UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM 10-Q





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





FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2009





OR





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





FOR THE
TRANSITION PERIOD FROM    _____________   TO
_______________





Commission
File Number:


001-33758


Fuqi
International, Inc.


(Exact
name of registrant as specified in its charter)





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





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





86
(755) 2580-1888


(Registrant’s
telephone number, including area code)





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





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




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




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




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





As
of August 5, 2009 the registrant had issued and outstanding 27,628,656 shares of
common stock, par value $0.001 per share.







FUQI
INTERNATIONAL, INC.


FORM
10-Q QUARTERLY REPORT





TABLE
OF CONTENTS




PagePART I
      :
                  FINANCIAL
      INFORMATIONITEM
      1 — FINANCIAL STATEMENTS
                  1Condensed
      Consolidated Balance Sheets as of June 30, 2009 (unaudited) and
      December 31, 2008
                  1Condensed
      Consolidated Statements of Income and Comprehensive Income for the Three
      and Six Months Ended June 30, 2009 and 2008 (unaudited)
                  2Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June
      30, 2009 and 2008 (unaudited)
                  3Notes
      To Condensed Consolidated Financial Statements (unaudited)
                  4ITEM
      2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATION
                  18ITEM
      3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
                  26ITEM
      4 — CONTROLS AND PROCEDURES
                  26PART II
      :
                  OTHER
      INFORMATIONITEM
      1 — LEGAL PROCEEDINGS
                  28ITEM
      1A — RISK FACTORS
                  28ITEM
      2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                  29ITEM
      3 — DEFAULTS UPON SENIOR SECURITIES
                  29ITEM
      4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  29ITEM
      5 — OTHER INFORMATION
                  30ITEM
      6 — EXHIBITS
                  31SIGNATURES
                  32


i


PART
I - FINANCIAL INFORMATION





ITEM
1 - FINANCIAL STATEMENTS





FUQI
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





June 30,
                                
                                
                                December 31,2009
                                
                                
                                2008(Unaudited)ASSETSCurrent
      assets:Cash
                                
                                $
                                49,320,954
                                
                                
                                $
                                56,569,733Accounts
      receivable, including amount due from related party of $13,157,401 for
      2009 and $2,837,907 for 2008, net of allowance for doubtful accounts of
      $1,481,000 for 2009 and $1,620,000 for 2008
                                
                                
                                60,041,347
                                
                                
                                
                                73,949,200Value
      added taxes receivable
                                
                                
                                6,653,192
                                
                                
                                
                                2,170,669Inventories
                                
                                
                                86,839,054
                                
                                
                                
                                44,409,645Prepaid
      expenses and other current assets
                                
                                
                                722,703
                                
                                
                                
                                286,405Advances
      to suppliers
                                
                                
                                7,835,492
                                
                                
                                
                                8,468,971Gold
      future contracts
                                
                                
                                73,762
                                
                                
                                
                                1,426,236Deferred
      taxes
                                
                                
                                90,904
                                
                                
                                
                                142,608Total
      current assets
                                
                                
                                211,577,408
                                
                                
                                
                                187,423,467Property,
      equipment, and improvements, net
                                
                                
                                3,730,988
                                
                                
                                
                                3,400,642Deposits
                                
                                
                                115,065
                                
                                
                                
                                104,414Goodwill
                                
                                
                                585,444
                                
                                
                                
                                583,269Acquired
      intangibles, net
                                
                                
                                3,134,710
                                
                                
                                
                                3,197,344Other
      assets
                                
                                
                                109,479
                                
                                
                                
                                140,278$
                                219,253,094
                                
                                
                                $
                                194,849,414LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Notes
      payable
                                
                                $
                                32,201,876
                                
                                
                                $
                                21,944,904Accounts
      payable and accrued liabilities
                                
                                
                                6,117,966
                                
                                
                                
                                12,511,519Other
      payable, related parties
                                
                                
                                7,447,372
                                
                                
                                
                                6,287,102Customer
      deposits
                                
                                
                                13,300,774
                                
                                
                                
                                14,474,178Income
      tax payable
                                
                                
                                3,581,828
                                
                                
                                
                                2,802,110Total
      current liabilities
                                
                                
                                62,649,816
                                
                                
                                
                                58,019,813STOCKHOLDERS'
      EQUITYPreferred
      stock, $0.001 par value, 5,000,000 shares authorized, none issued and
      outstanding
                                
                                -
                                
                                
                                -Common
      stock, $0.001 par value, 100,000,000 shares authorized, shares issued and
      outstanding – 22,047,261 for 2009 and 22,005,509 for 2008
                                
                                
                                22,047
                                
                                
                                
                                22,006Additional
      paid in capital
                                
                                
                                82,758,313
                                
                                
                                
                                82,503,638Accumulated
      foreign currency translation adjustments
                                
                                
                                9,611,745
                                
                                
                                
                                9,620,524Retained
      earnings
                                
                                
                                64,211,173
                                
                                
                                44,683,433Total
      stockholders' equity
                                
                                
                                156,603,278
                                
                                
                                
                                136,829,601$
                                219,253,094
                                
                                
                                $
                                194,849,414





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


1





FUQI
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)





Three Months Ended
                                                      
                                                      
                                                      Six Months EndedJune 30,
                                                      
                                                      
                                                      June 30,2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009
                                                      
                                                      
                                                      2008Net
      sales:Wholesale and
    distribution
                                                      
                                                      $
                                                      92,504,318
                                                      
                                                      
                                                      $
                                                      66,129,787
                                                      
                                                      
                                                      $
                                                      189,330,171
                                                      
                                                      
                                                      $
                                                      142,488,298Retail
                                                      
                                                      
                                                      8,337,927
                                                      
                                                      
                                                      
                                                      746,468
                                                      
                                                      
                                                      
                                                      20,872,084
                                                      
                                                      
                                                      
                                                      1,954,316100,842,245
                                                      
                                                      
                                                      
                                                      66,876,255
                                                      
                                                      
                                                      
                                                      210,202,255
                                                      
                                                      
                                                      
                                                      144,442,614Cost
      of sales:Wholesale
      and distribution
                                                      
                                                      
                                                      77,960,527
                                                      
                                                      
                                                      
                                                      59,088,244
                                                      
                                                      
                                                      
                                                      160,593,482
                                                      
                                                      
                                                      
                                                      126,893,710Retail
                                                      
                                                      
                                                      5,526,081
                                                      
                                                      
                                                      
                                                      691,109
                                                      
                                                      
                                                      
                                                      14,201,770
                                                      
                                                      
                                                      
                                                      1,640,62783,486,608
                                                      
                                                      
                                                      
                                                      59,779,353
                                                      
                                                      
                                                      
                                                      174,795,252
                                                      
                                                      
                                                      
                                                      128,534,337Gross
      Profit
                                                      
                                                      
                                                      17,355,637
                                                      
                                                      
                                                      
                                                      7,096,902
                                                      
                                                      
                                                      
                                                      35,407,003
                                                      
                                                      
                                                      
                                                      15,908,277Operating
      expenses:Selling
      and marketing
                                                      
                                                      
                                                      2,855,884
                                                      
                                                      
                                                      
                                                      461,267
                                                      
                                                      
                                                      
                                                      5,838,471
                                                      
                                                      
                                                      
                                                      926,128General
      and administrative
                                                      
                                                      
                                                      1,328,014
                                                      
                                                      
                                                      
                                                      627,347
                                                      
                                                      
                                                      
                                                      3,861,619
                                                      
                                                      
                                                      
                                                      2,069,059Total
      operating expenses
                                                      
                                                      
                                                      4,183,898
                                                      
                                                      
                                                      
                                                      1,088,614
                                                      
                                                      
                                                      
                                                      9,700,090
                                                      
                                                      
                                                      
                                                      2,995,187Income
      from operations
                                                      
                                                      
                                                      13,171,739
                                                      
                                                      
                                                      
                                                      6,008,288
                                                      
                                                      
                                                      
                                                      25,706,913
                                                      
                                                      
                                                      
                                                      12,913,090Other
      income (expenses):Interest
      expense
                                                      
                                                      
                                                      (377,535
                                                      )
                                                      
                                                      
                                                      (322,935
                                                      )
                                                      
                                                      
                                                      (795,973
                                                      )
                                                      
                                                      
                                                      (686,155
                                                      )Interest
      income
                                                      
                                                      
                                                      32,275
                                                      
                                                      
                                                      
                                                      4,376
                                                      
                                                      
                                                      
                                                      60,625
                                                      
                                                      
                                                      
                                                      13,335Gain
      from derivative instrument
                                                      
                                                      
                                                      17,212
                                                      
                                                      
                                                      
                                                      720,744
                                                      
                                                      
                                                      
                                                      95,671
                                                      
                                                      
                                                      
                                                      1,561,265Miscellaneous
                                                      
                                                      
                                                      35,799
                                                      
                                                      
                                                      
                                                      129,378
                                                      
                                                      
                                                      
                                                      40,257
                                                      
                                                      
                                                      
                                                      256,161Total
      other income (expenses)
                                                      
                                                      
                                                      (292,249
                                                      )
                                                      
                                                      
                                                      531,563
                                                      
                                                      
                                                      
                                                      (599,420
                                                      )
                                                      
                                                      
                                                      1,144,606Income
      before provision for income taxes
                                                      
                                                      
                                                      12,879,490
                                                      
                                                      
                                                      
                                                      6,539,851
                                                      
                                                      
                                                      
                                                      25,107,493
                                                      
                                                      
                                                      
                                                      14,057,696Provision
      for income taxes
                                                      
                                                      
                                                      3,012,249
                                                      
                                                      
                                                      
                                                      1,289,084
                                                      
                                                      
                                                      
                                                      5,579,753
                                                      
                                                      
                                                      
                                                      2,411,856Net
      income
                                                      
                                                      
                                                      9,867,241
                                                      
                                                      
                                                      
                                                      5,250,767
                                                      
                                                      
                                                      
                                                      19,527,740
                                                      
                                                      
                                                      
                                                      11,645,840Other comprehensive income
      (loss) - foreign currency translation adjustments
                                                      
                                                      
                                                      4,979
                                                      
                                                      
                                                      
                                                      2,539,723
                                                      
                                                      
                                                      
                                                      (8,779
                                                      )
                                                      
                                                      
                                                      6,506,456Comprehensive
      income
                                                      
                                                      $
                                                      9,872,220
                                                      
                                                      
                                                      $
                                                      7,790,490
                                                      
                                                      
                                                      $
                                                      19,518,961
                                                      
                                                      
                                                      $
                                                      18,152,296Earnings
      per share - basic
                                                      
                                                      $
                                                      0.46
                                                      
                                                      
                                                      $
                                                      0.25
                                                      
                                                      
                                                      $
                                                      0.91
                                                      
                                                      
                                                      $
                                                      0.56Earnings
      per share - diluted
                                                      
