**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, 2007





OR





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




FOR
      THE
      TRANSITION PERIOD FROM    _____________   TO
      _______________





**Commission
      File Number:**


**001-33758**


**FUQI
      INTERNATIONAL, INC.**


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





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





**86
      (755) 2580-1888**


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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
      (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days. Yes x No   o





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





Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x





As
      of
      November 6, 2007 the registrant had issued and outstanding 20,924,843 shares
      of
      common stock, par value $.001 per share.














**FUQI
      INTERNATIONAL, INC.**


**FORM
      10-Q QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





PART I
                : FINANCIAL INFORMATION
            PageITEM
                1 — FINANCIAL STATEMENTS
            1Condensed
                Consolidated Balance Sheets as of September 30, 2007 (unaudited) and
                December 31, 2006
            1Condensed
                Consolidated Statements of Income and Comprehensive Income for the
                Three
                Months and Nine Months Ended September 30, 2007 and 2006
                (unaudited)
            2Condensed
                Consolidated Statement of Cash Flows for the Nine Months Ended 
                September 30, 2007 and 2006 (unaudited)
            3Notes
                To Condensed Consolidated Financial Statements (unaudited)
            4ITEM
                2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATION
            14ITEM
                3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
                RISK
            24ITEM
                4 — CONTROLS AND PROCEDURES
            25PART II
                : OTHER INFORMATION
            26ITEM
                1 — LEGAL PROCEEDINGS
            26ITEM
                1A — RISK FACTORS
            26ITEM
                2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            27ITEM
                3 — DEFAULTS UPON SENIOR SECURITIES
            27ITEM
                4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            27ITEM
                5 — OTHER INFORMATION
            28ITEM
                6 — EXHIBITS
            28SIGNATURES
            29










i












**PART
      I - FINANCIAL INFORMATION**






**ITEM
      1 - FINANCIAL STATEMENTS**




**Fuqi
                International, Inc.****Condensed
                Consolidated Balance Sheets****September
                  30,**
            
            **December
                31,****2007**
            
            **2006****Assets**
            
            **(Unaudited)****Current
                assets:**Cash
            
            $
            16,097,286
            
            $
            13,354,981Restricted
                cash
            
            
            399,425
            
            
            -Accounts
                receivable, net of allowance for doubtful accounts of $363,000 as
                of
                September 30, 2007 and $195,000 as of December 31,
                2006
            
            
            13,955,656
            
            
            9,363,397Refundable
                value added taxes
            
            
            808,978
            
            
            -Inventories
            
            
            15,267,360
            
            
            6,066,213Prepaid
                expenses
            
            
            142,355
            
            
            89,362Deposits
            
            
            66,821
            
            
            -Deposits
                related to borrowings on notes payable
            
            
            -
            
            
            736,358Deferred
                taxes
            
            
            54,521
            
            
            29,198Total
                current assets
            
            
            46,792,402
            
            
            29,639,509**Property,
                equipment, and improvements,****net**
            
            
            1,187,212
            
            
            1,354,313**Deposits**
            
            
            95,023
            
            
            91,398**Deferred
                offering costs**
            
            
            218,042
            
            
            -**Other
                assets**
            
            
            38,520
            
            
            40,122$
            48,331,199
            
            $
            31,125,342**Liabilities
                and Stockholders' Equity****Current
                liabilities:**Notes
                payable
            
            $
            15,311,285
            
            $
            14,086,852Line
                of credit
            
            
            1,331,416
            
            
            -Accounts
                payable and accrued liabilities
            
            
            1,708,108
            
            
            215,092Accrued
                business tax
            
            
            1,501,111
            
            
            1,084,078Accrued
                estimated penalties
            
            
            1,163,592
            
            
            1,119,201Accrued
                value added taxes
            
            
            -
            
            
            133,010Customer
                deposits
            
            
            3,776,088
            
            
            1,234,424Due
                to stockholder
            
            
            -
            
            
            422,909Income
                tax payable
            
            
            3,157,477
            
            
            1,884,837Total
                current liabilities
            
            $
            27,949,077
            
            $
            20,180,403**Stockholders'
                equity:**Preferred
                stock, $0.001 par value, 5,000,000 shares authorized, none issued
                and
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 100,000,000 shares authorized as of September
                30,
                2007 and 75,000,000 shares authorized as of December 31, 2006; shares
                issued and outstanding - 12,835,955 shares as of September 30, 2007
                and
                12,257,624 shares as of December 31, 2006
            
            $
            12,836
            
            $
            12,258Additional
                paid in capital
            
            
            9,967,031
            
            
            7,212,130Accumulated
                foreign currency translation adjustments
            
            
            1,011,342
            
            
            432,125Retained
                earnings
            
            
            9,390,913
            
            
            3,288,426Total
                stockholders' equity
            
            $
            20,382,122
            
            $
            10,944,939$
            48,331,199
            
            $
            31,125,342


**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,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Net
                sales**
            
            $
            36,247,811
            
            $
            19,082,910
            
            $
            90,488,776
            
            $
            67,606,850**Cost
                of sales**
            
            
            31,771,214
            
            
            17,657,069
            
            
            79,794,797
            
            
            61,750,693**Gross
                profit**
            
            
            4,476,597
            
            
            1,425,841
            
            
            10,693,979
            
            
            5,856,157**Operating
                expenses:**Selling
                and marketing
            
            
            268,334
            
            
            112,108
            
            
            648,907
            
            
            327,968General
                and administrative
            
            
            539,153
            
            
            76,713
            
            
            1,700,751
            
            
            644,910Total
                operating expenses
            
            
            807,487
            
            
            188,821
            
            
            2,349,658
            
            
            972,878**Income
                from operations**
            
            
            3,669,110
            
            
            1,237,020
            
            
            8,344,321
            
            
            4,883,279**Other
                income (expenses):**Interest
                expense
            
            
            (384,406
            )
            
            (176,635
            )
            
            (914,182
            )
            
            (576,869
            )Interest
                income
            
            
            2,850
            
            
            -
            
            
            5,859
            
            
            -Change
                of fair value on inventory loan payable
            
            
            2,683
            
            
            -
            
            
            (45,692
            )
            
            -Miscellaneous
            
            
            88
            
            
            49
            
            
            5,702
            
            
            12,502Total
                other expenses
            
            
            (378,785
            )
            
            (176,586
            )
            
            (948,313
            )
            
            (564,367
            )**Income
                before provision for income taxes**
            
            
            3,290,325
            
            
            1,060,434
            
            
            7,396,008
            
            
            4,318,912**Provision
                for income taxes**
            
            
            560,026
            
            
            155,056
            
            
            1,293,521
            
            
            624,959**Net
                income**
            
            
            2,730,299
            
            
            905,378
            
            
            6,102,487
            
            
            3,693,953**Other
                comprehensive income**-
                foreign currency translation adjustments
            
            
            228,320
            
            
            94,943
            
            
            553,239
            
            
            165,582**Comprehensive
                income**
            
            $
            2,958,619
            
            $
            1,000,321
            
            $
            6,655,726
            
            $
            3,859,535**Earnings
                per share - basic**
            
            $
            0.21
            
            $
            0.08
            
            $
            0.49
            
            $
            0.33**Earnings
                per share - diluted**
            
            $
            0.21
            
            $
            0.08
            
            $
            0.42
            
            $
            0.33**Weighted
                average number of common shares -  basic**
            
            
            12,835,955
            
            
            11,175,543
            
            
            12,497,006
            
            
            11,175,543**Weighted
                average number of common shares - diluted**
            
            
            12,835,955
            
            
            11,175,543
            
            
            14,531,517
            
            
            11,175,543








**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,****2007**
            
            **2006****Cash
                flows provided by operating activities:**Net
                income
            
            $
            6,102,487
            
            $
            3,693,953**Adjustments
                to reconcile net income to net cash used for operating
                activities:**Depreciation
                and amortization
            
            
            242,160
            
            
            229,387Bad
                debt
            
            
            158,129
            
            
            (12,502
            )**Changes
                in operating assets and liabilities:**Accounts
                receivable
            
            
            (4,301,122
            )
            
