UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM 10-Q





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





FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009





OR





 ̈           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  ̈





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  ̈    No  ̈




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




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





As
of November 9, 2009 the registrant had issued and outstanding 27,628,656 shares
of common stock, par value $0.001 per share.








FUQI
INTERNATIONAL, INC.


FORM
10-Q QUARTERLY REPORT





TABLE
OF CONTENTS





PagePART I
      :
                    FINANCIAL
      INFORMATION
                    1ITEM
      1 — FINANCIAL STATEMENTS
                    1Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008
                    1Condensed
      Consolidated Statements of Income and Comprehensive Income for the Three
      and Nine Months Ended September 30, 2009 and 2008
    (unaudited)
                    2Condensed
      Consolidated Statements of Cash Flows for the Nine Months
      Ended September 30, 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
                    18ITEM
      3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
                    26ITEM
      4 — CONTROLS AND PROCEDURES
                    27PART II
      :
                    OTHER
      INFORMATION
                    28ITEM
      1 — LEGAL PROCEEDINGS
                    28ITEM
      1A — RISK FACTORS
                    28ITEM
      2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                    28ITEM
      3 — DEFAULTS UPON SENIOR SECURITIES
                    28ITEM
      4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                    28ITEM
      5 — OTHER INFORMATION
                    28ITEM
      6 — EXHIBITS
                    29SIGNATURES
                    30




i





PART
I - FINANCIAL INFORMATION




ITEM
1 - FINANCIAL STATEMENTS





FUQI
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008(Unaudited)ASSETSCurrent
      assets:Cash
                      
                      $
                      173,169,185
                      
                      
                      $
                      56,569,733Accounts
      receivable, including amount due from related party of $9,376,955 for 2009
      and $2,837,907 for 2008, net of allowance for doubtful accounts of
      $1,171,000 for 2009 and $1,620,000 for 2008
                      
                      
                      73,825,242
                      
                      
                      
                      73,949,200Value
      added taxes receivable
                      
                      
                      5,824,290
                      
                      
                      
                      2,170,669Inventories
                      
                      
                      85,774,101
                      
                      
                      
                      44,409,645Prepaid
      expenses and other current assets
                      
                      
                      561,747
                      
                      
                      
                      286,405Advances
      to suppliers
                      
                      
                      26,120,827
                      
                      
                      
                      8,468,971Gold
      future contracts
                      
                      
                      -
                      
                      
                      
                      1,426,236Deferred
      taxes
                      
                      
                      26,820
                      
                      
                      
                      142,608Total
      current assets
                      
                      
                      365,302,212
                      
                      
                      
                      187,423,467Property,
      equipment, and improvements, net
                      
                      
                      4,046,172
                      
                      
                      
                      3,400,642Deposits
                      
                      
                      114,909
                      
                      
                      
                      104,414Goodwill
                      
                      
                      585,693
                      
                      
                      
                      583,269Acquired
      intangibles, net
                      
                      
                      3,103,914
                      
                      
                      
                      3,197,344Other
      assets
                      
                      
                      93,658
                      
                      
                      
                      140,278$
                      373,246,558
                      
                      
                      $
                      194,849,414LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Notes
      payable
                      
                      $
                      48,323,327
                      
                      
                      $
                      21,944,904Accounts
      payable and accrued liabilities
                      
                      
                      8,261,630
                      
                      
                      
                      12,511,519Other
      payable, related parties
                      
                      
                      3,076,720
                      
                      
                      
                      6,287,102Customer
      deposits
                      
                      
                      18,271,322
                      
                      
                      
                      14,474,178Income
      tax payable
                      
                      
                      6,682,964
                      
                      
                      
                      2,802,110Total
      current liabilities
                      
                      
                      84,615,963
                      
                      
                      
                      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, shares issued and
      outstanding – 27,628,656 for 2009 and 22,005,509 for 2008
                      
                      
                      27,629
                      
                      
                      
                      22,006Additional
      paid in capital
                      
                      
                      195,960,570
                      
                      
                      
                      82,503,638Accumulated
      foreign currency translation adjustments
                      
                      
                      9,659,714
                      
                      
                      
                      9,620,524Retained
      earnings
                      
                      
                      82,982,682
                      
                      
                      
                      44,683,433Total
      stockholders' equity
                      
                      
                      288,630,595
                      
                      
                      
                      136,829,601$
                      373,246,558
                      
                      
                      $
                      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
                              September 30,
                            
                            
                            Nine Months Ended
                              September 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Net
      sales:Wholesale
      and distribution
                            
                            $
                            117,450,677
                            
                            
                            $
                            90,523,143
                            
                            
                            $
                            306,780,848
                            
                            
                            $
                            233,011,441Retail
                            
                            
                            9,737,783
                            
                            
                            
                            3,154,558
                            
                            
                            
                            30,609,867
                            
                            
                            
                            5,108,874127,188,460
                            
                            
                            
                            93,677,701
                            
                            
                            
                            337,390,715
                            
                            
                            
                            238,120,315Cost
      of sales:Wholesale
      and distribution
                            
                            
                            89,712,957
                            
                            
                            
                            80,723,212
                            
                            
                            
                            250,306,439
                            
                            
                            
                            207,616,922Retail
                            
                            
                            7,538,332
                            
                            
                            
                            1,956,227
                            
                            
                            
                            21,740,102
                            
                            
                            
                            3,596,85497,251,289
                            
                            
                            
                            82,679,439
                            
                            
                            
                            272,046,541
                            
                            
                            
                            211,213,776Gross
      Profit
                            
                            
                            29,937,171
                            
                            
                            
                            10,998,262
                            
                            
                            
                            65,344,174
                            
                            
                            
                            26,906,539Operating
      expenses:Selling
      and marketing
                            
                            
                            3,893,122
                            
                            
                            
                            1,559,892
                            
                            
                            
                            9,731,593
                            
                            
                            
                            2,486,020General
      and administrative
                            
                            
                            1,828,675
                            
                            
                            
                            1,153,666
                            
                            
                            
                            5,690,294
                            
                            
                            
                            3,222,725Total
      operating expenses
                            
                            
                            5,721,797
                            
                            
                            
                            2,713,558
                            
                            
                            
                            15,421,887
                            
                            
                            
                            5,708,745Income
      from operations
                            
                            
                            24,215,374
                            
                            
                            
                            8,284,704
                            
                            
                            
                            49,922,287
                            
                            
                            
                            21,197,794Other
      income (expenses):Interest
      expense
                            
                            
                            (667,537
                            )
                            
                            
                            (400,799
                            )
                            
                            
                            (1,463,510
                            )
                            
                            
                            (1,086,954
                            )Interest
      income
                            
                            
                            54,303
                            
                            
                            
                            6,715
                            
                            
                            
                            114,928
                            
                            
                            
                            20,050(Loss)
      / gain from derivative instrument
                            
                            
                            (18,652
                            )
                            
                            
                            22,954
                            
                            
                            
                            77,019
                            
                            
                            
                            1,584,220Miscellaneous
                            
                            
                            150,648
                            
                            
                            
                            16,111
                            
                            
                            
                            190,905
                            
                            
                            
                            272,271Total
      other income (expenses)
                            
                            
                            (481,238
                            )
                            
                            
                            (355,019
                            )
                            
                            
                            (1,080,658
                            )
                            
                            
                            789,587Income
      before provision for income taxes
                            
                            
                            23,734,136
                            
                            
                            
                            7,929,685
                            
                            
                            
                            48,841,629
                            
                            
                            
                            21,987,381Provision
      for income taxes
                            
                            
                            4,962,627
                            
                            
                            
                            1,409,127
                            
                            
                            
                            10,542,380
                            
                            
                            
                            3,820,983Net
      income
                            
                            
                            18,771,509
                            
                            
                            
                            6,520,558
                            
                            
                            
                            38,299,249
                            
                            
                            
                            18,166,398Other comprehensive
      income - foreign currency translation adjustments
                            
                            
                            47,969
                            
                            
                            
                            707,332
                            
                            
                            
                            39,190
                            
                            
                            
                            7,213,788Comprehensive
      income
                            
                            $
                            18,819,478
                            
                            
                            $
                            7,227,890
                            
                            
                            $
                            38,338,439
                            
                            
                            $
                            25,380,186Earnings
      per share - basic
                            
                            $
                            0.75
                            
                            
                            $
                            0.31
                            
                            
                            $
                            1.69
                            
                            
                            $
                            0.86Earnings
      per share - diluted
                            
                            $
                            0.73
                            
                            
                            $
                            0.31
                            
                            
                            $
                            1.66
                            
                            
                            $
                            0.86Weighted
      average number of common shares - basic
                            
