            -Change
                of fair value of inventory loan payable
            
            
            (7
            )
            
            (0.0
            %)
            
            -
            
            
            -
            
            
            (48
            )
            
            (0.1
            %)
            
            -Miscellaneous
            
            
            6
            
            
            0.0
            %
            
            
            
            
            
            
            
            5
            
            
            0.0
            %
            
            12
            
            
            0.0
            %Total
                other income (expenses)
            
            
            (281
            )
            
            (1.1
            %)
            
            (190
            )
            
            (0.8
            %)
            
            (570
            )
            
            1.1
            %
            
            (388
            )
            
            (0.8
            %)**Income
                before provision for income taxes**
            
            
            1,845
            
            
            7.0
            %
            
            614
            
            
            2.5
            %
            
            4,105
            
            
            7.6
            %
            
            3,258
            
            
            6.7
            %**Provision
                for income taxes**
            
            
            356
            
            
            1.3
            %
            
            100
            
            
            0.4
            %
            
            733
            
            
            1.4
            %
            
            470
            
            
            1.0
            %**Net
                income**
            
            
            1,489
            
            
            5.7
            %
            
            514
            
            
            2.1
            %
            
            3,372
            
            
            6.2
            %
            
            2,788
            
            
            5.7
            %**Other
                comprehensive income -**foreign
                currency translation adjustments
            
            
            204
            
            
            0.8
            %
            
            14
            
            
            0.1
            %
            
            314
            
            
            0.6
            %
            
            71
            
            
            0.2
            %**Comprehensive
                income**
            
            $
            1,693
            
            
            6.5
            %
            $
            528
            
            
            2.2
            %
            $
            3,686
            
            
            6.8
            %
            $
            2,859
            
            
            5.9
            %**Earnings
                per share - basic**
            
            $
            0.07
            
            
            
            
            $
            0.03
            
            
            
            
            $
            0.16
            
            
            
            
            $
            0.15**Earnings
                per share - diluted**
            
            $
            0.06
            
            
            
            
            $
            0.03
            
            
            
            
            $
            0.13
            
            
            
            
            $
            0.15**Dividend
                per share - basic**
            
            $
            -
            
            
            
            
            $
            0.14
            
            
            
            
            $
            -
            
            
            
            
            $
            0.14**Dividend
                per share - diluted**
            
            $
            -
            
            
            
            
            $
            0.14
            
            
            
            
            $
            -
            
            
            
            
            $
            0.14**Weighted
                average number of common shares - basic**
            
            
            20,940,873
            
            
            
            
            
            18,886,666
            
            
            
            
            
            20,828,751
            
            
            
            
            
            18,886,666**Weighted
                average number of common shares -diluted**
            
            
            25,453,673
            
            
            
            
            
            18,886,666
            
            
            
            
            
            26,014,731
            
            
            
            
            
            18,886,666







**Three
      Months Ended June 30, 2007 and 2006**





Net
      sales ,
      which
      consist of gross sales net of returns, for the
      three months ended June 30, 2007 increased to $26.3 million, an increase of
      $2.1
      million, or 8.7%, from net sales of $24.2 million for the three months ended
      June 30, 2006. The increase in net sales was primarily the result of an increase
      in our prices, which included the price of precious metals, our processing
      fees
      and our design fees.




17




Sales
      for
      the three months ended June 30, 2007 and 2006 were comprised of the
      following:




**Three
                Months Ended June 30,****2007**
            
            **2006****Amount
                in millions**
            
            **Percentage**
            
            **Amount
                in millions**
            
            **Percentage****Platinum**
            
            $
            6.5
            
            
            24.7
            %
            $
            4.5
            
            
            18.6
            %**Gold**
            
            
            13.5
            
            
            51.3
            
            
            10.6
            
            
            43.8**K-gold
                and Studded Jewelry**
            
            
            6.3
            
            
            24.0
            
            
            9.1
            
            
            37.6**Total**
            
            $
            26.3
            
            
            100.0
            %
            $
            24.2
            
            
            100.0
            %




Cost
      of
      sales is mainly comprised of costs of raw materials, primarily gold and
      platinum, in addition to direct manufacturing costs and factory overhead, which
      accounted for approximately 1.3% of the cost of sales for the three months
      ended
      June 30, 2007. Cost of sales for the three months ended June 30, 2007 increased
      to $23.2 million, an increase of $0.2 million, or 0.9%, from $23.0 million
      for
      the same period in 2006. The percentage increase in cost of sales was less
      than
      the percentage increase in net sales, primarily due to the increase of our
      selling prices.





Gross
      profit for the three months ended June 30, 2007 increased to $3.1 million,
      an
      increase of $1.9 million, or 158.3%, from $1.2 million for the same period
      in
      2006. The gross profit margin for the three months ended June 30, 2007 was
      11.6%, compared to 5.0% for the same period in 2006. Our gross profit margin
      for
      the three months ended June 30, 2007 was approximately the same as the first
      quarter of 2007. The increase in the gross margin for the three months ended
      June 30, 2007 as compared to the same period in 2006 was primarily due to our
      higher sales prices during the three months ended June 30, 2007, as compared
      to
      the reduced sales prices in the same period in 2006, which were lowered in
      an
      attempt to generate more sales volume.





