SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q





x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934




For the
quarterly period ended March 31, 2009.




or




 ̈
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934




For the
transition period from
             to
            .




Commission
File Number 000-52650









LIHUA INTERNATIONAL,
INC.


(Exact
name of registrant as specified in its charter)










Delaware
                (State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              14-1961536
                (I.R.S.
      Employer
                Identification
      No.)





Houxiang
Five Star Industry District


Danyang
City, Jiangsu Province, PR China 212312


(Address
of Principal Executive Offices including zip code)




+86
51 86317399


(Registrant’s
Telephone Number, Including Area Code)




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





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




Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company


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




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




There
were 15,000,000 shares of the Registrant’s Common Stock issued and outstanding
on  May 14, 2009.







Lihua
International, Inc.


Index
to Form 10-Q




PagePart I.
            
            Financial
      InformationItem
      1. Unaudited Condensed Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December
      31, 2008 (Audited)
            
            1Condensed
      Consolidated Statements of Income and Comprehensive Income (Unaudited) for
      the three months ended March 31, 2009 and 2008
            
            2Condensed
      Consolidated Statement of Stockholders’ Equity (Unaudited) for the three
      months ended March 31, 2009
            
            3Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the three months
      ended March 31, 2009 and 2008
            
            4Notes
      to Unaudited Condensed Consolidated Financial Statements
            
            5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            27Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            36Item
      4T. Controls and Procedures
            
            36Part II.
            
            Other
      Information
            
            36Item
      1. Legal Proceedings
            
            36Item
      1A. Risk Factors
            
            36Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            36Item
      3. Defaults Upon Senior Securities
            
            36Item
      4. Submission of Matters to a Vote of Security Holders
            
            37Item
      5. Other Information
            
            37Item
      6. Exhibits
            
            37SIGNATURES
            
            38







PART
I — FINANCIAL INFORMATION




Item 1.       UNAUDITED
CONDENSED FINANCIAL STATEMENTS





LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(AMOUNTS
EXPRESSED IN US DOLLARS)





March
      31,
                              
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                              
                              $
                              25,330,049
                              
                              
                              $
                              26,041,849Restricted
      cash
                              
                              
                              950,000
                              
                              
                              
                              1,750,000Notes
      receivable, net
                              
                              
                              -
                              
                              
                              
                              321,892Accounts
      receivable, net
                              
                              
                              5,464,734
                              
                              
                              
                              5,042,739Other
      receivables and current assets
                              
                              
                              855,279
                              
                              
                              
                              -Prepaid
      land use right – current portion
                              
                              
                              172,320
                              
                              
                              
                              172,353Inventories
                              
                              
                              4,343,071
                              
                              
                              
                              586,938Total
      current assets
                              
                              
                              37,115,453
                              
                              
                              
                              33,915,771OTHER
      ASSETSBuildings,
      machinery and equipment, net
                              
                              
                              14,262,114
                              
                              
                              
                              7,440,943Construction
      in progress
                              
                              
                              1,042,440
                              
                              
                              
                              6,017,941Deposits
      for buildings, machinery and equipment
                              
                              
                              1,563,516
                              
                              
                              
                              1,077,892Prepaid
      land use right-long term portion
                              
                              
                              8,288,057
                              
                              
                              
                              8,332,732Intangible
      assets
                              
                              
                              3,862
                              
                              
                              
                              4,214Deferred
      income tax assets
                              
                              
                              -
                              
                              
                              
                              23,395Total
      non-current assets
                              
                              
                              25,159,989
                              
                              
                              
                              22,897,117Total
      assets
                              
                              $
                              62,275,442
                              
                              
                              $
                              56,812,888LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term bank loans
                              
                              $
                              4,973,742
                              
                              
                              $
                              6,145,202Accounts
      payable
                              
                              
                              3,500,090
                              
                              
                              
                              1,643,544Other
      payables and accruals
                              
                              
                              1,113,678
                              
                              
                              
                              830,744Income
      taxes payable
                              
                              
                              740,653
                              
                              
                              
                              401,436Total
      current liabilities
                              
                              
                              10,328,163
                              
                              
                              
                              9,020,926OTHER
      LIABILITIESCommon
      stock purchase warrants
                              
                              
                              2,430,903
                              
                              
                              
                              -Total
      liabilities
                              
                              
                              12,759,066
                              
                              
                              
                              9,020,926COMMITMENT
      AND CONTINGENCIES (Note 20)Series
      A redeemable convertible preferred stock: $0.0001 par
    value:10,000,000
      shares authorized (liquidation preference of $2.2 per share), 6,818,182
      shares issued and outstanding
                              
                              
                              13,116,628
                              
                              
                              
                              13,116,628SHAREHOLDERS'
      EQUITYCommon
      stock, $0.0001 par value: 75,000,000 shares authorized, 15,000,000 shares
      issued and outstanding
                              
                              
                              1,500
                              
                              
                              
                              1,500Additional
      paid-in capital
                              
                              
                              7,410,629
                              
                              
                              
                              7,976,976Statutory
      reserves
                              
                              
                              2,603,444
                              
                              
                              
                              2,603,444Retained
      earnings
                              
                              
                              23,821,136
                              
                              
                              
                              21,521,937Accumulated
      other comprehensive income
                              
                              
                              2,563,039
                              
                              
                              
                              2,571,477Total
      shareholders' equity
                              
                              
                              36,399,748
                              
                              
                              
                              34,675,334Total
      liabilities and shareholders' equity
                              
                              $
                              62,275,442
                              
                              
                              $
                              56,812,888





See
accompanying notes to these condensed consolidated financial
statements


- 1
-


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME


(AMOUNTS
EXPRESSED IN US DOLLARS)





Three months ended March 31,2009
                
                
                2008NET
      REVENUE
                
                $
                20,550,327
                
                
                $
                9,812,937Cost
      of sales
                
                
                (14,851,807
                )
                
                
                (6,759,836
                )GROSS
      PROFIT
                
                
                5,698,520
                
                
                
                3,053,101Selling
      expenses
                
                
                (203,252
                )
                
                
                (86,809
                )General
      and administrative expenses
                
                
                (542,130
                )
                
                
                (195,096
                )Income
      from operations
                
                
                4,953,138
                
                
                
                2,771,196Other
      income (expenses):Interest
      income
                
                
                24,245
                
                
                
                2,701Interest
      expenses
                
                
                (113,126
                )
                
                
                (76,769
                )Change
      in fair value of warrants
                
                
                (124,215
                )
                
                
                -Total
      other income (expenses)
                
                
                (213,096
                )
                
                
                (74,068
                )Income
      before income taxes
                
                
                4,740,042
                
                
                
                2,697,128Provision
      for income taxes
                
                
                (764,065
                )
                
                
                (341,477
                )NET
      INCOME
                
                
                3,975,977
                
                
                
                2,355,651OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustments
                
                
                (8,438
                )
                
                
                873,650TOTAL
      COMPREHENSIVE INCOME
                
                $
                3,967,539
                
                
                $
                3,229,301Net
      income per shareBasic
                
                $
                0.27
                
                
                $
                0.17Diluted
                
                $
                0.18
                
                
                $
                0.17Weighted
      average number of shares outstandingBasic
                
                
                15,000,000
                
                
                
                14,025,000Diluted
                
                
                21,818,182
                
                
                
                14,025,000





See
accompanying notes to these condensed consolidated financial
statements.




- 2
-





LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(AMOUNTS
EXPRESSED IN US DOLLARS)





AccumulatedCommon Stock
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    
                    
                    
                    OtherNumber of
                    
                    
                    
                    
                    
                    Paid-in
                    
                    
                    Statutory
                    
                    
                    Retained
                    
                    
                    ComprehensiveShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Reserves
                    
                    
                    Earnings
                    
                    
                    Income
                    
                    
                    TotalAt
      December 31, 2008, as previously reported (Audited)
                    
                    
                    15,000,000
                    
                    
                    $
                    1,500
                    
                    
                    $
                    7,976,976
                    
                    
                    $
                    2,603,444
                    
                    
                    $
                    21,521,937
                    
                    
                    $
                    2,571,477
                    
                    
                    $
                    34,675,334Cumulative
      effect of reclassification of common stock purchase
    warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (629,910
                    )
                    
                    
                    -
                    
                    
                    
                    (1,676,778
                    )
                    
                    
                    -
                    
                    
                    
                    (2,306,688
                    )At
      January 1, 2009, as adjusted (Unaudited)
                    
                    
                    15,000,000
                    
                    
                    
                    1,500
                    
                    
                    
                    7,347,066
                    
                    
                    
                    2,603,444
                    
                    
                    
                    19,845,159
                    
                    
                    
                    2,571,477
                    
                    
                    
                    32,368,646Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,975,977
                    
                    
                    
                    -
                    
                    
                    
                    3,975,977Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (8,438
                    )
                    
                    
                    (8,438
                    )Comprehensive
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,967,539Share-based
      payment to employee
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    63,563
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    63,563At
      March 31, 2009 (Unaudited)
                    
                    
                    15,000,000
                    
                    
                    $
                    1,500
                    
                    
                    $
                    7,410,629
                    
                    
                    $
                    2,603,444
                    
                    
                    $
                    23,821,136
                    
                    
                    $
                    2,563,039
                    
                    
                    $
                    36,399,748





See
accompanying notes to these condensed consolidated financial
statements.


