UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q





S            QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2009





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:


001-33758





Fuqi
International, Inc.


(Exact
name of registrant as specified in its charter)





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





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





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” as defined in Rule 12b-2 of the Exchange Act.




Large accelerated
      filero
            Accelerated
      filer   x
            Non-accelerated
      filer  o
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x





As of May
11, 2009 the registrant had issued and outstanding 22,005,509 shares of common
stock, par value $0.001 per share.










FUQI
INTERNATIONAL, INC.


FORM
10-Q QUARTERLY REPORT





TABLE
OF CONTENTS





PagePART
      I :
            FINANCIAL
      INFORMATIONITEM
      1 — FINANCIAL STATEMENTS
            1Condensed
      Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December
      31, 2008
            1C
      Condensed Consolidated Statements of Income and Comprehensive Income for
      the Three Months March 31, 2009 and 2008 (unaudited)
            2C
      Condensed Consolidated Statements of Cash Flows for the Three Months Ended
      March 31, 2009 and 2008 (unaudited)
            3Notes
      To Condensed Consolidated Financial Statements (unaudited)
            4ITEM
      2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATION
            16ITEM
      3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
            22ITEM
      4 — CONTROLS AND PROCEDURES
            22PART
      II :
            OTHER
      INFORMATIONITEM
      1 — LEGAL PROCEEDINGS
            24ITEM
      1A — RISK FACTORS
            24ITEM
      2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            24ITEM
      3 — DEFAULTS UPON SENIOR SECURITIES
            24ITEM
      4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            24ITEM
      5 — OTHER INFORMATION
            24ITEM
      6 — EXHIBITS
            24SIGNATURES
            25




i




PART I - FINANCIAL INFORMATION





ITEM
1 - FINANCIAL STATEMENTS





FUQI INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS







March
      31,
            
            
            December
      31,2009
            
            
            2008(Unaudited)ASSETSCurrent
      assets:Cash
            
            $
            53,972,530
            
            
            $
            56,569,733Accounts
      receivable, including amount due from related party of $9,510,149 for 2009
      and $2,837,907 for 2008, net of allowance for doubtful accounts of
      $2,222,000 for 2009 and $1,620,000 for 2008
            
            
            64,993,257
            
            
            
            73,949,200Value
      added taxes receivable
            
            
            5,258,902
            
            
            
            2,170,669Inventories
            
            
            70,050,289
            
            
            
            44,409,645Prepaid
      expenses and other current assets
            
            
            2,275,894
            
            
            
            286,405Advances
      to supplier
            
            
            3,146,638
            
            
            
            8,468,971Gold
      future contracts
            
            
            409,631
            
            
            
            1,426,236Deferred
      taxes
            
            
            257,939
            
            
            
            142,608Total
      current assets
            
            
            200,365,080
            
            
            
            187,423,467Property,
      equipment, and improvements, net
            
            
            3,270,764
            
            
            
            3,400,642Deposits
            
            
            104,405
            
            
            
            104,414Goodwill
            
            
            585,102
            
            
            
            583,269Acquired
      intangibles, net
            
            
            3,164,969
            
            
            
            3,197,344Other
      assets
            
            
            207,113
            
            
            
            140,278$
            207,697,433
            
            
            $
            194,849,414LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Notes
      payable
            
            $
            29,257,303
            
            
            $
            21,944,904Accounts
      payable and accrued liabilities
            
            
            7,314,839
            
            
            
            12,511,519Other
      payable, related parties
            
            
            7,084,564
            
            
            
            6,287,102Customer
      deposits
            
            
            15,099,824
            
            
            
            14,474,178Income
      tax payable
            
            
            2,453,083
            
            
            
            2,802,110Total
      current liabilities
            
            
            61,209,613
            
            
            
            58,019,813STOCKHOLDERS'
      EQUITYPreferred
      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 and 22,005,509
      shares issued and outstanding
            
            
            22,006
            
            
            
            22,006Additional
      paid in capital
            
            
            82,515,116
            
            
            
            82,503,638Accumulated
      foreign currency translation adjustments
            
            
            9,606,766
            
            
            
            9,620,524Retained
      earnings
            
            
            54,343,932
            
            
            44,683,433Total
      stockholders' equity
            
            
            146,487,820
            
            
            
            136,829,601$
            207,697,433
            
            
            $
            194,849,414





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




1




FUQI
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)






Three
      Months Ended March 31,2009
            
            
            2008Net
      sales:Wholesale
      and distribution
            
            $
            96,825,853
            
            
            $
            76,358,511Retail
            
            
            12,534,157
            
            
            
            1,207,848109,360,010
            
            
            
            77,566,359Cost
      of sales:Wholesale
      and distribution
            
            
            82,632,955
            
            
            
            67,805,466Retail
            
            
            8,675,689
            
            
            
            949,51891,308,644
            
            
            
            68,754,984Gross
      profit
            
            
            18,051,366
            
            
            
            8,811,375Operating
      expenses:Selling
      and marketing
            
            
            2,982,587
            
            
            
            397,396General
      and administrative
            
            
            2,533,605
            
            
            
            1,509,177Total
      operating expenses
            
            
            5,516,192
            
            
            
            1,906,573Income
      from operations
            
            
            12,535,174
            
            
            
            6,904,802Other
      income (expenses):Interest
      expense
            
            
            (418,438
            )
            
            
            (363,220
            )Interest
      income
            
            
            28,350
            
            
            
            8,959Gain
      from derivative instrument
            
            
            78,459
            
            
            
            840,522Miscellaneous
            
            
            4,458
            
            
            
            126,782Total
      other (expenses) income
            
            
            (307,171)
            
            
            
            613,043Income
      before provision for income taxes
            
            
            12,228,003
            
            
            
            7,517,845Provision
      for income taxes
            
            
            2,567,504
            
            
            
            1,122,772Net
      income
            
            
            9,660,499
            
            
            
            6,395,073Other comprehensive (loss)
      income - foreign currency translation adjustments
            
            
            (13,758)
            
            
            
            3,966,733Comprehensive
      income
            
            $
            9,646,741
            
            
            $
            10,361,806Earnings
      per share – basic
            
            $
            0.45
            
            
            $
            0.31Earnings
      per share – diluted
            
            $
            0.45
            
            
            $
            0.31Weighted
      average number of common shares - basic
            
            
            21,465,176
            
            
            
            20,924,843Weighted
      average number of common shares - diluted
            
            
            21,465,176
            
            
            
            20,924,843





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




2




FUQI
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


INCREASE
(DECREASE) IN CASH







Three
      Months Ended March 31,2009
            
            
            2008Cash
      flows provided by operating activities:Net
      income
            
            $
            9,660,499
            
            
            $
            6,395,073Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            280,113
            
            
            
            104,232Bad
      debt
            
            
            602,750
            
            
            
            237,928Stock-based
      compensation expense
            
            
            11,478
            
            
            
            148,551Loss
      on disposal on property, equipment and improvements
            
            
            8,206
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            8,345,262
            
            
            
            (4,817,841
            )Refundable
      value added taxes
            
            
            (3,087,926
            )
            
            
            (5,448,855
            )Inventories
            
            
            (25,640,415
            )
            
            
            (32,911,543
            )Prepaid
      expenses and other current assets
            
            
            (1,436,911
            )
            
            
            297,614Gold
      future contracts
            
            
            1,016,317
            
            
            
            571,682Advance
      to supplier
            
            
            5,320,733
            
            
            
            (674,373
            )Deferred
      taxes
            
            
            (115,325
            )
            
            
            (1,789,723
            )Other
      assets
            
            
            (66,836
            )
            