                            
                            24,964,966
                            
                            
                            
                            21,247,868
                            
                            
                            
                            22,654,228
                            
                            
                            
                            21,033,701Weighted
      average number of common shares - diluted
                            
                            
                            25,722,344
                            
                            
                            
                            21,247,868
                            
                            
                            
                            23,045,424
                            
                            
                            
                            21,033,701





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





Nine Months Ended
                  September 30,2009
                
                
                2008Cash
      flows provided by operating activities:Net
      income
                
                $
                38,299,249
                
                
                $
                18,166,398Adjustments
      to reconcile net income to net cash provided by (used for) operating
      activities:Depreciation
      and amortization
                
                
                905,330
                
                
                
                363,644Provision
      for inventory reserve
                
                
                -
                
                
                
                1,958,552Bad
      debt provision
                
                
                (449,290
                )
                
                
                100,633Stock-based
      compensation
                
                
                467,729
                
                
                
                445,653Loss
      on disposal on property, equipment and improvements
                
                
                55,355
                
                
                
                18,189Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (3,749,103
                )
                
                
                (24,737,675
                )Value
      added taxes receivable
                
                
                (3,649,481
                )
                
                
                (2,951,671
                )Inventories
                
                
                (41,299,295
                )
                
                
                (10,614,653
                )Prepaid
      expenses and other current assets
                
                
                (215,109
                )
                
                
                (148,260
                )Gold
      future contracts
                
                
                1,426,716
                
                
                
                609,615Advances
      to suppliers
                
                
                (17,633,714
                )
                
                
                (576,491
                )Deferred
      taxes
                
                
                115,851
                
                
                
                (2,239,121
                )Other
      assets
                
                
                46,722
                
                
                
                (111,561
                )Accounts
      payable, accrued expenses, accrued business tax, and other
      payable
                
                
                (4,218,947
                )
                
                
                4,957,894Customer
      deposits
                
                
                3,781,576
                
                
                
                2,311,975Income
      tax payable
                
                
                3,876,000
                
                
                
                1,658,344Net
      cash used for operating activities
                
                
                (22,240,411
                )
                
                
                (10,788,535
                )Cash
      flows provided by (used for) investing activities:Purchase
      of property, equipment and improvements
                
                
                (1,624,738
                )
                
                
                (959,435
                )Proceeds
      from disposal of property, equipment and improvements
                
                
                79,028
                
                
                
                -Business
      acquisition
                
                
                -
                
                
                
                (3,911,646
                )Decrease
      in restricted cash
                
                
                -
                
                
                
                431,282Net
      cash used for investing activities
                
                
                (1,545,710
                )
                
                
                (4,439,799
                )Cash
      flows provided by (used for) financing activities:Proceeds
      from short-term borrowing
                
                
                26,342,748
                
                
                
                3,594,019Repayments
      to a related party
                
                
                (965,901
                )
                
                
                -Advances
      from a related party
                
                
                2,071,706
                
                
                
                -Issuance
      of common stock related to public offering, net of financing
      cost
                
                
                112,994,826
                
                
                
                -Net
      cash provided by financing activities
                
                
                140,443,379
                
                
                
                3,594,019Effect
      of exchange rate changes on cash
                
                
                (57,806
                )
                
                
                4,522,759Net
      increase (decrease) in cash
                
                
                116,599,452
                
                
                
                (7,111,556
                )Cash,beginning of the
      period
                
                
                56,569,733
                
                
                
                63,293,653Cash,end of the
      period
                
                $
                173,169,185
                
                
                $
                56,182,097Supplemental
      disclosure of cash flow information:Interest
      paid
                
                $
                1,533,925
                
                
                $
                604,505Income
      taxes paid
                
                $
                6,550,534
                
                
                $
                4,449,155Non-cash
      disclosure:Issuance
      of common stock for the Temix acquisition
                
                $
                -
                
                
                $
                4,021,160Offset
      of accounts receivables from related party and other payable to a related
      party
                
                $
                4,392,387
                
                
                $
                -Non
      monetary exchanges related to certain retail sales
                
                $
                1,553,949
                
                
                $
                607,186Transfer
      of acquisition deposit as a payment of the purchase price for business
      acquisition
                
                $
                -
                
                
                $
                718,804





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.





The
Company’s business is seasonal in nature, and its sales on wholesales are
typically lower in the third quarter as compared to the other quarters of the
year. The Company utilizes its facilities, as well, for original design
manufacturing ("ODM") contracts.  Through these ODM contracts, customers
provide the raw materials used to produce the finished products in its
production facilities with its labor, expertise, and know-how. With cooperation
between PRC universities and its internal technical experts, the
Company developed an exclusive processing technique for the production of
hard gold products, which have been released into the jewelry market during the
year. The Company will continue to invest to develop new
technology.





The
Company has increasingly received ODM contracts/orders from customers. In
the third quarter of 2009, it entered into ODM contracts with
various customers, and such contracts contributed significant amount of revenue
in the third quarter, which was recognized under our wholesale segment. The
Company is still evaluating the demand and its business model whether to
form a new business department or new production unit to capture more
potential ODM business.





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 September 30, 2009, the Company had 79 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 (“SEC”). 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 September 30,
2009 and the results of operations for the three and nine months ended September
30, 2009 and 2008, and the cash flows for the nine months ended September 30,
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 and nine months ended September 30, 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 the Company 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"), Shenzhen Fuqi
Jewelry Co., Ltd. ("Fuqi China"), and Fuqi Jewelry (Hong Kong) Co., Ltd. ("Fuqi
HK"). 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




Government
Subsidy





The Company receives non-repayable
subsidies from PRC local government agencies after meeting certain conditions,
such as locating their office in a certain district, passing certain
technological certification or initial public offering of the Company’s stock.
The subsidies are recorded in other income of the consolidated statements of
operations in the period in which the right to receive such subsidies is
established.





Operating
Leases





The Company generally enters into
operating leases for its retail counters. Other than the Company’s seven retail
stores as of September 30, 2009, which operate under a monthly fixed rate of
lease, all counters 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 the Company’s 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
September 30, 2009 and 2008, the Company had common stock equivalents of
1,110,364 shares and 1,320,000 shares, respectively, upon the exercise of stock
options.  Basic net income per share is computed by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period and excludes the dilutive effect of stock
options.  Diluted net income per share gives effect to all dilutive
potential common shares outstanding during a period. 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
released as of September 30, 2009.  See Note (12) for further
details.





The
dilutive effect of outstanding stock options is reflected in diluted net income
per share by application of the treasury stock method including the impact of
pro forma deferred tax benefits for the three months and nine months ended
September 30, 2009.  The following table sets forth the computation of
basic and diluted net income per share (in thousands, except per share amounts,
unaudited):





Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Numerator
      for basic and diluted earnings per share:Net
      income
                  
                  $
                  18,772
                  
                  
                  $
                  6,521
                  
                  
                  $
                  38,299
                  
                  
                  $
                  18,166Denominator:Weighted
      average common stock outstandingBasic
                  
                  
                  24,964,966
                  
                  
                  
                  21,247,868
                  
                  
                  
                  22,654,228
                  
                  
                  
                  21,033,701Effect
      of dilutive securities
                  
                  
                  757,378
                  
                  
                  
                  -
                  
                  
                  
                  391,196
                  
                  
                  
                  -Denominator
      for diluted calculation
                  
                  
                  25,722,344
                  
                  
                  
                  21,247,868
                  
                  
                  
                  23,045,424
                  
                  
                  
                  21,033,701Net
      income per share:Basic
                  
                  $
                  0.75
                  
                  
                  $
                  0.31
                  
                  
                  $
                  1.69
                  
                  
                  $
                  0.86Diluted
                  
                  $
                  0.73
                  
                  
                  $
                  0.31
                  
                  
                  $
                  1.66
                  
                  
                  $
                  0.86





Stock-based
Compensation





2007 Equity Incentive
Plan





Stock
options have been granted to certain of the Company’s 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.