Selling
      and marketing expenses are primarily comprised of business taxes, advertising
      expenses, traveling expenses, production costs of marketing materials,
      insurance, and delivery expenses. Selling and marketing expenses for the three
      months ended June 30, 2007 were approximately $187,000, an increase of $77,000,
      or 70%, from approximately $110,000 for the same period in 2006. The increase
      in
      selling and marketing expenses was primarily due to an increase in electricity
      fees, an increase in insurance coverage for product delivery, and an
      increase in retail related expenses. We expect higher selling and marketing
      expenses in total dollars and as a percentage of revenues for the foreseeable
      future. We anticipate spending more on advertising expenses in an attempt to
      strengthen brand awareness and to establish and maintain a strong market
      position.





General
      and administrative expenses consist primarily of payroll expenses, benefits
      and
      travel expenses for our staff, professional fees including audit, accounting,
      legal and financial advisory, depreciation expenses, and general office
      expenses. General and administrative expenses for the three months ended June
      30, 2007 were $740,000, an increase of $441,000, or 147.5%, from $299,000 for
      the same period in 2006. The increase in general and administrative expenses
      was
      primarily due to an increase of professional fees incurred as a result of being
      a publicly reporting company in the United States. In addition, we granted
      our
      Chief Financial Officer a one-time discretionary bonus of approximately $88,000
      in connection with the exercise of warrants during the second quarter of 2007.
      We expect that our general and administrative expenses will increase due to
      the
      various additional legal, accounting and other requirements applicable to a
      public company in the United States. In addition, upon the effective date
      of our proposed initial public offering, we intend to issue stock options to
      acquire a significant number of shares of our common stock. As a result, we
      will
      incur a charge to earnings equal to the fair market value of such stock
      options.





Interest
      expenses were approximately $283,000 for the three months ended June 30, 2007,
      an increase of $93,000, or 48.9%, from approximately $190,000 for same period
      in
      2006. The increase in interest expense was primarily a result of our increases
      in short term bank financing and an increase in interest rates for the three
      months ended June 30, 2007.





Provision
      for income tax expense was approximately $356,000 for the three months ended
      June 30, 2007, an increase of $256,000, or 256%, from approximately $100,000
      for
      the same period in 2006. The increase was caused by the increase of gross
      margin, which was partially offset by the increase of general and administrative
      expenses. Companies in China are generally subject to a 30% state enterprise
      income tax and a 3% national income tax. Our subsidiary, Fuqi China, currently
      enjoys a reduced enterprise income tax rate of 15%, which is granted to all
      enterprises operating in Shenzhen Special Economic Zone. We were under a
      preferential income tax rate of 7.5% in 2005 and 2004 due to our status of
      being
      a new business. That status expired effective January 1, 2006. Because of the
      recent announcement of the new Enterprise Income Tax Law in China, which becomes
      effective on January 1, 2008, we will be subject to an income tax rate of 25%.
      We anticipate that the increase in income tax rate will cause an increase
      in our income tax expenses beginning in 2008. See “Taxation” in this
      section, above.




18




Net
      income increased to $1.5 million for the three months ended June 30, 2007 from
      $0.5 million for the three months ended June 30, 2006, an increase of $1.0
      million, or 200%.





Other
      comprehensive income, which consists of gains from foreign exchange
      translations, was approximately $204,000 for the three months ended June 30,
      2007, an increase of $190,000, or 1,357%, from approximately $14,000 during
      the
      same period of 2006. The increase was a result of continuous appreciation of
      the
      RMB exchange rate against the U.S. dollar. The PRC government maintained a
      relatively fixed exchange rate against the U.S. dollars until the end of the
      third quarter of 2005, which has resulted in a significant appreciation of
      the
      RMB since the third quarter of 2005.





**Six
      Months Ended June 30, 2007 and 2006**





Net
      sales
      for the six months ended June 30, 2007 increased to $54.2 million, an increase
      of $5.7 million, or 11.8%, from net sales of $48.5 million for the six months
      ended June 30, 2006. The increase in net sales was primarily the result of
      an
      increase in our prices, which included the price of precious metals, our
      processing fees and our design fees.





Sales
      for
      the six months ended June 30, 2007 and 2006 were comprised of the
      following:




**Six
                Months Ended June 30,****2007**
            
            **2006****Amount
                in millions**
            
            **Percentage**
            
            **Amount
                in millions**
            
            **Percentage****Platinum**
            
            $
            12.0
            
            
            22.1
            %
            $
            10.0
            
            
            20.6
            %**Gold**
            
            
            28.2
            
            
            52.0
            
            
            22.1
            
            
            45.6**K-gold
                and Studded Jewelry**
            
            
            14.0
            
            
            25.9
            
            
            16.4
            
            
            33.8**Total**
            
            $
            54.2
            
            
            100.0
            %
            $
            48.5
            
            
            100.0
            %




Cost
      of
      sales accounted for approximately 1.1% of the cost of sales for the six months
      ended June 30, 2007. Cost of sales for the six months ended June 30, 2007
      increased to $48.0 million, an increase of $3.9 million, or 8.8%, from $44.1
      million for the same period in 2006. The increase was primarily due to the
      increase in net sales for the six months ended June 30, 2007.





Gross
      profit for the six months ended June 30, 2007 increased to $6.2 million, an
      increase of $1.8 million, or 40.9%, from $4.4 million for the same period in
      2006. The gross margin for the six months ended June 30, 2007 was 11.5%,
      compared to 9.1% for the same period in 2006. The increase in the gross margin
      for the six months ended June 30, 2007 as compared to the same period in 2006
      was primarily due our higher sales prices during the three months ended June
      30,
      2007, as compared to the reduced sales prices in the same period in 2006, which
      were lowered in an attempt to generate more sales volume.