            
            1,126Accounts
      payable, accrued expenses, accrued business tax, and accrued estimated
      penalties
            
            
            (5,708,500
            )
            
            
            (285,464
            )Customer
      deposits
            
            
            626,816
            
            
            
            2,158,525Income
      tax payable
            
            
            (348,724
            )
            
            
            1,043,382Net
      cash used for operating activities
            
            
            (10,532,463
            )
            
            
            (34,969,686
            )Cash
      flows provided by (used for) investing activities:Purchase
      of property, equipment and improvements
            
            
            (165,917
            )
            
            
            (81,722
            )Decrease
      (Increase) in restricted cash
            
            
            -
            
            
            
            422,357Net
      cash (used for) provided by investing activities
            
            
            (165,917
            )
            
            
            340,635Cash
      flows provided by (used for) financing activities:Proceeds
      from (repayments to) short-term borrowing
            
            
            7,313,149
            
            
            
            (2,111,784
            )Advance
      from a related party
            
            
            797,892
            
            
            
            -Net
      cash provided by (used for) financing activities
            
            
            8,111,041
            
            
            
            (2,111,784
            )Effect
      of exchange rate changes on cash
            
            
            (9,864
            )
            
            
            2,303,898Net
      decrease in cash
            
            
            (2,597,203
            )
            
            
            (34,436,937
            )Cash,beginning of the
      period
            
            
            56,569,733
            
            
            
            63,293,653Cash,end of the
      period
            
            $
            53,972,530
            
            
            $
            28,856,716Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            452,652
            
            
            $
            296,120Income
      taxes paid
            
            $
            3,031,560
            
            
            $
            1,869,312Non-cash
      disclosure:Non
      monetary exchanges related to certain retail sales
            
            $
            503,442
            
            
            $
            231,472





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




3




FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)







(1)
            Organization, Nature of Business
      and Basis of Presentation:





Fuqi
International, Inc. ("Fuqi” or the "Company") is a leading designer of high
quality precious metal jewelry in China, developing, promoting, and selling a
broad range of products to the Chinese luxury goods market. The Company operates
in two divisions: (i) wholesale of jewelry products and (ii) retail jewelry
products. The wholesale division is responsible for designing, manufacturing,
selling and marketing its products to other wholesalers and distributors. Since
May 2007, the Company has been expanding its retail jewelry strategy. This
retail strategy focuses on customer segmentation with emphasis on expansion of
its product range to meet differing customer requirements in the various
regions.





In 2007,
the Company formally started operating retail jewelry counters under the brand
name of “FUQI,” which is targeted to a broad group of middle class consumers
that purchase more traditional gold and platinum jewelry and jewelry gift items.
In August 2008, the Company acquired Temix, a jewelry retail chain with 50
jewelry counters and shops offering high quality diamond products, located in
Beijing and Shanghai. As of March 31, 2009, the Company had 69 jewelry retail
counters and stores in China.





The
accompanying condensed consolidated balance sheet as of December 31, 2008, which
has been derived from the audited consolidated financial statements and the
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to those rules and regulations, although the company believes that the
disclosures made are adequate to make the information not
misleading.





In the
opinion of the management, these condensed 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 March 31, 2009
and the results of operations and the cash flows for the three-month periods
ended March 31, 2009 and 2008. These condensed consolidated financial statements
and related notes should be read in conjunction with the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2008. The results of
operations for the three months ended March 31, 2009 are not necessarily
indicative of the results which may be expected for the entire fiscal year. The
Company’s business is seasonal in nature, with its sales and net income
generally higher in the fourth calendar quarter.





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, Inc. and its wholly owned
subsidiaries, Fuqi International Holdings Co., Ltd. ("Fuqi BVI") and Shenzhen
Fuqi Jewelry Co., Ltd. ("Fuqi China"). All significant intercompany accounts and
transactions have been eliminated in preparation of the condensed consolidated
financial statements.




4
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued






Operating
Leases





The
Company enters into operating leases for its retail locations. Other than the
six retail shops which a monthly fixed rate of lease amount is charged, all
store lease agreements are provided with contingent rent provisions based on a
percentage of sales generated in the jewelry counters within department stores.
Most of the Company’s lease agreements include renewal periods at our option.
Lease expenses are recorded in selling and marketing expenses on the Company’s
condensed consolidated statements of income.





Basic
and Diluted Earnings Per Share





As of
March 31, 2009 and 2008, the Company had common stock equivalents of 841,776 and
1,320,000 shares, respectively, upon the exercise of stock options, which were
excluded from the computation of diluted earnings per share for the three months
ended March 31, 2009 and 2008 as their effect is
anti-dilutive.  Contingency shares of 540,333 issued and held in the
escrow related to the Temix acquisition in August 2008 were excluded from the
calculations as the contingency has not yet been resolved as of March 31, 2009.
The computation of dilutive potential common shares for the periods is shown as
follows:





Three
      months ended
              March
      31,2009
            
            
            2008Basic
      weighted average shares
            
            
            21,465,176
            
            
            
            20,924,843Effect
      of dilutive securities
            
            
            -
            
            
            
            -Dilutive
      potential common shares
            
            
            21,465,176
            
            
            
            20,924,843





Stock-based
Compensation





Stock
options have been granted to certain of our officers and directors pursuant to
the 2007 Equity Incentive Plan. Stock options are generally
granted with exercise prices equal to the market price of the Company's stock at
the date of grant and vested over time.For the three months ended March
31, 2009 and 2008, no options were granted.





Stock-based
compensation expense for our stock options was approximately $167,000 and
$149,000 for the three months ended March 31, 2009 and 2008, respectively. As of
March 31, 2009 and December 31, 2008, total unrecognized estimated compensation
cost was approximately $228,000 and $459,000, respectively, which is expected to
be recognized over a weighted-average period of 0.57 year and 0.82 year relating
to options for approximately 200,000 shares and 400,000 shares which were
outstanding at such date but which had not yet vested. Unvested option shares
are not included in reported common shares outstanding amounts.  The
Company reversed $46,000 of previously amortized portion of unvested options for
an executive director who resigned during the three months ended March 31, 2009.
In addition, the Company accrued $110,000 for estimated value of options
pursuant to the terms of employment agreements with three of its executive
officers for the three months ended March 31, 2009.





As of
March 31, 2009 options to purchase 56,422, 65,354, and 720,000 shares of common
stock, at exercise prices of $6.89, $6.26, and $9.00, respectively, were
outstanding and 641,776 of the options to purchase common shares were
exercisable as of March 31, 2009. Net stock options outstanding during the three
months ended March 31, 2009 represented 0.8% of outstanding shares as of March
31, 2009.





Segment
Reporting





SFAS No.
131 “Disclosures about Segments of an Enterprise and Related Information,”
established standards for reporting information about operating segments in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and assessing performance. Upon the
acquisition of Temix, the Company is considered to be comprised of two operating
segments: (i) wholesale and distribution and (ii) retail. The Company measures
segment profit as operating profit. All of the Company’s sales are generated in
the PRC and substantially all of the Company’s assets are located in the
PRC.




5
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued




Non-monetary
(Barter) Exchanges





Barter
exchanges are incurred when retail customers trade-in their jewelries to obtain
barter credits that can be used in lieu of cash to buy jewelry products in the
Company’s retail counters. In accordance with APB 29 paragraph 20, as amended by
SFAS 153, as the fair value of the customers’ jewelry is not determinable, the
transaction was valued at the non-monetary asset relinquished in barter credits.
These transactions have not had significant impact to our consolidated financial
position, results of operations, or cash flows.





Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(revised 2007),
“Business Combinations” (“SFAS 141(R)”), which addresses the accounting and
disclosure for identifiable assets acquired, liabilities assumed, and
noncontrolling interests in a business combination. In April 2009, the FASB
issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FSP FAS 141(R)-1”), which amended certain provisions of SFAS 141(R) related to
the recognition, measurement, and disclosure of assets acquired and liabilities
assumed in a business combination that arise from contingencies. SFAS 141(R) and
FSP FAS 141(R)-1 became effective in the first quarter of 2009, and the adoption
did not have a material impact on the Company’s condensed consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”),
which addresses the accounting and reporting framework for noncontrolling
interests by a parent company. SFAS 160 also addresses disclosure requirements
to distinguish between interests of the parent and interests of the
noncontrolling owners of a subsidiary. SFAS 160 became effective in the first
quarter of 2009, which resulted in reporting noncontrolling interest as a
component of equity in the Company’s condensed consolidated balance sheets and
below income tax expense in our condensed consolidated statements of income. In
addition, the provisions of SFAS 160 require that minority interest be renamed
noncontrolling interests and that a company present a consolidated net income
measure that includes the amount attributable to such noncontrolling interests
for all periods presented.  The Company adopted SFAS 160 in the first
quarter of 2009 and the adoption did not have a material impact on the Company’s
condensed consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”),
which requires enhanced disclosures for derivative and hedging activities. SFAS
161 became effective in the first quarter of 2009 and the adoption did not have
a material impact on the condensed consolidated financial
statements.





In April
2008, the FASB issued FASB Staff Position FAS142-3: Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under FASB Statement No. 142, Goodwill and
Other Intangible Assets. This FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The guidance for determining the useful life of a recognized
intangible asset in this FSP shall be applied prospectively to intangible assets
acquired after the effective date. The Company adopted FSP 142-3 in the first
quarter of 2009 and the adoption did not have a material impact on the Company’s
condensed consolidated financial statements.





In May
2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the
entity, not the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. SFAS 162 is effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to remove the GAAP hierarchy from the auditing standards. The Company
adopted SFAS 162 in the first quarter of 2009 and the adoption did not have a
material impact on the Company’s condensed consolidated financial
statements.




6
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This FSP gives guidance on the computation of earnings per share and
the impact of share-based instruments that contain certain nonforfeitable rights
to dividends or dividend equivalents. The FSP is effective for fiscal years
beginning after December 31, 2008 and early application is prohibited. The
Company adopted EITF 03-6-1 in the first quarter of 2009 and such adoption did
not have a material impact on the Company’s condensed consolidated financial
statements.





At a
November 24, 2008 meeting, the FASB ratified the consensus reached by the Task
Force in Issue No. 08-6: Equity Method Investment Accounting Considerations
(“EITF 08-6”). Because of the significant changes to the guidance on subsidiary
acquisitions and subsidiary equity transactions and the increased use of fair
value measurements as a result of Statements 141(R) and 160, questions have
arisen regarding the application of that accounting guidance to equity method
investments. EITF 08-6 provides guidance for entities that acquire or hold
investments accounted for under the equity method. This issue is effective for
transactions occurring in fiscal years and interim periods beginning on or after
December 15, 2008. Early adoption is not permitted. The Company adopted EITF
08-6 in the first quarter of 2009 and the adoption did not have a material
impact on the Company’s condensed consolidated financial
statements.





In April
2009, the FASB issued FASB Staff Position No. SFAS 107-1 and APB No. 28-1,
“Disclosures about the Fair Value of Financial Instruments” (“FSP FAS 107-1 and
APB 28-1”), which requires quarterly disclosure of information about the fair
value of financial instruments within the scope of FASB Statement No. 107,
“Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB
28-1 have an effective date requiring adoption by the third quarter of 2009 with
early adoption permitted. The Company is currently evaluating the impact of this
standard on its consolidated financial statements.





Reclassifications





Certain
reclassifications have been made to the 2008 consolidated financial statements
to conform to the 2009 presentation.





(2)
            Inventories:





A summary
of inventory is as follows:





March
      31,
            
            
            December
      31,2009
            
            
            2008Raw
      materials
            
            $
            31,038,351
            
            
            $
            2,438,800Work
      in progress
            
            
            5,837,734
            
            
            
            12,710,735Finished
      goods
            
            
            10,534,651
            
            
            
            7,781,159Merchandise
      - retail
            
            
            22,639,553
            
            
            
            21,478,951$
            70,050,289
            
            
            $
            44,409,645





Inventories
are stated at the lower of cost or market. The first-in-first-out method is used
to account for gold and platinum jewelries and the specific identification
method for diamond jewelries.




7
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





(3)
            Property, Equipment and
      Improvements:





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





March
      31,
            
            
            December
      31,2009
            
            
            2008Production
      equipment
            
            $
            1,597,636
            
            
            $
            1,578,682Computer
      hardware and software
            
            
            296,129
            
            
            
            255,376Furniture
      and fixtures
            
            
            224,782
            
            
            
            220,441Automobiles
            
            
            637,081
            
            
            
            637,137Leasehold
      improvement
            
            
            2,013,084
            
            
            
            1,964,445Building
            
            
            622,851
            
            
            
            622,9065,391,563
            
            
            
            5,278,987Less
      accumulated depreciation and amortization
            
            
            2,120,799
            
            
            
            1,878,345$
            3,270,764
            
            
            $
            3,400,642





Depreciation
and amortization expense for property, equipment, and improvements amounted to
approximately $248,024 and $104,232 for the three months ended March 31, 2009
and 2008, respectively.





(4)
            Acquired
      Intangible Assets:





Acquired
intangible assets, net consisted of the following:





March
      31,
              2009
            
            
            December
      31,
              2008Trade
      names
            
            $
            2,952,820
            
            
            $
            2,952,820Non-compete
      agreement
            
            
            123,318
            
            
            
            123,318Strategic
      alliance agreement
            
            
            174,538
            
            
            
            174,538Total
            
            $
            3,250,676
            
            
            $
            3,250,676Less:
      accumulated amortization
            
            
            (85,707
            )
            
            
            (53,332
            )Acquired
      intangible assets, net
            
            $
            3,164,969
            
            
            $
            3,197,344




8
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





As
      of March 31, 2009
              
              
              As
      of December 31, 2008Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Gross
      Carrying Amount
              
              
              Accumulated
      AmortizationIntangible
      assets subject to amortization:Non-compete
      agreement
              
              $
              123,318
              
              
              $
              (32,357
              )
              
              $
              123,318
              
              
              $
              (22,080
              )Strategic
      alliance agreement
              
              
              174,538
              
              
              
              (53,350
              )
              
              
              174,538
              
              
              $
              (31,252
              )Total
              
              $
              297,856
              
              
              $
              (85,707
              )
              
              $
              297,856
              
              
              $
              (53,332
              )Intangible
      assets not subject to amortization:Trade
      names
              
              $
              2,952,820
              
              
              $
              -
              
              
              $
              2,952,820
              
              
              $
              -Total
              
              $
              2,952,820
              
              
              $
              -
              
              
              $
              2,952,820
              
              
              $
              -





Amortization
expense is $32,375 for the three months ended March 31, 2009 and is estimated to
be $92,013 in 2010, and $24,136 in 2011 and the weighted average amortization
lives are approximately 1.76 years.  The Company did not incur costs
to renew or extend the term of acquired intangible assets during the period
ended March 31, 2009.