5





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





A summary
of the status of the Company’s 2007 Equity Incentive Plan is presented
below:





Number of shares
                  
                  
                  Weighted average exercise
                    price per share
                  
                  
                  Aggregate
                    Intrinsic ValueOutstanding,
      January 1, 2009
                  
                  
                  1,441,776
                  
                  
                  $
                  8.79Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (600,000
                  )
                  
                  $
                  9.00Exercised
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      March 31, 2009
                  
                  
                  841,776
                  
                  
                  $
                  8.65Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      June 30, 2009
                  
                  
                  841,776
                  
                  
                  $
                  8.65Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      September 30, 2009
                  
                  
                  841,776
                  
                  
                  $
                  8.65
                  
                  
                  $
                  17,310,616Vested
      and expected to vest, September 30, 2009
                  
                  
                  841,776
                  
                  
                  $
                  8.65
                  
                  
                  $
                  17,310,616Exercisable,
      September 30, 2009
                  
                  
                  641,776
                  
                  
                  $
                  8.54
                  
                  
                  $
                  13,268,616





Stock-based
compensation expense for the 2007 Equity Incentive Plan was approximately
$57,000 and $149,000 for the three months ended September 30, 2009 and 2008,
respectively, and $126,000 and $446,000 for the nine months ended September 30,
2009 and 2008, respectively. As of September 30, 2009 and December 31, 2008,
unrecognized estimated compensation cost was approximately $23,000 and $459,000,
respectively, which is expected to be recognized over a weighted-average period
of 0.07 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. In March 2009, the Company reversed $46,000 of previously amortized
portion of unvested options for an executive director who resigned during the
first quarter of 2009. In addition, the Company reversed $110,000 of
compensation expense in the second quarter of 2009 that was previously accrued
in the first quarter of 2009 for estimated value of options pursuant to the
terms of employment agreements with three of its executive
officers.





As of
September 30, 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 September 30, 2009.





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the closing stock price of $29.21 of the
Company’s common stock on the last trading day on September 30,
2009.




2009 Omnibus Incentive
Plan




Share
Options




On April
29, 2009, stock options have been granted to certain of the Company’s officers
and directors pursuant to the 2009 Omnibus Incentive Plan. The Company granted
options for the purchase of an aggregate of 268,588 shares of common stock to
certain of the Company’s executive officers with exercise prices equal to the
market price of the Company's stock at the date of grant and vest over
time.





The fair
value of these options was calculated using a Black-Scholes option pricing model
using the following assumptions: (1) risk-free interest rates of 1.4%,
(2) an expected life of 3 years, (3) expected volatility of 108%,
(4) expected forfeitures of 10%, and (5) a dividend yield of
0%.




6





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





A summary
of the status of the Company’s 2009 Omnibus Incentive Plan is presented
below:





Number of shares
                
                
                Weighted average exercise
                  price per share
                
                
                Aggregate
                  Intrinsic ValueOutstanding,
      January 31, 2009
                
                
                -
                
                
                $
                -Granted
                
                
                -
                
                
                
                -Forfeited
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Outstanding,
      March 31, 2009
                
                
                -
                
                
                
                -Granted
                
                
                268,588
                
                
                $
                5.93Forfeited
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Outstanding,
      June 30, 2009
                
                
                268,588
                
                
                $
                5.93Granted
                
                
                -
                
                
                
                -Forfeited
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Outstanding,
      September 30, 2009
                
                
                268,588
                
                
                $
                5.93
                
                
                $
                6,252,729Vested
      and expected to vest, September 30, 2009
                
                
                268,588
                
                
                $
                5.93
                
                
                $
                6,252,729Exercisable,
      September 30, 2009
                
                
                -
                
                
                $
                -
                
                
                $
                -





Stock-based
compensation expense for options granted under the 2009 Omnibus Incentive Plan
was approximately $94,000 and $156,000 for the three and nine months ended
September 30, 2009. As of September 30, 2009, unrecognized estimated
compensation cost was approximately $787,000, which is expected to be recognized
over a weighted-average period of 2.4 years relating to options for
approximately 269,000 nonvested shares. To the extent the actual forfeiture rate
is different from the original estimate, actual share-based compensation related
to these awards may be different from the expectation.





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the closing stock price of $29.21 of the
Company’s common stock on the last trading day on September 30,
2009.





Outstanding
stock options represented approximately 4% of the Company’s outstanding shares
of common stock as of September 30, 2009.





Restricted
Stock





On April
29, 2009, the Company granted an aggregate of 41,752 shares of restricted stock
to certain participants under the Company’s 2009 Omnibus Incentive Plan. A
restricted stock is an agreement to issue stock at the time when the award
vests. These awards granted by the Company vest 25% upon grant, 25% at June 30,
2009, 25% at September 30, 2009, and the remaining 25% at December 31, 2009. The
fair value of the restricted stock is measured on the grant date based on the
market price of the stock on the grant date.





Stock-based
compensation expense for these restricted stock granted under the 2009 Omnibus
Incentive Plan was approximately $62,000 and $186,000 for the three and nine
months ended September 30, 2009.  As of September 30, 2009, there was
$61,897 unrecognized share-based compensation cost related to nonvested
restricted stock. This deferred cost is expected to be recognized over a
weighted-average vesting period of 0.25 year.





Segment
Reporting





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.


7





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. 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 the
Company’s consolidated financial position, results of operations, or cash
flows.





Subsequent
Events





We
evaluated subsequent events through November 9, 2009, the date this Quarterly
Report on Form 10-Q was filed with the SEC.





Newly
Adopted Accounting Pronouncements





Effective
January 1, 2009, the Company adopted guidance issued by the Financial Accounting
Standards Board (“FASB”) regarding business combinations. This guidance
addresses the accounting and disclosure for identifiable assets acquired,
liabilities assumed, and noncontrolling interests in a business combination.
Also, the Company adopted issued by the FASB regarding accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies. This guidance amended certain provisions of business combinations
guidance related to the recognition, measurement, and disclosure of assets
acquired and liabilities assumed in a business combination that arise from
contingencies. The Company believes the adoption this guidance did not have a
material impact on its condensed consolidated financial statements.





Effective
January 1, 2009, the Company adopted guidance issued by the FASB regarding
noncontrolling interests in consolidated financial statements, which was
retrospectively applied. The guidance requires noncontrolling interests to be
separately presented as a component of stockholders’ equity in the unaudited
condensed consolidated financial statements. The Company believes the adoption
of this guidance did not have any significant impact on its financial
condition or results of operations.





Effective
January 1, 2009, the Company adopted guidance issued by the FASB regarding
determination of the useful life of intangible assets. This guidance 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 another
guidance regarding goodwill and other intangible assets. The guidance for
determining the useful life of a recognized intangible asset in this guidance
shall be applied prospectively to intangible assets acquired after the effective
date. The Company believes the adoption did not have a material impact on its
condensed consolidated financial statements.





Effective
January 1, 2009, the Company adopted guidance issued by the FASB regarding the
hierarchy of generally accepted accounting principles. This guidance 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. This
guidance 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. The Company believes the
adoption did not have a material impact on its condensed consolidated financial
statements.




Effective
January 1, 2009, the Company adopted the guidance issued by the FASB issued
regarding determining whether instruments granted in share-based payment
transactions are participating securities. This guidance 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
Company believes the adoption did not have a material impact on its condensed
consolidated financial statements.





Effective
January 1, 2009, the Company adopted the guidance issued by the FASB regarding
equity method investment accounting considerations. This guidance provides
guidance for entities that acquire or hold investments accounted for under the
equity method. The Company believes the adoption did not have a material impact
on its condensed consolidated financial statements.







Effective
April 1, 2009, the Company adopted the amended guidance issued by the FASB
regarding interim disclosures about fair value of financial instruments. The
guidance requires disclosures about fair value of financial instruments for
interim reporting periods as well as in annual financial statements of publicly
traded companies. The guidance also requires those disclosures in summarized
financial information at interim reporting periods. The Company believes the
adoption of this guidance did not have any significant impact on its financial
condition or results of operations.


8





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued




Effective
April 1, 2009, the Company adopted guidance issued by the FASB regarding
subsequent events. The objective of the guidance is to establish general
standards for the accounting and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. In particular, the guidance sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The Company
believes the adoption of this guidance did not have any significant impact on
its financial condition or results of operations.




Effective
July 1, 2009, the Company adopted the new Accounting Standards Codification (the
“ASC”) as issued by the FASB. The ASC has become the source of authoritative US
GAAP recognized by the FASB to be applied by nongovernmental entities and
provides that all such guidance carries an equal level of authority. The ASC is
not intended to change or alter existing GAAP. The ASC is effective for interim
and annual periods ending after September 15, 2009. The Company believes the
adoption of the ASC did not have any significant impact on its financial
condition or results of operations.





