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 for many reasons including our ability to raise capital when necessary and other risks described elsewhere in this report and in our other filings with the Securities and Exchange Commission including our annual report on Form 10-K filed on April 17, 2007. 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. In the following part of this report, "we", "the Company" and "Fuqi" refer to Fuqi International, Inc.

Overview

We are engaged in the design, manufacture, marketing and wholesale distribution of a full range of precious metal jewelry in China. We currently operate through two divisions: (i) production and (ii) sales and marketing. The production division is responsible for manufacturing our jewelry products and the sales and marketing division is responsible for selling and marketing the products, including customer relations and customer service. We intend to enter into the retail distribution of our jewelry products by opening or acquiring retail stores in China beginning in 2007.

We generate our revenues primarily from the sale of gold and platinum jewelry. We intend to develop platinum as the primary metal from which our jewelry is manufactured to capitalize on the recent increase in consumption of platinum jewelry in China. We also will devote resources to strengthen our brand name in the China jewelry market by expanding the marketing and promotion of our products and maintaining large-scale production of quality products. Our operations are subject to all of the risks inherent in establishing a business enterprise in China, particularly one that is dependent, initially, on the ever-changing retail trends in products that are discretionary. If we do not receive the consumer or business acceptance that we anticipate, our revenues and operating results will likewise not reach the levels we anticipate. In addition, our ability to effectively conduct our operations must be evaluated in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with establishing a growth business, including uncertainty as to production capabilities, market acceptance, marketing methods, expenses and competition. We may not be successful in our proposed new business activities, such as entering the retail market for our products.

The Chinese jewelry industry has recently experienced growth due to a series of governmental reforms, an increase in income levels and growth in the urban population in China. The industry is also highly competitive, and our competitors include domestic and foreign jewelry manufacturers, wholesalers, and importers who may operate on a national, regional and local scale. Many of our competitors have substantially greater financial, technical and marketing resources and personnel than us. As we believe competition is largely based on quality, service, and pricing, our strategy is to provide competitively priced, moderate- to high-quality products to the high-volume retail jewelry market. We also intend to enter into the jewelry retail industry, which is also highly competitive. Many of our potential competitors in the retail industry will have larger customer bases, longer operating histories and significantly greater financial, technical, marketing and other resources. It may be difficult for a newcomer to enter into the retail industry, but we believe that our established production and wholesale distribution business will facilitate our entrance into the retail market.

We currently anticipate that we need approximately $40.0 million in capital to execute our retail plan for the coming two years. A larger portion is intended to be used to acquire raw materials and a smaller portion of would be used for the opening or acquiring of retail outlets and acquisition of components and additional tooling, in addition to additional labor and promotional activities. The foregoing amount and intended uses are only estimates, which may change based on our analysis and evaluations and based on the changing market and other factors out of our control.

Corporate History

We were originally incorporated in the State of Arizona on September 3, 2004 as VT Marketing Services, Inc. We were a wholly-owned subsidiary of Visitalk Capital Corporation ("VCC"), and were formed as part of the implementation of the Chapter 11 reorganization plan (the "Visitalk Plan") of visitalk.com, Inc. ("Visitalk.com"). Visitalk.com filed for Chapter 11 Bankruptcy in November 2000. The Visitalk Plan became effective on September 17, 2004 (the "Effective Date"). On September 22, 2004, Visitalk.com merged into VCC, which was authorized as the reorganized debtor under the Visitalk Plan. As part of the Visitalk Plan, we issued shares of our common stock and warrants to purchase shares of our common stock that were distributed to creditors and claimants of Visitalk.com. Our original business was to use Visitalk.com's technology to facilitate peer-to-peer marketing activities. On July 21, 2006, we sold 1,368,761 shares of common stock (post Reverse Split) to BayPeak, LLC. As part of this transaction (the "Bay Peak Sale"), we abandoned our peer-to-peer marketing business, and began to seek companies in Asia with business potential, in particular companies based in China, to acquire. The shares issued in the Bay Peak Sale represented 75% of our outstanding shares at the time of issuance. On July 28, 2006, Visitalk.com was granted its Final Decree by the Bankruptcy Court. On November 6, 2006, we conducted a reverse stock split of our shares common stock and issued one share for each 15.43 shares of our common stock then outstanding (the "Reverse Split"). No shareholder was reversed below 100 shares in the Reverse Split and the then outstanding Plan Warrants were not affected by the Reverse Split. On November 8, 2006, we changed our state of incorporation from Arizona to Nevada.

