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: risks related to our acquisition of Temix in August 2008, adverse capital and credit market conditions, vulnerability of our business to general economic downturn; fluctuation and unpredictability of costs related to the gold, platinum, and precious metals markets and other commodities used to make our products; changes in the laws of the PRC that affect our operations; our inexperience in the retail jewelry market; 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 2007 Form 10-K filed with the SEC on March 28, 2008 and the unaudited interim condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Unless the context otherwise requires, the terms "we," the "Company," "us," or "Fuqi" refers to Fuqi International, Inc. and our wholly-owned subsidiaries.

OVERVIEW

We are a leading designer of high quality precious metal jewelry in China, developing, promoting, and selling a broad range of products in the large and rapidly expanding Chinese luxury goods market. Our products consist of a range of unique styles and designs made from precious metals such as platinum, gold, and Karat gold (K-gold), as well as diamonds and other precious stones.

RECENT EVENTS

Acquisition of Temix

On August 7, 2008, we closed the acquisition of Temix, a jewelry retail chain with 50 jewelry counters and shops offering high quality diamond products, located in Beijing and Shanghai. Temix has a fashionable diamond business in addition to its wide selection of gold and platinum products. Temix's counters and retail stores represent contemporary, fashionable jewelry designs that are designed to appeal to young women. Temix also strives to provide its customers with a pleasurable shopping experience by offering well-trained sales associates and marketing programs designed to promote customer awareness of its high quality of merchandise assortments. Temix offers lifetime exchange and lifetime buy-back as well as certification for certain high quality jewelry pieces to its consumers.

Temix's retail operations are located within the leading department stores and shopping malls in the first-tier cities. The average size of each retail operation ranges from 300 to 600 square feet with approximately 1,300 to 2,500 SKUs available for sale and the average transaction cost ranges from $200 to $3,000

We acquired Temix to diversify our business strategy, expand our presence at the retail level and improve our sales and margin performance. After closing the acquisition, Temix continues to be led by Mr. Chujian Huang, the co-founder of Temix, who is responsible for managing the Temix chain as our subsidiaries. Temix's operating results are included as part of the Company's retail segment since the date of Temix's acquisition.

The purchase consisted of approximately $11.7 million of cash and a total of 1,080,666 shares of our common stock. A total of 540,333 shares were issued to Mr. Huang at closing and the remaining 540,333 shares were being placed into an escrow account for the two-year period following the closing and will only transferred to Mr. Huang if the business of the Temix meets certain performance targets as set forth in the IP Transfer Agreement. The value of the 540,333 shares was determined based on the average market prices of our common stock during the two day-period before and after the terms of the acquisitions were agreed on and announced on April 18, 2008. The value of the shares held in escrow was not included in computing the purchase price until the contingency is resolved. The purchase price will be adjusted for the fair value of contingency shares when the contingency is resolved and such additional shares become distributable.

During August and September of 2008, the acquisition integration was being processed and the Temix acquisition added approximately $2.2 million of retail sales and $177,000 of operating profits in the third quarter of 2008. In future periods, we hope to improve Temix's net sales and operating profit by instituting price increases and improving product mix with a focus on higher-margin products.

Expansion of Retail Presence

Since we launched of our retail strategy in May 2007, we initiated the establishment of brand presence in the jewelry retail operations in Shenyang region and developed the brand of FUQI. Our FUQI brand is marketed to a broad group of mid-level income consumers that purchase more traditional gold and platinum jewelry and jewelry gift items. During the third quarter of 2008, we have expanded our FUQI brand presence in Beijing with three new counters which are located among large business and tourist districts in Beijing. In September 2008, subsequent to completion of our Temix acquisition, we opened three new Temix-branded jewelry counters, two in Shanghai and one in Beijing.