            (331,054
            )Refundable
                value added taxes
            
            
            (929,785
            )
            
            (1,163,132
            )Inventories
            
            
            (8,795,197
            )
            
            (9,560,912
            )Inventory
                loan receivable
            
            
            -
            
            
            687,936Prepaid
                expenses
            
            
            (48,536
            )
            
            (54,840
            )Deposits
                - short term
            
            
            684,617
            
            
            (284,486
            )Deferred
                taxes
            
            
            (23,719
            )
            
            (21,242
            )Other
                current assets
            
            
            -
            
            
            2,189Deposits
            
            
            -
            
            
            18,966Deferred
                offering costs
            
            
            (217,674
            )Other
                assets
            
            
            3,061
            
            
            (23,283
            )Accounts
                payable, accrued expenses, accrued business tax and accrued
                penalties
            
            
            1,830,231
            
            
            235,018Customer
                deposits
            
            
            2,446,706
            
            
            (1,055,564
            )Income
                tax payable
            
            
            1,175,777
            
            
            501,463Net
                cash used for operating activities
            
            
            (1,672,865
            )
            
            (7,138,103
            )**Cash
                flows provided by (used for) investing
                activities:**Purchase
                of property, equipment and improvements
            
            
            (25,347
            )
            
            (20,864
            )Disbursements
                on loans to stockholder
            
            
            -
            
            
            (47,988,056
            )Proceeds
                from collections on loans to stockholder
            
            
            -
            
            
            54,983,415Decrease
                (Increase) in restricted cash
            
            
            (392,054
            )
            
            1,011,506Net
                cash provided by (used for) investing activities
            
            
            (417,401
            )
            
            7,986,001**Cash
                flows provided by (used for) financing
                activities:**Proceeds
                from short-term borrowing
            
            
            1,960,272
            
            
            -Loan
                from (repayment to) a non-related party
            
            
            -
            
            
            (991,326
            )Cash
                proceeds from exercise of warrants, net of financing cost
            
            
            2,755,479
            
            
            -Proceeds
                from loans borrowed from stockholder
            
            
            203,506
            
            
            -Repayments
              to loans payable to stockholder
            
            
            (642,295
            )Net
                cash provided by (used for) financing activities
            
            
            4,276,962
            
            
            (991,326
            )**Effect
                of exchange rate changes on cash**
            
            
            555,609
            
            
            201,619**Net
                increase (decrease) in cash**
            
            
            2,742,305
            
            
            58,191**Cash**,**beginning
                of the period**
            
            
            13,354,981
            
            
            71,479**Cash**,**end
                of the period**
            
            $
            16,097,286
            
            $
            129,670**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            904,194
            
            $
            573,541Income
                taxes paid
            
            $
            141,463
            
            $
            150,141**Non-cash
                activities:**Decrease
                in due from stockholder for dividend declared and paid
            
            $
            -
            
            $
            2,739,726




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




3


**FUQI
      INTERNATIONAL, INC.**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      (UNAUDITED)**








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





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





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





The
      accompanying condensed consolidated balance sheet as of December 31, 2006,
      which
      has been derived from the audited consolidated financial statements and the
      accompanying unaudited condensed consolidated financial statements have been
      prepared pursuant to the rules and regulations of the Securities and Exchange
      Commission. Certain information and note disclosures normally included in annual
      financial statements prepared in accordance with accounting principles generally
      accepted in the United States of America have been condensed or omitted pursuant
      to those rules and regulations, although the company believes that the
      disclosures made are adequate to make the information not misleading. In
      the
      opinion of the management, these condensed consolidated financial statements
      reflect all adjustments which are of a normal recurring nature and which are
      necessary to present fairly the financial position of Fuqi as of September 30, 2007
      and the results of operations for the three months and nine months
      ended September 30, 2007
      and 2006 and the cash flows for the nine month
      periods ended September 30, 2007
      and 2006. 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, 2006. The
      results of operations for the three months and nine months
      ended September 30, 2007
      are not necessarily indicative of the results which may be expected for the
      entire fiscal year. The preparation of condensed consolidated financial
      statements in conformity with accounting principles generally accepted in the
      United States of America requires us to make estimates and assumptions that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenue and expenses during the reporting period. Actual
      results could differ from those estimates.





**Reverse
      Stock Split**







On
      August
      23, 2007, the Company’s Board of Directors unanimously authorized a 1.69-to-1
      reverse stock split of the Company’s common stock. The reverse stock split
      became effective on October 22, 2007. All references to shares in the condensed
      consolidated financial statements and the accompanying notes, including but
      not
      limited to the number of shares and per share amounts, unless otherwise noted,
      have been adjusted to reflect the reverse stock split retroactively. Previously
      awarded warrants to purchase the Company’s common shares have been also
      retroactively adjusted to reflect the reverse stock split.







**Consolidation
      Policy**





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




4




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


**Cost
      of Sales**





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





**Operating
      Costs**





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





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





**Revenue
      Recognition**





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





·
            persuasive
                evidence of an arrangement exists;


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


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


·
            collectibility
                is reasonably assured.





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





**Currency
      Reporting**





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





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




5




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


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





**Basic
      and Diluted Earnings Per Share**





In
      accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
      per common share is computed by dividing net earnings (loss) available to common
      stockholders by the weighted average number of common shares outstanding.
      Diluted earnings (loss) per common share is computed similarly to basic earnings
      (loss) per common share, except that the denominator is increased to include
      the
      number of additional common shares that would have been outstanding if the
      potential common shares had been issued and if the additional common shares
      were
      dilutive. In accordance with the Visitalk Plan (See Note 7), the Company issued
      six series of common stock purchase warrants allowing holders to purchase
      additional shares of common stock (“Plan Warrants”). As of December 31, 2006,
      the Company had common stock equivalents of 9,968,628 shares upon the exercise
      of the plan warrants. The Company delivered a notice of redemption to the
      warrant holders in May 2007, and all of the warrants were either exercised
      or
      redeemed and cancelled in June 2007. The computation of dilutive potential
      common shares for the periods is shown as follows:





Three
                Months Ended
              September30,
            
            Nine
                Months Ended
              September30,2007
            
            2006
            
            2007
            
            2006Basic
                weighted average shares
            
            
            12,835,955
            
            
            11,175,543
            
            
            12,497,006
            
            
            11,175,543Effect
                of dilutive securities - warrants
            
            
            -
            
            
            -
            
            
            2,034,511
            
            
            -Dilutive
                potential common shares
            
            
            12,835,955
            
            
            11,175,543
            
            
            14,531,517
            
            
            11,175,543











**Restricted
      Cash**





As
      of September 30,
      2007, the Company was required to maintain a fixed deposit of $39 9 , 425 as a
      condition to borrow under a bank loan agreement. The amount was classified
      as
      restricted cash as of September 30,
      2007.





**New
      Accounting Pronouncements**




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




6


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





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





A
      summary
      of inventory is as follows:




September30,
              2007
            
            December
                31,
              2006Raw
                materials
            
            $
            11,349,334
            
            $
            743Work
                in process
            
            
            1,608,340
            
            
            3,917,795Finished
                goods
            
            
            2,309,686
            
            
            2,147,675$
            15,267,360
            
            $
            6,066,213











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





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




September30,
                2007
              
              December
                  31,
                2006Production
                  equipment
              
              $
              992,947
              
              $
              950,479Computers
              
              
              15,996
              
              
              14,976Office
                  equipment and furniture
              
              
              110,588
              
              
              101,289Automobiles
              
              
              264,949
              
              
              254,841Leasehold
                  improvements
              
              
              413,573
              
              
              382,963Building
              
              
              566,884
              
              
              545,2572,364,937
              
              
              2,249,805Less
                  accumulated depreciation and amortization
              
              
              1,177,725
              
              
              895,492$
              1,187,212
              
              $
              1,354,313


Depreciation
      and amortization expense for property, equipment, and improvements amounted
      to
      approximately $82,469 and $77,629 for the three months ended
      September  30,
      2007
      and 2006, respectively, and $242,160 and $229,387 for the nine months ended
      September  30,
      2007
      and 2006, respectively.