Recently
Issued Accounting Pronouncements Not Yet Adopted





In June
2009, the FASB issued new accounting guidance which amends the evaluation
criteria to identify the primary beneficiary of a variable interest entity
(“VIE”) and requires ongoing reassessment of whether an enterprise is the
primary beneficiary of the VIE. The new guidance significantly changes the
consolidation rules for VIEs including the consolidation of common structures,
such as joint ventures, equity method investments and collaboration
arrangements. The guidance is applicable to all new and existing VIEs. The
provisions of this new accounting guidance is effective for interim and annual
reporting periods ending after November 15, 2009 and will become effective for
us beginning in the first quarter of 2010. The Company does not expect the
adoption of this guidance to have a significant effect on its consolidated
financial position or results of operations.





In
September 2009, the FASB issued new accounting guidance related to the revenue
recognition of multiple element arrangements. The new guidance states that if
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, companies will be required to develop a
best estimate of the selling price to separate deliverables and allocate
arrangement consideration using the relative selling price method. The
accounting guidance will be applied prospectively and will become effective
during the first quarter of 2011. Early adoption is allowed.  The
Company does not expect the adoption of this guidance to have a significant
effect on its consolidated financial position or results of
operations.




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:





September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      32,714,165
                      
                      
                      $
                      2,438,800Work
      in progress
                      
                      
                      3,300,138
                      
                      
                      
                      12,710,735Finished
      goods
                      
                      
                      22,086,668
                      
                      
                      
                      7,781,159Merchandise
      - retail
                      
                      
                      27,673,130
                      
                      
                      
                      21,478,951$
                      85,774,101
                      
                      
                      $
                      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.




9





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:





September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Production
      equipment
                    
                    $
                    1,802,446
                    
                    
                    $
                    1,578,682Computer
      hardware and software
                    
                    
                    433,206
                    
                    
                    
                    255,376Furniture
      and fixtures
                    
                    
                    266,427
                    
                    
                    
                    220,441Automobiles
                    
                    
                    726,365
                    
                    
                    
                    637,137Leasehold
      improvement
                    
                    
                    2,707,458
                    
                    
                    
                    1,964,445Building
                    
                    
                    623,481
                    
                    
                    
                    622,9066,559,383
                    
                    
                    
                    5,278,987Less:
      accumulated depreciation and amortization
                    
                    
                    2,513,211
                    
                    
                    
                    1,878,345$
                    4,046,172
                    
                    
                    $
                    3,400,642





Depreciation
and amortization expense for property, equipment, and improvements amounted to
approximately $300,951 and $122,135 for the three months ended September 30,
2009 and 2008, respectively, and $809,006 and $342,248 for the nine months ended
September 30, 2009 and 2008, respectively.




(4)
            Acquired
      Intangible Assets:




Acquired
intangible assets, net consisted of the following:





September 30,
                      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
                    
                    
                    146,762
                    
                    
                    
                    53,332Acquired
      intangible assets, net
                    
                    $
                    3,103,914
                    
                    
                    $
                    3,197,344





As of September 30, 2009
                    
                    
                    As of December 31, 2008Gross
                      Carrying
                      Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Gross
                      Carrying
                      Amount
                    
                    
                    Accumulated
                      AmortizationIntangible
      assets subject to amortization:Non-compete
      agreement
                    
                    $
                    123,318
                    
                    
                    $
                    (52,911
                    )
                    
                    $
                    123,318
                    
                    
                    $
                    (22,080
                    )Strategic
      alliance agreement
                    
                    
                    174,538
                    
                    
                    
                    (93,851
                    )
                    
                    
                    174,538
                    
                    
                    $
                    (31,252
                    )Total
                    
                    $
                    297,856
                    
                    
                    $
                    (146,762
                    )
                    
                    $
                    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 $30,796 and $0 for the three months ended September 30, 2009 and
2008, respectively, and $93,430 and $0 for the nine months ended September 30,
2009 and 2008, respectively. Expected amortization expense is estimated to be
$92,013 in 2010, and $24,136 in 2011 and the weighted average amortization lives
are approximately 1.26 years.  The Company did not incur costs to
renew or extend the term of acquired intangible assets during the period ended
September 30, 2009.




10





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





(5)
            Goodwill:





The
changes in the carrying amount of goodwill which was assigned to the retail
segment during the nine months ended September 30, 2009 were as
follows:




Balance
      as of December 31, 2008
                    
                    $
                    583,269Foreign
      exchange difference due to translation
                    
                    
                    2,424Balance
      as of September 30, 2009
                    
                    $
                    585,693





(6)
            Retail
      Operating Lease Agreements:




For the
three months ended September 30, 2009, the Company opened a total of eleven new
retail counters. Three counters ,which are located in Beijing, Shanghai and
Shenyang, are under the FUQI brand and eight counters, which located in Beijing
and Shanghai, are under the Temix brand. A total of three retail counters in
Henan and Jiangsu were closed during the three months ended September 30,
2009.  Including the retail counters and shops acquired through the
Temix acquisition, the Company had a total of 72 jewelry counters and seven
jewelry shops located in Beijing, Shanghai, and other PRC cities. A summary of
retail presences as of September 30, 2009 is summarized as follows:





Brand
                        
                        
                        
                        Counters
                        
                        
                        Shops
                        
                        
                        TotalFUQI
                        
                        Beijing
                        
                        
                        8
                        
                        
                        
                        0
                        
                        
                        
                        8Shenyang
                        
                        
                        4
                        
                        
                        
                        0
                        
                        
                        
                        4Shanghai
                        
                        
                        1
                        
                        
                        
                        0
                        
                        
                        
                        1Shandong
                        
                        
                        1
                        
                        
                        
                        0
                        
                        
                        
                        114
                        
                        
                        
                        0
                        
                        
                        
                        14TEMIX
                        
                        Beijing
                        
                        
                        29
                        
                        
                        
                        0
                        
                        
                        
                        29Shanghai
                        
                        
                        29
                        
                        
                        
                        7
                        
                        
                        
                        3658
                        
                        
                        
                        7
                        
                        
                        
                        6572
                        
                        
                        
                        7
                        
                        
                        
                        79





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 monthly fees for the seven retail shops under the lease agreement are fixed
and are charged in a range of $826 to $21,740 per shop.  Fees paid to
the department stores and shopping malls totaling $1,032,443 and $641,082 for
the three months ended September 30, 2009 and 2008, respectively, and $3,350,498
and $711,180 for the nine months ended September 30, 2009 and 2008,
respectively, and 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)
            Notes
      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 $22 million (RMB 150,000,000).  The Company executed
notes payable with this bank under this facility line with terms less than one
year. As of September 30, 2009 and December 31, 2008, the Company has
approximately $22 million and $14.6 million, respectively, outstanding under the
facility, with interest rates ranging from 4.779% to 8.217%.


11





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





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 $7.3
million (RMB 50,000,000) as of December 31, 2008. This facility and related
guarantees which expired and were renewed in May 2009, increased the maximum the
Company could draw to approximately $8.3 million (RMB57,000,000) and is secured
by certain real properties owned by affiliated companies and guaranteed by
affiliated companies. Interest is charged at the bank’s prime rate. As of
September 30, 2009 and December 31, 2008, the outstanding balance was $8,346,757
and $7,314,968 respectively, with interest rates ranging from 4.860% to
5.310%.




In June
2009, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to
approximately $6.3 million (RMB 43,000,000) as of June 30, 2009. This facility
expires in May 2010 and is secured by certain real properties owned by
affiliated companies and guaranteed by the Company’s controlling stockholder.
Interest is charged at the bank’s prime rate (5.310% at September 30, 2009). As
of September 30, 2009 and December 31, 2008, the outstanding balance was
$6,296,676 and $0, respectively.





In July
and August 2009, the Company entered into two Working Capital Loan Agreements in
an aggregate amount of $11,714,746 with the Industrial and Commercial Bank of
China.  These loans mature in July and August 2010, respectively,
and   are guaranteed by an affiliated company, a third-party
financing company, and  personally guaranteed by the Company’s
controlling stockholder, up to a maximum guarantee amount of $14.6 million
(RMB100,000,000). As of September 30, 2009, the outstanding balance was
$11,714,746 with an interest rate based on China People’s Bank’s base rate,
which is subject to be revised semi-annually.  The initial interest
rate charged on these loans is 4.425%.









September 30,
                    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, matured in June 2009 and was
      repaid.
                  
                  
                  -
                  
                  
                  
                  3,364,885A
      note payable with interest at a rate of 4.86%, secured by certain real
      properties owned by an affiliate, matured in June 2009 and was
      repaid.
                  
