U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-K





x           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934




For the
fiscal year ended December 31, 2008




 ̈           TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from _________ to _____________





Commission
file number: 0-19276





FUSHI
COPPERWELD, INC.


(Exact
name of registrant as specified in its charter)





Nevada
            13-3140715(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)





1 Shuang Qiang Road, Jinzhou, Dalian,People’s Republic of China
116100


(Address
of Principal Executive Offices, Including Zip Code)





Registrant’s
telephone number:  (011)-86-411-8770-3333





Securities
registered pursuant to Section 12(b) of the Act:


Common
Stock, $0.006 Par Value





Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes   ̈
     No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.  Yes   ̈
     No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to such filing requirements
for the past 90 days.  Yesx
     No   ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈





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 companies in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer ̈
            Accelerated
      filer                 
      xNon-accelerated
      filer   ̈
            Smaller
      reporting company ̈


Do not
check if a smaller reporting company




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










The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of the
registrant’s common stock as reported on the NASDAQ Global Market on March 13,
2008 was approximately $58,610,873.  Shares of common stock held
by each officer and director and by each person who owns 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates.





The
number of outstanding shares of the registrant’s common stock on March 16,
2009 was 27,799,034.





DOCUMENTS INCORPORATED BY REFERENCE





The
definitive proxy statement for the registrant’s 2009 Annual Meeting of
Stockholders to be held in May of 2009 is incorporated by reference in Part
III to the extent described therein.








FORM 10-K
ANNUAL REPORT


YEAR
ENDED DECEMBER 31, 2008









TABLE
OF CONTENTS





PAGEPART
      IItem
      1.
                  
                  Business
                  
                  1Item
      1A
                  
                  Risk
      Factors
                  
                  14Item
      1B
                  
                  Unresolved
      Staff Comments
                  
                  30Item
      2.
                  
                  Properties
                  
                  30Item
      3.
                  
                  Legal
      Proceedings
                  
                  31Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  32PART
      IIItem
      5.
                  
                  Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  32Item
      6.
                  
                  Selected
      Financial Data
                  
                  36Item
      7.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  37Item
      7A.
                  
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  53Item
      8.
                  
                  Financial
      Statements and Supplementary Data
                  
                  55Item
      9.
                  
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  55Item
      9A.
                  
                  Controls
      and Procedures
                  
                  55Item
      9B.
                  
                  Other
      Information
                  
                  57PART
      IIIItem
      10.
                  
                  Directors,
      Executive Officers and Corporate Governance
                  
                  57Item
      11.
                  
                  Executive
      Compensation
                  
                  57Item
      12.
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  57Item
      13.
                  
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  57Item
      14.
                  
                  Principal
      Accountant Fees and Services
                  
                  58PART
      IVItem
      15.
                  
                  Exhibits
      and Financial Statement Schedules
                  
                  58SIGNATURES
                  
                  59EXHIBIT
      INDEX
                  
                  E-1FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                  
                  F-1









PART
I








FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK





Certain
statements in this Report, and the documents incorporated by reference herein,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements, which involve risks and uncertainties, regarding,
among other things, (a) our projected sales, profitability, and cash flows, (b)
our growth strategies, (c) anticipated trends in our industries, (d) our future
financing plans, and (e) our anticipated needs for, and use of, working capital.
They are generally identifiable by use of the words “may,” “will,” “should,”
“anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,”
“ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the
negative of these words or other variations on these words or comparable
terminology. These statements may be found under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business,” as
well as in this Report generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under “Risk Factors”
and matters described in this report generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur. You should not place undue reliance
on these forward-looking statements.





The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.




Unless
otherwise noted, all currency figures in this filing are in U.S. dollars.
References to "yuan" or "RMB" are to the Chinese yuan (also known as the
renminbi). According to the Federal Reserve Bank, http://www.ny.frb.org/, as of
December 31, 2008, US $1.00 =6.8225 yuan (or 1 yuan = US$
0.14657).




The
"Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi
Copperweld, Inc. (formerly Fushi International, Inc.), (ii) Fushi Holdings, Inc.
(formerly Diversified Product Inspections, Inc.) (“Fushi Holdings”), (iii) Fushi
International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian Diversified
Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi International
(Dalian)”), (iv) Dalian Fushi Bimetallic Wire Manufacturing, Co., Ltd. (“Dalian
Fushi”), (v) Copperweld Holdings, LLC, (vi) Copperweld Bimetallic, LLC
(“Copperweld”), (vii) Copperweld Bimetallics UK, LLC, and (viii) Copperweld
International Holdings, LLC.





PART I





ITEM
1.           DESCRIPTION
OF BUSINESS







Fushi
Copperweld, Inc. is the global leader in developing, designing, manufacturing,
marketing, and distributing bimetallic wire products, principally copper-clad
aluminum and copper-clad steel. Our products are primarily focused on serving
end-user applications in the telecommunication, electrical utility, and
transportation (including automotive) markets.  Our products are
engineered conductors, rather than commodity products, that offer favorable
end-use characteristics.  These characteristics include one or more of
the following: weight savings, increased flexibility of end-products, increased
tensile strength, increased theft resistance, and equivalent RF resistance
qualities, when compared to solid copper or solid aluminum conductors. We add
value through innovative design and engineering, excellence in manufacturing,
superior product quality, and our commitment to the highest level of customer
service.  With the exception of utility grounding and distribution
applications, the majority of our finished products become components of a wide
variety of end-use products.  Bimetallic products offer weight,
strength and economic advantages as a replacement for solid copper in our
targeted applications.





The
People’s Republic of China (“PRC”) is the largest market for our products;
however, we are a worldwide provider. During 2008, we shipped 37,291 metric tons
of bimetallic products to over 300 customers in 38 countries.





1


Our
History


We were
incorporated as a Nevada company on October 6, 1982 under the name M, Inc. We
changed our corporate name to Parallel Technologies, Inc. in June 1991. We were
formed as a "blank check" entity for the purpose of seeking a merger,
acquisition or other business combination transaction with a privately-owned
entity seeking to become a publicly-owned entity. In a series of restructuring
transactions which began in 2005 and were completed in 2006 (the
“Restructuring”), we acquired Fushi Holdings, Inc., incorporated in the state of
Delaware, which is a holding company for Fushi International (Dalian) Bimetallic
Cable Co., Ltd(“Fushi International (Dalian)”), organized under the laws of the
People’s Republic of China (PRC). As a result of the restructuring transactions,
Fushi International (Dalian) acquired substantially all of the manufacturing
assets and business and controls the remaining assets and financial affairs of
Dalian Fushi Bimetallic Manufacturing Co., Ltd (“Dalian Fushi”). Dalian Fushi is
a limited liability company organized under the laws of the PRC, which is
engaged in the manufacture and sale of bimetallic wire products. Following the
restructuring, Dalian Fushi became a non-operating entity. The Restructuring is
more fully described in our Current Report on Form 8-K filed with the Securities
and Exchange Commission (“SEC”) on December 14, 2005.




On
September 25, 2007 Fushi International entered into an LLC Membership Interest
Purchase Agreement (the “Purchase Agreement”) to acquire Copperweld Holdings,
LLC, a limited liability company incorporated in the state of North Carolina and
the sole member of Copperweld Bimetallics, LLC, a limited liability company
incorporated in the state of Delaware (“Copperweld”) and all of the issued and
outstanding membership interest of International Manufacturing Equipment
Suppliers, LLC (“IMES”). Copperweld is the parent company of Copperweld
Bimetallics UK, LLC, a limited liability company registered in the United
Kingdom and Copperweld International Holdings, LLC, a limited liability company
incorporated in the state of North Carolina. We closed on the purchase agreement
as of the beginning of business on October 29, 2007 with all of the Copperweld
entities and IMES becoming subsidiaries of Fushi International Inc.





Effective
January 15, 2008, we changed our name from Fushi International, Inc. to Fushi
Copperweld, Inc. to recognize the worldwide importance of the Copperweld brand
while continuing to leverage the Fushi brand, especially in the PRC. We, and our
customers, view the Copperweld brand as the premium brand of bimetallic products
and will promote the Copperweld brand as a premier product,
worldwide.





On June
20, 2008, Copperweld Holdings, LLC was dissolved and its membership interest in
Copperweld Bimetallics, LLC was transferred to Fushi Copperweld,
Inc.  Copperweld Holdings, LLC was a shell entity and its only asset
was its membership interest in Copperweld Bimetallics, LLC.  On August
27, 2008, Copperweld International Holdings, LLC and International Manufacturing
Equipment Suppliers, LLC, both shell entities without assets or liabilities,
were dissolved.





Our
Corporate Structure




The
following diagram shows the structure of our company from an operating
perspective. The top management functions reside at the Fushi Copperweld level
with executive management, operations management, sales management and financial
management functioning at this level.  The PRC manufacturing, while
managed at the corporate level, functions through Fushi Holdings, Fushi
International (Dalian) and Dalian Fushi. The US and United Kingdom manufacturing
occurs through Copperweld and report to an executive at the Fushi Copperweld
level.




2









The
functions of each location are clearly defined with information reporting
occurring for each entity. To facilitate management of the various operations,
we upgraded our Dalian accounting software provided by UFIDA Software Co., Ltd.
during 2008. We employ an Enterprise Resource Planning (“ERP”) system and a
Manufacturing Execution System (“MES”) in Fayetteville and we are implementing
portions of the system in Dalian during 2009. Once fully installed, the system
will provide management with information that will allow us to further improve
efficiencies of our operations through more effective management of our
resources.





Business
Operations





Fushi
International (Dalian)





Through
our wholly owned operating subsidiary Fushi International (Dalian), we are
engaged in developing, designing, manufacturing, marketing and distributing
copper cladded bi-metallic engineered conductor products, principally
copper-clad aluminum wires (“CCA”). Our Dalian facility operated by Fushi
International (Dalian) primarily services the Asia-Pacific region, specifically
the PRC market. Through our CCA products, we believe that we are the leading
provider of bimetallic wire in terms of quality, capacity, and products sold in
the PRC market. We view the PRC as the fastest growing market for bimetallic
wire worldwide and we expect to see our growth within the PRC continue due to
organic expansion of our PRC business to assist in meeting the Chinese
government’s commitment to build infrastructure, the continuing development of
telecom within the PRC and the opportunities within the utility
market.





3


In the
first quarter of 2008, we expanded our product offerings and production
capabilities in the PRC through the transfer of higher capacity CCA machinery
which utilizes Copperweld’s superior cladding technology to our Dalian facility.
In 2009, we expect to further expand our production capabilities in Dalian
through additional CCA machinery and the introduction of large scale copper-clad
steel (“CCS”) production capacity. Adding CCS manufacturing to our Dalian
facility will increase opportunities for utility grounding sales, electrified
railway applications, and CATV products.





Within
the PRC, telecommunication applications currently serve as the largest market
for bimetallic wire. We expect demand to remain strong and for this market to
continue its growth patterns.  Our expectation is based on the belief
that the PRC’s leading telecom providers will continue to see strong growth of
broadband and mobile subscribers, both of which are key drivers for investment
into telecommunication infrastructure.  According to Ministry of
Industry and Information Technology, the mobile and broadband penetration rates
in the PRC are 48.5% and 20.5%, respectively. The PRC has lower penetration
levels for broadband and mobile subscribers than developed countries in North
America and Europe and we believe the PRC’s telecommunication carriers will
maintain their strong investment for telecommunication related infrastructure
build out in 2009 as the subscriber base grows.  According to the
Minister of Information, total broadband subscribers in the PRC grew
approximately 25.6% for full-year 2008. Furthermore, China Mobile, China Unicom
and China Telecom recently announced that they will spend RMB 400 billion over
the course of 2009, 2010, and 2011 to build out the PRC’s Third Generation
(“3G”) and mobile networks. According to the Ministry of Industry and
Information Technology, China Mobile plans to spend RMB 58.8 billion in 2009 to
build approximately 60,000 base stations and China Unicom and China Telecom will
each spend approximately RMB 30 billion in 2009 to develop their WCDMA and CDMA
2000 networks, respectively.





We
believe that the electrical utility market for bimetallics in the PRC is
underdeveloped relative to other markets worldwide and could serve as an area of
significant growth for our Dalian facility. Our expectation is based on the
response by the two largest power grid operators, State Grid Corporation (SGCC)
and China Southern Grid (SGC), to widespread blackouts and power shortages
experienced in the PRC between 2002 and 2005. According to strategy laid out by
SGCC and SGC for the Eleventh Five Year Plan, they plan to spend RMB 1,200
billion in total transmission and distribution (“T&D”) capital expenditures
over a five year time period beginning in 2007. Additionally, the PRC’s recent
USD $586 billion stimulus package earmarks additional funds for the build out of
the national T&D grid. As we expand our product offering from our Dalian
facility to include CCS and continue to develop our CCA power cable and flat
wire technologies for use in low and mid-voltage T&D components, we expect
to enter into additional electrical utility markets. For example, we view CCS as
an ideal substitute to copper for use in grounding and electrified railway
applications due its lower cost and superior strength.





Copperweld





Copperweld
operates two manufacturing facilities in Fayetteville, Tennessee and Telford,
England. Through these facilities we are engaged in developing, designing,
manufacturing, marketing and distributing copper-cladded bimetallic engineered
conductor products, principally CCA and CCS. We believe that through our
operations at these two facilities our Copperweld subsidiary is the leading
provider of bimetallic wire in the North American, European, Middle Eastern and
North African markets.





Copperweld’s
Fayetteville plant will continue to produce CCA and CCS for the growing demand
in the Americas, European, Middle Eastern and African markets where we believe
there to be strong growth opportunities in the electrical utility
markets.





We have
added additional product capabilities to our Fayetteville facility in
anticipation of demand and to further our ability to provide products to
end-users for battery/booster cables, automotive applications such as wiring
harnesses and white goods. The new equipment allows us to draw CCA to smaller
diameters and new bunching equipment will allow us to provide a wide range of
configurations.





The
consumer goods market is driven by both the high price of copper and by the
advantages of bimetallic technology. Copperweld is working with several
suppliers to appliance manufacturers and with United Laboratories to gain
product approvals. Despite the decline in copper prices over the last two
quarters of 2008, we believe that our products continue to provide customers
with an economic incentive to convert from copper to CCA. The addition of
drawing and bunching equipment will provide Copperweld with the ability to
provide bulk cable to the white goods market.





4


Similarly,
our recent addition of stranding equipment in Fayetteville will provide our
Copperweld subsidiary with the ability to provide additional products to the
utility market, a market where Copperweld is the dominant supplier of CCS. The
additional stranding equipment will bring us closer to the customer and reduce
delivery times as we bring in-house value-added product
enhancements.





We
started work on the above projects commencing December 2007. We purchased
additional equipment for our Fayetteville plant that will enable us to expand
our finishing capabilities of our products. We expect the additional stranding
capacity to be commissioned and in production by March 2009 and although we are
now able to produce fine wire CCA bunched products, this project won’t be fully
completed until the end of the 2nd quarter
2009. All components are purchased; however we still have to complete the
installation of a new Frigerio break down machine, which will supply the
feedstock to this cell. We anticipate the equipment to add increased value to
our products and immediately improve margins seen at our Fayetteville plant by
removing third party processors from between us and our end-user
customers.





We expect
demand for bimetallic wire with diameters of less than 0.25 mm to continue to
increase worldwide. We plan to supply smaller diameter wire from our Dalian
facility which is better equipped to produce this product cost effectively
because it is a more labor intensive product. As we further integrate the
combined Company, we also expect to shift supply from Copperweld’s customers
located in the Asia-Pacific geographic region to our Dalian facility to provide
more efficient service and delivery.




Our
Telford facility provides manufacturing, sales and service to our European,
Middle East and African customers. The facility has drawing, stranding and
extrusion equipment that produces bimetallic products for a wide range of
markets. The CCA and CCS originates primarily from Fayetteville and is imported
and finished to customer specifications. Telford’s finishing capabilities are
unique to the Company and provide higher value added products





Financial
Information About Geographic Areas





See Note
2 to the Consolidated Financial Statements included in this Annual Report on
Form 10-K for a breakdown of our sales by region for the fiscal years ended
December 31, 2008, 2007 and 2006.  The below table provides a
breakdown of our long-lived assets by region for the fiscal years ended December
31, 2008, 2007 and 2006.





YearendedDecember31(in
      millions)
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006Total
      assets:P.R.C.
                            
                            $
                            119.7
                            
                            
                            $
                            101.4
                            
                            
                            $
                            62.9North
      American and Europe
                            
                            
                            28.4
                            
                            
                            
                            20.4
                            
                            
                            -Total
                            
                            $
                            148.1
                            
                            
                            $
                            121.8
                            
                            
                            $
                            62.9




Our
Products





We are
engaged in the manufacture and sale of bimetallic wire, principally copper-clad
aluminum (“CCA”) and copper-clad steel (“CCS”).  CCA and CCS are
bimetallic products that have a copper strip formed around and bonded to a solid
core of aluminum or steel.





CCA
combines the conductivity and corrosion resistance of copper with the light
weight and relatively low cost of aluminum. It is more robust than an aluminum
conductor. Easy to handle and install, CCA is widely used in applications
requiring the conductivity of copper while retaining the light weight advantages
of aluminum.  Because television and networks have high frequency
transmission signals and the high frequency signals are transmitted on the
surface layer of a wire, CCA is an ideal inner conductor for trunk and
distribution cables for the cable TV industry and for cables used in the
cellular phone industry.





5


Our
copper-clad steel (CCS) is an ideal substitute for solid copper, and is
recognized around the world through its trademarked name,
Copperweld®.  Copperweld® combines the strength of steel with the
conductivity of copper, offering increased strength in comparison to solid
copper.  The signal carrying capability of copper combined with the
high resistance of steel, which decreases feedback and thus enhances signal
quality, makes CCS the center conductor of choice in
telecommunications.  CCS is widely used in utility applications and
has been introduced into automotive applications. Copperweld® is available in a
variety of sizes, conductivities and strengths to meet the requirements of the
most demanding customer. Our CCS delivers outstanding reliability and value
relative to solid copper.





Our
copper-clad products offer superior value compared to copper and are
increasingly utilized as customers look to add features while retaining the
conductivity of copper, especially in light of increasing copper costs during
early 2008. The applications base for CCA and CCS as substitutes and/or
improvements over solid copper is expanding to an ever-growing variety of
end-user applications on a worldwide basis.  Products manufactured by
our facilities are typically used in the following products:





·
            Telecommunications
      products – Due primarily to the signal carrying capabilities of
      copper at the surface of the center conductor, bimetallic wire is a
      standard center conductor for telecommunication applications. The primary
      products in this grouping include coaxial cables for CATV, trunk and
      distribution cables, cables for the cellular industry and telephony drop
      cable. We believe that we are the leading supplier of bimetallic wire for
      telecommunication cables in the Asia-Pacific, the Americas and
      Europe.





·
            Utility products– Our
      CCA and CCS products are used for grounding applications and in power
      cables, transformer windings and tracer wire.  We produce single
      end, three wire, seven wire and 19 wire strand constructions and hybrid
      cables that utilize a combination of CCA, CCS and copper wires that are
      used in these products.





·
            Transportation products –Our CCA and CCS wires are used in wiring harnesses for automobiles,
      trucks, motorcycles, commercial off road equipment and
      trailers.  We also provide bimetallic wire for aftermarket
      applications such as booster cables.  Automotive wiring
      harnesses include a variety of energy or control signal applications.
      Stranded CCS configurations are used in component wires for overhead wire
      in electrified railways.





The
Bimetallic Industry





We market
and sell our products directly to end-user manufacturers, and through
distribution, both typically within the wire and cable industry. The
bimetallic wire industry can be characterized as fast-growing on a worldwide
basis and increasingly competitive, specifically in China where there is
considerable fragmentation; however, beginning in the Second Quarter 2008 and
continuing throughout 2008, an economic slowdown in the United States and
slowing growth in certain European markets resulted in lower demand as compared
to 2007. The slowdown in North America and Europe also affected wire and
cable manufacturers within the PRC who relied heavily on exports to these
markets for business.





A
significant barrier to entry into this industry is technology, specifically in
respect to cladding technologies. Cladding processes are typically
proprietary in nature and have a direct impact on quality of the product, which
is largely dependent on the characteristics of the bond between the differing
metals. For many product offerings, there is significant differentiation
among industry participants from a manufacturing, technological and quality
standpoint.





Copper
wires have historically been the dominant product for use in the wire and cable
manufacturing industry due to its electrical conductivity and corrosion
resistance; however, end-user manufacturers in the industry have increasingly
pursued and considered alternative technologies such as bimetallics due
performance and economic considerations. Relative to traditional copper
wires, we believe that bimetallic wires offer greater value to end-users through
its lower weight, increased tensile strength, extended life, theft deterrence
and lower prices while still retaining the corrosion resistance and conductivity
needs of the end-user. Because of the benefits of bimetallic wire, we
believe there are substantial opportunities to capture increased market share in
applications that have historically been largely dominated by solid copper wire.
As the worldwide leader in bimetallic manufacturing, we possess superior
cladding technologies, production capabilities, product offerings and
distribution channels, which makes us well positioned to capitalize on the
growing bimetallic demand worldwide.





6


The
bimetallic wire industry is raw materials intensive with copper, aluminum and
steel comprising the major cost components for products. Changes in the
cost of raw materials are generally passed through to the customer, although
there can be timing delays of varying lengths depending on the volatility in
metal prices, the type of product, and competitive conditions.





Manufacturing
Process




Manufacturing
copper-clad products involves bonding copper strip to an aluminum or steel core,
drawing the clad product to a finished diameter and heat treating as necessary
depending upon the customer’s specifications. We use proprietary technologies
developed in Dalian and Fayetteville.  We also own the worldwide
rights to other technologies. These proprietary technologies allow us to produce
superior copper-clad products compared to other producers. The Copperweld
acquisition has allowed us to share technology between our manufacturing
locations.  We have and will continue to integrate our technologies
and equipment so we can better serve our customers from the location that offers
the most cost effective and efficient means. Our technology base allows us to
produce superior products, our combined research and development department
supports continuing development and the geographical spread of our manufacturing
locations improves our ability to provide superior service to our international
customer base.





Research
and Development





We are
dedicated to improving our current products and to developing new technologies
and products that will improve the performance and capabilities of bimetallic
materials and allow entry into new markets. Because of our research and
development ("R&D") initiatives in Dalian, we are recognized by the Dalian
Municipal Government as a "new and high-technology" enterprise and have been
receiving governmental funding or subsidies for our operations and R&D
activities. Complimentary to our internal R&D initiatives, we also have
ongoing partnerships with the University of Alabama and the Shanghai Electric
Cable Research Institute (“SECRI”) to advance development of new products and
production methods. Furthermore, in November 2007, we were appointed to the
Copper-Clad Aluminum Executive Standards committee by the National
Standardization Administration of China. As part of the Copper-Clad Aluminum
Executive Committee, we assisted in drafting China’s first-ever nationwide
standards for copper-clad aluminum wire and are now waiting for the standard
issuing.




Quality
Control




Our
quality control begins with our ordering process because we believe that to
produce quality products we must use high quality raw materials.  We
provide our suppliers with our required specifications that apply to each
category of raw material that we use.  When the raw materials arrive, our
quality inspectors inspect each shipment for critical factors. During the
manufacturing process, every employee has the responsibility and authority to
identify non-conforming material or any material that shows manufacturing
imperfections.  Inspectors test our products during and after all of the
manufacturing processes.





In our
final inspection process, we complete additional testing to insure the customer
receives what he has ordered.  Additional testing in our laboratories
includes breaking load, elongation, torsions, conductivity and the uniformity of
the copper surface depending on the product and the individual customer’s
requirements. We follow ISO guidelines in our process and in maintaining our
testing equipment.





7


Warranties




We
typically warrant all of our products and provide replacement or credit to our
customers who are not satisfied with our products for a period of one year from
the date of shipment. When we receive an indication that a product did not
perform as expected, our quality control specialist and laboratory personnel
test the product to determine if our process was correct for the specifications
submitted by the customer and if the manufacturing process was completed as
planned.  If we failed to produce the product according to the
customer’s specifications or if the manufacturing process was flawed, we provide
immediate credit to the customer. If we produced the product to the customer’s
specifications and if the manufacturing process was not flawed, we send a team
to the customer’s facilities to see if we can assist the customer in correcting
its process.  Typically a team consists of at least one engineer, at
least one experienced production person and the customer’s sales
representative.  If the product was manufactured to the proper
specifications, our team works with the customer in developing corrective action
to solve their problem.




We have
not established reserve funds for potential customer claims because,
historically, we have not experienced significant customer complaints about our
products. We believe that our customer support teams, our quality assurance and
manufacturing monitoring procedures will continue to keep claims at a level that
does not support a need for a reserve. We review customer returns on a monthly
basis and should the need ever arise, may establish a reserve fund as we expand
our business by volume and products. If we were to experience a significant
increase in warranty claims, our financial results could be adversely affected.
See "Risk Factors - Risks Related to Our Business - We do not maintain a reserve
fund for warranty or defective products claims. Our costs could substantially
increase if we experience a significant number of warranty claims."




Raw
Materials and Suppliers





Our
principal raw materials consist of aluminum and steel rods and copper strips,
which collectively accounted for approximately 84.8% of our costs of goods sold
during the fiscal year ended December 31, 2008.  Changes in the prices
of copper, which has an established history of volatility, directly affect the
prices of our products and may influence the demand for our products. The daily
selling price of copper on the COMEX averaged $3.13 per pound for 2008, a
decrease of 2.8% from the average of $3.22 per pound for 2007. Particularly, the
average price of copper on the COMEX dropped sharply in the last quarter of 2008
to $1.75 per pound, after averaging $3.59 per pound for the first three
quarters, an increase of 10.6% over the same period in 2007.  Copper,
steel and aluminum are available in the market and we have not experienced
shortages even in the current tough economic climate.  We are
constantly reviewing sources for raw materials to prevent shortages of these
materials as we expand our business.  During 2008, copper represented
55.6% of our raw material purchases, aluminum 38.7% and steel 5.7%,
respectively.




For the
fiscal year 2008 our top five suppliers accounted for 65% of our raw material
supply compared to 38.6% in 2007.  Our acquisition of Copperweld made
additional suppliers in different parts of the world available to us so we
believe that we will continue to reduce our dependence on only a few suppliers
in future periods.  We are in the process of integrating and
restructuring our operations in an effort to streamline corporate resources and
improve internal efficiency, with a particular focus on manufacturing and
sales.





We
purchase most of our raw materials at prevailing market prices. We do not have
formal long-term purchase contracts with our suppliers and, therefore, we are
exposed to the risk of fluctuating raw material prices. Our raw material price
risk is mitigated because we generally attempt to pass changes in raw material
costs to our customers. See "Risk Factors - Risks Related to Our Business- We
depend on a few suppliers for a significant portion of our principal raw
materials and we do not have any long-term supply contracts with our raw
materials suppliers. Interruptions of production at our key suppliers may affect
our results of operations and financial performance."




In
addition to these short-term purchase contracts, we also purchase from our
primary suppliers or other suppliers to satisfy additional raw materials needs
from additional orders we did not previously project. Due to fluctuating
worldwide supply and demand for our principal raw materials, we cannot guarantee
that necessary materials will continue to be procured at the prices currently
available or that are acceptable to our customers.  However, prices
adversely affecting the supply and prices of our raw materials have an equal or
greater adverse effect on producers of alternatives to our bimetallic products.
We maintain multiple suppliers for each type of raw material that we use and
monitor the availability of additional suppliers so that we have access to
sufficient raw material sources necessary to meet customer
demand.  Notwithstanding our supply availability practices, we do not
have a guarantee that raw material availability will meet our demands. To the
extent that our suppliers are not able to provide raw materials in sufficient
quantity and quality on a timely and cost-efficient basis, our results of
operations could be adversely impacted until we find other qualified
suppliers.





8




Our
increasing economies of scale as we streamline the procurement process at the
corporate level will enable us to purchase materials in large volumes, offering
us leverage to secure better pricing, and to a lesser degree, increasing the
extent to which our suppliers rely on our purchase orders.  We believe
this relationship of mutual reliance will enable us to reduce our exposure to
possible price fluctuations.





Payment
terms vary with each supplier. Some suppliers require payment prior to shipment,
others offer varying terms from three to 30 days following
shipment.  Demand for raw material in the PRC often requires that we
prepay for our raw materials.  Price is often affected by our payment
terms; therefore, we typically agree to shorter terms in exchange for reduced
pricing for our raw materials.





Customers




Our
products' target markets are manufacturers of finished wire, cable products and
installers of equipment and systems which require conductive
materials.  We also utilize distributors for targeted markets and
products. In most cases, our customers incorporate our products into
end-products that they subsequently supply to their customers. The products we
manufacture are used by these end-product makers as standard components,
materials or parts that are built to their specifications. Therefore, our
business is driven, in part, by the strength, growth prospects and activity in
the end-markets in which our products are used. Our technical and sales staff
frequently provides technical and sales support to our customers.




We do not
have long-term purchase commitments from our customers and the term of our sales
contracts with our customers varies from 15 days to one
year.  Furthermore, these contracts normally leave certain major terms
such as price and quantity of products open to be determined in each purchase
order.  These contracts also allow customers to re-adjust the contract
price to reflect substantial changes in market conditions such as significant
raw material price movements.





We have a
large customer base, with approximately 300 customers in 38 countries around the
world. The geographic dispersion and large number of customers provide a diverse
base of revenue sources that we believe provide additional insulation to slowing
economic conditions in selected regions. As a result of our large and diverse
customer base our largest customers account for an increasingly smaller, but
healthy, percentage of net sales compared to past fiscal years. Our top five
customers represented 18.2% and 24.6% of our net sales during the fiscal years
ended December 31, 2008 and 2007, respectively on a pro forma basis. Further, we
anticipate that our overall customer composition and the concentration of our
top customers will change as we expand our business and shift our product
portfolio to higher-margin products; however, we can give no assurance that this
will be the case.




The
following table sets forth our ten largest customers in fiscal
2008:





Originating Office
                                    
                                    2008 Sales in USD
                                    
                                    
                                    Percentage of Total SalesDalian
                                    
                                    
                                    10,077,574
                                    
                                    
                                    
                                    4.55
                                    %Fayetteville
                                    
                                    
                                    8,682,315
                                    
                                    
                                    
                                    3.92
                                    %Fayetteville
                                    
                                    
                                    8,545,835
                                    
                                    
                                    
                                    3.86
                                    %Dalian
                                    
                                    
                                    6,713,586
                                    
                                    
                                    
                                    3.03
                                    %Dalian
                                    
                                    
                                    6,270,735
                                    
                                    
                                    
                                    2.83
                                    %Dalian
                                    
                                    
                                    6,133,967
                                    
                                    
                                    
                                    2.77
                                    %Dalian
                                    
                                    
                                    5,275,169
                                    
                                    
                                    
                                    2.38
                                    %Fayetteville
                                    
                                    
                                    4,858,052
                                    
                                    
                                    
                                    2.19
                                    %Dalian
                                    
                                    
                                    4,784,115
                                    
                                    
                                    
                                    2.16
                                    %Dalian
                                    
                                    
                                    4,294,241
                                    
                                    
                                    
                                    1.94
                                    %Total
                                    
                                    
                                    65,635,589
                                    
                                    
                                    
                                    29.63
                                    %





Marketing,
Sales and Distribution




Our sales
and marketing is a global operation. We market and sell our products through our
direct sales force. In some countries we use sales agents or distributors to
provide assistance with or lead our sales and distribution in selected
countries.





9


Since the
acquisition of Copperweld, we have begun integrating our sales and marketing
functions on a global basis under the direction of a global sales
manager.  Our extensive sales and service network covers a total of 38
countries.  A majority of the sales from our Dalian Sales and
Marketing Department, consisting of 13 people, are made to PRC customers. There
are five outside direct sales representatives working from the Fayetteville and
Telford offices supported by four customer service representatives in addition
to the global sales manager.  We offer different price incentives to
encourage large-volume and long-term customers.  As a result of
increasing demand for our products and as new marketing opportunities develop,
we expect to increase our outside sales force by reassigning current employees
and through adding additional qualified personnel, particularly in strategically
significant areas such as South East Asia.  Our sales staff works
closely with our customers to understand their needs and provide feedback to us
so that we can better address their needs and improve the quality and features
of our products. Throughout 2008 and continuing into the 2009 year, we provided
professional sales training to our sales force.





As an
important component of our marketing activities, we attended industry-specific
conferences and exhibitions to promote our products and brand
name.  We also advertised in industry journals and magazines and
marketed our products on the Internet.  For example, in April 2008, we
participated in “Wire Dusseldorf”” exhibitions in Dusseldorf, Germany, and in
October 2008, we participated in the “Wire China 2008,” the largest biannual
industry exhibition in China. We believe these activities are conducive in
promoting our products and brand name among key industry
participants.





Product
Delivery and Risk of Loss




We
usually deliver our products to our customers' place of business, while in some
cases customers make their own delivery arrangements. Our Shipping Departments
arrange for all deliveries regardless of the delivery method.  In
Dalian we have four heavy trucks and eight contracted drivers that allow us to
ship up to 30 tons per day and also utilize common carriers. In Fayetteville and
Telford, we use common carriers.  International shipments are arranged
through several ocean freight forwarding companies.




We
include shipping expenses in the purchase price of our products or as separately
stated charges.  In either instance delivery costs are ultimately
borne by our customers. In addition, some orders require us to purchase freight
insurance on behalf of a customer in which case the cost of such freight
insurance is included in the purchase price of the products.




Insurance




Product
Liability Insurance





We
currently do not carry product liability or other similar insurance to cover
products made and shipped. While historically product liability lawsuits against
the Company have been rare and we have never experienced significant failures of
our products, we cannot give any assurance that we will not have exposure for
liability in the event of the failure of any of our products in the future. See
“Risk Factors – Risks Related  to our Business – We do not presently
maintain product liability insurance in the PRC, and our property and equipment
insurance does not cover the full value of our property and equipment, which
leaves us with exposure in the event of loss or damage to our properties or
claims filed against us.”




Property Insurance and Other
Insurance





We
maintain property and casualty insurance coverage consistent with local rules
and best practices in the PRC, Fayetteville, TN and Telford,
England.  We use different insurers in each location and solicit
competitive bids on a regular basis.  We believe that we are
adequately protected with an appropriate level of insurance coverage from
normally anticipated events.  We remain aware of replacement
values





10





Seasonality





Historically,
our revenues were not materially impacted by seasonal variations. In the first
several years of our operation, due to limited manufacturing capacity and demand
that outstripped capacity, seasonality was minimal.  After the
increase of our manufacturing capacities and acquisition of Copperweld, we
experienced certain quarterly fluctuations in revenues due to changing and
expanding customer demands from different markets.  Sales volumes out of
Fayetteville, which primarily serves the North American and European
markets,  are generally lower in our fourth and first quarters, due
primarily to cold weather related reduction in demand for construction related
products and shutdown of our facility during the year-end
holidays. Additionally, the PRC historically experiences a slowdown in
demand during our first quarter due to the Chinese New Year holiday. We expect
these variations to continue in the future and thus, we believe it is more
meaningful to focus on annual rather than interim results.




Competition




Competition
in the bimetallic industry, particularly in the PRC, can be characterized by
rapid growth and a concentration of manufacturers, primarily due to an
accelerated replacement of copper by bimetallic products
applications.  The most significant factors that affect our
competitive position are:




·
            the
      performance and cost effectiveness of our products relative to those of
      our competitors;





·
            our
      ability to manufacture and deliver products in required volumes, on a
      timely basis and at competitive
prices;




·
            the
      superior quality and reliability of our
  products;




·
            our
      customer support capabilities, both from an engineering and operational
      perspective;




·
            excellence
      and flexibility in operations;




·
            world
      leader in bimetallic products;




·
            effectiveness
      of customer service and our ability to send experienced operators and
      engineers as well as a seasoned sales force to assist our customers;
      and




·
            overall
      management capability.