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





In
      April
      2007, the Company entered into a transfer agreement with an unrelated party
      (the
“Transferor”), which has operation agreements with department stores for five
      jewelry retail counters. Under the terms of the agreement, the Transferor agreed
      to assign all of the operation rights to the Company for a fee of $400,000.
      The
      fee is payable in three separate installments. The first payment of $120,000
      is
      due upon completion of the transfer of the operation rights by the department
      stores to the Company. The second installment of $120,000 is due within 30
      days
      after the remittance of the first installment while the final installment of
      $160,000 is due within 90 days after the remittance of the first installment.
      The Company recorded an amortization of this fee in the amount of $67,000 during
      the three months and nine months ended September 30, 2007. The expense was
      computed based on the total fee amount over a 36-month amortization period
      which
      is the estimated useful life assessed by the management. Such estimate could
      change upon the agreement being finalized.




7




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






The
      Company obtained temporary operation rights from the Transferor to operate
      these
      counters since May 1, 2007. The Transferor is still in the progress of
      negotiating the transfer of operation rights to the Company with these
      department stores. As of November 8, 2007, the Company has not yet received
      formal operation rights transfer agreements but has received verbal
      confirmations from the department stores.








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





In
      February 2007, the Company entered into a facility line of credit with a bank.
      Under the terms of the agreement, the Company can borrow a maximum amount of
      $1,997,124 and each of the borrowings cannot be less than $133,142 and have
      a
      maturity of more than 90 days. This facility line of credit expires in February
      2012 and is secured by an affiliated company and certain real properties owned
      by an affiliated company. Interest is charged at 1.2 times the bank’s prime rate
      (7.776% at September  30,
      2007). The facility line of credit agreement has certain conditions that the
      Company must fulfill prior to the withdrawals in order to continue to borrow
      from the bank, including execution of the fixed deposit agreement and
      maintaining approximately $666,000 (RMB 5,000,000) in fixed deposit with this
      bank. The bank has allowed the Company to draw on the line of credit without
      fulfilling these conditions. The facility line of credit agreement also has
      certain restrictions and covenants with which the Company must comply during
      the
      term of the agreement. The outstanding balance as of September  30,
      2007
      was $1,331,416.








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




As
      of
      September  30,
      2007
      and December 31, 2006, outstanding notes payable to the bank consisted of loan
      agreements that are covered by a Maximum Banking Facility Agreement dated August
      24, 2006 with the
      Agricultural Bank of China which
      was
      renewed on September 27, 2007. Under this agreement, the maximum facility
      amount, which was $13,314,161 at September  30,
      2007
      and $12,806,229 at December 31, 2006 (RMB100,000,000), is secured by the
      Company’s inventories. The amounts borrowed under the agreement are guaranteed
      by certain affiliated companies, real estate properties owned by affiliated
      companies, and personally guaranteed by the controlling stockholder of the
      Company. The Bank Facility Agreement has certain restrictions and covenants.
      The
      Company has been in compliance with these restrictions and covenants since
      the
      execution of the agreement. As of September  30,
      2007
      and December 31, 2006, the Company had outstanding loan balances with this
      bank
      totaling $13,314,161 and $12,806,229, respectively.




8


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





September30,
              2007
            
            December
                31,
              2006A
                note payable with interest at a rate of 5.76%, secured by certain
                real
                estate properties owned by an affiliated company, matured in January
                2007.
                The loan was repaid upon maturity and replaced by another loan.
            
            $
            -
            
            $
            1,280,623Two
                notes payable with interest at a rate of 5.85%, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matured in February 2007. The loan was repaid upon maturity
                and replaced by another loan.
            
            
            -
            
            
            2,561,246Four
                notes payable with interest at a rate of 5.832%, secured by certain
                real
                estate properties owned by an affiliated company and guaranteed by
                affiliated companies and personally guaranteed by the Company’s
                controlling stockholder, matured in January 2007. The loan was repaid
                upon
                maturity and replaced by another loan.
            
            
            -
            
            
            3,841,869A
                note payable with interest at a rate of 6.138%, guaranteed by affiliated
                companies and secured by certain real estate properties owned by
                an
                affiliated company, matured in March 2007. The loan was repaid upon
                maturity and replaced by another loan.
            
            
            -
            
            
            1,280,623A
                note payable with interest at a rate of 6.732%, guaranteed by affiliated
                companies and secured by certain real estate properties owned by
                an
                affiliated company and personally guaranteed by the Company’s controlling
                stockholder, matured in July 2007. The loan was repaid upon maturity
                and
                replaced by another loan.
            
            
            -
            
            
            960,467A
                note payable with interest at a rate of 6.732%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matured in September 2007. The loan was repaid upon
                maturity
                and replaced by another loan.
            
            
            -
            
            
            960,467A
                note payable with interest at a rate of 6.426%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matured in September 2007. The loan was repaid upon
                maturity
                and replaced by another loan.
            
            
            -
            
            
            1,024,498A
                note payable with interest at a rate of 6.426%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matured in October 2007. The loan was repaid upon maturity
                and replaced by another loan.
            
            
            931,991
            
            
            896,436A
                note payable with interest at a rate of 6.732%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in December 2007.
            
            
            1,331,416
            
            
            1,280,623




9




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




September30,
              2007
            
            
            December
                31,
              2006A
                note payable with interest at a rate of 6.732%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in January 2008.
            
            $
            1,797,412
            
            $
            -A
                note payable with interest at a rate of 6.732%, secured by guaranteed
                by
                affiliated companies and personally guaranteed by the Company’s
                controlling stockholder, matured in October 2007. The loan was repaid
                upon
                maturity and replaced with another note.
            
            
            1,331,416
            
            
            -A
                note payable with interest at a rate of 6.732%, guaranteed by affiliated
                companies, matures in January 2008.
            
            
            1,997,124
            
            
            -A
                note payable with interest at a rate of 6.732%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in November 2007.
            
            
            1,331,416
            
            
            -A
                note payable with interest at a rate of 7.227%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in February 2008.
            
            
            998,563
            
            
            -A
                note payable with interest at a rate of 7.227%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in February 2008.
            
            
            865,420
            
            
            -A
                note payable with interest at a rate of 6.633%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in December 2007.
            
            
            1,331,416
            
            
            -A
                note payable with interest at a rate of 6.03%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in January 2008.
            
            
            1,331,416
            
            
            -A
                note payable with interest at a rate of 6.03%, secured by certain
                real
                estate properties owned by affiliated companies, guaranteed by affiliated
                companies and personally guaranteed by the Company’s controlling
                stockholder, matures in February 2008.
            
            
            2,063,695
            
            
            -$
            15,311,285
            
            $
            14,086,852






**(7)**
            **Stock
                Purchase Warrants:**







Fuqi
      was
      originally formed as part of the implementation of the Chapter 11 reorganization
      plan (the “Visitalk Plan”) of visitalk.com. In accordance with the Visitalk
      Plan, the Company issued six series of common stock purchase warrants allowing
      holders to purchase additional shares of common stock (“Plan Warrants”). Each
      Plan Warrant provides for the purchase of one share of common stock and is
      callable by the Company for a price of $.0001 per warrant at any time. The
      Plan
      Warrants are governed by a Warrant Agreement. In connection with the execution
      of the Share Exchange Agreement on November 20, 2006, four series of the Plan
      Warrants (series A, B, D and F) were called and expired. In substance, three
      of
      Visitalk Plan’s warrants were exchanged for each of the Company’s warrants.




10




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




Pursuant
      to the terms of the Warrant Agreement and Visitalk Plan, the Company delivered
      a
      notice of redemption to the warrant holders in May 2007, and upon expiration
      of
      the call period on June 8, 2007, series C warrants had been exercised for
      578,177 shares of the Company’s common stock for total gross proceeds of
      $2,931,360. The remaining unexercised warrants were redeemed at $0.0001 per
      share by the Company. No warrants remained outstanding after the closing of
      the
      call.





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





For
      the
      three months and nine months ended September 30, 2006, the Company earned
      certain cash revenues from its customers that were subsequently collected by
      its
      controlling stockholder. Approximate cash revenues amounting to $1,178,587
      and
      $3,914,158 were collected by its controlling stockholder for the three months
      and nine months ended September 30, 2006, respectively. Beginning December
      2006,
      the controlling stockholder is no longer collecting cash revenue on behalf
      of
      the Company and all the cash revenues are deposited through the Company’s bank
      accounts.