                                                      $
                                                      0.45
                                                      
                                                      
                                                      $
                                                      0.25
                                                      
                                                      
                                                      $
                                                      0.91
                                                      
                                                      
                                                      $
                                                      0.56Weighted
      average number of common shares - basic
                                                      
                                                      
                                                      21,494,081
                                                      
                                                      
                                                      
                                                      20,924,843
                                                      
                                                      
                                                      
                                                      21,479,708
                                                      
                                                      
                                                      
                                                      20,924,843Weighted
      average number of common shares - diluted
                                                      
                                                      
                                                      21,700,421
                                                      
                                                      
                                                      
                                                      20,924,843
                                                      
                                                      
                                                      
                                                      21,517,171
                                                      
                                                      
                                                      
                                                      20,924,843





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





2





FUQI
INTERNATIONAL, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


INCREASE
(DECREASE) IN CASH





Six Months Ended
                                                June 30,2009
                                              
                                              
                                              2008Cash
      flows provided by operating activities:Net
      income
                                              
                                              $
                                              19,527,740
                                              
                                              
                                              $
                                              11,645,840Adjustments
      to reconcile net income to net cash provided by (used for) operating
      activities:Depreciation
      and amortization
                                              
                                              
                                              572,188
                                              
                                              
                                              
                                              220,113Bad
      debt provision
                                              
                                              
                                              (139,596)
                                              
                                              
                                              
                                              24,220Stock-based
      compensation
                                              
                                              
                                              254,716
                                              
                                              
                                              
                                              297,102Loss
      on disposal on property, equipment and improvements
                                              
                                              
                                              8,640
                                              
                                              
                                              
                                              -Changes
      in operating assets and liabilities:Accounts
      receivable
                                              
                                              
                                              14,079,966
                                              
                                              
                                              
                                              (268,315
                                              )Value
      added taxes receivable
                                              
                                              
                                              (4,480,064
                                              )
                                              
                                              
                                              (538,773
                                              )Inventories
                                              
                                              
                                              (42,394,276
                                              )
                                              
                                              
                                              (3,481,151
                                              )Prepaid
      expenses and other current assets
                                              
                                              
                                              (135,517
                                              )
                                              
                                              
                                              36,987Gold
      future contracts
                                              
                                              
                                              1,352,768
                                              
                                              
                                              
                                              245,357Advances
      to suppliers
                                              
                                              
                                              635,067
                                              
                                              
                                              
                                              (71,607
                                              )Deferred
      taxes
                                              
                                              
                                              51,759
                                              
                                              
                                              
                                              (1,773,008
                                              )Rental
      deposits
                                              
                                              
                                              (10,596
                                              )
                                              
                                              
                                              -Other
      assets
                                              
                                              
                                              30,859
                                              
                                              
                                              
                                              2,278Accounts
      payable, accrued expenses, accrued business tax, and other
      payable
                                              
                                              
                                              (6,586,029
                                              )
                                              
                                              
                                              (125,501
                                              )Customer
      deposits
                                              
                                              
                                              (1,180,245)
                                              
                                              
                                              
                                              2,431,032Income
      tax payable
                                              
                                              
                                              778,085
                                              
                                              
                                              
                                              889,845Net
      cash (used for) provided by operating activities
                                              
                                              
                                              (17,634,535
                                              )
                                              
                                              
                                              9,534,419Cash
      flows (used for) investing activities:Purchase
      of property, equipment and improvements
                                              
                                              
                                              (963,470
                                              )
                                              
                                              
                                              (566,809
                                              )Proceeds
      from disposal of property, equipment and improvements
                                              
                                              
                                              79,017
                                              
                                              
                                              
                                              -Decrease
      in restricted cash
                                              
                                              
                                              -
                                              
                                              
                                              
                                              427,411Net
      cash used for investing activities
                                              
                                              
                                              (884,453
                                              )
                                              
                                              
                                              (139,398
                                              )Cash
      flows provided by (used for) financing activities:Proceeds
      from (repayments to) short-term borrowing
                                              
                                              
                                              10,242,903
                                              
                                              
                                              
                                              (284,941
                                              )Repayments
      to a related party
                                              
                                              
                                              (965,759
                                              )
                                              
                                              
                                              -Advances
      from a related party
                                              
                                              
                                              2,052,202
                                              
                                              
                                              
                                              -Net
      cash provided by (used for) financing activities
                                              
                                              
                                              11,329,346
                                              
                                              
                                              
                                              (284,941
                                              )Effect
      of exchange rate changes on cash
                                              
                                              
                                              (59,137
                                              )
                                              
                                              
                                              4,538,160Net
      (decrease) increase in cash
                                              
                                              
                                              (7,248,779
                                              )
                                              
                                              
                                              13,648,240Cash,beginning of the
      period
                                              
                                              
                                              56,569,733
                                              
                                              
                                              
                                              63,293,653Cash,end of the
      period
                                              
                                              $
                                              49,320,954
                                              
                                              
                                              $
                                              76,941,893Supplemental
      disclosure of cash flow information:Interest
      paid
                                              
                                              $
                                              823,306
                                              
                                              
                                              $
                                              599,079Income
      taxes paid
                                              
                                              $
                                              4,749,914
                                              
                                              
                                              $
                                              3,293,418Non-cash
      disclosure:Non
      monetary exchanges related to certain retail sales
                                              
                                              $
                                              997,742
                                              
                                              
                                              $
                                              398,057





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


3




FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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





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





In 2007,
the Company formally started operating retail jewelry counters under the brand
name of “FUQI,” which is targeted to a broad group of middle class consumers
that purchase more traditional gold and platinum jewelry and jewelry gift items.
In August 2008, the Company acquired Temix, a jewelry retail chain with 50
jewelry counters and shops offering high quality diamond products, located in
Beijing and Shanghai. As of June 30, 2009, the Company had 71 jewelry retail
counters and stores in China.





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





In the
opinion of the management, these condensed consolidated financial statements
reflect all adjustments which are of a normal recurring nature and which are
necessary to present fairly the financial position of Fuqi as of June 30, 2009
and the results of operations for the three and six months ended June 30, 2009
and 2008, and the cash flows for the six months ended June 30, 2009 and 2008.
These condensed consolidated financial statements and related notes should be
read in conjunction with the Company’s annual report on Form 10-K for the fiscal
year ended December 31, 2008. The results of operations for the three and six
months ended June 30, 2009 are not necessarily indicative of the results which
may be expected for the entire fiscal year. The Company’s business is seasonal
in nature, with its sales and net income generally higher in the fourth calendar
quarter.





The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.





Consolidation
Policy





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


4


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





Operating
Leases





The
Company generally enters into operating leases for its retail counters. Other
than the Company’s seven retail stores as of June 30, 2009, which operate under
a monthly fixed rate of lease, all counters lease agreements are provided with
contingent rent provisions based on a percentage of sales generated in the
jewelry counters within department stores. Most of the Company’s lease
agreements include renewal periods at the Company’s option. Lease expenses are
recorded in selling and marketing expenses on the Company’s condensed
consolidated statements of income.





Basic
and Diluted Earnings Per Share





As of
June 30, 2009 and 2008, the Company had common stock equivalents of 1,110,364
shares and 1,320,000 shares, respectively, upon the exercise of stock
options.  Basic net income per share is computed by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period and excludes the dilutive effect of stock
options.  Diluted net income per share gives effect to all dilutive
potential common shares outstanding during a period. Contingency shares of
540,333 issued and held in the escrow related to the Temix acquisition in August
2008 were excluded from the calculations as the contingency has not yet been
resolved as of June 30, 2009.





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





Three Months Ended
                                              June 30,
                                            
                                            
                                            Six Months Ended
                                              June 30,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2009
                                            
                                            
                                            2008Numerator
      for basic and diluted earnings per share:Net
      income
                                            
                                            $
                                            9,867
                                            
                                            
                                            $
                                            5,251
                                            
                                            
                                            $
                                            19,528
                                            
                                            
                                            $
                                            11,646Denominator:Weighted
      average common stock outstandingBasic
                                            
                                            
                                            21,494,081
                                            
                                            
                                            
                                            20,924,843
                                            
                                            
                                            
                                            21,479,708
                                            
                                            
                                            
                                            20,924,843Effect
      of dilutive securities
                                            
                                            
                                            206,340
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            37,463
                                            
                                            
                                            
                                            -Denominator
      for diluted calculation
                                            
                                            
                                            21,700,421
                                            
                                            
                                            
                                            20,924,843
                                            
                                            
                                            
                                            21,517,171
                                            
                                            
                                            
                                            20,924,843Net
      income per shareBasic
                                            
                                            $
                                            0.46
                                            
                                            
                                            $
                                            0.25
                                            
                                            
                                            $
                                            0.91
                                            
                                            
                                            $
                                            0.56Diluted
                                            
                                            $
                                            0.45
                                            
                                            
                                            $
                                            0.25
                                            
                                            
                                            $
                                            0.91
                                            
                                            
                                            $
                                            0.56





Stock-based
Compensation





2007 Equity Incentive
Plan





Stock options have been granted to
certain of the Company’s officers and directors pursuant to the 2007 Equity
Incentive Plan. Stock options are generally granted with exercise prices equal
to the market price of the Company's stock at the date of grant and vested over
time.


5


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





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





Number of shares
                                        
                                        
                                        Weighted average exercise
                                          price per share
                                        
                                        
                                        Aggregate
                                          Intrinsic ValueOutstanding,
      January, 2009
                                        
                                        
                                        1,441,776
                                        
                                        
                                        $
                                        8.79Granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Forfeited
                                        
                                        
                                        (600,000
                                        )
                                        
                                        $
                                        9.00Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Outstanding,
      March 31, 2009
                                        
                                        
                                        841,776
                                        
                                        
                                        $
                                        8.65Granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Forfeited
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Outstanding,
      June 30, 2009
                                        
                                        
                                        841,776
                                        
                                        
                                        $
                                        8.65
                                        
                                        
                                        $
                                        10,155,529Vested
      and expected to vest, June 30, 2009
                                        
                                        
                                        841,776
                                        
                                        
                                        $
                                        8.65
                                        
                                        
                                        $
                                        10,155,529Exercisable,
      June 30, 2009
                                        
                                        
                                        641,776
                                        
                                        
                                        $
                                        8.54
                                        
                                        
                                        $
                                        7,813,529





Stock-based
compensation expense for the 2007 Equity Incentive Plan was approximately
$57,000 and $149,000 for the three months ended June 30, 2009 and 2008,
respectively, and $69,000 and $297,000 for the six months ended June 30, 2009
and 2008, respectively. As of June 30, 2009 and December 31, 2008, unrecognized
estimated compensation cost was approximately $92,000 and $459,000,
respectively, which is expected to be recognized over a weighted-average period
of 0.32 year and 0.82 year relating to options for approximately 200,000 shares
and 400,000 shares which were outstanding at such date but which had not yet
vested. In March 2009, the Company reversed $46,000 of previously amortized
portion of unvested options for an executive director who resigned during the
first quarter of 2009. In addition, the Company reversed $110,000 of
compensation expense in the second quarter of 2009 that was previously accrued
in the first quarter of 2009 for estimated value of options pursuant to the
terms of employment agreements with three of its executive
officers.