(5)
            Goodwill:





The
changes in the carrying amount of goodwill which was assigned to the retail
segment during the three months ended March 31, 2009 were as
follows:





March
      31, 2009Beginning
      balance
            
            $
            583,269Foreign
      exchange difference due to translation
            
            
            1,833Ending
      balance
            
            $
            585,102




9
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





(6)
            Retail Operating Lease
      Agreements:





For the
three months ended March 31, 2009, the Company opened a total of three new
retail counters, with two of the counters under the FUQI brand and one of the
counters under the Temix brand. In addition, three retail counters in Shenyang
were closed in January 2009.  Including the retail counters and shops
acquired through the Temix acquisition, the Company had a total of 62 jewelry
counters and seven jewelry shops located in Beijing, Shanghai, and PRC regions.
A summary of retail presences as of March 31, 2009 is summarized as
follows:





Brand
            
            
            Counters
            
            
            Shops
            
            
            TotalFUQI
            Beijing
            
            
            6
            
            
            
            0
            
            
            
            6Shanghai
            
            
            1
            
            
            
            0
            
            
            
            1Shenyang
            
            
            3
            
            
            
            0
            
            
            
            3Dailian
            
            
            2
            
            
            
            0
            
            
            
            2Haerbin,
      Jilin
            
            
            1
            
            
            
            0
            
            
            
            1Xinxiang,
      Henan
            
            
            2
            
            
            
            0
            
            
            
            2Shunyang,
      Henan
            
            
            1
            
            
            
            0
            
            
            
            1Shandong
            
            
            1
            
            
            
            0
            
            
            
            1Yancheng,
      Jiangsu
            
            
            1
            
            
            
            0
            
            
            
            118
            
            
            
            0
            
            
            
            18TEMIX
            Beijing
            
            
            23
            
            
            
            0
            
            
            
            23Shanghai
            
            
            21
            
            
            
            7
            
            
            
            2844
            
            
            
            7
            
            
            
            5162
            
            
            
            7
            
            
            
            69





The
retail counters and shops are operating under operating leases with a term in a
range of 6 months to 1 year with an option of extensions. A majority of the
leases require payment of contingent rent based on a percentage of store sales.
The leasing agreements for six of the retail shops provide for the payment of
fees under a fixed rate rent in a range of $826 to $21,740. Fees paid to the
department stores and shopping malls totaling $1,497,661 and $74,753, for the
three months ended March 31, 2009 and 2008, are included in selling and
marketing expenses.





The
Company recognizes revenues generated from these retail counters when the titles
of the merchandise are transferred to the ultimate consumers. The Company
determines the product pricing, provides staff training at the counters,
controls merchandising and display at the counters, manages inventory, and
controls and pays for all the advertising and marketing with respect to the
Company’s merchandise.





(7)
            Note
    Payable:





The
Company has a general banking facility line of credit with Agricultural Bank of
China pursuant to a Maximum Banking Facility Agreement dated August 24, 2006
which was renewed in September 2007 and December 2008. The terms of the
agreement enable the Company to borrow up to a maximum facility amount of
approximately $14.6 million (RMB 100,000,000) as of December 31,
2008.  In March 2009, the Company entered into a supplemental
agreement with this bank to increase the maximum borrowing amount to
approximately $21.9 million (RMB 150,000,000) as of March 31,
2009.  The Company executed notes payable with this bank under this
facility line with terms less than one year. As of March 31, 2009 and December
31, 2008, the Company has approximately $21.9 million and $14.6 million,
respectively, outstanding under the facility, with interest rates ranging from
4.779% to 8.217%.





In June
2008, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to
$7,314,326 and $7,314,968 (RMB 50,000,000) as at March 31, 2009 and December 31,
2008, respectively. This facility has a term of one year and expires in June
2009 and is secured by certain real properties owned by an affiliated company.
Interest is charged at the bank’s prime rate. A portion of the loan proceeds
were used to repay the facility line of credit with another bank executed in
February 2007. As of March 31, 2009 and December 31, 2008, the outstanding
balance was $7,314,326 and $7,314,968 respectively.




10
 
 FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued


March
      31,
              2009
            
            
            December
      31,
              2008A
      note payable with interest at a rate of 8.217%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
            
            $
            -
            
            
            $
            1,024,096A
      note payable with interest at a rate of 8.217%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
            
            
            -
            
            
            
            1,462,994A
      note payable with interest at a rate of 6.831%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
            
            
            -
            
            
            
            1,462,994A
      note payable with interest at a rate of 6.831%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
            
            
            -
            
            
            
            2,267,640A
      note payable with interest at a rate of 7.227%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in January 2009 and was
      repaid.
            
            
            -
            
            
            
            1,975,041A
      note payable with interest at a rate of 8.217%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
            
            
            -
            
            
            
            2,925,987A
      note payable with interest at a rate of 7.227%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in January 2009 and was
      repaid.
            
            
            -
            
            
            
            1,462,994A
      note payable with interest at a rate of 7.227%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in January 2009 and was
      repaid.
            
            
            -
            
            
            
            2,048,190A
      note payable with interest at a rate of 5.04%, secured by certain real
      properties owned by an affiliate, matures in June 2009.
            
            
            3,364,590
            
            
            
            3,364,885A
      note payable with interest at a rate of 4.86%, secured by certain real
      properties owned by an affiliate, matures in June 2009.
            
            
            3,949,736
            
            
            
            3,950,083




11
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued




March
      31,
              2009
            
            
            December
      31,
              2008A
      note payable with interest at a rate of 5.841%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in December
    2009.
            
            $
            1,974,868
            
            
            $
            -A
      note payable with interest at a rate of 5.841%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in December
    2009.
            
            
            3,510,876
            
            
            
            -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in January
2010.
            
            
            2,925,730
            
            
            
            -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in March 2010.
            
            
            2,267,441
            
            
            
            -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in March 2010.
            
            
            2,486,871
            
            
            
            -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in March 2010.
            
            
            1,462,865
            
            
            
            -A
      note payable with interest at a rate of 4.779%, guaranteed by an
      affiliated company, and the Company’s controlling stockholder and his
      wife, matures in February 2010.
            
            
            2,486,871
            
            
            
            -A
      note payable with interest at a rate of 4.779%, guaranteed by an
      affiliated company, and the Company’s controlling stockholder and his
      wife, matures in February 2010.
            
            
            2,340,584
            
            
            
            -A
      note payable with interest at a rate of 4.779%, guaranteed by an
      affiliated company, and the Company’s controlling stockholder and his
      wife, matures in March 2010.
            
            
            2,486,871
            
            
            
            -$
            29,257,303
            
            
            $
            21,944,904





(8)
            Gold
      Futures Contracts:





The
Company enters into certain gold futures contracts with its supplier, Shanghai
Gold Exchange. Gold futures offered by Shanghai Gold Exchange are designed for
full members to hedge or to acquire inventory at a preset price. The futures
contract arrangements include purchase call and/or put options. The Company
utilized these futures contracts to manage its consolidated exposure to changes
in inventory values due to fluctuations in market prices and is not considered
as hedges under SFAS 133. The Company’s gold futures positions are marked to
market at each reporting date and all unrealized gains and losses are recognized
in earnings.  A gain on derivatives of approximately $78,000 and
$841,000 was recognized as non-operating income in the consolidated statement of
income for the three months ended March 31, 2009 and 2008,
respectively.




12
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





(9)
            Fair
      Value Measurement:





On
January 1, 2008, the Company adopted the provisions of SFAS No. 157,Fair Value Measurements
(“SFAS No. 157”) for financial assets and liabilities. SFAS No. 157 establishes
a framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, except for non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis, for which application has been deferred for
one year.





SFAS 157
established the following fair value hierarchy that prioritizes the inputs used
to measure fair value:


Level1:
              Quoted prices are available in
      active markets for identical assets or liabilities as of the reporting
      date.
 