                  
                  -
                  
                  
                  
                  3,950,083




12





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





September 30,
                    2009
                  
                  
                  December 31,
                    2008A
      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.
                  
                  
                  2,928,686
                  
                  
                  
                  -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.
                  
                  
                  2,269,732
                  
                  
                  
                  -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.
                  
                  
                  2,489,384
                  
                  
                  
                  -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.
                  
                  
                  1,464,343
                  
                  
                  
                  -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.
                  
                  
                  2,489,384
                  
                  
                  
                  -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.
                  
                  
                  2,342,949
                  
                  
                  
                  -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.
                  
                  
                  2,489,384
                  
                  
                  
                  -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and guaranteed by affiliated
      companies, matures in May 2010.
                  
                  
                  4,393,030
                  
                  
                  
                  -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and guaranteed by affiliated
      companies, matures in June 2010.
                  
                  
                  3,953,727
                  
                  
                  
                  -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and personally guaranteed by the
      Company’s controlling stockholder, matures in June 2010.
                  
                  
                  1,903,646
                  
                  
                  
                  -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and personally guaranteed by the
      Company’s controlling stockholder, matures in July 2010.
                  
                  
                  4,393,030
                  
                  
                  
                  -




13




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


September 30,
                      2009
                    
                    
                    December 31,
                      2008A
      note payable with interest at a rate of 4.425%, which is subject to be
      revised semi-annually, guaranteed by an affiliated company, a third-party
      financing company, and personally guaranteed by the Company’s controlling
      stockholder, matures in July 2010.
                    
                    
                    5,857,373
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.425%, which is subject to be
      revised semi-annually,  guaranteed by an affiliated company, a
      third-party financing company, and personally guaranteed by the Company’s
      controlling stockholder, matures in August 2010.
                    
                    
                    5,857,373
                    
                    
                    
                    -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 and his wife, matures in June
      2010.
                    
                    
                    1,976,863
                    
                    
                    
                    -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 and his wife, matures in June
      2010.
                    
                    
                    3,514,423
                    
                    
                    
                    -$
                    48,323,327
                    
                    
                    $
                    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 US GAAP.





Effective
January 1, 2009, the Company adopted the disclosure requirements of FASB
regarding disclosures about derivative instruments and hedging activities. As of
December 31, 2008, the Company’s only derivative instrument was the gold future
contracts which were shown as gold future contracts under assets in the
accompanying condensed consolidated balance sheets.  The fair value of
these gold future contracts totaled $0 and $1,426,236, as of September 30, 2009
and December 31, 2008, respectively.





The
Company incurred a loss from the derivative instrument of approximately $19,000
for the three months ended September 30, 2009 and recognized a gain from the
derivative instrument of approximately $23,000 for the three months ended
September 30, 2008. In addition, a gain of approximately $77,000 and $1,584,000
for the nine months ended September 30, 2009 and 2008, respectively, was
recognized as gain from derivative instrument under other income (expense) in
the accompanying condensed consolidated statements of income.




(9)
            Fair
      Value Measurement:





On
January 1, 2008, the Company adopted guidance issued by FASB regarding fair
value measurements for financial assets and liabilities. This guidance
establishes a framework for using fair value to measure assets and liabilities,
and expands disclosures about fair value measurements.





This
guidance established the following fair value hierarchy that prioritizes the
inputs used to measure fair value:





Level 1:
            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.




14





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





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 September 30, 2009
and December 31, 2008 by level within the fair value hierarchy:




Fair Value Measurements UsingLevel 1
                  
                  
                  Level 2
                  
                  
                  Level 3As
      of September 30, 2009:AssetsDerivative
      financial instruments
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —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 December 31, 2008 was immaterial to the
consolidated financial statements.




(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 Company’s stockholder and the
former owner of the Temix retail chains which the Company acquired in August
2008, collected a total of $9,376,955 from the shopping malls on behalf of the
Company which was classified as accounts receivable from related party at
September 30, 2009.  For the three months and nine months ended
September 30, 2009, Mr. Chujian Huang also paid certain expenses for operating
the retail counters totaling $19,504 and $2,071,706, respectively, which was
classified as part of other payable, related party at September 30,
2009.





The
Company had 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 December 31, 2008. The Company
settled the full outstanding amount due to Mr. Huang through an offset of
accounts receivable due from him during the three months ended September 30,
2009.





For the
three months and nine months ended September 30, 2008, approximately $0 and
$357,000 of operating expenditure, respectively, 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 as of September 30, 2008.




(11)
            Income
      Taxes:





The
Company’s tax provision for the three months and nine months ended September 30,
2009 and 2008 was primarily for taxes on the Company’s subsidiary in China. The
Company’s effective income tax rate was 20.9% and 17.8% for the three months
ended September 30, 2009 and 2008, respectively, and 21.6% and 17.4% for the
nine months ended September 30, 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. The Company’s subsidiary in China is subject to an income tax rate
of 20% for 2009.





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.


15





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





(12)
            Stockholders’
      Equity:





In August
2008, the Company completed the acquisition of the Temix Companies. As
stipulated in the Intellectual Property 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 September 30, 2009 and December 31, 2008, 540,333 shares
(“Escrow 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. One-half of the Escrow Shares
or adjusted number of the Escrow Shares which is based on certain performance
targets, shall be released to Mr. Huang no later 30 days following the
completion of Temix Brand’s financial statements for the period from September
1, 2008 through August 31, 2009. The Company is still in the process of
completing the financial statements which will be used as a basis to determine
the number of Escrow Shares to be issued to Mr. Huang. The management of the
Company expects the process will be completed no later than the end of December
2009.





On August
5, 2009, the Company closed a public offering of 5,581,395 shares of common
stock at $21.50, raising proceeds, net of underwriting discounts and commissions
and estimated offering expenses, of approximately $113.0 million. The shares
issued in the offering include 726,395 shares issued pursuant to the
underwriters’ exercise of their over-allotment option.





(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 and nine months ended September 30, 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
                        September 30,
                      
                      
                      
                      Nine months Ended
                        September 30,2009
                      
                      
                      2008
                      
                      
                      
                      2009
                      
                      
                      2008Net
      Sales:Wholesale
      and distribution
                      
                      $
                      117,450,677
                      
                      
                      $
                      90,523,143
                      
                      
                      $
                      306,780,848
                      
                      
                      $
                      233,011,441Retail
                      
                      
                      9,737,783
                      
                      
                      
                      3,154,558
                      
                      
                      
                      30,609,867
                      
                      
                      
                      5,108,874$
                      127,188,460
                      
                      
                      $
                      93,677,701
                      
                      
                      $
                      337,390,715
                      
                      
                      $
                      238,120,315Income
      (loss) before provision for income taxes:Wholesale
      and distribution
                      
                      $
                      25,754,716
                      
                      
                      $
                      8,666,885
                      
                      
                      $
                      52,520,245
                      
                      
                      $
                      22,813,611Retail
                      
                      
                      (585,631
                      )
                      
                      
                      292,523
                      
                      
                      
                      578,445
                      
                      
                      
                      578,46725,169,085
                      
                      
                      
                      8,959,408
                      
                      
                      
                      53,098,690
                      
                      
                      
                      23,392,078Unallocated
      corporate expenses
                      
                      
                      (953,711
                      )
                      
                      
                      (674,704)
                      
                      
                      
                      (3,176,403)
                      
                      
                      
                      (2,194,284)Other
      income (expense), net
                      
                      
                      (481,238
                      )
                      
                      
                      (355,019)
                      
                      
                      
                      (1,080,658)
                      
                      
                      
                      789,587$
                      23,734,136
                      
                      
                      $
                      7,929,685
                      
                      
                      $
                      48,841,629
                      
                      
                      $
                      21,987,381





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:





September
      30,
                    
                    December
      31,2009
                    
                    2008Wholesale
      and distribution
                    
                    $
                    255,809,915
                    
                    
                    $
                    163,502,662Retail
                    
                    
                    44,680,031
                    
                    
                    
                    30,286,845Corporate
                    
                    
                    72,756,612
                    
                    
                    
                    1,059,907$
                    373,246,558
                    
                    
                    $
                    194,849,414




16





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) –
continued





(14)
            Concentrations:





The
Company purchased approximately 87% and 99% for the three months ended September
30, 2009 and 2008, respectively, and 95% and 100% for the nine months ended
September 30, 2009 and 2008, respectively, of its inventories from Shanghai Gold
Exchange.