- 3
-


LIHUA
INTERNATIONAL, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(AMOUNTS
EXPRESSED IN US DOLLARS)





Three
      months ended March 31,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                      
                      $
                      3,975,977
                      
                      
                      $
                      2,355,651Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      261,443
                      
                      
                      
                      157,649Share-based
      compensation expense
                      
                      
                      63,563
                      
                      
                      
                      -Change
      in fair value of warrants
                      
                      
                      124,215
                      
                      
                      
                      -(Increase)
      decrease in assets:Accounts
      receivable
                      
                      
                      (422,966
                      )
                      
                      
                      156,421Notes
      receivables
                      
                      
                      321,840
                      
                      
                      
                      694,200Other
      receivables and current assets
                      
                      
                      (855,303
                      )
                      
                      
                      (397
                      )Inventories
                      
                      
                      (3,756,354
                      )
                      
                      
                      406,361Deferred
      income tax assets
                      
                      
                      23,391
                      
                      
                      
                      -Increase
      (decrease) in liabilities:Accounts
      payable
                      
                      
                      1,856,914
                      
                      
                      
                      (745,833
                      )Other
      payables and accruals
                      
                      
                      283,087
                      
                      
                      
                      113,220Income
      taxes payable
                      
                      
                      339,303
                      
                      
                      
                      (50,879
                      )Net
      cash provided by operating activities
                      
                      
                      2,215,110
                      
                      
                      
                      3,086,393CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of buildings, machinery and equipment
                      
                      
                      (2,552,128
                      )
                      
                      
                      (220,808
                      )Prepayment
      for land use right
                      
                      
                      -
                      
                      
                      
                      (3,561,761
                      )Net
      cash used in investing activities
                      
                      
                      (2,552,128
                      )
                      
                      
                      (3,782,569
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESNew
      short-term bank loans
                      
                      
                      -
                      
                      
                      
                      1,567,174Repayment
      to related parties
                      
                      
                      -
                      
                      
                      
                      (31,864
                      )Release
      of restricted cash related to Private Placement (Note 20)
                      
                      
                      800,000
                      
                      
                      
                      -Repayments
      of short-term bank loans
                      
                      
                      (1,170,326
                      )
                      
                      
                      (1,788,377
                      )Net
      cash used in financing activities
                      
                      
                      (370,326
                      )
                      
                      
                      (253,067
                      )Foreign
      currency translation adjustment
                      
                      
                      (4,456
                      )
                      
                      
                      421,468DECREASE
      IN CASH AND CASH EQUIVALENTS
                      
                      
                      (711,800
                      )
                      
                      
                      (527,775
                      )CASH
      AND CASH EQUIVALENTS, at the beginning of the period
                      
                      
                      26,041,849
                      
                      
                      
                      3,213,649CASH
      AND CASH EQUIVALENTS, at the end of the period
                      
                      $
                      25,330,049
                      
                      
                      $
                      2,685,874SUPPLEMENTAL
      DISCLOSURE INFORMATIONInterest
      paid
                      
                      $
                      113,126
                      
                      
                      $
                      76,769Income
      taxes paid
                      
                      $
                      401,371
                      
                      
                      $
                      407,212NON-CASH
      TRANSACTION:Shares-based
      payment to employee
                      
                      $
                      63,563
                      
                      
                      $
                      -





See
accompanying notes to these condensed consolidated financial
statements.


- 4
-


NOTE 1 − DESCRIPTION OF BUSINESS AND
ORGANIZATION





Lihua
International, Inc. (“the Company”) was
incorporated in the State of Delaware on January 24, 2006 under the name
Plastron Acquisition Corp. On September 22, 2008, the Company changed its name
from Plastron Acquisition Corp. to Lihua International, Inc. The Company
conducts its business through two operating subsidiaries located in the
People’s Republic of China, Danyang Lihua Electron Co., Ltd. and Jiangsu Lihua
Copper Industry Co., Ltd.





As of
March 31, 2009, details of the subsidiaries of the Company are as
follows:





Subsidiaries’
      names
              
              Domicile
      and date of
                incorporation
              
              Paid-up
      capital
              
              Effective
                ownership
              
              Principal
      activitiesAlly
      Profit Investments Limited (“Ally
      Profit”)
              
              British
      Virgin Islands
                March
      12, 2008
              
              $100
              
              100%
              
              Holding
      company of other subsidiariesLihua
      Holdings Limited (“Lihua
      Holdings”)
              
              Hong
      Kong
                April
      17, 2008
              
              HK$100
              
              100%
              
              Holding
      company of other subsidiariesDanyang
      Lihua Electron Co., Ltd. (“Lihua
      Electron”)
              
              People’s
      Republic of China (“PRC”)
                December
      30, 1999
              
              $2,200,000
              
              100%
              
              Manufacturing
      and sales of bimetallic composite conductor wire such as copper clad
      aluminum (CCA) wire and enameled CCA wire.Jiangsu
      Lihua Copper Industry Co., Ltd. (“Lihua
      Copper”)
              
              PRC
                August 31,
      2007
              
              $15,000,000
              
              100%
              
              Manufacturing
      and sales of refined copper.





NOTE 2− SUMMARIES OF SIGNIFICANT ACCOUNTING
POLICIES





Principle
of consolidation




These
condensed consolidated financial statements include the financial statements of
Lihua International, Inc. and its subsidiaries.  All significant
inter-company balances or transactions are eliminated on
consolidation.





Basis
of preparation




These
interim condensed consolidated financial statements are unaudited. In the
opinion of management, all adjustments and disclosures necessary for a fair
presentation of these interim condensed consolidated financial statements have
been included. The results
reported in the condensed consolidated financial statements for any interim
periods are not necessarily indicative of the results that may be reported for
the entire year.  The accompanying condensed consolidated financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission and do not include all information and
footnotes necessary for a complete presentation of financial statements in
conformity with accounting principles generally accepted in the United States.
These unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and accompanying
footnotes included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.





Foreign
currency translation




The
Company uses United States dollars (“US Dollar” or “US$” or “$”) for financial
reporting purposes. However, the Company maintains the books and records in its
functional currency, Chinese Renminbi (“RMB”), being the primary currency of the
economic environment in which its operations are conducted. In general, the
Company translates its assets and liabilities into U.S. dollars using the
applicable exchange rates prevailing at the balance sheet date, and the
statement of income is translated at average exchange rates during the reporting
period. Equity accounts are translated at historical rates. Adjustments
resulting from the translation of the Company’s financial statements are
recorded as accumulated other comprehensive income.


- 5
-


The
exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the consolidated financial statements were as
follows:-




As of March 31, 2009
                    
                    As of December 31, 2008Balance sheet
      items, except for equity accounts
                    US$1=RMB6.8359
                    
                    US$1=RMB6.8346Three
      months ended March 31,2009
                    
                    2008Items
      in the statements of income and cash flows
                    US$1=RMB6.8357
                    
                    US$1=RMB7.1692





Research
and development costs




Research
and development costs are expensed as incurred. During the three months ended
March 31, 2009 and 2008, research and development costs were $23,570 and
$12,303, respectively.





Advertising
costs




The
Company expenses all advertising costs as incurred.  The total amounts
of advertising costs charged to selling, general and administrative expense were
nil and $56 for the three months ended March 31, 2009 and 2008,
respectively.





Shipping
and handling costs




Substantially
all costs of shipping and handling of products to customers are included in
selling, general and administrative expense.  Shipping and handling
costs for the three months ended March 31, 2009 and 2008 were $116,306 and
$40,143, respectively.





Recent
Accounting Pronouncement Adopted




Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”
(“EITF 07-5”). EITF 07-5 applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. As a result of adopting EITF 07-5, the
Company’s issued and outstanding Series A Warrants to purchase 1,500,000 shares
of Common Stock and Series B Warrants to purchase 500,000 shares of Common Stock
previously treated as equity pursuant to the scope exception in paragraph 11(a)
of SFAS No. 113 were no longer afforded equity treatment. These warrants expire
in 5 years from October 31, 2008 and have an exercise price of $3.50, which is
subject to a downward adjustment if the Company issues additional shares of
Common Stock or securities exercisable, convertible or exchangeable for Common
Stock at a price less than the exercise price for a period of two years from
October 31, 2008.





As such,
effective January 1, 2009, the Company reclassified the fair value of the Series
A and Series B Warrants from equity to liability as if these warrants were
treated as a derivative liability since their date of issue on October 31, 2008.
On January 1, 2009, the Company recognized a cumulative-effect adjustment of
$2,306,688, and 1,676,778 was reclassified from beginning retained earnings and
$629,910 from additional paid-in capital  to a long-term warrant
liability to recognize the fair value of such warrants on such date. The fair
value of these warrants increased to $2,430,903 as of March 31, 2009. As such,
the Company recognized a $124,215 loss from the change in fair value of these
warrants for the three months ended March 31, 2009.