As of
June 30, 2009, options to purchase 56,422, 65,354, and 720,000 shares of common
stock, at exercise prices of $6.89, $6.26, and $9.00, respectively, were
outstanding and 641,776 of the options to purchase common shares were
exercisable as of June 30, 2009. Net stock options outstanding as of June 30,
2009 represented 3.8% of outstanding shares as of June 30, 2009.





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the closing stock price of $20.71 of the
Company’s common stock on the last trading day on June 30, 2009.




2009 Omnibus Incentive
Plan




Share Options




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





Options
granted for 2009 were valued in accordance with SFAS 123R. The fair value of
these options was calculated using a Black-Scholes option pricing model using
the following assumptions: (1) risk-free interest rates of 1.4%,
(2) an expected life of 3 years, (3) expected volatility of 108%,
(4) expected forfeitures of 10%, and (5) a dividend yield of
0%.


6


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





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





Number of shares
                        
                        
                        Weighted average exercise
                          price per share
                        
                        
                        Aggregate
                          Intrinsic ValueOutstanding,
      January 31, 2009
                        
                        
                        -
                        
                        
                        $
                        -Granted
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      March 31, 2009
                        
                        
                        -
                        
                        
                        
                        -Granted
                        
                        
                        268,588
                        
                        
                        $
                        5.93Forfeited
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      June 30, 2009
                        
                        
                        268,588
                        
                        
                        $
                        5.93
                        
                        
                        $
                        3,969,731Vested
      and expected to vest, June 30, 2009
                        
                        
                        268,588
                        
                        
                        $
                        5.93
                        
                        
                        $
                        3,969,731Exercisable,
      June 30, 2009
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -





Stock-based
compensation expense for options granted under the 2009 Omnibus Incentive Plan
was approximately $62,000 for the three and six months ended June 30, 2009. As
of June 30, 2009, unrecognized estimated compensation cost was approximately
$881,000, which is expected to be recognized over a weighted-average period of
2.7 years relating to options for approximately 269,000 nonvested shares. To the
extent the actual forfeiture rate is different from the original estimate,
actual share-based compensation related to these awards may be different from
the expectation.





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the closing stock price of $20.71 of the
Company’s common stock on the last trading day on June 30, 2009.





Restricted
Stock





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





Stock-based
compensation expense for these restricted stock granted under the 2009 Omnibus
Incentive Plan was approximately $124,000 for the three and six months ended
June 30, 2009.  As of June 30, 2009, there was $123,795 unrecognized
share-based compensation cost related to nonvested restricted stock. This
deferred cost is expected to be recognized over a weighted-average vesting
period of 0.50 year.





Total
intrinsic value of restricted stock vested for the three months and six ended
June 30, 2009 and 2008 was $308,547 and $0, respectively.





Segment
Reporting





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


7


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





Non-monetary
(Barter) Exchanges





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





Subsequent
Events





We
evaluated subsequent events through August 6, 2009, the date this Quarterly
Report on Form 10-Q was filed with the Securities and Exchange Commission
(SEC).





Recent
Accounting Pronouncements





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





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





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





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




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


8


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





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





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





In May
2009, the FASB issued SFAS No. 165, "Subsequent
Events", ("SFAS 165"), which established standards for accounting and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued. It requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date,
whether that date represents the date the financial statements were issued or
were available to be issued. SFAS 165 was effective for interim and annual
periods ending after June 15, 2009. The Company adopted SFAS 165 in the
second quarter of 2009 and the adoption did not have a material impact on the
Company’s Consolidated Financial Statements.




In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of financial
Assets ("SFAS 166"), and No. 167, Amendments to FASB Interpretation
No. 46(R) ("SFAS 167"). SFAS 166 is a revision to Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and requires more information about transfers of
financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of “qualified special-purpose
entity”, changes the requirements for derecognizing financial assets, and
requires additional disclosures. SFAS 167 is a revision to FASB
Interpretation No. 46(R), Consolidation of Variable Interest Entities, and
changes how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. SFAS 167 requires the determination of whether a company is
required to consolidate an entity to be based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
SFAS 166 and SFAS 167 are both effective for financial statements issued
for fiscal years beginning after November 15, 2009. The Company does not
expect the adoption of these two statements will have a material impact on its
condensed financial statements.


In June 2009, the FASB issued SFAS
No. 168 which replaces SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (“SFAS 168”), to establish the FASB Accounting
Standards Codification, (the “Codification”), as the single source of
authoritative nongovernmental Generally Accepted Accounting Principles (“GAAP”)
in the United States. The Codification will be effective for interim and annual
periods ending after September 15, 2009. Upon the effective date, the
Codification will be the single source of authoritative accounting principles to
be applied by all nongovernmental U.S. entities. All other accounting literature
not included in the Codification will be nonauthoritative. This pronouncement
will have no effect on our unaudited condensed consolidated financial statements
upon adoption other than current references to GAAP which will be replaced with
references to the applicable codification paragraphs.




Reclassifications





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


9


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued







(2)
              Inventories:





A summary
of inventory is as follows:





June 30,
                      
                      
                      December 31,2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      43,640,062
                      
                      
                      $
                      2,438,800Work
      in progress
                      
                      
                      3,724,445
                      
                      
                      
                      12,710,735Finished
      goods
                      
                      
                      14,028,691
                      
                      
                      
                      7,781,159Merchandise
      - retail
                      
                      
                      25,445,856
                      
                      
                      
                      21,478,951$
                      86,839,054
                      
                      
                      $
                      44,409,645





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




(3)
              Property, Equipment
      and Improvements:





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





June 30,
                      
                      
                      December 31,2009
                      
                      
                      2008Production
      equipment
                      
                      $
                      1,685,634
                      
                      
                      $
                      1,578,682Computer
      hardware and software
                      
                      
                      388,174
                      
                      
                      
                      255,376Furniture
      and fixtures
                      
                      
                      245,804
                      
                      
                      
                      220,441Automobiles
                      
                      
                      558,759
                      
                      
                      
                      637,137Leasehold
      improvement
                      
                      
                      2,457,934
                      
                      
                      
                      1,964,445Building
                      
                      
                      623,216
                      
                      
                      
                      622,9065,959,521
                      
                      
                      
                      5,278,987Less:
      accumulated depreciation and amortization
                      
                      
                      2,228,533
                      
                      
                      
                      1,878,345$
                      3,730,988
                      
                      
                      $
                      3,400,642





Depreciation
and amortization expense for property, equipment, and improvements amounted to
approximately $260,110 and $115,881 for the three months ended June 30, 2009 and
2008, respectively, and $509,554 and $220,113 for the six months ended June 30,
2009 and 2008, respectively.


10


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued




(4)
              Acquired
      Intangible Assets:


Acquired
intangible assets, net consisted of the following:





June 30,
                        2009
                      
                      
                      December 31,
                        2008Trade
      names
                      
                      $
                      2,952,820
                      
                      
                      $
                      2,952,820Non-compete
      agreement
                      
                      
                      123,318
                      
                      
                      
                      123,318Strategic
      alliance agreement
                      
                      
                      174,538
                      
                      
                      
                      174,538Total
                      
                      $
                      3,250,676
                      
                      
                      $
                      3,250,676Less:
      accumulated amortization
                      
                      
                      115,966
                      
                      
                      
                      53,332Acquired
      intangible assets, net
                      
                      $
                      3,134,710
                      
                      
                      $
                      3,197,344





As of June 30, 2009
                      
                      
                      As of December 31, 2008Gross
                        Carrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      Gross
                        Carrying
                        Amount
                      
                      
                      Accumulated
                        AmortizationIntangible
      assets subject to amortization:Non-compete
      agreement
                      
                      $
                      123,318
                      
                      
                      $
                      (42,634
                      )
                      
                      $
                      123,318
                      
                      
                      $
                      (22,080
                      )Strategic
      alliance agreement
                      
                      
                      174,538
                      
                      
                      
                      (73,332
                      )
                      
                      
                      174,538
                      
                      
                      $
                      (31,252
                      )Total
                      
                      $
                      297,856
                      
                      
                      $
                      (115,966
                      )
                      
                      $
                      297,856
                      
                      
                      $
                      (53,332
                      )Intangible
      assets not subject to amortization:Trade
      names
                      
                      $
                      2,952,820
                      
                      
                      $
                      -
                      
                      
                      $
                      2,952,820
                      
                      
                      $
                      -Total
                      
                      $
                      2,952,820
                      
                      
                      $
                      -
                      
                      
                      $
                      2,952,820
                      
                      
                      $
                      -





Amortization
expense is $30,259 and $0 for the three months ended June 30, 2009 and 2008,
respectively, and $62,634 and $0 for the six months ended June 30, 2009 and
2008, respectively. Expected amortization expense is estimated to be $92,013 in
2010, and $24,136 in 2011 and the weighted average amortization lives are
approximately 1.52 years.  The Company did not incur costs to renew or
extend the term of acquired intangible assets during the period ended June 30,
2009.




(5)
                Goodwill:








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




Balance
      as of December 31, 2008
                        
                        $
                        583,269Foreign
      exchange difference due to translation
                        
                        
                        2,175Balance
      as of June 30, 2009
                        
                        $
                        585,444


11


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued


(6)
              Retail
      Operating Lease Agreements:







For the
three months ended June 30, 2009, the Company opened a total of six new retail
counters, with one of the counters under the FUQI brand and five of the counters
under the Temix brand. In addition, a total of four retail counters in Beijing,
Shanghai and PRC regions were closed during the three months ended June 30,
2009.  Including the retail counters and shops acquired through the
Temix acquisition, the Company had a total of 64 jewelry counters and seven
jewelry shops located in Beijing, Shanghai, and PRC regions. A summary of retail
presences as of June 30, 2009 is summarized as follows:





Brand
                            
                            
                            
                            Counters
                            
                            
                            Shops
                            
                            
                            TotalFUQI
                            
                            Beijing
                            
                            
                            7
                            
                            
                            
                            0
                            
                            
                            
                            7Shenyang
                            
                            
                            3
                            
                            
                            
                            0
                            
                            
                            
                            3Xinxiang,
      Henan
                            
                            
                            1
                            
                            
                            
                            0
                            
                            
                            
                            1Shunyang,
      Henan
                            
                            
                            1
                            
                            
                            
                            0
                            
                            
                            
                            1Shandong
                            
                            
                            1
                            
                            
                            
                            0
                            
                            
                            
                            1Yancheng,
      Jiangsu
                            
                            
                            1
                            
                            
                            
                            0
                            
                            
                            
                            114
                            
                            
                            
                            0
                            
                            
                            
                            14TEMIX
                            
                            Beijing
                            
                            
                            25
                            
                            
                            
                            0
                            
                            
                            
                            25Shanghai
                            
                            
                            25
                            
                            
                            
                            7
                            
                            
                            
                            3250
                            
                            
                            
                            7
                            
                            
                            
                            5764
                            
                            
                            
                            7
                            
                            
                            
                            71





The
retail counters and shops are operating under operating leases with a term in a
range of 6 months to 1 year with an option of extensions. A majority of the
leases require payment of contingent rent based on a percentage of store sales.
The monthly fees for the seven retail shops under the lease agreement are fixed
and are charged in a range of $826 to $21,740 per shop.  Fees paid to
the department stores and shopping malls totaling $820,394 and $39,130, for the
three months ended June 30, 2009 and 2008, respectively, and $2,318,055 and
$113,883 for the six months ended June 30, 2009 and 2008, respectively, and are
included in selling and marketing expenses.