17


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, producer and seller of high quality precious metal jewelry in
China. We develop, promote, manufacture and sell a broad range of products
consisting 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 products
are competitively priced, high-quality and target the high-volume retail jewelry
market and China’s growing middle-class. Our design database presently contains
over 30,000 unique products, and our designs are continuously updated based on
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 third quarter of 2009, we opened and/or acquired
11 retail counters in municipalities and provincial capitals throughout China
and closed 3 retail counters.  As of September 30, 2009, we had a
total of 72 retail counters, including 58 under the Temix brand and 14 under the
FUQI brand, and a total of 7 retail stores, which are all under the Temix
brand.


18





Our
business is seasonal in nature, and our sales on wholesales are typically lower
in the third quarter as compared to the other quarters of the year. We utilize
our facilities, as well, for original design manufacturing ("ODM")
contracts.  Through these ODM contracts, customers provide the raw
materials used to produce the finished products in our production facilities
with our labor, expertise, and know-how. With cooperation between PRC
universities and our internal technical experts, we developed an exclusive
processing technique for the production of hard gold products, which have been
released into the jewelry market during the year. We will continue to invest to
develop new technology.





We have
increasingly received ODM contracts/orders from customers. In the third quarter
of 2009, we entered into ODM contracts with various customers, and
such contracts contributed significant amount of revenue in the third quarter,
which was recognized under our wholesale segment. We are still evaluating the
demand and our business model whether to form a new business department or new
production unit to capture more potential ODM business.





RESULTS
OF OPERATIONS





The
following table sets forth certain information from our condensed consolidated
statements of income and comprehensive income for the three and nine months
ended September 30, 2009 and 2008 (unaudited):





Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008In Dollars
                  
                  
                  Percent of
                      Revenues
                  
                  
                  In Dollars
                  
                  
                  Percent of
                      Revenues
                  
                  
                  In Dollars
                  
                  
                  Percent of
                      Revenues
                  
                  
                  In Dollars
                  
                  
                  Percent of
                      Revenues($
      in thousands, except earnings per share)Net
      sales:Wholesale
      and distribution
                  
                  $
                  117,451
                  
                  
                  
                  92.34
                  %
                  
                  $
                  90,523
                  
                  
                  
                  96.63
                  %
                  
                  $
                  306,781
                  
                  
                  
                  90.93
                  %
                  
                  $
                  233,011
                  
                  
                  
                  97.85
                  %Retail
                  
                  
                  9,738
                  
                  
                  
                  7.66
                  %
                  
                  
                  3,155
                  
                  
                  
                  3.37
                  %
                  
                  
                  30,610
                  
                  
                  
                  9.07
                  %
                  
                  
                  5,109
                  
                  
                  
                  2.15
                  %127,189
                  
                  
                  
                  100
                  %
                  
                  
                  93,678
                  
                  
                  
                  100
                  %
                  
                  
                  337,391
                  
                  
                  
                  100
                  %
                  
                  
                  238,120
                  
                  
                  
                  100
                  %Cost
      of sales:Wholesale
      and distribution
                  
                  
                  89,713
                  
                  
                  
                  70.53
                  %
                  
                  
                  80,723
                  
                  
                  
                  86.17
                  %
                  
                  
                  250,306
                  
                  
                  
                  74.19
                  %
                  
                  
                  207,617
                  
                  
                  
                  87.19
                  %Retail
                  
                  
                  7,538
                  
                  
                  
                  5.93
                  %
                  
                  
                  1,956
                  
                  
                  
                  2.09
                  %
                  
                  
                  21,740
                  
                  
                  
                  6.44
                  %
                  
                  
                  3,597
                  
                  
                  
                  1.51
                  %97,251
                  
                  
                  
                  76.46
                  %
                  
                  
                  82,679
                  
                  
                  
                  88.26
                  %
                  
                  
                  272,046
                  
                  
                  
                  80.63
                  %
                  
                  
                  211,214
                  
                  
                  
                  88.70
                  %Gross
      profit
                  
                  
                  29,938
                  
                  
                  
                  23.54
                  %
                  
                  
                  10,999
                  
                  
                  
                  11.74
                  %
                  
                  
                  65,345
                  
                  
                  
                  19.37
                  %
                  
                  
                  26,906
                  
                  
                  
                  11.30
                  %Operating
      expenses:Selling
      and marketing
                  
                  
                  3,893
                  
                  
                  
                  3.06
                  %
                  
                  
                  1,560
                  
                  
                  
                  1.67
                  %
                  
                  
                  9,732
                  
                  
                  
                  2.88
                  %
                  
                  
                  2,486
                  
                  
                  
                  1.05
                  %General
      and administrative
                  
                  
                  1,829
                  
                  
                  
                  1.44
                  %
                  
                  
                  1,154
                  
                  
                  
                  1.23
                  %
                  
                  
                  5,690
                  
                  
                  
                  1.69
                  %
                  
                  
                  3,223
                  
                  
                  
                  1.35
                  %Total
      operating expenses
                  
                  
                  5,722
                  
                  
                  
                  4.50
                  %
                  
                  
                  2,714
                  
                  
                  
                  2.90
                  %
                  
                  
                  15,422
                  
                  
                  
                  4.57
                  %
                  
                  
                  5,709
                  
                  
                  
                  2.40
                  %Income
      from operations
                  
                  
                  24,216
                  
                  
                  
                  19.04
                  %
                  
                  
                  8,285
                  
                  
                  
                  8.84
                  %
                  
                  
                  49,923
                  
                  
                  
                  14.80
                  %
                  
                  
                  21,197
                  
                  
                  
                  8.90
                  %Other
      (expense) income, net
                  
                  
                  (481
                  )
                  
                  
                  0.38
                  %
                  
                  
                  (355
                  )
                  
                  
                  0.38
                  %
                  
                  
                  (1,081
                  )
                  
                  
                  0.32
                  %
                  
                  
                  790
                  
                  
                  
                  0.33
                  %Income
      before provision for income taxes
                  
                  
                  23,735
                  
                  
                  
                  18.66
                  %
                  
                  
                  7,930
                  
                  
                  
                  8.46
                  %
                  
                  
                  48,842
                  
                  
                  
                  14.48
                  %
                  
                  
                  21,987
                  
                  
                  
                  9.23
                  %Provision
      for income taxes
                  
                  
                  4,963
                  
                  
                  
                  3.90
                  %
                  
                  
                  1,409
                  
                  
                  
                  1.50
                  %
                  
                  
                  10,542
                  
                  
                  
                  3.13
                  %
                  
                  
                  3,821
                  
                  
                  
                  1.60
                  %Net
      income
                  
                  
                  18,772
                  
                  
                  
                  14.76
                  %
                  
                  
                  6,521
                  
                  
                  
                  6.96
                  %
                  
                  
                  38,300
                  
                  
                  
                  11.35
                  %
                  
                  
                  18,166
                  
                  
                  
                  7.63
                  %Other
      comprehensive income (loss)-
      foreign currency translation adjustments
                  
                  
                  48
                  
                  
                  
                  0.04
                  %
                  
                  
                  707
                  
                  
                  
                  0.76
                  %
                  
                  
                  39
                  
                  
                  
                  0.01
                  %
                  
                  
                  7,214
                  
                  
                  
                  3.03
                  %Comprehensive
      income
                  
                  $
                  18,820
                  
                  
                  
                  14.80
                  %
                  
                  $
                  7,228
                  
                  
                  
                  7.72
                  %
                  
                  $
                  38,339
                  
                  
                  
                  11.36
                  %
                  
                  $
                  25,380
                  
                  
                  
                  10.66
                  %Earnings
      per share - basic
                  
                  $
                  0.75
                  
                  
                  
                  
                  
                  
                  $
                  0.31
                  
                  
                  
                  
                  
                  
                  $
                  1.69
                  
                  
                  
                  
                  
                  
                  $
                  0.86Earnings
      per share - diluted
                  
                  $
                  0.73
                  
                  
                  
                  
                  
                  
                  $
                  0.31
                  
                  
                  
                  
                  
                  
                  $
                  1.66
                  
                  
                  
                  
                  
                  
                  $
                  0.86




19





Three
Months Ended September 30, 2009 and 2008





Net
sales





Net
sales, which consist of gross sales net of returns, for the three months ended
September 30, 2009 increased by 35.8% to $127.2 million from $93.7 million,
compared with the same period in 2008.