These
1,500,000 Series A and 250,000 Series B Warrants were initially issued in
connection with the Private Placement of 6,818,182 shares of Preferred Shares,
which are further disclosed in Note 14. 250,000 Series B Warrants were issued
for business and investor relations consulting services. These warrants were not
issued with the intent of effectively hedging any future cash flow, fair value
of any asset, liability or any net investment in a foreign operation. These
warrants do not qualify for hedge accounting, and as such, all future changes in
the fair value of these warrants will be recognized in statement of income until
such time as the warrants are exercised or expire. These warrants do not trade
in an active securities market, and as such, the Company estimates the fair
value of these warrants using the Black-Scholes option pricing model using the
following assumptions:


- 6
-





March 31, 2009
                
                
                January 1, 2009Estimated
      fair value of common stock:
                
                $
                3.813
                
                
                $
                3.850Exercise
      price:
                
                $
                3.50
                
                
                $
                3.50Remaining
      contractual life (years):
                
                
                4.59
                
                
                
                4.83Dividend
      yield:
                
                
                -
                
                
                
                -Expected
      volatility:
                
                
                34.87
                %
                
                
                30.58
                %Risk-free
      interest rate:
                
                
                1.53
                %
                
                
                1.49
                %





The
Company’s common stock is not publicly traded. The Company has determined the
fair value of its common stock based on retrospective valuations prepared
consistent with the methods outlined in the American Institute of Certified
Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates.





As the
Company’s stock is not publicly traded, historical volatility information is not
available. In accordance with SFAS No. 123R, “Accounting for Stock-Based
Compensation”, the Company identified five similar public entities for
which share and option price information was available, and considered the
historical volatilities of those public entities’ share prices in calculating
the expected volatility appropriate to the Company (i.e. the calculated value).
The risk-free rate of return reflects the interest rate for United States
Treasury Note with similar time-to-maturity to that of the
Warrants.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. In February 2008,
the FASB deferred the effective date of SFAS 157 by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On January 1, 2008, the Company adopted the
provisions of SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities for which the effective date has been delayed by one
year, which the Company adopted on January 1, 2009. The adoption of SFAS 157 did
not have a material effect on the Company’s financial position or results of
operations. The book values of cash, accounts receivable, accounts payable and
short-term bank loans approximate their respective fair values due to the
short-term nature of these instruments.





The fair
value hierarchy distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:





•
            Level
      one — Quoted market prices in active markets for identical assets or
      liabilities;•
            Level
      two — Inputs other than level one inputs that are either directly or
      indirectly observable; and•
            Level
      three — Unobservable inputs developed using estimates and assumptions,
      which are developed by the reporting entity and reflect those assumptions
      that a market participant would
use.





Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. Assets and liabilities measured at fair value on a recurring basis are
summarized as follows (unaudited):





Fair value measurement using inputs
                    considered as
                  
                  Fair value atLevel 1
                  
                  Level 2
                  
                  Level 3
                  
                  March 31, 2009Liabilities:Derivative
      instruments − Warrants
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2,430,903
                  
                  
                  $
                  2,430,903Total
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2,430,903
                  
                  
                  $
                  2,430,903





A
discussion of the valuation techniques used to measure fair value for the
warrants listed above is provided above in this footnote. There were no assets
or liabilities measured at fair value on a non-recurring basis during the three
months ended March 31, 2009.


- 7
-


Effective
January 1, 2009, the first day of fiscal 2009, the Company adopted FASB Staff
Position Financial Accounting Standard 142-3 (“FSP FAS 142-3”), “Determination
of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The Company
will apply FSP FAS 142-3 prospectively to intangible assets acquired subsequent
to the adoption date, January 1, 2009.  The adoption of FSP FAS 142-3
had no impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted, Statement of Financial Accounting
Standards No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and
Hedging Activities,” which amends and expands Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 161 requires tabular disclosure of the fair value of
derivative instruments and their gains and losses.  This Statement
also requires disclosure regarding the credit-risk related contingent features
in derivative agreements, counterparty credit risk, and strategies and
objectives for using derivative instruments. The adoption of SFAS 161 did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51." SFAS 160 amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the Company’s Consolidated Financial Statements. Among other requirements,
this Statement requires that the consolidated net income attributable to the
parent and the noncontrolling interest be clearly identified and presented on
the face of the consolidated income statement. The adoption of SFAS 160 did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired. The Company will apply SFAS 141R to any business combinations
subsequent to adoption.





In April
2009, the FASB issued FASB Staff Position Financial Accounting Standard
141R-1 ("FSP FAS 141R-1"), "Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies." FSP FAS 141R-1
amends SFAS 141R to require that an acquirer recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value of such an asset acquired or liability assumed
cannot be determined, the acquirer should apply the provisions of SFAS 5, "
Accounting for Contingencies", to determine whether the contingency should be recognized at the
acquisition date or after such date. FSP FAS 141R-1 is effective for business
combinations whose acquisition date is on or after the first reporting period
beginning after December 15, 2008. Accordingly, the Company adopted this FSP
during the first quarter of 2009. The adoption of FSP FAS 141R-1 did
not have a material impact on the Company’s Condensed Consolidated Financial
Statements.





New
accounting pronouncement to be adopted




In
December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP FAS
132(R)-1”), “Employers’ Disclosures about Postretirement Benefit Plan Assets.”
The FSP expands the disclosure requirements about plan assets for defined
benefit pension plans and postretirement plans. The Company is required to adopt
FSP FAS 132(R)-1 in the fourth quarter of 2009. The Company is currently
assessing the impact that this FSP may have on the disclosures in the Company’s
Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 ("FSP FAS
107-1 and APB 28-1"), "Interim Disclosures about Fair Value of Financial
Instruments." The FSP amends SFAS 107, "Disclosure about Fair Value of Financial
Instruments," and Accounting Principles Board Opinion No. 28, "Interim Financial
Reporting," to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. The Company is required to adopt FSP FAS
107-1 and APB 28-1 in the second quarter of 2009. The Company does not currently
believe that adopting this FSP will have a material impact on the Company’s
Consolidated Financial Statements.


- 8
-


In April
2009, the FASB issued FASB Staff Position No. FSP FAS 115-2 and FAS 124-2 ("FSP
FAS 115-2 and FAS 124-2"), "Recognition and Presentation of Other-Than-Temporary
Impairments." The FSP amends the other-than-temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. The Company is required to adopt FSP FAS 115-2
and FAS 124-2 in the second quarter of 2009.  The Company does not
currently believe that adopting this FSP will have a material impact on the
Company’s Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FAS 157-4 ("FSP FAS 157-4"),
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." The FSP provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, "Fair Value Measurements" , when the
volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. The Company is required to adopt FSP FAS
157-4 in the second quarter of 2009.  The Company does not currently
believe that adopting this FSP will have a material impact on the Company’s
Consolidated Financial Statements.




Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.


- 9
-


NOTE
3 − RESTRICTED
CASH





As of
March 31, 2009 and December 31, 2008, $950,000 and $1,750,000 in total was held
in escrow arising from agreements in conjunction with the Private Placement,
which are further disclosed in Notes 14 and 20.





Restricted
cash consisted of the following:


March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Guarantee
      fund for financing agreement
                
                $
                -
                
                
                $
                800,000Special
      fund for listing
                
                
                750,000
                
                
                
                750,000Special
      fund for employee pensions
                
                
                200,000
                
                
                
                200,000$
                950,000
                
                
                $
                1,750,000





NOTE4 − NOTESRECEIVABLE, NET





Notes
receivable arose from sale of goods and represented commercial drafts issued by
customers to the Company that were guaranteed by bankers of the customers. Notes
receivable were interest-free with maturity dates of 3 or 6 months from date of
issuance.





Notes
receivable consisted of the following:


March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Notes
      receivable
                
                $
                -
                
                
                $
                321,892Less:
      Allowance for doubtful debts
                
                
                -
                
                
                
                -Notes
      receivable, net
                
                $
                -
                
                
                $
                321,892





NOTE5− ACCOUNTS RECEIVABLE, NET





Accounts
receivable consisted of the following:


March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Accounts
      receivable
                
                $
                5,464,734
                
                
                $
                5,042,739Less:
      Allowance for doubtful debts
                
                
                -
                
                
                
                -Accounts
      receivable, net
                
                $
                5,464,734
                
                
                $
                5,042,739


- 10
-


NOTE
6 − OTHER RECEIVABLES AND CURRENT ASSETS





Other
receivables and current assets consisted of the following:


March
      31,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Other
      receivables
                
                $
                60,146
                
                
                $
                -Recoverable
      value added tax
                
                
                795,133
                
                
                
                -Less:
      Allowance for valuation and doubtful debts
                
                
                -
                
                
                
                -$
                855,279
                
                
                $
                -





NOTE
7 INVENTORIES





Inventories
by major categories are summarized as follows:





March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Raw
      materials
                
                $
                2,404,818
                
                
                $
                160,234Work
      in progress
                
                
                200,749
                
                
                
                29,013CCA
      wire
                
                
                227,032
                
                
                
                397,691Refined
      copper
                
                
                1,510,472
                
                
                
                -$
                4,343,071
                
                
                $
                586,938





NOTE
8 − INTANGIBLE ASSETS





March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Computer
      software, cost
                
                $
                7,022
                
                
                $
                7,023Less:
      Accumulated amortization
                
                
                (3,160
                )
                
                
                (2,809
                )$
                3,862
                
                
                $
                4,214





Amortization
expenses for the three months ended March 31, 2009 and 2008 were $351 and
$342.