We
believe that we can differentiate ourselves by offering superior product
quality, timely delivery, and better value. See "Risk Factors - Risks Related to
Our Business — We may encounter substantial competition in our business and our
failure to compete effectively may adversely affect our ability to generate
revenue."




Our goal
is to maintain our position as the worldwide leader in the bimetallic industry.
Set forth below are our measures and strategies:





·
            Manufacturing. By
      improving our production ability and enhancing equipment management,
      optimizing the process and products structure, perfecting the supplier
      system and cutting production cost, we will strive to maintain and expand
      our profit margins.




·
            Research and
      Development. With the addition of the Fayetteville R&D
      department and the consolidation of our research and development
      capabilities we are well positioned to improve our existing products and
      to develop new applications for our customers and potential customers. We
      will continue to expand our association with the various universities and
      organizations who promote and support research into bimetallic
      technologies.





·
            Domestic and International
      Expansion. We are a global company and as such we will continue to
      seek opportunities all around the globe in addition to continuing to
      expand our presence in our existing
markets.





·
            Raw Materials. We
      mitigate the risk of increases in raw material price volatility by passing
      changes in raw material prices through to our customers. We mitigate
      volatile supplies through effective planning, working closely with key
      suppliers to obtain the best possible supply schedules and delivery
      terms.




11




·
            Acquisitions/ Strategic
      Alliance. We remain aware of opportunities that develop where we
      have opportunities to add to our product mix and global strategies that
      will increase shareholder value.





Intellectual
Property




Our
principal intellectual property rights are our patents, patent application and
the trademarks "FUSHI" and “Copperweld”. Additionally we have acquired the
rights to superior processes that can be renewed when they expire in 2015. We
continue to improve the products for which we hold the rights and through our
research department, we anticipate continuing our development of proprietary
intellectual properties. We employ the services of a law firm to maintain our
trademark registrations throughout the world and to identify any potential
infringements on our trademarks or our patents.




Domain
Names. We own
and operate websites, under the internet domain names www.fushiinternational.com,
www.fushiinternational.cn,
www.copperweld.com,
www.copperweldbimetallic.com,
and www.fushicopperweld.com.
We pay an annual fee to maintain our registrations and for a service that
identifies of any potential infringement on our domain names. The information
contained on our website does not form part of this report.




Government
Regulation




As a
global company we are subject to rules and regulations imposed by a wide range
of countries and are diligent in maintaining an awareness of those rules. The
common stock of Fushi Copperweld, Inc. is registered with the U.S. Securities
and Exchange Commission (“SEC”) and, therefore, we are subject to U.S. rules and
regulations regarding our securities and disclosure requirements. Our
headquarters and a major manufacturing facility are located in the PRC and as
such, we are subject to various tax and business governance rules and
regulations imposed by the PRC and it political subdivisions. We also have a
major operation in Fayetteville TN and are subject to various commercial and
taxing regulations imposed by the US and Tennessee as well as local governments.
Our UK operation is subject to rules and regulations applicable to businesses
operating in Great Britain. Failure to comply with the various government
regulations can have a negative impact on our company; therefore we are diligent
in our compliance with these rules and regulations.





In
addition, our common stock is traded on the NASDAQ stock exchange. NASDAQ, while
not having the force of governmental regulations, imposes significant corporate
governance and reporting rules where failure to follow its rules can have an
adverse impact on the public’s perception of investing in our stock. If we fail
to comply with NASDAQ corporate governance and listing requirements, we could be
subject to delisting from the NASDAQ Global Market.




Backlog
of Orders





Our
business is characterized generally by short-term order and shipment schedules.
Accordingly, we do not consider backlog at any given date to be indicative of
future sales. Our backlog consists of product orders for which we have received
a customer purchase order or purchase commitment and which have not yet been
shipped. At March 13, 2009, our backlog of orders believed to be firm was
$3.4 million compared with $17.3 million at March 14,
2008.





Environmental
Compliance




We are
subject to environmental regulations that are generally applicable to
manufacturing companies in the PRC, UK and in the US and we are subject to
periodic inspection by environment regulators and must follow specific
procedures in some of our processes. We do not have a record of violating
environmental regulations or approved practices either in the PRC, UK or in the
US.





12


Employees




As of
December 31, 2008, we had approximately 584 employees worldwide. A majority of
our employees are located outside of the United States in the People’s Republic
of China and the United Kingdom. Of our employees, approximately 73% work in
manufacturing.  The remainder of employees includes engineers, sales
and administrative personnel.





As a
matter of Company policy, we seek to maintain good relations with our employees
at all locations. We believe our relationship with our employees is
good.





Available
Information





Our
website (www.fushicopperweld.com)
contains frequent updated information about us and our operations. Our filings
with the Securities and Exchange Commission (SEC) on Form 10-K, Form 10-Q, Form
8-K and Proxy Statements and all amendments to those reports can be viewed free
of charge as soon as reasonably practicable after the reports and amendments are
electronically filed with or furnished to the SEC by accessing www.fushicopperweld.com and
clicking on Investor
Relations and then clicking on SEC Filings.





Executive
Officers of the Registrant





The
following are our Executive Officers as of December 31, 2008.





Directors and Executive Officers
                
                Position/Title
                
                AgeLi
      Fu
                
                Chairman
      of Board and CEO
                
                43Wenbing
      Christopher Wang
                
                President
      and CFO, Director
                
                38James
      Allen Todd
                
                EVP,
      Financial Controller
                
                65





The
following is a description of the business experience for the last five years
for each of the above named executive officers of our company:





Mr. Li Fu was appointed our
Chairman and CEO on December 13, 2005. Mr. Fu is a founder of Dalian Fushi and
has been the Executive Director of Dalian Fushi since he founded the company in
2001. Prior to founding Dalian Fushi and focusing his time on Dalian Fushi's
management and operations, Mr. Fu had founded and managed Dalian Fushi
Enterprise Group Co., Ltd., a holding company owning various subsidiaries in the
hotel, process control instrumentation, international trade, automobile
maintenance and education businesses. Mr. Fu graduated from PLA University of
Science and Technology with a degree in Engineering.





Mr. Wenbing Christopher Wang
has served as our Chief Financial Officer since December 13, 2005 and on January
21, 2008 was appointed as our President and Director. Mr. Wang has served as
Chief Financial Officer of Dalian Fushi since March 2005. Prior to Fushi, Mr.
Wang was an Executive Vice President at Redwood Capital, Inc. from November 2004
to March 2005 and an Assistant VP of Portfolio Management at China Century
Investment Corporation from October 2002 to September 2004. Mr. Wang worked for
Credit Suisse First Boston (HK) Ltd in 2001. From 1999 to 2000, Mr. Wang worked
for VCChina as Management Analyst. Fluent in both English and Chinese, Mr. Wang
holds an MBA in Finance and Corporate Accounting from Simon Business School of
University of Rochester.  Mr. Wang was named one of the top ten CFO’s
of 2007 in China by CFO magazine.





Mr. James Allen Todd served
as our Controller from October 29, 2007 to February 11, 2009. Mr. Todd was Chief
Financial Officer of Copperweld Bimetallics, LLC and previously, beginning in
July 2004 Mr. Todd was a co-principal of James A. Todd Associates providing
consulting services relating to corporate management, financial services
management and delivery to individuals, small companies and to the financial
services industry. Prior to that, he was President, CEO, and Chairman of AF
Financial Group, the holding company for AF Bank, AF Insurance Services, Inc.
and AF Brokerage, Inc. from February 1994 to July 2004.





Mr. Todd
retired from his position as Executive Vice President and Financial Controller
effective February 11, 2009 and we named Mr. J. Dwight Berry as our new Chief
Operating Officer as of the same date.  For additional information
regarding Mr. Todd’s resignation and Mr. Berry’s appointment, please refer to
our Current Report on Form 8-K filed February 17, 2009 and incorporated herein
by reference.





13





ITEM
1A RISK FACTORS





RISKS RELATED TO OUR
BUSINESS





Recently
announced tightened controls on the convertibility of RMB into foreign currency
have made it more difficult to make payments in U.S. dollars or fund business
activities outside China.





Substantially
all of the cash on our balance sheet are in RMB.  Recently tightened
restrictions on currency exchanges has considerably limited our ability to use
our cash in RMB to make payments in U.S. dollars or fund business activities
outside China, in particular to support our Fayetteville
subsidiary.  As a result, our business operations have been adversely
affected.  Although the PRC government introduced regulations in 1996
to allow greater convertibility of RMB for current account transactions,
significant restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business after providing
valid commercial documents. In addition, remittance of foreign currencies abroad
and conversion of RMB for capital account items, including direct investment and
loans, is subject to the approval of the PRC State Administration for Foreign
Exchange, or SAFE, and other relevant authorities, and companies are required to
open and maintain separate foreign exchange accounts for capital account items.
As an example, the new SAFE restrictions caused a delay in payment of interest
on our outstanding Notes and forced us to raise capital from outside sources in
order to fund working capital for our Fayetteville, TN operations. We cannot
assure you the Chinese regulatory authorities will not impose new or more
stringent restrictions on the convertibility of RMB, especially with respect to
foreign exchange transactions.  Any adverse actions by SAFE could
affect our ability to obtain foreign currency through debt or equity financing,
including by means of loans or capital contributions.





Adverse
capital and credit market conditions may significantly affect our ability to
meet liquidity needs, access to capital and cost of capital.





The
capital and credit markets have been experiencing extreme volatility and
disruption in recent months, including, among other things, extreme volatility
in securities prices, severely diminished liquidity and credit availability,
ratings downgrades of certain investments and declining valuations of others.
Governments have taken unprecedented actions intended to address extreme market
conditions that have included severely restricted credit and declines in real
estate values. In some cases, the markets have exerted downward pressure on
availability of liquidity and credit capacity for certain issuers. While
currently these conditions have not impaired our ability to utilize our current
credit facilities and finance our operations, there can be no assurance that
there will not be a further deterioration in financial markets and confidence in
major economies such that our ability to access credit markets and finance our
operations might be impaired. Adverse market conditions may limit our ability to
replace, in a timely manner, maturing liabilities and access the capital
necessary to operate and grow our business. As such, we may be forced to delay
raising capital or bear an unattractive cost of capital which could decrease our
profitability and significantly reduce our financial flexibility. Demand for our
products is vulnerable to economic downturns.  Although our total
revenues continue to improve in 2008 as a whole, the continued worsening of
economic condition could result in a decrease in or cancellation of orders for
our products. We are unable to predict the duration and severity of the current
disruption in financial markets and the global adverse economic conditions and
the effect such events might have on our business. Our results of operations,
financial condition, cash flows and capital position could be materially
adversely affected by disruptions in the financial markets.  Further,
any decreased collectability of accounts receivable or early termination of
sales contracts due to the current deterioration in economic conditions could
negatively impact our results of operations. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources.”





14


Our
Fayetteville, Tennessee operation is dependent upon a line of credit to fund
working capital needs and, if we are unable to renew or replace the line of
credit, our Fayetteville results of operations would be adversely
affected.





Our
Fayetteville facility is dependent upon an asset based line of credit (ABL) to
fund its working capital needs. In times of declining sales due to circumstances
beyond the control of the Company, such as occurred during the fourth quarter of
2008, the level of accounts receivable can decline.  A significant
decline in the availability under the ABL can reduce the ability of the
Fayetteville facility to purchase raw materials and fund other operating
costs.  Raw materials generally require 30 to 60 days from the time
the order is placed until the raw materials are delivered but payment from the
raw materials is required no more than 30 days from
shipment.  Therefore, a reduction in sales from an economic slowdown
or from seasonal reductions in sales can have an adverse impact on the
facility’s ability to purchase raw materials for future sales.  In
periods of increasing sales, delivery of finished products can be adversely
affected by limitations on funding for raw materials under the restriction and
limitations of the ABL line





The
current limit of $12.8 million will limit the sales growth that can occur at the
facility when sales growth returns to expected levels. Any increases in the
level of debt, including ABL limits, must be approved by the holders of our
Notes.  The holders of our Notes refused to approve increases in our
ABL line of credit during the second and third quarters of 2008, which resulted
in funding shortages during the fourth quarter.  If our current ABL
lender terminates the line of credit or fails to renew the line when it matures
in April 2010, a significant funding shortfall would occur in the Fayetteville
facility.  We would have to seek additional funding sources to pay off
the current ABL balance of $4,712,075 at December 31, 2008 and to provide an
equal amount to fund working capital needs.  In the current
environment, obtaining another ABL with a different lender would be difficult,
and our liquidity and results of operations would be negatively impacted if we
were unable to obtain alternative funding sources for Fayetteville working
capital.





Our
China operation's limited operating history may not serve as an adequate basis
to judge our future prospects and results of operations.





Our China
operation began the sale of copper-clad aluminum wire in 2002. Our limited
operating history may not provide a meaningful basis on which to evaluate our
business. Although our revenues have grown rapidly since inception, we cannot
assure you that we will maintain our rate of growth, our profitability or that
we will not incur net losses in the future. We expect that our operating
expenses will increase as we expand. Any significant failure to realize
anticipated revenue growth could result in significant operating losses. We will
continue to encounter risks and difficulties frequently experienced by companies
at a similar stage of development, including our potential failure
to:




-
            expand
      our product offerings and maintain the high quality of our
      products;-
            maintain
      our proprietary copper-cladding technology for the manufacturing of
      bimetallic wires;


-
            manage
      our expanding operations, including the integration of Copperweld
      Bimetallics and any future acquisitions;-
            maintain
      adequate control of our expenses;


-
            implement
      our product development, marketing, sales, and acquisition strategies and
      adapt and modify them as needed;-
            anticipate
      and adapt to changing conditions in the bimetallic products markets in
      which we operate as well as the impact of any changes in government
      regulation, mergers and acquisitions involving our competitors,
      technological developments and other significant competitive and market
      dynamics.




If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.





A
judgment has been entered against us as a result of recent litigation and, if we
are unable to stay enforcement pending our appeal, we will be forced to pay the
judgment.





On
November 27, 2006, an action was filed against the Company in the United States
District Court for the District of Connecticut by Kuhn Brothers, Inc., Kuhn
Brothers Securities Corp. and Kuhn Brothers & Co. On August 5, 2008, a
judgment was entered against the Company in the amount of $7,197,794, plus
interest and attorneys fees. The Company has filed an appeal and is currently
seeking to stay enforcement of the judgment pending appeal.  If the
Court refused to grant a stay of enforcement, the Company would be forced to pay
the entire judgment, which payment could negatively impact the Company’s
liquidity and results of operations. See “Item 3 – Legal Proceedings” for a more
detailed discussion of the litigation.





15


Quarterly
operating results may fluctuate due to factors including customer demand and raw
materials pricing.





Our
quarterly results of operations may fluctuate as a result of a number of
factors, including fluctuation in the demand for and shipments of our products
and changes in the prices of copper which directly affect the prices of our
products and may influence the demand for our products. Therefore,
quarter-to-quarter comparisons of results of operations have been and will be
impacted by the volume of such orders and shipments. In addition, our operating
results could be adversely affected by the following factors, among others, such
as variations in the mix of product sales, price changes in response to
competitive factors, increases in raw material costs and other significant
costs, increases in utility costs (particularly electricity) and various types
of insurance coverage and interruptions in plant operations resulting from the
interruption of raw material supplies and other factors. Some uses of our
products are subject to seasonality factors which can affect our quarter to
quarter results as well.





Fluctuating
copper prices impact our business and operating results.





Copper
prices, which have increased over the past several years followed by more recent
sharp declines, have varied significantly and may vary significantly in the
future because the copper industry is highly volatile and cyclical in nature.
This affects our business both positively and negatively - as our products are a
substitute for pure copper wire, higher prices increase demand, while lower
copper prices can decrease demand. Numerous factors, most of which are beyond
our control, influence copper price. These factors include general economic
conditions, industry capacity utilization, import duties and other trade
restrictions. We cannot predict copper prices in the future or the effect of
fluctuations in the costs of copper on our future operating results. We mitigate
the impact of changing raw material prices by attempting to pass changes in
prices to our customers by adjusting prices at least monthly to reflect changes
in raw material prices, as is customary in the industry. We may not be able to
adjust our product prices rapidly enough in the short-term to recover the costs
of increases in raw materials. Our future profitability may be adversely
affected to the extent we are unable to pass on higher raw material costs to our
customers.




We
may encounter substantial competition in our business and our failure to compete
effectively may adversely affect our ability to generate revenue.





The
bimetallic industry is becoming increasingly competitive. The principal elements
of competition in the bimetallic industry are, in our opinion, pricing, payment
terms, product availability and quality. While we believe that we have attained
a leadership position with respect to all of these factors, our major
competitors with substantially greater resources than us may be better able to
successfully endure downturns in our industrial sector. In periods of reduced
demand for our products, we can either choose to maintain market share by
reducing our selling prices to meet competition or maintain selling prices,
which may sacrifice market share. Sales and overall profitability would be
reduced under either scenario. In addition, we cannot assure you that additional
competitors will not enter our existing markets, or that we will be able to
compete successfully against existing or new competition.





We
may not be able to effectively control and manage our growth.





If our
business and markets grow and develop as we expect, it will be necessary for us
to finance and manage expansion in an orderly fashion. In addition, we may face
challenges in managing expanding product offerings and in integrating acquired
businesses with our own. Such eventualities will increase demands on our
existing management and facilities. Failure to manage these growth and expansion
could interrupt or adversely affect our operations and cause production
backlogs, longer product development time frames and administrative
inefficiencies.





A
significant portion of our sales are derived from a limited number of customers,
and results from operations could be adversely affected and stockholder value
harmed if we lose these customers.





Our
revenue is dependent, in large part, on significant orders from a limited number
of customers. Sales to our five largest customers accounted for approximately
18.2%, 24.6% and 28.9% of our net sales during the years ended December 31,
2008, 2007, and 2006 respectively. We believe that revenue derived from current
and future large customers will continue to decline but will continue to
represent a significant portion of our total revenue. Our inability to continue
to secure and maintain a sufficient number of large customers would have a
material adverse effect on our business, operating results and financial
condition. Moreover, our success will depend in part upon our ability to obtain
orders from new customers, as well as the financial condition and success of our
customers and general economic conditions.




16


Shortages
or disruptions in the availability of raw materials could have a material
adverse effect on our business.





Aluminum
and steel rods and copper strips, our principal raw materials, collectively
accounted for approximately 84.8% of our costs of goods sold during the fiscal
year ended December 31, 2008. We expect that raw materials will continue to
account for a significant portion of our cost of goods sold in the future. The
prices of raw materials fluctuate because of general economic conditions, global
supply and demand and other factors causing monthly variations in the costs of
our raw materials purchases. The macro-economic factors, together with labor and
other business interruptions experienced by certain suppliers, have contributed
to periodic shortages in the supply of raw materials, and such shortages may
increase in the future. If we are unable to procure adequate supplies of raw
material to meet our future production needs and customer demand, shortages
could result in a material loss of customers and revenues and adversely impact
our results of operations. In addition, supply shortages or disruptions or the
loss of suppliers may cause us to procure our raw materials from less cost
effective sources and may have a material adverse affect on our business,
revenues and results of operations.





We
depend on a few suppliers for a significant portion of our principal raw
materials and we do not have any long-term supply contracts with our raw
materials suppliers. Interruptions of production at our key suppliers may affect
our results of operations and financial performance.





We rely
on a limited number of suppliers for most of the raw materials we use. During
the fiscal year ended December 31, 2008, purchase from our five largest
suppliers of metal raw materials represented approximately 65% of our total raw
material purchases. Purchases from our five largest suppliers of raw materials
represented 38.6% and 93.4% in 2007 and 2006, respectively. Interruptions or
shortages of supplies from our key suppliers of raw materials could disrupt
production or impact our ability to increase production and sales. We do not
have long-term or volume purchase agreements with most of our suppliers and we
may have limited options in the short-term for alternative supply if these
suppliers fail for any reason, including their business failure or financial
difficulties, to continue the supply of materials or components. Moreover,
identifying and accessing alternative sources may increase our costs.
Interruptions at our key suppliers could negatively impact our results of
operations, financial performance and the price of our common
stock.





Due
to increased volatility of raw material prices, the timing lag between the raw
material purchase and product pricing can negatively impact our
profitability.





Volatility
in the prices of raw materials, among other factors, may adversely impact our
ability to accurately forecast demand and may have a material adverse impact on
our results of operations. For example, our manufacturing activities are
determined, and raw materials purchase scheduled, upon forecasted demand while
sales prices are determined at the time of order placement, subject to
adjustment at fulfillment. The lag between the point when raw materials are
acquired in advance and the point when products are actually priced may impact
us both positively and negatively, resulting in increased or reduced
profitability. In addition, we routinely maintain a certain level of finished
goods inventories to meet near term expected demand. Pricing for the sale of
these inventories is generally based on current raw material prices. Rapid
declines in the price of raw materials may result in our inventories being
carried at costs in excess of net realizable value and may have an adverse
effect on our results of operations and the price of our common
stock.




We rely on short-term financing from
banks for our daily operation.





We rely
on short-term borrowings to fund our financing needs. If we fail to achieve
timely rollover, extension or refinancing of our short-term debt, or sufficient
availability of financing in the case of our Fayetteville facility, we may be
unable to meet our obligations in connection with debt service, accounts payable
and/or other liabilities when they become due and payable. In China, short-term
bank loans generally mature in one year or less and contain no specific renewal
terms.  However, it is customary practice for banks and borrowers to
negotiate roll-overs or renewals of short-term borrowings on an on-going basis
shortly before they mature.  Although we have renewed our short-term
borrowings in the past, we cannot assure you that we will be able to renew these
loans in the future as they mature. If we are unable to obtain renewals of these
loans or sufficient alternative funding on reasonable terms from banks or other
parties, we will have to repay these borrowings with the cash on our balance
sheet or cash generated by our future operations, if any.  We cannot
assure you that our business will generate sufficient cash flow from operations
to repay these borrowings.  In addition, we may be exposed to changes
in interest rates. If interest rates increase substantially, our results of
operations could be adversely affected.





17


Substantial
defaults by our customers on accounts receivable could have a material adverse
affect on our liquidity and results of operations.




A
substantial portion of our working capital consists of accounts receivable from
customers. If customers responsible for a significant amount of accounts
receivable were to become insolvent or otherwise unable to pay for our products,
or unable 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.  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.





We
face manufacturing challenges due to difficulties in forecasting customer
demand.





The
volume and timing of sales to our customers may vary due to: variation in demand
for our customers’ products; our customers’ attempts to manage their inventory;
design changes; changes in our customers’ manufacturing strategy; and
acquisitions of or consolidations among customers. Due in part to these factors,
many of our customers do not commit to long-term production schedules. Our
inability to forecast the level of customer orders with certainty makes it
difficult to schedule production and maximize utilization of manufacturing
capacity. Customers may cancel their orders, change production quantities or
delay production for a number of reasons and such actions could negatively
impact our operating results. In addition, we make significant operating
decisions based on our estimate of customer requirements. The short-term nature
of our customers’ commitments and the possibility of rapid changes in demand for
their products reduce our ability to accurately estimate the future requirements
of those customers.




If
we fail to accurately project market demand for our products, our business
expansion plan could be jeopardized and our financial condition and results of
operations will suffer.





We plan
to increase our annual manufacturing capacity and relocate unused capacity from
Fayetteville, Tennessee to Dalian, China, to meet an expected increase in demand
for our products in the Asia Pacific region. Our decision to increase our
manufacturing capacity was based primarily on our projected increases in our
sales volume and growth in the size of the bimetallic market in China. If actual
customer orders are less than our projected market demand, we may suffer
overcapacity problems and may have to leave capacity idle, which can reduce our
overall profitability and hurt our financial condition and results of
operations.





We
may encounter problems associated with our global operations.





As a
result of the Copperweld acquisition, a significant portion of our operations
consists of manufacturing and sales activities outside of PRC, primarily in the
US. Our ability to sell our products and conduct our operations globally is
subject to a number of risks. Local economic, political and labor conditions in
each country could adversely affect demand for our products and services or
disrupt our operations in these markets. We may also experience reduced
intellectual property protection or longer and more challenging collection
cycles as a result of different customary business practices in certain
countries where we do business. Additionally, we face the following
risks:




-
            International
      business conditions including the relationships between the U.S., Chinese
      and other governments;-
            Unexpected
      changes in laws, regulations, trade, monetary or fiscal policy, including
      interest rates, foreign currency exchange rates and changes in the rate of
      inflation in the U.S., China or other foreign
  countries;


-
            Tariffs,
      quotas and other import or export restrictions and other trade
      barriers;-
            Difficulties
      in staffing and management;




18




-
            Language
      and cultural barriers; and-
            Potentially
      adverse tax consequences.





The
anticipated benefits of the Copperweld transaction may not be
realized.





We
entered the Copperweld acquisition agreement with the expectation that the
acquisition will result in a number of benefits to us including, among other
things:




-
            enhanced
      revenues;-
            broader
      product offering;


-
            significant
      savings on capital expenditures;-
            expansion
      of our global distribution and manufacturing
  capabilities;


-
            operational
      improvements;-
            more
      effective use of our production capacity;
and


-
            diversification
      of our customer base.




Achieving
the anticipated benefits of the Copperweld acquisition depends on the successful
integration of Fushi’s and Copperweld's products, services, operations,
personnel, technology and facilities in a timely and efficient manner. Although
we have generally be successful in such integration, difficulties have
been experienced, especially given the cultural difference, time zone
difference, and language differences. For example, we have encounter
delay associated with converting the businesses of Fushi and Copperweld to
a common platform. Similarly, the process of reallocating machinery and
capacity, combining sales, marketing and manufacturing forces, consolidating
administrative functions, and coordinating product and service offerings could
take longer, cost more, and provide fewer benefits than initially projected. To
the extent any of these events occur, the benefits of the transaction may be
reduced.




Integrating
our business with that of Copperweld is a complex and time-consuming
process. Before the acquisition, Fushi and Copperweld operated independently,
each with its own business, products, customers, employees, culture and systems.
Fushi may continue to face substantial difficulties, costs and delays in
integrating the two businesses. These difficulties, costs and delays may
include:




-
            Costs
      and delays in moving additional capacity from Fayetteville, TN to Dalian,
      China;-
            Costs
      and delays in implementing common systems and
  procedures;


-
            Difficulties
      in combining research and development teams and
  processes;


-
            Difficulty
      comparing financial reports due to differing financial and/or internal
      reporting systems and practices;


-
            Diversion
      of management resources from the business;-
            The
      inability to retain existing customers of each
  company;




19




-
            Challenges
      in retaining and integrating management and other key employees of Fushi
      and Copperweld;


-
            Difficulty
      in coordinating operations in an effective and efficient manner;
      and-
            The
      inability to achieve the synergies anticipated to be realized from the
      acquisition on the timeline presently anticipated, or at
    all.




After the
acquisition, communication between the Dalian, Fayetteville and Telford
subsidiaries has been challenging as most of our middle and top
management staff in Dalian are not educated and trained in the Western system,
and we have experienced difficulty hiring new employees in the PRC with such
training.  As a result, we experienced integration difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices.





Any one
or all of these factors may cause increased operating costs, worse than
anticipated financial performance or the loss of customers and employees. Many
of these factors are also outside of our control.





The
integration process may result in a loss of key personnel of Fushi and/or
Copperweld.





Fushi and
Copperweld both depend on the services of their key personnel. Current and
prospective employees of Fushi and Copperweld may become uncertain or
dissatisfied about their changing or future roles with Fushi as the integration
evolves. Uncertainty or dissatisfaction may affect the performance of such
personnel adversely and the ability of each company to retain and attract key
personnel. The loss of the services of one or more of these key employees or the
inability of Fushi or Copperweld to attract, train, and retain qualified
employees could result in the loss of customers or otherwise inhibit the ability
of Fushi to integrate and grow the combined businesses effectively.




The
combination of Copperweld and Fushi may result in a loss of customers of
Copperweld and/or Fushi.





Some
customers may seek alternative sources of product and/or services due to, among
other reasons, a lack of desire to do business with our combined company or
perceptions that we may not continue to support and develop certain products.
Difficulties in combining operations could also result in the loss of, potential
disputes or litigation with, customers. Any steps by management to counter such
potential increased customer attrition may not be effective. Failure by
management to retain customers could result in worse than anticipated financial
performance.




Copperweld’s
ability to sustain profitability is uncertain.





Prior to
its acquisition by us, Copperweld incurred losses for the entire time it
operated as a stand-alone business. The combined company’s ability for the
Fayetteville, TN location to generate sufficient revenues and make profits is
dependent in large part on its ability to move more value-added production in
house, control manufacturing related costs, manage its growth related expenses,
make additional capital expenditures, expand its customer base, increase sales
of its current products to existing customers, enter into additional supply
arrangements and manage its working capital and other financial resources. We
cannot provide any assurance that improved profitability can be achieved at the
Fayetteville location in the amounts or during the periods
expected.




Also, see
“Risks Related to Our Business- Our Fayetteville, Tennessee operation is
dependent upon a line of credit to fund working capital needs and, if we are
unable to renew or replace the line of credit, our Fayetteville results of
operations would be adversely affected.”




We
face risks associated with future investments or acquisitions.





An
important element of our growth strategy is to invest in or acquire businesses
that will enable us, among other things, to expand our manufacturing capacity
and the products we offer. However, we may be unable to identify suitable
investment or acquisition candidates or may be unable to make these investments
or acquisitions on commercially reasonable terms, if at all.





20




If we
complete an investment or acquisition, we may not realize the anticipated
benefits from the transaction. Integrating an acquired business is distracting
and time consuming, as well as a potentially expensive process. The successful
integration of any acquired businesses requires us to:


-
            integrate
      and retain key management, sales, research and development, production and
      other personnel;


-
            incorporate
      the acquired products or capabilities into our offerings from an
      engineering, sales and marketing
perspective;


-
            coordinate
      research and development efforts;


-
            integrate
      and support pre-existing supplier, distribution and customer
      relationships; and


-
            consolidate
      duplicate facilities and functions and combine back office accounting,
      order processing and support
functions





Geographic
distance between business operations, the compatibility of the technologies and
operations being integrated and the disparate corporate cultures being combined
also present significant challenges. Acquired businesses are likely to have
different standards, controls, contracts, procedures and policies, making it
more difficult to implement and harmonize company-wide financial, accounting,
billing, information and other systems. Our focus on integrating operations may
also distract attention from our day-to-day business and may disrupt key
research and development, marketing or sales efforts. If we cannot overcome
these challenges, we may not realize actual benefits from future acquisitions,
which will impair our overall business results.





We
may not be able to prevent others from unauthorized use of Fushi Copperweld
patents, which could harm our business and competitive position.





We
believe that other manufacturers in the PRC have been infringing our patents and
are using our core technology. Although we have pursued legal remedies available
in the PRC to protect our patents, we can provide no assurance that the
protection afforded under the laws of the PRC is adequate to maintain our
competitive position or that we will be successful in all our efforts. Our
patents and patent applications may be challenged, invalidated or circumvented
in the future. We cannot assure you that our current or potential competitors do
not have, and will not obtain, patents that will prevent, limit or interfere
with our ability to make, use or sell our products in either the PRC or other
countries.





Enforcement
and implementation of PRC intellectual property-related laws has historically
been lacking. Accordingly, intellectual property rights and confidentiality
protections in the PRC may not be as effective as in the United States or other
countries. Policing unauthorized use of proprietary technology is difficult and
expensive, and we might need to resort to litigation to enforce or defend
patents issued to us or to determine the enforceability, scope and validity of
our proprietary rights or those of others. Such litigation may require
significant expenditure of cash and management efforts and could harm our
business, financial condition and results of operations. An adverse
determination in any such litigation will impair our intellectual property
rights and may harm our business, competitive position, business prospects,
reputation and the price of our common stock.




We
did not have effective internal control over financial reporting as of December
31, 2008 due to a material weakness, which relates primarily to
management not adhering to controls as designed and a significant
deficiency, which relates to untimely booking of assets.  We can make
no assurances that additional material weaknesses or significant deficiencies
will not be identified in the future. Our failure to implement and maintain
effective internal control over financial reporting could cause investors to
lose confidence in our reported financial information and have a negative effect
on our stock price.





We are
subject to the reporting obligations under the U.S. securities laws. The SEC,
under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring
public companies to include a report of management on such companies’ internal
control over financial reporting in their annual reports that contain an
assessment by management of the effectiveness of their internal control over
financial reporting at a reasonable assurance level. In addition, pursuant to
Auditing Standard No. 5, which is in effect for the fiscal year ended December
31, 2008, our independent registered public accounting firm must attest to and
report on the operating effectiveness of the company’s internal
controls.





21




We
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2008.  This evaluation was performed
using theInternal
Control–EvaluationFramework developed by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).  Based on such evaluation, management concluded that the
Company’s internal control over financial reporting was not effective and
identified one material weakness and one significant deficiency in the Company’s
internal control over financial reporting as stated below.




Our
material weakness related to:


·
            the
      Company’s not
      adhering to controls as designed to ensure the timely and accurate
      disbursement of cash for the fiscal year ended December 31, 2008. The
      Company’s control system governing cash disbursement practices was
      adequately designed, faithfully implemented and properly documented by
      staff.  However, occurrences were detected that final payments
      were not made to intended payees due to override by certain members of
      management.  Although such occurrences did not result in
      material adjustments to the Company’s consolidated financial statements
      for the year ended December 31, 2008, there is a reasonable possibility
      that the control did not operate effectively because only certain key
      management had the ability to authorize, execute and change the
      disbursement of cash.





Our
deficiency related to:


·
            Failure
      to maintain effective controls over the financial closing process to
      ensure the accurate and timely accounting and disclosure of fixed asset
      including 1) not timely placing equipments received in construction in
      progress and 2) not timely transferring completed equipments to fixed
      assets.





To
address the material weakness and significant deficiency, we have:


·
            revised
      the reporting structure and established clear roles, responsibilities, and
      accountability;


·
            reorganized
      the cash disbursement process by including staff from different
      departments to ensure adequate segregation of
  duties;


·
            implemented
      additional controls to continuously improve our period-end closing
      procedures by ensuring that account reconciliations and analyses are
      adequately reviewed for completeness and accuracy to timely identify
      adjustments, particularly as it relates to fixed
      assets;


·
            evaluated
      the sufficiency of financial and accounting staff in Dalian, China,
      Fayetteville, Tennessee, and Telford, England and, based on that
      evaluation, we hired and continue to hire additional accounting
      staff;


·
            implemented
      a formal training program to train all key employees, especially new
      hires, on our antifraud programs, corporate governance guidelines, and
      business ethics; and


·
            engaged
      a professional advisory firm on outsourcing part of our internal audit
      function.




We
believe that the steps we are taking are necessary for remediation of the
material weakness and significant deficiency identified above, and we will
continue to monitor the effectiveness of these steps and to make any
changes that our management deems appropriate.  However, we can
make no assurances that we can fully remediate the material weakness or the
significant deficiency or address additional material weaknesses or significant
deficiencies that may subsequently arise by the year end of fiscal year 2009, so
that our management will be able to conclude that we will have effective
internal control over financial reporting as of December 31, 2009.