The
      Company’s controlling stockholder borrowed from the Company on a non-interest
      bearing and frequent basis since the inception of its operations. As of December
      31, 2006, the Company discontinued such practice and the balance was repaid
      to
      the Company in full. In aggregate, the Company loaned $22,348,322 and
      $73,175,364, during the three months and nine months ended September 30, 2006,
      respectively, and collected $23,277,389 and $79,915,486 during the three months
      and nine months ended September 30, 2006, respectively. The Company did not
      loan
      or collect any amounts to or from the controlling stockholder during the three
      or nine months ended September 30, 2007. Outstanding balance due from the
      controlling stockholder was $0 as of September 30, 2007 and December 31,
      2006.





The
      Company has borrowed from its controlling stockholder on a non-interest bearing
      basis to satisfy the Company’s short term capital needs since the inception of
      its operations. In aggregate, the Company borrowed $1,383 and $204,889 during
      the three months and nine months ended September 30, 2007, respectively, and
      repaid $4,359 and $646,654 during the three months and nine months ended
      September 30, 2007, respectively. The Company borrowed $255,237 from the
      controlling stockholder during the three months and nine months ended September
      30, 2006. Outstanding loan payables to the controlling stockholder amounted
      to
      $0 and $422,909 as of September 30, 2007 and December 31, 2006,
      respectively.





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




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





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




11




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






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





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





On
      April
      28, 2006, the Company filed an extension application to remit these outstanding
      tax liabilities no later than December 20, 2006, which was approved by the
      tax
      department in July 2006.





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





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





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








**(10)**
            **Subsequent
                Events:**




On
      October 22, 2007, the Company effected a 1.69 to 1 reverse stock split, which
      was approved by the Company’s Board of Directors on August 23,
      2007.




On
      October 22, 2007, the Fuqi International, Inc. 2007 Equity Incentive Plan (the
      “2007 Plan”) became effective. As previously disclosed in the Company’s
      Definitive Information Statement on Schedule 14C, on August 23, 2007, the
      Company’s Board of Directors adopted the 2007 Plan and the Company received the
      written consent of the holders of a majority of its outstanding common stock
      authorizing the 2007 Plan. Immediately prior to the adoption of the 2007 Plan,
      the Company cancelled and terminated its 2006 Equity Incentive Plan (``2006
      Plan''). There were no options or other securities outstanding under the 2006
      Plan at the time of termination and no future grants or issuance of securities
      may be made under the 2006 Plan.




12




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






On
      October 23, 2007, the Company publicly offered 7,033,816 shares of the Company’s
      common stock at $9.00 per share. On October 25, 2007, the Company’s underwriters
      elected to fully exercise their over-allotment option to purchase an additional
      1,055,072 shares of the Company’s common stock. In total, including the
      over-allotment shares, the Company sold 8,088,888 shares of the Company's common
      stock at $9.00 per share. The shares offered were listed and traded on the
      Nasdaq Global Market under the ticker symbol “FUQI”. After underwriting
      discounts and commissions and estimated offering costs, the Company received
      net
      proceeds of approximately $67.0 million.





On
      October 23, 2007, the Company granted each of its Chief Financial Officer and
      the Executive Vice President, Corporate Development, options to purchase 600,000
      shares of the Company’s common stock at $9.00 per share. Options to purchase
      200,000 shares of the Company’s common stock vested immediately upon grant and
      the remaining options to purchase 400,000 shares will vest in two equal annual
      installments over the 24-month period following the date of the grant.





On
      October 23, 2007, the Company also granted each of the Company’s four
      independent directors options to purchase 30,000 shares of the Company’s common
      stock at $9.00 per share. Of the options granted to each of the directors,
      options to purchase 15,000 shares of common stock vested immediately upon grant
      and the remaining options to purchase 15,000 shares will vest in equal quarterly
      installments over the one-year period following the date of the grant.





On
      August
      10, 2007, the Company received a notice from the tax department conditionally
      agreeing to exempt the Company’s tax liabilities in the amount of approximately
      $3 million on unreported design fee income for the period from the inception
      of
      the Company’s operations in 2001 to December 31, 2006, provided that the
      Company’s common stock is successfully listed on a major overseas stock exchange
      within 180 days from the date of the tax notice. The Company’s securities began
      trading on the Nasdaq Global Market on October 22, 2007. On November 8, 2007,
      the Company received a confirmation notice from the tax department to exempt
      the
      tax liability.




13




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




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





**Overview**




We
      are a
      leading designer of high quality precious metal jewelry in China, developing,
      promoting, and selling a broad range of products in the large and rapidly
      expanding Chinese luxury goods market. Our products consist of a range of unique
      styles and designs made from precious metals such as platinum, gold, and Karat
      gold (K-gold), as well as diamonds and other precious stones.  We
      continuously innovate and change our designs based upon consumer trends in
      China. By continuously creating new designs and rapidly bringing them to market,
      we are able to differentiate ourselves from our competitors and strengthen
      our
      brand identity. Our design database presently contains approximately 27,000
      unique products.




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




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




We
      expect
      to expend significant resources to commence our planned retail distribution
      of
      our manufactured jewelry in China. We will require substantial funds in order
      to
      finance our planned retail distribution, fund operating expenses, to develop
      manufacturing, marketing and sales capabilities and to cover public company
      costs. In addition to the funds required to open retail locations, additional
      working capital will be needed to operate retail locations due to longer sales
      and collection cycles and higher inventory levels required to support retail
      stores. We also expect to require substantial funds to change our product mix
      to
      include more platinum products. Without these funds, we may not be able to meet
      these goals. Also, we expect our general and administrative costs to
      substantially increase due to higher salaries to be paid to our executive
      officers further to employment agreements we entered into that became effect
      upon the closing of our public offering in October 2007.




14




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




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




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




**Corporate
      History**





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





On
      November 20, 2006, Fuqi BVI entered into a share exchange agreement with VT
      Marketing Services, Inc. (“VT”) and Mr. Yu Kwai Chong, who is our current Chief
      Executive Officer and Chairman of the Board of the Directors, to effect a
      reverse merger transaction (the “Reverse Merger”). Pursuant to the Reverse
      Merger, Mr. Chong, as the sole shareholder of Fuqi BVI, agreed to exchange
      all
      of his shares of Fuqi BVI for shares of VT and VT agreed to acquire all of
      the
      issued and outstanding capital stock of Fuqi BVI. VT was formed as part of
      the
      implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of
      visitalk.com, Inc., which became effective on September 17, 2004. The Reverse
      Merger closed on November 22, 2006 and VT issued an aggregate of 11,175,543
      shares of common stock in exchange for all of the issued and outstanding
      securities of Fuqi BVI. Upon the close of the Reverse Merger, VT became the
      100%
      parent of Fuqi BVI and assumed the operations of Fuqi BVI and its subsidiary
      as
      its sole business. On November 8, 2006, VT reincorporated from Arizona to Nevada
      and on December 8, 2006, after the Reverse Merger, VT reincorporated from the
      Nevada to Delaware and changed its corporate name from “VT Marketing Services,
      Inc.” to “Fuqi International, Inc.” The transactions contemplated by the Reverse
      Merger were intended to be a “tax-free” transaction pursuant to the provisions
      of Section 351 of the Internal Revenue Code of 1986, as amended.




15




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








**Critical
      Accounting Policies, Estimates and Assumptions**





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





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





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





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





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





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




16





**Taxation**





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





Under
      current tax laws in China, the usual statutory income tax rate applicable to
      PRC
      companies is 33%. Fuqi China currently enjoys a reduced enterprise income tax
      rate of 15%, which is granted to all enterprises operating in the Shenzhen
      Special Economic Zone. Prior to 2006, we were under the preferential income
      tax
      rate of 7.5% in 2005 and 2004, due to our status of being a new business. That
      status expired effective January 1, 2006. Our effective income tax rates for
      the
      three months ended September 30, 2007 and September 30, 2006, were 17.0% and
      14.6%, respectively, and for the nine months ended September 30, 2007 and
      September 30, 2006 were 17.5% and 14.5%, respectively. On March 16, 2007, the
      National People’s Congress of China enacted a new PRC Enterprise Income Tax Law,
      under which foreign invested enterprises and domestic companies will be subject
      to enterprise income tax at a uniform rate of 25%. The new law will become
      effective on January 1, 2008. We anticipate that as a result of the new EIT
      law,
      our income tax rates will rise to 25%, which could adversely affect our
      financial condition and results of operations.