On November 20, 2006, we entered into a share exchange agreement with Mr. Yu Kwai Chong, who was the sole shareholder of Fuqi International Holdings Co., Ltd., a British Virgin Islands corporation ("Fuqi BVI") pursuant to which we agreed to acquire all of the issued and outstanding capital stock of Fuqi BVI (the "Exchange Transaction"). The Exchange Transaction closed on November 22, 2006 and, per the terms of the share exchange agreement (the "Share Exchange Agreement"), we issued an aggregate of 18,886,666 shares of our common stock (post Reverse Split) in exchange for all of the issued and outstanding securities of Fuqi BVI. Pursuant to the Share Exchange Agreement, BayPeak agreed to cancel 8,761 shares of common stock.

On December 8, 2006, we changed our corporate name from "VT Marketing Services, Inc." to "Fuqi International, Inc." and reincorporated from the State of Nevada to the State of Delaware.

For financial accounting purposes, the Exchange Transaction was treated as a reverse acquisition by Fuqi BVI, and was treated as a recapitalization with Fuqi BVI as the acquirer. Accordingly, our historical financial statements have been prepared to give retroactive effect to the reverse acquisition completed on November 22, 2006, and represent the operations of Fuqi BVI and its wholly-owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd., a company established under the laws of the People's Republic of China. Upon the acquisition of Fuqi BVI, our sole business operations became that of Fuqi BVI.

Critical Accounting Policies, Estimates and Assumptions

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

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

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

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

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

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

Results of Operations

Three Months Ended March 31, 2007 As Compared To The Three Months Ended March
31, 2006

The following table sets forth our statements of operations for the three months
ended March 31, 2007 and 2006 (unaudited):


                                                             Three Months Ended March 31,
                                                                2007              2006
                                                            (unaudited)        (unaudited)
                                                            (in thousands, except earnings
                                                                         per
                                                               share and share amounts)
Net sales                                                  $       27,960     $      24,304

Cost of sales                                                      24,796            21,087

Gross profit                                                        3,164             3,217

Operating expenses:
Selling and marketing                                                 194               106
General and administrative                                            421               269

Total operating expenses                                              615               375

Income from operations                                              2,549             2,842

Other income (expenses):
Interest expense                                                     (247 )            (210 )
Change of fair value of inventory loan payable                        (41 )               -
Miscellaneous                                                           -                12

Total other expenses                                                 (288 )            (198 )

Income before provision for income taxes                            2,261             2,644

Provision for income taxes                                            377               370

Net income                                                          1,884             2,274


Other comprehensive income - foreign currency
translation adjustments                                               110                57

Comprehensive income                                       $        1,994     $       2,331
Earnings per share - basic                                 $         0.09     $        0.12

Earnings per share - diluted                               $         0.07     $        0.12

Weighted average number of common shares - basic               20,715,384        18,886,666

Weighted average number of common shares - diluted             26,582,024        18,886,666

Net sales for the three months ended March 31, 2007 increased to $28.0 million, an increase of $3.7 million, or 15.2%, from net sales of $24.3 million for the three months ended March 31, 2006. The increase in net sales was primarily the result of an increase in our prices, which was the result of an increase in the price of precious metals. We had a decrease in our sales quantity for the three months ended March 31, 2007 as compared to the same period in 2006. The decrease in sales quantity was approximately 1%.

Sales for the three months ended March 31, 2007 and 2006 were comprised of the following (expressed in millions of dollars):

                                  Three Months Ended March 31,
                                   2007                   2006
                           Amount in $     %      Amount in $     %
Platinum                      5.56       19.86       5.44       22.39
Gold                          14.70      52.50       11.59      47.70
K-gold and Studded Jewelry    7.74       27.64       7.27       29.91
Total                         28.00      100.00      24.30      100.00

Cost of sales is mainly comprised of costs of raw materials, primarily gold and platinum, in addition to direct manufacturing costs and factory overhead, which accounted for approximately 7.9% of the cost of sales for the three months ended March 31, 2007. Cost of sales for the three months ended March 31, 2007 increased to $24.8 million, an increase of $3.7 million, or 17.5%, from $21.1 million for the same period in 2006. The increase was primarily due to the increase in net sales for the three months ended March 31, 2007.

Gross profit for the three months ended March 31, 2007 and 2006 was $3.2 million. The gross margin decreased to 11.4% for the three months ended March 31, 2007, compared to 13.3% for the same period in 2006. The gross margin for the three months ended March 31, 2007 was at approximately the same level as that of the fourth quarter of 2006. The decrease in gross profit margin in first quarter 2007 as compared to March 31, 2006 was mainly attributed to the sharp increase in precious metal prices in early 2006. The 9% increase in average material costs in first quarter of 2006 had created a higher margin for our selling of 2005 year ended inventory. With removal of the price element, the gross margin for the first quarter of 2007 was approximately the same as that of the first quarter of 2006. As a result of increases in utility costs and direct labor, we have increased our processing fees in second quarter of 2007.