Further,
we can make no assurances that additional material weaknesses in our internal
control over financial reporting will not be identified in the future. Any
failure to maintain or implement required new or improved controls, or any
difficulties we encounter in their implementation, could result in additional
significant deficiencies or material weaknesses, causing us to fail to meet our
periodic reporting obligations or result in the loss of investor confidence in
the reliability of our financial reporting processes.  Any such
failure could adversely affect the results of periodic management evaluations
and annual auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that are required under Section 404 of
the Sarbanes-Oxley Act of 2002. The existence of a material weakness could
result in errors in our financial statements that could result in restatement of
financial statements, causing us to fail to meet our reporting obligations and
cause investors to lose confidence in our reported financial information,
leading to a decline in our stock price.  Furthermore, we anticipate
that we will continue to incur considerable costs and use significant management
and other resources in an effort to comply with Section 404 and other
requirements of the Sarbanes-Oxley Act of 2002.  See Item 9A.
“Controls and Procedures” for a more detailed discussion





22


Potential
environmental liability could have a material adverse effect on our operations
and financial condition.





As a
manufacturer, we are subject to various Chinese environmental laws and
regulations on air emission, waste water discharge, solid wastes and noise.
Although we believe that our operations are in substantial compliance with
current environmental laws and regulations, we may not be able to comply with
these regulations at all times as the Chinese environmental legal regime is
evolving and becoming more stringent. Therefore, if the Chinese government
imposes more stringent regulations in the future, we will have to incur
additional and potentially substantial costs and expenses in order to comply
with new regulations, which may negatively affect our results of operations. If
we fail to comply with any of the present or future environmental regulations in
any material aspects, we may suffer from negative publicity and may be required
to pay substantial fines, suspend or even cease operations.




Regulations
promulgated by the US government, the State of Tennessee and local authorities
impose environmental rules and regulations on our Fayetteville operation. Our
Fayetteville plant is subject to regular reporting to and inspections by local,
state and federal authorities. To date, inspections have not found our
Fayetteville plant in violation of any rules or regulations. We believe that we
comply in all material respects with the environmental rules imposed on our
Fayetteville plant. Our internal procedures require regular monitoring of our
processes to assure that we do not violate environmental standards. Failure to
comply with Chinese or US environmental laws and regulations may materially and
adversely affect our business, financial condition and results of
operations.





We
do not presently maintain product liability insurance in the PRC, and our
property and equipment insurance does not cover the full value of our property
and equipment, which leaves us with exposure in the event of loss or damage to
our properties or claims filed against us.





We
currently do not carry any product liability or other similar insurance in
China. We cannot assure you that we would not face liability in the event of the
failure of any of our products. This is particularly true given our plan to
significantly expand our sales into international markets, like the United
States, where product liability claims are more prevalent. We carry product
liability insurance for our Fayetteville operations but we have no assurance
that the coverage would be sufficient in the event of a claim.





We have
purchased automobile insurance with third party liability coverage for our
vehicles. In addition, we have purchased property insurance from China United
Property Insurance Company to cover real property and plant. Except for property
and automobile insurance, we do not have other insurance such as business
liability or disruption insurance coverage for our operations in the PRC. In the
event of a significant product liability claim or other uninsured event, our
financial results and the price of our common stock may be adversely affected.
Likewise, we maintain casualty insurance for our plant and equipment in
Fayetteville and Telford; however, we cannot assure you that the coverage would
be sufficient to replace our equipment in the event of a
catastrophe.





We
do not maintain a reserve fund for warranty or defective products claims. Our
costs could substantially increase if we experience a significant number of
warranty claims.





Our
product warranties against technical defects of our copper-clad products wires
vary, depending on our purchase orders with customers. The warranties require us
to replace defective components and pay for the losses customers incur from
defective products or a certain percentage of the purchase price as liquidated
damages for our failure to meet the specified product specifications and
packaging requirements in the purchase orders. We have not established any
reserve funds for potential warranty claims since historically we have
experienced few warranty claims for our products so that the costs associated
with our warranty claims have been low. If we experience an increase in warranty
claims or if our repair and replacement costs associated with warranty claims
increase significantly, it would have a material adverse effect on our financial
condition and results of operations.





We
could suffer significant business interruptions.





Our
operations and those of our suppliers may be vulnerable to interruption by
natural disasters such as the earthquake experienced in Sichuan province of
China in May 2008, or other disasters such as fires, explosions, acts of
terrorism or war, or government imposed restriction or reduction on industrial
manufacturing activities such as the one during the Olympics from August to
September 2008. If a business interruption occurs, our business could be
materially and adversely affected.





23


RISKS RELATED TO DOING
BUSINESS IN THE PRC





Changes
in the policies of the PRC government could have a significant impact upon the
business we may be able to conduct in the PRC and the profitability of that
business.





The PRC's
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy, such as the United States. Under this direction, we believe that the
PRC will continue to strengthen its economic and trading relationships with
foreign countries and business development in the PRC will follow market forces.
While we believe that this trend will continue, we cannot assure you that this
will be the case. Our interests may be adversely affected by changes in policies
by the PRC government, including:




-
            changes
      in laws, regulations or their interpretation-
            confiscatory
      taxation


-
            restrictions
      on currency conversion, imports or sources of supplies-
            expropriation
      or nationalization of private
enterprises.




Although
the PRC government has been pursuing economic reform policies for more than two
decades, we cannot assure you that the government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other
circumstances affecting the PRC's political, economic and social
life.




The PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may have a
material and adverse effect on our business.





There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are sometimes vague and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses.





Restrictions
on the convertibility of RMB into foreign currency may limit our ability to make
payments in U.S. dollars or fund business activities outside China.




Substantially
all of the cash on our balance sheet are in RMB.  Recently tightened
restriction on currency exchanges has considerably limited our ability to use
our cash in RMB to make payments in U.S. dollars or fund business activities
outside China, in particular to support our Fayetteville
subsidiary.  As a result, our business operations have been adversely
affected.  Although the PRC government introduced regulations in 1996
to allow greater convertibility of RMB for current account transactions,
significant restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business after providing
valid commercial documents. In addition, remittance of foreign currencies abroad
and conversion of RMB for capital account items, including direct investment and
loans, is subject to the approval of the PRC State Administration for Foreign
Exchange, or SAFE, and other relevant authorities, and companies are required to
open and maintain separate foreign exchange accounts for capital account items.
We cannot assure you the Chinese regulatory authorities will not impose new or
more stringent restrictions on the convertibility of RMB, especially with
respect to foreign exchange transactions.  Any adverse actions by SAFE
could affect our ability to obtain foreign currency through debt or equity
financing, including by means of loans or capital contributions.





24


A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect our customers, demand for our products and our
business.





A
majority of our operations are conducted in the PRC and more than 72.4% of our
net sales for 2008 were generated from sales in the PRC. Although the PRC
economy has grown significantly in recent years, we cannot assure you that such
growth will continue. The bimetallic wire industry in the PRC is growing, but we
do not know how sensitive we are to a slowdown in economic growth or other
adverse changes in the PRC economy which may affect demand for our products.
With the addition of Copperweld we are now exposed to global economic
conditions. In the future, a slowdown in overall economic growth, an economic
downturn or recession or other adverse economic developments globally or in a
large segment of the world could have adverse economic developments and may
materially and adversely affect our business.





Fushi
International (Dalian) and Dalian Fushi are subject to restrictions on paying
dividends and making other payments to us.





We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than investments in our subsidiaries
and affiliates, Copperweld Bimetallics, LLC, Fushi International (Dalian) and
Dalian Fushi. As a result of this holding company structure, we rely on
dividends payments from our subsidiaries for funds. PRC regulations, which apply
to Fushi International (Dalian) and Dalian Fushi, currently permit payment of
dividends only out of accumulated profits, as determined in accordance with PRC
accounting standards and regulations. Fushi International (Dalian) and Dalian
Fushi also are required to set aside a portion of their after-tax profits
according to PRC accounting standards and regulations to fund certain reserve
funds. The PRC government also imposes controls on the conversion of RMB into
foreign currencies and the remittance of currencies out of the PRC. We may
experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency. Furthermore, if Fushi International (Dalian)
or Dalian Fushi incurs debt on its own in the future, the instruments governing
the debt may restrict its ability to pay dividends or make other payments. If we
or Fushi International (Dalian) are unable to receive all of the revenues from
operations or if Copperweld is unable to pay dividends to the parent, we may be
unable to pay dividends on our common stock. See also "Risk Factors—Risks
Related to an Investment in Our Common Stock — We are unlikely to pay cash
dividends in the foreseeable future."




The
fluctuation of the Renminbi may materially and adversely affect your
investment.





The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC's political and economic
conditions. Since a significant portion of our revenues are earned in the PRC,
any significant revaluation of the Renminbi may materially and adversely affect
our cash flows, revenues and financial condition. For example, to the extent
that we need to convert U.S. dollars we receive from an offering of our
securities into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar could have a material adverse effect on our business,
financial condition and results of operations. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi the U.S. dollar equivalent of the we convert
would be reduced. In addition, the depreciation of significant U.S. dollar
denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.





On July
21, 2005, the PRC government changed its policy of tying the value of the
Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in a continuous appreciation of
the Renminbi against the U.S. dollar. While the international reaction to the
Renminbi revaluation generally has been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. dollar.




The
following table sets forth information concerning exchange rates between the RMB
and the U.S. dollar for the periods indicated. These rates are provided solely
for your convenience and are not necessarily the exchange rates that we used in
this presentation or will use in the preparation of our periodic reports or any
other information to be provided to you. The source of these rates is the
Federal Reserve Bank of New York.




25




Noon Buying RatePeriod
                                
                                Period End
                                
                                
                                Average(1)
                                
                                
                                Low
                                
                                
                                High(RMB per US$1.00)2002
                                
                                
                                8.2800
                                
                                
                                
                                8.2772
                                
                                
                                
                                8.2800
                                
                                
                                
                                8.27002003
                                
                                
                                8.2767
                                
                                
                                
                                8.2771
                                
                                
                                
                                8.2800
                                
                                
                                
                                8.27652004
                                
                                
                                8.2765
                                
                                
                                
                                8.2768
                                
                                
                                
                                8.2774
                                
                                
                                
                                8.27642005
                                
                                
                                8.0702
                                
                                
                                
                                8.1826
                                
                                
                                
                                8.2765
                                
                                
                                
                                8.07022006
                                
                                
                                7.8041
                                
                                
                                
                                7.9636
                                
                                
                                
                                8.0702
                                
                                
                                
                                7.80412007
                                
                                
                                7.2946
                                
                                
                                
                                7.6058
                                
                                
                                
                                7.8127
                                
                                
                                
                                7.29462008
                                
                                
                                6.8225
                                
                                
                                
                                6.9477
                                
                                
                                
                                7.2946
                                
                                
                                
                                6.7800





(1)
              Annual
      averages are calculated from month-end rates. Monthly averages are
      calculated using the average of the daily rates during the relevant
      period.
  (2)
              Unless
      otherwise noted, all translations from RMB to U.S. dollars and from U.S.
      dollars to RMB in this report were made in the statement of operations at
      6.948 to $1, balance sheet at 6.823 to $1 and equity section at historical
      rates.




If
preferential tax concessions granted by the PRC government are changed or
expire, our financial results and results of operations would be materially and
adversely affected.





Our
results of operation may be adversely affected by changes to, or expiration of,
preferential tax concessions that our subsidiaries in the PRC currently enjoy.
The statutory tax rate generally applicable to domestic PRC companies is 33%,
including 30% state income tax and 3% local income tax. Our subsidiaries, Fushi
International (Dalian) as a Wholly Foreign Owned Enterprise, or WFOE, and Dalian
Fushi as a “new or high-technology enterprise” located in Economic Development
Zone of the Dalian City, have been subject to tax exemptions or relatively low
tax rates. The estimated tax savings for the year ended December 31, 2008
without preferential tax treatment amounted to approximately $5.9
million.





As the
newly adopted PRC corporate income tax law comes into effect, preferential tax
benefits currently granted to WFOE’s are to be phased out and we would be
subject to the same tax treatment as a domestic Chinese company, applying a
uniform 25% tax rate to company profits. The loss of these preferential tax
treatments that are currently available to us will have a material and adverse
effect on our financial condition and results of operations and could adversely
impact the price of our common stock.




In
addition, tax laws in China are subject to interpretation by local tax
authorities. Our preferential tax treatment may not remain in effect, or may
change, in which case we may be required to pay the higher income tax rate
generally applicable to Chinese companies, or such other rate as is required by
the laws of China.





The
PRC State Administration of Foreign Exchange, or SAFE, requires PRC residents to
register with, or obtain approval from, SAFE regarding their direct or indirect
offshore investment activities.





PRC State
Administration of Foreign Exchange Regulations regarding offshore financing
activities by PRC residents have undertaken continuous changes which may
increase the administrative burden we face and create regulatory uncertainties
that could adversely affect the implementation of our acquisition strategy, and
a failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.




26


We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements are able to be reconciled to U.S.
generally accepted accounting principles in a timely manner.




Companies
based in the PRC may not have properly kept financial books and records that may
be reconciled with U.S. generally accepted accounting principles. If we attempt
to acquire a significant PRC target company and/or its assets, we would be
required to obtain or prepare financial statements of the target that are
prepared in accordance with and reconciled to U.S. generally accepted accounting
principles. Federal securities laws require that a business combination meeting
certain financial significance tests require the public acquirer to prepare and
file historical and/or pro forma financial statement disclosure with the SEC.
These financial statements must be prepared in accordance with, or be reconciled
to U.S. generally accepted accounting principles and the historical financial
statements must be audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. If a proposed
acquisition target does not have financial statements that have been prepared in
accordance with, or that can be reconciled to, U.S. generally accepted
accounting principles and audited in accordance with the standards of the PCAOB,
we will not be able to acquire that proposed acquisition target. These financial
statement requirements may limit the pool of potential acquisition targets with
which we may acquire and hinder our ability to expand our operations.
Furthermore, if we consummate an acquisition and are unable to timely file
audited financial statements and/or pro forma financial information required by
the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use
the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form
S-3, the process of raising capital may be more expensive and time consuming and
the terms of any offering transaction may not be as favorable as they would have
been if we were eligible to use Form S-3.





Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.





A renewed
outbreak of SARS or another widespread public health problem in the PRC, where a
substantial portion of our revenue is derived, could have an adverse effect on
our operations. Our operations may be impacted by a number of health-related
factors, including quarantines or closures of some of our offices that could
leave us without many employees to conduct our business which would materially
and adversely affect our operations and financial condition.





We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.





PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. In addition, we may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards. Therefore, we may, in turn, experience
difficulties in implementing and maintaining adequate internal controls as
required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in
significant deficiencies or material weaknesses in our internal controls which
could impact the reliability of our financial statements and prevent us from
complying with SEC rules and regulations and the requirements of the
Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of
compliance could have a materially adverse effect on our business.





RISKS RELATED TO AN
INVESTMENT IN OUR COMMON STOCK.





Our existing shareholders have
substantial influence over our company and their interests may not be aligned
with the interests of our other shareholders.





Mr. Li
Fu, our founder, chief executive officer and chairman of our board of directors,
beneficially owns approximately 40.0% of our outstanding share capital as of
March 16, 2009. As such, Mr. Fu has substantial influence over our business,
including decisions regarding mergers, consolidations and the sale of all or
substantially all of our assets, election of directors and other significant
corporate actions. This concentration of ownership may discourage, delay or
prevent a change in control of our company, which could deprive our shareholders
of an opportunity to receive a premium for their shares as part of a sale of our
company and might reduce the price of our stock. These actions may be taken even
if they are opposed by our other shareholders. In
addition, pursuant to the Indentures governing the Notes, if Mr. Li Fu ceases to
be the beneficial owners, directly or indirectly, of atleast 35%
of the total voting power of the voting stocks of the Company, a “Change of
Control” occurs. Upon the occurrence of a Change of Control,the
Company shall be required to make a “Change of Control” offer, which could have
a material adverse effect on the Company’s liquidity.




27




We
are unlikely to pay cash dividends in the foreseeable future.





We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries. In addition, our operating
subsidiaries, particularly those in the PRC, from time to time, may be subject
to restrictions on its ability to make distributions to us, including as a
result of restrictions on the conversion of local currency into U.S. dollars or
other hard currency and other regulatory restrictions. See, "Risk Factors-Risks
Related to Doing Business in the PRC— Fushi International (Dalian) and Dalian
Fushi are subject to restrictions on paying dividends and making other payments
to us", Risk Factors-Risks Related to Doing Business in the PRC— Governmental
control of currency conversion may affect the value of your investment" and
"Market for Our Common Stock— Dividends."





Due
to limited liquidity, our stock is subject to price volatility unrelated to our
operations.





The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market may be subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.








RISKS RELATED TO OUR HIGH
YIELD AND CONVERTIBLE NOTES





Covenants
in our debt instruments restrict or prohibit our ability to engage in or enter
into a variety of transactions.





On
January 25, 2007, we entered a Notes Purchase Agreement with Citadel Equity
Fund, LLC, as well as Indentures, a Share Pledge Agreement and an Investor
Rights Agreement. The Notes Purchase Agreement relates to the purchase and sale
of $40 million Guaranteed Senior Secured Floating Rate Notes Due 2012 and $20
million of 3% Guaranteed Senior Secured Convertible Notes Due 2012 (collectively
“Notes”).





The
indentures governing our Notes contain various covenants that may limit our
discretion in operating our business. In particular, we are limited in our
ability to merge, consolidate or transfer substantially all of our assets, issue
stock of subsidiaries, incur additional debts and create liens on our assets to
secure debt. These covenants and ratios could also have an adverse effect on our
business by limiting our ability to take advantage of financing, merger and
acquisition or other corporate opportunities and to fund our
operations.





The Notes
and their corresponding debt could have significant consequences to investors.
For example, they could:


·
            reduce
      the availability of our cash flow to fund future working capital, capital
      expenditures, acquisitions and other general corporate
      purposes;


·
            limit
      our ability to obtain additional financing for working capital, capital
      expenditures, and other general corporate
  requirements;


·
            restrict
      us from making strategic acquisitions or pursuing business
      opportunities;


·
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate;


·
            place
      us at a competitive disadvantage compared to competitors that may have
      proportionately less debt.




We have
previously experienced payment delays due to delays in conversion from RMB
to USD caused by the tightened controls under SAFE. While the Company is now
current in its payment obligations, any delay in paying interest, if
extended, raises the possibility of the potential acceleration of the
maturity of the Notes. If the Company experiences future payment delays or
otherwise violates the terms of the Notes, the holders of the Notes could
accelerate the maturity of the Notes and the Company’s liquidity could be
materially and adversely affected.





28


In
addition, our ability to make scheduled payments or refinance our obligations
depends on our successful financial and operating performance, cash flows, and
capital resources, which in turn depend upon prevailing economic conditions and
certain financial, business, and other factors, many of which are beyond our
control. If our cash flows and capital resources are insufficient to fund our
debt obligations, we may be forced to reduce or deplete our working capital,
reduce or delay capital expenditures, sell material assets or operations, obtain
additional capital, restructure our debt, or declare bankruptcy. In the event
that we are required to dispose of material assets or operations to meet our
debt service and other obligations, the value realized on such assets or
operations will depend on market conditions and the availability of buyers.
Accordingly, we may be forced to sell at an unfavorable price.





We
have pledged the shares of our subsidiaries as security for the Notes and, upon
a default, we could lose those securities and therefore, our
business.





Pursuant
to our Share Pledge Agreement, we have pledged the shares of our wholly owned
subsidiary, Fushi Holdings, and its shares of Fushi International (Dalian) as
security for our obligations under the Notes. In the event of a default, we
could lose the shares of our subsidiaries and therefore, a major portion of our
business, to the holders of the Notes which would materially and adversely
affect the price of our common stock.





The
issuance of shares upon conversion of the Convertible Notes after reset of
conversion price and occurrence of Financial and Operational Trigger may result
in substantial dilution.





The
Convertible Notes are convertible at the option of the holder into the Company’s
common stock at an initial conversion price of $7 per share (approximating
14,286 shares per $100,000 principal amount of the Convertible
Notes).





On
January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the CB
indenture and received 2,142,857 shares in exchange for $15.0 million in
debt with an exchange factor of $7.00 in debt for each share of
stock.  The balance $5 million Convertible Notes are convertible with
the conversion price subject to downward adjustment occurring on March 1 and
September 1 of each year, beginning with March 1, 2008, to equal the simple
arithmetic average of VWAP for the fifteen trading days preceding such March 1
or September1, with a floor of $4.5.





In
addition, adjustment of conversion price will be made if and at each time, upon
completion of the quarter review (for each Fiscal Quarter ended March 31, June
30 and September 30) or annual audit (for each Fiscal Quarter ended December 31)
of the Company’s financial statements an event defined as Financial and Operational
Trigger under the CB indenture shall have occurred in the immediately
preceding Fiscal Quarter, then within five (5) Business Days following issuance
of the review or audit report, as the case may be, for such Fiscal
Quarter.  The Financial and Operational
Trigger means, for the Company and its Subsidiaries on a consolidated
basis, that net income for a Fiscal Quarter shall be less than the US dollar
amount indicated in the table below opposite such Fiscal Quarter:





FiscalQuarterEnding
                                                
                                                NetIncomeJune
      30, 2007
                                                
                                                $
                                                5.0 millionSeptember
      30, 2007
                                                
                                                $
                                                5.0 millionDecember
      31, 2007
                                                
                                                $
                                                5.0 millionMarch
      31, 2008
                                                
                                                $
                                                6.0 millionJune
      30, 2008
                                                
                                                $
                                                6.0 millionSeptember
      30, 2008
                                                
                                                $
                                                6.0 millionDecember
      31, 2008
                                                
                                                $
                                                6.0 millionMarch
      31, 2009
                                                
                                                $
                                                7.2 millionJune
      30, 2009
                                                
                                                $
                                                7.2 millionSeptember
      30, 2009
                                                
                                                $
                                                7.2 millionDecember
      31, 2009
                                                
                                                $
                                                7.2 million





Upon
review of our financial statements, we determined that a Financial and Operational
Trigger as defined under the CB indenture occurred in the quarter ended
December 31, 2008.  To the extent a conversion occurs, the Company
shall be required to deliver approximately 140,000 additional shares of the
Company’s common stock to the holder of the Convertible Notes by increasing the
conversion rate with respect to such notes.  Further, the Company
cannot provide assurance that Financial and Operational
Trigger may not occur again in future fiscal quarters especially under
challenging macro-economic conditions and difficult operating environments like
the current one which are circumstances beyond the control of the
Company.





29


To the
extent conversion occurs under the above mentioned circumstances, our ordinary
shareholders may experience substantial dilution and the market price of our
shares of common stock could decline.  In addition, during the time
that the foregoing Convertible Notes are outstanding, they may adversely affect
the terms on which we could obtain additional capital.




ITEM 1B
            UNRESOLVED
      STAFF COMMENTS





None.




ITEM 2.
            PROPERTIES





Under PRC
law, all land in the PRC is owned by the government, which grants a "land use
right" to an individual or entity after a purchase price for such "land use
right" is paid to the government. The "land use right" allows the holder the
right to use the land for a specified long-term periods of time and enjoys all
the ownership incidents to the land. Dalian Fushi holds land use rights for one
piece of land that was used in its business and Fushi International (Dalian)'s
business. In addition, we have the right to use another smaller piece of land
that is registered under the name of a formerly affiliated company (the “Dongyi
Property”). The Company also owns and leases various manufacturing and sales and
administrative offices around the world. The Company believes that is
properties are generally well maintained and are adequate for the Company’s
current level of operations:




Registered
                        Owner of land
                        use right
                      
                      Location &
                        Certificate of
                        Land Use Right
                        Number
                      
                      Usage
                      
                      Square Meters
                      
                      Construction on
                        the Land
                      
                      Term of Use RightDalian
      Fushi
                      
                      1
      Shuang Qiang
                      
                      Industrial
                      
                      103,605
      Sq. M;
                      
                      Dalian
      Fushi's
                      
                      50
      years fromRoad,
      Yang Jia
                      
                      Use
                      
                      
                      
                      new
      facilities
                      
                      July,
      2003Village,
      JinzhouDistrict,
      Dalian,PRC;
      #0625014Dongyi
                      
                      8
      Hai La'er Road,
                      
                      Industrial
                      
                      3,569
      Sq. M;
                      
                      Dalian
      Fushi's
                      
                      40
      years fromDalian
                      
                      Use
                      
                      
                      
                      old
      facilities
                      
                      March
      4, 1989Development
      Zone;PRC;#0626006Fushi
      International
                        (Dalian)
                      
                      Wafangdian,
      Dalian
                      
                      Industrial
                      
                      90,640
      Sq. M;
                      
                      
                      
                      Rights
      terminate on Oct. 28, 2038.Copperweld
      Bimetallics LLC
                      
                      254
      Cotton Mill Rd., Fayetteville, TN
                      
                      Industrial
                      
                      52
      Ares or
                        210,437
                      
                      Industrial
      Building of 285,000 Sq.ft. or 26,477 Sq. M.
                      
                      1975
      with Construction in 1975, 1990, 1995,
1998




30




We
acquired the Dongyi Property in connection with the acquisition of Dongyi in
2001. Dongyi was dissolved after the acquisition. Because of the transfer fees
that would be incurred as a result of change of registered owner, and because
this land is no longer being used in the business, we have not, and we do not
intend to change the registered owner of this land. Currently, we lease the
facilities located on the Dongyi Property to a third party.




The land
registered under our name, as well as the buildings and improvements on the
land, secures our bank loans from Bank of China and Industrial and Commercial
Bank. We acquired rights
to the Wafangdian property during the fourth quarter of 2007 in order to have
access to electrical power required to operate larger machines. The property is
currently used for retail trade but such use will cease if we develop the
property. Management has not determined when construction will begin on this
property.




Copperweld
Bimetallics, LLC’s predecessor company acquired the Fayetteville Tennessee
property in 1975 though a Payment In Lieu of Taxes (PILOT) program commonly
offered in Tennessee by local industrial community development programs
established to encourage industry development.  Copperweld owns the
property but the Industrial Development Board holds a lease on the property to
secure the “In Lieu of Taxes.”  There is no financing lien on the
property.  The net effect of the lease is to provide Copperweld with a
reduction in local city and county property taxes to a rate of 50% of the normal
rate.





For
information concerning the costs associated with land use rights, see note 7 to
Dalian Fushi's audited financial statements for the year ended December 31,
2008.




ITEM
      3.
            LEGAL
      PROCEEDINGS





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business.  In addition to the
litigations described below, we have also commenced a number of legal actions
against companies which we believe are infringing on our patents, as described
above.





Kuhns
Brothers Litigation




Kuhns Brothers,
Inc., et al. v. Fushi Copperweld, Inc. f/k/a Fushi International, Inc., et
al., United States District Court for the District of Connecticut, Civil
Action No. 3:06-CV-1917. On November 27, 2006, an action was filed against the
Company in the United States District Court for the District of Connecticut by
Kuhn Brothers, Inc., Kuhn Brothers Securities Corp. and Kuhn Brothers & Co.
On August 5, 2008, a judgment was entered against the Company in the amount of
$7,197,794, plus interest and attorneys fees. The Company has appealed the
judgment to the United States Court of Appeals for the Second Circuit, Case No.
08-411-CV, and will continue to vigorously defend against these claims which we
believe to be without merit. However, we have no assurance that we will prevail
in our appeal. The enforcement of the judgment is not stayed pending the appeal,
and the Plaintiffs could execute against the Company at any time. We believe
that if the Company is required to pay the judgment, it will impact the
Company's liquidity and working capital. However, we do not believe that
the payment of the judgment, if required, will adversely affect the
Company's ability to fund its working capital or capital expenditure
needs.  See “Risk Factors – Risks Related to Our Business - A
judgment has been entered against us as a result of recent litigation and, if we
are unable to stay enforcement pending our appeal, we will be forced to pay the
judgment.”




31




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





There
were no matters submitted to a vote of security holders in the fourth quarter of
2008




PART
II





ITEM
      5.
            MARKET
      FOR THE REGISTRANT’S COMMON EQUITY, RELATED
              STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY
  SECURITIES





Market
Information





The
Company's common stock is currently quoted on the NASDAQ Global Market under the
trading symbol "FSIN."




On March
13, 2009, the last reported close price of our common stock was $4.54 per
share.




As of
December 31, 2008, there were approximately 549 holders of record of our
outstanding shares.





The high
and low prices for each of the fiscal quarters for fiscal years ended on
December 31, 2007 and December 31, 2008 are set forth below:





QuarterEnded
                          
                          High
                          
                          
                          Low
                          
                          
                          Closing
                            Price03/30/2007
                          
                          $
                          8.80
                          
                          
                          $
                          8.10
                          
                          
                          $
                          8.2006/29/2007
                          
                          $
                          13.15
                          
                          
                          $
                          12.80
                          
                          
                          $
                          13.1509/28/2007
                          
                          $
                          15.10
                          
                          
                          $
                          13.60
                          
                          
                          $
                          13.9512/31/2007
                          
                          $
                          25.70
                          
                          
                          $
                          24.30
                          
                          
                          $
                          25.1703/31/2008
                          
                          $
                          15.29
                          
                          
                          $
                          14.88
                          
                          
                          $
                          15.0006/30/2008
                          
                          $
                          24.2
                          
                          
                          $
                          23.42
                          
                          
                          $
                          23.7309/30/2008
                          
                          $
                          9.78
                          
                          
                          $
                          8.93
                          
                          
                          $
                          9.6912/31/2008
                          
                          $
                          5.89
                          
                          
                          $
                          5.27
                          
                          
                          $
                          5.27




Dividends





Our board
of directors has not declared a dividend on our common stock during the last two
fiscal years or the subsequent interim period and we do not anticipate the
payments of dividends in the near future as we intend to reinvest our profits to
grow operations. See "Risk Factors - Risks Related to an Investment in our
common stock - We are unlikely to pay cash dividends in the foreseeable future."
We rely entirely on dividends from Fushi International (Dalian) for our funds
and PRC regulations may limit the amount of funds distributed to us from Fushi
International (Dalian), which will affect our ability to declare any dividends.
See "Risk Factors - Risks Related to Doing Business in the PRC - Fushi
International (Dalian) and Dalian Fushi are subject to restrictions on
paying dividends and making other payments to us" and "- Governmental control of
currency conversion may affect the value of your investment."




32




Equity
Compensation Plan Information at December 31, 2008





The
following tabular disclosure provides information as of December 31, 2008
regarding the Company’s common stock authorized for issuance under equity
compensation plans.





Plan
      Category
                                      
                                      Number of Securities to be
                                        Issued
      for Outstanding
                                        Options
      and Performance
                                        Share
      Awards
                                      
                                      
                                      Weighted
                                        Average
                                        Exercise Price
                                      
                                      Number of Securities
                                        Remaining Available for
                                        Future Issuance Under Equity
                                        Compensation
      PlansEquity
      compensation plans approved by security holders
                                      
                                      
                                      384,000
                                      
                                      
                                      $
                                      19.19
                                      
                                      
                                      
                                      416,000Equity
      compensation plans not approved by security holders
                                      
                                      
                                      683,333
                                      
                                      
                                      $
                                      12.56
                                      
                                      
                                      
                                      -Total
                                      
                                      
                                      1,067,333
                                      
                                      
                                      $
                                      14.94
                                      
                                      
                                      
                                      416,000





33




STOCK
PERFORMANCE GRAPH











1/30/06
                                            
                                            
                                            
                                            12/06
                                            
                                            
                                            
                                            12/07
                                            
                                            
                                            
                                            12/08Fushi
      Copperweld Inc.
                                            
                                            
                                            100.00
                                            
                                            
                                            
                                            51.00
                                            
                                            
                                            
                                            251.70
                                            
                                            
                                            
                                            52.70NASDAQ
      Composite
                                            
                                            
                                            100.00
                                            
                                            
                                            
                                            100.21
                                            
                                            
                                            
                                            125.19
                                            
                                            
                                            
                                            70.09NASDAQ
      Industrial
                                            
                                            
                                            100.00
                                            
                                            
                                            
                                            109.13
                                            
                                            
                                            
                                            117.26
                                            
                                            
                                            
                                            63.23





The
annual changes for the three-year period shown in the graph on this page are
based on the assumption that $100 had been invested in Fushi common stock, the
Nasdaq Composite Index and the Nasdaq Industrial Index on January 30, 2006, the
date Fushi common stock began trading publicly, and that all quarterly dividends
were reinvested. The total cumulative dollar returns shown on the graph
represent the value that such investments would have had on December 31,
2008.





This
performance graph shall not be deemed to be “soliciting material” or to be
“filed” with the SEC, or subject to Regulation 14A or 14C, other than as
provided in Item 201 of Regulation S-K, or subject to the liability of Section
18 of the Exchange Act, nor shall it be deemed incorporated by reference in any
of our filings under the Securities Act or Exchange Act, except to the extent
that we specifically request incorporation by reference thereof.





Information
used on the graphs was obtained from Research Data Group, Inc., a source
believed to be reliable, but we are not responsible for any errors or omissions
in such information.




34




Recent
Sales of Unregistered Securities.





During
the fiscal year ended December 31, 2008, a total of 44,873 warrants were
exercised at $3.11 per share. The shares of common stock issued upon exercise
were issued in reliance on Section 4(2) under the Securities Act of
1933.





Issuer
Purchases of Equity Securities.





None.




35




ITEM
6. SELECTED FINANCIAL DATA





The
following table sets forth our selected consolidated financial data for the
years ended December 31, 2008, 2007, 2006, 2005and 2004. You should read
the following table in conjunction with the consolidated financial statements
and related notes contained elsewhere in the report on Form 10-K. Operating
results for any year are not necessarily indicative of results for any future
periods.