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


(7)
              Note
      Payable:








The
Company has a general banking facility line of credit with Agricultural Bank of
China pursuant to a Maximum Banking Facility Agreement dated August 24, 2006
which was renewed in September 2007 and December 2008. The terms of the
agreement enable the Company to borrow up to a maximum facility amount of
approximately $14.6 million (RMB 100,000,000) as of December 31,
2008.  In March 2009, the Company entered into a supplemental
agreement with this bank to increase the maximum borrowing amount to
approximately $22 million (RMB 150,000,000) as of June 30, 2009.  The
Company executed notes payable with this bank under this facility line with
terms less than one year. As of June 30, 2009 and December 31, 2008, the Company
has approximately $22 million and $14.6 million, respectively, outstanding under
the facility, with interest rates ranging from 4.779% to 8.217%.





In June
2008, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to $7.3
million (RMB 50,000,000) as of December 31, 2008. This facility and related
guarantees which expired and were renewed in May 2009, increased the maximum the
Company could draw to approximately $8.3 million (RMB57,000,000) as of June 30,
2009 and is secured by certain real properties owned by affiliated companies and
guaranteed by affiliated companies. Interest is charged at the bank’s prime
rate. As of June 30, 2009 and December 31, 2008, the outstanding balance was
$8,343,213 and $7,314,968 respectively, with interest rates ranging from 4.860%
to 5.310%.




In June
2009, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to
approximately $6.3 million (RMB 43,000,000) as of June 30, 2009. This facility
expires in May 2010 and is secured by certain real properties owned by
affiliated companies and guaranteed by the Company’s controlling stockholder.
Interest is charged at the bank’s prime rate (5.310% at June 30, 2009). As of
June 30, 2009 and December 31, 2008, the outstanding balance was $1,902,838 and
$0, respectively.


12


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





June 30,
                  2009
                
                
                December 31,
                  2008A
      note payable with interest at a rate of 8.217%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
                
                $
                -
                
                
                $
                1,024,096A
      note payable with interest at a rate of 8.217%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
                
                
                -
                
                
                
                1,462,994A
      note payable with interest at a rate of 6.831%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
                
                
                -
                
                
                
                1,462,994A
      note payable with interest at a rate of 6.831%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
                
                
                -
                
                
                
                2,267,640A
      note payable with interest at a rate of 7.227%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in January 2009 and was
      repaid.
                
                
                -
                
                
                
                1,975,041A
      note payable with interest at a rate of 8.217%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in March 2009 and was
      repaid.
                
                
                -
                
                
                
                2,925,987A
      note payable with interest at a rate of 7.227%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in January 2009 and was
      repaid.
                
                
                -
                
                
                
                1,462,994A
      note payable with interest at a rate of 7.227%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matured in January 2009 and was
      repaid.
                
                
                -
                
                
                
                2,048,190A
      note payable with interest at a rate of 5.04%, secured by certain real
      properties owned by an affiliate, matured in June 2009 and was
      repaid.
                
                
                -
                
                
                
                3,364,885A
      note payable with interest at a rate of 4.86%, secured by certain real
      properties owned by an affiliate, matured in June 2009 and was
      repaid.
                
                
                -
                
                
                
                3,950,083


13


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued





June 30,
                      2009
                    
                    
                    December 31,
                      2008A
      note payable with interest at a rate of 5.841%, secured by the Company’s
      inventories,certain
      real estate properties owned by affiliated companies, guaranteed by
      affiliatedcompanies
      and personally guaranteed by the Company’s controlling stockholder,
      maturesin
      December 2009.
                    
                    $
                    1,976,024
                    
                    
                    $
                    -A
      note payable with interest at a rate of 5.841%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in December
    2009.
                    
                    
                    3,512,932
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in January
2010.
                    
                    
                    2,927,443
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in March 2010.
                    
                    
                    2,268,769
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in March 2010.
                    
                    
                    2,488,327
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, secured by the Company’s
      inventories, certain real estate properties owned by affiliated companies,
      guaranteed by affiliated companies and personally guaranteed by the
      Company’s controlling stockholder, matures in March 2010.
                    
                    
                    1,463,722
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, guaranteed by an
      affiliated company, and the Company’s controlling stockholder and his
      wife, matures in February 2010.
                    
                    
                    2,488,327
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, guaranteed by an
      affiliated company, and the Company’s controlling stockholder and his
      wife, matures in February 2010.
                    
                    
                    2,341,955
                    
                    
                    
                    -A
      note payable with interest at a rate of 4.779%, guaranteed by an
      affiliated company, and the Company’s controlling stockholder and his
      wife, matures in March 2010.
                    
                    
                    2,488,327
                    
                    
                    
                    -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and guaranteed by affiliated
      companies, matures in May 2010.
                    
                    
                    4,391,164
                    
                    
                    
                    -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and guaranteed by affiliated
      companies, matures in June 2010.
                    
                    
                    3,952,048
                    
                    
                    
                    -A
      note payable with interest at a rate of 5.310%, secured by certain real
      properties owned by affiliated companies, and personally guaranteed by the
      Company’s controlling stockholder, matures in June 2010.
                    
                    
                    1,902,838
                    
                    
                    
                    -$
                    32,201,876
                    
                    
                    $
                    21,944,904


14


FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued




(8)
              Gold
      Futures Contracts:





The
Company enters into certain gold futures contracts with its supplier, Shanghai
Gold Exchange. Gold futures offered by Shanghai Gold Exchange are designed for
full members to hedge or to acquire inventory at a preset price. The futures
contract arrangements include purchase call and/or put options. The Company
utilized these futures contracts to manage its consolidated exposure to changes
in inventory values due to fluctuations in market prices and is not considered
as hedges under SFAS 133.





Effective
January 1, 2009, the Company adopted the disclosure requirements of SFAS No.
161, Disclosures about
Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No.
133 (SFAS 161). As of June 30, 2009 and December 31, 2008, the Company’s
only derivative instrument was the gold future contracts which were shown as
gold future contracts under assets in the accompanying condensed consolidated
balance sheets.  The fair value of these gold future contracts totaled
$73,762 and $1,426,236, as of June 30, 2009 and December 31, 2008,
respectively.





A gain
from the derivative instrument of approximately $17,000 and $721,000 for the
three months ended June 30, 2009 and 2008, respectively, and $96,000 and
$1,561,000 for the six months ended June 30, 2009 and 2008, respectively, was
recognized as gain from derivative instrument under other income (expense) in
the accompanying condensed consolidated statements of income.


(9)
              Fair
      Value Measurement:








On
January 1, 2008, the Company adopted the provisions of SFAS No. 157,Fair Value Measurements
(“SFAS No. 157”) for financial assets and liabilities. SFAS No. 157 establishes
a framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements..





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





Level1:
            Quoted
      prices are available in active markets for identical assets or liabilities
      as of the reporting date.





Level
      2:
            Pricing
      inputs are other than quoted prices in active markets included in Level 1,
      which are either directly or indirectly observable as of the reporting
      date.





Level
      3:
            Pricing
      inputs include significant inputs that are generally less observable from
      objective sources.  These inputs may be used with internally
      developed methodologies that result in management’s best estimate of fair
      value.




The
following table presents the Company’s financial assets and liabilities that
were accounted for at fair value on a recurring basis as of June 30, 2009 and
December 31, 2008 by level within the fair value hierarchy:




Fair Value Measurements UsingLevel 1
                          
                          
                          Level 2
                          
                          
                          Level 3As
      of June 30, 2009:AssetsDerivative
      financial instruments
                          
                          $
                          —
                          
                          
                          $
                          73,762
                          
                          
                          $
                          —Liabilities:
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —As
      of December 31, 2008:AssetsDerivative
      financial instruments
                          
                          $
                          —
                          
                          
                          $
                          1,426,236
                          
                          
                          $
                          —Liabilities:
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —




The
Company’s derivative financial instruments are gold future contracts based on
gold price rates, which are observable at commonly quoted intervals for the full
term of the derivatives and therefore considered a Level 2 input. Unrealized
gain of these gold future contracts at June 30, 2009 and December 31, 2008 was
immaterial to the consolidated financial statements.


15




FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued




(10)
              Related-Party
      Transactions:





In
connection with the Company’s continued transferring of certain legal titles of
the retail counters from each individual department store or mall from the Temix
Companies to Shenzhen Fuqi, Mr. Chujian Huang, the former owner of the Temix
retail chains which the Company acquired in August 2008, collected a total of
$13,157,401 from the shopping malls on behalf of the Company which was
classified as accounts receivable from related party at June 30,
2009.  For the three months and six months ended June 30, 2009, Mr.
Chujian Huang also paid certain expenses for operating the retail counters
totaling $1,254,310 and $2,052,202, respectively, which was classified as part
of other payable, related party at June 30, 2009.





During
2008, Rong Xing Company, an affiliated company which is owned by the controlling
stockholder of the Company, advanced an interest-free loan of $965,576 (RMB
6,600,000) to the Company for short term financing purpose.  The
Company repaid the full outstanding amount during the three months ended June
30, 2009.





The
Company has an outstanding payable to Mr. Chujian Huang in the amount of
approximately $4.4 million related to the Temix acquisition in 2008, which was
included in other payable, related parties as of June 30, 2009 and December 31,
2008.





For the
three months and six months ended June 30, 2008, approximately $0 and $357,000
of operating expenditure, respectively, including wages and benefits of
production workers and material tools and supplies was paid by the Company’s
affiliate, Rong Xing Company Limited, on behalf of the Company. The Company
repaid the full outstanding amount as of June 30, 2008.


(11)
              Income
      Taxes:





The
Company’s tax provision for the three months and six months ended June 30, 2009
and 2008 was primarily for taxes on the Company’s subsidiary in China. The
Company’s effective income tax rate was 23.4% and 19.7% for the three months
ended June 30, 2009 and 2008, respectively, and 22.2% and 17.2% for the six
months ended June 30, 2009 and 2008, respectively. Effective January 1, 2008,
the National People’s Congress of China enacted a new PRC Enterprise Income Tax
Law, under which foreign invested enterprises and domestic companies is subject
to enterprise income tax at a uniform rate of 25%. During the transition period,
the tax rate is gradually increased to coincide with the new tax rate within
five years starting from 2008 and reaching the uniform rate of 25% in
2012.