NOTE
9 − PREPAID LAND USE RIGHTS





The
Company has recorded as prepaid land use rights the lump sum payments paid to
acquire long-term interest to utilize the land underlying the Company’s
buildings and production facility.  This type of arrangement is common
for the use of land in the PRC.  The prepaid land use rights are
expensed on the straight-line basis over the term of the land use rights of 50
years.  As of March 31, 2009, the Company has obtained the relevant
PRC property ownership and land use rights certificates.





The
amount expensed on prepaid land use rights for the three months ended March 31,
2009 and 2008 were $43,091 and $5,592, respectively.  The estimated
expense of the prepaid land use rights over each of the next five years and
thereafter will be $172,320.


- 11
-


NOTE
10 − BUILDINGS, MACHINERY AND EQUIPMENT, NET





Buildings,
machinery and equipment, net consisted of the following:


March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Cost:Buildings
                
                $
                7,149,637
                
                
                $
                1,367,189Office
      equipment
                
                
                174,324
                
                
                
                61,767Motor
      vehicles
                
                
                212,639
                
                
                
                137,423Machinery
                
                
                8,903,228
                
                
                
                7,834,657Total
      cost
                
                
                16,439,828
                
                
                
                9,401,036Less:
      Accumulated depreciation
                
                
                (2,177,714
                )
                
                
                (1,960,093
                )Net
      book value
                
                $
                14,262,114
                
                
                $
                7,440,943





Depreciation
expenses for the three months ended March 31, 2009 and 2008 were
$218,001 and $151,715, respectively.





NOTE
11  − CONSTRUCTION IN PROGRESS





Construction
in progress consisted of the following:


March
      31,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Construction
      of equipment
                
                $
                724,833
                
                
                $
                1,295,315Construction
      of buildings
                
                
                317,607
                
                
                
                4,722,626$
                1,042,440
                
                
                $
                6,017,941


- 12
-


NOTE
12 − SHORT TERM BANK LOANS





Short-term
bank loans consisted of the following:


March 31,
                  2009
                
                
                December 31,
                  2008(Unaudited)Bank
      loan granted by Bank of Jiangsu, with an interest rate of 6.66% p.a.,
      guaranteed by a related company, Danyang Tianyi Telecommunication
      Co., Ltd. (“Tianyi Telecom”), and maturing on November 18,
      2009
                
                $
                2,194,298
                
                
                $
                2,194,715Bank
      loan granted by Agriculture Bank of China, with interest rates ranging
      from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom,
      maturing on April 15, 2009, which has been extended to April 15, 2010
      subsequently
                
                
                760,690
                
                
                
                760,835Bank
      loan granted by Agriculture Bank of China, with interest rates ranging
      from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom and
      maturing on May 20, 2009
                
                
                702,175
                
                
                
                702,309Bank
      loan granted by China Construction Bank, with interest rates ranging from
      5.841% p.a. to 8.217% p.a., guaranteed by Tianyi Telecom, and
      maturing on April 29, 2009, which has been extended to April 29, 2010
      subsequently
                
                
                585,146
                
                
                
                585,257Bank
      loan granted by Agriculture Bank of China, with interest rates ranging
      from 6.903% p.a. to 9.711% p.a., guaranteed by Tianyi Telecom
      and maturing on August 21, 2009
                
                
                731,433
                
                
                
                731,572Bank
      loan granted by China Construction Bank with interest rates ranging from
      6.372% p.a. to 8.964% p.a., guaranteed by Tianyi Telecom, matured and
      fully repaid on March 6, 2009.
                
                
                -
                
                
                
                1,170,514$
                4,973,742
                
                
                $
                6,145,202





NOTE
13 − OTHER PAYABLES AND ACCRUALS





Other
payables and accruals consisted of the following:


March
      31,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Accrued
      staff costs
                
                $
                152,787
                
                
                $
                380,472Other
      taxes payable
                
                
                521,483
                
                
                
                335,152Other
      payables
                
                
                439,408
                
                
                
                115,120$
                1,113,678
                
                
                $
                830,744


- 13
-


NOTE
14 − SHAREHOLDERS’ EQUITY





The
Company’s Article of Incorporation grants the Board of Directors the
authority, without any further vote or action by stockholders, to issue
preferred stock in one or more series, fix the number of shares constituting the
series and establish the preferences, limitations and relative rights, including
dividend rights, dividend rate, voting rights, terms of redemption, redemption
price or prices, redemption rights and liquidation preferences of the shares of
the series.





Series
A Redeemable Convertible Preferred Stock





On
October 31, 2008, the Company entered into and completed a securities purchase
agreement (“Private
Placement”) with certain accredited investors (the “Investors”) for the
issuance and sale by the Company in a private placement of 6,818,182 shares of
Series A Convertible Preferred Stock (“Preferred Shares”)
and Series A warrants to purchase 1,500,000 shares of Common Stock. The Company
received $13,656,538 in proceeds from this Private Placement after paying fees
and expenses.





The
principal terms of the Preferred Shares are as follows:





Conversion: At any time on or
after our issuance of Preferred Shares, each share of Preferred Shares will be
convertible, at the option of the holder thereof (subject to certain ownership
percentage limitations set forth in the Certificate of Designations), into one
share of Common Stock, subject to adjustment from time to time, upon the
occurrence of certain events described below. The rate of conversion (the “Conversion Rate”) is
determined by dividing $2.20 per share (the “Liquidation Preference
Amount”) by the conversion price of $2.20 (the “Conversion Price”),
subject to adjustment as discussed below.





In the
event the Company does not timely convert and deliver Preferred Shares into
shares of Common Stock after request of a holder to so convert, and the holder
must purchase shares of Common Stock, in excess of the price for which the
holder sold such shares, the Company must make a payment in cash to the holder
in the amount of the excess paid and the Company will not honor the conversion
request and will reinstate the number of Preferred Shares for which such
conversion was not honored.





If at any
time, the Company consummate a bona fide offering of shares of Common Stock of
at least $5,000,000, all outstanding Preferred Shares shall automatically
convert to shares of Common Stock (subject to certain ownership percentage
limitations set forth in the Certificate of Designations of the Series A
Preferred Shares).





Liquidation Rights: The
Preferred Shares will, in the event of any distributions or payments in the
event of the voluntary or involuntary liquidation, dissolution or winding up of
the Company rank senior to Common Stock and to any other class or series of
stock which may be issued not designated as ranking senior to or pari passu with
the Preferred Shares in respect of the right to participate in distributions or
payments upon any liquidation, dissolution or winding up of the Company. In the
event of any voluntary or involuntary liquidation, dissolution or winding up,
the holders of shares of Preferred Shares will be entitled to receive, out of
assets available for distribution to stockholders, an amount equal to the
Liquidation Preference Amount before any payment shall be made or any assets
distributed to the holders of Common Stock or any stock which ranks junior to
the Preferred Shares. In the event of a liquidation, dissolution or winding up
of the Company, the rights of holders of Preferred Shares to convert such shares
into shares of Common Stock shall terminate prior to the date fixed for the
payment to the holders of Preferred Shares of any amounts distributable to them
in the event of any such liquidation, dissolution or winding
up.


- 14
-


NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Series
A Redeemable Convertible Preferred Stock – continued





Redemption Rights: None of
Preferred Shares may be redeemed without the express written consent of each
holder of such shares. If the Company cannot issue shares of Common Stock upon a
conversion because the Company does not have a sufficient number of shares of
Common Stock authorized and available, then with respect to the unconverted
Preferred Shares, the holder of such Preferred Shares, solely at such holder's
option, may require the Company to redeem from such holder those Preferred
Shares with respect to which the Company is unable to issue Common Stock in
accordance with such holder's conversion notice at a price per share payable in
cash equal to one hundred thirty percent of the Liquidation Preference
Amount.





Simultaneously
with the occurrence of any merger, consolidation or similar capital
reorganization of Common Stock, each holder of Preferred Shares shall have the
right, at such holder's option, to require the Company to redeem all or a
portion of such holder's Preferred Shares at a price per share equal to one
hundred ten percent of the Liquidation Preference Amount.