Selling
      and marketing expenses for the six months ended June 30, 2007 were approximately
      $381,000, an increase of $165,000, or 76.39%, from $216,000 for the same period
      in 2006. The increase in selling and marketing expenses was primarily due to
      our
      extended advertising campaign during Chinese New Year, an increase in
      electricity fees, an increase in insurance coverage for product delivery, and
      an
      increase in retail related expenses.





General
      and administrative expenses for the six months ended June 30, 2007 were $1.2
      million, an increase of $0.6 million, or 100%, from $0.6 million for the same
      period in 2006. The increase in general and administrative expenses was
      primarily due to an increase of professional fees incurred as a result of being
      a publicly reporting company in the United States. In addition, we granted
      our
      Chief Financial Officer a one-time discretionary bonus of approximately $88,000
      in connection with the exercise of warrants during the second quarter of 2007.




19




Interest
      expenses were approximately $530,000 for the six months ended June 30, 2007,
      an
      increase of $130,000, or 32.5%, from $400,000 for same period in 2006. The
      increase in interest expense was primarily a result of our increases in short
      term bank financing and increases in interest rates for the six months ended
      June 30, 2007.





Provision
      for income tax expense was approximately $733,000 for the six months ended
      June
      30, 2007, an increase of $263,000, or 56%, from approximately $470,000 for
      the
      same period in 2006. The increase was primarily due to an increase in the
      taxable income for the six months ended June 30, 2007.





Net
      income increased to $3.4 million for the six months ended June 30, 2007 from
      $2.8 million for the six months ended June 30, 2006, an increase of $0.6
      million, or 21.43%.





Other
      comprehensive income was approximately $314,000 for the six months ended June
      30, 2007, an increase of $243,000, or 342.3%, from $71,000 for the six months
      ended June 30, 2006. The increase was a result of continuous appreciation of
      the
      RMB exchange rate against the U.S. dollar.




**Liquidity
      and Capital Resources**





At
      June
      30, 2007, we had retained earnings of $6.7 million and had cash of $8.5 million.
      We have historically financed our operations with cash flows generated from
      operations, as well as through the borrowing of long-term or short-term bank
      loans. In addition, we have borrowed from our controlling stockholder, Mr.
      Yu
      Kwai Chong, for short term working capital requirements.





At
      June
      30, 2007, we had outstanding facility lines of credit and short-term notes
      payables with banks in an aggregate amount of $16.4 million, consisting of
      $15.1
      million in short-term notes payable to banks and $1.3 million in facility lines
      of credit. Our loans are secured by inventory, real property and/or guaranteed
      by our affiliates and controlling stockholder.





We
      have a
      general banking facility line of credit with Agricultural Bank of China pursuant
      to a Maximum Banking Facility Agreement dated August 24, 2006. The terms of
      the
      agreement enable us to borrow up to a maximum facility amount of $13.1 million.
      Maturity dates for each withdrawal typically range from three to six months
      and
      are agreed to by the parties at the time of withdrawal. As of June 30, 2007,
      we
      had $13.1 million outstanding under the facility, with interest rates ranging
      from 6.426% to 6.732%. In addition, we have a line of credit and bank loan
      with
      other banks, including China Construction Bank and DBS Bank. As of June 30,
      2007, we had a total of $3.3 million outstanding with interest rates ranging
      from 6.732%
      to
      7.02%  from
      the
      DBS Bank line of credit and bank loan from China Construction Bank. Amounts
      borrowed under the banking facility lines of credit are secured by our
      inventory, real property, and/or guaranteed by our affiliates and our
      controlling stockholder and have certain restrictions and covenants. We do
      not
      guarantee any indebtedness of our affiliates. The amounts outstanding under
      these lines of credit and bank loans are presented in our condensed
      consolidated financial
      statements as notes payable and line of credit. For additional information,
      see
      Note 5 and Note 6 to the condensed consolidated financial statements contained
      in this quarterly report.





Prior
      to
      the Reverse Merger, our then sole stockholder, Mr. Yu Kwai Chong, who is also
      our President, Chief Executive Officer and Chairman of the Board, made loans
      to
      us on a regular basis to meet short term financing needs of our company.
      Typically, these advances were in amounts ranging from $30,000 to $5.5 million,
      with no more than $10.0 million outstanding at any time. We did not pay interest
      on any of these advances. During the same period, Mr. Chong borrowed from our
      company primarily to fund personal liquidity needs. Our advances to Mr. Chong
      were typically in amounts ranging from $30,000 to $5.0 million, with no more
      than $10.0 million outstanding at any time. We did not charge interest on any
      of
      these advances. Since the closing of the Reverse Merger, at which time Mr.
      Chong
      ceased to be our sole stockholder, we have not engaged in any cash advance
      transactions with Mr. Chong and will not engage in these transactions in the
      future. On our consolidated statement of cash flows, we recorded advances by
      Mr.
      Chong to us and related repayments to him as financing activities, and advances
      by us to Mr. Chong and related repayments by him as investing activities.
      Advances and repayments were not subject to written loan agreements; the
      advances were partially repaid within three months while the remaining portions
      were repaid over three months. In accordance with FAS No. 95, we present the
      gross amounts of the advances and repayments in our consolidated statements
      of
      cash flows.




Prior
      to
      the Reverse Merger, effective in November 2006, we paid dividends to our then
      sole stockholder, Mr. Chong. During the years ended December 31, 2006, 2005
      and
      2004, we paid cash dividends of $2.7 million, $5.4 million, and $4.0 million,
      respectively to Mr. Chong. We currently have no intention to declare further
      dividends in the foreseeable future. Payment of dividends is further restricted
      under the provisions of our existing loan agreements.