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




(12)
              Stockholders’
      Equity:





In August
2008, the Company completed the acquisition of the Temix Companies. As
stipulated in the IP Transfer Agreement entered into with Mr. Huang, the Company
issued 1,080,666 shares of Company common stock to acquire all of the
intellectual property rights related to the business of Temix Companies. As of
June 30, 2009 and December 31, 2008, 540,333 shares, representing 50% of the
total number of shares issued related to this acquisition, are to be held in
escrow over a two-year period and will be released when certain performance
targets are met.


16





FUQI
INTERNATIONAL, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued




(13)
              Segment
      Information:







With its
acquisition of Temix, the Company is considered to be comprised of two
reportable segments: (i) wholesale and distribution and (ii) retail. The segment
data for the three months and six months ended June 30, 2009 and 2008 are shown
below. Net sales represent sales to unaffiliated customers as reported in the
consolidated condensed statements of earnings.




Three Months Ended
                                                                                                  June 30,
                                                                                                
                                                                                                
                                                                                                
                                                                                                Six Months Ended
                                                                                                  June 30,2009
                                                                                                
                                                                                                
                                                                                                2008
                                                                                                
                                                                                                
                                                                                                
                                                                                                2009
                                                                                                
                                                                                                
                                                                                                2008Net
      Sales:Wholesale
      and distribution
                                                                                                
                                                                                                $
                                                                                                92,504,318
                                                                                                
                                                                                                
                                                                                                $
                                                                                                66,129,787
                                                                                                
                                                                                                
                                                                                                $
                                                                                                189,330,171
                                                                                                
                                                                                                
                                                                                                $
                                                                                                142,488,298Retail
                                                                                                
                                                                                                
                                                                                                8,337,927
                                                                                                
                                                                                                
                                                                                                
                                                                                                746,468
                                                                                                
                                                                                                
                                                                                                
                                                                                                20,872,084
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,954,316$
                                                                                                100,842,245
                                                                                                
                                                                                                
                                                                                                $
                                                                                                66,876,255
                                                                                                
                                                                                                
                                                                                                $
                                                                                                210,202,255
                                                                                                
                                                                                                
                                                                                                $
                                                                                                144,442,614Income
      before provision for income taxes:Wholesale
      and distribution
                                                                                                
                                                                                                $
                                                                                                14,149,838
                                                                                                
                                                                                                
                                                                                                $
                                                                                                6,468,411
                                                                                                
                                                                                                
                                                                                                $
                                                                                                26,765,529
                                                                                                
                                                                                                
                                                                                                $
                                                                                                14,230,282Retail
                                                                                                
                                                                                                
                                                                                                182,053
                                                                                                
                                                                                                
                                                                                                
                                                                                                64,680
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,164,076
                                                                                                
                                                                                                
                                                                                                
                                                                                                202,38814,331,891
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,533,091
                                                                                                
                                                                                                
                                                                                                
                                                                                                27,929,605
                                                                                                
                                                                                                
                                                                                                
                                                                                                14,432,670Unallocated
      corporate expenses
                                                                                                
                                                                                                
                                                                                                (1,160,152
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (524,803)
                                                                                                
                                                                                                
                                                                                                
                                                                                                (2,222,692)
                                                                                                
                                                                                                
                                                                                                
                                                                                                (1,519,580)Other
      income (expense), net
                                                                                                
                                                                                                
                                                                                                (292,249
                                                                                                )
                                                                                                
                                                                                                
                                                                                                531,563
                                                                                                
                                                                                                
                                                                                                
                                                                                                (599,420)
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,144,606$
                                                                                                12,879,490
                                                                                                
                                                                                                
                                                                                                $
                                                                                                6,539,851
                                                                                                
                                                                                                
                                                                                                $
                                                                                                25,107,493
                                                                                                
                                                                                                
                                                                                                $
                                                                                                14,057,696





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





June
      30,
                  
                  December
      31,2009
                  
                  2008Wholesale
      and distribution
                  
                  $
                  175,070,449
                  
                  
                  $
                  163,502,662Retail
                  
                  
                  43,841,885
                  
                  
                  
                  30,286,845Corporate
                  
                  
                  340,760
                  
                  
                  
                  1,059,907$
                  219,253,094
                  
                  
                  $
                  194,849,414


(14)
              Concentrations:








The
Company purchased approximately 97% and 100% for the three months ended June 30,
2009 and 2008, respectively, and 98% and 100% for the six months ended June 30,
2009 and 2008, respectively, of its inventories from Shanghai Gold
Exchange.


(15)
              Subsequent
      Event:





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


17


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




FORWARD-LOOKING
STATEMENTS





The
following discussion contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements include, but are not limited to,
statements regarding future events, our plans and expectations and financial
projections. The words “anticipated,” “believe,” “expect, “plan,” “intend,”
“seek,” “estimate,” “project,” “could,” “may,” and similar expressions are
intended to identify forward-looking statements. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed elsewhere
in this report and in our other filings with the Securities and Exchange
Commission (“SEC”), and the “Risk Factors” section below.





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





The
following discussion should be read in conjunction with our 2008 Form 10-K
filed with the SEC on March 31, 2009 and the unaudited interim condensed
consolidated financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Unless the context otherwise requires, the
terms “we,” the “Company,” “us,” or “Fuqi” refers to Fuqi International, Inc.
and our wholly-owned subsidiaries.





OVERVIEW




We are a
leading designer, producer and seller of high quality precious metal jewelry in
China. We develop, promote, manufacture and sell a broad range of products
consisting of unique styles and designs made from gold and other precious metals
such as platinum and Karat gold (K-gold). We also produce jewelry items that
contain diamonds and other precious stones on a custom-order basis. Our products
are competitively priced, high-quality and target the high-volume retail jewelry
market and China’s growing middle-class. Our design database presently contains
over 30,000 unique products, and our designs are continuously updated based on
consumer trends in China. By continuously creating new designs and rapidly
bringing them to market, we believe we are able to differentiate ourselves from
our competitors and strengthen our brand identity.





Since we
launched of our retail strategy in May 2007, we initiated the establishment of
brand presence in the jewelry retail operations in Shenyang region and developed
the brand of FUQI. Our FUQI brand is marketed to a broad group of mid-level
income consumers that purchase more traditional gold and platinum jewelry and
jewelry gift items. During the second quarter of 2009, we opened and/or acquired
6 retail counters in municipalities and provincial capitals throughout China and
closed four retail counters.  As of June 30, 2009, we had a total of
64 retail counters, including 50 under the Temix brand and 14 under the FUQI
brand, and a total of 7 retail stores, which are all under the Temix
brand.


18


RESULTS
OF OPERATIONS





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




Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008In Dollars
                  
                  
                  Percent of
                      Revenues
                  
                  
                  In Dollars
                  
                  
                  Percent of
                      Revenues
                  
                  
                  In Dollars
                  
                  
                  Percent of
                      Revenues
                  
                  
                  In Dollars
                  
                  
                  Percent of
                      Revenues($
      in thousands, except earnings per share)Net
      sales:Wholesale
      and distribution
                  
                  $
                  92,504
                  
                  
                  
                  91.73
                  %
                  
                  $
                  66,130
                  
                  
                  
                  98.88
                  %
                  
                  $
                  189,330
                  
                  
                  
                  90.07
                  %
                  
                  $
                  142,489
                  
                  
                  
                  98.65
                  %Retail
                  
                  
                  8,338
                  
                  
                  
                  8.27
                  %
                  
                  
                  746
                  
                  
                  
                  1.12
                  %
                  
                  
                  20,872
                  
                  
                  
                  9.93
                  %
                  
                  
                  1,954
                  
                  
                  
                  1.35
                  %100,842
                  
                  
                  
                  100
                  %
                  
                  
                  66,876
                  
                  
                  
                  100
                  %
                  
                  
                  210,202
                  
                  
                  
                  100
                  %
                  
                  
                  144,443
                  
                  
                  
                  100
                  %Cost
      of sales:Wholesale
      and distribution
                  
                  
                  77,961
                  
                  
                  
                  77.31
                  %
                  
                  
                  59,088
                  
                  
                  
                  88.36
                  %
                  
                  
                  160,593
                  
                  
                  
                  76.40
                  %
                  
                  
                  126,894
                  
                  
                  
                  87.85
                  %Retail
                  
                  
                  5,526
                  
                  
                  
                  5.48
                  %
                  
                  
                  691
                  
                  
                  
                  1.03
                  %
                  
                  
                  14,202
                  
                  
                  
                  6.76
                  %
                  
                  
                  1,641
                  
                  
                  
                  1.14
                  %83,487
                  
                  
                  
                  82.79
                  %
                  
                  
                  59,779
                  
                  
                  
                  89.39
                  %
                  
                  
                  174,795
                  
                  
                  
                  83.16
                  %
                  
                  
                  128,535
                  
                  
                  
                  88.99
                  %Gross
      profit
                  
                  
                  17,355
                  
                  
                  
                  17.21
                  %
                  
                  
                  7,097
                  
                  
                  
                  10.61
                  %
                  
                  
                  35,407
                  
                  
                  
                  16.84
                  %
                  
                  
                  15,908
                  
                  
                  
                  11.01
                  %Operating
      expenses:Selling
      and marketing
                  
                  
                  2,856
                  
                  
                  
                  2.83
                  %
                  
                  
                  461
                  
                  
                  
                  0.69
                  %
                  
                  
                  5,838
                  
                  
                  
                  2.78
                  %
                  
                  
                  926
                  
                  
                  
                  0.64
                  %General
      and administrative
                  
                  
                  1,328
                  
                  
                  
                  1.32
                  %
                  
                  
                  628
                  
                  
                  
                  0.94
                  %
                  
                  
                  3,862
                  
                  
                  
                  1.83
                  %
                  
                  
                  2,069
                  
                  
                  
                  1.43
                  %Total
      operating expenses
                  
                  
                  4,184
                  
                  
                  
                  4.15
                  %
                  
                  
                  1,089
                  
                  
                  
                  1.63
                  %
                  
                  
                  9,700
                  
                  
                  
                  4.61
                  %
                  
                  
                  2,995
                  
                  
                  
                  2.07
                  %Income
      from operations
                  
                  
                  13,171
                  
                  
                  
                  13.06
                  %
                  
                  
                  6,008
                  
                  
                  
                  8.98
                  %
                  
                  
                  25,707
                  
                  
                  
                  12.23
                  %
                  
                  
                  12,913
                  
                  
                  
                  8.94
                  %Other
      (expense) income, net
                  
                  
                  (292
                  )
                  
                  
                  0.29
                  %
                  
                  
                  532
                  
                  
                  
                  0.79
                  %
                  
                  
                  (599
                  )
                  
                  
                  0.29
                  %
                  
                  
                  1,145
                  
                  
                  
                  0.79
                  %Income
      before provision for income taxes
                  
                  
                  12,879
                  
                  
                  
                  12.77
                  %
                  
                  
                  6,540
                  
                  
                  