YearsEndedDecember31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2005
                                                        
                                                        
                                                        2004(in
      thousands, except per share data)Consolidated
      Statements of Operations DataNET
      REVENUE
                                                        
                                                        $
                                                        221,435
                                                        
                                                        
                                                        
                                                        128,222
                                                        
                                                        
                                                        
                                                        67,596
                                                        
                                                        
                                                        
                                                        33,709
                                                        
                                                        
                                                        
                                                        15,662Cost
      of revenue )
                                                        
                                                        
                                                        164,182
                                                        
                                                        
                                                        
                                                        85,774
                                                        
                                                        
                                                        
                                                        42,782
                                                        
                                                        
                                                        
                                                        21,400
                                                        
                                                        
                                                        
                                                        8,947GROSS
      PROFIT
                                                        
                                                        
                                                        57,253
                                                        
                                                        
                                                        
                                                        42,448
                                                        
                                                        
                                                        
                                                        24,814
                                                        
                                                        
                                                        
                                                        12,309
                                                        
                                                        
                                                        
                                                        6,715OPERATING
      EXPENSES:Research
      and development
                                                        
                                                        
                                                        403
                                                        
                                                        
                                                        
                                                        154
                                                        
                                                        
                                                        
                                                        195
                                                        
                                                        
                                                        
                                                        65
                                                        
                                                        
                                                        
                                                        -Sales,
      general and administrative
                                                        
                                                        
                                                        19,760
                                                        
                                                        
                                                        
                                                        11,649
                                                        
                                                        
                                                        
                                                        4,233
                                                        
                                                        
                                                        
                                                        2,282
                                                        
                                                        
                                                        
                                                        1,997Total
      operating expenses
                                                        
                                                        
                                                        20,163
                                                        
                                                        
                                                        
                                                        11,803
                                                        
                                                        
                                                        
                                                        4,428
                                                        
                                                        
                                                        
                                                        2,347
                                                        
                                                        
                                                        
                                                        1,997INCOME
      (LOSS) FROM OPERATIONS
                                                        
                                                        
                                                        37,090
                                                        
                                                        
                                                        
                                                        30,645
                                                        
                                                        
                                                        
                                                        20,386
                                                        
                                                        
                                                        
                                                        9,962
                                                        
                                                        
                                                        
                                                        4,718INTEREST
      AND OTHER INCOME (EXPENSE):Interest
      and investment income
                                                        
                                                        
                                                        826
                                                        
                                                        
                                                        
                                                        3,331
                                                        
                                                        
                                                        
                                                        74
                                                        
                                                        
                                                        
                                                        288
                                                        
                                                        
                                                        
                                                        133Interest
      and other expense
                                                        
                                                        
                                                        (8,946
                                                        )
                                                        
                                                        
                                                        (7,322
                                                        )
                                                        
                                                        
                                                        (2,252
                                                        )
                                                        
                                                        
                                                        (1,049
                                                        )
                                                        
                                                        
                                                        (379
                                                        )Total
      interest and other income (expense), net
                                                        
                                                        
                                                        (8,120
                                                        )
                                                        
                                                        
                                                        (3,991
                                                        )
                                                        
                                                        
                                                        (2,178
                                                        )
                                                        
                                                        
                                                        (761
                                                        )
                                                        
                                                        
                                                        (246
                                                        )INCOME
      (LOSS) BEFORE INCOME TAXES
                                                        
                                                        
                                                        28,970
                                                        
                                                        
                                                        
                                                        26,654
                                                        
                                                        
                                                        
                                                        18,208
                                                        
                                                        
                                                        
                                                        9,201
                                                        
                                                        
                                                        
                                                        4,472(BENEFIT)
      PROVISION FOR INCOME TAXES
                                                        
                                                        
                                                        495
                                                        
                                                        
                                                        
                                                        (2,852
                                                        )
                                                        
                                                        
                                                        398
                                                        
                                                        
                                                        
                                                        1,402
                                                        
                                                        
                                                        
                                                        (667
                                                        )NET
      INCOME (LOSS)
                                                        
                                                        $
                                                        28,475
                                                        
                                                        
                                                        
                                                        29,506
                                                        
                                                        
                                                        
                                                        17,810
                                                        
                                                        
                                                        
                                                        7,799
                                                        
                                                        
                                                        
                                                        3,805NET
      INCOME (LOSS) PER SHARE:Basic
                                                        
                                                        $
                                                        1.04
                                                        
                                                        
                                                        
                                                        1.33
                                                        
                                                        
                                                        
                                                        0.89
                                                        
                                                        
                                                        
                                                        2,015.76
                                                        
                                                        
                                                        
                                                        -Diluted
                                                        
                                                        $
                                                        1.00
                                                        
                                                        
                                                        
                                                        1.19
                                                        
                                                        
                                                        
                                                        0.84
                                                        
                                                        
                                                        
                                                        0.5
                                                        
                                                        
                                                        
                                                        0.25WEIGHTED
      AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE
      CALCULATION:Basic
                                                        
                                                        
                                                        27,299
                                                        
                                                        
                                                        
                                                        22,179
                                                        
                                                        
                                                        
                                                        19,933
                                                        
                                                        
                                                        
                                                        3,869
                                                        
                                                        
                                                        
                                                        -Diluted
                                                        
                                                        
                                                        28,272
                                                        
                                                        
                                                        
                                                        25,244
                                                        
                                                        
                                                        
                                                        21,276
                                                        
                                                        
                                                        
                                                        15,689
                                                        
                                                        
                                                        
                                                        15,476Years Ended December 31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2005
                                                        
                                                        
                                                        2004(in
      thousands)Consolidated
      Balance Sheet DataCash
      and cash equivalents
                                                        
                                                        $
                                                        65,612
                                                        
                                                        
                                                        
                                                        79,915
                                                        
                                                        
                                                        
                                                        20,494
                                                        
                                                        
                                                        
                                                        6,164
                                                        
                                                        
                                                        
                                                        2,612Working
      capital
                                                        
                                                        
                                                        106,443
                                                        
                                                        
                                                        
                                                        91,009
                                                        
                                                        
                                                        
                                                        18,055
                                                        
                                                        
                                                        
                                                        10,077
                                                        
                                                        
                                                        
                                                        (2,729
                                                        )Total
      assets
                                                        
                                                        
                                                        294,458
                                                        
                                                        
                                                        
                                                        246,469
                                                        
                                                        
                                                        
                                                        96,162
                                                        
                                                        
                                                        
                                                        71,137
                                                        
                                                        
                                                        
                                                        48,834Total
      long term obligations
                                                        
                                                        
                                                        44,377
                                                        
                                                        
                                                        
                                                        68,515
                                                        
                                                        
                                                        
                                                        10,256
                                                        
                                                        
                                                        
                                                        9,676
                                                        
                                                        
                                                        
                                                        9,676Total
      stockholders’ equity
                                                        
                                                        
                                                        202,980
                                                        
                                                        
                                                        
                                                        144,288
                                                        
                                                        
                                                        
                                                        65,134
                                                        
                                                        
                                                        
                                                        44,465
                                                        
                                                        
                                                        
                                                        26,292




36




Factors that impact the comparability of revenues for the years
presented include:





(a) In
October 2007, the Company completed the acquisition of Copperweld Holdings LLC.
The results of operations of the acquired company are included in the
consolidated financial statements since that date.




ITEM
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION





The
following discussion of our financial condition and results of operations should
be read in conjunction with our audited consolidated financial statements and
the notes to those financial statements appearing elsewhere in this Form 10-K.
This discussion contains forward-looking statements that involve significant
risks and uncertainties. As a result of many factors, such as those set forth
under “Forward Looking Statements” and “Item 1A. Risk Factors” and elsewhere in
this Form 10-K, our actual results may differ materially from those anticipated
in these forward-looking statements.





Overview




We are
the global leader in the development, design, manufacture, marketing and
distribution of copper-cladded bimetallic engineered conductor products. Our
principal products, copper-clad aluminum (“CCA”) and copper-clad steel (“CCS”)
are primarily used as conductor components within wire and cable products in the
telecommunication, utility, transportation and industrial
industries.





Today, we
serve approximately 300 customers in 38 countries from our facilities in Dalian,
China, Fayetteville, TN, and Telford, England. We have a strong market position
in all markets in which we compete due to product, geographic, customer
diversity and our ability to deliver superior products while operating as a low
cost provider.  As a result, we are now the leading producer of
bimetallic wire products in the world and are the market leaders in North
America, Europe, North Africa the Middle East, and the People’s Republic of
China.  We strive to continue expansion within current and evolving
markets, and to create shareholder value by:





·
            Investing
      in organic and inorganic growth in both infrastructure-based and
      fast-growing markets;


·
            Focusing
      on expansion within and into new, higher-margin products, applications and
      markets through investment into new machinery and research and
      development;


·
            Continuously
      improving business processes throughout the Company by focusing on key
      performance indicators and operational
  excellence;


·
            Hiring
      and developing strategic talent thus improving the effectiveness of our
      performance management processes;
and


·
            Protecting
      and enhancing shareholder value of the Fushi Copperweld
    brand.





To
accomplish these goals, we are focused on continuously improving operational
efficiency in areas we view to be vital: quality, delivery, cost, and
innovation. We also take an opportunistic approach to achieving our goals, and
thus, we seek acquisitions of businesses which facilitate overall growth and
cash flows of the Company.





Typically
using 70% less copper than conventional copper wire, but offering materially the
same utility and functionality, our bimetallic wire is used in applications such
as distribution products for telecommunication networks, cables for the wireless
industry, automotive and consumer products, video and data applications,
electrical power cables, wire components for electronic devices, as well as
other industrial conductors. In many applications, the value of bimetallic wire
is based on advantages other than the economies of bimetallic versus solid
copper.  Weight considerations strongly favor CCA because the end user
can expect approximately 2.6 times the length with the same weight as solid
copper.  Wire is sold by weight but used by length.  The
additional length increases the value of CCA. Weight is a major concern in some
applications where the end product is portable, such as cell phones, music
players, etc. and in automotive applications.  We believe that the use
of much lighter bimetallic products will continue to offer opportunities for
these applications. Other advantages include RF resistance factor.  RF
signals travel over the surface of the wire.  With bimetallic wire,
the RF resistance characteristics of the copper cladding offers identical high
frequency characteristics as solid copper, but with much less weight and lower
end-product stiffness.




37





CCS
combines the functionality of copper with the strength of steel to provide a
higher value, stronger alternative to solid copper for use in coaxial drop
cables for cable television, electrical utility applications including ground
cables and tracer wire, automotive wiring harnesses, catenary cable for
electrified railroads and other applications requiring specific levels of
conductivity and higher levels of tensile strength. Copperweld CCS is synonymous
with copper-clad steel and is registered as Copperweld®.





Our
products are effectively “engineered composite conductors”. We do not produce
commodity products and are not subject to the same pricing effects of pure
commodity metals. Our customers purchase and use our products for their physical
and/or conductive qualities, which have their respective application advantages,
with cost savings being an added incentive. While the pricing volatility of our
raw materials, especially copper, is a primary cause of cost variations in our
products, changes in raw material costs do not materially affect our earnings
per share. Although an increase in the price of raw materials may serve to
reduce our gross margins as a percentage of net sales, likewise, a decline in
raw material prices will increase our gross margin as a percentage of net sales.
We generally pass the cost of price changes in our raw materials to our
customers rather than the percentage changes. We establish prices for our
products based on market factors and our cost to produce our products.
Typically, we set a base price for our products for our customers with an
understanding that as prices of raw materials change, primarily for copper but
also for aluminum and steel, we will pass the change through to our customers.
Therefore, when prices of raw material increase, our prices to our customers
increase and the amount of our total net sales increases while the dollar amount
of our gross margin remains relatively stable.  As a result, the
impact on earnings per share from volatile raw material prices is minimal,
although there are timing delays of varying lengths depending upon volatility of
metals prices, the type of product, competitive conditions and particular
customer arrangements.











The above
chart demonstrates how changes in the 2008 Comex monthly average copper and
aluminum prices can hypothetically affect our margins. The combined cost of
copper and aluminum changed from approximately $4.25 at month one to a high of
$5.33 in month four and then trended generally down during the remainder of the
year to a low of $2.11 in month twelve. In this example, we have a gross margin
per pound of $0.50 for illustrative purposes. Passing the changing costs through
to our customers’ prices allows us to maintain a level amount of dollar gross
margin. Considering gross margin as a percentage of net sales can be misleading
when raw materials costs are increasing even though the dollar amount of gross
margin remains the same. Although the gross margin would have fluctuated between
from 8.6% and 19.2% in our example, the dollar amount of gross margin and
resulting net income flowing to earnings per share remained the
same.




38




Factors
driving and affecting operations results include raw material prices, product
and price competition, economic conditions in various geographic regions,
foreign currency exchange rates, interest rates, changes in technology,
fluctuations in customer demand, variations in the mix of products, production
capacity and utilization, working capital sufficiency, availability of credit
and general market liquidity, patent and intellectual property issues,
litigation results and legal and regulatory developments, and our ability to
accurately forecast sales demand and calibrate manufacturing to such demand,
manage volatile raw material costs, develop, manufacture and successfully market
new and enhanced products and product lines, control operating costs, and
attract, motivate and retain key personnel to manage our operational, financial
and management information systems.





Current
Business Environment and 2009 Outlook





With
respect to the overall business trends in 2009 and forward, management
recognizes that the current condition of the global economy may present us with
significant challenges to our financial condition and results of operations.
Statistics showed that the global economy decelerated quickly and severely in
the second half of 2008.  China, a market that has generated most of our
revenue and growth, saw its GDP growth in the fourth quarter of 2008 drop to
6.8%, the slowest the country has experienced in seven years. The figure was
more than 10% in the first half of 2008, and 13% rate for 2007.  Global
economic turmoil, uncertainties in capital markets, currency fluctuations and
commodity cost volatility have substantially reduced the visibility for our
industry and our business.





However,
we think the following macro-level trends will positively impact our business
and offer us opportunity to capture new business despite global economic
conditions and preserve profitability:





·
            Continued
      growth in demand for CCA-based telecommunication
  products;


·
            Government
      stimulus packages focused on infrastructure: high-speed railways, T&D
      and power grid build out;


·
            Continued
      strength of grounding wire market;


·
            Worldwide
      underlying long-term growth trends in electric utility and infrastructure
      markets;


·
            Continuing
      demand for cost effective, energy saving
  alternatives.





In
addition to these macro-level trends, the Company is presented with tremendous
opportunities brought by the increasing capital expenditures of major
telecommunications operators in China subsequent to the restructuring and the
recent issuance of 3G licenses. In order to capture the growth opportunities, we
will focus on driving profitability by streamlining our organizational structure
and business procedures, increasing operational efficiency and optimizing
operating processes, while managing production costs and operating
expenses.





In
addition, we are seeking to continue to develop the high potential utility and
electrical appliance markets, to enhance productivity and to expand our sales of
higher margin products.  Meanwhile, we are also working to strengthen sales
management and customer relations.  We will seek to consolidate our
relationships with our best customers, stop or suspend selling to customers that
pose significant credit risk, and develop new customers cautiously.  In
addition, as part of our ongoing efforts to reduce total operating costs, we
continuously improve our ability to efficiently utilize existing and new
manufacturing capacity to manage expansion and growth.  Investment in new
capacity will pay dividends.  Effectively utilized manufacturing assets,
economy of scale generated, will help offset high raw material prices and dilute
overhead over time.  Despite worsening economic conditions, we expect to
operate our facilities at relatively high combined utilization
rates.





We
actively seek to identify and promptly respond to key economic and industry
trends in order to capitalize on expanding niche markets for our products, and
possibly entering into new markets both down and up stream, in order to achieve
better returns.  We have the resources, technology, working capital and
capacity to meet growing market demands.  Over the long-term, we believe
that we are well positioned to benefit from the growth opportunities in China
and throughout the world.




39





Financial
Performance Highlights:


Results
of Operations





The
following table shows, for the periods indicated, information derived from our
consolidated statements of income in thousands of dollars and as a percentage of
net sales (net sales and expenses for the Fayetteville and Telford
(Copperweld) are included for the 2007 fiscal year beginning October 29, 2007
through December 31, 2007). Percentages may not add due to
rounding.







Year
      Ended December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Amount
                                    
                                    
                                    %
                                    
                                    
                                    Amount
                                    
                                    
                                    %
                                    
                                    
                                    Amount
                                    
                                    
                                    %Net
      Sales
                                    
                                    $
                                    221,435
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    $
                                    128,222
                                    
                                    
                                    
                                    100
                                    %
                                    
                                    $
                                    67,596
                                    
                                    
                                    
                                    100
                                    %Cost
      of Sales
                                    
                                    
                                    164,182
                                    
                                    
                                    
                                    74
                                    %
                                    
                                    
                                    85,774
                                    
                                    
                                    
                                    67
                                    %
                                    
                                    
                                    42,782
                                    
                                    
                                    
                                    63
                                    %Gross
      Profit
                                    
                                    
                                    57,253
                                    
                                    
                                    
                                    26
                                    %
                                    
                                    
                                    42,448
                                    
                                    
                                    
                                    33
                                    %
                                    
                                    
                                    24,814
                                    
                                    
                                    
                                    37
                                    %Selling,
      general and adminstrative expenses
                                    
                                    
                                    20,163
                                    
                                    
                                    
                                    9
                                    %
                                    
                                    
                                    11,803
                                    
                                    
                                    
                                    9
                                    %
                                    
                                    
                                    4,428
                                    
                                    
                                    
                                    7
                                    %Operating
      income
                                    
                                    
                                    37,090
                                    
                                    
                                    
                                    17
                                    %
                                    
                                    
                                    30,645
                                    
                                    
                                    
                                    24
                                    %
                                    
                                    
                                    20,386
                                    
                                    
                                    
                                    30
                                    %Income
      before taxes
                                    
                                    
                                    28,970
                                    
                                    
                                    
                                    13
                                    %
                                    
                                    
                                    26,654
                                    
                                    
                                    
                                    21
                                    %
                                    
                                    
                                    18,208
                                    
                                    
                                    
                                    27
                                    %Net
      income
                                    
                                    $
                                    28,475
                                    
                                    
                                    
                                    13
                                    %
                                    
                                    $
                                    29,506
                                    
                                    
                                    
                                    23
                                    %
                                    
                                    $
                                    17,810
                                    
                                    
                                    
                                    26
                                    %





Year
ended December 31, 2008 compared to year ended December 31,
2007





Net
Sales





Net sales
were $221.4 million in 2008, compared to $128.2 million in 2007. The 73%
increase in sales in the fiscal year ended December, 2008 was primarily
attributable to the full year inclusion of the Copperweld acquisition and an
increase in sales from our Dalian facility. Substantially all organic growth was
due to increases in sales volumes.




The
following table breaks down application categories as percentage of total
sales.





FY2008
                  
                  
                  FY
      2007*sales
                    (millions
                    USD)
                  
                  
                  %
      of total sales
                  
                  
                  sales
                    (millions
                    USD)
                  
                  
                  %
      of total salesTelecom
                  
                  $
                  112.6
                  
                  
                  
                  50.9
                  %
                  
                  $
                  110.6
                  
                  
                  
                  60.1
                  %Utility
                  
                  
                  97.4
                  
                  
                  
                  44.0
                  %
                  
                  
                  61.4
                  
                  
                  
                  33.4
                  %Auto
                  
                  
                  3.8
                  
                  
                  
                  1.7
                  %
                  
                  
                  5.8
                  
                  
                  
                  3.2
                  %Other
                  
                  
                  7.6
                  
                  
                  
                  3.4
                  %
                  
                  
                  6.2
                  
                  
                  
                  3.4
                  %Total
                  
                  $
                  221.4
                  
                  
                  
                  100.0
                  %
                  
                  $
                  184.0
                  
                  
                  
                  100.0
                  %


*Fiscal
year 2007 sales are shown on a pro forma basis assuming that sales from
Fayetteville and Telford were included for the full fiscal year for illustrative
purposes.




40







The
following table breaks down sales by categories for both Dalian and Fayetteville
for the year ended December 31, 2008 and 2007. Telford’s production is reflected
in Fayetteville’s production.




FY2008
                    
                    
                    FY 2007*Dalian
                    
                    
                    Fayetteville
                    
                    
                    Dalian
                    
                    
                    Fayettevillesales
                      (tons)
                    
                    
                    % of
                      total
                      sales
                    
                    
                    sales
                      (tons)
                    
                    
                    % of
                      total
                      sales
                    
                    
                    sales
                      (tons)
                    
                    
                    % of
                      total
                      sales
                    
                    
                    sales
                      (tons)
                    
                    
                    % of
                      total
                      salesTelecom
                    
                    
                    13,918
                    
                    
                    
                    53
                    %
                    
                    
                    4,631
                    
                    
                    
                    42.0
                    %
                    
                    
                    12,928
                    
                    
                    
                    66.6
                    %
                    
                    
                    7,564
                    
                    
                    
                    56.9
                    %Utility
                    
                    
                    11,674
                    
                    
                    
                    44
                    %
                    
                    
                    4,304
                    
                    
                    
                    39
                    %
                    
                    
                    6,139
                    
                    
                    
                    31.6
                    %
                    
                    
                    2,560
                    
                    
                    
                    19.3
                    %Automotive
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    532
                    
                    
                    
                    4.8
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,593
                    
                    
                    
                    19.5
                    %Other
                    
                    
                    669
                    
                    
                    
                    3
                    %
                    
                    
                    1,563
                    
                    
                    
                    14.2
                    %
                    
                    
                    349
                    
                    
                    
                    1.8
                    %
                    
                    
                    579
                    
                    
                    
                    4.4
                    %Total
                    
                    
                    26,261
                    
                    
                    
                    100.0
                    %
                    
                    
                    11,030
                    
                    
                    
                    100.0
                    %
                    
                    
                    19,416
                    
                    
                    
                    100.0
                    %
                    
                    
                    13,296
                    
                    
                    
                    100.0
                    %


*Fiscal
year 2007 volumes are shown on a pro forma basis assuming that sales from
Fayetteville and Telford were included for the full fiscal year for illustrative
purposes.





The
following table summarizes installed capacities and outputs by product type for
both Dalian and Fayetteville for the year ended December 31, 2008. Telford’s
production is reflected in Fayetteville’s numbers.





Dalian
                  
                  
                  FayettevilleInstalled Capacity
                  
                  
                  Output
                  
                  
                  Installed Capacity
                  
                  
                  OutputProduct line
                  
                  (Metric Tons)
                  
                  
                  (Metric Tons)
                  
                  
                  (Metric Tons)
                  
                  
                  (Metric Tons)CCA
                  
                  
                  34,000
                  
                  
                  
                  25,358
                  
                  
                  
                  12,400
                  
                  
                  
                  2,771CCS
                  
                  
                  800
                  
                  
                  
                  25
                  
                  
                  
                  16,300
                  
                  
                  
                  7,896





Capacity
in Transit:  CCA 6,000 M Tons and CCS 8,200 M Tons





At
December 31, 2008, we had combined production capacity for CCA of 46,400 metric
tons and CCS capacity of 17,100 metric tons. We had an additional 6,000 metric
tons of CCA capacity and 4,100 metric tons of CCS capacity in transit to Dalian.
We expect to have the additional CCA capacity installed in Dalian by the end of
second quarter 2009 and the CCS capacity installed in the third quarter 2009.
We
also expect to install a further 4,100 metric tons of CCs at our Fayetteville
facility over the course of 2009.The average price of CCA produced in
Dalian and sold primarily in the PRC was $6,188 per ton while the average price
of CCA produced in Fayetteville was $6,654 per ton. CCS produced in Fayetteville
sold for an average of $5,086 during 2008. Both Dalian and Fayetteville sell a
variety of CCA products and the price for each variety may vary based on the
amount of manufacturing required and the ratio of copper to aluminum. Dalian did
not sell a significant amount of CCS during 2008. The average selling price of
CCS sold by Fayetteville varies by product type primarily based on the amount of
copper (conductivity) in the product and the amount of manufacturing required.
Sales referred to as Fayetteville include the sales from Telford
also.





Customers





We
significantly expanded and diversified our customer base in 2008 both through
our acquisition of Copperweld and through organic growth. Our five largest
customers accounted for 18.2% of total sales in 2008, down from 24.6% in 2007
and 29% in 2006. (Copperweld’s sales for the full year of 2007 are included for
comparison purposes.) Furthermore, our ten largest customers in 2008 accounted
for only 29.6% of net sales, down from 37.8% in 2007 on a pro forma basis
including full year sales for Fayetteville facility. We believe this increased
diversification significantly limits our market risk and gives us a stronger
base on which to expand. We further believe our overall customer composition and
the concentration of our top customers will change as we expand our business and
seek to shift our product sales portfolio to higher margin products. We are
continuing to expand and consolidate the direction of our combined sales and
marketing group in order to focus our resources towards diversification of our
customer base, product mix and geographic presence to mitigate customer
concentration risk. Our objective is to focus on expanding our existing business
relationships by offering a wider range of products and building new sales
relationships throughout the world with our expanded sales
organization.




41





The
following table sets forth our ten largest customers in fiscal
2008:




Originating Office
                          
                          2008 Sales in USD
                          
                          
                          Percentage of Total SalesDalian
                          
                          
                          10,077,574
                          
                          
                          
                          4.55
                          %Fayetteville
                          
                          
                          8,682,315
                          
                          
                          
                          3.92
                          %Fayetteville
                          
                          
                          8,545,835
                          
                          
                          
                          3.86
                          %Dalian
                          
                          
                          6,713,586
                          
                          
                          
                          3.03
                          %Dalian
                          
                          
                          6,270,735
                          
                          
                          
                          2.83
                          %Dalian
                          
                          
                          6,133,967
                          
                          
                          
                          2.77
                          %Dalian
                          
                          
                          5,275,169
                          
                          
                          
                          2.38
                          %Fayetteville
                          
                          
                          4,858,052
                          
                          
                          
                          2.19
                          %Dalian
                          
                          
                          4,784,115
                          
                          
                          
                          2.16
                          %Dalian
                          
                          
                          4,294,241
                          
                          
                          
                          1.94
                          %Total
                          
                          
                          65,635,589
                          
                          
                          
                          29.63
                          %





Our
manufacturing activities are determined and scheduled upon both firm orders and
projected sales information gathered by our sales personnel from direct contact
with our customers. Customers typically submit purchase orders seven to thirty
days prior to the requested delivery date. However, depending on the product and
the available equipment run schedules, the lead time can be as short as three
days. The sales price is determined at the time of purchase based on a formula
or a unit price for each product. In either case, the purchase price is a
function of the market price of our raw materials at the time of purchase,
subject to adjustment at the time of delivery. For some customers, we adjust our
prices based on the average cost of raw materials for the previous
month.





Geographically,
a substantial portion of our customers served by our Dalian sales force is based
in the PRC. Some of our customers are US based corporations that have
established subsidiaries operating inside the PRC. Several of these corporations
were former customers of our Fayetteville facility but now place orders through
their subsidiaries located in the PRC. We categorize these orders as domestic
orders. On the other hand, most of our customers served by our Fayetteville and
Telford based sales group are located in the Americas, Europe, Africa, Asia,
excluding the PRC and the Middle East.  We are transferring all of our
Asian customers to our PRC based sales group in order to provide more efficient
customer service. As a result, we anticipate that most of our net sales will
continue to be derived from sales to our Asian customers. Combined, we expect
our sales growth to continue worldwide because of our working capital base, our
combined sales force, our production capacity and our commitment to innovative
research and development of our existing products and for developing new
products.





Cost
of Goods Sold





Cost of
goods sold increased to $164.2 million in 2008, from $85.8 million in
2007. As measured by percentage of net sales, our cost of goods sold was 74.1%
in 2008 compared with 66.9% in 2007. Cost of goods sold principally consists of
the cost of raw materials, labor, utilities, manufacturing costs, manufacturing
related depreciation, machinery maintenance costs, purchasing and receiving
costs, inspection costs, shipping and handling costs, and other fixed
costs associated with the manufacturing process. The increase in Cost of
Goods Sold as a percentage of net sales was principally due to the acquisition
of Copperweld in October 2007, which has labor and overhead costs that
historically have been greater than our legacy operations in
Dalian.





Raw
material costs accounted for 84.8% of total costs in 2008. Copper composed 55.6%
of our raw material costs, aluminum 38.7% and steel 5.7%. Other variable costs
included manufacturing labor, maintenance, shipping and handling, and utility
expenses. Depreciation and overhead costs as a percentage of COGS were 7.4% in
2008. The manufacturing related depreciation for 2008 was
$4,843,153.





Suppliers





In Dalian
we have historically relied on two key suppliers for the procurement of copper
strip and aluminum. These two suppliers combined to account for approximately
37% of our total raw material purchases for the fiscal years to 2008. Our
strategically located facilities worldwide provide us with the opportunity to
pursue global sourcing and we plan to increase the number of raw material
suppliers further spreading our supply risk over a larger number of suppliers.
We will continue our strategy of expanding our sources of supply to overcome
supply and price issues that can develop with only one or two suppliers,
particularly for copper.




42





The
following table sets forth our ten largest raw material suppliers for fiscal
2008:





Ten Largest Raw
                      Material Suppliers 2008
                    
                    Purchases
                      in USD
                    
                    
                    % of Raw Material
                      PurchasesCopper—Dalian
                    
                    
                    34,758,156
                    
                    
                    
                    25.2
                    %Aluminum—Dalian
                    
                    
                    16,172,714
                    
                    
                    
                    11.8
                    %Aluminum—Dalian
                    
                    
                    14,987,557
                    
                    
                    
                    10.9
                    %Copper—Dalian
                    
                    
                    14,087,237
                    
                    
                    
                    10.3
                    %Aluminum—Dalian
                    
                    
                    9,092,174
                    
                    
                    
                    6.6
                    %Copper—Fayetteville
                    
                    
                    7,177,355
                    
                    
                    
                    5.2
                    %Aluminum—Fayetteville
                    
                    
                    5,251,721
                    
                    
                    
                    3.8
                    %Copper—Fayetteville
                    
                    
                    5,191,525
                    
                    
                    
                    3.8
                    %Steel—Fayetteville
                    
                    
                    4,204,542
                    
                    
                    
                    3.1
                    %Steel-Fayetteville
                    
                    
                    3,802,794
                    
                    
                    
                    2.8
                    %Total—Top
      Ten
                    
                    
                    114,725,775
                    
                    
                    
                    83.5
                    %





Gross
margin





Gross
profit was $57.3 million in 2008, increased 34.9% from approximately $42.4
million in 2007. As a percentage of net sales, gross profit decreased from 33.1%
to 25.9%. This was primarily due to the lower margins contributed by the
Fayetteville and Telford facilities acquired in October 2007, as well as a
slight decline in gross margins in Dalian.





Selling,
General and Administrative Expenses




Selling
expenses, which principally includes sales related staff salary and benefits,
travel expenses, and sales commissions, were $4.6 million in 2008, compared to
$1.8 in 2007, a 161.4% increase. This increase is primarily due to the inclusion
of a full year of Fayetteville and Telford salaries, as well as a ramp up in
sales efforts to penetrate new markets and industries. As a percentage of net
sales, selling expenses increased by 0.7% in 2008 compared to 2007. General and
administrative expenses, as a percentage of net sales, decreased to 7% of net
sales in 2008, compared to 7.8% in 2007. The decrease is primarily due to
benefits realized from integrating our global sales team following the
acquisition of Copperweld in October 2007 and economies of scale resulting from
increased revenues.  On a dollar for dollar basis, general and
administrative expenses increased to $15.6 million in 2008 compared to $10.0
million in 2007.  As with selling expenses, the increase in gross
amount of general and administrative expenses primarily is attributed to a full
year of expenses associated with the acquisition of Copperweld in October
2007.




Interest
Expense





Interest
expense increased to $8.8 million in 2008 from $7.5 million in 2007,
while as a percentage of net sales, interest expense decreased to 4% in 2008
from 5.9% in 2007. This increase is primarily the result of interest on the $40
million High Yield notes and amortized loan commission, interest accrual and
amortization of costs relating to the Kuhns Brothers litigation, as well as
inclusion of the Dalian working capital line and increases in Dalian’s short
term bank loans.




Taxation





U.S.
income tax





Fushi
Copperweld, Inc. (formerly Fushi International, Inc.) is a company incorporated
in the State of Nevada, Fushi Holdings is a company incorporated in the State of
Delaware, Copperweld Bimetallics, LLC is chartered in the State of Delaware and
Copperweld UK, LLC is registered in the United Kingdom. Prior to the acquisition
of Copperweld, we conducted substantially all our operations through our PRC
operating subsidiaries. With the acquisition of Copperweld, we have a
manufacturing facility and administrative offices located in Fayetteville,
Tennessee, USA and in Telford, England, UK.




43




We are
subject to United States taxation; however, we do not anticipate incurring
significant United States income tax liability during fiscal year 2009 due to
the following factors:





- We
anticipate that Copperweld has sufficient tax loss carry forwards to offset any
taxable income earned during the coming years.





-
Earnings generated from our non-U.S. operating companies are generally eligible
for a deferral from United States taxation until such earnings are repatriated
to the United States, and




- We
believe that we will not generate any significant amount of income inclusions
under the income imputation rules applicable to a United States company that
owns "controlled foreign corporations" for United States federal income tax
purposes.




Therefore,
no provision for U.S. federal income taxes or tax benefits on the undistributed
earnings and/or losses of our company has been made.




P.R.C.
enterprise income tax




In the
fiscal year ended December 31, 2008, our business operations were principally
conducted by our subsidiaries incorporated in the PRC. PRC enterprise income tax
is calculated based on taxable income determined under PRC accounting
principles. In accordance with “Income Tax Law of China for Enterprises with
Foreign Investment and Foreign Enterprises,” or the Income Tax Law, “Foreign
Invested Enterprises”, or FIEs, established in the PRC are generally subject to
an “Enterprise Income Tax”, or EIT, rate of 33%. PRC domestic companies are
governed by the Enterprise Income Tax Laws of the PRC and are also generally
subject to an EIT rate of 33%. However, the Income Tax Laws provide certain
favorable tax treatment to a company that qualifies as a "New or High-technology
Enterprise" or a “Foreign Invested Enterprise” located in the old town of an
inshore open city. Additionally, the governments at the provincial, municipal
and local levels can provide many tax incentives and abatements based on a
number of programs at each level.




The
Dalian Municipal Government issued a notice in 2000 providing for a series of
tax preferential treatments to companies that qualify as "New or High-tech
Enterprise” or companies that are registered and operate in a specified
development zone in Dalian City.





Dalian
Fushi, a 100% variable interest, non-operating subsidiary, was incorporated in
the PRC and is subject to PRC income tax which is computed according to the
relevant laws and regulations in the PRC. Dalian Fushi's bimetallic composite
conductor wire product was approved by Dalian Cit as a "high-tech" project. As a
result, Dalian Fushi is a business entity that is qualified as a "new or
high-technology enterprise," and is entitled to a two-year full exemption from
the PRC enterprise income tax starting from its first year of operation, which
expired on December 31, 2003, followed by a 50% reduction and other favorable
tax treatment for the succeeding three years, which expired on December 31,
2006. The provision for income taxes for the twelve months ended December 31,
2008 was zero as we didn’t have any operation under Dalian Fushi from the
beginning of 2007.





Fushi
International (Dalian) (“FID”), a wholly owned subsidiary of Fushi Holdings,
Inc., was incorporated in the PRC as an FIE and is subject to PRC income tax
which is computed according to the relevant laws and regulations in the PRC. FID
has located its factories in a special economic region in Dalian and is granted
certain preferential treatments including a corporate income tax rate of 24%. In
September 2005, FID was approved as a wholly foreign owned enterprise. This
economic region allows FID a two-year income tax exemption for the years ended
December 31, 2006 and 2007, and a 50% income tax reduction for the following
three years ended December 31, 2008, 2009, and 2010.





Effective
January 1, 2008, the new EIT Law in PRC imposes a unified income tax rate
of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC
operating subsidiaries, unless they qualify under certain limited exceptions.
But the EIT Law permits companies to continue to enjoy their existing
preferential tax treatments until such treatments expire in accordance with
their current terms. Any increase in our effective tax rate as a result of the
above may adversely affect our operating results




44





Net
Income





Pre-tax
income increased 17.5% to $31.3 million from $26.6 million, excluding litigation
accrual expense.  Net income decreased to approximately $28.5 million,
or 13% of net sales for the year ended December 31, 2008, from approximately
$29.5 million, or 23% of net sales for the year ended December 31, 2007,
representing a decrease of $1.03 million or 3.5%. The bottom line decrease is
primarily due to a 7.2% decline in gross margin, slight increase in other
expense and increase in the provision for income tax.    As
more fully described in the section “Taxation” above, we became liable for PRC
income taxes on our Dalian operations during 2008.





Basic and
diluted earnings per share (EPS) for the fiscal year ended December 31, 2008
were $1.04 and $1.00, compared to $1.33 and $1.19 for the prior
year.  The weighted average number of shares outstanding to calculate
basic EPS was 27.3 million and 22.2 million for 2008 and 2007,
respectively.  The weighted average number of shares outstanding to
calculate diluted EPS was 28.3 million and 25.2 million for 2008 and 2007,
respectively.





Foreign
Currency Translation Gains










In the
year ended December 31, 2008, the RMB steadily rose against the US dollar for
the first and second quarter’s months and then partially stabilized for the
third and fourth quarters. As a result of the appreciation of the RMB, we
recognized a foreign currency translation gain of $12.5 million. Given the
uncertainty of exchange rate fluctuations, we cannot estimate the effect of
these fluctuations on our future business, product pricing, and results of
operations or financial condition. See “Risk Factors- Risks Related to Doing
Business in the PRC. - The fluctuation of the Renminbi may materially and
adversely affect your investment.”