20




In
      May
      2007, we delivered a notice of redemption to the holders of our Series C and
      Series E Plan Warrants ("Plan Warrants"). Prior to our redemption date of the
      warrants on June 8, 2007, holders of the warrants exercised Plan Warrants for
      the issuance of an aggregate of 977,119 shares of our common stock, for which
      we
      received an aggregate of $2,931,357 in exercise proceeds. All other remaining
      Plan Warrants expired unexercised. As of June 30, 2007 and December 31, 2006,
      respectively, a total of 0 and 16,846,982 Plan Warrants remained
      outstanding.





***Net
      cash provided by (used for) operating activities.*** ****** Net
      cash
      used by operating activities was $9.0 million for the six months ended June
      30,
      2007, compared to net cash used by operations of $4.1 million for the same
      period in 2006. The $4.9 million increase was primarily due to an increase
      in
      inventory in the amount of $14.4 million during the six months ended June 30,
      2007 compared to an increase of $5.2 million during the same period in 2006,
      in
      addition to an increase of refundable value added taxes in the amount of $2.1
      million during the first half of 2007 compared to an increase of $610,000 in
      same period in 2006. These increases were partially offset by an increase in
      customer deposits payable in the amount of $2.0 million in the first half of
      2007 compared to an increase of $259,000 in the same period in
      2006.





***Net
      cash provided by (used for) investing activities.*** Net
      cash
      used for investing activities amounted to approximately $398,000 for the six
      months ended June 30, 2007, compared to net cash provided by investing
      activities of $5.8 million for the six months ended June 30, 2006. The change
      was due to increase in restricted cash of approximately $390,000, in addition
      to
      the absence of loans and related repayments between our controlling stockholder
      and us, as had occurred during the six months ended June 30, 2006.





***Net
      cash provided by (used for) financing activities.*** ****** Net
      cash
      provided by financing activities amounted to $4.3 million for the six months
      ended June 30, 2007, compared to net cash used for financing activities of
      $0
      million for the six months ended June 30, 2006. The increase of cash provided
      was primarily a result of the additional borrowings of $1.9 million from the
      facility line of credit entered in February 2007, in addition to net proceeds
      of
      $2.8 million from the exercise of warrants that occurred during the second
      quarter of 2007.




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





We
      intend
      to expand our retail operations in order to capitalize on the growing consumer
      market in China. We intend to open new retail locations by leasing unoccupied
      space, acquiring existing leases from third parties and/or acquiring the
      existing jewelry operations of third parties that occupy retail space. Our
      retail expansion will largely depend on our ability to find sites for, open
      and
      operate new retail locations successfully, which depends on, among other things,
      our ability to: (i) identify suitable counter and store locations; (ii) purchase
      and negotiate acceptable lease terms; (iii) prepare counters and stores for
      opening within budget; (iv) source sufficient levels of inventory at acceptable
      costs to meet the needs of new counters and stores; (v) hire, train and retain
      personnel, and (vi) secure required governmental permits and approvals.
      Currently, we conduct our retail sales from five retail counters for which
      we
      have acquired operation rights. We have also commenced negotiations with an
      individual to potentially serve as director of our retail
      operations.





During
      2007, we plan to open 20 retail counters and 2 retail stores in municipalities
      and provincial capitals throughout China. In 2008, we plan to open 60 to 80
      retail counters and 8 to 10 retail stores. In addition to the funds required
      to
      open new retail locations, additional working capital will be needed to operate
      the retail locations due to longer sales and collection cycles and higher
      inventory levels required to support retail stores. We currently anticipate
      that
      we will need approximately $40 million in capital to execute our retail plan
      for
      the coming two years. We anticipate that a substantial portion of it,
      approximately $20 million, would be used to acquire new raw materials. A smaller
      portion of the additional capital, approximately $16 million, would be used
      for
      the opening of retail outlets. Approximately $2 million of the additional
      capital would be used to acquire new components and additional tooling, while
      the remaining portion of the additional capital would be applied to working
      capital for labor to manufacture jewelry and for marketing and promotional
      activities. Additional capital for this objective may be required that is in
      excess of our current resources, requiring us to raise additional capital
      through additional equity offerings or secured or unsecured debt financing.
      The
      availability of additional capital resources will depend on prevailing market
      conditions, interest rates, and our existing material financial position and
      results of operations. The foregoing amounts are only estimates, which may
      change based on our analysis and evaluations of changing market
      conditions.




21




**ITEM
      3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





***Foreign
      Exchange Risk***





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





The
      value
      of RMB is subject to changes in China’s governmental policies and to
      international economic and political developments. In January 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, the PBOC announced an adjustment of the
      exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified
      the
      system by which the exchange rates are determined. This modification has
      resulted in an approximate 7.3% appreciation of the RMB against the U.S. dollar
      from July 21, 2005 to May 2, 2007. While the international reaction to the
      RMB
      revaluation has generally been positive, there remains significant international
      pressure on the PRC government to adopt an even more flexible currency policy,
      which could result in further fluctuation of the exchange rate of RMB against
      the U.S. dollar. As all of our net revenues are recorded in RMB, any future
      devaluation of RMB against the dollar could negatively impact our results of
      operations.





***Interest
      Rate Risk***





As
      of
      June 30, 2007, we had $16.4 million outstanding under short term credit
      facilities from banks, with interest rates ranging from 6.426% to 6.732%. As
      all
      of these borrowings are short term borrowings, we believe our exposure to
      interest rate risk is not material. We do not use any derivative financial
      instruments to manage interest rate risks.