                  9.77
                  %
                  
                  
                  25,108
                  
                  
                  
                  11.94
                  %
                  
                  
                  14,058
                  
                  
                  
                  9.73
                  %Provision
      for income taxes
                  
                  
                  3,012
                  
                  
                  
                  2.99
                  %
                  
                  
                  1,289
                  
                  
                  
                  1.92
                  %
                  
                  
                  5,580
                  
                  
                  
                  2.65
                  %
                  
                  
                  2,412
                  
                  
                  
                  1.67
                  %Net
      income
                  
                  
                  9,867
                  
                  
                  
                  9.78
                  %
                  
                  
                  5,251
                  
                  
                  
                  7.85
                  %
                  
                  
                  19,528
                  
                  
                  
                  9.29
                  %
                  
                  
                  11,646
                  
                  
                  
                  8.06
                  %Other
      comprehensive income (loss)- foreign currency translation
      adjustments
                  
                  
                  5
                  
                  
                  
                  0.005
                  %
                  
                  
                  2,540
                  
                  
                  
                  3.80
                  %
                  
                  
                  (9
                  )
                  
                  
                  0.004
                  %
                  
                  
                  6,506
                  
                  
                  
                  4.50
                  %Comprehensive
      income
                  
                  $
                  9,872
                  
                  
                  
                  9.79
                  %
                  
                  $
                  7,791
                  
                  
                  
                  11.65
                  %
                  
                  $
                  19,519
                  
                  
                  
                  9.29
                  %
                  
                  $
                  18,152
                  
                  
                  
                  12.56
                  %Earnings
      per share - basic
                  
                  $
                  0.46
                  
                  
                  
                  
                  
                  
                  $
                  0.25
                  
                  
                  
                  
                  
                  
                  $
                  0.91
                  
                  
                  
                  
                  
                  
                  $
                  0.56Earnings
      per share - diluted
                  
                  $
                  0.45
                  
                  
                  
                  
                  
                  
                  $
                  0.25
                  
                  
                  
                  
                  
                  
                  $
                  0.91
                  
                  
                  
                  
                  
                  
                  $
                  0.56


Three
Months Ended June 30, 2009 and 2008





Net
sales





Net
sales, which consist of gross sales net of returns, for the three months ended
June 30, 2009 increased by 50.6% to $100.8 million from $66.9 million, compared
with the same period in 2008.





Net sales
of our wholesale and distribution segment increased by 39.9% to $92.5 million
from $66.1 million in the same period of 2008.  The increase was
mainly attributable to an increase of sales volume. The selling price of our
jewelry products is based on the market price of the precious metals (e.g., gold
and platinum) in the periods when the products are sold, plus our processing and
design fees. During the second quarter of 2009, the quantities sold for gold and
platinum increased by 38% and 133%, respectively.


19


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




Three Months Ended June 30,2009
                                                                        
                                                                        
                                                                        2008Amount in
                                                                          Millions
                                                                        
                                                                        Percentage
                                                                        
                                                                        
                                                                        Amount in
                                                                          Millions
                                                                        
                                                                        PercentagePlatinum
                                                                        
                                                                        $
                                                                        8.2
                                                                        
                                                                        8.9
                                                                        %
                                                                        
                                                                        $
                                                                        5.7
                                                                        
                                                                        8.6
                                                                        %Gold
                                                                        
                                                                        
                                                                        64.7
                                                                        
                                                                        69.9
                                                                        
                                                                        
                                                                        
                                                                        42.5
                                                                        
                                                                        64.3K-gold,
      Studded Jewelry and Diamond
                                                                        
                                                                        
                                                                        19.6
                                                                        
                                                                        21.2
                                                                        
                                                                        
                                                                        
                                                                        17.9
                                                                        
                                                                        27.1Total
                                                                        
                                                                        $
                                                                        92.5
                                                                        
                                                                        100.0
                                                                        %
                                                                        
                                                                        $
                                                                        66.1
                                                                        
                                                                        100.0
                                                                        %





Revenue
derived from our retail segment during the three months ended June 30, 2009
totaled $8.3 million, representing 8.27% of the total revenue, which included
$6.6 million of revenue from the Temix branded products and $1.7 million of
revenue from the sale of FUQI branded products.





Net sales
derived from our retail segment for the three months ended June 30, 2009
increased by $7.6 million to $8.3 million from $746,000 in the three months
ended June 30, 2008. The increase in retail revenue for the three months ended
June 30, 2009 is primarily due to the sales generated from the Temix branded
products which accounted for $6.6 million of this increase.





Cost
of sales




Cost of
sales is mainly comprised of costs of raw materials, primarily gold, platinum
and diamonds, in addition to direct manufacturing costs, factory overhead and
processing fees. Cost of sales for the three months ended June 30, 2009
increased to $83.5 million, an increase of $23.7 million, or 39.7%, from $59.8
million for the same period in 2008.





Wholesale
and distribution cost of sales increased by $18.9 million, or 31.9%, in the
second quarter of 2009 to $78.0 million from $59.1 million for the second
quarter of 2008. The increase in cost of sales, which was consistent with the
increase in net sales, was primarily due to an increase in the cost of raw
materials, which resulted from the increase in both sales volume and the general
increase in direct labor.





Cost of
retail sales for the three months ended June 30, 2009 increased by $4.8 million
to $5.5 million from approximately $691,000 for the same period in 2008. The
increase in cost of retail sales for the three months ended June 30, 2009 was
primarily due to the increase in sales volume.





Gross
profit





Gross
profit for the three months ended June 30, 2009 increased to $17.4 million, an
increase of $10.3 million, or 145%, from $7.1 million for the comparable period
in 2008. Gross profit margin increased to 17.2% for the three months ended June
30, 2009, compared to 10.6% for the same period in 2008. The increase in profit
margin was mainly attributable to an increase of product segments and an
expansion in retail sales, which resulted from an increase in brand awareness,
an opening of additional jewelry counters, and acquisition of Temix’s 50 retail
stores in August 2008.


20


Selling
and marketing expenses




Selling
and marketing expenses are primarily comprised of business taxes, advertising
expenses, traveling expenses, production costs of marketing materials, fees to
the malls for retail counters, insurance, payroll expenses and delivery
expenses. Selling and marketing expenses for the three months ended June 30,
2009 were approximately $2.9 million, an increase of $2.4 million, or 521%, from
$461,000 for the comparable period in 2008. Selling and marketing expenses were
2.83% of net sales for the three months ended June 30, 2009 compared to 0.7% for
the three months ended June 30, 2008. The increase in selling and marketing
expenses as a percentage of net sales was primarily due to an increase of
business tax expenses that resulted from an overall increase in our net revenue,
an increase in fees to the malls for retail counters, payroll for retail counter
employees, and salaries for our sales and marketing executives.





General
and administrative expenses




General
and administrative expenses consist primarily of payroll expenses, benefits and
travel expenses for our staff, professional fees including audit, accounting,
legal and financial advisory, depreciation expenses, and general office
expenses. General and administrative expenses for the three months ended June
30, 2009 were $1.3 million, an increase of $0.7 million or 112%, from $628,000
for the comparable period in 2008. General and administrative expenses were
1.32% of net sales for the three months ended June 30, 2009 compared to 0.9% for
the three months ended June 30, 2008. The increase in general and administrative
expenses as a percentage of net sales was due to an increase of audit fees as a
result of the expansion of the retail business and increased payroll cost for
the additional employees hired in the accounting and finance
department.





Other
income (expense), net




Other
expense, net was $292,000 in the three months ended June 30, 2009 compared to
$532,000 of other income, net in the three months ended June 30, 2008. The
decrease in other income was attributable to realized gain decreased by $0.7
million from our gold future contract during the three months ended June 30,
2009. We have entered into the gold future contracts with our supplier, The
Shanghai Gold Exchange, since 2008, in an attempt to reduce our exposure to
volatility in the price of gold.





Provision
for income tax




Provision
for income tax expense was $3.0 million for the three months ended June 30,
2009, an increase of $1.7 million, or 131%, from approximately $1.3 million for
the three months ended June 30, 2008. The increase was primarily due to an
increase in the taxable income for the three months ended June 30, 2009, in
addition to an increase in the statutory tax rate in 2009. Our effective tax
rate for the three months ended June 30, 2009 was 23.3%, an increase of 360
basis points from 19.7% for the same period in 2008.





Net
income




Net
income increased to $9.9 million for the three months ended June 30, 2009 from
$5.3 million for the same period of the prior year, an increase of
86.8%.





Six
Months Ended June 30, 2009 and 2008





Net
sales





Net sales
for the six months ended June 30, 2009 increased by 45.5% to $210.2 million from
$144.4 million, compared with the same period in 2008.





Net sales
of our wholesale and distribution segment increased by 32.9% to $189.3 million
from $142.5 million in the same period of 2008.  The increase was
mainly attributable to an increase of sales volume. The selling price of our
jewelry products is based on the market price of the precious metals (e.g., gold
and platinum) in the periods when the products are sold, plus our processing and
design fees. During the first six months of 2009, the quantities sold for gold
and platinum increased by 35% and 114%, respectively, compared to the same
period in 2008.


21


Net
wholesale and distribution sales for the six months ended June 30, 2009 and 2008
were comprised of the following:




Six Months Ended June 30,2009
                                                                              
                                                                              
                                                                              2008Amount in
                                                                                Millions
                                                                              
                                                                              Percentage
                                                                              
                                                                              
                                                                              Amount in
                                                                                Millions
                                                                              
                                                                              
                                                                              PercentagePlatinum
                                                                              
                                                                              $
                                                                              15.9
                                                                              
                                                                              8.4
                                                                              %
                                                                              
                                                                              $
                                                                              11.5
                                                                              
                                                                              
                                                                              8.1
                                                                              %Gold
                                                                              
                                                                              
                                                                              136.4
                                                                              
                                                                              72.1
                                                                              
                                                                              
                                                                              
                                                                              96.0
                                                                              
                                                                              
                                                                              67.3K-gold,
      Studded Jewelry and Diamond
                                                                              
                                                                              
                                                                              37.0
                                                                              
                                                                              19.5
                                                                              
                                                                              
                                                                              
                                                                              35.0
                                                                              
                                                                              
                                                                              24.6Total
                                                                              
                                                                              $
                                                                              189.3
                                                                              
                                                                              100.0
                                                                              %
                                                                              
                                                                              $
                                                                              142.5
                                                                              
                                                                              
                                                                              100.0
                                                                              %





Revenue
derived from our retail segment during the six months ended June 30, 2009
totaled $20.9 million, representing 9.9% of the total revenue, which included
$16.1 million of revenue from the Temix branded products and $4.8 million of
revenue from the sale of FUQI branded products.





Net sales
derived from our retail segment for the six months ended June 30, 2009 increased
by $18.9 million to $20.9 million from $2.0 million in the six months ended June
30, 2008. The increase in retail revenue for the six months ended June 30, 2009
is primarily due to the sales generated from the Temix branded products which
accounted for $16.1 million of this increase.