Prior to
acquiring Copperweld in October 2007, materially all of our revenues and a
majority of our expenses were denominated in RMB Yuan.  For our
operations in the PRC, the income statement accounts and balance sheet amounts
with the exception of equity at December 31, 2008 were translated at 1 RMB Yuan
to 0.14657 USD, or 1 USD to 6.8225 RMB Yuan. The equity accounts were stated at
their historical rate.





Year
ended December 31, 2007 compared to year ended December 31,
2006




Revenues





Net sales
were $128.2 million in 2007 including sales from Fayetteville and Telford
facilities for the period October 29 through the end of the period, compared to
$67.6 million in 2006. Of the 89.7% sales growth in the fiscal year ended
December 31, 2007, 74.8% was due to organic growth and 14.8% was attributable to
sales from Fayetteville and Telford for November and December of 2007. The 74.8%
organic growth was primarily driven by a 7.4% increase in the average selling
price of product sold and 62.6% increase in the volume of bimetallic products
sold. The increase in average selling price in 2007 was primarily due to the
increase in raw material prices, particularly copper prices, and the increased
sales volume primarily reflects expanded production capacity as a result of our
capital investment.




45


.


Customers





We
significantly expanded and diversified our customer base in 2007 both through
our acquisition of Copperweld and through organic growth. Our five largest
customers accounted for 24.6% of total sales in 2007, down from 29% in 2006 and
41% in 2005. Our largest customer accounted for 10.8% of sales in 2007. In fact,
our ten largest customers in 2007 accounted for only 37.75% of net sales, on a
pro forma basis including full year sales for Fayetteville facility. We believe
this increased diversification significantly limits our market risk and gives us
a stronger base on which to expand. We further believe our overall customer
composition and the concentration of our top customers will change as we expand
our business and seek to shift our product sales portfolio to higher margin
products. However, the loss of, or significant reduction in orders from any of
our largest customers may have a material adverse impact on our financial
condition and operating results. We are continuing to expand and consolidate the
direction of our combined sales and marketing group in order to focus our
resources towards diversification of our customer base, product mix and
geographic presence to mitigate customer concentration risk. Our objective is to
focus on expanding our existing business relationships by offering a wider range
of products and building new sales relationships throughout the world with our
expanded sales organization.





The
following table (which considers Fayetteville’s sales for the full year of 2007)
sets forth our ten largest customers in fiscal 2007:





Originating Office
                  
                  2007 Sales in
                    USD
                  
                  
                  Percentage of
                    Total SalesFayetteville
                  
                  
                  21,215,885
                  
                  
                  
                  10.80
                  %Dalian
                  
                  
                  8,027,451
                  
                  
                  
                  4.09
                  %Dalian
                  
                  
                  6,798,765
                  
                  
                  
                  3.46
                  %Fayetteville
                  
                  
                  6,638,111
                  
                  
                  
                  3.38
                  %Dalian
                  
                  
                  5,636,408
                  
                  
                  
                  2.87
                  %Dalian
                  
                  
                  5,518,656
                  
                  
                  
                  2.81
                  %Dalian
                  
                  
                  5,476,410
                  
                  
                  
                  2.79
                  %Dalian
                  
                  
                  5,222,391
                  
                  
                  
                  2.66
                  %Dalian
                  
                  
                  4,977,456
                  
                  
                  
                  2.53
                  %Dalian
                  
                  
                  4,624,811
                  
                  
                  
                  2.35
                  %Total
                  
                  
                  74,136,344
                  
                  
                  
                  37.74
                  %





Cost
of Goods Sold





Cost of
goods sold increased to $85.8 million in 2007, from $42.8 million in
2006. As measured by percentage of net sales, our cost of goods sold was 66.9%
in 2007 compared with 63.3% in 2006. Cost of goods sold principally consists of
the cost of raw materials, labor, utilities, manufacturing costs, manufacturing
related depreciation, machinery maintenance costs, purchasing and receiving
costs, inspection costs, shipping and handling costs, and other fixed
costs associated with the manufacturing process. The increase in Cost of
Goods Sold as a percentage of net sales was principally due to the cost of
adding capacity in Dalian and labor and overhead costs in Fayetteville that
historically have been greater than in Dalian.




46





Suppliers





We also
significantly diversified our sources of supply. In Dalian we have historically
relied on two key suppliers for the procurement of copper strip and aluminum.
These two suppliers combined to account for approximately 41% of our total raw
material purchases during the fiscal years prior to 2007. During 2007, four
suppliers provided 43.0% of our raw material for us.  With the
addition of Fayetteville and Telford, we will increase the number of raw
material suppliers further spreading our supply risk over a larger number of
suppliers. We will continue our strategy of expanding our sources of supply to
overcome supply and price issues that can develop with only one or two
suppliers, particularly for copper.





The
following table sets forth our ten largest raw material suppliers for fiscal
2007:





Ten Largest Raw
                    Material Suppliers 2007
                  
                  Purchases
                    in USD
                  
                  
                  % of Raw Material
                    PurchasesCopper—Dalian
                  
                  
                  26,122,785
                  
                  
                  
                  12.5
                  %Aluminum—Dalian
                  
                  
                  13,462,792
                  
                  
                  
                  11.0
                  %Aluminum—Dalian
                  
                  
                  13,220,800
                  
                  
                  
                  10.8
                  %Copper—Dalian
                  
                  
                  10,895,561
                  
                  
                  
                  8.9
                  %Aluminum—Dalian
                  
                  
                  10,334,099
                  
                  
                  
                  8.4
                  %Copper—Fayetteville
                  
                  
                  9,222,531
                  
                  
                  
                  7.5
                  %Aluminum—Fayetteville
                  
                  
                  7,693,142
                  
                  
                  
                  6.3
                  %Copper—Fayetteville
                  
                  
                  5,894,133
                  
                  
                  
                  4.8
                  %Copper—Fayetteville
                  
                  
                  4,758,723
                  
                  
                  
                  3.9
                  %Steel—Fayetteville
                  
                  
                  4,274,291
                  
                  
                  
                  3.5
                  %Total—Top
      Ten
                  
                  
                  105,878,857
                  
                  
                  
                  77.6
                  %


The
information in the preceding chart includes Fayetteville’s purchases for the
full year of 2007.





Gross
margin





Gross
profit was $42.4 million in 2007, increased 71.1% from approximately $24.8
million in 2006. As a percentage of net sales, gross profit decreased from 36.7%
to 33.1%. This was primarily driven by higher raw material costs that affected
the selling price but not the dollar amount of margin. As we discussed in the
overview, we pass increases in raw material costs to our customers rather than
the percentage changes in our raw material costs. Therefore, when raw material
increases are passed through to our customers, the sales price will increase and
the net margin as a percentage of net sales will decline. However, the dollar
amount of gross margin remains stable.




Selling,
General and Administrative Expenses




Selling
expenses, which principally include sales related staff salary and benefits,
travel expenses, and sales commissions, were $1.8 million in 2007, compared to
$613,119 in 2006, a 187.5% increase. As a percentage of net sales, selling
expenses increased by 0.47% in 2007 compared to 2006. General and administrative
expenses, as a percentage of net sales, increased to 7.8% of net sales in 2007,
compared to 5.6% in 2006. The increase was primarily due to increased
depreciation associated with expanded asset base amounting to $2.2 million, $1.9
million share based compensation, $1.6 million professional fee and costs
associated with expanding our staff in Dalian to accommodate the increasing
demand for our products and the inclusion of Copperweld operating expenses for
the period October 29, 2007 through December 31, 2007.




Interest
Expense





Interest
expense increased to $7.5 million in 2007 from $1.07 million in 2006,
while as a percentage of net sales, interest expense increased to 5.9% in 2007
from 1.6% in 2006. We issued $40 million in HY notes and $20 million in
convertible notes that were purchased by Citadel Equity Fund Ltd. on January 24,
2007. Interest expense related to those notes during 2007 was approximately $5.2
million.




47





Taxation





Income
tax





Fushi
Copperweld, Inc. (formerly Fushi International, Inc.) is a company incorporated
in the State of Nevada, Fushi Holdings is a company incorporated in the State of
Delaware, Copperweld Bimetallics, LLC is chartered in the State of Delaware and
Copperweld UK, LLC is registered in the United Kingdom. Prior to the acquisition
of Copperweld, we conducted substantially all our operations through our PRC
operating subsidiaries. With the acquisition of Copperweld, we have a
manufacturing facility and administrative offices located in Fayetteville,
Tennessee, USA and in Telford, England, UK.





P.R.C.
enterprise income tax




In the
fiscal year ended December 31, 2007, our business operations were principally
conducted by our subsidiaries incorporated in the PRC. PRC enterprise income tax
is calculated based on taxable income determined under PRC accounting
principles. In accordance with “Income Tax Law of China for Enterprises with
Foreign Investment and Foreign Enterprises,” or the Income Tax Law, “Foreign
Invested Enterprises”, or FIEs, established in the PRC are generally subject to
an “Enterprise Income Tax”, or EIT, rate of 33%. PRC domestic companies are
governed by the Enterprise Income Tax Laws of the PRC and are also generally
subject to an EIT rate of 33%. However, the Income Tax Laws provide certain
favorable tax treatment to a company that qualifies as a "New or High-technology
Enterprise" or a “Foreign Invested Enterprise” located in the old town of an
inshore open city. Additionally, the governments at the provincial, municipal
and local levels can provide many tax incentives and abatements based on a
number of programs at each level.




The
Dalian Municipal Government issued a notice in 2000 providing for a series of
tax preferential treatments to companies that qualify as "New or High-tech
Enterprise” or companies that are registered and operate in a specified
development zone in Dalian City.





Dalian
Fushi, a 100% variable interest, non-operating subsidiary, was incorporated in
the PRC and is subject to PRC income tax which is computed according to the
relevant laws and regulations in the PRC. Dalian Fushi's bimetallic composite
conductor wire product was approved by Dalian Cit as a "high-tech" project. As a
result, Dalian Fushi is a business entity that is qualified as a "new or
high-technology enterprise," and is entitled to a two-year full exemption from
the PRC enterprise income tax starting from its first year of operation, which
expired on December 31, 2003, followed by a 50% reduction and other favorable
tax treatment for the succeeding three years, which expires on December 31,
2006. The provision for income taxes for the twelve months ended December 31 was
zero as we didn’t have any operation under Dalian Fushi from the beginning of
2007.





Fushi
International (Dalian) (“FID”), a wholly owned subsidiary of Fushi Holdings,
Inc., was incorporated in the PRC as an FIE and is subject to PRC income tax
which is computed according to the relevant laws and regulations in the PRC. FID
has located its factories in a special economic region in Dalian and is granted
certain preferential treatments including a corporate income tax rate of 24%. In
September 2005, FID was approved as a wholly foreign owned enterprise. This
economic region allows FID a two-year income tax exemption for the years ended
December 31, 2006 and 2007, and a 50% income tax reduction for the following
three years ended December 31, 2008, 2009, and 2010.





Effective
January 1, 2008, the new EIT Law in PRC imposes a unified income tax rate
of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC
operating subsidiaries, unless they qualify under certain limited exceptions.
But the EIT Law permits companies to continue to enjoy their existing
preferential tax treatments until such treatments expire in accordance with
their current terms. Any increase in our effective tax rate as a result of the
above may adversely affect our operating results





Net
Income





Net
income increased to approximately $29.5 million, or 23.0% of net sales for the
year ended December 31, 2007, from approximately $17.8 million, or 26.4% of net
sales for the year ended December 31, 2006, representing an increase of $11.7
million or 65.7% with a net margin of 26%. The bottom line increase is primarily
due to substantial revenue increases while the decrease as a percentage of
the net sales was primarily due to lower gross margin and higher
SG&A.




48





Basic and
diluted earnings per share (EPS) for the fiscal year ended December 31, 2007
were $1.33 and $1.19, compared to $0.89 and $0.84 for the prior
year.  The weighted average number of shares outstanding to calculate
basic EPS was 22.2 million and 19.9 million for 2007 and 2006,
respectively.  The weighted average number of shares outstanding to
calculate diluted EPS was 25.2 million and 21.3 million for 2007 and 2006,
respectively.





Foreign
Currency Translation Gains










In the
year ended December 31, 2007, the RMB steadily rose against the US dollar. As a
result of the appreciation of the RMB, we recognized a foreign currency
translation gain of $9.9 million. Given the uncertainty of exchange rate
fluctuations, we cannot estimate the effect of these fluctuations on our future
business, product pricing, and results of operations or financial condition. See
“Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation of
the Renminbi may materially and adversely affect your investment.”




Prior to
acquiring Copperweld, materially all of our revenues and a majority of our
expenses in 2007 were denominated in RMB Yuan.  For our operations in
the PRC, the income statement accounts and balance sheet amounts with the
exception of equity at December 31, 2007 were translated at 1 RMB Yuan to 0.1371
USD, or 1 USD to 7.2941 RMB Yuan. The equity accounts were stated at their
historical rate.





LIQUIDITY
AND CAPITAL RESOURCES





We have
historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations.  Significant factors affecting our cash
liquidity include (1) cash provided by operating activities, (2) cash
used for capital expenditures, and (3) our available credit facilities and
other borrowing arrangements.




As is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.





In
summary, our cash flows were:





December 31, 2008
                                    
                                    
                                    December 31, 2007Net
      cash (used in) provided by operating activities
                                    
                                    $
                                    (368,212
                                    )
                                    
                                    $
                                    26,152,846Net
      cash (used in) investing activities
                                    
                                    
                                    (17,089,985
                                    )
                                    
                                    
                                    (51,182,872
                                    )Net
      cash (used in) provided by financing activities
                                    
                                    
                                    (1,666,360
                                    )
                                    
                                    
                                    80,257,602Effect
      of exchange rate on cash and cash equivalents
                                    
                                    
                                    4,821,569
                                    
                                    
                                    
                                    4,193,631Cash
      and cash equivalents at beginning
                                    
                                    
                                    79,914,758
                                    
                                    
                                    
                                    20,493,551Cash
      and cash equivalents at ending
                                    
                                    $
                                    65,611,770
                                    
                                    
                                    $
                                    79,914,758
  49





For the
fiscal year ended December 31, 2008, net cash used by operating activities was
$368,212. This was primarily attributable to our net income of $28.5 million,
$33.4 million increase in working capital from $7.9 million in 2007 to $41.3
million in 2008, adjusted by an add-back of non-cash expenses mainly consisting
of depreciation and amortization of $ 9.7 million and share-based compensation
expense of $1.9 million. The change in working capital for the year ended
December 31, 2008 was primarily related to i) a $24.8 million increase in
accounts receivable; ii) a $17.4 million increase in advance to raw material
suppliers, partially offset by $5.1 million decrease in inventory; iii) a $5.0
million increase in deferred tax assets and a $1.8 million decrease in taxes
payable; iv) a $1.1 million decrease in other payables and accrued liabilities,
partially offset by a $4.1 million increase in accounts
payables.  Increase in accounts receivables was primarily driven by
revenue growth, and extended credit term to certain customers as well as longer
collection cycle as a result of challenging economic condition.  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 debts, and the
general condition of the industry. We have not experienced any significant
amount of bad debt since the inception of our operation and have established
appropriate procedures to facilitate collection.  Increase in advance
to raw material suppliers was due to significant purchase commitments of copper
supplies incurred towards the end of the third quarter and the purchase
commitments were subsequently renegotiated and amended with the suppliers to
reflect prevailing market price for future delivery.





For the
fiscal year ended December 31, 2008, net cash used in investing activities was
$17.1 million, and was primarily attributable to i) a $1.7 million purchase of
land use rights; ii) a $15.2 million capital expenditure on improvement of
property and purchase of new equipment and machinery, and (iii) a $3.1 million
advances for purchase of equipment





For the
fiscal year ended December 31, 2008, net cash used in financing activities was
$1.7million as a result of repayment of maturing, long term and short term
working capital loan in the amount of $17.3 million and payment in the amount of
$2.4 million on our existing credit line facilities, partially offset by
proceeds from short term borrowing of $16.9 million. As of December 31, 2008, we
had outstanding short-term working capital loans with banks in an aggregate
amount of $17.6 million with terms ranging from three months to one year and
maturity dates ranging from February to March, 2009.  The weighted
average annual interest rate on the loan was 8.96%





Our
Fayetteville facility (Copperweld) maintains a revolving line of credit with
Wells Fargo Bank.  Availability on the credit line is the lower of
$12.8 million or the collateral balances.  The outstanding balance was
$4,712,075 at December 31, 2008. The Company deposits the cash collections from
its customers against the outstanding account balance of the line of credit on a
daily basis. The line of credit matures in 2010.  If we are unable to
renew or replace our Fayetteville revolving line of credit, our Fayetteville
results of operations would be adversely affected.  See “Risk Factors
– Risks Related to Our Business – Our Fayetteville, Tennessee operation is
dependent upon a line of credit to fund working capital needs and, if we are
unable to renew or replace the line of credit, our Fayetteville results of
operations would be adversely affected.” Our
Telford facility (Copperweld UK) maintains a revolving line of credit with a
limit of approximately $1,096,000 (or ₤750,000) but had no balance outstanding
at December 31, 2008.  Both lines of credit expire in
2010.





As of
December 31, 2008, we had cash and cash equivalents of $65.6 million, down $14.3
million from $79.9 million at December 31, 2007.




On
January 24, 2007, we and Citadel Equity Fund Ltd. ("Citadel") entered a Notes
Purchase Agreement (the “Notes Purchase Agreement”) pursuant to indicative
financing term sheets dated December 19, 2006. Pursuant to the terms of the
Notes Purchase Agreement, the Company offered and sold and Citadel purchased (a)
$40,000,000 of the Company’s Guaranteed Senior Secured Floating Rate Notes due
2012 (the “HY Notes”) and (b) $20,000,000 of the Company’s 3.0% Senior Secured
Convertible Notes due 2012 (the “Convertible Notes” and collectively with the HY
Notes, the "Notes").  The details of the indentures are available in
previous filing.  The indenture for the Convertible Notes, among other
provisions, allows the holder to convert the debt to common stock at a
conversion rate of $7.00 for each share.  On January 8, 2008, Citadel
converted $15.0 million in debt to 2,142,857 shares of our common
stock.




50





The HY Notes and Convertible Notes
contain customary affirmative and negative covenants and other provisions,
including restrictions on the incurrence of additional debt, creation of liens,
making restricted payments, paying dividends, maintenance of a maximum leverage
ratio, maintenance of a minimum fixed charge coverage ratio, and minimum net
worth.  We were in compliance with all of these requirements as of
December 31, 2008.




Under the
terms of the Indentures governing the Notes, we are required to make payments of
interest on the Notes on the same day such payments are due and
payable.  We have experienced payment delays in January 2009 due
to recent tightening of SAFE restrictions on the conversion of RMB to USD. We
have since paid the interest amounts in full and have no current issues with
respect to payment.





If there
is a default, or we do not maintain certain financial covenants or we do not
maintain borrowing availability in excess of certain pre-determined levels, we
may be unable to incur additional indebtedness, make restricted payments or
redeem or repurchase our capital stock. To the extent the Noteholders demand
accelerated payment of maturity in entire or partial principal of the Notes as a
result of declared default, our liquidity will be adversely
affected.  Without sufficient liquidity to fund our debt obligations,
we may be forced to curtail our operations, including reducing or depleting our
working capital, reducing or delaying capital expenditures, and limiting out
ability to obtain additional financing for future working capital, capital
expenditures, acquisitions and other business opportunities we want to
pursue.  Especially given the current adverse economic condition and
the extreme volatility, disruption and dislocation the capital and credit
markets have been experiencing in recent months, there can be no assurance that
our ability to utilize our current credit facilities or our ability to access
credit and capital markets and finance our operations will not be impaired. (See
risk factors related to business referencing foreign exchange control and
Fayetteville, and risks related to notes.)





In
addition, if we are unable to stay enforcement of the judgment in the Kuhns
litigation pending our appeal, we will be forced to pay the approximately $7
million judgment immediately. Any payment of the judgment would have a material
adverse effect on our liquidity. See “Item 3. Legal Proceedings.”





We
believe that our current cash flow and capital resources will be sufficient to
meet our anticipated cash needs, including our cash needs for working capital,
capital expenditures, and our other short-term operating strategies for the next
12 months. We may, however, require additional cash resources due to changing
business conditions or other future developments, including any investments or
acquisitions we may decide to pursue.  Customer demand, competitive
market forces, commodities pricing, customer acceptance of our product mix and
economic conditions worldwide could affect our ability to continue to fund our
future needs from business operations.




51





Critical Accounting Policies





Management's
discussion and analysis of its financial condition and results of operations are
based upon the Company's consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles. The Company's financial statements reflect the selection and
application of accounting policies which require management to make significant
estimates and judgments. See note 1 to the Company's consolidated financial
statements, "Summary of Significant Accounting Policies and Organization".
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. The Company believes that the following reflect the more critical
accounting policies that currently affect the Company's financial condition and
results of operations:





Revenue
recognition





Revenue
is recognized when product is shipped and title passes to the customer and
collectability is reasonably assured. Sales revenue represents the invoiced
value of goods, net of a VAT. All of the Company's products that are sold in the
PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales
price. All of the Company’s products that are manufactured and sold in the UK
are subject to a UK value-added tax at a rate of 15% of the gross sales
price.This
VAT may be offset by VAT paid by the Company on raw materials and other
materials included in the cost of producing its finished products.




Although
most of our products are covered by our warranty programs, the terms and
conditions of which vary depending on the customers and the product sold.
Because we have not experienced any significant warranty claims in the past, we
have not established any reserve fund for warranty claims or defective
products.





Property,
Plant and Equipment





Building,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded utilizing the
straight-line method over the estimated original useful lives of the assets.
Amortization of leasehold improvements is calculated on a straight-line basis
over the life of the asset or the term of the lease, whichever is shorter. Major
renewals and betterments are capitalized and depreciated; maintenance and
repairs that do not extend the life of the respective assets are charged to
expense as incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income. Depreciation related to property and equipment used in production is
reported in cost of sales.





Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired.





Bad
debts





The
Company's business operations are conducted in the PRC and in the US. The
Company extends unsecured credit to customers with good credit history.
Management reviews its accounts receivable on a regular basis to determine if
the bad debt allowance is adequate at each year-end. Because we only extend
trade credits too many of our customers, who tend to be well-established and
large sized businesses, and we have not experienced any write-offs in our PRC
operations and no material write-off of accounts receivable in our US
operations. At December 31, 2008 we had an allowance of bad debts in the amount
of $318,529.





Income taxes




We record
a valuation allowance to reduce our deferred tax assets to the amount that we
believe to be more likely than not to be realized. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of their recorded amount, an adjustment to our deferred tax assets
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to our deferred tax assets
would be charged to income in the period such determination was
made.





Fushi
International, Inc., Fushi Holdings, Copperweld Bimetallics Holdings, LLC and
Copperweld bimetallics, LLC were incorporated in the United States and have
incurred net operating losses for income tax purposes for 2008, 2007 and 2006.
Management believes that the realization of the benefits can be used by our US
operating subsidiary in future periods because expectations are that Copperweld
will have taxable income in future periods.




52




Stock-based
compensation.




In
preparing the consolidated financial statements for 2008, we adopted SFAS
No. 123 (revised 2004), or SFAS No. 123(R), issued by the FASB in
December 2004, to measure our issued share options based on the grant-date
fair value of the options and recognized as compensation expense over the
requisite service period, with a corresponding addition to equity. We adopt the
Black-Scholes Model to value the fair value of the share options and the
following major assumptions are adopted: average risk-free rate of return of
1.84% to 4.57%, expected option life of 2 years, volatility rate of 50% and no
dividend yield.





Off-Balance
Sheet Arrangements





We have
not engaged in any off-balance sheet transactions since its
inception.





ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS





Commodity Price
Risk




Certain
raw materials used by us are subject to price volatility caused by supply
conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage
the volatility associated with purchases of commodities in the normal course of
business. We do not speculate on commodity prices.




We are
primarily exposed to price risk related to our purchase of copper used in the
manufacture of our products. We purchase most of our raw materials at prevailing
market prices. We do not have formal long-term purchase contracts with our
suppliers and, therefore, we are exposed to the risk of fluctuating raw material
prices. Our raw material price risk is mitigated because we generally attempt to
pass changes in raw material costs to our customers.





We did
not have any commodity price derivatives or hedging arrangements outstanding at
December 31, 2008 and did not employ any commodity price derivatives during the
fiscal year ended December 31, 2008.





Foreign
Exchange Risk




While our
reporting currency is the U.S. dollar, substantially all of our consolidated
revenues and consolidated costs and expenses are denominated in RMB.
Substantially all of our assets are denominated in RMB except for cash. As a
result, we are exposed to foreign exchange risk as our revenues and results of
operations may be affected by fluctuations in the exchange rate between U.S.
dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of
our RMB revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. Assets and liabilities are translated at exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and shareholders’ equity is translated at historical
exchange rates. Any resulting translation adjustments are not included in
determining net income but are included in determining other comprehensive
income, a component of shareholders’ equity. A 1% average appreciation
(depreciation) of the RMB against the U.S. dollar would increase (decrease) our
comprehensive income by $0.3 million based on our outstanding revenues, costs
and expenses, assets and liabilities denominated in RMB as of December 31, 2008.
As of December 31, 2008, our foreign currency translation gain as comprehensive
income amounted to $ 12.5 million. We have not entered into any hedging
transactions in an effort to reduce our exposure to foreign exchange risk. The value of the Renminbi against the U.S. dollar and other
currencies is affected by, among other things, changes in China’s political and
economic conditions. Since July 2005, the Renminbi has not been pegged to the
U.S. dollar. Although the People’s Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the
exchange rate, the Renminbi may appreciate or depreciate significantly in value
against the U.S. dollar in the medium to long term. Moreover, it is possible
that in the future, PRC authorities may lift restrictions on fluctuations in the
Renminbi exchange rate and lessen intervention in the foreign exchange
market.




53




Interest
Rate Risk





We are
primarily exposed to interest rate risk arising from 6 months LIBOR rate on
which the interest rate for our Guaranteed Senior Secured Floating Rate Notes
due 2012 (HY Notes) totaling $40 million or 47.5% of our total debt, is based.
If there was a hypothetical 1% change in 6-month LIBOR interest rate, the net
impact to earnings would be approximately $0.4 million on annualized
basis.





In order
to mitigate our exposure to volatility in interest rates and foreign currency
exchange rates associated with the HY Notes, on April 10, 2007, the Company
entered into a cross currency swap transaction (the Swap) with Merrill Lynch
Capital Services, Inc. (“MLCS”). The Swap, with a notional principal value of
$40 million, converts the USD variable interest rate of initially LIBOR +
7% per annum and LIBOR + 5.4% per annum after qualified step-down to an 8.3% per
annum RMB fixed interest rate. The agreement was deemed effective January 24,
2007. The Swap requires semi-annual payment in arrears on July 24 and January 24
and matures earlier of (1) cash settlement defined as early termination; or (2)
January 24, 2012, at which point the Swap requires an exchange of RMB and USD
based principals. Under the terms of the cross currency swap, the Company
receives variable interest rate payments in USD and makes fixed interest rate
payments in RMB with settlement netted in USD, thereby creating the equivalent
of fixed-rate debt. The Company uses this derivative instrument only to hedge
exposures in the ordinary course of business and does not invest in derivative
instruments for speculative purposes.





The fair
value of the Swap is determined with the assistance of third party provided
calculations which reflect the present values of the difference between
estimated future variable-rate receipts in USD and future fixed-rate payments in
RMB. For the fiscal year ended December 31, 2007, changes in fair value of the
Swap designated and effective as cash flow hedge resulted in an increase in the
liability and a loss to other comprehensive income of $8.5 million, net of
taxes. For the fiscal year ended December 31, 2008, changes in fair value of the
Swap designated and effective as cash flow hedge resulted in a decrease in the
liability and a gain to other comprehensive income of $4.1 million, net of
taxes.  As of December 31, 2008, the Company had cross currency hedge
payable amounting to $104,324. For fiscal year ended December 31, 2008, there
were no amounts recorded in the consolidated statement of income in relation to
this interest rate swap related to ineffectiveness.





The
Company accounts for this interest rate swap in accordance with FAS No. 133,
“Accounting for Derivatives Instruments and Hedging Activity,” which requires
all derivatives to be carried on the balance sheet at fair value and to meet
certain documentary and analytical requirements to qualify for hedge accounting
treatment. The above derivative qualifies for hedge accounting under FAS 133
and, accordingly, changes in the fair value is reported in accumulated other
comprehensive income, net of related income tax effects.





The
Company also has outstanding senior convertible notes that may be converted into
the Company’s common stock. Accordingly, the price of its common stock may
affect the fair value of the Company’s convertible notes. On January 8, 2008,
the convertible notes holder elected to convert $15.0 million of the $20 million
convertible notes into common shares. If the $5 million Convertible Notes
outstanding are not converted at maturity, January 24, 2012, the Company will
have to repay the principal of $5 million and an additional redemption cost of
$5,305,158.  The estimated fair value of the remaining $5 million
Convertible Notes was approximately $5.4 million at December 31, 2008
based on a 25% discount rate. Since the Company’s stock price was below the
conversion price at December 31, 2008, the likelihood of conversion is low.
Therefore, a hypothetical 1% decrease in the price of the Company’s common stock
would not have impacted the fair value of the outstanding Convertible
Notes.




Changes
in the market value of the Company’s debt do not affect the reported results of
operations unless the Company is retiring such obligations prior to their
maturity. This analysis did not consider the effects of a changed level of
economic activity that could exist in such an environment and certain other
factors. Further, this sensitivity analysis assumes no changes in the Company’s
financial structure.




Credit
Risk





We have
not experienced significant credit risk, as most of our customers are long-term
customers with excellent payment records. We review our accounts receivable on a
regular basis to determine if the allowance for doubtful accounts is adequate at
each quarter-end. We only extend 30 to 90 day trade credit to our largest
customers, which tend to be well-established and large businesses, and we have
rarely seen accounts receivable go uncollected beyond 90 days or experienced
minimal write-off of accounts receivable in the past.




54




Inflation
Risk





Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues if the
selling prices of our products do not increase with these increased
costs.





ITEM
8.       FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA





Consolidated
balance sheets of Fushi Copperweld, Inc. and subsidiaries as of December 31,
2008 and 2007, and the related statements of income and comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2008 together with the related notes and the report of
our independent registered public accounting firm, are set forth on the “F”
pages of the Form 10-K.





ITEM 9.       CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.





ITEM
9A. CONTROLS AND PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized,
and reported within the time period specified in the Securities and Exchange
Commission’s rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Acting
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.





As
required by Rule 13a-15(b) promulgated under the Securities Exchange Act, our
management, with the participation of our CEO and CFO, evaluated the design and
operating effectiveness as of December 31, 2008 of our disclosure controls and
procedures, as defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act. Based on this evaluation our CEO and CFO concluded that, as of
December 31, 2008, our disclosure controls and procedures were not effective at
the reasonable assurance level to enable the Company to record, process,
summarize and report information required under the Securities and Exchange
Commission’s rules in a timely fashion.





Notwithstanding
management’s assessment that our internal control over financial reporting was
ineffective as of December 31, 2008 due to the material weakness and significant
deficiency described below under Management’s Report on Internal Control Over
Financial Reporting, we believe that the consolidated financial statements
included in this Annual Report on Form 10-K correctly present our financial
condition, results of operations and cash flows for the fiscal years covered
thereby in all material respects.





MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Acting Chief Financial Officer,
and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  Management is
responsible for establishing and maintaining adequate internal control over
financial reporting.




55





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, the application of any
evaluation of effectiveness to future periods is subject to the risk that
controls may become inadequate because of changes in conditions, or that
compliance with the policies or procedures may deteriorate.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.





A
significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness; yet important enough to merit attention by those responsible for
oversight of the company’s financial reporting.





We have
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2008.  This evaluation was performed
using theInternal
Control–Evaluation
Framework developed by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”).  Based on such evaluation,
management concluded that the Company’s internal control over financial
reporting was not effective and identified one material weakness and one
significant deficiency in the Company’s internal control over financial
reporting as stated below.




Our
material weakness related to:


·
            the
      Company’s not
      adhering to controls as designed to ensure the timely and accurate
      disbursement of cash for the fiscal year ended December 31, 2008. The
      Company’s control system governing cash disbursement practices were
      adequately designed, faithfully implemented and properly documented by
      staff.  However, occurrences were detected that final payments
      were not made to intended payees due to management’s failure to adhere to
      controls as designed.  Although such occurrences did not result
      in material adjustments to the Company’s consolidated financial statements
      for the year ended December 31, 2008, there is a reasonable possibility
      that the control did not operate effectively because only certain key
      management had the ability to authorize, execute and change the
      disbursement of cash.





Our
deficiency related to:


·
            Failure
      to maintain effective controls over the financial closing process to
      ensure the accurate and timely accounting and disclosure of fixed asset
      including 1) not timely placing equipments received in construction in
      progress and 2) not timely transferring completed equipments to fixed
      assets.





MANAGEMENT'S
REMEDIATION PLAN




The
Company has discussed the material weakness and significant deficiency in its
internal control over financial reporting with the Audit Committee and the Board
of Directors.  Specific remedial actions have been taken to reorganize
and restructure the Company’s corporate accounting staff, which include (1)
revising the reporting structure and establishing clear roles, responsibilities,
and accountability, and (2) reorganizing the cash disbursement process by
including staff from different departments to ensure adequate segregation of
duties. We also implemented additional controls to continuously improve our
period-end closing procedures by ensuring that account reconciliations and
analyses are adequately reviewed for completeness and accuracy to timely
identify adjustments, particularly as it relates to fixed assets.





In
addition, under the supervision and guidance of our audit committee to remediate
such ineffectiveness and to strengthen our internal controls over financial
reporting, the Company’s management has implemented, or is in the process of
implementing, the following measures as of the date of the filing,:




1.
            We
      increased the level of interaction among our management, audit committee,
      independent auditors and other external
  advisors;





2.
            We
      evaluated the sufficiency of financial and accounting staff in Dalian,
      China, Fayetteville, Tennessee, and Telford, England and, based on that
      evaluation, we hired and continue to hire additional accounting
      staff;




56




4.
            We
      implemented a formal training program to train all key employees,
      especially new hires, on our antifraud programs, corporate governance
      guidelines, and business ethics.





5.
            We
      have established monthly and quarterly data collection timetables and
      procedures, including assigning data collection responsibilities to
      designated personnel;





6.
            We
      engaged a professional advisory firm on outsourcing part of our internal
      audit function;





7.
            We
      are in the process of recruiting a qualified and experienced internal
      auditor to implement the internal audit function, and we plan to provide
      additional training to this internal auditor on appropriate controls and
      procedures necessary to document and evaluate our internal control
      procedures.




We
believe that the steps we are taking are necessary for remediation of the
material weakness and significant deficiency identified above, and we will
continue to monitor the effectiveness of these steps and to make any changes
that our management deems appropriate





Changes
in Internal Control over Financial Reporting





Other
than as described above, management does not believe that there have been any
other changes in the Company’s internal control over financial reporting during
year ended December 31, 2008, which have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   To the
Board of Directors and Stockholders of
 Fushi
Copperweld, Inc
  We have
audited Fushi Copperweld, Inc and subsidiaries’ (the “Company”) internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A “Management’s Report on Internal Control
Over Financial Reporting”.  Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on our
audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of effectiveness
of the internal control over financial reporting to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
  A
material weakness is a control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management’s
assessment:
  The
control designed to ensure the timely and accurate disbursement of cash for the
fiscal year ended December 31, 2008, did not operate effectively because only
certain key management had the ability to authorize and execute disbursement of
cash. This material weakness did not result in material adjustments to the
Company’s consolidated financial statements for the year ended December 31,
2008, however, there is a reasonable possibility that because only certain key
management had control over both the authorization and execution duties related
to the Company’s cash disbursement process, the failure to segregate both duties
creates an opportunity for errors or misappropriation to occur
undetected.
  57
  This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2008 financial statements, and this
report does not affect our report dated March 13, 2009 on those financial
statements.
  In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
  We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows of the Company, and our report dated March 13, 2009
expressed an unqualified opinion.
  /Moore
Stephens Wurth Frazer and Torbet, LLP/
  Walnut,
California
 March 13,
2009
  58


ITEM 9B.      OTHER
INFORMATION





There
were no matters required to be disclosed on Form 8-K during the year ended
December 31, 2008 which were not disclosed on such form.