Selling and marketing expenses were primarily comprised of business taxes, advertising expenses, traveling expenses, production costs of marketing materials, insurance and delivery expenses. Selling and marketing expenses for the three months ended March 31, 2007 were $194,000, an increase of $88,000, or 83.0%, from $106,000 for the same period in 2006. The increase in selling and marketing expenses was primarily due to our extended advertising campaign during Chinese New Year and increase on insurance coverage for product delivery.

General and administrative expenses consisted primarily of payroll expenses, benefits and travel expenses for our staff, professional fees including audit, accounting, legal and financial advisory, depreciation expenses, and general office expenses. General and administrative expenses for the three months ended March 31, 2007 were $422,000, an increase of $153,000, or 56.9%, from $269,000 for the same period in 2006. The increases in general and administrative expenses were mainly due to costs and fees incurred in connection with a reverse acquisition between us and Fuqi BVI, becoming a publicly reporting company in the United States, and increase in professional fees relating to being a publicly reporting company. We expect that our general and administrative expenses will increase due to the various additional legal, accounting and other requirements applicable to a public company in the United States.

Interest expenses were approximately $247,000 for the three months ended March 31, 2007, an increase of $37,000, or 17.6%, from $210,000 for same period in 2006. The increase in interest expense were primarily a result of our increase in short term bank financing and increase in interest rates for the three months ended March 31, 2007.

Provision for income tax expense was approximately $377,000 for the three months ended March 31, 2007, an increase of $7,000, or 1.9%, from approximately $370,000 for the same period in 2006. The increase was primarily due to the decrease in income tax benefits, partially offset by the taxable income slightly decreasing for the three months ended March 31, 2007. Companies in China are generally subject to a 30% state enterprise income tax and a 3% national income tax. Our subsidiary, Shenzhen Fuqi Jewelry Company Limited, enjoyed a reduced enterprise income tax rate of 15%, which is granted to all enterprises operating in Shenzhen Special Economic Zone. Because of the recent announcement in income tax rate restructure, we will be subject to an income tax rate of 25%. However, the impacts will depend on the timing for Shenzhen city to apply the new tax rate.

Net income decreased to $1.9 million for the three months ended March 31, 2007 from $2.3 million for the three months ended March 31, 2006, a decrease of $0.4 million, or 17.4%.

Other comprehensive income was $110,000 during 2007, an increase of $53,000, or 93.0%, from $57,000 during 2006. The increase was a result of accelerated appreciation of the RMB exchange rate against U.S. dollars during the first quarter of 2007 compared to that of 2006.

Liquidity and Capital Resources

At March 31, 2007, we had retained earnings of $5.2 million and had cash of $10.7 million. We have historically financed our operations with cash flows generated from operations, as well as through the borrowing of long term or short-term bank loans.

We currently have outstanding facility lines of credit and short-term notes payables with banks in an aggregate amount of $16.2 million, consisting of $14.9 million in short-term notes payable to banks and $1.3 million in facility lines of credit. Our loans are secured by inventory, real property and/or guaranteed by our affiliates.

Net cash used by operating activities was $4.0 million for the three months ended March 31, 2007, compared to net cash used by operations of $130,000 for the same period in 2006. Net cash used increased by $3.87 million for the three months ended March 31, 2007, as compared to the same period in 2006, primarily due to an increase in inventory to $8.4 million from $1.9 million in 2006 and an increase of refundable value added taxes to $1.25 million from $71,000 in 2006, partially offset by an increase in customer deposits payable to $1.6 million from $614,000 in 2006. Because of current negative press reports on the shopping tours to Hong Kong, local jewelry distributors expected Chinese consumers would spend more in China during the Labor Day Holidays. As a result, more purchase orders were placed with us to meet this expectation. Taking into account the upward trend of precious metal prices, the Company stocked up in advance by the end of first quarter of 2007 to meet these orders for the peak season of Labor Day holidays in May 2007. The refundable value added taxes was built up in line with the increase in inventory.

Net cash used for investing activities amounted to $395,000 for the three months ended March 31, 2007, compared to net cash provided by investing activities of $2.8 million for the three months ended March 31, 2006. The change was primarily due to release of restricted cash of $1.74 million in 2006 while there was $387,000 in 2007 being classified as restricted cash as a condition of bank borrowing.

Net cash provided by financing activities amounted to $1.63 million for the three months ended March 31, 2007, compared to net cash used for financing activities of $1.0 million for the three months ended March 31, 2006. The increase of cash provided was primarily a result of the additional borrowings of $1.9 million from the facility line of credit entered in February 2007.

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

New Accounting Pronouncements

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