 Level 2:
              Pricing inputs are other than
      quoted prices in active markets included in Level 1, which are either
      directly or indirectly observable as of the reporting
      date.
 
 Level 3:
              Pricing inputs include
      significant inputs that are generally less observable from objective
      sources.  These inputs may be used with internally developed
      methodologies that result in management’s best estimate of fair
      value.


The
following table presents the Company’s financial assets and liabilities that
were accounted for at fair value on a recurring basis as of March 31, 2009 and
December 31, 2008 by level within the fair value hierarchy:




Fair
      Value Measurements UsingLevel
      1
              
              
              Level
      2
              
              
              Level
      3As
      of March 31, 2009:AssetsDerivative
      financial instruments
              
              $
              —
              
              
              $
              409,631
              
              
              $
              —Liabilities:
              
              $
              —
              
              
              $
              —
              
              
              $
              —As
      of December 31, 2008:AssetsDerivative
      financial instruments
              
              $
              —
              
              
              $
              1,426,236
              
              
              $
              —Liabilities:
              
              $
              —
              
              
              $
              —
              
              
              $
              —




The
Company’s derivative financial instruments are gold future contracts based on
gold price rates, which are observable at commonly quoted intervals for the full
term of the derivatives and therefore considered a Level 2 input. Unrealized
gain of these gold future contracts at March 31, 2009 and December 31, 2008 was
immaterial to the consolidated financial statements.




13
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





(10)
            Related-Party
      Transactions:





In
connection with the Company’s continued transferring of certain legal titles of
the retail counters from each individual department store or mall from the Temix
Companies to Shenzhen Fuqi, Mr. Chujian Huang, the former owner of the Temix
retail chains which the Company acquired in August 2008, collected a total of
$9,510,149 from the shopping malls on behalf of the Company which was classified
as accounts receivable from related party at March 31, 2009.  For the
three months ended March 31, 2009, Mr. Chujian Huang also paid certain expenses
for operating the retail counters totaling $1,800,807 which was classified as
part of other payable, related party at March 31, 2009.





During
2008, Rong Xing Company, an affiliated company which is owned by the controlling
stockholder of the Company, advanced an interest-free loan of $965,576 (RMB
6,600,000) to the Company for short term financing purpose.  The
outstanding balance was approximately $965,576 as of March 31, 2009 and December
31, 2008.





The
Company has an outstanding payable to Mr. Chujian Huang in the amount of
approximately $4.4 million related to the Temix acquisition in 2008, which was
included in other payable, related parties as of March 31, 2009 and December 31,
2008.





For the
three months ended March 31, 2008, approximately $357,000 of operating
expenditure, including wages and benefits of production workers and material
tools and supplies was paid by the Company’s affiliate, Rong Xing Company
Limited, on behalf of the Company. The Company repaid the full outstanding
amount during the three months ended March 31, 2008.





(11)
            Income
      Taxes:





The
Company’s tax provision for the three months ended March 31, 2009 and 2008 was
primarily for taxes on the Company’s subsidiary in China. The Company’s
effective income tax rate was 21% and 14.9% for the three months ended March 31,
2009 and 2008, respectively. Effective January 1, 2008, the National People’s
Congress of China enacted a new PRC Enterprise Income Tax Law, under which
foreign invested enterprises and domestic companies is subject to enterprise
income tax at a uniform rate of 25%. During the transition period, the tax rate
is gradually increased to coincide with the new tax rate within five years
starting from 2008 and reaching the uniform rate of 25% in 2012.





No U.S.
income tax has been provided for income earned by the subsidiary in China, as
the Company intends to permanently reinvest these earnings outside of the
U.S.





(12)
            Stockholders’
      Equity:





In August
2008, the Company completed the acquisition of the Temix Companies. As
stipulated in the IP Transfer Agreement entered into with Mr. Huang, the Company
issued 1,080,666 shares of Company common stock to acquire all of the
intellectual property rights related to the business of Temix Companies. As of
March 31, 2009 and December 31, 2008, 540,333 shares, representing 50% of the
total number of shares issued related to this acquisition, are to be held in
escrow over a two-year period and will be released when certain performance
targets are met.




14
 
  FUQI
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





(13)
            Segment
      Information:





With its
acquisition of Temix, the Company is considered to be comprised of two
reportable segments: (i) wholesale and distribution and (ii) retail. The segment
data for the three months ended March 31, 2009 and 2008 are shown below. Net
sales represent sales to unaffiliated customers as reported in the consolidated
condensed statements of earnings.




Three
      Months Ended March 31,2009
            
            
            2008Net
      Sales:Wholesale
      and distribution
            
            $
            96,825,853
            
            
            $
            76,358,511Retail
            
            
            12,534,157
            
            
            
            1,207,848$
            109,360,010
            
            
            $
            77,566,359Income
      before provision for income taxes:Wholesale
      and distribution
            
            $
            12,615,691
            
            
            $
            7,761,871Retail
            
            
            982,023
            
            
            
            137,70813,597,714
            
            
            
            7,899,579Unallocated
      corporate expenses
            
            
            (1,062,540
            )
            
            
            (994,777
            )Other
      income (expense), net
            
            
            (307,171
            )
            
            
            613,043$
            12,228,003
            
            
            $
            7,517,845





The
table below provides a summary of the Company’s assets as it relates to the
Company’s operation segments as of the dates shown:





March
      31,
            
            December
      31,2009
            
            2008Wholesale
      and distribution
            
            $
            170,512,605
            
            
            $
            163,502,662Retail
            
            
            36,779,595
            
            
            
            30,286,845Corporate
            
            
            405,233
            
            
            
            1,059,907$
            207,697,433
            
            
            $
            194,849,414





(14)
            Concentrations:





The
Company purchased approximately 99% and 100% of its inventories from Shanghai
Gold Exchange for the three months ended March 31, 2009 and 2008.





(15)
            Subsequent
      Event:





On April
30, 2009, the Board of Directors approved the adoption of the 2009 Omnibus
Incentive Plan, which is subject to approval on the Annual Meeting of
Stockholders to be held on June 1, 2009.  The Compensation Committee
also approved the grant of 10,438 shares of restricted stock to each of its four
independent directors under the 2009 Omnibus Incentive Plan after its
passage.




15




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





FORWARD-LOOKING
STATEMENTS





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.





These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or
implied by these forward-looking statements, including the following:
vulnerability of discretionary jewelry purchases to general economic downturn in
China; adverse capital and credit market conditions and our ability to meet
liquidity needs; fluctuation and unpredictability of costs related to the gold,
platinum, and precious metals markets and other commodities used to make our
products; our inexperience in the retail jewelry market; the potential strain on
our resources caused from our retail expansion strategy; changes in the laws of
the PRC that affect our operations; our reliance on one source for precious
metals; our reliance on our distribution network for a significant portion of
our revenues; our requirement to maintain a large inventory of raw materials and
jewelry products, our acquisition of the operations of the Temix Companies in
August 2008, which may not result in the expected benefits; and related risks of
theft and fire; our reliance on, and ability to renew, outstanding short-term
borrowings; and our ability to obtain all necessary government certifications
and/or licenses to conduct our business.  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.





The
following discussion should be read in conjunction with our 2008 Form 10-K filed
with the SEC on March 31, 2009 and the unaudited interim condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q. 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 to the luxury goods market in
China. Our products consist of a range of unique styles and designs made from
gold and other precious metals such as platinum and Karat gold
(K-gold).  We also produce jewelry items that contain diamonds and
other precious stones on a custom-order basis. Our design database presently
contains over 30,000 unique products. We continuously innovate and change our
designs based upon consumer trends in China. By continuously creating new
designs and rapidly bringing them to market, we believe we are able to
differentiate ourselves from our competitors and strengthen our brand
identity.