PART
III





ITEM 10.       DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Information
regarding our executive officers is set forth in Part I herein under the heading
“Executive Officers of the Registrant”.  The additional information
with respect to Item 10 and “Directors, Executive Officers and Corporate
Governance” appears in our 2009 Proxy Statement and is incorporated by reference
in this section.





ITEM 11.       EXECUTIVE
COMPENSATION





The
information with respect to Item 11 and ”Executive Compensation” appears in our
2009 Proxy Statement and is incorporated by reference in this
section.





ITEM 12.       SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




The information with respect to Item 12 and “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters”
appears in our 2009 Proxy Statement and is incorporated by reference in this
section.





ITEM
13.       CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The information with respect to Item 13 and
“Certain Relationships and Related Transactions, and Director Independence”
appears in our 2009 Proxy Statement and is incorporated by reference in this
section.




59





ITEM 14.       PRINCIPAL
ACCOUNTANT FEES AND SERVICES





The
information with respect to Item 14 and “Principal Accountant Fees and Services”
appears in our 2009 Proxy Statement and is incorporated by reference in this
section.




PART
IV





Item 15.         Exhibits
and Financial Statement Schedules





(a)
            The
      following documents are filed as part of this
  report:





1.
            Financial
      Statements





The
following financial statements of Fushi Copperweld, Inc. and Reports of
Independent Registered Public Accounting Firms are presented in the “F” pages of
this report:





Report of
Independent Registered Public Accounting Firms





Consolidated
Balance Sheets – as of December 31, 2008 and 2007





Consolidated
Statements of Income and Other Comprehensive Income for the years ended December
31, 2008, 2007 and 2006





Consolidated
Statements of Stockholders’ Equity for each of the years ended December 31,
2008, 2007 and 2006





Consolidated
Statements of Cash Flows for each of the years ended December 31, 2008, 2007 and
2006





Notes to
Financial Statements





2.
            Financial
      Statement Schedule II Valuation and Qualifying Accounts. The information
      for Schedule II as well as other Schedules has been omitted since they are
      not applicable.





3.
            All
      management contracts and compensatory plans and arrangements are
      specifically identified on the attached Exhibit
  Index.





(b)
            Exhibits





See the
Exhibit Index following the signature page of this report, which Index is
incorporated herein by reference.





(c)
            Financial
      Statements and Schedules - See Item 15(a)(1) and Item 15(a)(2)
      above.





60





SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  FUSHI
      COPPERWELD, INC.Date: March
      16, 2009
                By:
                /s/
      Li FuLi
      Fu, CEO
                  (principal
      executive officer)
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
  March
      16, 2009
                            
                            
                            /s/
      Wenbing Chris WangWenbing
      Chris Wang, President and Chief Financial Officer
                              (principal
      financial officer and principal accounting officer)March
      16, 2009
                            
                            
                            /s/
      Li FuLi
      Fu, DirectorMarch
      16, 2009
                            
                            
                            /s/
      Bai FengBai
      Feng, DirectorMarch
      16, 2009
                            
                            
                            /s/
      Jiping HuaJiping
      Hua, DirectorMarch
      16, 2009
                            
                            
                            /s/
      Barry RaeburnBarry
      Raeburn, DirectorMarch
      16, 2009
                            
                            
                            /s/
      John PerkowskiJohn
      Perkowski, Director
  61





FUSHICOPPERWELD,
INC.
 Exhibit
Index to Annual Report on Form 10-K
 For
the Year Ended December 31, 2008
 Number
                                                                                                                            
                                                                                                                            Description3.1
                                                                                                                            
                                                                                                                            Articles
      of Incorporation, as amended(1)3.2
                                                                                                                            
                                                                                                                            Bylaws(1)3.3
                                                                                                                            
                                                                                                                            Specimen
      of Common stock certificate(1)3.4
                                                                                                                            
                                                                                                                            Certificate
      of Designations authorizing the Series A Convertible Preferred Stock
      (1)3.5
                                                                                                                            
                                                                                                                            Certificate
      of Designations authorizing the Series B Convertible Preferred Stock.
      (1)4.1
                                                                                                                            
                                                                                                                            Form
      of Stock Purchase Agreement, dated as of December 13, 2005 by and among
      Parallel Technologies, Inc., Dalian Fushi, the management of Dalian Fushi,
      Chinamerica Fund, LP, and the other investors named
      therein.(1).4.2
                                                                                                                            
                                                                                                                            Form
      of Warrant (included as Exhibit A to Exhibit 4.1).4.4
                                                                                                                            
                                                                                                                            Form
      of Amendment No. 1 to Stock Purchase Agreement, dated as of December 13,
      2005 by and among Parallel Technologies, Inc., Dalian Fushi, the
      management of Dalian Fushi, Chinamerica Fund, LP, and the other investors
      named therein.(3)4.5
                                                                                                                            
                                                                                                                            Form
      of Stock Purchase Agreement, dated as of December 28, 2005, by and among
      Parallel Technologies, Inc., Dalian Fushi, the management of Dalian Fushi,
      Heller Capital Investments, LLC and the other investors named
      therein.(3)4.6
                                                                                                                            
                                                                                                                            Form
      of Notes Purchase Agreement, dated as of January 24, 2007, by and among
      the Company and Citadel Equity Fund Ltd. (4)4.7
                                                                                                                            
                                                                                                                            Form
      of HY Indentures, dated as of January 25, 2007, by and among the Company,
      the FHI and the Bank of New York. (4)4.8
                                                                                                                            
                                                                                                                            Form
      of CB Indentures, dated as of January 25, 2007, by and among the Company,
      the FHI and the Bank of New York. (4)4.9
                                                                                                                            
                                                                                                                            Form
      of Share Pledge Agreement, dated as of January 25, 2007, by and among the
      Company and the Bank of New York. (4)4.10
                                                                                                                            
                                                                                                                            Form
      of Investor Rights Agreement, dated as of January 25, 2007, by and among
      the Company, FHI, FID, DF, Li Fu, Mathus Yue Yang, Chris Wenbing Wang and
      Citadel.
(4)
  62
  10.1
                                                                                                                
                                                                                                                Share
      Exchange Agreement dated as of December13, 2005 between Parallel
      Technologies, Inc. and the stockholders of Diversified Product
      Inspections, Inc. (1)10.2
                                                                                                                
                                                                                                                Translation
      of Purchase Agreement, dated as of December 13, 2005, between Fushi
      International (Dalian) and Dalian Fushi. (1)10.3
                                                                                                                
                                                                                                                Translation
      of Entrusted Management Agreement, dated as of December 13, 2005, by and
      among Fushi International (Dalian), Dalian Fushi, Dalian Fushi Enterprise
      Group Co., Ltd., Yue Yang, Xishan Yang, and Chunyan Xu.
  (1)10.4
                                                                                                                
                                                                                                                Translation
      of First Patents Transfer Contract, dated as of December 13, 2005, by and
      between Fushi International (Dalian) and Dalian Fushi.
  (1)10.5
                                                                                                                
                                                                                                                Translation
      of Second Patent Transfer Contract, dated as of December 13, 2005, by and
      between Fushi International (Dalian) and Li Fu. (1)10.6
                                                                                                                
                                                                                                                Translation
      of Voting Proxy Agreement, dated as of December 13, 2005, by and among
      Fushi International (Dalian), Dalian Fushi Enterprise Group Co., Ltd., Yue
      Yang, Xishan Yang, and Chunyan Xu. (1)10.7
                                                                                                                
                                                                                                                Translation
      of Exclusive Option Agreement, dated as of December 13, 2005, by and among
      Fushi International (Dalian), Dalian Fushi, Dalian Fushi Enterprise Group
      Co., Ltd., Yue Yang, Xishan Yang, and Chunyan Xu.(1).10.8
                                                                                                                
                                                                                                                Translation
      of Shares Pledge Agreement, dated as of December 13, 2005, by and among
      Fushi International (Dalian), Dalian Fushi Enterprise Group Co., Ltd., Yue
      Yang, Xishan Yang, and Chunyan Xu. (1)10.10
                                                                                                                
                                                                                                                Stock
      Purchase Agreement dated as of November 8, 2005 between Glenn A. Little
      and Dalian Fushi. (1) (1)10.11
                                                                                                                
                                                                                                                Consulting
      Agreement dated as of November 8, 2005 between Parallel Technologies, Inc.
      and Glenn A. Little. (1)10.12
                                                                                                                
                                                                                                                Form
      of Engagement Letter dated May 27, 2005 between Dalian Fushi and Kuhns
      Brothers, Inc. (1)10.13
                                                                                                                
                                                                                                                *Fushi
      Copperweld, Inc. 2007 Stock Incentive Plan (5).10.14
                                                                                                                
                                                                                                                *Fushi
      Copperweld, Inc. Form of Non-Qualified Stock Option Agreement.
      (5)10.15
                                                                                                                
                                                                                                                *Fushi
      Copperweld, Inc. Form of Qualified Stock Option Agreement.
    (5)10.16
                                                                                                                
                                                                                                                Settlement
      Agreement among Copperweld, Copperweld Bimetallics International Holdings,
      LLC, International Manufacturing Equipment Suppliers, LLC, Tongling Jingda
      Special Magnet Wire Co., Ltd. and Tongling Copperweld Bimetallics Co. Ltd.
      dated January 18, 2008, filed as Exhibit 10.1 to the Registrant’s
      Quarterly Report on Form 10-Q for the period ended March 31,
      2008.10.17
                                                                                                                
                                                                                                                Amended
      and Restated Investor Rights Agreement by and among the Registrant, Fushi
      Holdings, Inc.,†
      Dalian Fushi Bimetallic Manufacturing Company Limited, Fushi International
      (Dalian) Bimetallic Cable Co., Ltd., Li Fu, and Citadel Equity Fund Ltd.,
      dated as of June 4, 2008.10.18
                                                                                                                
                                                                                                                *Settlement
      Agreement with John Christopher Finley, filed as Exhibit 10.1 to the
      Registrant’s Quarterly Report on Form 10-Q for the period ended June 30,
      2008.
  63
  10.19
                                                                                
                                                                                *Employment
      Agreement of Dwight Berry, filed as Exhibit 10.2 to the Registrant’s
      Quarterly Report on Form 10-Q for the period ended June 30,
      2008.21.1
                                                                                
                                                                                List
      of Subsidiaries†23.1
                                                                                
                                                                                Consent
      of Moore Stephens Wurth Frazer and Torbet, LLP †31.1
                                                                                
                                                                                Certification
      of Li Fu pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;†31.2
                                                                                
                                                                                Certification
      of Wenbing Wang pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;†32.1
                                                                                
                                                                                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002;†(1)
                                                                                
                                                                                Incorporated
      by reference to the Registrant's Current Report on Form 8-K filed on
      December 14, 2005.(2)
                                                                                
                                                                                Incorporated
      by reference to the Registrant's Current Report on Form 8-K/A (Amendment
      No. 1) filed on December 20, 2005.(3)
                                                                                
                                                                                Incorporated
      by reference to the Registrant's Current Report on Form 8-K filed on
      January 5, 2006.(4)
                                                                                
                                                                                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K filed on
      January 26, 2007.(5)
                                                                                
                                                                                Incorporated
      by reference to the Registrant’s Information Statement on Schedule 14 C
      dated March 27,
2008.
 *Indicates employee benefit plan or agreement.
 †Filed
herewith.
  64
  FINANCIAL
STATEMENTS
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and
 Shareholders
of Fushi Copperweld, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Fushi Copperweld, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the related statements of
income and comprehensive income, stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2008. Fushi
Copperweld’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Fushi Copperweld, Inc and
subsidiaries as of December 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2008 in conformity with accounting principles generally accepted in the
United States of America.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Fushi Copperweld Inc’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 13, 2009 expressed an
adverse opinion.
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
 
 Walnut,
California
 March 13,
2009
  F-1
  Table of
Contents
  FINANCIAL
STATEMENTS
  FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 CONSOLIDATED  BALANCE
SHEETS
 AS OF
DECEMBER 31, 2008 AND 2007
 
 2008
                                                        
                                                        
                                                        2007ASSETSCURRENT
      ASSETS:Cash
                                                        
                                                        $
                                                        65,611,770
                                                        
                                                        
                                                        $
                                                        79,914,758Marketable
      securities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,977,699Restricted
      cash
                                                        
                                                        
                                                        1,000,000
                                                        
                                                        
                                                        
                                                        1,000,000Accounts
      receivable, trade, net of allowance of bad debt $318,529 and $135,418
      as of December 31, 2008 and 2007
                                                        
                                                        
                                                        49,782,548
                                                        
                                                        
                                                        
                                                        23,611,186Inventories
                                                        
                                                        
                                                        6,977,852
                                                        
                                                        
                                                        
                                                        12,308,295Notes
      receivables
                                                        
                                                        
                                                        171,300
                                                        
                                                        
                                                        
                                                        816,905Other
      receivables and prepaid expenses
                                                        
                                                        
                                                        869,973
                                                        
                                                        
                                                        
                                                        997,979Advances
      to suppliers
                                                        
                                                        
                                                        20,261,585
                                                        
                                                        
                                                        
                                                        2,341,839Cross
      currency hedge receivable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        706,170Deposit
      in derivative hedge
                                                        
                                                        
                                                        1,000,000
                                                        
                                                        
                                                        
                                                        -Prepaid
      taxes
                                                        
                                                        
                                                        670,805
                                                        
                                                        
                                                        
                                                        -Total
      current assets
                                                        
                                                        
                                                        146,345,833
                                                        
                                                        
                                                        
                                                        124,674,831PLANT
      AND EQUIPMENT, net
                                                        
                                                        
                                                        119,761,027
                                                        
                                                        
                                                        
                                                        87,228,600OTHER
      ASSETS:Notes
      receivable, noncurrent
                                                        
                                                        
                                                        799,106
                                                        
                                                        
                                                        
                                                        -Advances
      to suppliers, noncurrent
                                                        
                                                        
                                                        4,022,879
                                                        
                                                        
                                                        
                                                        18,204,775Prepaid
      land use right
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,559,760Intangible
      asset, net of accumulated amortization
                                                        
                                                        
                                                        12,406,920
                                                        
                                                        
                                                        
                                                        5,832,721Deferred
      loan expense, net
                                                        
                                                        
                                                        3,317,725
                                                        
                                                        
                                                        
                                                        3,115,930Deferred
      tax assets, noncurrent
                                                        
                                                        
                                                        7,804,027
                                                        
                                                        
                                                        
                                                        2,852,000Total
      other assets
                                                        
                                                        
                                                        28,350,657
                                                        
                                                        
                                                        
                                                        34,565,186Total
      assets
                                                        
                                                        $
                                                        294,457,517
                                                        
                                                        
                                                        $
                                                        246,468,617LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable, trade
                                                        
                                                        $
                                                        7,204,156
                                                        
                                                        
                                                        $
                                                        3,028,823Line
      of credit
                                                        
                                                        
                                                        4,712,075
                                                        
                                                        
                                                        
                                                        7,168,524Short
      term bank loans
                                                        
                                                        
                                                        17,588,400
                                                        
                                                        
                                                        
                                                        5,703,360Current
      portion of long term debts
                                                        
                                                        
                                                        5,000,000
                                                        
                                                        
                                                        
                                                        10,968,000Other
      payables and accrued liabilities
                                                        
                                                        
                                                        4,751,460
                                                        
                                                        
                                                        
                                                        5,791,597Customer
      deposits
                                                        
                                                        
                                                        542,540
                                                        
                                                        
                                                        
                                                        -Taxes
      payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,005,259Cross
      currency hedge payable
                                                        
                                                        
                                                        104,324
                                                        
                                                        
                                                        
                                                        -Total
      current liabilities
                                                        
                                                        
                                                        39,902,955
                                                        
                                                        
                                                        
                                                        33,665,563LONG
      TERM  LIABILITIES:Notes
      payable
                                                        
                                                        
                                                        40,000,000
                                                        
                                                        
                                                        
                                                        60,000,000Fair
      value of derivative instrument
                                                        
                                                        
                                                        4,377,076
                                                        
                                                        
                                                        
                                                        8,515,396Total
      liabilities
                                                        
                                                        
                                                        84,280,031
                                                        
                                                        
                                                        
                                                        102,180,959COMMITMENTS
      AND CONTINGENCIES
                                                        
                                                        
                                                        7,197,794
                                                        
                                                        
                                                        
                                                        -SHAREHOLDERS'
      EQUITY:Preferred
      stock,$0.001 par value, 5,000,000 shares authorized, none issued or
      outstanding as of December 31, 2008 and 2007
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Common
      stock, $0.006  par value, 100,000,000 shares authorized, 2008:
      27,499,034 issued and 27,399,034 outstanding, 2007: 25,311,304 issued and
      25,211,304 outstanding
                                                        
                                                        
                                                        164,395
                                                        
                                                        
                                                        
                                                        151,268Common
      stock held in escrow, 100,000 shares
                                                        
                                                        
                                                        600
                                                        
                                                        
                                                        
                                                        600Additional
      paid in capital
                                                        
                                                        
                                                        91,172,890
                                                        
                                                        
                                                        
                                                        77,665,064Statutory
      reserves
                                                        
                                                        
                                                        12,316,147
                                                        
                                                        
                                                        
                                                        8,321,726Retained
      earnings
                                                        
                                                        
                                                        78,613,158
                                                        
                                                        
                                                        
                                                        54,133,070Accumulated
      other comprehensive income
                                                        
                                                        
                                                        20,712,502
                                                        
                                                        
                                                        
                                                        4,015,930Total
      shareholders' equity
                                                        
                                                        
                                                        202,979,692
                                                        
                                                        
                                                        
                                                        144,287,658Total
      liabilities and shareholders' equity
                                                        
                                                        $
                                                        294,457,517
                                                        
                                                        
                                                        $
                                                        246,468,617
 
 See
report of independent registered public accounting firm.
 The
accompany notes are an integral part of this statement.
  F-2
 
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND
 OTHER
COMPREHENSIVE INCOME
 FOR YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
 
 2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006REVENUES
                                                        
                                                        $
                                                        221,434,702
                                                        
                                                        
                                                        $
                                                        128,222,083
                                                        
                                                        
                                                        $
                                                        67,595,774COST
      OF GOODS SOLD
                                                        
                                                        
                                                        164,181,739
                                                        
                                                        
                                                        
                                                        85,773,819
                                                        
                                                        
                                                        
                                                        42,781,669GROSS
      PROFIT
                                                        
                                                        
                                                        57,252,963
                                                        
                                                        
                                                        
                                                        42,448,264
                                                        
                                                        
                                                        
                                                        24,814,105OPERATING
      EXPENSE:Selling
      expenses
                                                        
                                                        
                                                        4,607,459
                                                        
                                                        
                                                        
                                                        1,762,461
                                                        
                                                        
                                                        
                                                        613,119General
      and administrative expenses
                                                        
                                                        
                                                        15,555,267
                                                        
                                                        
                                                        
                                                        10,040,827
                                                        
                                                        
                                                        
                                                        3,815,380Total
      operating expense
                                                        
                                                        
                                                        20,162,726
                                                        
                                                        
                                                        
                                                        11,803,288
                                                        
                                                        
                                                        
                                                        4,428,499INCOME
      FROM OPERATIONS
                                                        
                                                        
                                                        37,090,237
                                                        
                                                        
                                                        
                                                        30,644,976
                                                        
                                                        
                                                        
                                                        20,385,606OTHER
      INCOME (EXPENSE):Interest
      income
                                                        
                                                        
                                                        662,290
                                                        
                                                        
                                                        
                                                        1,822,048
                                                        
                                                        
                                                        
                                                        73,949Interest
      expense
                                                        
                                                        
                                                        (8,833,866
                                                        )
                                                        
                                                        
                                                        (7,544,635
                                                        )
                                                        
                                                        
                                                        (1,072,769
                                                        )Gain
      on derivative instrument
                                                        
                                                        
                                                        163,062
                                                        
                                                        
                                                        
                                                        1,508,693
                                                        
                                                        
                                                        
                                                        -Other
      (expense) income
                                                        
                                                        
                                                        (112,303
                                                        )
                                                        
                                                        
                                                        222,545
                                                        
                                                        
                                                        
                                                        300,185Registration
      rights penalty
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,478,520
                                                        )Total
      other expense, net
                                                        
                                                        
                                                        (8,120,817
                                                        )
                                                        
                                                        
                                                        (3,991,349
                                                        )
                                                        
                                                        
                                                        (2,177,155
                                                        )INCOME
      BEFORE INCOME TAXES
                                                        
                                                        
                                                        28,969,420
                                                        
                                                        
                                                        
                                                        26,653,627
                                                        
                                                        
                                                        
                                                        18,208,451PROVISION
      (BENEFIT) FOR INCOME TAXES
                                                        
                                                        
                                                        494,911
                                                        
                                                        
                                                        
                                                        (2,852,000
                                                        )
                                                        
                                                        
                                                        398,425NET
      INCOME
                                                        
                                                        
                                                        28,474,509
                                                        
                                                        
                                                        
                                                        29,505,627
                                                        
                                                        
                                                        
                                                        17,810,026OTHER
      COMPREHENSIVE INCOME:Unrealized
      loss (gain) on marketable securities
                                                        
                                                        
                                                        22,301
                                                        
                                                        
                                                        
                                                        (22,301
                                                        )
                                                        
                                                        
                                                        -Foreign
      currency translation adjustment
                                                        
                                                        
                                                        12,535,951
                                                        
                                                        
                                                        
                                                        9,853,904
                                                        
                                                        
                                                        
                                                        1,923,828Change
      in fair value of derivative instrument
                                                        
                                                        
                                                        4,138,320
                                                        
                                                        
                                                        
                                                        (8,515,396
                                                        )
                                                        
                                                        
                                                        -COMPREHENSIVE
      INCOME
                                                        
                                                        $
                                                        45,171,081
                                                        
                                                        
                                                        $
                                                        30,821,834
                                                        
                                                        
                                                        $
                                                        19,733,854Earnings
      per share:Basic
                                                        
                                                        $
                                                        1.04
                                                        
                                                        
                                                        $
                                                        1.33
                                                        
                                                        
                                                        $
                                                        0.89Diluted
                                                        
                                                        $
                                                        1.00
                                                        
                                                        
                                                        $
                                                        1.19
                                                        
                                                        
                                                        $
                                                        0.84Weighted
      average number of shares:Basic
                                                        
                                                        
                                                        27,298,891
                                                        
                                                        
                                                        
                                                        22,178,517
                                                        
                                                        
                                                        
                                                        19,933,193Diluted
                                                        
                                                        
                                                        28,271,863
                                                        
                                                        
                                                        
                                                        25,243,788
                                                        
                                                        
                                                        
                                                        21,276,263
 
 See
report of independent registered public accounting firm.
 The
accompany notes are an integral part of this statement.
  F-3
 
 FUSHI
COPPERWELD, INC AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR THE
YEARS ENDED DECEMBER 2008, 2007 AND 2006
  Series
      A
                
                
                Series
      Bconvertible
                
                
                convertible
                
                
                Common
      stockpreferred
      stock
                
                
                preferred
      stock
                
                
                Shares
      outstanding
                
                
                Shares
      In escrow
                
                
                Additional
                
                
                Retained
      earnings
                
                
                AccumulatedNumber
                
                
                Par
                
                
                Number
                
                
                Par
                
                
                Number
                
                
                Par
                
                
                Number
                
                
                Par
                
                
                paid
      in
                
                
                Statutory
                
                
                Unrestricted
                
                
                comprehensiveof
      shares
                
                
                value
                
                
                of
      shares
                
                
                value
                
                
                of
      shares
                
                
                value
                
                
                of
      shares
                
                
                value
                
                
                capital
                
                
                reserves
                
                
                earnings
                
                
                income
      (loss)
                
                
                TotalsBALANCE,
      December 31, 2005
                
                
                784,575
                
                
                $
                785
                
                
                
                216,000
                
                
                $
                216
                
                
                
                78,459
                
                
                $
                471
                
                
                
                -
                
                
                $
                -
                
                
                $
                29,307,285
                
                
                $
                2,428,310
                
                
                $
                12,710,833
                
                
                $
                775,895
                
                
                $
                45,223,795Conversion
      of preferred stock
                
                
                (784,575
                )
                
                
                (785
                )
                
                
                (216,000
                )
                
                
                (216
                )
                
                
                19,818,718
                
                
                
                118,912
                
                
                
                
                
                
                
                
                
                
                
                (195,411
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (77,500
                )Exercise
      of stock warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                148,985
                
                
                
                894
                
                
                
                
                
                
                
                
                
                
                
                253,081
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                253,975Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                17,810,026
                
                
                
                
                
                
                
                17,810,026Adjustment
      to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,024,157
                
                
                
                (2,024,157
                )
                
                
                
                
                
                
                -Foreign
      currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,923,828
                
                
                
                1,923,828BALANCE,
      December 31, 2006
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                20,046,162
                
                
                
                120,277
                
                
                
                -
                
                
                
                -
                
                
                
                29,364,955
                
                
                
                4,452,467
                
                
                
                28,496,702
                
                
                
                2,699,723
                
                
                
                65,134,124Shares
      issued for liquidated penalty
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                255,000
                
                
                
                1,530
                
                
                
                
                
                
                
                
                
                
                
                1,464,720
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,466,250Exercise
      of warrants for cash @ $3.67
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,056,015
                
                
                
                12,336
                
                
                
                
                
                
                
                
                
                
                
                7,533,239
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,545,575Exercise
      of warrants for cash @ $3.11
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                47,877
                
                
                
                287
                
                
                
                
                
                
                
                
                
                
                
                148,609
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                148,896Stock
      compensation expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,938,073
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,938,073Shares
      placed in escrow
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                100,000
                
                
                
                600
                
                
                
                (600
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Shares
      issued for cash @ $14.00
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,786,000
                
                
                
                16,716
                
                
                
                
                
                
                
                
                
                
                
                37,216,190
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                37,232,906Adjustment
      to shares outstanding
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                20,250
                
                
                
                122
                
                
                
                
                
                
                
                
                
                
                
                (122
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                29,505,627
                
                
                
                
                
                
                
                29,505,627Adjustment
      to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,869,259
                
                
                
                (3,869,259
                )
                
                
                
                
                
                
                -Net
      change related to cash flow hedge
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (8,515,396
                )
                
                
                (8,515,396
                )Unrealized
      loss on marketable securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (22,301
                )
                
                
                (22,301
                )Foreign
      currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                9,853,904
                
                
                
                9,853,904BALANCE,
      December 31, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,211,304
                
                
                
                151,268
                
                
                
                100,000
                
                
                
                600
                
                
                
                77,665,064
                
                
                
                8,321,726
                
                
                
                54,133,070
                
                
                
                4,015,930
                
                
                
                144,287,658Note
      payble converted to common stock @ $7.00
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,142,857
                
                
                
                12,857
                
                
                
                
                
                
                
                
                
                
                
                14,987,143
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,000,000Exercise
      of warrants for cash @ $3.11
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                44,873
                
                
                
                270
                
                
                
                
                
                
                
                
                
                
                
                139,124
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                139,394Stock
      compensation expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,868,809
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,868,809Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                28,474,509
                
                
                
                
                
                
                
                28,474,509Adjustment
      to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,994,421
                
                
                
                (3,994,421
                )
                
                
                
                
                
                
                -Net
      change related to cash flow hedge
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,138,320
                
                
                
                4,138,320Foreign
      currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                12,535,951
                
                
                
                12,535,951Recognition
      of loss on marketable securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                22,301
                
                
                
                22,301Allocation
      of APIC due to Kuhn's litigation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,487,250
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,487,250
                )BALANCE,
      December 31, 2008
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                27,399,034
                
                
                $
                164,395
                
                
                
                100,000
                
                
                $
                600
                
                
                $
                91,172,890
                
                
                $
                12,316,147
                
                
                $
                78,613,158
                
                
                $
                20,712,502
                
                
                $
                202,979,692
  See
report of independent registered public accounting firm.
 The
accompany notes are an integral part of this statement.
  F-4
 
 FUSHI
COPPERWELD, INC.  AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
 
 2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                          
                                          $
                                          28,474,509
                                          
                                          
                                          $
                                          29,505,627
                                          
                                          
                                          $
                                          17,810,026Adjustments
      to reconcile net income to cash provided by operating
      activities:Bad
      debt expenses
                                          
                                          
                                          178,467
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Reserve
      for inventory
                                          
                                          
                                          96,893
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Depreciation
                                          
                                          
                                          6,457,629
                                          
                                          
                                          
                                          3,117,837
                                          
                                          
                                          
                                          2,208,924Loss
      in disposal of PP&E
                                          
                                          
                                          28,887
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Amortization
      of intangibles
                                          
                                          
                                          417,681
                                          
                                          
                                          
                                          234,672
                                          
                                          
                                          
                                          223,800Amortization
      of loan commission
                                          
                                          
                                          2,798,205
                                          
                                          
                                          
                                          721,455
                                          
                                          
                                          
                                          -Interest
      penalty
                                          
                                          
                                          710,544
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Amortization
      of stock option compensation
                                          
                                          
                                          1,868,809
                                          
                                          
                                          
                                          1,938,073
                                          
                                          
                                          
                                          -Gain
      on derivative instrument
                                          
                                          
                                          (163,062
                                          )
                                          
                                          
                                          (1,508,693
                                          )
                                          
                                          
                                          -Investment
      loss on marketable securities
                                          
                                          
                                          16,158
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Change
      in operating assets and liabilities:Accounts
      receivable
                                          
                                          
                                          (24,794,459
                                          )
                                          
                                          
                                          (9,151,252
                                          )
                                          
                                          
                                          (616,477
                                          )Inventories
                                          
                                          
                                          5,113,772
                                          
                                          
                                          
                                          4,344,568
                                          
                                          
                                          
                                          478,455Other
      receivables and prepayments
                                          
                                          
                                          (810,192
                                          )
                                          
                                          
                                          200,721
                                          
                                          
                                          
                                          726Notes
      receivables
                                          
                                          
                                          (114,896
                                          )
                                          
                                          
                                          (784,551
                                          )
                                          
                                          
                                          -Advance
      to suppliers
                                          
                                          
                                          (17,408,968
                                          )
                                          
                                          
                                          1,015,842
                                          
                                          
                                          
                                          -Deferred
      tax assets
                                          
                                          
                                          (4,952,027
                                          )
                                          
                                          
                                          (2,852,000
                                          )
                                          
                                          
                                          -Accounts
      payable
                                          
                                          
                                          4,076,919
                                          
                                          
                                          
                                          (2,564,797
                                          )
                                          
                                          
                                          (1,747,265
                                          )Other
      payables and accrued liabilities
                                          
                                          
                                          (1,083,919
                                          )
                                          
                                          
                                          2,667,158
                                          
                                          
                                          
                                          (360,312
                                          )Customer
      deposits
                                          
                                          
                                          509,481
                                          
                                          
                                          
                                          (545,440
                                          )
                                          
                                          
                                          404,906Taxes
      payable
                                          
                                          
                                          (1,788,643
                                          )
                                          
                                          
                                          (186,374
                                          )
                                          
                                          
                                          (5,092,090
                                          )Net
      cash provided by operating activities
                                          
                                          $
                                          (368,212
                                          )
                                          
                                          $
                                          26,152,846
                                          
                                          
                                          $
                                          13,310,693CASH
      FLOWS FROM INVESTING ACTIVITIES:Marketable
      securities
                                          
                                          
                                          2,983,842
                                          
                                          
                                          
                                          (2,977,699
                                          )
                                          
                                          
                                          -Payment
      for swap liability
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (127,380
                                          )
                                          
                                          
                                          -Purchase
      of land use right
                                          
                                          
                                          (1,698,433
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Advance
      for purchase of land use right
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (4,379,166
                                          )
                                          
                                          
                                          -Purchase
      of property and equipment
                                          
                                          
                                          (15,226,592
                                          )
                                          
                                          
                                          (31,115,408
                                          )
                                          
                                          
                                          (8,493,919
                                          )Advances
      for purchase of equipment
                                          
                                          
                                          (3,148,802
                                          )
                                          
                                          
                                          (12,583,219
                                          )
                                          
                                          
                                          (4,465,823
                                          )Net
      cash used in investing activities
                                          
                                          
                                          (17,089,985
                                          )
                                          
                                          
                                          (51,182,872
                                          )
                                          
                                          
                                          (12,959,742
                                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from shareholder
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,450,000Repayments
      to shareholders
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (3,985,698
                                          )
                                          
                                          
                                          -Restricted
      cash in escrow
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,000,000
                                          )
                                          
                                          
                                          -Repayment
      to shareholder
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (532,379
                                          )Due
      to related companies
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,367,897Net
      borrowings on revolver line
                                          
                                          
                                          (2,419,008
                                          )
                                          
                                          
                                          1,025,814
                                          
                                          
                                          
                                          -Proceeds
      from bank loans
                                          
                                          
                                          16,908,000
                                          
                                          
                                          
                                          11,718,630
                                          
                                          
                                          
                                          24,365,120Payments
      on bank loans
                                          
                                          
                                          (17,268,032
                                          )
                                          
                                          
                                          (29,628,641
                                          )
                                          
                                          
                                          (19,714,490
                                          )Proceeds
      from derivative instrument
                                          
                                          
                                          973,556
                                          
                                          
                                          
                                          802,523
                                          
                                          
                                          
                                          -Net
      proceeds from stock issuance in private placement
                                          
                                          
                                          -
                                          
                                          
                                          
                                          37,232,906
                                          
                                          
                                          
                                          -Net
      proceeds from long term notes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          56,400,000
                                          
                                          
                                          
                                          -Proceeds
      from exercise of stock warrants
                                          
                                          
                                          139,124
                                          
                                          
                                          
                                          7,692,068
                                          
                                          
                                          
                                          248,729Fees
      paid for recapitalization
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (77,500
                                          )Net
      cash (used in) provided by financing activities
                                          
                                          
                                          (1,666,360
                                          )
                                          
                                          
                                          80,257,602
                                          
                                          
                                          
                                          12,107,377EFFECT
      OF EXCHANGE RATE ON CASH
                                          
                                          
                                          4,821,569
                                          
                                          
                                          
                                          4,193,631
                                          
                                          
                                          
                                          1,868,337CHANGE
      IN CASH
                                          
                                          
                                          (14,302,988
                                          )
                                          
                                          
                                          59,421,207
                                          
                                          
                                          
                                          14,326,665CASH,
      beginning
                                          
                                          
                                          79,914,758
                                          
                                          
                                          
                                          20,493,551
                                          
                                          
                                          
                                          6,166,886CASH,
      ending
                                          
                                          $
                                          65,611,770
                                          
                                          
                                          $
                                          79,914,758
                                          
                                          
                                          $
                                          20,493,551SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest expense
                                          
                                          $
                                          6,327,084
                                          
                                          
                                          $
                                          4,249,882
                                          
                                          
                                          $
                                          1,352,377Cash
      paid for income taxes
                                          
                                          $
                                          4,509,274
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          2,288,242
 
 See
report of independent registered public accounting firm.
 The
accompany notes are an integral part of this statement.
  F-5
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
1 - Organization
 
 Fushi
Copperweld, Inc (“Fushi”), the holding company of Fushi Holdings, Inc., (“Fushi
Holdings”) incorporated in the state of Delaware, which is a holding company for
Dalian Fushi International Bimetallic Cable Co., Ltd (“Fushi International”),
organized under the laws of the People Republic of China (“PRC”).  In
a series of restructuring transactions which began in 2005 and were completed in
2006 (the “restructuring”), Fushi acquired Fushi Holdings. As a result of the
restructuring transactions, Fushi International acquired substantially all of
the manufacturing assets and business and controls the remaining assets and
financial affairs of Dalian Fushi Bimetallic Manufacturing Co., Ltd (“Dalian
Fushi”). Dalian Fushi is a limited liability company organized under the laws of
the PRC, which is engaged in the manufacturing and sale of bimetallic wire
products.
 