***Inflation***





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 3.4% in 2004, 2005 and 2006, respectively.




22




***Commodity
      Price Sensitivity***





We
      are
      exposed to market risk in connection with our inventory balances, which are
      comprised primarily of gold, platinum and jewelry made from gold and platinum.
      Our inventories are stated at the lower of cost or market using the first in
      first out method. If there is a downward change in the market price of gold,
      we
      are required to mark-down the value of our inventory and record a loss in our
      statement of operations. As of June 30, 2007, our inventory position was
      approximately $20.8 million, which consisted of gold and jewelry made from
      gold
      acquired at an average price of $18.34 per gram and platinum and jewelry made
      from platinum acquired at an average price of $36.24 per gram. On June 29,
      2007,
      the prices of gold and platinum on the Shanghai Gold Exchange were $17.82 per
      gram and $36.13 per gram, respectively. Since our inception we have not
      experienced any losses due to changes in the market price of gold or platinum
      because the prices of gold and platinum have generally risen since our
      inception. Currently we do not hold any forward contracts or use any other
      derivative instruments to hedge our exposure to fluctuations in the price of
      gold. However, we intend to use such hedging strategies in the
      future.





**ITEM
      4 — CONTROLS AND PROCEDURES**





**(a)
      Evaluation of disclosure controls and procedures**





Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in the reports filed or submitted under the Securities Exchange Act
      of
      1934, as amended (“Exchange Act”) is recorded, processed, summarized and
      reported, within the time period specified in the Securities and Exchange
      Commission’s (“SEC”) rules and forms. Disclosure controls and procedures
      include, without limitation, controls and procedures designed to ensure that
      information required to be disclosed in the reports filed under the Exchange
      Act
      is accumulated and communicated to management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure.





As
      of
      June 30, 2007, our Chief Executive Officer and Chief Financial Officer, in
      consultation with other members of management and advisors as appropriate,
      performed an evaluation of the effectiveness of our disclosure controls and
      procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act.
      Based upon that evaluation, our Chief Executive Officer and our Chief Financial
      Officer concluded that our disclosure controls and procedures are effective
      as
      of June 30, 2007. However, our independent auditors have identified significant
      deficiencies that we are currently working to correct. Our independent auditors,
      Stonefield Josephson, Inc., identified that our accounting on certain
      significant transactions were incorrectly calculated or incorrectly recorded.
      During the course of field work related to the audit of our financial statements
      for the year ended December 31, 2006, our independent auditors discovered these
      errors. The independent auditors discussed these matters with our Chief
      Financial Officer, and we subsequently reevaluated the transactions and recorded
      the necessary adjustments. The auditors believe that these adjustments reflected
      significant deficiencies in our internal controls over accounting and financial
      reporting. We are in the process of improving our internal control processes
      and
      procedures with training programs that started in the second quarter of 2007. We
      have added two additional employees to our accounting staff to facilitate
      segregation of duties and improve the timeliness of recording and processing
      of
      financial information. We have reviewed, analyzed and adjusted the timing of
      our
      accounting procedures and we are evaluating new accounting software, which
      may
      assist us in quicker processing of books and ledgers. We have also scheduled
      and
      held monthly accounting staff meeting to ensure the timeliness, completeness
      and
      accuracy of accounting information. In addition, management is searching and
      evaluating external training courses for SEC reporting. Management and directors
      will continue to work with our auditors and other outside advisors to ensure
      that our controls and procedures are adequate and effective.




**(b)
      Changes in internal control over financial reporting**





The
      term
“Internal Control Over Financial Reporting” is defined as a process designed by,
      or under the supervision of, our Chief Executive Officer and Principal Financial
      Officer, and effected by our board of directors, management and other personnel,
      to provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with accounting principles generally accepted in the United States.




23




There
      have been no changes in our internal control over financial reporting identified
      in connection with the evaluation required by paragraph (d) Rule 13a-15 or
      15d-15 under the Exchange Act that occurred during the quarter ended June 30,
      2007 that has materially affected, or is reasonably likely to affect, our
      internal control over financial reporting.




**PART II
      — OTHER INFORMATION**




**ITEM
      1 — LEGAL PROCEEDINGS**





None.





**ITEM
      1A — RISK FACTORS**





*Investing
      in our common stock involves a high degree of risk. You should consider
      carefully the material risks described below and all of the information
      contained in this report before deciding whether to purchase any of our
      securities. Our business, financial condition or results of operations could
      be
      materially adversely affected by these risks if any of them actually occur.
      None
      of our securities are currently listed or quoted for trading on any national
      securities exchange or national quotation system. If and when our securities
      are
      traded, the trading price could decline due to any of these risks, and an
      investor may lose all or part of his investment. Some of these factors have
      affected our financial condition and operating results in the past or are
      currently affecting us. This filing also contains forward-looking statements
      that involve risks and uncertainties. Our actual results could differ materially
      from those anticipated in these forward-looking statements as a result of
      certain factors, including the risks described below and elsewhere in this
      quarterly report.*





**Risks
      Related To Our Operations**





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





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





While
      the
      Chinese economy has experienced rapid growth in recent years, such growth has
      been uneven among various sectors of the economy and in different geographical
      areas of the country. Also, many observers believe that this rapid growth cannot
      continue at its current pace and that an economic correction may be imminent.
      Rapid economic growth can also lead to growth in the money supply and rising
      inflation. During the past decade, the rate of inflation in China has been
      as
      high as approximately 20% and China has experienced deflation as low as minus
      2%. If prices for our products rise at a rate that is insufficient to compensate
      for the rise in the costs of supplies such as raw materials, it may have an
      adverse effect on our profitability. In order to control inflation in the past,
      the PRC government has imposed controls on bank credits, limits on loans for
      fixed assets and restrictions on state bank lending. The implementation of
      such
      policies may impede economic growth. In October 2004, the People’s Bank of
      China, the PRC’s central bank, raised interest rates for the first time in
      nearly a decade and indicated in a statement that the measure was prompted
      by
      inflationary concerns in the Chinese economy. In April 2006 and May 2007, the
      People’s Bank of China raised the interest rate again. Repeated rises in
      interest rates by the central bank could slow economic activity in China which
      could, in turn, materially increase our costs and also reduce demand for our
      products.