Dividend Rights:Preferred
Shares will not be entitled to receive dividends unless the Company pays
dividends to holders of our Common Stock. If the Company pays dividends to
holders of Common Stock, holders of Preferred Shares will be entitled to
receive, on each share of Preferred Shares held by them, dividends of equal
amount or value as dividends that would have been payable on the number of
underlying shares of Common Stock into which such Preferred Shares would be
convertible, if such shares of Preferred Shares had been converted on the date
for determination of holders of Common Stock entitled to receive such
dividends.





Adjustments to Conversion Price,
Conversion Rate and Other Similar Adjustments:The number of shares of
Common Stock into which the Series A Preferred shall be converted, or the
Conversion Price, as the case may be, shall be subject to upward or downward
adjustment from time to time, as applicable, in the event of a (i) combination,
stock split, recapitalization or reclassification of the Common Stock, (ii)
merger, consolidation or similar capital reorganization of the Common Stock,
(iii) distribution of stock dividends or (iv) issuance of additional shares of
Common Stock or securities convertible into Common Stock at a price less than
$2.20.





Voting Rights:Holders of
Preferred Shares shall vote together as a separate class on all matters which
impact the rights, value, or ranking of the Preferred Shares. Holders of
Preferred Shares shall vote on an "as converted" basis, together with holders of
Common Stock, as a single class, in connection with any proposal submitted to
stockholders to: (i) increase the number of authorized shares of capital stock,
(ii) to approve the sale of any of capital stock, (iii) adopt an employee stock
option plan, or (iv) effect any merger, consolidation, sale of all or
substantially all of assets, or related consolidation or combination
transaction.





Conversion Restriction:
Holders of Preferred Shares are restricted from converting to Common Stock if
the number of shares of Common Stock to be issued pursuant to such Conversion
would cause the number of shares of Common Stock owned by such holder and its
affiliates at such time to equal or exceed 9.9% of the then issued and
outstanding shares of Common Stock; provided, however, that upon a holder of the
Series A Preferred providing the Company with sixty-one (61) days notice that
such holder wishes to waive this restriction such holder may be entitled to
waive this restriction.




- 15
-


.


NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Series
A Redeemable Convertible Preferred Stock – continued





Accounting
for Preferred Shares





Pursuant
to the Securities Escrow Agreement entered into by the Company as discussed
below, if the Company fails to achieve certain net income thresholds for fiscal
years 2008 and/or 2009, additional shares of the Company’s common stock would be
released to the holders of the Preferred Shares. As a result, the holders of the
Preferred Shares could acquire a majority of the voting power of the Company’s
outstanding common stock.  In such a situation, the Company would not
be able to control the approval of “any merger, consolidation or similar capital
reorganization of its common stock”, i.e. events which could trigger the right
of Preferred Shares holder to request for redemption. EITF D-98, “
Classification and Measurement of Redeemable Securities ”, provides that
preferred securities that are redeemable for cash are to be classified outside
of permanent equity if they are redeemable upon the occurrence of an event that
is not solely within the control of the issuer. Therefore, the Preferred Shares
have been classified out of permanent equity in accordance with EITF D-98. For
the year ended December 31, 2008, the Company’s net income was $11,701,879 which
achieved 95% of the 2008 net income threshold and, according to the terms of the
Securities Escrow Agreement, all of the escrow shares will continue to be held
in escrow and no Preferred Share has been released to the holders of the
Preferred Shares. When the 2009 net income threshold is also achieved, the
Preferred Shares will be reclassified to permanent equity.





Series
A Warrants





In
conjunction with the issuance of the Preferred Shares, the Company issued Series
A Warrants to purchase up to 1,500,000 shares of Common Stock at an exercise
price of $3.50 per share issued and outstanding. The Series A Warrants have a
term of exercise expiring 5 years from October 31, 2008. The Series A Warrants
at the option of the holder, may be exercised by cash payment of the exercise
price or, commencing 18 months following the closing of the Private Placement,
if the per share market value of one share of Common Stock is greater than the
exercise price and a registration statement under the Securities Act of 1933, as
amended, covering the shares of Common Stock underlying the Series A Warrants is
not then declared ineffective by the SEC, in lieu of exercising the Series A
Warrants by payment of cash, a holder may exercise the Series A Warrant by a
cashless exercise by surrender of the Series A Warrant, in which event the
Company will issue to the holder a number of shares of our Common Stock computed
using the following formula:





X =
      Y - (A)(Y)
                          BWhere
                        X
      =
                        the
      number of shares of Common Stock to be issued to the
    holder.Y
      =
                        the
      number of shares of Common Stock issuable upon exercise of the Series A
      Warrant in accordance with the terms of the Series A Warrant by means of a
      cash exercise rather than a cashless exercise.A
      =
                        the
      Exercise Price.B
      =
                        the
      per share market value of one share of Common Stock on the trading day
      immediately preceding the date of such
election.





The
Company will not receive any additional proceeds to the extent that the Series A
Warrants are exercised by cashless exercise.


- 16
-


NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Series
A Warrants – continued





The
exercise price and number of shares of our Common Stock issuable upon exercise
of the Series A Warrants may be adjusted in certain circumstance, including in
the event of a stock dividend, or our recapitalization, reorganization, merger
or consolidation and the issuance of rights to purchase additional shares of our
Common Stock or to receive other securities convertible into additional shares
of Common Stock.





For a
period of two years following the original issue date of the Series A Warrants
(the “Full Ratchet Period”), in the event the Company issues any additional
shares of Common Stock or securities exercisable, convertible or exchangeable
for Common Stock at a price per share less than the exercise price then in
effect or without consideration, then the exercise price upon each such issuance
will be adjusted to a price equal to the consideration per share paid for such
additional shares of Common Stock.





No
fractional shares will be issued upon exercise of the Series A Warrants. If,
upon exercise of a Series A Warrant, a holder would be entitled to receive a
fractional interest in a share, the Company will pay to the holder cash equal to
such fraction multiplied by the then fair market value of one full
share.





Pursuant
to the terms of the Series A Warrants, the Company will not effect the exercise
of any Series A Warrant, and no person who is a holder of any Series A Warrant
has the right to exercise the Series A Warrant, to the extent that after giving
effect to such exercise, such person would beneficially own in excess of 9.9% of
the then outstanding shares of our Common Stock. However, the holder is entitled
to waive this cap upon 61 days notice to the Company.





The
Company has the right to redeem up to 9.9% of the Series A Warrants at a price
equal to $0.01 per share of Common Stock underlying such warrants if (i) our
Common Stock is traded on a national securities exchange, (ii) the daily volume
weighted average price of our Common Stock is above $8.87 for 30 consecutive
trading days ending on the date of the notice of redemption, and (iii) the
average daily trading volume for the trading period is greater than 300,000
shares per day ; provided, that all shares underlying such Series A Warrants are
registered pursuant to an effective registration statement and the Company
simultaneously calls all of the Series A Warrants on the same terms. The Company
will have the right, but not the obligation, to redeem the Series A Warrants at
any time, and from time to time, provided that at such time, the foregoing
conditions have been met, but in no event can the Company redeem the Series A
Warrants more than once in any thirty (30) trading day period.






Series
B Warrants





In
connection with the Private Placement, Broadband Capital Management, LLC
(“Broadband”) acted as the Company’s financial advisor and placement agent.
Broadband received Series B warrants to purchase 250,000 shares of the Company’s
Common Stock at an exercise price per share of $3.50.





On
October 31, 2008, the Company issued Series B Warrants to purchase 250,000
shares of the Registrant’s Common Stock at an exercise price of $3.50 to
Penumbra Worldwide Ltd. (“Penumbra”). Penumbra is not a broker dealer and the
Series B Warrants were not issued as compensation for underwriting activities,
but as compensation for business and investor relations consulting services
performed by Penumbra.


- 17
-




NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





The
Series B Warrants have a term of exercise expiring 5 years from October 31,
2008. The Series B Warrants, at the option of the holder, may be exercised by
cash payment of the exercise price or by “cashless exercise”. The Company will
not receive any additional proceeds to the extent that warrants are exercised by
cashless exercise.





If the
per share market value of one share of Common Stock is greater than the exercise
price and at the time of election, the average trading volume of Common Stock
exceeds 100,000 shares for the immediately preceding 30 trading days, in lieu of
exercising the Series B Warrant by payment of cash, the holder may exercise the
Series B Warrant by cashless exercise by surrendering the Series B Warrant, in
which event the Company will issue to the holder a number of shares of our
Common Stock computed using the following formula:





X =
      Y - (A)(Y)
                BWhere:
              X
      =
              the
      number of shares of Common Stock to be issued to the
    Holder.Y
      =
              the
      number of shares of Common Stock issuable upon exercise of the Series B
      Warrant in accordance with the terms of the Series B Warrant by means of a
      cash exercise rather than a cashless exercise.A
      =
              the
      exercise price.B
      =
              the
      volume weighted average price of the Common Stock for the 30 trading day
      period immediately preceding the date of such
  election.




The
exercise price and number of shares of Common Stock issuable upon exercise of
the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merger or
consolidation and the issuance of rights to purchase additional shares of Common
Stock or to receive other securities convertible into additional shares of
Common Stock.