 Fushi
acquired Copperweld Bimetallics Holdings, LLC, a North Carolina limited
liability company and the holder of the partnership interest in Copperweld
Bimetallics, LLC, (“Copperweld”) a limited liability company registered in the
state of Delaware and the parent of Copperweld Bimetallics UK, Ltd., a private
company registered in the United Kingdom and Copperweld International Holdings,
LLC a North Carolina limited liability company.  Copperweld is a
bimetallic sales and manufacturing operation headquartered in Fayetteville,
Tennessee. Copperweld Bimetallics UK, Ltd. (“Copperweld UK”) is a manufacturing,
distribution and customer service facility located in Telford, England.
Copperweld International Holdings, LLC was a non-operating company that held
partnership interests in a company located in Tongling, PRC at December 31,
2007.  Those interests were liquidated in an agreement entered into by
Copperweld and its subsidiaries, affiliates and International Manufacturing
Equipment Sales, Inc. on January 16, 2008. Additionally, Fushi acquired
International Manufacturing Equipment Sales, LLC, a shell company that was, at
the time of purchase, a non-affiliated but commonly owned Limited Liability
Company.
 
 Three of
the companies acquired on October 29, 2007 were dissolved in 2008:
 
 1.
Copperweld Holdings, LLC a North Carolina limited liability company.  This
company had no liabilities and it’s only asset was the ownership of Copperweld
Bimetallics, LLC, which the ownership rights were transferred to Fushi
Copperweld, Inc. on October 29, 2007.
 
 2.
Copperweld Bimetallics International Holdings, LLC a Delaware limited liability
company was established to hold the partnership interest in the Tongling joint
venture which has been dissolved.  This company was a shell company with no
assets or liabilities at the time the joint venture was dissolved.
 
 3.
International Manufacturing Equipment Suppliers, LLC a North Carolina limited
liability company.  This company was not an affiliate of the Copperweld
companies. This company was formed by the prior owner of Copperweld
Bimetallics to facilitate the transfer of equipment to the Tongling joint
venture.  As noted above, the Tongling joint venture has been
dissolved.  This company had no assets or liabilities at the time of the
dissolution.
 
 F-6
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Fushi,
Fushi Holdings, Fushi International, Dalian Fushi, Copperweld and Copperweld UK
are hereinafter referred to as “the Company”.
 
 Note
2 - Summary of Significant Accounting Policies
 
 Principles of
consolidation
 
 The
accompanying consolidated financial statements include the financial statements
of Fushi and it’s wholly owned subsidiaries, Fushi Holdings, Fushi International
(Dalian), Copperweld, Copperweld UK and its 100% variable interest entity Dalian
Fushi. All significant inter-company transactions and balances have been
eliminated in consolidation.
 
 In
accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate
decision making ability.  All VIEs with which the Company is involved
must be evaluated to determine the primary beneficiary of the risks and rewards
of the VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.
 
 The
Company has concluded that Dalian Fushi is a VIE and that the Company is the
primary beneficiary.  Under the requirements of FIN 46R, the Company
consolidated the financial statements of Dalian Fushi.
 
 Use of
estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management 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 revenues and expenses during the reporting period. For
example, the Company estimates the fair value of its derivative instrument.
Actual results could differ from those estimates.
 
 Revenue
recognition
  The
Company's revenue recognition policies are in accordance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as customer
deposits.
 
 Shipping and handling
costs
 
 Shipping
and handling costs related to costs of goods sold are included in selling costs
which totaled $1,979,689,$1,006,769 and $349,257
for the years ended December 31, 2008, 2007 and 2006, respectively.
 
 F-7
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Foreign currency translation
and other comprehensive income
 
 The
reporting currency of the Company is the US dollar. The functional currency of
Fushi Copperweld and its USA subsidiary is the US dollar. The functional
currency of Fushi International (Dalian), Dalian Fushi and Beijing Office is
Renminbi (RMB). The functional currency of Copperweld UK is the British
Pound.
 
 For the
subsidiaries whose functional currencies are other than the US dollar, all
assets and liabilities accounts were translated at the exchange rate on the
balance sheet date; stockholder's equity is translated at the historical rates
and items in the statement of operations items and cash flow statements are
translated at the average rate in each applicable period. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statement of shareholders’ equity. The resulting
translation gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred.
 
 Accumulated
other comprehensive income amounted to $20,712,502, $4,015,930 and $2,699,723 as
of December 31, 2008, 2007 and 2006 respectively. The balance sheet amounts with
the exception of equity at December 31, 2008 were translated at 6.823 RMB and
£0.684 to $1.00. The balance sheet amounts with the exception of equity at
December 31, 2007 were translated at 7.29 RMB and £0.501 to $1.00 USD. The
average translation rates applied to income and cash flow statement amounts for
year ended December 31, 2008 were 6.948 RMB and £0.539 to $1.00
respectively.  The average translation rates applied to income and
cash flow statement amounts for the year ended December 31, 2007 were 7.59 RMB
and £0.49 to $1.00. The average translation rates applied to income statement
accounts for the year ended December 31, 2006 was 7.96 RMB.
  In
accordance with FAS 95, "Statement of Cash Flows," cash flows from the Company's
operations is calculated based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
 
 Cash and concentration of
risk
 
 The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC and with banks in the
United Kingdom (“UK”) and the USA.
 
 Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed deposit insurance limits for the banks
located in the United States and UK. Balances at financial institutions or state
owned banks within the PRC are not covered by insurance. As of December 31,
2008, the Company had deposits in excess of federally insured limits totaling
$65,895,459. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
 
 F-8
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Part of
the Company's operations are carried out in the PRC and UK. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the two
countries, and by the general state of the two countries' economy. The Company's
operations in the two countries are subject to specific considerations and
significant risks not typically associated with companies in the North America.
These include risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Company's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
 
 Additional product sales
information
  The
Company has expanded its geographic sales area from the Chinese domestic market
to the international market. The following chart shows that the PRC market
remains the largest single market for the Company while approximately 29% sales
were spread across international markets during the year of 2008, 8% during the
year of 2007, and 0% during the year of 2006, respectively.
 
 2008
                        
                        
                        2007
                        
                        
                        2006China
                        
                        $
                        156,342,939
                        
                        
                        $
                        117,737,442
                        
                        
                        $
                        67,595,774USA
                        
                        
                        45,754,350
                        
                        
                        
                        9,327,218
                        
                        
                        
                        -Europe
                        
                        
                        8,375,872
                        
                        
                        
                        1,157,423
                        
                        
                        
                        -Other
      countries
                        
                        
                        10,961,541
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      sales
                        
                        $
                        221,434,702
                        
                        
                        $
                        128,222,083
                        
                        
                        $
                        67,595,774
 
 Major customers and
suppliers
 
 Ten major
customers accounted for 30% and 37.75% of the sales for the years ended December
31, 2008 and 2007, respectively. (Copperweld’s sales for the full year of 2007
are included for comparison purpose.) Six customers accounted for 34% of the
Company’s total sales for the year ended December 31, 2006. Total receivable
balance due from the top ten customers at December 31, 2008 and 2007 amounted to
$11,838,214 and $15,029,038, respectively.
 
 Five
major suppliers provided approximately 65% of the Company’s raw materials for
the years ended December 31, 2008 and eight major suppliers provided
approximately 79% for the year ended December 31, 2007. (Copperweld’s purchases
for the full year of 2007 are included for comparison purpose). Four suppliers
provided approximately 85% of the Company’s raw materials for the year ended
December 31, 2006. At December 31, 2008, our advances to the major five
suppliers were $20,111,644, all of which was current. At December 31, 2007, our
advances to the major eight suppliers were $1.6 million, all of which was
current.
 
 Accounts receivables and
allowance for doubtful accounts
 
 Management
regularly reviews aging of receivables and changes in payment trends by its
customers, and records a reserve when they believe collection of amounts due are
at risk. Accounts considered uncollectible are written off. As of December 31,
2008 and 2007, management concluded its allowance for bad debts was
sufficient.
 
 F-9
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Inventories
  Inventories
are stated at the lower of cost or market using a weighted average method.
Inventories consist of raw materials, work in process, finished goods and
packing materials. Raw materials consist of copper, aluminum and steel used in
production. The cost of finished goods included direct costs of raw materials as
well as direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling for raw material costs are also included in the cost of
inventory.
 
 The
Company reviews its inventory regularly for possible obsolete goods and net
realizable and establishes reserves or written off when necessary.
 
 Derivative
Instrument
 
 The
Company uses a cross currency hedge, a derivative financial instrument, to hedge
the risk of rising interest rates on its variable interest rate debt. This type
of derivative financial instrument is known as a cash flow hedge. The Company
accounts for this interest rate swap in accordance with FAS No. 133, “Accounting
for Derivatives Instruments and Hedging Activity,” which requires the derivative
to be carried on the balance sheet at fair value and to meet certain documentary
and analytical requirements to qualify for hedge accounting treatment. The above
derivative qualifies for hedge accounting under FAS 133 and, accordingly,
changes in the fair value effective portion is reported in accumulated other
comprehensive income, net of related income tax effects. Amounts included in
accumulated other comprehensive income are reclassified into earnings when the
hedged transaction affects earnings.
 
 At the
inception of the transaction, the Company documented the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking various hedge transactions. This process
includes linking all derivatives designated to specific firm commitments of
forecast transactions. The Company also documents its assessment, both at
inception and on an ongoing basis, of whether the derivative financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. Any portion
deemed ineffective is recorded in earnings with the effective portion reflected
in accumulated other comprehensive. Changes in the fair values of derivative
financial instruments accounted for as cash flow hedges, to the extent they
qualify for hedge accounting, are recorded in accumulated other comprehensive
income.
 
 Financial
instruments
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under FAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” FAS 133 and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” The convertible note issued in 2007 did not
require bifurcation or result in liability accounting. Additionally, the Company
analyzes registration rights agreements associated with any equity instruments
issued to determine if penalties triggered for late filing should be accrued
under FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements.”
 
 F-10
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 On
January 1, 2008, the Company adopted FAS 157, “Fair Value Measurements,” which
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
current assets and current liabilities qualify as financial instruments are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and their
current market rate of interest.  The three levels are defined as
follow:
 
 ·
                Level
      1   inputs to the valuation methodology are quoted prices
      (unadjusted) for identical assets or liabilities in active
      markets.
 ·
                Level
      2   inputs to the valuation methodology include quoted
      prices for similar assets and liabilities in active markets, and inputs
      that are observable for the assets or liability, either directly or
      indirectly, for substantially the full term of the financial
      instruments.
 ·
                Level
      3   inputs to the valuation methodology are unobservable
      and significant to the fair value.
 
 Other
than the derivative instrument, the Company did not identify any assets and
liabilities that are required to be presented on the balance sheet at fair value
in accordance with FAS 157.
 
 During
2007, the Company issued 3% secured convertible debentures in a face amount of
$20,000,000 which are due in 2012 from issuance of common stock.  The
notes qualify as conventional convertible debt and thus the embedded conversion
feature was not separated from the host instrument. Also during 2007, the
Company borrowed $40,000,000 in the form of a debenture note with floating
rate.
 
 As of
December 31, 2008, the outstanding principal amounted to
$45,000,000.  The Company used Level 3 inputs for its valuation
methodology for the notes payable, and their fair values are determined using
cash flows discounted at relevant market interest rates in effect at the period
close since there is no observable market price.
 
 As of
December 31, 2008, the Company had a $4.4 million derivative
instrument.  Management obtains the fair value of the derivative
instrument from a financial institution using Level 3 inputs since there is no
observable market price.
  Carrying Value
                          December 31,
                          2008
                        
                        
                        Fair Value Measurements
                          December 31, 2008
                          Using Fair Value HierarchyLevel
      1
                        
                        
                        
                        Level 2
                        
                        
                        
                        Level 3Notes
      payable
                        
                        $
                        45,000,000
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        40,883,269Derivative
      Instrument
                        
                        $
                        4,377,076
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        4,377,076
 
 F-11
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Stock-Based
Compensation
 
 The
Company records and reports stock-based compensation under FAS 123R,
“Share-Based Payments”. This Statement requires a public entity to measure the
cost of services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over the
period during which services are received. Stock compensation for stock granted
to non-employees is determined in accordance with FAS 123R and the EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services", as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.
 
 Plant and equipment,
net
  Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When the asset property and equipment is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives as
follows:
 
 Estimated UsefulLifeBuildings
                    
                    20-39.5
      yearsMachinery
      and equipment
                    
                    7-15
      yearsOther
      equipment
                    
                    3-5
      yearsTransportation
      equipment
                    
                    3-5
      years
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and are placed into service. The Company added production equipment
during 2008 and the interest capitalized for the years ended December 31, 2008
and 2007 amounted to $160,166 and $285,689, respectively.
 
 The
Company evaluates the carrying value of long-lived assets in accordance with FAS
144 each reporting period. When estimated cash flows generated by those assets
are less than the carrying amounts of the asset, the Company recognizes an
impairment loss. Based on its review, the Company believes that, as of December
31, 2008, there were no impairments of its long-lived assets.
 
 Intangible
assets
 
 Land use
rights – land in the People’s Republic of China is government owned. However,
the government grants “land use rights”. The Company amortizes land use rights
on a straight line basis over the 50 year life.
 
 Patents –
Patents are stated at cost, less accumulated amortization. The Company amortizes
patents on a straight line basis over 7-15 years.
 
 F-12
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 The
Company evaluates intangible assets for impairment, at least annually and more
often whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets, and goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. Based on its review, the
Company believes that, as of December 31, 2008, there was no impairment of
intangible assets.
 
 Research and
development
 
 Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as facilities,
utilities and other departmental expenses. The costs we incur with respect to
internally developed technology and engineering services are included in
research and development expenses as incurred as they do not directly relate to
any particular licensee, license agreement or licenses fee.
 
 Research
and development costs are recorded in general and administrative expenses.
Research and development costs were $403,488, $154,127 and $195,058 for the
years ended December 31, 2008, 2007 and 2006, respectively.
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the provisions of FAS 128,
"Earnings Per Share." FAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method.
 
 Income
taxes
 
 The
Company records and reports income taxes pursuant to FAS 109, “Accounting for
Income Taxes”. Provision for income taxes consist of taxes currently due plus
deferred taxes. FAS 109 requires the recognition of deferred income tax
liabilities and assets for the estimated future tax effects attributable to
temporary differences and operating loss and tax credit carryforwards. Deferred
tax liability or asset attributable to temporary differences is accounted for
using the balance sheet liability method in respect of temporary differences
between income tax basis and financial reporting basis of assets and
liabilities. Deferred tax expense or benefit is the change during the year in
deferred tax liabilities and assets.  Deferred taxes are determined
separately for each tax-paying component (an individual entity or group of
entities that is consolidated for tax purposes) in each tax jurisdiction.
Deferred tax liability or asset is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and
liabilities on a net basis. Deferred tax assets is reduced by a valuation
allowanceif, based
on the weight of available evidence, it is more likely than not (a likelihood of
more than 50 percent) that some portion or all of the deferred tax assets will
not be realized.
 
 F-13
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 The
Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes”, on January
1, 2007. Under FIN 48, the evaluation of a tax position is a two-step process.
The first step is to determine whether it is more-likely-than-not that a tax
position will be sustained upon examination, including the resolution of any
related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the more-likely-than-not
threshold to determine the amount of benefit to be recognized in the financial
statements. A tax position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition. The adoption had no
affect on the Company’s financial statements.
 
 Value Added
Tax
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are produced and sold in the PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross sales price.
All of the Company’s products that are manufactured and sold in the UK are
subject to a UK value-added tax at a rate of 15% of the gross sales price. This
VAT may be offset by VAT paid by the Company on raw materials and other
materials included in the cost of producing their finished product. The Company
recorded VAT Payable and VAT receivable net of payments in the financial
statements. The VAT tax return is filed offsetting the payables against the
receivables.
 
 Recently issued accounting
pronouncements
 
 In
February 2007, the FASB issued FAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115. FAS 159 permits companies to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value. The objective of FAS 159 is to provide opportunities to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge accounting provisions. FAS
159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The Company adopted FAS
159 on January 1, 2008.  The Company chose not to elect the option to
measure the fair value of eligible financial assets and
liabilities.
 
 F-14
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 In
December 2007, the FASB issued FAS 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51”, which establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. FAS 160 is effective for
fiscal years beginning after December 15, 2008. The Company has not determined
the effect that the application of FAS 160 will have on its consolidated
financial statements.
 
 In
December 2007, FAS 141(R), “Business Combinations”, was issued. FAS 141R
replaces FAS 141.SFAS
141R retains the fundamental requirements in FAS 141 that the acquisition method
of accounting, which FAS 141 called the purchase method, be used for all
business combinations and for an acquirer to be identified for each business
combination. FAS 141R requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This replaces FAS 141’s cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. FAS 141R also requires
the acquirer in a business combination achieved in stages, sometimes referred to
as a step acquisition, to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values, or other amounts determined in accordance with FAS 141R. FAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. An entity may not apply it before that date. The
Company is currently evaluating the impact that adopting FAS 141R will have on
its financial statements.
  In May
2008, the FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.” This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). This Statement has no impact on the Company’s
financial statements.
  In June
2008, the FASB issued EITF 07-5 “Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity’s Own Stock”. This Issue is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of FAS 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF 07-5 provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuer’s
own stock and thus able to qualify for the FAS 133 paragraph 11(a) scope
exception.The Company
believes adopting this statement will have a material impact on the financial
statements because among other things, any option or warrant previously issued
and all new issuances denominated in US dollars will be required to be carried
as a liability and marked to market each reporting period.
 
 F-15
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.”  The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. Management is currently
evaluating the impact of adoption of EITF 08-4 on the accounting for the
convertible notes and related warrants transactions, no impact on the Company’s
financial statements
 
 On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of FAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results of operation for the
year ended December 31, 2008.
 
 In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008, and its adoption did not
have a material impact on our financial position or results of operation for the
year ended December 31, 2008.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of FAS 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements because all of our investments in debt
securities are classified as trading securities.
 
 F-16
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
3 - Accounts receivable
 
 Accounts
receivable consisted of the following:
 
 2008
                      
                      
                      2007Trade
      accounts receivable
                      
                      $
                      50,101,077
                      
                      
                      $
                      23,746,604Allowance
      for bad debts
                      
                      
                      (318,529
                      )
                      
                      
                      (135,418
                      )Trade
      accounts receivable, net
                      
                      $
                      49,782,548
                      
                      
                      $
                      23,611,186
 
 The
following table consists of allowance for doubtful accounts.
 Allowance
      for doubtful accounts at January 1, 2006
                      
                      $
                      -Additional
      reserves
                      
                      
                      -Accounts
      receivable write off
                      
                      
                      -Allowance
      for doubtful accounts at December 31, 2006
                      
                      
                      -Additional
      reserves
                      
                      
                      -Accounts
      receivable write off
                      
                      
                      -Carried
      over from reorganization
                      
                      
                      135,418Allowance
      for doubtful accounts at December 31, 2007
                      
                      
                      135,418Additional
      reserves
                      
                      
                      178,467Accounts
      receivable write off
                      
                      
                      (1,093
                      )Effect
      of foreign currency translation
                      
                      
                      5,737Allowance
      for doubtful accounts at December 31, 2008
                      
                      $
                      318,529
 
 Note
4 - Inventories
 
 Inventories
consisted of the following:
 
 2008
                            
                            
                            2007Raw
      materials
                            
                            $
                            3,929,585
                            
                            
                            $
                            5,991,315Work
      in process
                            
                            
                            1,337,703
                            
                            
                            
                            2,260,015Finished
      goods
                            
                            
                            1,832,511
                            
                            
                            
                            4,120,559Scrap
                            
                            
                            38,540
                            
                            
                            
                            -Totals
                            
                            
                            7,138,339
                            
                            
                            
                            12,371,889Less
      allowance for obsolete inventory
                            
                            
                            (160,487
                            )
                            
                            
                            (63,594
                            )Totals
                            
                            $
                            6,977,852
                            
                            
                            $
                            12,308,295
 
 The
following table consists of allowance for obsolete inventory.
 
 Allowance
      for obsolete inventory at January 1, 2006
                        
                        $
                        -Additional
      reserves
                        
                        
                        -Reserves
      write off
                        
                        
                        -Allowance
      for obsolete inventory at December 31, 2006
                        
                        
                        -Additional
      reserves
                        
                        
                        63,594Reserves
      write off
                        
                        
                        -Allowance
      for obsolete inventory at December 31, 2007
                        
                        
                        63,594Additional
      reserves
                        
                        
                        82,183Reserves
      write off
                        
                        
                        -Effect
      of foreign currency translation
                        
                        
                        14,710Allowance
      for obsolete inventory at December 31, 2008
                        
                        $
                        160,487
 
 F-17
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 For the
years ended December 31, 2008, 2007 and 2006, total inventory write off due to
the net realization of raw material cost amounted to $205,852, $0 and
$0.
 
 Note
5 - Plant and equipment
 
 Plant and
equipment consisted of the following:
 
 2008
                                
                                
                                2007Land
                                
                                $
                                100,726
                                
                                
                                $
                                100,726Buildings
      and improvements
                                
                                
                                43,418,544
                                
                                
                                
                                32,846,156Transportation
      equipment
                                
                                
                                4,138,892
                                
                                
                                
                                3,193,995Machinery
      and equipment
                                
                                
                                55,147,707
                                
                                
                                
                                24,111,971Office
      furniture
                                
                                
                                1,166,477
                                
                                
                                
                                833,474Construction
      in progress
                                
                                
                                33,163,330
                                
                                
                                
                                36,880,809Totals
                                
                                
                                137,135,676
                                
                                
                                
                                97,967,131Less
      accumulated depreciation
                                
                                
                                (17,374,649
                                )
                                
                                
                                (10,738,531
                                )Totals
                                
                                $
                                119,761,027
                                
                                
                                $
                                87,228,600
 
 Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 amounted to
$6,457,629, $3,117,837 and $2,208,924, respectively.
 
 Capitalized
interest for construction projects for the years ended December 31, 2008, 2007
and 2006, amounted to $160,166, $285,689 and $282,641,
respectively.
 
 Note
6 – Advances to suppliers
 
 Advances
on purchases are monies deposited or advanced to outside vendors for future
inventory and equipment purchases. Most of Company’s vendors require a certain
amount of money to be deposited with them as a guarantee that the Company will
receive their purchase on a timely basis.
 
 Advances
to suppliers consisted of the following:
 
 2008
                    
                    
                    2007Advances
      for inventories – current
                    
                    $
                    20,261,585
                    
                    
                    $
                    2,341,839Advances
      for equipment – non current
                    
                    
                    4,022,879
                    
                    
                    
                    18,204,775Total
      advances to suppliers
                    
                    $
                    24,284,464
                    
                    
                    $
                    20,546,614
 
 F-18
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
7 – Intangible assets
 
 Intangible
assets consist of land use rights and patents. In June 2008, the Company
obtained additional land use rights that had were prepaid in previous periods
and reclassified it to intangible assets-land use rights where it began to be
amortized.  Intangible assets consisted of the following:
 
 2008
                      
                      
                      2007Patents
                      
                      $
                      1,755,025
                      
                      
                      $
                      1,652,938Land
      use rights
                      
                      
                      12,478,090
                      
                      
                      
                      5,492,089Total:
                      
                      
                      14,233,115
                      
                      
                      
                      7,145,027Less:
      accumulated amortization
                      
                      
                      (1,826,195
                      )
                      
                      
                      (1,312,306
                      )Intangible
      assets, net
                      
                      $
                      12,406,920
                      
                      
                      $
                      5,832,721
 
 Amortization
expense for the years ended December 31, 2008, 2007 and 2006 amounted to
$417,681, $234,672 and $223,800.
 
 Estimated
annual amortization expense is as the following, for the year
ended:
 
 December
      31,2009
                      
                      $
                      469,9942010
                      
                      
                      469,9942011
                      
                      
                      469,9942012
                      
                      
                      451,3802013
                      
                      
                      327,444
 
 Note
8 - Prepaid taxes, Taxes Payable and Deferred Tax Asset
 
 Prepaid
taxes and taxes payable consisted of the following:
 
 2008
                          
                          
                          2007Income
      Tax
                          
                          $
                          997,581
                          
                          
                          $
                          -VAT
      Benefit or Payable
                          
                          
                          (1,779,973
                          )
                          
                          
                          856,482Others
                          
                          
                          111,587
                          
                          
                          
                          148,777Total
      (prepaid taxes) tax payable
                          
                          $
                          (670,805
                          )
                          
                          $
                          1,005,259
 
 Income
Tax
 
 Under the
former Income Tax Laws of PRC, the Company is generally subject to an income tax
at an effective rate of 33% (30% state income taxes plus 3% local income taxes)
on income reported in the statutory financial statements after appropriate tax
adjustments. For an enterprise that qualifies as a new or high-technology
enterprise or a Foreign Invested Enterprise (“FIE”) located in the old town of
an inshore open city, it is subject to an income tax rate of 24%. In addition,
if the enterprise is located in a specially designated region that allows
foreign enterprises the enterprise is entitled to a two-year income tax
exemption and a 50% income tax reduction for the following three
years.
 
 F-19
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Beginning
January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the
former income tax laws for Domestic Enterprises (“DEs”) and FIEs. The new
standard EIT rate of 25% replaced the 33% rate previously applicable to both DEs
and FIEs. The two years tax exemption, three years 50% tax reduction tax holiday
for production-oriented FIEs was eliminated. However, the new EIT Law permits
companies to continue to enjoy their former preferential tax treatments until
such treatments expire in accordance with their current terms.
 
 The
Company’s wholly owned subsidiary, Fushi International (Dalian), is a foreign
limited liability company and is located in the old town of an inshore open
city. Under the former Income Tax Laws of PRC, the Company qualified to use 24%
income tax rate and has a full income tax exemption for the years ended December
2006 and 2007 and a 50% income tax reduction for the years ending December 31,
2008, 2009 and 2010. Under the new EIT law effected in 2008, the company
continues to enjoy the former preferential tax rate until it expires in December
2010. So, the applicable corporate income tax rate in 2008 is 12%. The provision
for income tax for the years ended December 31, 2008 and 2007 was $5,446,938 and
$0, respectively.
 
 Dalian
Fushi was incorporated in the PRC and is subject to PRC income tax. Dalian Fushi
located its factory in a special economic region in Dalian, PRC and qualified as
a "new or high-technology enterprise" that is allowed a two year income tax
exemption beginning in 2002, the first year after it became profitable, and a
50% income tax reduction for the following three years, 2004 through 2006.
Dalian Fushi had a loss from operations in year 2008, so no provision for income
taxes was made during this period.
 
 The
Company is subject to the United States federal income tax at a tax rate of 34%.
No provision for income taxes in the U.S. has been made as the Company had no
U.S. taxable income for the years ended December 31, 2008, 2007,
2006.
 
 Fushi,
Fushi Holdings, Copperweld Bimetallics Holdings, LLC and Copperweld Bimetallics,
LLC were incorporated in the United States and have incurred net operating
losses for income tax purposes since inception. The net operating loss carry
forwards for United States income taxes may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized, through 2025
and 2028.
 
 Copperweld
UK is organized as a United Kingdom private company and subject to 20% to 28%
statutory taxes on its taxable income. The provision for income tax for the
years ended December 31, 2008, 2007 and 2006 was $0, $0 and $0,
respectively.
 
 The
Provision for income taxes consisted of the following:
 
 2008
                      
                      
                      2007
                      
                      
                      2006Provision
      for China income taxes
                      
                      $
                      5,446,938
                      
                      
                      $
                      -
                      
                      
                      $
                      362,205Provision
      for China local taxes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      36,220Benefit
      for US income taxes
                      
                      
                      (4,952,027
                      )
                      
                      
                      (2,852,000
                      )
                      
                      
                      -Provision
      for income taxes
                      
                      $
                      494,911
                      
                      
                      $
                      (2,852,000
                      )
                      
                      $
                      398,425
  F-20
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2008, 2007 and 2006:
 
 2008
                        
                        
                        2007
                        
                        
                        2006U.S.
      Statutory rates on foreign income
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %NOL
      and foreign income not recognized in U.S.
                        
                        
                        (34.0
                        )
                        
                        
                        (34.0
                        )
                        
                        
                        (34.0
                        )China
      income taxes
                        
                        
                        25.0
                        
                        
                        
                        33.0
                        
                        
                        
                        33.0China
      income tax exemption
                        
                        
                        (13.0
                        )
                        
                        
                        (33.0
                        )
                        
                        
                        (31.0
                        )Total
      provision for income taxes
                        
                        
                        12.0
                        %
                        
                        
                        -
                        %
                        
                        
                        2.0
                        %
 
 The
estimated tax savings from the tax exemptions for the year ended December 31,
2008, amounted to $5,900,849. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $1.04 to
$0.82 and diluted earning per share from $1.00 to $0.79.
 
 The
estimated tax savings from the tax exemptions for the year ended December 31,
2007, amounted to $12,815,700. The net effect on earnings per share had the
income tax been applied would decrease basic earnings per share from $1.33 to
$0.75 and diluted earning per share from $1.19 to $0.66.
 
 The
estimated tax savings for the year ended December 31, 2006 amounted to
$6,281,290. The net effect on earnings per share had the income tax been applied
would decrease basic earnings per share from $0.89 to $0.58 and diluted earning
per share from $0.84 to $0.54.
 
 Deferred Tax
Asset
 
 Fushi was
incorporated in the United States and have incurred net operating losses for
income tax purposes since inception. The net operating loss carry forwards for
United States income taxes may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, through 2025 and
2028. Management believes that the realization of the benefits can be used by
our US operating subsidiary in future periods because expectations are that
Copperweld will have taxable income in future periods. Based on its review, the
Company believes that, as of December 31, 2008, there was no valuation allowance
for deferred tax assets.
 
 The
deferred tax asset consisted of the following:
  Deferred
      tax asset at December 31,2006
                        
                        $
                        -Additions
      to deferred tax asset
                        
                        
                        2,852,000Deferred
      tax asset at December 31,2007
                        
                        
                        2,852,000Additions
      to deferred tax asset
                        
                        
                        4,952,027Deferred
      tax asset at December 31,2008
                        
                        $
                        7,804,027
 
 F-21
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Value Added
Tax
 
 VAT on
sales and VAT on purchases in Dalian China amounted to $27,272,714 and
$19,151,207 for the year ended December 31, 2008, $20,030,111 and $12,303,624
for the year ended December 31, 2007, and $60,346,802 and $7,161,857 for the
year ended December 31, 2006,  respectively.
 
 VAT on
sales and VAT on purchases in Copperweld UK amounted to $210,487 and $447,746
for the year ended December 31, 2008 and $96,167 and $89,099 for the period from
October 29, 2007 to December 31, 2007, respectively.
 
 Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Note
9 - Short term bank loans and revolving credit lines
 
 Short
term bank loans represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks.
Short term bank loans consisted of the following:
 
 Name
      of lender
                              
                              2008
                              
                              
                              2007Bank
      of China, Xinghaiwan Branch, due March 28, 2008, annual interest at 7.227%
      secured by theCompany’s land use
      right and building.
                              
                              $
                              -
                              
                              
                              $
                              2,687,160Bank
      of China, Xinghaiwan Branch, due February 15, 2008, and was renewed to May
      15, 2008 annual interest at 7.029%, secured by the Company’s landuse
      right and building.
                              
                              
                              -
                              
                              
                              
                              3,016,200Guangdong
      Development bank, Dalian Stadium branch, due February 25, 2009, annual
      interest at 8.96%,secured by the Company’s land use rightand
      building.
                              
                              
                              8,794,200
                              
                              
                              
                              -Guangdong
      Development bank, Dalian Stadium branch, due March 9, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                              
                              
                              2,931,400
                              
                              
                              
                              -Guangdong
      Development bank, Dalian Stadium branch, due March 19, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                              
                              
                              1,465,700
                              
                              
                              
                              -Guangdong
      Development bank, Dalian Stadium branch, due March 26, 2009, annual
      interest at 8.96%, secured by the Company’s land use right and
      building
                              
                              
                              4,397,100
                              
                              
                              
                              -Total
      Short Term Bank Loan
                              
                              
                              17,588,400
                              
                              
                              
                              5,703,360Wells
      Fargo Bank revolving credit line, annual interest at 0.5% plus chase bank
      rate, the line of credit expires in 2010, secured by all present and
      future account receivables, equipment, inventory and other goods,
      documents of title, general intangibles, investment property, and real
      estate of Copperweld.
                              
                              
                              4,712,075
                              
                              
                              
                              7,168,524Total
                              
                              $
                              22,300,475
                              
                              
                              $
                              12,871,884
 
 F-22
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 The
Company paid off its two short term loans with total outstanding balances of
$5,703,360, in the first quarter of 2008 and obtained four new short term loans
with total balances of $17,588,400 at December 31, 2008 at annual interest rate
of 8.96% which are due in February and March 2009.
 
 Copperweld
maintains a revolving line of credit with Wells Fargo Bank. Availability of the
credit line is the lower of $12.8 million or the collateral balances. The
outstanding balance was $4,712,075 at December 31, 2008. The Company deposits
the cash collections from its customers against the outstanding account balance
of the line of credit on a daily basis. Copperweld UK maintains a revolving line
of credit with a limit of approximately $1,096,000 (or ₤750,000) but had no
balance outstanding at December 31, 2008.  Both lines of credit expire
in 2010.
 
 Current
portion of long term debt as of December 31, 2007, which represents the loan
that was originated May 2003 and due on April 10, 2008 at an annual rate of
5.58%, secured by the Company’s land use right and building, were all paid off
on April 29, 2008. $5,000,000 guaranteed senior secured floating rate notes will
mature on July 24, 2009 and is reclassified to current portion of notes payable
in the accompanying consolidated balance sheet as of December 31,
2008.
 
 Name
      of Lender
                                  
                                  2008
                                  
                                  
                                  2007ICBC,
      Dalian JinZhou BranchDue
      April 10, 2008, annual interest at 5.58%,secured
      by the Company’s land use right and building
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  5,484,000ICBC,
      Dalian JinZhou BranchDue
      April 10, 2008, annual interest at 5.58%,secured
      by the Company’s land use right and building
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,484,000Guaranteed
      senior secured floating rate notes (“HY Notes”) maturing on January 24,
      2012
                                  
                                  
                                  5,000,000
                                  
                                  
                                  
                                  -Total
      current portion of long term debts
                                  
                                  $
                                  5,000,000
                                  
                                  
                                  $
                                  10,968,000
 
 Total
interest expense on the revolving credit line, short term and long term loans
for the years ended December 31, 2008, 2007 and 2006 amounted to $2,014,149,
$1,424,824 and $1,352,377, of which $160,166, $285,689 and $282,641,
respectively was capitalized for construction projects.
 