24




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





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





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





A
      significant percentage of our total sales are made in the northeast region
      of
      China, particularly in the provinces of Liaoning, Jilin and Heilongjiang, and
      the city of Beijing. For the six months ended June 30, 2007 and the year ended
      December 31, 2006, approximately 45.7% and 44.9% of revenues, respectively,
      was
      generated from this area. Our concentration of sales in this area heightens
      our
      exposure to adverse developments related to competition, as well as economic
      and
      demographic changes in this region. Our geographic concentration might result
      in
      a material adverse effect on our business, financial condition or results of
      operations in the future.





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





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





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




·
            purchase
                and negotiate acceptable lease terms;




·
            prepare
                counters and stores for opening within budget;




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




·
            hire,
                train and retain personnel;




·
            secure
                required governmental permits and
                approvals;




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




·
            contain
                payroll costs; and




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




25




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





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





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





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





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




We
      expect
      that the net proceeds from our proposed offering, together with cash generated
      from operations, will be sufficient to fund our projected operations for at
      least the next 12 months. We expect to expend significant resources to commence
      our planned retail distribution of our manufactured jewelry in China. We will
      require substantial funds in order to finance our planned retail distribution,
      fund operating expenses, to develop manufacturing, marketing and sales
      capabilities and to cover public company costs. In addition to the funds
      required to open retail locations, additional working capital will be needed
      to
      operate retail locations due to longer sales and collection cycles and higher
      inventory levels required to support retail stores. We also expect to require
      substantial funds to change our product mix to include more platinum products.
      Without these funds, we may not be able to meet these goals. Also, we expect
      our
      general and administrative costs to substantially increase due to higher
      salaries to be paid to our executive officers further to employment agreements
      we intend to enter into, which will come into effect on the effective date
      of
      our proposed offering. See “Executive Compensation - Compensation Discussion and
      Analysis.”





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





You
      should also be aware that in the future:





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




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




·
            Any
                equity financing would result in dilution to stockholders.




26




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




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





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





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





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





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





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





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




We
      intend
      to conduct a growth strategy into retail distribution of our products that
      we
      believe will result in rapid growth, which will place significant demands on
      our
      managerial, operational and financial resources. Any significant growth in
      the
      market for our current wholesale business and our planned retail distribution
      would require us to expand our employee base for managerial, operational,
      financial, and other purposes. During any growth, we may face problems related
      to our operational and financial systems and controls, including quality control
      and delivery and service capabilities. We would also need to continue to expand,
      train and manage our employee base. We currently have approximately 600
      full-time employees, and, at that size, a rapid increase in the number of our
      employees would be difficult to manage. Continued future growth will impose
      significant added responsibilities upon the members of management to identify,
      recruit, maintain, integrate, and motivate new employees. If we are able to
      expand our retail business, we would need to train or hire additional employees
      with retail experience.




27




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





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




Our
      business has become increasingly dependent on the performance of our
      distributors. During the six months ended June 30, 2007 and the years ended
      December 31, 2006, 2005 and 2004, 20%, 13%, 10% and 14%, respectively, of our
      net revenues were generated through our distributors. We currently have 136
      distributors. Our largest distributor accounted for approximately 4% and 2%
      of
      our gross revenues in 2006 and 2005. We do not maintain long-term contracts
      with
      our distributors. Maintaining relationships with existing distributors and
      replacing any distributor may be difficult or time consuming. Our failure to
      maintain good relationships with our distributors could materially disrupt
      our
      distribution business and harm our net revenues.





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





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





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





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




28




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




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





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





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





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




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




·
            seasonality
                of our business;




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




·
            our
                recent entry into the retail jewelry
                market;




·
            competition
                from our competitors;




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




·
            development
                of a public trading market for our securities after our proposed
                offering;







**Risks
      Related To Doing Business In China**





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





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




29




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





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





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





·
            levying
                fines;




·
            revoking
                our business license, other licenses or
                authorities;




·
            requiring
                that we restructure our ownership or operations;
                and




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







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




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





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





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




30




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





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





If
      the
      CSRC or another PRC regulatory agency subsequently determines that CSRC approval
      was required for our proposed offering, we may face regulatory actions or other
      sanctions from the CSRC or other PRC regulatory agencies. These regulatory
      agencies may impose fines and penalties on our operations in the PRC, limit
      our
      operating privileges in the PRC, delay or restrict the repatriation of the
      proceeds from our proposed offering into the PRC, or take other actions that
      could have a material adverse effect on our business, financial condition,
      results of operations, reputation and prospects, as well as the trading price
      of
      our Common Stock. The CSRC or other PRC regulatory agencies also may take
      actions requiring us, or making it advisable for us, to halt our proposed
      offering before settlement and delivery of the Common Stock offered hereby.
      Consequently, if you engage in market trading or other activities in
      anticipation of and prior to settlement and delivery, you do so at the risk
      that
      settlement and delivery may not occur.