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





We
      failed
      to report a cumulative amount of approximately $26 million in cash revenues
      related to design fees for the period from the inception of Fuqi China in 2001
      to June 30, 2007. In April 2006, the Shenzhen local tax department levied a
      $1.8
      million assessment against us for unpaid business taxes, fees, and income taxes
      related to these unreported cash revenues up to the period from inception to
      December 31, 2005. The assessment was originally due at the end of April 2006
      and subject to 0.05% per day of interest and penalties thereafter. On April
      28,
      2006, we filed for an extension of the deadline to remit these outstanding
      taxes
      payable to December 20, 2006, and the extension request was approved by the
      tax
      department in July 2006. On December 28, 2006, Shenzhen City Tax Bureau granted
      a further extension to us from December 20, 2006 to April 25, 2007. On April
      25,
      2007, we appointed a Registered Tax Agent to apply on our behalf for a special
      reduction or exemption for the unpaid tax liabilities for the period from
      inception to December 31, 2006. On May 14, 2007, we received a notice from
      the
      Shenzhen tax department accepting our application for a tax reduction or
      exemption and were granted an additional period to remit our outstanding tax
      liabilities until August 9, 2007. The tax department agreed not to assess any
      interest and penalties during this review process until August 9, 2007. As
      of
      September 30, 2007, we had an accrual of approximately $3.8 million in tax
      liabilities representing business tax and fees of 5.2% and income tax on the
      unreported design revenues since inception  and
      an
      accrual of approximately $1.2 million in estimated penalties. In July 2007,
      we
      began to report the income taxes and business taxes on design revenues to the
      tax authority. On August 10, 2007, we received a notice from the tax department
      that conditionally agreeing to exempt our tax liabilities in the amount of
      approximately $3 million on unreported design fee income for the period from
      the
      inception of our operations in 2001 to December 31, 2006, provided that our
      common stock is successfully listed on a major overseas stock exchange within
      180 days from the date of the tax notice. On
      November 8, 2007, we received a confirmation notice from the tax department
      to
      exempt our tax liability.




17




**Equity
      Financings**





On
      May 8,
      2007, we issued a notice of redemption for two outstanding series of warrants
      in
      our company. The warrants allowed holders to purchase up to
      9,968,628  shares
      of
      common stock. As of June 9, 2007, we issued a total of 578,177 shares of common
      stock to exercising holders of Series C Warrants and received gross cash
      proceeds of $2,931,360 from the exercising warrant holders. No warrants remained
      outstanding after closing of redemption.





On
      October 23, 2007, we publicly offered 7,033,816 shares of our common stock
      at
      $9.00 per share. On October 25, 2007, our underwriters elected to fully exercise
      their over-allotment option to purchase an additional 1,055,072 shares of our
      common stock. In total, including the over-allotment shares, we sold 8,088,888
      shares of our common stock at $9.00 per share. After underwriting discounts
      and
      commissions and estimated offering costs, we received net proceeds of
      approximately $67.0 million.








**Impact
      of Recent Currency Exchange Rate Increase**





We
      use
      the U.S. dollar as the reporting currency for our financial statements. Our
      operations are conducted through our PRC operating subsidiary, Fuqi China,
      and
      our functional currency is the RMB. On July 21, 2005, the PRC government changed
      its policy of pegging the value of the RMB to the U.S. dollar and, as a result,
      the RMB has appreciated against the U.S. dollar by approximately 9.7% from
      1:8.27 on July 21, 2005 to 1:7.4692 on October 31, 2007.  In
      converting our RMB income statement amounts into U.S. dollars we used the
      following RMB/$ exchange rates: 7.751 and
      7.652 ,
      respectively, for the three months and
      nine months
      ended September 30,
      2007, and 8.049 and
      7.999 ,
      respectively, for the three months and
      nine
      months ended September 30,
      2006. Our operating results have benefited in 2006 and, thus far, in 2007,
      and
      our financial results for the balance of 2007 are likely to benefit, as a result
      of appreciation of the RMB against the U.S. dollar. There is no guarantee that
      we will benefit from the exchange rate in the future and our operations may
      suffer if a less favorable exchange rate develops.




18




**Results
      of Operations**





The
      following table sets forth our condensed consolidated statements of operations
      for the three months and nine months ended September 30, 2007 and 2006
      (unaudited):





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**In
                Dollars
            
            Percent
                of Revenue
            
            In
                Dollars
            
            Percent
                of Revenue
            
            In
                Dollars
            
            Percent
                of Revenue
            
            In
                Dollars
            
            Percent
                of Revenue***(in
                thousands, except share amounts and earnings per
                share)*****Net
                sales**
            
            $
            36,248
            
            
            100.0
            %
            $
            19,083
            
            
            100.0
            %
            $
            90,489
            
            
            100.0
            %
            $
            67,607
            
            
            100.0
            %**Cost
                of sales**
            
            
            31,771
            
            
            87.6
            %
            
            17,657
            
            
            92.5
            %
            
            79,795
            
            
            88.2
            %
            
            61,751
            
            
            91.3
            %**Gross
                profit**
            
            
            4,477
            
            
            12.4
            %
            
            1,426
            
            
            7.5
            %
            
            10,694
            
            
            11.8
            %
            
            5,856
            
            
            8.7
            %**Operating
                expenses**Selling
                and marketing
            
            
            268
            
            
            0.7
            %
            
            112
            
            
            0.6
            %
            
            649
            
            
            0.7
            %
            
            328
            
            
            0.4
            %General
                and administrative
            
            
            539
            
            
            1.5
            %
            
            77
            
            
            0.4
            %
            
            1,701
            
            
            1.9
            %
            
            645
            
            
            1.0
            %Total
                operating expenses
            
            
            807
            
            
            2.2
            %
            
            189
            
            
            1.0
            %
            
            2,350
            
            
            2.6
            %
            
            973
            
            
            1.4
            %**Income
                from operations**
            
            
            3,670
            
            
            10.2
            %
            
            1,237
            
            
            6.5
            %
            
            8,344
            
            
            9.2
            %
            
            4,883
            
            
            7.3
            %**Other
                income (expenses):**Interest
                expense
            
            
            (384
            )
            
            (1.1
            %)
            
            (177
            )
            
            (0.9
            %)
            
            (914
            )
            
            (1.0
            %)
            
            (577
            )
            
            (1.0
            %)Interest
                income
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            6
            
            
            -
            
            
            -Change
                of fair value of inventory loan payable
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            (46
            )
            
            -
            
            
            -Miscellaneous
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            6
            
            
            -
            
            
            13
            
            
            0.1
            %Total
                other income (expenses)
            
            
            (380
            )
            
            (1.1
            %)
            
            (177
            )
            
            (0.9
            %)
            
            (948
            )
            
            (1.0
            %)
            
            (564
            )
            
            (0.9
            %)**Income
                before provision for income taxes**
            
            
            3,290
            
            
            9.1
            %
            
            1,060
            
            
            5.6
            %
            
            7,396
            
            
            8.2
            %
            
            4,319
            
            
            6.4
            %**Provision
                for income taxes**
            
            
            560
            
            
            1.6
            %
            
            155
            
            
            0.9
            %
            
            1,294
            
            
            1.5
            %
            
            625
            
            
            0.9
            %**Net
                income**
            
            
            2,730
            
            
            7.5
            %
            
            905
            
            
            4.7
            %
            
            6,102
            
            
            6.7
            %
            
            3,694
            
            
            5.5
            %**Other
                comprehensive income -**foreign
                currency translation adjustments
            