Since we
launched of our retail strategy in May 2007, we initiated the establishment of
brand presence in the jewelry retail operations in Shenyang region and developed
the brand of FUQI. Our FUQI brand is marketed to a broad group of mid-level
income consumers that purchase more traditional gold and platinum jewelry and
jewelry gift items. During the first quarter of 2009, we opened and/or acquired
three retail counters in municipalities and provincial capitals throughout
China.  As of March 31, 2009, we had a total of 62 retail counters,
including 44 under the Temix brand and 18 under the FUQI brand, and a total of 7
retail stores, which are all under the Temix brand.





16





RESULTS
OF OPERATIONS





The
following table sets forth certain information from our condensed consolidated
statements of income and comprehensive income for the three months ended March
31, 2009 and 2008 (unaudited):





Three
      Months EndedMarch
      31,2009
              
              
              2008In
                Dollars
              
              
              Percent
      of Revenues
              
              
              In
                Dollars
              
              
              Percent
      of Revenues(in
      thousands, except earnings per share)Net
      sales:Wholesale
      and distribution
              
              $
              96,826
              
              
              
              88.54
              %
              
              $
              76,358
              
              
              
              98.4
              %Retail
              
              
              12,534
              
              
              
              11.46
              %
              
              
              1,208
              
              
              
              1.6
              %109,360
              
              
              
              100.0
              %
              
              
              77,566
              
              
              
              100.0
              %Cost
      of sales:Wholesale
      and distribution
              
              
              82,633
              
              
              
              75.56
              %
              
              
              67,806
              
              
              
              87.44
              %Retail
              
              
              8,676
              
              
              
              7.93
              %
              
              
              950
              
              
              
              1.2
              %91,309
              
              
              
              83.49
              %
              
              
              68,756
              
              
              
              88.64
              %Gross
      profit
              
              
              18,051
              
              
              
              16.51
              %
              
              
              8,810
              
              
              
              11.36
              %Operating
      expenses:Selling
      and marketing
              
              
              2,982
              
              
              
              2.73
              %
              
              
              397
              
              
              
              0.51
              %General
      and administrative
              
              
              2,534
              
              
              
              2.32
              %
              
              
              1,509
              
              
              
              1.95
              %Total
      operating expenses
              
              
              5,516
              
              
              
              5.05
              %
              
              
              1,906
              
              
              
              2.46
              %Income
      from operations
              
              
              12,535
              
              
              
              11.46
              %
              
              
              6,904
              
              
              
              8.9
              %Other
      (expense) income, net
              
              
              (307
              )
              
              
              -0.28
              %
              
              
              613
              
              
              
              0.79
              %Income
      before provision for income taxes
              
              
              12,228
              
              
              
              11.18
              %
              
              
              7,517
              
              
              
              9.69
              %Provision
      for income taxes
              
              
              2,568
              
              
              
              2.35
              %
              
              
              1,122
              
              
              
              1.45
              %Net
      income
              
              
              9,660
              
              
              
              8.83
              %
              
              
              6,395
              
              
              
              8.24
              %Other comprehensive (loss)
      income - foreign currency translation adjustments
              
              
              (14
              )
              
              
              -0.01
              %
              
              
              3,966
              
              
              
              5.12
              %Comprehensive
      income
              
              $
              9,646
              
              
              
              8.82
              %
              
              $
              10,361
              
              
              
              13.36
              %Earnings
      per share - basic
              
              $
              0.45
              
              
              
              
              
              
              $
              0.31Earnings
      per share - diluted
              
              $
              0.45
              
              
              
              
              
              
              $
              0.31




17





Three
Months Ended March 31, 2009 and 2008





Net
sales





Net
sales, which consist of gross sales net of returns, for the three months ended
March 31, 2009 increased by 41% to $109.4 million from $77.6 million, compared
with the same period in 2008.





Net sales
of our wholesale and distribution segment increased by 26.8% to $96.8 million
from $76.3 million in the same period of 2008.  The increase was
mainly attributable to an increase of sales volume. The selling price of our
jewelry products is based on the market price of the precious metals (e.g., gold
and platinum) in the periods when the products are sold, plus our processing and
design fees. During the first quarter of 2009, the quantities sold for gold and
platinum increased by 34% and 105%, respectively.




Net
wholesale and distribution sales for the three months ended March 31, 2009 and
2008 were comprised of the following:




Three
      Months Ended March 31,2009
            
            
            2008Amount
      in
              Millions
            
            
            Percentage
            
            
            Amount
      in
              Millions
            
            
            PercentagePlatinum
            
            $
            7.7
            
            
            
            8.0
            %
            
            $
            5.8
            
            
            
            7.6
            %Gold
            
            
            72.0
            
            
            
            74.4
            
            
            
            53.5
            
            
            
            70.0K-gold,
      Studded Jewelry and Diamond
            
            
            17.1
            
            
            
            17.6
            
            
            
            17.1
            
            
            
            22.4Total
            
            $
            96.8
            
            
            
            100.0
            %
            
            $
            76.4
            
            
            
            100.0
            %





Revenue
derived from our retail segment during the three months ended March 31, 2009
totaled $12.5 million, representing 11.5% of the total revenue, which included
$9.5 million of revenue from the Temix branded products and $3.0 million of
revenue from the sale of FUQI branded products.





Net sales
derived from our retail segment for the three months ended March 31, 2009
increased by $11.3 million to $12.5 million from $1.2 million in the three
months ended March 31, 2008. The increase in retail revenue for the three months
ended March 31, 2009 is primarily due to the sales generated from the Temix
branded products which accounted for $9.5 million of this increase.





Cost
of sales





Cost of
sales is mainly comprised of costs of raw materials, primarily gold, platinum
and diamonds, in addition to direct manufacturing costs, factory overhead and
processing fees. Cost of sales for the three months ended March 31, 2009
increased to $91.3 million, an increase of $22.5 million, or 32.7%, from $68.8
million for the same period in 2008.





Wholesale
and distribution cost of sales increased by $14.9 million, or 22%, in the first
quarter of 2009 to $82.7 million from $67.8 million for the first quarter of
2008. The increase in cost of sales, which was consistent with the increase in
net sales, was primarily due to an increase in the cost of raw materials, which
resulted from the increase in both sales volume and the general increase in
direct labor.





Cost of
retail sales for the three months ended March 31, 2009 increased by $7.7 million
to 8.7 million from approximately $0.95 million for the same period in 2008. The
increase in cost of retail sales for the three months ended March 31, 2009 was
primarily due to the increase in sales volume.




18




Gross
profit





Gross
profit for the three months ended March 31, 2009 increased to $18.1 million, an
increase of $9.3 million, or 106%, from $8.8 million for the comparable period
in 2008. Gross profit margin increased to 16.5% for the three months ended March
31, 2009, compared to 11.4% for the same period in 2008. The increase in profit
margin was mainly attributable to an increase of product segments, an expansion
in retail sales, which resulted from an increase in brand awareness and an
opening additional jewelry counters in locations and acquisition of Temix’s 50
retail stores in 2008.





Selling
and marketing expenses





Selling
and marketing expenses are primarily comprised of business taxes, advertising
expenses, traveling expenses, production costs of marketing materials, fees to
the malls for retail counters, insurance, payroll expenses and delivery
expenses. Selling and marketing expenses for the three months ended March 31,
2009 were approximately $3.0 million, an increase of $2.6 million, or 651%, from
$0.40 million for the comparable period in 2008. Selling and marketing expenses
were 2.72% of net sales for the three months ended March 31, 2009 compared to
0.5% for the three months ended March 31, 2008. The increase in selling and
marketing expenses as a percentage of net sales was primarily due to an increase
of business tax expenses that resulted from an overall increase in our net
revenue, an increase in fees to the malls for retail counters, payroll for
retail counter employees, and salaries for our sales and marketing
executives.