Also,
      if
      later the CSRC requires that we obtain its approval, we may be unable to obtain
      a waiver of the CSRC approval requirements, if and when procedures are
      established to obtain such a waiver. Any uncertainties and/or negative publicity
      regarding this CSRC approval requirement could have a material adverse effect
      on
      the trading price of our Common Stock. Furthermore, published news reports
      in
      China recently indicated that the CSRC may have curtailed or suspended overseas
      listings for Chinese private companies. These news reports have created further
      uncertainty regarding the approach that the CSRC and other PRC regulators may
      take with respect to transactions such as our proposed offering.





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




31




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





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





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




Our
      subsidiary, Fuqi China, is subject to a reduced enterprise income tax rate
      of
      15%, which is granted to all enterprises operating in the Shenzhen Special
      Economic Zone. In 2004 and 2005, Fuqi China enjoyed a preferential income tax
      rate of 7.5% due to its status as a new business. That status expired effective
      January 1, 2006. The expiration of the preferential tax treatment has increased
      our tax liabilities and reduced our profitability. Additionally, the PRC
      Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007. Under
      the EIT Law, effective January 1, 2008, China will adopt a uniform tax rate
      of
      25.0% for all enterprises (including foreign-invested enterprises) and cancel
      several tax incentives enjoyed by foreign-invested enterprises. Since the PRC
      government has not announced implementation measures for the transitional policy
      with regards to such preferential tax rates, we cannot reasonably estimate
      the
      financial impact of the new tax law to us at this time. Any future increase
      in
      the enterprise income tax rate applicable to us or other adverse tax treatments,
      could increase our tax liabilities and reduce our net income.





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




On
      April
      6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
      Individuals Participating in the Employee Stock Ownership Plan or Stock Option
      Plan of An Overseas Listed Company, Hui Zong Fa [2007] No. 78,” or “Circular
      78.” It is not clear whether Circular 78 covers all forms of equity compensation
      plans or only those which provide for the granting of stock options. For any
      plans which are so covered and are adopted by a non-PRC listed company such
      as
      our company after April 6, 2007, Circular 78 requires all participants who
      are
      PRC citizens to register with and obtain approvals from SAFE prior to their
      participation in the plan. In addition, Circular 78 also requires PRC citizens
      to register with SAFE and make the necessary applications and filings if they
      participated in an overseas listed company’s covered equity compensation plan
      prior to April 6, 2007. We believe that the registration and approval
      requirements contemplated in Circular 78 will be burdensome and time consuming.




Upon
      the
      closing of our proposed offering, we intend to make numerous stock option grants
      to our officers and directors, some of whom are PRC citizens may be required
      to
      register with SAFE. In addition to our officers and directors that receive
      option grants at the close of our proposed offering, future participants of
      our
      equity incentive plan or any other equity compensation plan we may adopt who
      are
      PRC citizens may be required to register with SAFE. Circular 78 has not yet
      been
      made publicly available nor formally promulgated by SAFE, however, it is our
      understanding that SAFE has begun enforcing its provisions, although we cannot
      predict whether it will continue to enforce it or adopt additional or different
      requirements with respect to equity compensation plans. If it is determined
      that
      any of our equity compensation plans is subject to Circular 78, failure to
      comply with such provisions may subject us and participants of our equity
      incentive plan who are PRC citizens to fines and legal sanctions and prevent
      us
      from being able to grant equity compensation to our PRC employees. In that
      case,
      our business operations may be adversely affected.




32




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





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





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




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




·
            a
                general slowdown in the Chinese
                economy.




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





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





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





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





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





**Risks
      Related To Owning our Securities**





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





Mr.
      Yu
      Kwai Chong, our Chief Executive Officer and our largest stockholder,
      beneficially owns or controls approximately 87% of our outstanding shares as
      of
      August 10, 2007. Mr. Chong possesses significant influence over us, giving
      him
      the ability, among other things, to elect all or a majority of the Board of
      Directors and to approve significant corporate transactions. Such stock
      ownership and control may also have the effect of delaying or preventing a
      future change in control, impeding a merger, consolidation, takeover or other
      business combination or discourage a potential acquirer from making a tender
      offer or otherwise attempting to obtain control of our company. Without the
      consent of Mr. Chong, we could be prevented from entering into potentially
      beneficial transactions if they conflict with our major stockholder’s interests.
      The interests of this stockholder may differ from the interests of our other
      stockholders.




33




**An
      active trading market for our shares may not develop.**





There
      is
      and has been no public market for our common stock. Although we have applied
      to
      have our common stock approved for listing on the Nasdaq Global Market, we
      may
      not receive approval for listing, and even if we are to receive such approval,
      an active trading market for our shares may never develop or be sustained.
      In
      addition, you may not be able to sell any shares of common stock that you
      purchased at or above the price at which you purchased your shares.





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





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





In
      addition, management’s assessment of internal controls over financial reporting
      may identify weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting or other matters that may raise concerns
      for
      investors. Any actual or perceived weaknesses and conditions that need to be
      addressed in our internal control over financial reporting, disclosure of
      management’s assessment of our internal controls over financial reporting, or
      disclosure of our public accounting firm’s attestation to or report on
      management’s assessment of our internal controls over financial reporting may
      have an adverse impact on the price of our common stock. Our independent public
      accountants, Stonefield Josephson, Inc., identified that our accounting for
      certain significant transactions were incorrectly calculated or incorrectly
      recorded. Our public accountants informed us that these adjustments reflected
      significant deficiencies in our internal controls over accounting and financial
      reporting for the year ended December 31, 2006. We are in the process of
      improving our internal controls in an effort to improve our control processes
      and procedures with training programs that will commence later in 2007; however,
      there can be no guarantee that we will be successful in our attempts to correct
      our significant deficiencies.