            
            229
            
            
            0.7
            %
            
            95
            
            
            0.5
            %
            
            554
            
            
            0.7
            %
            
            166
            
            
            0.2
            %**Comprehensive
                income**
            
            $
            2,959
            
            
            8.2
            %
            $
            1,000
            
            
            5.2
            %
            $
            6,656
            
            
            7.4
            %
            $
            3,860
            
            
            5.7
            %**Earnings
                per share - basic**
            
            $
            0.21
            
            
            
            
            $
            0.08
            
            
            
            
            $
            0.49
            
            
            
            
            $
            0.33**Earnings
                per share - diluted**
            
            $
            0.21
            
            
            
            
            $
            0.08
            
            
            
            
            $
            0.42
            
            
            
            
            $
            0.33**Dividend
                per share - basic**
            
            $
            -
            
            
            
            
            $
            0.24
            
            
            
            
            $
            -
            
            
            
            
            $
            0.24**Dividend
                per share - diluted**
            
            $
            -
            
            
            
            
            $
            0.24
            
            
            
            
            $
            -
            
            
            
            
            $
            0.24**Weighted
                average number of common shares - basic**
            
            
            12,835,955
            
            
            
            
            
            11,175,543
            
            
            
            
            
            12,497,006
            
            
            
            
            
            11,175,543**Weighted
                average number of common shares -diluted**
            
            
            12,835,955
            
            
            
            
            
            11,175,543
            
            
            
            
            
            14,531,517
            
            
            
            
            
            11,175,543







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





Net
      sales, which consist of gross sales net of returns, for the three months ended
      September 30, 2007 increased to $36.2 million, an increase of $17.1 million,
      or
      89.5%, from net sales of $19.1 million for the three months ended September
      30,
      2006. The increase in net sales for the three months ended September 30, 2007
      was primarily the result of an increase in the quantity of jewelry products
      sold, in addition to an increase in our prices, which included the price of
      precious metals, our processing fees and our design fees. The increase was
      also
      due to increased marketing of our products to existing and potential customers
      and increased advertising coverage.




19




Net
      sales
      for the three months ended September 30, 2007 and 2006 were comprised of the
      following:




**Three
                Months Ended September 30,****2007**
            
            **2006****Amount
                in Millions**
            
            **Percentage**
            
            **Amount
                in Millions**
            
            **Percentage****Platinum**
            
            $
            8.7
            
            
            24.0
            %
            $
            4.8
            
            
            25.2
            %**Gold**
            
            
            22.1
            
            
            61.0
            
            
            8.7
            
            
            45.5**K-gold
                and Studded Jewelry**
            
            
            5.4
            
            
            15.0
            
            
            5.6
            
            
            29.3**Total**
            
            $
            36.2
            
            
            100.0
            %
            $
            19.1
            
            
            100.0
            %




Cost
      of
      sales is mainly comprised of costs of raw materials, primarily gold and
      platinum, in addition to direct manufacturing costs and factory overhead. Cost
      of sales for the three months ended September 30, 2007 increased to $31.8
      million, an increase of $14.1 million, or 79.7%, from $17.7 million for the
      same
      period in 2006. The increase was primarily due to an increase in net sales
      and
      the cost of raw materials.





Gross
      profit for the three months ended September 30, 2007 increased to $4.5 million,
      an increase of $3.1 million, or 221.4%, from $1.4 million for the same period
      in
      2006. The gross margin for the three months ended September 30, 2007 was 12.4%,
      compared to 7.5% for the same period in 2006. The increase in the gross margin
      for the three months ended September 30, 2007 as compared to the same period
      in
      2006 was primarily due to increase in sales prices, which included our design
      fees and prices of precious metals.





Selling
      and marketing expenses are primarily comprised of business taxes, advertising
      expenses, traveling expenses, production costs of marketing materials,
      insurance, delivery expenses and retail related expenses. Selling and marketing
      expenses for the three months ended September 30, 2007 were approximately
      $268,000, an increase of $156,000, or 139.3%, from approximately $112,000 for
      the same period in 2006. The increase in selling and marketing expenses, except
      for business taxes, was primarily due to an increase in advertising 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, 2007 were approximately $539,000, an increase of $462,000, or
      600%, from $77,000 for the same period in 2006. The increase in general and
      administrative expenses was mainly due to an increase of professional fees
      incurred as a result of being a publicly reporting company in the United States
      since November 2006.





Interest
      expenses were approximately $384,000 for the three months ended September 30,
      2007, an increase of $207,000, or 116.9%, from approximately $177,000 for same
      period in 2006. The increase in interest expense was primarily a result of
      our
      increases in short term bank financing and increases in interest rates for
      the
      three months ended September 30, 2007.





Provision
      for income tax expense was approximately $560,000 for the three months ended
      September 30, 2007, an increase of $405,000, or 261.3%, from approximately
      $155,000 for the same period in 2006. The increase was primarily due to an
      increase in the taxable income for the three months ended September 30, 2007.





Net
      income increased to $2.7 million for the three months ended September 30, 2007
      from $0.9 million for the three months ended September 30, 2006, an increase
      of
      $1.8 million, or 200%.




20




Other
      comprehensive income, which consists of gains from foreign exchange
      translations, was approximately $228,000 for the three months ended September
      30, 2007, an increase of $133,000, or 140%, from approximately $95,000 during
      the same period of 2006. The increase was a result of continuous appreciation
      of
      the RMB exchange rate against the U.S. dollar.





**Nine
      Months Ended September 30, 2007 and 2006**





Net
      sales, which consist of gross sales net of returns, for the nine months ended
      September 30, 2007 increased to $90.5 million, an increase of $22.9 million,
      or
      33.9%, from net sales of $67.6 million for the nine months ended September
      30,
      2006. The increase in net sales for the nine months ended September 30, 2007,
      was primarily the result of an increase in the quantity of products sold. During
      the nine month period ended September 30, 2007, quantity of gold jewelry sold
      and quantity of platinum jewelry sold increased by approximately 172% and 168%,
      respectively, as compared to the same period of 2006. The increase was also
      due
      to increased marketing of our products to existing and potential customers
      and
      increased advertising coverage.





Net
      sales
      for the nine months ended September 30, 2007 and 2006 were comprised of the
      following:




**Nine
                months Ended September 30,****2007**
            
            **2006****Amount
                in Millions**
            
            **Percentage**
            
            **Amount
                in Millions**
            
            **Percentage****Platinum**
            
            $
            20.7
            
            
            22.9
            %
            $
            14.7
            
            
            21.7
            %**Gold**
            
            
            50.4
            
            
            55.7
            
            
            30.8
            
            
            45.6**K-gold
                and Studded Jewelry**
            
            
            19.4
            
            
            21.4
            
            
            22.1
            
            
            32.7**Total**
            
            $
            90.5
            
            
            100.0
            %
            $
            67.6
            
            
            100.0
            %




Cost
      of
      sales is mainly comprised of costs of raw materials, primarily gold and
      platinum, in addition to direct manufacturing costs and factory overhead. Cost
      of sales for the nine months ended September 30, 2007 increased to $79.8
      million, an increase of $18.0 million, or 29.1%, from $61.8 million for the
      same
      period in 2006. The increase was primarily due to the increase in net sales
      for
      the nine months ended September 30, 2007.





Gross
      profit for the nine months ended September 30, 2007 increased to $10.7 million,
      an increase of $4.8 million, or 81.4%, from $5.9 million for the same period
      in
      2006. The gross margin for the nine months ended September 30, 2007 was 11.8%,
      compared to 8.7% for the same period in 2006. The increase in the gross margin
      for the nine months ended September 30, 2007 as compared to the same period
      in
      2006 was primarily due to an increase in prices and increase in sales of
      platinum products.





Selling
      and marketing expenses are primarily comprised of business taxes, advertising
      expenses, traveling expenses, production costs of marketing materials,
      insurance, delivery expenses and retail related expenses. Selling and marketing
      expenses for the nine months ended September 30, 2007 were approximately
      $649,000, an increase of $321,000, or 97.9%, from $328,000 for the same period
      in 2006. The increase in selling and marketing expenses, except for business
      taxes, was primarily due to an increase in advertising expenses and an increase
      in insurance coverage for product delivery.