General
and administrative expenses





General
and administrative expenses consist primarily of payroll expenses, benefits and
travel expenses for our staff, professional fees including audit, accounting,
legal and financial advisory, depreciation expenses, and general office
expenses. General and administrative expenses for the three months ended March
31, 2009 were $2.5 million, an increase of $1.0 million, or 66.7%, from $1.5
million for the comparable period in 2008. General and administrative expenses
were 2.3% of net sales for the three months ended March 31, 2009 compared to
1.95% for the three months ended March 31, 2008. The increase in general and
administrative expenses as a percentage of net sales was due to an increase of
audit fees as a result of the expansion of the retail business and increased
payroll cost for the additional employees hired in the accounting and finance
department.





Other
income (expense), net





Other
expense, net was $0.31 million in the three months ended March 31, 2009 compared
to $0.61 million of other income, net in the three months ended March 31, 2008.
The decrease in other income was attributable to realized gain decreased by
$0.76 million from our gold future contract. We have entered into the gold
future contracts with our supplier, The Shanghai Gold Exchange, since 2008, in
order to reduce our exposure to volatility in the price of gold.





Provision
for income tax





Provision
for income tax expense was $2.6 million for the three months ended March 31,
2009, an increase of $1.44 million, or 129%, from approximately $1.1 million for
the three months ended March 31, 2008. The increase was primarily due to an
increase in the taxable income for the three months ended March 31, 2009, in
addition to an increase in the statutory tax rate in 2009. Our effective tax
rate for the three months ended March 31, 2009 was 21.0%, an increase of 6.1%
from 14.9% for the same period in 2008.





Net
income





Net
income increased to $9.7 million for the three months ended March 31, 2009 from
$6.4 million for the same period of the prior year, an increase of
51.6%.





LIQUIDITY
AND CAPITAL RESOURCES





At March
31, 2009, we had retained earnings of $54.3 million, and cash and cash
equivalents of $54.0 million. Our primary sources of cash are from operating
activities and borrowings from the bank.




19




At March
31, 2009, we had working capital of $139 million. Except for cash and cash
equivalents, a majority of our net working capital consisted of inventories and
accounts receivable. Our inventories increased by 57.7% and our accounts
receivable decreased by 12.11% as of March 31, 2009 as compared to December 31,
2008. The increase in inventory was a result of a substantial increase in our
purchases of raw materials in order to expand our sales capabilities by taking
on larger sales orders from our customers for the rest of the year. As a leading
wholesaler and retailer of high quality of precious metal jewelry in China, we
believe that we have to maintain a sufficient inventory to meet the demand for
our products based on customers orders, sales projection and finished goods for
sales for retailers, who will purchase from our show room in our head office in
Shenzhen. We do not conduct any trading of our precious metal raw
materials.   The decrease in accounts receivable was attributable
to collection of accounts receivable derived from the trend of higher sales in
the fourth quarter in 2008. We typically offer certain of our customers 30-days
credit terms for payment but we also extend credit terms to some of our
customers with high credit standings. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Allowance for doubtful accounts is based on our
assessment of the collectability of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry. If a major customer’s credit worthiness deteriorates, or our
customers’ actual defaults exceed historical experience, our estimates could
change and impact our reported results. We have not experienced any significant
amount of bad debt since the inception of our operation.





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.





As of
March 31, 2009, we had outstanding short-term notes payables with banks in an
aggregate amount of $29.3 million that are due and payable on dates between June
2009 and March 2010. Our loans are secured by inventory, real properties owned
by our affiliated companies and/or guaranteed by our affiliates and our
controlling stockholder and his wife.  The amounts outstanding under
these lines of credit and short-term notes payable are presented in our
financial statements as notes payable and line of credit.





We have a
general banking facility line of credit with Agricultural Bank of China pursuant
to a Maximum Banking Facility Agreement dated August 24, 2006 which was renewed
in September 2007 and December 2008. The terms of the agreement enable us to
borrow up to a maximum facility amount of $14.6 million (RMB 100,000,000) as of
December 31, 2008.  In March 2009, we entered into a supplemental
agreement with this bank to increase the maximum borrowing amount to
approximately $21.9 million (RMB 150,000,000) as of March 31,
2009.  We executed notes payable with this bank under this facility
line with terms less than one year. As of March 31, 2009 and December 31, 2008,
we have approximately $21.9 million and $14.6 million, respectively, outstanding
under the facility, with interest rates ranging from 4.779% to
8.217%.  In addition, we have a one-year term loan with the Shenzhen
Development Bank that provides for a maximum borrowing of up to approximately
$7.4 million. This facility expires in June 2009 and is secured by certain real
properties owned by an affiliate company.  As of March 31 2009 and
December 31, 2008, we had a total of $7.4 million outstanding under this term
loan agreement with interest rates ranging from 4.860% to 5.040%, and is secured
by certain real properties owned by an affiliate company.  The
remaining outstanding loans are secured by our inventory, real properties owned
by affiliated companies, and/or guaranteed by our affiliates and our controlling
stockholder and his wife and have certain restrictions and covenants. We do not
guarantee any indebtedness of our affiliates.





We did
not pay any cash dividends during the three months ended March 31, 2009 or the
years ended December 31, 2008 and 2007. 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




We paid a
total of approximately $11.7 million to acquire substantially all of the assets
of the Temix Companies in August 2008, with $7.3 million having been paid in
cash and the remaining $4.4 million is recorded as other payable, related
parties in the consolidated balance sheets as of December 31, 2008. We expect to
pay the remaining $4.4 million in the second quarter of 2009.  During
the rest of 2009, we intend to open additional retail counters and retail
stores, although these plans may change at any given time as our management
continually reviews our retail expansion plans, particularly in light of the
recent fluctuations in the economy.  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. 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
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 believe that the sources of the funding for
our expected expenditures in 2009 include our current cash and cash flow from
operations.  However, there is no guarantee that we be able to
generate positive cash flow from operations for the year ending December 31,
2009.  In addition, we may require additional cash resources due to
our inability to generate positive cash flow from our operations, changing
business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. We may seek additional funding through
public or private financing or through collaborative arrangements with strategic
partners.  We cannot be certain that additional capital will be
available on favorable terms, if at all, and any available additional financing
may not be adequate to meet our goals.  Moreover, any equity financing
would result in dilution to stockholders.  If we cannot raise
additional funds when needed, or on acceptable terms, we may not be able to
effectively execute our growth strategy (including expanding our business to the
retail market), take advantage of future opportunities, or respond to
competitive pressures or unanticipated requirements. In addition, we may be
required to scale back or discontinue our production and development program, or
obtain funds through strategic alliances that may require us to relinquish
certain rights.





Operating
activities – Net cash used for operating activities was $10.5 million for
the three months ended March 31, 2009, compared to net cash used for operating
activities of $35.0 million for the same period in 2008. The $24.5 million
decrease was primarily due to an increase in inventory in the amount of $25.6
million during the period ended March 31, 2009 compared to an increase of $32.9
million during the same period in 2008, in additional to a decrease of accounts
receivable in the amount of $8.3 million during the period ended March 31, 2009
compared to an increase of $4.8 million in the same period in
2008.





Investing activities -Net
cash used by investing activities amounted to approximately $166,000 for the
three months ended March 31, 2009, compared to net cash provided by investing
activities of $341,000 for the three months ended March 31, 2008. The change was
due to a decrease in restricted cash of $422,000 resulting from a bank loan of
which the restricted deposit was pledged as collateral being paid off during the
first quarter of 2008.