For a
period of two years following the original issue date of the Series B Warrant
(the “Weighted Average Period”), in the event the Company issues any additional
shares of Common Stock or securities exercisable, convertible or exchangeable
for Common Stock at a price per share less than the exercise price then in
effect or without consideration, then the exercise price then in effect shall be
multiplied by a fraction (i) the numerator of which shall be equal to the sum of
(x) the number of shares of outstanding Common Stock immediately prior to the
issuance of such additional shares of Common Stock plus (y) the number of shares
of Common Stock (rounded to the nearest whole share) which the aggregate
consideration price per share paid for the total number of such additional
shares of Common Stock so issued would purchase at a price per share equal to
the exercise price then in effect and (ii) the denominator of which shall be
equal to the number of shares of outstanding Common Stock immediately after the
issuance of such additional shares of Common Stock.





No
fractional shares will be issued upon exercise of the warrants. If, upon
exercise of a warrant, a holder would be entitled to receive a fractional
interest in a share, the Company will pay to the holder cash equal to such
fraction multiplied by the then fair market value of one full
share.









- 18
-




NOTE
14 − SHAREHOLDERS’ EQUITY – CONTINUED





Allocation
of Proceeds from Private Placement





In
accordance with EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments”, the proceeds from the Private Placement were first
allocated between the Preferred Shares and the warrants issued in connection
with the Private Placement based upon their estimated fair values as of the
closing date, resulting in an aggregate amount of $539,910 being allocated to
the Series A Warrants and the 250,000 Series B Warrants issued to
Broadband.





Then, the
fair value of the embedded conversion feature of the Preferred Shares of
$1,002,115 was calculated using EITF 98-5 intrinsic value model in accordance
with EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments”, limited to the amount of the proceeds allocated to the convertible
instrument. The intrinsic value of the beneficial conversion feature was
calculated by comparing the effective conversion price, which was determined
based on the proceeds from the Private Placement allocated to the convertible
Preferred Shares, and the fair value of the Company’s common stock of $2.26 at
the commitment date, which was determined based on retrospective valuations
prepared consistent with the methods outlined in the American Institute of
Certified Public Accountants Practice Aids, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation” and based on a discounted
future cash flow approach that used the Company’s estimates of revenue, driven
by assumed market growth rates, and estimated costs as well as appropriate
discount rates. The fair value of $1,002,115 of the beneficial conversion
feature has been recognized as a reduction to the carrying amount of the
convertible Preferred Shares and an addition to paid-in capital.





The
following table sets out the accounting for the Preferred Shares:





Proceeds
      of the Private Placement (net of fees and expenses)
                  
                  $
                  13,656,538Allocation
      of proceeds to Series A Warrants and 250,000 Series B
    Warrants
                  
                  
                  (539,910
                  )Allocation
      of proceeds to beneficial conversion feature
                  
                  
                  (1,002,115
                  )Amortization
      of discount resulting from the accounting for a beneficial conversion
      feature, deemed analogous to a dividend to the Preferred Shares
      holders
                  
                  
                  1,002,115Series
      A Convertible Preferred Stock at December 31, 2008 and March 31,
      2009
                  
                  $
                  13,116,628




- 19
-




NOTE
15 − SHARE-BASED COMPENSATION





Make
Good Escrow Agreement





In
conjunction with the Private Placement, the Company also entered into a make
good escrow agreement with the Investors (the “ Securities Escrow Agreement ”),
pursuant to which Magnify Wealth initially placed 6,818,182 of Common Stock
(equal to 100% of the number of shares of Common Stock underlying the Investor
Shares) (the “ Escrow Shares ”) into an escrow account. The Escrow Shares are
being held as security for the achievement of $12 million in audited net income
and $0.50 earnings per share for the fiscal year 2008 (the “ 2008 Performance
Threshold ”) and $18 million in audited net income and $0.76 earnings per share
for the fiscal year 2009 (the “ 2009 Performance Threshold ”). The calculation
of earnings per share of $0.76 for the fiscal year 2009 shall exclude up to
$5,000,000 in shares of Common Stock issued in a bona fide initial public
offering, however, any shares issued in excess of $5,000,000 shall be included
in the calculation of earnings per share for the fiscal year 2009. If the
Company achieves the 2008 Performance Threshold and the 2009 Performance
Threshold, the Escrow Shares will be released back to Magnify Wealth. If either
the 2008 Performance Threshold or 2009 Performance Threshold is not achieved, an
aggregate number of Escrow Shares (such number to be determined by the formula
set forth in the Securities Escrow Agreement) will be distributed to the
Investors, based upon the number of Investor Shares (on an as converted basis)
purchased in the Private Placement and still beneficially owned by such
Investor, or such successor, assign or transferee, at such time. If less than
50% of the 2008 or 2009 Performance threshold is achieved, based on the formula
set forth in the Securities Escrow Agreement, a certain amount of Escrow Shares
may be released. If the Company achieves at least 50% but less than 95% of the
2008 or 2009 performance thresholds, based on the formula set forth in the
Securities Escrow Agreement, a certain number of Escrow shares may be released.
If the Company achieves at least 95% of either the 2008 or 2009 performance
thresholds, the Escrow shares will continue to be held in escrow. If any
Investor transfers Investor Shares purchased pursuant to the Purchase Agreement,
the rights to the Escrow Shares shall similarly transfer to such transferee,
with no further action required by the Investor, the transferee or the Company.
Pursuant to the Securities Escrow Agreement, if any Escrow Shares are delivered
to Investors as a result of the Company’s failure to fully achieve the 2008
Performance Thresholds, Magnify Wealth shall deliver that number of additional
shares of Common Stock as is necessary to maintain 100% of the number of
original Escrow Shares in the escrow account at all times. With respect to the
2008 and 2009 performance thresholds, net income shall be defined in accordance
with US GAAP and reported by us in the Company’s audited financial statements
for each of 2008 and 2009, plus any amounts that may have been recorded as
charges or liabilities on the 2008 and 2009 audited financial statements,
respectively, as a result of (i) the Private Placement, including without
limitation, as a result of the issuance and/or conversion of the Investor
Shares, (ii) the release of the Escrow Shares to Magnify Wealth pursuant to
the terms of the Escrow Agreement, (iii) the issuance of ordinary shares held by
the sole shareholder of Magnify Wealth to Mr. Zhu upon the exercise of options
granted to Mr. Zhu by the shareholder of Magnify Wealth, as of the date
thereof.




- 20
-





NOTE
15 − SHARE-BASED COMPENSATION – CONTINUED





Make
Good Escrow Agreement – continued





According
to the Accounting Interpretation and Guidance of the staff of the SEC, the
placement of shares in escrow is viewed as a recapitalization similar to a
reverse stock split. The agreement to release the shares upon achievement of
certain criteria is presumed to be a separate compensatory arrangement with the
Company. Accordingly, when the Escrow Shares are released back to Magnify
Wealth, an expense equal to the amount of the grant-date fair value of $2.26 per
share of the Company’s common stock as of October 31, 2008, or the date of the
Securities Escrow Agreement will be recognized in the Company’s financial
statements in accordance with SFAS No. 123R, “Accounting for Stock-Based
Compensation”. Otherwise, if the net income threshold is not met and the Escrow
Shares are released to the investors instead, it will be accounted for as a
capital transaction with the investors resulting in no income or expense being
recognized in the Company’s financial statements.





For the
year ended December 31, 2008, the Company’s net income was $11,701,879 which
achieved 95% of the 2008 performance threshold. All of the Escrow Shares will
continue to be held in escrow and none has yet been released to either Magnify
Wealth or the Investors. As the release of the Escrow Shares requires the
attainment of the performance thresholds for both 2008 and 2009, the Company
will only commence to recognize compensation expense around the middle of fiscal
year 2009 when the Company will be able to evaluate whether it is probable that
the Company will achieve the 2009 performance threshold to provide for the
ultimate release of the Escrow Shares back to Magnify Wealth.  For the
three months ended March 31, 2009, no compensation expense has been recognized
on the make good arrangement. If the 2009 performance threshold is also met and
all of the Escrow Shares are released back to Magnify Wealth, a compensation
expense of $15,409,091 will be recognized in fiscal year 2009.





Share-based
payments awarded to employees by a shareholder





Pursuant
to a contractual arrangement between Magnify Wealth and Mr. Yang “Roy” Yu, our
Chief Financial Officer (CFO), Mr. Yu is entitled to receive up to 450,000
shares of the Company’s common stock issued to Magnify Wealth in the Share
Exchange. 112,500 of such shares were transferred to Mr. Yu immediately upon
consummation of the Share Exchange. As of March 31, 2009, the remaining 337,500
shares have remained in an escrow account and shall be released to Mr. Yu in
three equal installments of 112,500 shares issuable on the first, second and
third anniversary of the consummation of the Share Exchange.  In
connection with these share-based payments to Mr. Yu, the Company recognized a
compensation expense of $63,563, based on the grant-date fair value of the
Company’s common stock of $2.26 per share, for the three months ended March 31,
2009.