In conjunction with the retail jewelry operations acquired through Temix acquisition, as of September 30, 2008, we have a total of 60 retail operations, 51 of Temix brand and 9 of FUQI brand. We plan to open an additional 10 to 12 retail counters toward the end of the year and intend to further penetrate our retail presence in northern region of China. Our retail expansion is aimed towards increasing penetration across the first and second-tier cities, focusing on customer segmentation with emphasis on expansion of product range to meet differing customer groups and enhancing brand awareness to our products.

RESULTS OF OPERATIONS

The following table sets forth certain information from our condensed
consolidated statements of income and comprehensive income for the three months
and nine months ended September 30, 2008 and 2007 (unaudited):


                                           Three Months Ended                                       Nine Months Ended
                                              September 30,                                           September 30,
                                    2008                        2007                        2008                        2007
                                         Percent of                  Percent of                  Percent of                  Percent of
                           In Dollars     Revenues     In Dollars     Revenues     In Dollars     Revenues     In Dollars     Revenues
                                                 (in thousands, except percentages, share and per share amounts)
Net sales
Wholesale and
distribution              $     90,523        96.6%   $     35,861        98.9%   $    233,011        97.9%   $     89,824        99.3%
Retail                           3,155         3.4%            387         1.1%          5,109         2.1%            665         0.7%

                                93,678       100.0%         36,248       100.0%        238,120       100.0%         90,489       100.0%

Cost of sales
Wholesale and
distribution                    80,723        86.2%         31,468        86.8%        207,617        87.2%         79,289        87.6%
Retail                           1,956         2.1%            303         0.8%          3,597         1.5%            506         0.6%

                                82,679        88.3%         31,771        87.6%        211,214        88.7%         79,795        88.2%

Gross profit                    10,999        11.7%          4,477        12.4%         26,906        11.3%         10,694        11.8%

Operating expenses:
Selling and marketing            1,560         1.7%            268         0.7%          2,486         1.0%            649         0.7%
General and
administrative                   1,154         1.2%            539         1.5%          3,223         1.4%          1,701         1.9%

 Total operating
expenses                         2,714         2.9%            807         2.2%          5,709         2.4%          2,350         2.6%

Income from operations           8,285         8.8%          3,670        10.2%         21,197         8.9%          8,344         9.2%


Other income (expense),
net                               (355 )      -0.3%           (380 )      -1.1%            790         0.3%           (948 )      -1.0%

Income before provision
for income taxes                 7,930         8.5%          3,290         9.1%         21,987         9.2%          7,396         8.2%

Provision for income
taxes                            1,409         1.5%            560         1.6%          3,821         1.6%          1,294         1.5%

Net income                       6,521         7.0%          2,730         7.5%         18,166         7.6%          6,102         6.7%

Other comprehensive
income - foreign
currency translation
adjustments                        707         0.7%            229         0.7%          7,214         3.1%            554         0.7%

Comprehensive income      $      7,228         7.7%   $      2,959         8.2%   $     25,380        10.7%   $      6,656         7.4%

Earnings per share -
basic                     $       0.31                $       0.21                $       0.86                $       0.49

Earnings per share -
diluted                   $       0.31                $       0.21                $       0.85                $       0.42

Three Months Ended September 30, 2008 and 2007

Net sales

Net sales, which consist of gross sales net of returns, for the three months ended September 30, 2008 increased by 158.8% to $93.7 million from $36.2 million compared with the same period in 2007.

Net sales of our wholesale and distribution segment increased by 152.1% to $90.5 million from $35.9 million in the same period of 2007. Consistent with the first half of 2008, our gold jewelry products continued to be the primary driver of our sales. In addition, we have implemented price increases for the products in response to rising raw material costs as compared with the same period of last year, particularly with respect to gold and platinum. The year-over-year growth in our sales volume during 2008 was primarily attributable to expanding of our customer bases and receiving larger sale orders from customers, which we were able to meet with our increased working capital that resulted from our initial public offering in October 2007.