34




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





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





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





The
      value
      of RMB is subject to changes in China’s governmental policies and to
      international economic and political developments. In January, 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, PBOC announced an adjustment of the
      exchange rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified
      the
      system by which the exchange rates are determined. This modification has
      resulted in an approximate 7.3% appreciation of the RMB against the U.S. dollar
      from July 21, 2005 to May 2, 2007. While the international reaction to
      the RMB revaluation has generally been positive, there remains significant
      international pressure on the PRC government to adopt an even more flexible
      currency policy, which could result in further fluctuations of the exchange
      rate
      of RMB against the U.S. dollar, including possible devaluations. As all of
      our
      net revenues are recorded in RMB, any future devaluation of RMB against the
      U.S.
      dollar could negatively impact our results of operations.




**Sales
      of a substantial number of shares of our common stock may adversely affect
      the
      market price of our common stock and the issuance of additional shares will
      dilute all other stockholdings.**




Sales
      of
      a substantial number of shares of our common stock in the public market or
      otherwise, or the perception that such sales could occur, could adversely affect
      the market price of our common stock. There are 21,692,503 shares of our common
      stock outstanding as of August 15, 2007. Our certificate of incorporation
      permits the issuance of up to a total of 100,000,000 shares of common stock.
      Thus, we have the ability to issue substantial amounts of common stock in the
      future, which would dilute the percentage ownership held by the investors who
      purchase our shares in our proposed offering. In addition, we intend to conduct
      a public offering of shares of our common stock, and such shares will be freely
      tradeable and may have a detrimental effect on the trading price of our
      securities. In connection with the offering, officers, directors, and other
      of
      our shareholders intends to enter into lock up agreements with the underwriters
      of the public offering, and upon release of such shares from the lock up, the
      number of freely tradeable shares will increase and could cause the trading
      price of our securities to fall.





Moreover,
      the former stockholder of Fuqi China who received shares of our common stock
      in
      the Share Exchange Transaction on the closing of the transaction in November
      2006 will be eligible to sell all or some of their shares of common stock by
      means of ordinary brokerage transactions in the open market pursuant to Rule
      144, promulgated under the Securities Act, or Rule 144, subject to certain
      limitations. In general, pursuant to Rule 144, a stockholder (or stockholders
      whose shares are aggregated) who has satisfied a one-year holding period may,
      under certain circumstances, sell within any three-month period a number of
      securities which does not exceed the greater of 1% of the then outstanding
      shares of common stock or the average weekly trading volume of the class during
      the four calendar weeks prior to such sale. Rule 144 also permits, under certain
      circumstances, the sale of securities, without any limitations, by a
      non-affiliate that has satisfied a two-year holding period. Any substantial
      sale
      of common stock pursuant to any resale prospectus or Rule 144 may have an
      adverse effect on the market price of our common stock by creating an excessive
      supply.




35




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





We
      do not
      plan to declare or pay any further cash dividends on our shares of common stock
      in the foreseeable future and we currently intend to retain any future earnings
      for funding growth. Prior to the reverse merger we effected with VT Marketing
      Services, the predecessor of Fuqi International, Inc. (the “Reverse Merger”) in
      November 2006, we were wholly-owned by our founder and Chief Executive Officer,
      Mr. Yu Kwai Chong. During the years ended December 31, 2006, 2005, and 2004,
      we
      paid cash dividends of $2.7 million, $5.4 million, and $4.0 million,
      respectively, to Mr. Chong as our sole stockholder prior to the Reverse Merger.
      We currently have no intention to declare further dividends in the foreseeable
      future. Payment of dividends is further restricted under the provisions of
      our
      existing loan agreements. As a result, you should not rely on an investment
      in
      our securities if you require the investment to produce dividend income. Capital
      appreciation, if any, of our shares may be your sole source of gain for the
      foreseeable future. Moreover, you may not be able to resell your shares in
      our
      company at or above the price you paid for them.





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




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




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




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




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




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




·
            Our
                recent entry into the retail jewelry
                market;




·
            Competition
                from our competitors;




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




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




·
            Development
                of a public trading market for our securities after our proposed
                offering;




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




·
            The
                other factors referenced in this quarterly report, including, without
                limitation, under the sections entitled “Management’s Discussion and
                Analysis of Financial Condition and Results of Operations.”




36




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




**ITEM
      2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





In
      June
      2007, pursuant to the exercise of Series C and Series E Plan Warrants called
      for
      redemption, the Company issued a total of 977,119 shares of common stock to
      existing warrant holders under the registration exemption offered under Section
      1145(a)(1) of the United States Bankruptcy Code, as amended.




**ITEM
      3 — DEFAULTS UPON SENIOR SECURITIES**





None.




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





None.





**ITEM
      5 — OTHER INFORMATION**





None.





**ITEM
      6 — EXHIBITS**




(a)
      Exhibits





31.1
            Certification
                of Chief Executive Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification Pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002.*





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




37




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant has duly
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.





**FUQI
                INTERNATIONAL, INC.**Date:
                August 17, 2007
            By:
            /s/
                Yu Kwai ChongYu
                Kwai ChongChief
                Executive OfficerDate:
                August 17, 2007
            By:
            /s/
                Ching Wan WongChing
                Wan WongChief
                Financial Officer




38