- 21
-




NOTE
16 − INCOME TAXES





The PRC
subsidiaries within the Group are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate,
i.e. the PRC.  In accordance with the relevant tax laws in the PRC,
the Company’s subsidiary, Danyang Lihua, was subject to an enterprise income tax
(“EIT”) rate of 24% on its taxable income for periods before January 1, 2008
because it is located in an economic development zone.  Furthermore,
Danyang Lihua is a production-based foreign investment enterprise and was
granted an EIT holiday for the two years ended December 31, 2006 and 2005 and a
50% reduction on the EIT rate for the three years ended December 31, 2007, 2008
and 2009.





On March
16, 2007, the PRC government promulgated a new tax law, China’s Unified
Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1,
2008. Under the New EIT Law, foreign-owned enterprises as well as domestic
companies are subject to a uniform tax rate of 25%. The New EIT Law provides for
a five-year transition period from its effective date for those enterprises
which were established before the promulgation date of the New EIT Law and which
were entitled to a preferential EIT treatment. Accordingly, Danyang Lihua has
continued to be entitled to the 50% reduction on its EIT rate for the two years
ended December 31, 2008 and 2009.





The
Company’s provision for income taxes consisted of:





Three months ended March 31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)Current
      – PRC
                      
                      $
                      740,674
                      
                      
                      $
                      341,477Deferred
                      
                      
                      23,391
                      
                      
                      
                      -$
                      764,065
                      
                      
                      $
                      341,477





- 22
-




NOTE
17                      EARNINGS
PER SHARE





All per
share data including earnings per share has been retroactively restated to
reflect the reverse acquisition on October 31, 2008 whereby the 14,025,000
shares of common stock issued by the Company (nominal acquirer) to the
shareholder of Ally Profit (nominal acquiree) are deemed to be the number of
shares outstanding for the period prior to the reverse acquisition. For the
period after the reverse acquisition, the number of shares considered to be
outstanding is the actual number of shares outstanding during that
period.





The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
periods presented:


Three months ended March 31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Unaudited)Income
      available to common shareholders:-
      Basic
                    
                    $
                    3,975,977
                    
                    
                    $
                    2,355,651-
      Diluted
                    
                    $
                    3,975,977
                    
                    
                    $
                    2,355,651Weighted
      average number of shares:-
      Basic
                    
                    
                    15,000,000
                    
                    
                    
                    14,025,000-
      Effect of dilutive convertible preferred stock
                    
                    
                    6,818,182
                    
                    
                    
                    --
      Diluted
                    
                    
                    21,818,182
                    
                    
                    
                    14,025,000Net
      income per share-
      Basic
                    
                    $
                    0.27
                    
                    
                    $
                    0.17-
      Diluted
                    
                    $
                    0.18
                    
                    
                    $
                    0.17




NOTE
18                      RELATED
PARTY TRANSACTIONS





(1)  Sales


For the
three months ended March 31, 2009 and 2008, the Company’s sales included
$169,775 and $132,366, respectively that were made to Tianyi Telecom and Jiangsu
Dongya Electronic Co., Ltd.  Tianyi Telecom is owned by the brother of
Ms. Yaying Wang, our Chief Operational Officer and director and wife of the
Company’s CEO.





(2)  Guarantees


At March
31, 2009, Tianyi Telecom provided guarantees for the Company’s short-term bank
loans of $4,973,742 (see Note 12 above).




- 23
-




NOTE
19 −CONCENTRATION OF RISKS





Credit
risk





As of
March 31, 2009 and December 31, 2008, 100% of the Company’s cash included cash
on hand and deposits in accounts maintained within the PRC where there is
currently no rule or regulation in place for obligatory insurance to cover bank
deposits in the event of bank failure. However, 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.





For the
three months ended March 31, 2009 and 2008, all of the Company’s sales arose in
the PRC.  In addition, all accounts receivable as of March 31, 2009
and December 31, 2008 were due from customers located in the PRC.





There was
no single customer who accounted for more than 10% of the accounts receivable of
the Company as of March 31, 2009.  As of December 31, 2008, there was
one customer who accounted for 14.4% of the accounts receivable of the Company.
 Except for the afore-mentioned, there was no other single customer who
accounted for more than 10% of the Company’s accounts receivable as of December
31, 2008. There was no single customer who constituted more than 10% of the
Company’s revenue for the three months ended March 31, 2009 or
2008.




Risk
arising from operations in foreign countries





Substantially
all of the Company’s operations are conducted in China. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in China. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations.





NOTE
20 −COMMITMENTS AND CONTINGENCIES





Capital
commitment





March 31, 2009(Unaudited)Contracted
      but not provided for:Purchase
      of machinery - within one year
                
                $
                924,677Acquisition
      or construction of buildings – within one year
                
                
                993,539$
                1,918,216





Agreements
in Conjunction with the Private Placement





Escrow Agreements:  In conjunction with the Private Placement as discussed in
Note 14, the Company entered into an escrow agreement with the Investors (the
“Closing Escrow Agreement”), pursuant to which the Investors deposited the funds
in the aggregate amount of $15,000,000 for the purchase and sale of the Investor
Shares (the “Escrowed Funds”) into an escrow account which was disbursed at the
closing of the Private Placement. Pursuant to the Closing Escrow Agreement,
$1,000,000 of the Escrowed Funds were not released from the escrow account (the
“Held Back Escrow Funds”) until the escrow agent received written notice that
the Company had caused Lihua Copper to fulfill one hundred percent of its
registered capital obligation of $15,000,000 no later than 90 days from the
closing date, as well as comply with other covenants. Before December 31, 2008,
the registered capital of $15,000,000 of Lihua Copper was fully paid up, as
certified and approved by the relevant PRC business authority.




- 24
-




NOTE
20 −COMMITMENTS AND CONTINGENCIES – CONTINUED





Agreements
in Conjunction with the Private Placement – continued





Additionally,
the Company entered into a public relations escrow agreement with the Investors
(the “Public Relations Escrow Agreement”), pursuant to which the Company agreed
to deposit $750,000 in an escrow account (the “Public Relations Escrowed
Funds”).
$125,000 from the Public Relations Escrowed Funds shall be released when the
Company appoints a Vice President of Investor Relations, an additional $250,000
shall be released once the Company has complied with all Nasdaq Corporate
Governance standards, and the remaining $375,000 shall be released as invoices
become due for the purpose of any investor and public relations activities. As
negotiated with Vision Opportunity China L.P. (“Vision”), the lead investor in
the Private Placement who wishes to ensure that quality firms handle certain
affairs of the Company, if the Company fails to timely comply with the foregoing
obligations, or fails to fulfill a request to change the Company’s auditor upon
such request by any holder of five percent of our Common Stock in the aggregate
on a fully diluted basis, or fails to hire an internal control consultant
acceptable to Vision within three months of the Closing Date,  the
Company will pay liquidated damages of 0.5% of the aggregate purchase price paid
by for the Investor Shares on the expiration date to comply with such covenant
and for each 30 day period thereafter, up to 10% of the aggregate purchase
price, which the Investors may require that the Company pay from the Public
Relations Escrowed Funds. In the event such liquidated payments are made, the
Company shall return an amount equal to the amount of liquidated damages paid,
back into the Public Relations Escrow Funds.





On
February 11, 2009, the parties to the Escrow Agreement entered into a First
Supplement to the Escrow Agreement pursuant to which it was agreed (i) to
release $800,000 of the Held Back Escrow Funds to the Company for having
complied with all of the Held Back Release Conditions within 90 days of the
Closing Date, and (ii) to hold $200,000 of the Held Back Escrow Funds to cover
any contingent liabilities relating to unpaid employee social insurance and
housing payments from periods prior to 2009. The $200,000 is to be held in
escrow until June 30, 2010 to cover any claims from employees relating to the
unpaid costs. $800,000 was released from escrow to the Company on March 4,
2009.





Pursuant
to the Private Placement, the Company also has an obligation to have its shares
of Common Stock listed on a national securities exchange no later than October
31, 2009 (the “Listing Date”). In the event that the Company does not list on a
national securities exchange in the proscribed time period and manner provided
for in the Purchase Agreement, then the Ally Profit Shareholder shall transfer
750,000 shares (the “Listing Penalty Shares”) of Common Stock to the Investors,
with no additional consideration due from the Investors. However, if the Company
is requested by certain Investors to have its shares of Common stock quoted on
the Over-the-Counter Bulletin Board (“OTCBB Demand”) prior to the Listing Date,
the Company shall do so and then the Company will have an additional 18 months
to list on a national securities exchange. If the Company fails to comply with
the OTCBB Demand in a timely manner or, to then list on a national securities
exchange within the 18-month period, the Listing Penalty Shares shall be
transferred to the Investors.