Net wholesale and distribution sales for the three months ended September 30, 2008 and 2007 were comprised of the following:

                                                      Three Months Ended September 30,
                                                  2008                               2007
                                       Amount in
                                        Millions        Percentage     Amount in Millions    Percentage
Platinum                             $         11.3            12.5 %  $               8.7          24.2 %
Gold                                           76.9            85.0 %                 21.8          60.7 %
K-gold and Studded Jewelry                      2.3             2.5 %                  5.4          15.1 %
Total                                $         90.5             100 %  $              35.9           100 %

Revenue derived from our retail segment during the third quarter totaled $3.2 million, representing 3.4% of the total revenue, which included $2.2 million of revenue from the acquisition of Temix and $1.0 million of revenue from the sale of FUQI branded products.

Cost of sales

Cost of sales is mainly comprised of costs of raw materials, primarily gold and platinum, in addition to direct manufacturing costs and factory overhead. Cost of sales for the three months ended September 30, 2008 increased by 160.1% to $82.7 million from $31.8 million for the same period in 2007.

Wholesale and distribution cost of sales increased by $49.2 million, or 156.2%, in the third quarter of 2008 to $80.7 million from $31.5 million for the third quarter of 2007. As a percentage of wholesale and distribution sales, cost of sales increased to 89.2% in the three months ended September 30, 2008 compared to 87.8% in the three months ended September 30, 2007 primarily attributable to approximately $2.0 million of inventory reserves related to the excess of certain inventories cost over the expected net realizable value as a result of the recent drop of the price of platinum.

Cost of retail sales primarily represent cost of merchandise sold. Cost of retail sales as a percentage of retail revenue was 62.0% for the three months ended September 30, 2008, a decrease of 163 basis points, from 78.3% for the same period last year. The decrease of cost of sales as a percentage was a result of the lower cost of Temix products. We are currently in the process of centralized procurement of diamond jewelry, which we hope will be able to further lower our cost of the retail operations in the fourth quarter of 2008 and thereafter.

Gross profit

Gross profit as a percentage of net sales for the three months ended September 30, 2008 decreased by 70 basis points to 11.7% from 12.4% for the same period in 2007. Our retail segment contributed approximately $1.2 million in gross profit for the third quarter of 2008. In the fourth quarter of 2008 and year 2009, we intend to make significant investments to expand Temix's product mix, which typically have higher margins than the jewelry wholesale and distribution.

Selling and marketing expenses

Selling and marketing expenses are primarily comprised of business taxes, payroll expenses of our sales workforce, advertising expenses, traveling expenses, production costs of marketing materials, insurance, delivery expenses and retail related expenses. Selling and marketing expenses increased by 497.0% to approximately $1.6 million for the three months ended September 30, 2008 as compared to $268,000 for the same periods in 2007. Selling and marketing expenses as a percentage of net sales increased to 1.7% for the three months ended September 30, 2008 from 0.7% for the same period in 2007.

The increase in selling and marketing expenses was due to an increase of business tax as a result of the increase in our overall net sales and an additional $641,000 of leasing expenses for our retail operations. The increase was also due to higher personnel cost due to the expansion of our sales workforce as a result of our acquisition of Temix, in addition to advertising and promotional expenses associated with our annual national jewelry exhibition held in September 2008.

General and administrative expenses

General and administrative expenses consist primarily of payroll expenses, benefits and travel expenses for our staff, professional fees including audit, accounting, legal, and financial advisory, depreciation expenses, and general office expenses. General and administrative expenses for the three months ended September 30, 2008 were approximately $1.2 million, an increase of 122.6%, from $539,000 for the same period in 2007. General and administrative expenses as a percentage of net sales decreased to 1.2% for the three months ended September 30, 2008 from 1.5% for the same period in prior year. The increase in general and administrative expenses as a dollar amount for the third quarter of 2008 included approximately $280,000 in legal, consulting and accounting costs, part of which was incurred to assist with our year end Sarbanes-Oxley compliance. In addition, we incurred $180,000 in salary costs in the third quarter of 2008 to support our business expansion, including the recently established retail counters and stores, in addition to $150,000 in stock compensation costs. The decrease in general and administrative expenses as a percentage of net sales was due to an increase of net sales, which was at a higher rate than the increase in general and administrative expenses.