Net sales
of our wholesale and distribution segment increased by 29.8% to $117.5 million
from $90.5 million in the same period of 2008.  The increase was
mainly attributable to an increase of sales volume and ODM revenue and other
processing fee. For the three months ended September 30, 2009, ODM revenue
increased by $15.8 million to $19.1 million, as compared to $3.3 million for the
same period in 2008. 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
third quarter of 2009, the quantities sold for gold and platinum increased by
approximately 4% and 109%, respectively.





Net
wholesale and distribution sales segment for the three months ended September
30, 2009 and 2008 were comprised of the following:




Three Months Ended September
      30,2009
                          
                          
                          2008Amount in
                            Millions
                          
                          
                          Percentage
                          
                          
                          Amount in
                            Millions
                          
                          
                          PercentagePlatinum
                          
                          $
                          12.0
                          
                          
                          
                          10.2
                          %
                          
                          $
                          5.8
                          
                          
                          
                          6.4
                          %Gold
                          
                          
                          65.6
                          
                          
                          
                          55.8
                          
                          
                          
                          59.7
                          
                          
                          
                          66.0K-gold,
      Studded Jewelry and Diamond
                          
                          
                          20.8
                          
                          
                          
                          17.7
                          
                          
                          
                          21.7
                          
                          
                          
                          24.0ODM
                          
                          
                          19.1
                          
                          
                          
                          16.3
                          
                          
                          
                          3.3
                          
                          
                          
                          3.6Total
                          
                          $
                          117.5
                          
                          
                          
                          100
                          %
                          
                          $
                          90.5
                          
                          
                          
                          100
                          %





Revenue
from retail sales for the three months ended September 30, 2009 increased by
$6.5 million to $9.7 million, as compared to $3.2 million in the three months
ended September 30, 2008. The increase in retail revenue for the three months
ended September 30, 2009 is primarily due to the sales generated from the Temix
branded products which accounted for $5.8 million of this
increase.  Revenue derived from our retail segment during the three
months ended September 30, 2009 represented 7.7% of the total revenue, which
included $8.0 million of revenue from the Temix branded products and $1.7
million of revenue from the sale of FUQI branded products.





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 September 30, 2009
increased to $97.3 million, an increase of $14.6 million, or 17.7%, from $82.7
million for the same period in 2008.





Wholesale
and distribution cost of sales increased by $9.0 million, or 11.2%, in the third
quarter of 2009 to $89.7 million, as compared to $80.7 million for the third
quarter of 2008. The increase in the dollar amount of cost of 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.  As a percentage of net sales, the cost of sales increased at a
slower rate than the increase in net sales primarily because of the higher
contribution of ODM revenue.





Cost of
retail sales for the three months ended September 30, 2009 increased by $5.5
million to $7.5 million, as compared to approximately $2.0 for the same period
in 2008. The increase in the dollar amount of cost of retail sales for the three
months ended September 30, 2009 was primarily due to the increase in sales
volume.




20





Gross
profit





Gross
profit for the three months ended September 30, 2009 increased to $29.9 million,
an increase of $18.9 million, or 172%, from $11.0 million for the comparable
period in 2008. Gross profit margin increased to 23.5% for the three months
ended September 30, 2009, compared to 11.7% for the same period in 2008. The
increase in profit margin was mainly attributable to an opening of additional
jewelry counters and shops and an increase of product segments. In addition, the
launch of the hard gold series that attracted an increasing volume of
subcontracting contracts contributed to 13.5% increase in the gross profit
margin during the third quarter.





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 September
30, 2009 were approximately $3.9 million, an increase of $2.3 million, or 144%,
from $1.6 million for the comparable period in 2008. Selling and marketing
expenses were 3.1% of net sales for the three months ended September 30, 2009
compared to 1.7% for the three months ended September 30, 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
September 30, 2009 were $1.8 million, an increase of approximately $675,000 or
56.3%, from $1.2 million for the comparable period in 2008. General and
administrative expenses were 1.4% of net sales for the three months ended
September 30, 2009 compared to 1.2% for the three months ended September 30,
2008. The increase in general and administrative expenses as a percentage of net
sales was due to an increase of professional 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 $481,000 in the three months ended September 30, 2009 compared
to $355,000 for the three months ended September 30, 2008. The increase in other
expense, net was attributable to an increase of $267,000 in interest expense
partially offset by a $146,000 (RMB 1 million) subsidy by the PRC local
government to support the Company’s initial public offering.


Provision
for income tax




Provision
for income tax expense was $5.0 million for the three months ended September 30,
2009, an increase of $3.6 million, or 257%, from approximately $1.4 million for
the three months ended September 30, 2008. The increase was primarily due to an
increase in the taxable income for the three months ended September 30, 2009, in
addition to an increase in the statutory tax rate in 2009. Our effective tax
rate for the three months ended September 30, 2009 was 20.9%, an increase of 310
basis points from 17.8% for the same period in 2008.





Net
income




Net
income increased to $18.8 million for the three months ended September 30, 2009
from $6.5 million for the same period of the prior year, an increase of
189%.




21


Nine
Months Ended September 30, 2009 and 2008





Net
sales





Net sales
for the nine months ended September 30, 2009 increased by 41.7% to $337.4
million from $238.1 million, compared with the same period in 2008.





Net sales
of our wholesale and distribution segment increased by 31.7% to $306.8 million
from $233.0 million in the same period of 2008.  The increase was
mainly attributable to an increase of sales volume and ODM revenue. 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 nine months of 2009, the
quantities sold for gold and platinum increased by approximately 24% and 114%,
respectively, as compared to the same period in 2008.





Net
wholesale and distribution sales segment for the nine months ended September 30,
2009 and 2008 were comprised of the following:




Nine Months Ended September
    30,2009
                      
                      
                      2008Amount in
                        Millions
                      
                      
                      Percentage
                      
                      
                      Amount in
                        Millions
                      
                      
                      PercentagePlatinum
                      
                      $
                      27.9
                      
                      
                      
                      9.1
                      %
                      
                      $
                      17.3
                      
                      
                      
                      7.4
                      %Gold
                      
                      
                      202.1
                      
                      
                      
                      65.9
                      
                      
                      
                      155.7
                      
                      
                      
                      66.8K-gold,
      Studded Jewelry and Diamond
                      
                      
                      56.7
                      
                      
                      
                      18.4
                      
                      
                      
                      55.0
                      
                      
                      
                      23.7ODM
                      
                      
                      20.1
                      
                      
                      
                      6.6
                      
                      
                      
                      5.0
                      
                      
                      
                      2.1Total
                      
                      $
                      306.8
                      
                      
                      
                      100
                      %
                      
                      $
                      233.0
                      
                      
                      
                      100
                      %





Revenue
derived from our retail segment for the nine months ended September 30, 2009
increased by $25.5 million to $30.6 million, as compared to $5.1 million in the
nine months ended September 30, 2008. The increase in retail revenue for the
nine months ended September 30, 2009 is primarily due to the sales generated
from the Temix branded products which accounted for $21.9 million of this
increase.  Revenue derived from our retail segment during the nine
months ended September 30, 2009 represented 9.1% of the total revenue, which
included $24.2 million of revenue from the Temix branded products and $6.4
million of revenue from the sale of FUQI branded products.





Cost
of sales




Cost of
sales for the nine months ended September 30, 2009 increased to $272.0 million,
an increase of $60.8 million, or 28.8%, from $211.2 million for the same period
in 2008.





Wholesale
and distribution cost of sales increased by $42.7 million, or 20.6%, in the
first nine months of 2009 to $250.3 million, as compared to $207.6 million for
the first nine months of 2008. The increase in dollar amount of cost of 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.
As a percentage of net sales, the cost of sales increased at a slower rate than
the increase in net sales primarily because of the increase in ODM
revenue.





Cost of
retail sales for the nine months ended September 30, 2009 increased by $18.1
million to $21.7 million, as compared to approximately $3.6 for the same period
in 2008. The increase in the dollar amount of cost of retail sales for the nine
months ended September 30, 2009 was primarily due to the increase in sales
volume.





Gross
profit





Gross
profit for the nine months ended September 30, 2009 increased to $65.3 million,
an increase of $38.4 million, or 143%, from $26.9 million for the comparable
period in 2008. Gross profit margin increased to 19.4% for the nine months ended
September 30, 2009, compared to 11.3% for the same period in 2008. The increase
in profit margin was mainly attributable to an increase of product segments and
an expansion in retail sales, which resulted from an increase in brand
awareness, an opening of additional jewelry counters and shops.