 F-23
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
10 – Notes payable
 
 Notes
payable consisted of the following:
 
 December 31,
                                2008
                              
                              
                              December 31,
                                2007Senior
      secured convertible notes (“Convertible Notes”), bearing interest at 3%
      per annum, maturing on January 24, 2012, convertible to common stock at an
      initial conversion price of $7.00 per share
                              
                              $
                              5,000,000
                              
                              
                              $
                              20,000,000Guaranteed
      senior secured floating rate notes (“HY Notes”) maturing between July 24,
      2009 to January 24, 2012
                              
                              
                              35,000,000
                              
                              
                              
                              40,000,000Total
      notes payable
                              
                              $
                              40,000,000
                              
                              
                              $
                              60,000,000
 
 Current portion of long term
debts
 
 $5,000,000
HY notes will mature on July 24, 2009 and is reclassified to current portion of
notes payable on the Balance Sheet as of December 31, 2008.
  3%
senior secured convertible notes and senior secured floating rate
notes
  On
January 24, 2007, the Company and Citadel Equity Fund Ltd. ("Citadel") entered a
Notes Purchase Agreement.  In this transaction, Citadel
purchased:
 
 (i)          $40
million principal amount (less 3% Notes Discount and 4% commission for proceeds
of $37,200,000) of guaranteed senior secured floating rate notes (“HY Notes”)
due between July 2009 to January 2012 and
 
 (ii)         $20
million principal amount (less 4% commission for proceeds of $19,200,000) of the
Company’s 3% senior secured convertible notes (“Convertible Notes”) due 2012,
which are convertible into shares of the Company's common stock at an initial
conversion price of $7.00 per share.
 
 The HY
notes bear interest at LIBOR (approximately 1.75% at December 31, 2008) + 7% and
changes to LIBOR + 5.6% permanently upon successful completion of Qualifying IPO
within eighteen months from January 24, 2007.  See below for
discussion of swap agreement changing variable interest to 8.3% fixed.The
Convertible Notes bear interest at a fixed rate of 3.00%, payable semi-annually
in arrears, and mature in 2012.  The HY Notes and the Convertible
Notes are guaranteed, jointly and severally, on a senior secured basis, by all
of the Company’s wholly-owned existing and future domestic
subsidiaries.   Subsequently on November 15, 2007, the Company
filed Form S-3 with the Securities and Exchange Commission (SEC) with a proposed
prospectus to register up to 5,743,143 shares including 2,857,143 shares
underlying the 3% Senior Convertible Notes. On November 21, 2007, the
registration statement was declared effective by SEC.  Upon the S-3
registration statement being declared effective, Management concluded that the
Company had met all the requirements for a Qualifying IPO and therefore notified
the HY Notes holders of the 140 basis points step-down and subsequently paid
interest per the stepped down rate in January 2008.
 
 F-24
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Management
determined that the conversion option in Convertible Notes does not qualify as
an embedded derivative under FAS 133 nor does it qualify for fair value
treatment under EITF 00-19 or beneficial conversion treatment under EITF 98-5
and 00-27.
 
 In
connection with the transaction, Citadel was also granted certain rights over
the Company and its subsidiaries.  On January 25, 2007, Fushi, Fushi
Holdings, Fushi International (Dalian), Dalian Fushi, the “Group Companies”, Li
Fu, our Chairman and Chief Executive Officer, Mathus Yue Yang, our then
President, Chris Wenbing Wang, our current President and Chief Financial Officer
and Citadel entered into an Investor Rights Agreement. Subsequently on June 4,
2008, the Group Companies, Li Fu, Chris Wenbing Wang and Citadel entered in an
Amended and Restated Investor Rights Agreement.  Pursuant to the
Investor Rights Agreement and the Amended and Restated Investor Rights
Agreement, Citadel was granted, among other things and subject to certain
conditions, the right to designate up to certain number of the Company's board
of directors, a right of first refusal with respect to any debt or equity
financing sought by the Company and the right to approve the Company's annual
business plan and budget. In addition, Messrs. Fu, Yang and Wang agreed to a
non-competition covenant relating to their employment and ability to engage in a
business that is competitive with the Company's business for five
years.
 
 The HY
Notes and the Convertible Notes were issued pursuant to indentures, each dated
January 25, 2007 (the “HY Indenture” and “CB Indenture”, respectively, and
together, the "Indentures") among the Company, Fushi Holdings, as guarantor, and
the Bank of New York, as trustee for the Notes.  The indenture, notes
purchase agreement and investor rights agreement related to the HY Notes and
Convertible Notes contain various covenants that may limit the Company’s
discretion in operating its business. In particular, the Company is limited in
its ability to merge, consolidate or transfer substantially all of its assets,
issue stock of its subsidiaries, incur additional debt and create liens on
assets to secure debt. In addition, the Company is required to comply with
certain financial covenants, including maintenance of a fixed charge coverage
ratio of at least 2.0 and maintenance of a leverage ratio not exceeding 5.5.
Management believes the Company was in compliance with all of these covenants as
of December 31, 2008. In addition, upon occurrence of events defined as “Asset
Sale”, “Change of Control” or “Designated Event (means any Fundamental Change or
Termination of Trading)” under the Indentures, holders of the HY Notes and
Convertible Notes may require the Company to make an offer to repurchase the
principal amounts.
 
 The
Company also agrees that on the dates indicated in the following table, the
Company will prepay the corresponding principal amount (or such lesser principal
amount as shall then be outstanding) in respect of the aggregate principal
amounts.
  Date
                      
                      Principal AmountJuly
      24, 2009
                      
                      $
                      5,000,000January
      24, 2010
                      
                      $
                      5,000,000July
      24, 2010
                      
                      $
                      5,000,000January
      24, 2011
                      
                      $
                      5,000,000July
      24, 2011
                      
                      $
                      10,000,000
 
 F-25
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 The
entire remaining principal amount of the Notes shall become due and payable on
January 24, 2012.
 
 Unless
previously redeemed, converted, purchased or cancelled, the Company must repay
the Convertible Notes on January 24, 2012. The Convertible Notes may not be
prepaid at any time prior to maturity. At maturity, the Company must repay all
of the outstanding Convertible Notes plus a premium of 15.00% per annum on the
principal amount calculated on a semi-annual basis, plus accrued and unpaid
interest on late payment, if any, to reflect a additional 5% per annum interest
in excess of the rate of interest then in effect.
 
 The
Convertible Notes are convertible at the option of the holder into the Company’s
common stock at an initial conversion price of $7 per share (approximating
14,286 shares per $100,000 principal amount of the Convertible Notes), subject
to downward adjustment of conversion price on March 1 and September 1 of each
year, beginning with March 1, 2008, to equal the simple arithmetic average of
VWAP for the fifteen trading days preceding such March 1 or September1, with a
floor of $4.5.  In addition, adjustment of conversion price will be
made if and at each time, upon completion of the quarter review (for each Fiscal
Quarter ended March 31, June 30 and September 30) or annual audit (for each
Fiscal Quarter ended December 31) of the Company’s financial statements an event
defined as Financial and
Operational Trigger under the CB indenture shall have occurred in the
immediately preceding Fiscal Quarter, then within five (5) Business Days
following issuance of the review or audit report, as the case may be, for such
Fiscal Quarter.  The Financial
and Operational Triggermeans, for the Company
and its Subsidiaries on a consolidated basis, that net income for a Fiscal
Quarter shall be less than the US dollar amount indicated in the table below
opposite such Fiscal Quarter:
  Fiscal Quarter Ending
                              
                              Net IncomeJune
      30, 2007
                              
                              $
                              5.0millionSeptember
      30, 2007
                              
                              $
                              5.0millionDecember
      31, 2007
                              
                              $
                              5.0millionMarch
      31, 2008
                              
                              $
                              6.0millionJune
      30, 2008
                              
                              $
                              6.0
      millionSeptember
      30, 2008
                              
                              $
                              6.0
      millionDecember
      31, 2008
                              
                              $
                              6.0
      millionMarch
      31, 2009
                              
                              $
                              7.2
      millionJune
      30, 2009
                              
                              $
                              7.2
      millionSeptember
      30, 2009
                              
                              $
                              7.2
      millionDecember
      31, 2009
                              
                              $
                              7.2
      million
 
 Upon
review of our financial statements, we determined that a Financial and Operational
Trigger as defined under the CB indenture occurred in the quarter ended
December 31, 2008.  To the extend an conversion occurs, the Company
shall be required to deliver approximately 140,000 additional shares of the
Company’s common stock to the holder of the Convertible Notes by increasing the
conversion rate with respect to such notes.  Further, the Company
cannot provide assurance that Financial and Operational
Trigger may not occur again in future fiscal quarters especially under
challenging macro-economic conditions and difficult operating environments like
the current one.
 
 F-26
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 On
January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the CB
indenture and received 2,142,857 in exchange for $15.0 million in debt with an
exchange factor of $7.00 in debt for each share of stock.
 
 As of
December 31, 2007, the Company had $20 million Convertible Notes and $40 million
HY notes, a total of $60 million long term notes payable outstanding. On January
8, 2008, Citadel converted $15.0 million of the Convertible Notes into 2,142,857
shares of common stock. As of December 31, 2008, the Company had $5 million
Convertible Notes and $40 million HY notes, for a total of $45,000,000 long term
notes outstanding, of which, $5 million HY Notes will be due on July 24, 2009
and become current liability as of December 31, 2008. Deferred commissions on
long term notes amounted to $3,188,344 (of which $1,350,000 was due to Kuhn's
verdict as explained in Note 19) as of December 31, 2008 and $2,946,740 as of
December 31, 2007.  Amortized commission for the years ended December
31, 2008 and 2007 amounted to $2,758,396 (of which $1,650,000 was due to Kuhn's
verdict as explained in Note 19) and $ 653,260, respectively. Interest on long
term notes for the years ended December 31, 2008, 2007 and 2006 amounted to
$3,414,804, $5,180,067 and $0, respectively. Both amortized commission and
interest on long term notes are recorded as interest expense.
 
 If the $5
million Convertible Notes outstanding are not converted at maturity, January 24,
2012, the Company will have to repay the principal of $5 million and an
additional redemption cost of $5,305,158.
 
 Note
11 – Derivative instrument
 
 The
Company's operations are exposed to a variety of global market risks, including
the effect of changing interest rates. This exposure is managed, in part, with
the use of financial derivatives. The Company uses financial derivatives only to
hedge exposures in the ordinary course of business and does not invest in
derivative instruments for speculative purposes.
 
 On April
10, 2007, effective January 24, 2007, the Company entered a cross currency swap
transaction (the Swap) with Merrill Lynch Capital Services, Inc. (“MLCS”) on the
$40 million HY notes which converts the LIBOR + 7% per annum USD variable
interest rate to an 8.3% per annum RMB fixed interest rate. The agreement was
deemed effective January 24, 2007. The Swap requires semi-annual payment in
arrears on July 24 and January 24 and matures on the earlier of (1) cash
settlement defined as early termination; or (2) January 24, 2012, at which point
the Swap requires an exchange of RMB and USD based principals. Under the terms
of the cross currency swap, the Company receives variable interest rate payments
in USD and makes fixed interest rate payments in RMB with settlement netted in
USD, thereby creating the equivalent of fixed-rate debt. MLCS requires the
Company to deposit $1,000,000 with them to secure the agreement. The deposit may
be increased to $3,000,000 if the exchange rate for RMB to USD falls below 6.5
and to $5,000,000 if the exchange rate falls below 5.5. This swap is designated
and qualified as a cash flow hedge. In July, 2008, the Company placed the
$1,000,000 deposit with MLCS to secure the agreement.
 
 F-27
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Since its
effective date, the fair value of this Swap agreement changed to a payable of
$4,377,076 on December 31, 2008, and a payable of $8,515,396 on December 31,
2007, respectively. For the year ended December 31, 2008, changes in fair value
of the Swap resulted in an decrease in the liability and a gain to other
comprehensive income of $4,138,320, respectively; For the year ended December
31, 2007, changes in fair value of the Swap resulted in an increase in the
liability and a loss to other comprehensive income of $8,515,396, respectively,
net of taxes.
 
 The
Company had cross currency hedge payable amounting to $104,324 as of December
31, 2008 and $706,170 cross currency hedge receivable as of December 31, 2007.
The total gain from derivative transactions for the year 2008, 2007 and 2006 was
$163,062, $1,508,693 and $0, respectively.  For the year ended
December 31, 2008, there were no amounts recorded in the consolidated statement
of income in relation to this interest rate swap related to ineffectiveness of
the swap transaction.
 
 Note
12 – Supplemental disclosure of cash flow information
 
 Total
interest paid for the years ended December 31, 2008, 2007 and 2006 amounted to
$6,327,084, $4,249,882 and $1,352,377, respectively.
 
 Total
income tax paid for the years ended December 31, 2008, 2007 and 2006 amounted to
$4,509,274, $0 and $0, respectively.
 
 Convertible
notes totaling $15,000,000 were converted into 2,142,857 shares of common stock
at $7.00 per share, on January 8, 2008.
 
 Pursuant
to the verdict from the United States District Court, the Company must pay Kuhns
Brothers, Inc. (also explained in Note 19) $7,197,794. For the year ended
December 31, 2008, the Company allocated $3,487,250 to Additional Paid in
Capital.
 
 Note
13 - Earnings per share
 
 The
following is information of net income per share for the years ended December
31:
 
 2008
                    
                    
                    2007
                    
                    
                    2006Net
      income for basic earnings per share
                    
                    $
                    28,474,509
                    
                    
                    $
                    29,505,627
                    
                    
                    $
                    17,810,026Add:
      Interest expense for convertible note
                    
                    
                    102,149
                    
                    
                    
                    4,151,233
                    
                    
                    
                    -Deduct:
      Loan issuance cost
                    
                    
                    (179,894
                    )
                    
                    
                    (3,600,000
                    )
                    
                    
                    -Net
      income for diluted earnings per share
                    
                    $
                    28,396,764
                    
                    
                    $
                    30,056,860
                    
                    
                    $
                    17,810,026Weighted
      average sharesused
      in basic computation
                    
                    
                    27,298,891
                    
                    
                    
                    22,178,517
                    
                    
                    
                    19,933,193Diluted
      effect of warrants, option and convertible note
                    
                    
                    972,972
                    
                    
                    
                    3,065,271
                    
                    
                    
                    1,343,070Weighted
      average sharesused
      in diluted  computation
                    
                    
                    28,271,863
                    
                    
                    
                    25,243,788
                    
                    
                    
                    21,276,263Earnings
      per shareBasic
                    
                    $
                    1.04
                    
                    
                    $
                    1.33
                    
                    
                    $
                    0.89Diluted
                    
                    $
                    1.00
                    
                    
                    $
                    1.19
                    
                    
                    $
                    0.84
 
 F-28
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Shares
excluded from the calculation of diluted earnings per share:
 
 Date
                                                  issued/
                                                  granted
                                                
                                                Nature
                                                
                                                Excise
                                                  price
                                                
                                                
                                                Shares excluded
                                                  for year diluted
                                                  EPS calculation
                                                
                                                Reason for
                                                  exclusion10/23/2007
                                                
                                                Common
      stock held in escrow
                                                
                                                
                                                
                                                
                                                
                                                100,000
                                                
                                                Common
      stock issued in Company's name11/31/2007
                                                
                                                Warrants
                                                
                                                16.80
                                                
                                                
                                                
                                                100,000
                                                
                                                Anti-dilutive10/29/2007
                                                
                                                Options
                                                
                                                16.44-20.94
                                                
                                                
                                                
                                                230,000
                                                
                                                Anti-dilutive11/13/2007
                                                
                                                Options
                                                
                                                16.36
                                                
                                                
                                                
                                                10,000
                                                
                                                Anti-dilutive4/10/2008
                                                
                                                Options
                                                
                                                15.04
                                                
                                                
                                                
                                                17,000
                                                
                                                Anti-dilutive5/21/2008
                                                
                                                Options
                                                
                                                20.04
                                                
                                                
                                                
                                                50,000
                                                
                                                Anti-dilutive6/25/2008
                                                
                                                Options
                                                
                                                23.25
                                                
                                                
                                                
                                                84,000
                                                
                                                Anti-dilutive
 
 Note
14 - Stockholders' Equity
  (A) Series A and
Series B Convertible Preferred Stock
  The
Series A and Series B convertible preferred stock (“Series A and B Stock”) were
automatically converted into common stock upon the effectiveness of the reverse
split on January 30, 2006 under the certificates of designation for Series A and
B stock.   Specifically, 784,575 shares of Series A preferred
stock and 216,000 shares of Series B preferred stock were converted into
19,818,718 shares of common stock. In connection with the $12 million financing
closed in December 2005, we granted 2,125,000 warrants exercisable at $3.67 to
the investors, 424,929 warrants exercisable at $3.11 to Kuhns Brothers, Inc. and
its certain affiliates and 80,000 warrants exercisable at $0.01 to Glenn Little,
then President of Parallel Technology.
 OutstandingWarrants
                            
                            
                            ExercisableWarrantsExercise
                              Price
                            
                            Number
                            
                            
                            Average
                              Remaining Life
                              (years)
                            
                            
                            Average
                              Exercise Price
                            
                            
                            Number
                            
                            
                            Average
                              Remaining
                              Life
                              (years)$
                            3.11
                            
                            
                            332,124
                            
                            
                            
                            3.00
                            
                            
                            $
                            3.11
                            
                            
                            
                            332,124
                            
                            
                            
                            3.00$
                            16.80
                            
                            
                            100,000
                            
                            
                            
                            2.92
                            
                            
                            $
                            16.80
                            
                            
                            
                            100,000
                            
                            
                            
                            2.92
  F-29
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 The
following is a summary of the warrant activities:
 
 Number of
                      Warrants
                      Outstanding
                    
                    
                    Number of
                      Warrants
                      Exercisable
                    
                    
                    Weighted-
                      Average
                      Exercise
                      Price
                    
                    
                    Average
                      Remaining
                      Contractual
                      LifeBalance,
      January 1, 2006
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Granted
                    
                    
                    2,629,929
                    
                    
                    
                    2,629,929
                    
                    
                    $
                    3.47
                    
                    
                    5.11
      yearsForfeited
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    (148,985
                    )
                    
                    
                    (148,985
                    )
                    
                    $
                    1.70Balance,
      December 31, 2006
                    
                    
                    2,480,944
                    
                    
                    
                    2,480,944
                    
                    
                    $
                    3.57
                    
                    
                    4.92
      yearsGranted
                    
                    
                    100,000
                    
                    
                    
                    100,000
                    
                    
                    $
                    16.80Forfeited
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    (2,103,892
                    )
                    
                    
                    (2,103,892
                    )
                    
                    $
                    3.67Balance,
      at December 31, 2007
                    
                    
                    477,052
                    
                    
                    
                    477,052
                    
                    
                    $
                    6.35
                    
                    
                    3.92
      yearsRounding
      adjustments
                    
                    
                    (55
                    )
                    
                    
                    (55
                    )Granted
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    (44,873
                    )
                    
                    
                    (44,873
                    )
                    
                    $
                    3.11Balance,
      at December 31, 2008
                    
                    
                    432,124
                    
                    
                    
                    432,124
                    
                    
                    $
                    6.28
                    
                    
                    2.92
      years
 
 Note
15 – Stock based compensation
 
 On May 21
and June 7, 2007, the Company issued 500,000 and 150,000 options to four
executives and three independent directors, respectively, both for a service
period of two years starting from the grant date. The vesting period is two
years for both grants.  These options were not awarded pursuant to the
2007 Stock Incentive Plan.
 
 On
September 27, 2007, the Company granted to Mr. Chris Wenbing Wang, the president
and CFO, a non-qualified stock option to purchase 125,000 shares of its Common
Stock vesting immediately at an exercise price of $13.70 and terminating in five
(5) years from the grant date.
 
 On
October 29, 2007, in connection with Mr. John Christopher Finley’s employment as
Chief Operating Officer and Mr. James A. Todd’s employment as Financial
Controller, the Board of Directors approved a non-qualified stock option grant
to Mr. Finley and Mr. Todd in the amounts of 190,000 shares and 135,000 shares
of common stock of the Company, respectively, for a service period of two years,
vesting over a two (2) year period with 12.5% of the options vesting each
quarter for eight (8) quarters.  The grants to Mr. Finley and Mr. Todd
were pursuant to the Fushi International, Inc. 2007 Stock Incentive
Plan.
 
 On May
29, 2008, we executed a Separation Agreement accepting the resignation of Mr.
John Christopher Finley as our chief operating officer.  Under the
terms of the Separation Agreement, Mr. Finley’s options will continue to vest
for six months following the execution of the agreement for the value of
$290,242 was expensed on May 29, 2008.  Further, Mr. Finley will have
15 months from the date of execution to exercise his vested options.  As a
result, total of 95,000 unvested options were forfeited.
 
 F-30
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 On June
25, 2008, the Company issued 84,000 options to Copperweld
employees.  The vesting period is half year and exercise term of three
years and exercisable at $23.25.
 
 The fair
values of stock options granted to the executives and the independent directors
were estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
 
 Expected
                          
                          Expected
                          
                          
                          Dividend
                          
                          
                          Risk Free
                          
                          
                          Grant DateLife
                          
                          Volatility
                          
                          
                          Yield
                          
                          
                          Interest Rate
                          
                          
                          Fair ValueExecutives
                          
                          2.0
      yrs
                          
                          
                          50
                          %
                          
                          
                          0
                          %
                          
                          
                          1.84% - 4.57
                          %
                          
                          $
                          3.08 - $5.33Independent
      Directors
                          
                          2.0
      yrs
                          
                          
                          50
                          %
                          
                          
                          0
                          %
                          
                          
                          2.41% - 4.57
                          %
                          
                          $
                          3.64 - $5.84Employees
                          
                          0.5
      yrs
                          
                          
                          50
                          %
                          
                          
                          0
                          %
                          
                          
                          2.82
                          %
                          
                          $
                          4.11
 
 -
                Volatility:
      One year historical volatility of our stock is 58%.  Adjustment
      is made based on volatility of industry peers average which is 31%, to
      arrive at 50% as expected
volatility.
 
 -
                Dividend
      Yield: The expected dividend yield is zero.  The Company has not
      paid a dividend and does not anticipate paying dividends in the
      foreseeable future.
 
 -
                Risk
      Free Rate: Risk-free interest rate of 1.84% to 4.57% was
      used.  The risk-free interest rate was based on U.S. Treasury
      yields that corresponded to the expected term of the option calculated on
      the granted date.
 
 -
                Expected
      Life:  Because the Company has no historical share option exercise
      experience to estimate future exercise patterns, the expected life was
      determined using the simplified method as these awards meet the definition
      of "plain-vanilla" options under the rules prescribed by Staff Accounting
      Bulletin No. 107.
 
 Stock
compensation expense is recognized based on awards expected to
vest.  There were no estimated forfeitures as the Company has a short
history of issuing options. FAS 123R requires forfeitures to be estimated at the
time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
 
 As of
December 31, 2008, the 790,333 executive options, 200,000 director options and
77,000 employee options issued had fair values of approximately $3,319,023,
$838,731 and $345,151 respectively. The Company recognized $1,868,809, 1,938,073
and $0 of compensation expenses in general and administrative expenses for the
years ended December 31, 2008, 2007 and 2006, respectively.
 
 As of
December 31, 2008, the total compensation cost related to stock options not yet
recognized was $460,074 and will be recognized over the weighted average life of
2 years.
  F-31
  FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
  
 Number of
                                          Options
                                          Outstanding
                                        
                                        
                                        Weighted-
                                          Average
                                          Exercise
                                          Price
                                        
                                        
                                        Aggregate
                                          Intrinsic
                                          ValueBalance,
      January 1, 2006
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Forfeited
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Balance,
      December 31, 2006
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Granted
                                        
                                        
                                        1,110,000
                                        
                                        
                                        $
                                        14.3
                                        
                                        
                                        
                                        -Forfeited
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Balance,
      December 31, 2007
                                        
                                        
                                        1,110,000
                                        
                                        
                                        $
                                        14.3
                                        
                                        
                                        $
                                        12,075,850Granted
                                        
                                        
                                        151,000
                                        
                                        
                                        $
                                        21.3
                                        
                                        
                                        
                                        -Forfeited
                                        
                                        
                                        (193,667
                                        )
                                        
                                        $
                                        16.3
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Balance,
      December 31, 2008
                                        
                                        
                                        1,067,333
                                        
                                        
                                        $
                                        14.9
                                        
                                        
                                        $
                                        -
 
 Following
is a summary of the status of options outstanding at December 31,
2008:
 
 Outstanding Option
                      
                      Exercisable OptionsExercise Price
                      
                      Number
                      
                      Average
                        Remaining
                        Contractual
                        Life
                      
                      Average
                        Exercise
                        Price
                      
                      
                      Number
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price$12.30
                      
                      
                      408,333
                      
                      0.39
      years
                      
                      $
                      12.30
                      
                      
                      
                      358,333
                      
                      
                      $
                      12.30$11.75
                      
                      
                      150,000
                      
                      0.43
      years
                      
                      $
                      11.75
                      
                      
                      
                      121,866
                      
                      
                      $
                      11.75$13.70
                      
                      
                      125,000
                      
                      0.74
      years
                      
                      $
                      13.70
                      
                      
                      
                      125,000
                      
                      
                      $
                      13.70$16.44
      - $20.94
                      
                      
                      230,000
                      
                      0.83
      years
                      
                      $
                      18.69
                      
                      
                      
                      166,128
                      
                      
                      $
                      16.40$16.36
                      
                      
                      10,000
                      
                      0.87
      years
                      
                      $
                      16.36
                      
                      
                      
                      10,000
                      
                      
                      $
                      16.36$23.25
                      
                      
                      77,000
                      
                      0.00
      years
                      
                      $
                      23.25
                      
                      
                      
                      77,000
                      
                      
                      $
                      23.25$15.04
                      
                      
                      17,000
                      
                      0.28
      years
                      
                      $
                      15.04
                      
                      
                      
                      12,283
                      
                      
                      $
                      15.04$20.04
                      
                      
                      50,000
                      
                      1.39
      years
                      
                      $
                      20.04
                      
                      
                      
                      23,934
                      
                      
                      $
                      20.04Total
                      
                      
                      1,067,333
                      
                      
                      
                      
                      
                      
                      
                      
                      894,544
 
 Note
16 - Statutory reserves
 
 The laws
and regulations of the People’s Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions determined at the discretion
of the board of directors, after the statutory reserve.
 
 F-32
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Surplus reserve
fund
 
 The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital, the Company has total registered capital approximately $80,931,711 (RMB
624.3 million). As of December 31, 2008 and 2007, the Company had statutory
reserve amounted to $12,316,147 and $8,321,726, respectively. The Company is
required to contribute an additional $28,149,708 from future
earnings.
 
 The
transfer to this reserve must be made before distribution of any dividend to
shareholders. The company will transfer at year end 10% of the year’s net income
determined in accordance with PRC accounting rules and regulations.
 
 The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital.
 
 Note
17 – Employee pension
 
 The
Company’s employee pension for China employees generally includes two parts: the
first to be paid by the Company is 20% of the employee’s actual salary in the
prior year. The other part, paid by the employee, is 8% of the actual salary.
The Company made $140,499 and $43,381 in contributions of employment benefits
for China employees in the years ended December 31, 2008 and 2007,
respectively.
 
 US
employees are provided a 401(k) plan.  US employees are eligible for the
defined contribution plan after three-months of full-time
employment.  Employee deferrals and company matching are 100% vested
immediately upon eligibility. The company made $142,374 in contributions of
employment benefits for US employees in the year ended December 31, 2008 and
made $25,004 contributions in the period between October 29, 2007 and December
31, 2007. Copperweld UK operates a defined contribution pension scheme for
employees. All UK employees are eligible to join the pension on satisfactory
completion of their trial period, which is typically three months. UK employees
can contribute as much as they like subject to current UK laws, but the company
will match only the first 2.5% of gross pay in the current year.The assets of
the scheme are held separately from those of the company. The annual
contributions payable are charged to expense. The company made $29,149 in
contributions of employment benefits for UK employees in the year ended December
31, 2008 and made no material contributions in the period between October 29,
2007 and December 31, 2007.
 
 Copperweld
UK operates a defined contribution pension scheme for employees. The assets of
the scheme are held separately from those of the company. The annual
contributions payable are charged to expense. The company made $29,149 in
contributions of employment benefits for UK employees in the year ended
December 31, 2008 and made no material contributions in the period between
October 29, 2007 and December 31, 2007.
 
 F-33
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
18 – Business combinations
 
 On July
18, 2007, the Company, Copperweld Bimetallics, Inc. and David S. Jones entered
into a non-binding Memorandum of Understanding. Pursuant to the Memorandum of
Understanding and certain agreements signed, Fushi extended $3,000,000 secured
bridge funding to Copperweld Bimetallics, Inc.
 
 On
September 25, 2007, the Company entered into a LLC Membership Interest Purchase
Agreement (the “Purchase Agreement”) with David S. Jones (the “Seller”),
pursuant to which the Company agreed to purchase all of the issued and
outstanding membership interests of Copperweld Holdings, LLC (“Copperweld”), the
sole member of Copperweld Bimetallics, LLC, and all of the issued and
outstanding membership interests of International Manufacturing Equipment
Suppliers, LLC. The transaction is valued at $22.5 Million, including the
assumption of debt and is subject to adjustment based upon Copperweld’s net
working capital at closing.
 
 10% of
the purchase price ($2.25 million) has been deposited in escrow at closing to
secure the indemnification obligations of the Seller. The Purchase Agreement
also contains customary representations, warranties and covenants.
 
 The
Company subsequently completed the transaction on October 29, 2007 and the
investment in Copperweld balance was eliminated on consolidation basis as of
December 31, 2007. The results of operations of the acquired companies are
included in the consolidated statement of income from October 29, 2007 to the
end of the year.
 
 Assets
acquired and debts assumed of the transaction are listed as below:
 
 Fair Value
                    
                    
                    Acquired or Assumed
                      by the CompanyCurrent
      assets
                    
                    $
                    16,241,211
                    
                    
                    $
                    16,241,211Property,
      plant and equipment, net
                    
                    
                    31,274,166
                    
                    
                    
                    12,600,484Other
      assets
                    
                    
                    726,987
                    
                    
                    
                    726,987Total
      assets
                    
                    
                    48,242,364
                    
                    
                    
                    29,568,682Total
      liabilities
                    
                    
                    12,597,320
                    
                    
                    
                    12,597,320Net
      assets
                    
                    $
                    35,645,044
                    
                    
                    $
                    16,971,362
 
 We
determined the fair value of the acquired assets of Copperweld based on an
independent appraisal. The fair value of Copperweld’s net assets pursuant to the
independent appraisals was $35,645,044, exceeding total consideration by
$18,673,682. Pursuant to SFAS
141, Business Combination,the excess of total fair value acquired over
the acquisition cost should be allocated as pro rata deduction of the amount of
Copperweld’s fixed assets and intangible assets that would have been assigned to
those assets. As a result, we arrived at the above list of amount of assets
acquired and debt assumed.
 
 F-34
 
 FUSHI
COPPERWELD, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 
 Note
19 - Commitments and contingencies
 
 As
discussed in Note 11, the Company entered into a swap agreement that required a
$1,000,000 deposit to secure the transaction. If the exchange rate for RMB to US
Dollars drops below certain levels, the Company will be required to deposit up
to $5,000,000. In
July 2008, the Company deposited the $1,000,000 with MLCS to secure the
agreement.
  On
December 11, 2007, the Company received service of an action filed by Kuhns
Brothers, Inc., Kuhns Brothers Securities Corp., and Kuhns Brothers & Co.,
Inc. against the Company in the United States District Court, District of
Connecticut on November 27, 2006.  On August 5, 2008, the Company received
verdict from the United States District Court that Kuhns is entitled to recover
a total of $7,197,794. The court ruling was recorded as a contingent liability
of $7,197,794 and was allocated to the following: (a) $710,544 was expensed
immediately in second quarter of 2008; (b) $3,000,000 was recorded as deferred
commissions on long term notes (also explained in Note 10) and is being
amortized over the remainder of the long term note’s life, $1,650,000 was
amortized for the year ended December 31, 2008, $1,350,000 was outstanding as
deferred commissions on long term notes as of December 31, 2008; (c) $3,487,250
was allocated to Additional Paid in Capital.  The Company is in the
process of appealing the case.
 
 Note
20 - Subsequent events
 
 On
January 5, 2009, the Company paid off its short term bank loan for the amount of
$17,588,400.
 
 In
January 2009, the Company was late in making interest payments on both the HY
Notes and the Convertible Notes. The delay in payment was due to a delay in
conversion from RMB to USD caused by the tightened controls under PRC State
Administration for Foreign Exchange, or SAFE. Payment of the interest due has
been made in full and the Company is now current in its payment
obligations.
 
 On
February 23, 2009, the Company sold 400,000 shares of its common stock and
300,000 warrants in a private placement for an average price of $4.80 per share
for $1,920,000.  The warrants consisted of 100,000 Series A warrants
at an exercise price of $5.25 per share, 100,000 Series B warrants at an
exercise price of $5.50 per share, and 100,000 Series C warrants at an exercise
price of $6.00 per share.
 
 F-35
  Quarterly
Data (unaudited)
 
 First
                          Quarter
                        
                        
                        Second
                          Quarter
                        
                        
                        Third
                          Quarter
                        
                        
                        Fourth
                          Quarter
                        
                        
                        Full Year
                          (audited)2008Net
      operating revenue
                        
                        $
                        54,009,027
                        
                        
                        $
                        63,823,927
                        
                        
                        $
                        62,536,129
                        
                        
                        $
                        41,065,619
                        
                        
                        $
                        221,434,702Gross
      profit
                        
                        $
                        14,733,687
                        
                        
                        $
                        16,892,527
                        
                        
                        $
                        16,746,607
                        
                        
                        $
                        8,880,142
                        
                        
                        $
                        57,252,963Net
      income
                        
                        $
                        7,570,496
                        
                        
                        $
                        9,046,950
                        
                        
                        $
                        7,280,846
                        
                        
                        $
                        4,576,217
                        
                        
                        $
                        28,474,509Basic
      net income per share
                        
                        $
                        0.28
                        
                        
                        $
                        0.33
                        
                        
                        $
                        0.27
                        
                        
                        $
                        0.17
                        
                        
                        $
                        1.04Diluted
      net income per share
                        
                        $
                        0.26
                        
                        
                        $
                        0.31
                        
                        
                        $
                        0.25
                        
                        
                        $
                        0.15
                        
                        
                        $
                        1.002007Net
      operating revenue
                        
                        $
                        21,137,917
                        
                        
                        $
                        32,014,592
                        
                        
                        $
                        26,085,908
                        
                        
                        $
                        48,983,666
                        
                        
                        $
                        128,222,083Gross
      profit
                        
                        $
                        7,685,180
                        
                        
                        $
                        10,533,417
                        
                        
                        $
                        9,652,114
                        
                        
                        $
                        14,577,553
                        
                        
                        $
                        42,448,264Net
      income
                        
                        $
                        4,974,733
                        
                        
                        $
                        8,233,326
                        
                        
                        $
                        6,982,659
                        
                        
                        $
                        9,314,909
                        
                        
                        $
                        29,505,627Basic
      net income per share
                        
                        $
                        0.24
                        
                        
                        $
                        0.37
                        
                        
                        $
                        0.32
                        
                        
                        $
                        0.38
                        
                        
                        $
                        1.33Diluted
      net income per share
                        
                        $
                        0.21
                        
                        
                        $
                        0.33
                        
                        
                        $
                        0.28
                        
                        
                        $
                        0.34
                        
                        
                        $
                        1.19
 
 F-36