Other income (expense), net

Other expenses were approximately $355,000 for the three months ended September 30, 2008, a decrease of 6.6% compared to other expenses of $380,000 for the same period in 2007. The decrease was attributable to realized gains of approximately $23,000 from our gold futures contracts.

Provision for income tax

Provision for income tax expense was approximately $1.4 million for the three months ended September 30, 2008, an increase of 150% from approximately $560,000 for the same period in 2007. Our effective tax rate for the three months ended September 30, 2008 was 17.8%, an increase of 80 point basis, compared to that of 17.0% for the same period in 2007. The increase was due to an increase in the taxable income for the three months ended September 30, 2008 and an increase of our income tax rate to 18% in 2008 from 15% in 2007, as a result of the newly enacted PRC Enterprise Income Tax Law effective January 1, 2008.

Net income

Net income increased to $6.5 million for the three months ended September 30, 2008 from $2.7 million for the same period of the prior year, an increase of 140.7%. Our net margin decreased to 7.0% for the three months ended September 30, 2008 from 7.5% for the same period in 2007.

Nine Months Ended September 30, 2008 and 2007

Net sales

Net sales for the nine months ended September 30, 2008 increased by 163.1% to $238.1 million from $90.5 million compared with the nine months ended September 30, 2008.

Net sales derived from our wholesale and distribution segment for the nine months ended September 30, 2008 increased by 159.5% to $233.0 million from $89.8 million for the same period in 2007. During the first nine months of the fiscal year 2008, our sales prices and sales volume increased by approximately 13.5% and 102.8%, respectively, from the same period in last year. The increase in sales prices was primarily attributable to an increase in the cost of precious metals. The growth in our sales volume during 2008 was primarily attributable to receiving larger sale orders from customers, which we were able to meet with our increased working capital that resulted from our initial public offering in October 2007.

Net wholesale and distribution sales for the nine months ended September 30, 2008 and 2007 were comprised of the following:

                                                   Nine Months Ended September 30,
                                                 2008                           2007
                                       Amount in                       Amount in
                                       Millions        Percentage      Millions      Percentage
Platinum                             $        24.5            10.5 % $        20.7          23.1 %
Gold                                         201.4            86.4 %          49.8          55.5 %
K-gold and Studded Jewelry                     7.1             3.1 %          19.3          21.4 %
Total                                $       233.0             100 % $        89.8           100 %

Net sales derived from our retail segment for the nine months ended September 30, 2008 increased by $4.4 million to $5.1 million from $665,000 for the same period in 2007. The increase in retail revenue for the nine months ended September 30, 2008 is primarily due to the Temix acquisition which accounted for $2.2 million of this increase.

Cost of sales

Cost of sales for the nine months ended September 30, 2008 increased by 164.7% to $211.2 million from $79.8 million for the same period in 2007. As a percentage of revenue, cost of sales increased to 88.7% for the nine months ended September 2008, compared to 88.2% for the comparable period in 2007

Wholesale and distribution cost of sales for the nine months ended September 30, 2008 increased by 161.8% to $207.6 million from $79.3 million for the same period in 2007. 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 the cost of precious metals. In addition, our direct labor costs increased at a higher rate during the first nine months of the fiscal year 2008 as compared to the same period in 2007 due to the inflationary pressure and enforcement of the New Labor Law effective January 1, 2008.

Cost of retail sales for the nine months ended September 30, 2008 increased by $3.1 million to $3.6 million from $506,000 for the same period in 2007. As a percentage of retail revenue, cost of retail sales decreased to 70.4% for the nine months ended September 30, 2008 from 76.1% for the same period of last year. The increase in cost of retail sales for the nine months ended September 30, 2008 included $1.3 million from the acquisition of Temix.