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 nine months ended
      September 30, 2007 were $1.7 million, an increase of $1.1 million, or 183.3%,
      from $0.6 million for the same period in 2006. The increase in general and
      administrative expenses was mainly due to an increase of professional fees
      incurred for the Company being a publicly reporting company in the United States
      since November 2006. In addition, we granted our Chief Financial Officer a
      one-time discretionary bonus of $89,411 in connection with the exercise of
      warrant during the second quarter of 2007.




21




Interest
      expenses were approximately $914,000 for the nine months ended September 30,
      2007, an increase of $337,000, or 58.4%, from $577,000 for same period in 2006.
      The increase in interest expense was primarily a result of our increases in
      short term bank financing and increase in interest rates for the nine months
      ended September 30, 2007.





Provision
      for income tax expense was approximately $1.3 million for the nine months ended
      September 30, 2007, an increase of $0.7 million, or 116.7%, from approximately
      $0.6 million for the same period in 2006. The increase was primarily due to
      an
      increase in the taxable income for the nine months ended September 30,
      2007.





Net
      income increased to $6.1 million for the nine months ended September 30, 2007
      from $3.7 million for the nine months ended September 30, 2006, an increase
      of
      $2.4 million, or 64.9%.





Other
      comprehensive income, which consists of gains from foreign exchange
      translations, was approximately $553,000 for the nine months ended September
      30,
      2007, an increase of $387,000, or 233.1%, from $166,000 for the nine months
      ended September 30, 2006. The increase was a result of continuous appreciation
      of the RMB exchange rate against the U.S. dollar.




**Liquidity
      and Capital Resources**





At
      September 30, 2007, we had retained earnings of $9.4 million and had cash of
      $16.1 million. We have historically financed our operations with cash flows
      generated from operations, as well as through the borrowing of long-term or
      short-term bank loans. In addition, prior to December 31, 2006, we borrowed
      from
      our controlling stockholder for short term working capital
      requirements.





On
      October 23, 2007, we publicly offered 7,033,816 shares of our common stock
      at
      $9.00 per share. On October 25, 2007, our underwriters elected to fully exercise
      their over-allotment option to purchase an additional 1,055,072 shares of our
      common stock. In total, including the over-allotment shares, we sold 8,088,888
      shares of our common stock at $9.00 per share. After underwriting discounts
      and
      commissions and estimated offering costs, we received net proceeds of
      approximately $67.0 million.





At
      September 30, 2007, we had outstanding facility lines of credit and short-term
      notes payables with banks in an aggregate amount of $16.6 million, consisting
      of
      $15.3 million in short-term notes payable to banks and $1.3 million in facility
      lines of credit. Our loans are secured by real properties of our affiliates,
      and
      guaranteed by our affiliates and our controlling stockholder.





We
      have a
      general banking facility line of credit with Agricultural Bank of China pursuant
      to a Maximum Banking Facility Agreement dated September 27, 2007. The terms
      of
      the agreement enable us to borrow up to a maximum amount of $13.3 million.
      Maturity dates for each withdrawal typically range from three to twelve months
      and are agreed to by the parties at the time of withdrawal. As of September
      30,
      2007, we had $13.3 million outstanding under the facility, with interest rates
      ranging from 6.030% to 7.227%. In addition, we have a line of credit and a
      bank
      loan from China Construction Bank and DBS Bank. As of September 30, 2007, we
      had
      $3.3 million outstanding with interest rates ranging from 6.732%
      to
      7.776%  from
      the
      DBS Bank and line of credit and a bank loan from China Construction Bank.
      Amounts borrowed under the banking facility lines of credit are secured by
      certain real properties of our affiliates, and guaranteed by our affiliates
      and
      personally guaranteed by our controlling stockholder. The loan agreements
      contain certain restrictions and covenants. We do not guarantee any indebtedness
      of our affiliates. The amounts outstanding under these lines of credit and
      bank
      loans are presented in our condensed
      consolidated financial
      statements as notes payable and line of credit. For additional information,
      see
      Note 5 and Note 6 to the condensed consolidated financial statements contained
      in this quarterly report.




22




Prior
      to
      the Reverse Merger, our then sole stockholder, Mr. Yu Kwai Chong, who is also
      our President, Chief Executive Officer and Chairman of the Board, made loans
      to
      us on a regular basis to meet short term financing needs of our company.
      Typically, these advances were in amounts ranging from $30,000 to $5.5 million,
      with no more than $10.0 million outstanding at any time. We did not pay interest
      on any of these advances. During the same period, Mr. Chong borrowed from our
      company primarily to fund personal liquidity needs. We did not charge interest
      on any of these advances. Since the closing of the Reverse Merger, at which
      time
      Mr. Chong ceased to be our sole stockholder, we have not engaged in any cash
      advance transactions with Mr. Chong and will not engage in these transactions
      in
      the future. Prior to the Reverse Merger, effective in November 2006, we paid
      dividends to our then sole stockholder, Mr. Chong. During the years ended
      December 31, 2006, 2005 and 2004, we paid cash dividends of $2.7 million, $5.4
      million, and $4.0 million, respectively to Mr. Chong. We currently have no
      intention to declare further dividends in the foreseeable future. Payment of
      dividends is further restricted under the provisions of our existing loan
      agreements.





On
      our
      condensed consolidated statements of cash flows, we recorded advances by Mr.
      Chong to us and related repayments to him as financing activities, and advances
      by us to Mr. Chong and related repayments by him as investing activities.
      Advances and repayments were not subject to written loan agreements. The
      advances were partially repaid within three months while the remaining portions
      were repaid over three months. In accordance with FAS No. 95, we present the
      gross amounts of the advances and repayments in our consolidated statements
      of
      cash flows.





***Net
      cash provided by (used for) operating activities.*** ****** Net
      cash
      used for operating activities was $1.7 million for the nine months ended
      September 30, 2007, compared to net cash used for operations of $7.1 million
      for
      the same period in 2006. The $5.4 million decrease in cash used was primarily
      due to an increase in our net income from $3.7 million for the nine months
      ended
      September 30, 2006 to $6.1 million for the nine months ended September 30,
      2007,
      an increase in customer deposits of $2.4 million, and an increase in accounts
      payable, accrued expenses, and accrued business tax of $1.8 million.





***Net
      cash provided by (used for) investing activities.*** Net
      cash
      used for investing activities amounted to approximately $417,000 for the nine
      months ended September 30, 2007, compared to net cash provided by investing
      activities of $8.0 million for the nine months ended September 30, 2006. The
      change was due to an increase in restricted cash of approximately $392,000,
      in
      addition to the absence of loans and related repayments between our majority
      stockholder and us during the nine months ended September 30, 2007. We received
      the return of approximately $1.0 million in restricted cash and had a net
      collection of $7.0 million from the controlling stockholder during the nine
      months ended September 30, 2006.





***Net
      cash provided by (used for) financing activities.*** ****** Net
      cash
      provided by financing activities amounted to $4.3 million for the nine months
      ended September 30, 2007, compared to net cash used for financing activities
      of
      $0.7 million for the nine months ended September 30, 2006. The increase of
      cash
      provided was primarily a result of the additional borrowings of $2.0 million
      from the facility line of credit we entered into in February 2007, in addition
      to net proceeds of $2.8 million from the exercise of warrants that occurred
      during the second quarter of 2007.




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





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




23




In
      April
      2007, we entered into a transfer agreement with an unrelated party (the
“Transferor”), which has operation agreements with department stores for five
      jewelry retail counters. Under the terms of the agreement, the Transferor agreed
      to assign all of the operation rights to us for a fee of $400,000. The fee
      is
      payable in three separate installments. The first payment of $120,000 is due
      upon completion of the transfer of the operation rights by the department stores
      to us. The second installment of $120,000 is due within 30 days after the
      remittance of the first installment while the final installment of $160,000
      is
      due within 90 days after the remittance of the first installment. We obtained
      temporary operation rights from the Transferor to operate these counters from
      May 1, 2007. The Transferor is in the progress of negotiating the transfer
      of
      operation rights to us with these department stores. As of November 8, 2007,
      we
      have not yet received formal operation rights transfer agreements but have
      received verbal confirmations from the department stores. We have also commenced
      negotiations with an individual to potentially serve as director of our retail
      operations.