22





Selling
and marketing expenses




Selling
and marketing expenses for the nine months ended September 30, 2009 were
approximately $9.7 million, an increase of $7.2 million, or 288%, from $2.5
million for the comparable period in 2008. Selling and marketing expenses were
2.9% of net sales for the nine months ended September 30, 2009 compared to 1.1%
for the nine months ended September 30, 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 for the nine months ended September 30, 2009 were
$5.7 million, an increase of $2.5 million or 78.1%, from $3.2 million for the
comparable period in 2008. General and administrative expenses were 1.7% of net
sales for the nine months ended September 30, 2009 compared to 1.4% for the nine
months ended September 30, 2008. The increase in general and administrative
expenses as a percentage of net sales was due to an increase of professional
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 $1.1 million in the nine months ended September 30, 2009
compared to $790,000 of other income, net in the nine months ended September 30,
2008. The decrease in other income was attributable to realized gain decreased
by $1.5 million from our gold future contract during the nine months ended
September 30, 2009. We have entered into the gold future contracts with our
supplier, The Shanghai Gold Exchange, since 2008, in an attempt to reduce our
exposure to volatility in the price of gold.





Provision
for income tax




Provision
for income tax expense was $10.5 million for the nine months ended September 30,
2009, an increase of $6.7 million, or 176%, from approximately $3.8 million for
the nine months ended September 30, 2008. The increase was primarily due to an
increase in the taxable income for the nine months ended September 30, 2009, in
addition to an increase in the statutory tax rate in 2009. Our effective tax
rate for the nine months ended September 30, 2009 was 21.6%, an increase of 420
basis points from 17.4% for the same period in 2008.





Net
income




Net
income increased to $38.3 million for the nine months ended September 30, 2009
from $18.2 million for the same period of the prior year, an increase of
110%.




LIQUIDITY
AND CAPITAL RESOURCES





At
September 30, 2009, we had retained earnings of $83.0 million, and cash of
$173.2 million. Our primary sources of cash are from operating activities,
borrowings from the bank, and issuance of common stock on August 5,
2009.




23


At
September 30, 2009, we had working capital of $280.7 million. Except for cash, a
majority of our net working capital consisted of inventories and accounts
receivable and advance to suppliers. Our inventories increased by 93.1%, our
advance to suppliers increased by 208% and our accounts receivable decreased by
0.2% as of September 30, 2009 as compared to December 31, 2008. The increase in
inventory and advance to suppliers 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 holiday selling season in the
fourth quarter. 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.     We typically
offer certain of our customers with 30-day credit terms but we also temporarily
extend credit terms to some of our customers with high credit standings and
during the sales peak season, such as the fourth quarter. 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 debt, 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 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
September 30, 2009, we had outstanding short-term notes payables with banks in
an aggregate amount of $48.3 million that are due and payable on dates between
January 2010 and August 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.





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 $22 million (RMB 150,000,000) as of September 30,
2009.  We executed notes payable with this bank under this facility
line with terms less than one year. This renewed facility is 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. As of September 30, 2009 and December 31, 2008, we have
approximately $22 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
approximately $7.3 million (RMB 50,000,000) as of December 31, 2008. This
facility and related guarantees which expired and were renewed in May 2009,
increased the maximum the Company could draw to $8.3 million (RMB57,000,000) as
of September 30, 2009 and is secured by certain real properties owned by
affiliate companies and guaranteed by affiliated companies.  Interest
is charged at the bank’s prime rate. As of September 30, 2009 and December 31,
2008, the outstanding balance was approximately $8.3 million and $7.3 million,
respectively, with interest rates ranging from 4.860% to 5.310%.





In June
2009, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to
approximately $6.3 million (RMB 43,000,000) as of September 30, 2009. This
facility expires in May 2010 and is secured by certain real properties owned by
affiliated companies and guaranteed by the Company’s controlling stockholder.
Interest is charged at the bank’s prime rate (5.310% at September 30, 2009). As
of September 30, 2009 and December 31, 2008, the outstanding balance was
approximately $6.3 million and $0, respectively.




24


In July
and August 2009, the Company entered into two Working Capital Loan Agreements in
an aggregate amount of $11,714,746 with the Industrial and Commercial Bank of
China.  These loans mature in July and August 2010, respectively, and
are guaranteed by an affiliated company, a third-party financing company, and
personally guaranteed by the Company’s controlling stockholder, up to a maximum
guarantee amount of $14.6 million (RMB100,000,000). As of September 30, 2009,
the outstanding balance was $11,714,746 with an interest rate based on China
People’s Bank’s base rate, which is subject to be revised
semi-annually.  The initial interest rate charged on these loans is
4.425%.





We did
not pay any cash dividends during the nine months ended September 30, 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.





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 in 2008 and the remaining $4.4 million being paid during the third quarter
in 2009. During the remainder 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.





On August
5, 2009, we closed an underwritten public offering of 5,581,395 shares of common
stock at a price per share of $21.50, raising proceeds, net of underwriting
discounts and commissions and estimated offering expenses, of approximately
$112.4 million.  The shares issued in the offering include 726,395
shares issued pursuant to the underwriters’ exercise of their over-allotment
option.





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 at least the next 12 months. During the next 12 months, we expect
to expend significant amounts of capital to support and grow our wholesale and
distribution business and expand our retail business. The sources of the funding
for our expected expenditures over the next 12 months include the net proceeds
from the August 2009 public offering, and our current cash and cash flow from
operations.  However, we may require additional cash resources due to
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 $22.2 million for the nine months ended
September 30, 2009, compared to net cash used for operating activities of $10.8
million for the same period in 2008. The $11.4 million increase in cash used for
operating activities was primarily due to an increase in inventory in the amount
of $41.3 million during the period ended September 30, 2009 compared to an
increase of $10.6 million during the same period in 2008, that was partially
offset by the $20.2 million increase in net income.





Investing activities -Net
cash used for investing activities amounted to $1.5 million for the nine months
ended September 30, 2009, compared to net cash used for investing activities of
$4.4 million for the nine months ended September 30, 2008. The change was due to
a decrease of $3.9 million of cash paid for business acquisition in
2008.




25


Financing activities - Net
cash provided by financing activities amounted to $140.4 million for the nine
months ended September 30, 2009, compared to net cash provided by financing
activities of $3.6 million for the nine months ended September 30, 2008. The
increase was primarily a result of net proceeds of $113.0 million raised from
our follow-on public offering of 5,581,395 shares of common stock and additional
bank borrowings of approximately $22.7 million in 2009.





Contractual Obligations





We enter
into operating leases for our retail locations. Other than the 7 retail stores
as of September 30, 2009, which operate under a monthly fixed rate of lease, all
counter 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 average monthly fixed rate
of each of the 7 retail stores is approximately $8,000. Since the transfer of
the legal titles of the stores into our name has not yet been completed, the
lease agreements of the 7 retail stores remain between the lessors and Shanghai
Tian Mei Jewelry Co. Ltd., and the operating lease commitment of these retail
stores are not included in the following table.





The
following table describes our contractual commitments and obligations as of
September 30, 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
                  
                  $
                  48,323,327
                  
                  
                  $
                  48,323,327
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Lease
      of Plant & Office
                  
                  $
                  129,506
                  
                  
                  $
                  45,946
                  
                  
                  $
                  83,560
                  
                  
                  $
                  -
                  
                  
                  $
                  -Lease
      of Staff Dormitory
                  
                  $
                  277,584
                  
                  
                  $
                  27,728
                  
                  
                  $
                  174,260
                  
                  
                  $
                  75,596
                  
                  
                  $
                  -$
                  48,730,417
                  
                  
                  $
                  48,397,001
                  
                  
                  $
                  257,820
                  
                  
                  $
                  75,596
                  
                  
                  $
                  -





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.


26





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 September 30, 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 September 30,
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.




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
      qualifications.





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.


27





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. Moreover, we also hired an international accounting firm to
      provide professional support to our internal control functions to achieve
      compliance of internal controls required by the Sarbanes-Oxley Act of
      2002.





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 third quarter of fiscal 2009 that have materially affected,
or are reasonably likely to materially affect our internal control over
financial reporting.





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. Other than 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 and as filed in our Quarterly Report on Form 10-Q
as of and for the periods ended June 30, 2009.





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




None.




28


ITEM
6 — EXHIBITS




(a)
Exhibits





21.1
                      List
      of Subsidiaries of the Registrant31.1
                      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.




29





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:
      November 9, 2009
                    By:
                    /s/  Yu Kwai
  ChongYu
      Kwai ChongChief
      Executive OfficerDate:
      November 9, 2009
                    By:
                    /s/  Ching Wan
    WongChing
      Wan WongChief
      Financial
Officer




30