Gross profit

Gross profit as a percentage of net sales for the nine months ended September 30, 2008 decreased by 50 basis points to 11.3% from 11.8% for the same period in 2007.

Selling and marketing expenses

Selling and marketing expenses for the nine months ended September 30, 2008 were approximately $2.5 million, an increase of $1.9 million, or 285.2%, from approximately $649,000 for the same period in 2007. The increase was primarily due to an increase of business tax expenses that resulted from an overall increase in our net revenue and salaries from our sales and marketing executives. Selling and marketing expenses as a percentage of net sales slightly increased to 1.0% for the nine months ended September 30, 2008 compared to 0.7% for the same period in 2007.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2008 increased by 88.2% to $3.2 million from $1.7 million for the same period in 2007. General and administrative expenses as a percentage of net sales decreased by 50 point basis to 1.4% for the nine months ended September 30, 2008 from 1.9% in the same period of 2007. The dollar amount increase for the nine months ended September 30, 2008 was due to a substantial increase in legal, accounting and professional fees as a result of being a publicly traded company since October 2007, in addition to expenses related to options granted and increased salaries to certain executives under employment agreements executed in October 2007.

Other income (expense), net

Other income for the nine months ended September 30, 2008 increased by 183.3% to $790,000 from $948,000 of other expense in the same period in 2007. A majority of the increase resulted from the gain from derivative instruments of approximately $1.6 million during the nine months ended September 30, 2008.

Provision for income tax

Provision for income tax expense was approximately $3.8 million for the nine months ended September 30, 2008, an increase of 192.3% from approximately $1.3 million for the same period in 2007. Our effective tax rate for the nine months ended September 30, 2008 was 17.4% a decrease of 10 basis points from 17.5% for the same period in 2007.

Net income

Net income increased to $18.2 million for the nine months ended September 30, 2008 from 6.1 million for the same period of the prior year, an increase of 198.4%. Our net margin increased to 7.6% for the nine months ended September 30, 2008 from 6.7% for the same period in 2007.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, we had cash and cash equivalents of $56.2 million which is a decrease of $7.1 million or 11.2% compared to December 31, 2007. The decrease was primarily a result of approximately $4.6 million cash paid for the Temix acquisition. Our primary sources of cash are from operating activities.

Operating activities - Net cash used for operating activities increased to $10.8 million for the nine months ended September 30, 2008, compared to net cash used for operating activities of $1.7 million for the same period in 2007 mainly due to higher balances of our accounts receivable, refundable value added tax and inventory.

During the first nine months of year 2008, we used cash to increase our inventory, which increased by 70.2% to $50.4 million as of September 30, 2008, as compared with December 31, 2007. We increased our inventory in an effort to maintain sufficient levels to meet our expanding retail operations and wholesale and distribution by investing more of our working capital in our inventory to take on larger sales orders, which ultimately increased the accounts receivables. At the same time, we continued to limit our inventory risk and managed the average inventory per our retail stores. During the fourth quarter of 2008 and during 2009, we intend to increase the effectiveness of our retail inventory assortments in an effort to increase sales and inventory turnover.

We analyze our inventory levels quarterly, and write-down inventory that has a cost basis in excess of its expected net realizable value. As of September 30, 2008, an inventory reserve of approximately $2.0 million, representing less than 4% of our total inventory, was recorded due to recent drop in the market price of platinum.

Investing activities - For the first nine months of 2008, cash used for investing activities was $4.4 million, which was higher than the amount of $417,000 used for the same period in 2007. The increased was primarily due to $3.9 million of cash paid for business acquisitions and $959,000 spent on plant asset additions. During the remainder of fiscal 2008, we expect to continue to invest in additional fixed assets in connection with the expansion of our retail operations.

Financing activities - Net cash provided by financing activities amounted to approximately $3.6 million for the nine months ended September 30, 2008, compared to net cash provided by financing activities of $4.3 million for the . . .