Financing activities - Net
cash provided by financing activities amounted to $8.1 million for the three
months ended March 31, 2009, compared to net cash used for financing activities
of $2.1 million for the three months ended March 31, 2008. The increase was
primarily a result of an additional borrowing of  $7.3 million
(RMB50,000,000) through a supplemental agreement with the Agricultural Bank of
China executed in March 2009.





Contractual
Obligations





We enter
into operating leases for our retail locations. Other than the six retail shops
which a monthly fixed rate of lease amount is charged, all store lease
agreements are provided with contingent rent provisions based on a percentage of
sales generated in the jewelry counters within department stores which are
excluded from minimum lease payments. The monthly fixed rate of the six retail
shops is approximately $7,000.




21




The
following table describes our contractual commitments and obligations as of
March 31, 2009:





Payments
      due by Period (in $)Contractual
      Obligations
            
            Total
            
            
            Less
      Than
              1
      Year
            
            
            1
      - 3
              Years
            
            
            3
      - 5
              Years
            
            
            More
              Than
              5
      YearsShort-term
      borrowings
            
            $
            29,257,303
            
            
            $
            29,257,303
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Lease
      of Plant & Office
            
            $
            189,976
            
            
            $
            169,198
            
            
            $
            20,778
            
            
            $
            —
            
            
            $
            —Lease
      of Staff Dormitory
            
            $
            120,955
            
            
            $
            47,455
            
            
            $
            73,500
            
            
            $
            —
            
            
            $
            —$
            29,568,234
            
            
            $
            29,473,956
            
            
            $
            94,278
            
            
            $
            —
            
            
            $
            —





Off-Balance Sheet Arrangements





We have
no material off-balance sheet arrangements.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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 purchase price allocation relating to the
business acquired. 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.





We
describe our significant accounting policies in Note 1, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K as of and for the year ended December 31,
2008. We discuss our critical accounting policies and estimates in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K as of and for the year ended December 31, 2008. Other
than as indicated in this quarterly report, there have been no material
revisions to the critical accounting policies as filed in our Annual Report on
Form 10-K as of and for the year ended December 31, 2008 with the SEC on March
31, 2009.





ITEM
3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There
have been no material changes in market risk from the information provided in
Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
other than those discussed below.





ITEM
4 — CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.





As
required by Rule 13a-15(b) under the Securities Exchange Act, our management has
carried out an evaluation, with the participation and under the supervision of
our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2009.  As discussed in more detail below,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were ineffective as of March 31, 2009, due to
the material weaknesses that we identified in internal control over financial
reporting, specifically related to period-end closing process and revenue
recognition in improper periods.





1.
            We did not
      maintain effective control over the period-end closing
      process.  Due to the insufficient number of qualified
      resources, we were unable to timely and accurately complete our work
      needed to close our books and prepare financial statements in accordance
      with accounting principles generally accepted in the United States of
      America for period covered by this report. In addition, this control
      deficiency could result in a material misstatement to annual or interim
      financial statements that would not be prevented or
    detected.




22




2.
            We did not
      maintain effective control over the revenue cycle with revenue
      recognition.  We did not properly perform and follow the
      control procedures set forth in the revenue cycle.  This control
      deficiency resulted in significant amounts of sales not being recorded in
      the proper periods.





Remediation
Measures of Material Weaknesses





We have
implemented the following measures in 2009 as indicated:





1.
            We
      have increased efforts to enforce internal control
      procedures.  We have started restructuring our China financial
      department and clarifying the responsibilities of key personnel in order
      to increase communications and accountability.  Under the new
      procedures, non-routine transactions are identified and presented to
      senior financial management when discovered to ensure proper accounting
      treatment.  We will seek opportunities to provide additional
      technical resources in order to improve the quality of the reviews of
      underlying financial information related to certain significant
      transactions.  We will continue to review and assess the
      effectiveness of the restructuring and make modifications accordingly in
      an effort to improve the effectiveness of our control
      procedures.





2.
            We
      have hired and will continue to hire additional qualified financial
      personnel for the accounting department to further strengthen our China
      financial reporting function.  In 2009, we hired 4 additional
      personnel in our accounting and finance
  department.





3.
            We
      will continue to evaluate our existing staff and make modifications as
      necessary, in addition to providing additional training on accounting
      principles and internal control procedures for our existing
      staff.  We have also required all personnel in our China
      financial department to obtain additional accounting
      certifications.





4.
            We
      continually review and improve our standardization of our monthly and
      quarterly data collection, analysis, and reconciliation procedures. To
      further improve the timeliness of data collection, we are selecting and
      will install new point of sale systems and enterprise resource planning
      systems for our wholesale and retail operations. We have also implemented
      a variety of manual review procedures, such as an extensive review of
      journal entry postings into the accounting system, a thorough review of
      account reconciliation, and a detailed review by our U.S. reporting team
      of the trial balance from our China entity, to ensure the completeness and
      accuracy of the underlying financial
  information.





5.
            We
      have increased the level of communication and interaction among sales
      department, production department, PRC accounting team and other external
      advisors. In addition, our Chief Financial Officer and US GAAP team are
      becoming increasingly involved with the financial accounting and reporting
      process in China and are monitoring such processes.  For
      example, we will relocate a portion of the US GAAP team from our Hong Kong
      office to our Shenzhen offices to strengthen the local accounting and
      reporting processes.





6.
            We
      are in the process of expanding the internal control functions and honing
      related policies and procedures. As referenced above, we hired a qualified
      and experienced Internal Audit Manager, who commenced work in January
      2009.  We also plan to allocate and transfer additional
      resources to the internal audit department for the purpose of enhancing
      the internal audit function.





Changes
in Internal Controls over Financial Reporting




Due to
the implementation of the remedial measures described above, in addition to the
designing, planning, and integration of the internal controls over financial
reporting for Temix, there were changes in our internal controls over financial
reporting during the first quarter of fiscal 2009 that have materially affected,
or are reasonably likely to materially affect our internal control over
financial reporting.




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PART II —
OTHER INFORMATION





ITEM
1 — LEGAL PROCEEDINGS





None.




ITEM
1A — RISK FACTORS





Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in our public filings before deciding whether to purchase our common
stock. Except as set forth below, there have been no material revisions to the
“Risk Factors” as filed in our Annual Report on Form 10-K as of and for the year
ended December 31, 2008.





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





None.





ITEM
3 — DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM 5 — OTHER
INFORMATION





On March
28, 2009, the Company’s indirect held subsidiary, Shenzhen Fuqi Jewelry CO.,
Ltd, and Agricultural Bank of China, Shenzhen Central District Branch entered
into a Supplemental Loan Agreement related to its Contract of Maximum General
Banking Facilities pursuant to which the banking facility limit was increased
from $14.6 million (RMB 100 million) to $21.9 million (RMB 150
million).  A copy of the Supplemental Agreement is attached hereto as
Exhibit
10.1.




ITEM
6 — EXHIBITS





(a)
Exhibits





10.1
            Supplemental
      Loan Agreement dated March 28, 2009 increasing facility line of credit to
      RMB 150 million entered by and between Shenzhen Fuqi Jewelry CO., Ltd and
      Agricultural Bank of China, Shenzhen Central District
    Branch.31.1
            Certification
      of Chief Executive Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.*





* 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.





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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:
      May 15, 2009
            By:
            /s/
      Yu Kwai ChongYu
      Kwai ChongChief
      Executive OfficerDate:
      May 15, 2009
            By:
            /s/
      Ching Wan WongChing
      Wan WongChief
      Financial Officer





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