Cost
of sales




Cost of
sales for the six months ended June 30, 2009 increased to $174.8 million, an
increase of $46.3 million, or 36.0%, from $128.5 million for the same period in
2008.





Wholesale
and distribution cost of sales increased by $33.7 million, or 26.6%, in the
first six months of 2009 to $160.6 million from $126.9 million for the first six
months of 2008. The increase in cost of sales, which was consistent with the
increase in net sales, was primarily due to an increase in the cost of raw
materials, which resulted from the increase in both sales volume and the general
increase in direct labor.





Cost of
retail sales for the six months ended June 30, 2009 increased by $12.6 million
to $14.2 million from approximately $1.6 million for the same period in 2008.
The increase in cost of retail sales for the six months ended June 30, 2009 was
primarily due to the increase in sales volume.





Gross
profit





Gross
profit for the six months ended June 30, 2009 increased to $35.4 million, an
increase of $19.5 million, or 123%, from $15.9 million for the comparable period
in 2008. Gross profit margin increased to 16.8% for the six months ended June
30, 2009, compared to 11.0% for the same period in 2008. The increase in profit
margin was mainly attributable to an increase of product segments and an
expansion in retail sales, which resulted from an increase in brand awareness,
an opening of additional jewelry counters, and acquisition of Temix’s 50 retail
stores in August 2008.





Selling
and marketing expenses




Selling
and marketing expenses for the six months ended June 30, 2009 were approximately
$5.8 million, an increase of $4.9 million, or 530%, from $926,000 for the
comparable period in 2008. Selling and marketing expenses were 2.8% of net sales
for the six months ended June 30, 2009 compared to 0.6% for the six months ended
June 30, 2008. The increase in selling and marketing expenses as a percentage of
net sales was primarily due to an increase of business tax expenses that
resulted from an overall increase in our net revenue, an increase in fees to the
malls for retail counters, payroll for retail counter employees, and salaries
for our sales and marketing executives.


22


General
and administrative expenses




General
and administrative expenses for the six months ended June 30, 2009 were $3.9
million, an increase of $1.8 million, or 85.7%, from $ 2.1 million for the
comparable period in 2008. General and administrative expenses were 1.8% of net
sales for the six months ended June 30, 2009 compared to 1.4% for the six months
ended June 30, 2008. The increase in general and administrative expenses as a
percentage of net sales was due to an increase of audit fees as a result of the
expansion of the retail business and increased payroll cost for the additional
employees hired in the accounting and finance department.





Other
income (expense), net




Other
expense, net was $599,000 in the six months ended June 30, 2009 compared to $1.1
million of other income, net in the six months ended June 30, 2008. The decrease
in other income was attributable to realized gain decreased by $1.5 million from
our gold future contract during the six months ended June 30, 2009.





Provision
for income tax




Provision
for income tax expense was $5.6 million for the six months ended June 30, 2009,
an increase of $3.2 million, or 133%, from approximately $2.4 million for the
six months ended June 30, 2008. The increase was primarily due to an increase in
the taxable income for the six months ended June 30, 2009, in addition to an
increase in the statutory tax rate in 2009. Our effective tax rate for the six
months ended June 30, 2009 was 22.2%, an increase of 500 basis points from 17.2%
for the same period in 2008.





Net
income




Net
income increased to $19.5 million for the six months ended June 30, 2009 from
$11.6 million for the same period of the prior year, an increase of
68.1%.




LIQUIDITY
AND CAPITAL RESOURCES





At June
30, 2009, we had retained earnings of $64.2 million, and cash of $49.3 million.
Our primary sources of cash are from operating activities and borrowings from
the bank.





At June
30, 2009, we had working capital of $148.9 million. Except for cash, a majority
of our net working capital consisted of inventories and accounts receivable. Our
inventories increased by 95.5% and our accounts receivable decreased by 18.8% as
of June 30, 2009 as compared to December 31, 2008. The increase in inventory was
a result of a substantial increase in our purchases of raw materials in order to
expand our sales capabilities by taking on larger sales orders from our
customers for the rest of the year. As a leading wholesaler and retailer of high
quality of precious metal jewelry in China, we believe that we have to maintain
sufficient inventory to meet the demand for our products based on customers
orders, sales projection and finished goods for sales for retailers, who will
purchase from our show room in our head office in Shenzhen. We do not conduct
any trading of our precious metal raw materials.   The decrease
in accounts receivable was attributable to collection of accounts receivable
that were derived from the trend of higher sales in the fourth quarter in
2008.  We typically offer certain of our customers 30-days credit
terms for payment but we also temporarily extend credit terms to some of our
customers with high credit standings and during the sales peak season, such as
the fourth quarter. We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
Allowance for doubtful accounts is based on our assessment of the collectability
of specific customer accounts, the aging of accounts receivable, our history of
bad debt, and the general condition of the industry. If a major customer’s
credit worthiness deteriorates, or our customers’ actual defaults exceed
historical experience, our estimates could change and impact our reported
results. We have not experienced any significant amount of bad debt since the
inception of our operation.





If
customers responsible for a significant amount of accounts receivable were to
become insolvent or otherwise unable to pay for our products, or to make
payments in a timely manner, our liquidity and results of operations could be
materially adversely affected. An economic or industry downturn could materially
adversely affect the servicing of these accounts receivable, which could result
in longer payment cycles, increased collections costs and defaults in excess of
management’s expectations. In addition, as we increase our presence in the
retail market, we expect 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.


23


As of
June 30, 2009, we had outstanding short-term notes payables with banks in an
aggregate amount of $32.2 million that are due and payable on dates between
December 2009 and June 2010. Our loans are secured by inventory, real properties
owned by our affiliated companies and/or guaranteed by our affiliates and our
controlling stockholder and his wife.  The amounts outstanding under
these lines of credit and short-term notes payable are presented in our
financial statements as notes payable.





We have a
general banking facility line of credit with Agricultural Bank of China pursuant
to a Maximum Banking Facility Agreement dated August 24, 2006 which was renewed
in September 2007 and December 2008. The terms of the agreement enable us to
borrow up to a maximum facility amount of $14.6 million (RMB 100,000,000) as of
June 30, 2009.  In March 2009, we entered into a supplemental
agreement with this bank to increase the maximum borrowing amount to
approximately $22 million (RMB 150,000,000) as of June 30, 2009.  We
executed notes payable with this bank under this facility line with terms less
than one year. This renewed facility is secured by our inventory, real
properties owned by affiliated companies, and/or guaranteed by our affiliates
and our controlling stockholder and his wife and have certain restrictions and
covenants. We do not guarantee any indebtedness of our affiliates. As of June
30, 2009 and December 31, 2008, we have approximately $22 million and $14.6
million, respectively, outstanding under the facility, with interest rates
ranging from 4.779% to 8.217%.





In June
2008, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to
approximately $7.3 million (RMB 50,000,000) as of June 30, 2009. This facility
and related guarantees which expired and were renewed in May 2009, increased the
maximum the Company could draw to $8.3 million (RMB57,000,000) as of June 30,
2009 and is secured by certain real properties owned by affiliate companies and
guaranteed by affiliated companies.  Interest is charged at the bank’s
prime rate. As of June 30, 2009 and December 31, 2008, the outstanding balance
was approximately $8.3 million and $7.3 million, respectively, with interest
rates ranging from 4.860% to 5.310%.





In June
2009, the Company entered into a Maximum Banking Facility Agreement with the
Shenzhen Development Bank that provides for a maximum borrowing of up to
approximately $6.3 million (RMB 43,000,000) as of June 30, 2009. This facility
expires in May 2010 and is secured by certain real properties owned by
affiliated companies and guaranteed by the Company’s controlling stockholder.
Interest is charged at the bank’s prime rate (5.310% at June 30, 2009). As of
June 30, 2009 and December 31, 2008, the outstanding balance was approximately
$1.9 million and $0, respectively.





We did
not pay any cash dividends during the six months ended June 30, 2009 or the
years ended December 31, 2008 and 2007. We currently have no intention to
declare further dividends in the foreseeable future. Payment of dividends is
further restricted under the provisions of our existing loan
agreements.





We paid a
total of approximately $11.7 million to acquire substantially all of the assets
of the Temix Companies in August 2008, with $7.3 million having been paid in
cash and the remaining $4.4 million is recorded as other payable, related
parties in the consolidated balance sheets as of June 30, 2009 and December 31,
2008. We expect to pay the remaining $4.4 million in the second half of 2009.
During the rest of 2009, we intend to open additional retail counters and retail
stores, although these plans may change at any given time as our management
continually reviews our retail expansion plans, particularly in light of the
recent fluctuations in the economy.  Our retail expansion will largely
depend on our ability to find sites for, open and operate new retail locations
successfully, which depends on, among other things, our ability to: (i) identify
suitable counter and store locations; (ii) purchase and negotiate acceptable
lease terms; (iii) prepare counters and stores for opening within budget; (iv)
source sufficient levels of inventory at acceptable costs to meet the needs of
new counters and stores; (v) hire, train and retain personnel, and (vi) secure
required governmental permits and approvals. In addition to the funds required
to open new retail locations, additional working capital will be needed to
operate the retail locations due to longer sales and collection cycles and
higher inventory levels required to support retail stores.


24


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





We
believe that our current cash and cash flow from operations will be sufficient
to meet our anticipated cash needs, including our cash needs for working
capital, for at least the next 12 months. During the next 12 months, we expect
to expend significant amounts of capital to support and grow our wholesale and
distribution business and expand our retail business. The sources of the funding
for our expected expenditures over the next 12 months include the net proceeds
from the August 2009 public offering, our current cash and cash flow from
operations.  However, we may require additional cash resources due to
changing business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  We may seek
additional funding through public or private financing or through collaborative
arrangements with strategic partners.  We cannot be certain that
additional capital will be available on favorable terms, if at all, and any
available additional financing may not be adequate to meet our
goals.  Moreover, any equity financing would result in dilution to
stockholders.  If we cannot raise additional funds when needed, or on
acceptable terms, we may not be able to effectively execute our growth strategy
(including expanding our business to the retail market), take advantage of
future opportunities, or respond to competitive pressures or unanticipated
requirements. In addition, we may be required to scale back or discontinue our
production and development program, or obtain funds through strategic alliances
that may require us to relinquish certain rights.





Operating activities – Net
cash used for operating activities was $17.6 million for the six months ended
June 30, 2009, compared to net cash provided by operating activities of $9.5
million for the same period in 2008. The $27.1 million decrease was primarily
due to an increase in inventory in the amount of $42.4 million during the period
ended June 30, 2009 compared to an increase of $3.5 million during the same
period in 2008, in additional to a decrease of accounts receivable in the amount
of $14.1 million during the period ended June 30, 2009 compared to an increase
of $268,000 in the same period in 2008.





Investing activities -Net
cash used for investing activities amounted to approximately $884,000 for the
six months ended June 30, 2009, compared to net cash used for investing
activities of $140,000 for the six months ended June 30, 2008. The change was
due to a decrease in restricted cash of $427,000 resulting from a bank loan of
which the restricted deposit was pledged as collateral being paid off during the
first quarter of 2008.