During
      2007, we plan to open 20 retail counters and 2 retail stores in
      municipalities and provincial capitals throughout China. In 2008, we plan to
      open 60 to 80 retail counters and 8 to 10 retail stores. In addition to the
      funds required to open new retail locations, additional working capital will
      be
      needed to operate the retail locations due to longer sales and collection cycles
      and higher inventory levels required to support retail stores. We currently
      anticipate that it will cost approximately $40 million to execute our retail
      plan for the coming two years. We anticipate that a substantial portion of
      it,
      approximately $20 million, would be used to acquire new raw materials. A smaller
      portion of the additional capital, approximately $16 million, would be used
      for
      the opening of retail outlets. Approximately $3.8 million of the additional
      capital would be used to acquire new components and additional tooling, while
      the remaining portion of the additional capital would be applied to working
      capital for labor to manufacture jewelry and for marketing and promotional
      activities. Additional capital for this objective may be required that is in
      excess of our current resources, requiring us to raise additional capital
      through additional equity offerings or secured or unsecured debt financing.
      The
      availability of additional capital resources will depend on prevailing market
      conditions, interest rates, and our existing material financial position and
      results of operations. The foregoing amounts are only estimates, which may
      change based on our analysis and evaluations of changing market
      conditions.




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




***Foreign
      Exchange Risk***





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





The
      value
      of RMB is subject to changes in China’s governmental policies and to
      international economic and political developments. In January 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange
      rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system
      by
      which the exchange rates are determined. This modification has resulted in
      an
      approximate 9.7% appreciation of the RMB against the U.S. dollar from July
      21,
      2005 to October 31, 2007. While the international reaction to the RMB
      revaluation has generally been positive, there remains significant international
      pressure on the PRC government to adopt an even more flexible currency policy,
      which could result in further fluctuation of the exchange rate of RMB against
      the U.S. dollar. As all of our net revenues are recorded in RMB, any future
      devaluation of RMB against the dollar could negatively impact our results of
      operations.




24




***Interest
      Rate Risk***





As
      of September 30,
      2007, we had $16. 6 million
      outstanding under short term credit facilities from banks, with interest rates
      ranging from 6. 030 %
      to 7 .7 76% .
      As all
      of these borrowings are short term borrowings, we believe our exposure to
      interest rate risk is not material. We do not use any derivative financial
      instruments to manage interest rate risks.





***Inflation***





In
      recent
      years, China has not experienced significant inflation, and thus inflation
      has
      not had a material impact on our results of operations. According to the
      National Bureau of Statistics of China, the change in Consumer Price Index
      in
      China was 3.9%, 1.8% and 3.4% in 2004, 2005 and 2006, respectively.





***Commodity
      Price Sensitivity***





We
      are
      exposed to market risk in connection with our inventory balances, which are
      comprised primarily of gold, platinum and jewelry made from gold and platinum.
      Our inventories are stated at the lower of cost or market using the first in
      first out method. If there is a downward change in the market price of gold,
      we
      are required to mark-down the value of our inventory and record a loss in our
      statement of operations. As of September 30,
      2007, our inventory position was approximately $ 15 .3
      million, which consisted of gold and jewelry made from gold acquired at an
      average price of $18. 59 per gram
      and platinum and jewelry made from platinum acquired at an average price of
      $3 5 . 56 per
      gram. On October 31,
      2007, the prices of gold and platinum on the Shanghai Gold Exchange were
      $ 21.59 per gram
      and $40.91 per gram, respectively. Since our inception we have not experienced
      any losses due to changes in the market price of gold or platinum because the
      prices of gold and platinum have generally risen since our inception. Currently
      we do not hold any forward contracts or use any other derivative instruments
      to
      hedge our exposure to fluctuations in the price of gold. However, we intend
      to
      use such hedging strategies in the future.







**ITEM
      4 — CONTROLS AND PROCEDURES**







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





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




25




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








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





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





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






**PART II
      — OTHER INFORMATION**








**ITEM
      1 — LEGAL PROCEEDINGS**







None.







**ITEM
      1A - RISK FACTORS**







*Other
      than with respect to the following risk factor, there have been no material
      changes from the risk factors disclosed in the “Risk Factors” section of our
      Annual Report on Form 10-K for the year ended December 31, 2006 as filed with
      the Securities and Exchange Commission (“SEC”) on April 17, 2007, as updated by
      our Quarterly Report on Form 10-Q as filed with the SEC on August 20,
      2007.*




26




**We
      have significant outstanding short-term borrowings, and we may not be able
      to
      obtain extensions when they mature.**





Our
      notes
      payable to banks for short-term borrowings as of September 30, 2007, December
      31, 2006 and 2005 were $15.3 million, $14.1 million, and $12.4 million,
      respectively, and bore weighted average interest rates of 6.59%, 6.14%, and
      5.32%, respectively. Of these outstanding borrowings, $13.3 million, $11.5
      million and $13.0 million were arranged or guaranteed by our controlling
      stockholder, Mr. Yu Kwai Chong, as of September 30, 2007, December 31, 2006
      and
      2005, respectively. In addition, we have short-term borrowings from Mr. Chong,
      the outstanding amount of which was $0 and approximately $423,000 and as of
      September 30, 2007 and December 31, 2006, respectively.





Generally,
      these short-term bank loans mature in one year or less and contain no specific
      renewal terms. However, in China it is customary practice for banks and
      borrowers to negotiate roll-overs or renewals of short-term borrowings on an
      on-going basis shortly before they mature. Although we have renewed our
      short-term borrowings in the past, we cannot assure you that we will be able
      to
      renew these loans in the future as they mature. In particular, a substantial
      portion of our short-term borrowings are arranged or guaranteed by Mr. Yu Kwai
      Chong, our controlling stockholder, or one of his affiliated companies. Since
      Mr. Chong ceased to be our sole stockholder in November 2006, he may be less
      inclined to guarantee our bank borrowings. If we are unable to obtain renewals
      of these loans or sufficient alternative funding on reasonable terms from banks
      or other parties, we will have to repay these borrowings with the cash on our
      balance sheet or cash generated by our future operations, if any. We cannot
      assure you that our business will generate sufficient cash flow from operations
      to repay these borrowings.






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







On
      October 23, 2007, we publicly offered 7,033,816 shares of our common stock
      at
      $9.00 per share. On October 25, 2007, our underwriters elected to fully exercise
      their over-allotment option to purchase an additional 1,055,072 shares of our
      common stock. In total, including the over-allotment shares, we sold 8,088,888
      shares of our common stock at $9.00 per share. After underwriting discounts
      and
      commissions and estimated offering expenses, we received net proceeds of
      approximately $67.0 million.





We
      intend
      to use the net proceeds from the offering for general corporate purposes,
      including approximately $16.0 million to expand our retail operations, $3.8
      million to expand our product lines, and $47.2 million for general working
      capital purposes.






**ITEM
      3 — DEFAULTS UPON SENIOR SECURITIES**







None.






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







We
      filed
      a Definitive Information Statement on Schedule 14C with the SEC on October
      2,
      2007 to notify the stockholders that on August 23, 2007 we received a written
      consent in lieu of a meeting of stockholders from a holder of shares
      representing 87.1% of the total issued and outstanding shares of our capital
      stock voting together as a single class (the “Majority Stockholder”) authorizing
      our Board of Directors, in its discretion, to effect a reverse stock split
      at an
      exchange ratio ranging from 1.1:1 to 2.5:1 of our issued and outstanding shares
      of Common Stock (the “Reverse Spilt”). On October 22, 2007, the Board effected
      the Reverse Split at a ratio of 1.69:1.




27




**ITEM
      5 — OTHER INFORMATION**







None.







**ITEM
      6 — EXHIBITS**










(a)
      Exhibits





31.1
            Certification
                of Chief Executive Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act of 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 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.




28




**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 14, 2007
            By:
            /s/
                Yu Kwai ChongYu
                Kwai Chong
              Chief
                Executive Officer


Date:
                November 14, 2007
            By:
            /s/
                Ching Wan WongChing
                Wan Wong
              Chief
                Financial Officer






29