Financing activities - Net
cash provided by financing activities amounted to $11.3 million for the six
months ended June 30, 2009, compared to net cash used for financing activities
of $285,000 for the six months ended June 30, 2008. The increase was primarily a
result of additional borrowings of approximately $7.3 million (RMB50,000,000)
through a supplemental agreement with the Agricultural Bank of China executed in
March 2009 and approximately $2.9 million (RMB20,000,000) with the Shenzhen
Development Bank in May and June 2009.





Contractual Obligations





We enter
into operating leases for our retail locations. Other than the seven retail
stores as of June 30, 2009, which operate under a monthly fixed rate of lease,
all counter lease agreements are provided with contingent rent provisions based
on a percentage of sales generated in the jewelry counters within department
stores which are excluded from minimum lease payments. The average monthly fixed
rate of each of the seven retail shops is approximately $8,000.  Since
the transfer of the legal titles of the stores into our name has not yet been
completed, the lease agreements of the seven retail stores remain between the
lessors and Shanghai Tian Mei Jewelry Co. Ltd., and the operating lease
commitment of these retail stores are not included in the following
table.





The
following table describes our contractual commitments and obligations as of June
30, 2009:


25





Payments due by Period (in $)Contractual Obligations
                        
                        Total
                        
                        
                        Less Than
                          1 Year
                        
                        
                        1 - 3
                          Years
                        
                        
                        3 - 5
                          Years
                        
                        
                        More
                          Than
                          5 YearsShort-term
      borrowings
                        
                        $
                        32,201,876
                        
                        
                        $
                        32,201,876
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Lease
      of Plant & Office
                        
                        $
                        176,863
                        
                        
                        $
                        93,316
                        
                        
                        $
                        83,547
                        
                        
                        $
                        -
                        
                        
                        $
                        -Lease
      of Staff Dormitory
                        
                        $
                        305,808
                        
                        
                        $
                        54,555
                        
                        
                        $
                        175,668
                        
                        
                        $
                        75,585
                        
                        
                        $
                        -$
                        32,684,547
                        
                        
                        $
                        32,349,747
                        
                        
                        $
                        259,215
                        
                        
                        $
                        75,585
                        
                        
                        $





Off-Balance
Sheet Arrangements




We have
no material off-balance sheet arrangements.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




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




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





ITEM
3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




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





ITEM
4 — CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures




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





As
required by Rule 13a-15(b) under the Securities Exchange Act, our management has
carried out an evaluation, with the participation and under the supervision of
our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2009.  As discussed in more detail below,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were ineffective as of June 30, 2009, due to
the material weaknesses that we identified in internal control over financial
reporting, specifically related to period-end closing process and revenue
recognition in improper periods.





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




26





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




Remediation
Measures of Material Weaknesses




We have
implemented the following measures in 2009 as indicated:




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





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





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





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





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





6.
            We
      are in the process of expanding the internal control functions and honing
      related policies and procedures. As referenced above, we hired a qualified
      and experienced Internal Audit Manager, who commenced work in January
      2009.  We also plan to allocate and transfer additional
      resources to the internal audit department for the purpose of enhancing
      the internal audit function. Moreover, we also hired an international
      accounting firm to provide professional support to our internal control
      functions to achieve compliance of internal controls required by the
      Sarbanes-Oxley Act of 2002.





Changes
in Internal Controls over Financial Reporting




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


27


PART II
— OTHER INFORMATION





ITEM
1 — LEGAL PROCEEDINGS




None.




ITEM
1A - RISK FACTORS




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





Our
acquisition of substantially all of the assets of the Temix Companies in August
2008 may not result in the benefits and revenue growth we expect.




In August
2008, we commenced our acquisition of substantially all of the assets of the
Temix Companies. As part of the acquisition, the intellectual property was
first transferred from the Temix Companies to their controlling shareholder, Mr.
Chujian Huang, which step has been completed, and then from Mr. Huang to us,
which step has not yet been completed.  The Temix Companies was our
first major acquisition of a jewelry retail operation. We may continue to
acquire additional businesses in the future. This acquisition and future
acquisitions involve substantial risks, including:







·
            integration
      and management of the operations;




·
            retention
      of key personnel;




·
            integration
      of information systems, internal procedures, accounts receivable and
      management, financial and operational
controls;




·
            retention
      of customer base of acquired
businesses;




·
            diversion
      of management’s attention from other ongoing business concerns; and
      exposure to unanticipated liabilities of acquired
    companies;




·
            uncertainty
      as to whether PRC governmental authorities will question the structure of
      the acquisition of assets of the Temix Companies and require approval of
      PRC authorities that would have the ability to seek to void the
      transaction;




·
            uncertainty
      as to whether the payment of our common stock for the intellectual
      property of the Temix Companies may be subject to tax liability or foreign
      exchange control in the PRC;




·
            timely
      transfer by Mr. Huang to us of net sales proceeds from Temix leased
      counters not yet transfered by Mr. Huang to
us;




·
            unforeseen
      tax liability in connection with Shenzhen Fuqi Jewelry Co., Ltd.’s (“Fuqi
      China”) possession and operation of the majority of the assets we acquired
      from the Temix Companies;




·
            difficulty
      or delays in fully implementing transfers of tangible and intangible
      property rights in the PRC—we have had such difficulties with the
      acquisition of assets of the Temix Companies;
  and




·
            failure
      to realize anticipated financial results or
  benefits.




These and
other factors could harm our ability to achieve anticipated levels of
profitability or realize other anticipated benefits of an acquisition and could
adversely affect our business and operating results.


28


Our
business could be materially adversely affected if we cannot protect our
intellectual property rights.





Protection
of intellectual property rights remains an issue in China. While we have applied
for patents on a limited number of designs of our jewelry products, it may be
difficult to enforce our rights relating to these designs as well as our
trademark and tradenames. Unauthorized use of our designs, trademarks and
tradenames could result in potential sales of products being diverted to such
unauthorized sellers and potential damage or dilute the value of such rights and
our brand.





Our
failure to comply with environmental laws, rules, and regulations may have a
material adverse effect on our business and results of operations.





Fuqi
China’s operations are subject to environmental laws, rules, and regulations of
the PRC. Our manufacturing process involves certain hazardous chemicals we use
in processing precious metals. We are subject to a special set of environmental
protection standards that require us to properly treat and dispose of waste
substance produced in our manufacturing process, and are also subject to fees
for the discharge of such waste substances under PRC laws and
regulations.





Environmental
hazards may occur in connection with our operations as a result of human
negligence, force majeure or otherwise. The occurrence of any environmental
hazards may delay production, increase production costs, cause personal injuries
or property damage, all of which could result in damage to our reputation or
fines, penalties or revocation of our business license, any of which could
detrimentally affect our results of operations.





In the
future, we may experience increased costs of production arising from compliance
with environmental laws and regulations. Moreover, the development of the
Chinese economy and improvements in living standards may lead to heightened
awareness of environmental protection. As a result, it is possible that the PRC
may enact more stringent environmental laws, regulations or policies in the
future, or that the PRC will more strictly enforce the existing environmental
laws, regulations and policies. We may not always be able to comply with
existing or future PRC environmental protection laws, regulations or policies.
Should we fail to comply with such laws, regulations or policies, we may be
subject to penalties and liabilities under PRC laws and regulations, which may
have a material adverse effect on our business and results of
operations.





We
face risks related to natural disasters, terrorist attacks or other events in
China that may affect usage of public transportation, which could have a
material adverse effect on our retail business and results of
operations.





Our
business could be materially and adversely affected by natural disasters,
terrorist attacks or other events in China. Any future natural disasters,
terrorist attacks or other events in China could cause a reduction in usage of,
or other severe disruptions to, public transportation systems and could have a
material adverse effect on our retail business and results of
operations.





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




None.





ITEM
3 — DEFAULTS UPON SENIOR SECURITIES





None.





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





On June
1, 2009, we held our annual meeting of stockholders. Of the 22,005,509 shares
eligible to vote, 20,904,350, or 95%, votes were returned, formulating a quorum.
At the annual stockholders meeting, the following matters were submitted to
stockholders for vote: Proposal I—Election of directors; Proposal
II—Ratification of the appointment of Stonefield Josephson, Inc. as our
independent auditors for the year ending December 31, 2009; and Proposal III
—Approval of the Fuqi International, Inc. 2009 Omnibus Incentive
Plan.


29


Proposal
I—Election of Directors





The
results of voting on these proposals are as follows:




Director
                    
                    For
                    
                    
                    Withheld
                    
                    ElectedYu
      Kwai Chong
                    
                    
                    20,847,612
                    
                    
                    
                    63,806
                    
                    YesChing
      Wan Wong
                    
                    
                    19,671,877
                    
                    
                    
                    1,239,541
                    
                    YesLie
      Xi Zhuang
                    
                    
                    19,831,714
                    
                    
                    
                    1,079,704
                    
                    YesLily
      Lee Chen
                    
                    
                    20,861,696
                    
                    
                    
                    49,722
                    
                    YesEileen
      B. Brody
                    
                    
                    19,400,325
                    
                    
                    
                    1,511,093
                    
                    YesVictor
      A. Hollander
                    
                    
                    19,399,152
                    
                    
                    
                    1,512,266
                    
                    YesJeff
      Haiyong Liu
                    
                    
                    19,382,573
                    
                    
                    
                    1,528,845
                    
                    Yes




All
directors are elected at our annual meeting of stockholders.





Proposal
II—Ratification of the appointment of Stonefield Josephson, Inc. as our
independent auditors for the year ending December 31, 2009.





Proposal
II was approved with 20,846,596 shares voted for, 62,438 voted against and 2,383
abstained from voting, thereby, ratifying the appointment of Stonefield
Josephson, Inc. as our independent auditors for the year ending December 31,
2009.





Proposal
III—Approval of the Fuqi International, Inc. 2009 Omnibus Incentive
Plan.





Proposal
III was approved with 13,935,068 shares voted for, 2,975,401 voted against and
5,806 abstained from voting, thereby, approving the Fuqi International, Inc.
2009 Omnibus Incentive Plan.  Upon the approval of the Fuqi
International, Inc. 2009 Omnibus Incentive Plan, our 2007 Equity Incentive Plan
was frozen and no further grants or awards will be made under such plan.
However, the 2007 Equity Incentive Plan will continue in effect for so long as
and solely to the extent necessary to administer previously-granted awards that
remain outstanding under such plan.





ITEM
5 — OTHER INFORMATION




None.


30


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 and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.*




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


31





SIGNATURES




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




FUQI
      INTERNATIONAL, INC.Date:
      August 6, 2009
                    By:
                    /s/
      Yu Kwai ChongYu
      Kwai ChongChief
      Executive OfficerDate:
      August 6, 2009
                    By:
                    /s/
      Ching Wan WongChing
      Wan WongChief
      Financial
Officer


32