The
Company’s contingent obligations to pay liquidated damages under the Closing
Escrow Agreement, Public Relations Escrow Agreement and the Securities Purchase
Agreement, and to deliver Listing Penalty Shares will be recognized and measured
separately in accordance with SFAS 5, “Accounting for Contingencies”, and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a
Loss”.  Any loss recognized on a probable delivery of Listing Penalty
Shares will be measured based on the grant-date fair value of the shares as of
October 31, 2008, or the date of the Securities Purchase Agreement between the
Company and certain investors.  The Company believes that it has
fulfilled its obligations under the agreements in conjunction with the Private
Placement up to March 31, 2009, therefore no liquidated damages have been
accrued.




- 25
-




NOTE
20 −COMMITMENTS AND CONTINGENCIES – CONTINUED





Agreements
in Conjunction with the Private Placement – continued





Registration Rights
Agreement: In connection with the Private Placement, the Company
entered into a registration rights agreement dated as of October 31, 2008 with
the Investors pursuant to which the Company agreed to use its best efforts to
file with the SEC and have a registration statement declared effective within
150 calendar days following the date of the Registration Rights Agreement, or
180 calendar days following the date of the Registration Rights Agreement in the
case of a full review of the initial registration statement by the SEC. The
Company is required to keep the registration statement continuously effective
under the Securities Act for an effectiveness period to end on the earlier of
the date when all of the securities covered by the registration statement have
been sold or the date on which such securities may be sold without any
restriction pursuant to Rule 144.





On April
29, 2009, the Company and the Investors entered into a waiver and consent
whereby the investors agreed to waive the requirement under the Registration
Rights Agreement to have the registration statement declared effective prior to
the 180th
calendar day following the date of the Registration Rights Agreement and
consented to the extension of the date by which the Company is required to have
the registration statement effective from the 180th to the
194th
calendar day following the date of the Registration Rights
Agreement.





The
Company accounts for the Registration Rights Agreement in accordance with FSP
EITF 00-19-2, “Accounting fro Registration Payment Arrangements”. The Company’s
contingent obligation to make liquidated damages under the Registration Rights
Agreement will be recognized and measured separately in accordance with SFAS 5,
“Accounting for Contingencies”, and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss”. If it is probable that the Company will be
required to make any payments to the investors for non-fulfillment of the
conditions provided for in the Registration Rights Agreement, an estimate
of the contingent payment will be made and accrued for in the Company’s
financial statements. The registration statement was declared
effective on May 13, 2009.





- 26
-




NOTE
21 – SEGMENT DATA AND RELATED INFORMATION





The
Company operates in one business segment, manufacturing and sale of copper clad
aluminum (CCA) superfine wire produced from refined copper materials. The
Company also operates only in one geographical segment – China, as all of the
Company’s products are sold to customers located in China and the Company’s
manufacturing operations are located in China.





The
Company’s major product categories are (1) CCA, which is an electrical conductor
consisting of an outer sleeve of copper that is metallurgically bonded to a
solid aluminum core, and (2) refined copper produced from scrap copper
and used to manufacture copper rod, raw wire, cable and magnet wire. The
manufacturing of refined copper was launched in the first quarter of
2009.





Management
evaluates performance based on several factors, of which net revenue and gross
profit by product are the primary financial measures:




Three months ended March 31,2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)Net
      revenue from unaffiliated customers:CCA
      and Copper Wire
                
                $
                16,313,595
                
                
                $
                9,812,937Refined
      Copper Rod
                
                
                4,236,732
                
                
                
                -$
                20,550,327
                
                
                $
                9,812,937Gross
      profit from unaffiliated customers:CCA
      and Copper Wire
                
                $
                5,310,089
                
                
                $
                3,053,101Refined
      Copper Rod
                
                
                388,431
                
                
                
                -$
                5,698,520
                
                
                $
                3,053,101




Item. 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS





OVERVIEW




We are
principally engaged in the production of copper replacement cable and wire
products which include CCA wire and wire produced from refined scrap
copper.




We are
currently one of the leading CCA superfine wire producers in
China.  We purchase relatively large diameter CCA wire from other
manufacturers, and draw that wire down to much smaller (“superfine”) diameter
CCA wires.  This superfine CCA wire can be used in the place of solid
copper wire in many applications.  We believe we were among one of the
first manufacturers which commercialized CCA superfine wire production in China.
We have experienced substantial growth in recent years. Our aggregate annual CCA
wire production capacity increased from 2,200 tons in 2006 to 6,000 tons as of
March 31, 2009. We sold 1,414 tons and 1,165 tons of CCA wire during the three
months ended March 31, 2009 and 2008, respectively. We plan to increase our
annual CCA production capacity to 7,500 tons by the end of 2009. Our output
capacity is determined by the type and width of wire our customers demand. Our
current capacity of 6,000 tons is an estimate of our capacity for CCA wire of
average diameter.




We
introduced a new production process and product line in the quarter ended March
31, 2009.  This new line of business involves the fire refining of
bulk recycled copper into high purity, low oxygen content copper rods (also
known as Fire-Refined High-Conductivity (“FRHC”) rods).  We then
either sell these large diameter (8mm) copper rods into a range of markets, or
we further process these rods into much smaller diameter (e.g. .04mm) copper
wire (also known as “superfine” copper wire).. We believe this recycled
superfine copper wire is generally a more cost effective product for our
customers, compared to wire manufactured from newly mined copper.  We
believe that our pricing advantage can be maintained regardless of fluctuations
in the commodity price of copper.    As of March 31, 2009,
our copper refinery capacity was approximately 20,000 tons of FRHC copper rods
per annum, of which approximately 6,000 tons can be further processed into
superfine copper wire. During the three months ended March 31, 2009, we sold
1,225 tons of superfine copper wire and 1,102 tons of FRHC copper
rods.




- 27
-




We sell
our products primarily in China, either through distributors or directly to
users, including distributors in the wire and cable industries and manufacturers
in the consumer electronics, white goods, automotive, utility,
telecommunications and specialty cable industries.




Significant
Factors Affecting Our Results of Operations




The most
significant factors that affect our financial condition and results of
operations are:




Ÿ
            economic conditions in
      China;





Ÿ
            the market price for
      copper;





Ÿ
            demand for, and market acceptance
      of, copper replacement
products





Ÿ
            production
      capacity;





Ÿ
            supply and costs of principal raw
      materials; and





Ÿ
            product mix and implications on
      gross margins.




Economic conditions in
China




We
operate our manufacturing facilities in China and derive the majority of our
revenues from sales to customers in China. As such, economic conditions in China
will affect virtually all aspects of our operations, including the demand for
our products, the availability and prices of our raw materials and our other
expenses. China has experienced significant economic growth, achieving a CAGR,
of 11% in gross domestic product from 1996 through 2007. Domestic demand for and
consumption of copper and CCA products has increased substantially as a result
of this growth. We believe that economic conditions in China will continue to
affect our business and results of operations.




Copper
prices




Generally
the price of each of our products is set at a certain discount to local retail
copper prices, and we believe our products replace or supplement non-recycled
copper. For these reasons, our products are affected by the market price, demand
for and supply of copper.




We price
our superfine copper, FRHC copper rods and CCA wire products based on the market
price for materials plus a fixed mark-up, which is essentially our gross profit.
Despite the implications of copper price volatility on our gross and net profit
margins in percentage terms, during the past three years the markup, or our
gross and net profit in absolute dollar terms, has not been materially affected
by the change of copper prices. Shanghai Changjiang Commodity Market, one of the
major metal trading markets in China, publishes the copper trading prices twice
daily. These prices typically set the range for the prices of our materials as
well as finished products, and are generally followed by all industry
participants.




Over the
past three years, copper prices have fluctuated tremendously, with a high point
of $8,730 per ton in April 2008 and a recent range averaging $3,600 per ton. We
believe such volatility has forced industry participants to seek replacement and
supplementary products so as to reduce their reliance on copper, and this has
provided us with a unique market opportunity.




Demand
for, and market awareness of, copper replacement products




During
the current copper cycle, in which the price upturn started in 2003 with the
peak in April 2008, Chinese companies seized the potential market opportunity in
the production of CCA wire as a replacement for traditional copper wire, and
have improved the production process and made increased production volumes
available from China.  The major industry players in China also have
moved to get involved in the secondary refining process under the pressure of
the copper price uncertainty and fluctuation. We believe we are one of
innovators in both movements, in which China plays an important role in seeking
copper replacement cable and wire products.




- 28
-




The
copper replacement industry segment is still in an early stage of development
with a limited production capacity. We believe demand for our products will
continue to grow as demand for copper products grows and as market awareness of
copper replacement products increases.  China is deficient in copper
reserves, and thus PRC law and government policies are encouraging the
development of copper replacement products. We expect demand for our products to
continue to increase over time.




Production
capacity




In order
to capture the market opportunity for our products, we have expanded, and plan
to continue to expand, our production capacity. Increased capacity has had, and
could continue to have, a significant effect on our results of operations, by
allowing us to produce and sell more products to generate higher
revenues.




Supply
and costs of principal raw materials




Our
ability to manage our operating costs depends significantly on our ability to
secure affordable and reliable supplies of raw materials. We have been able to
secure a sufficient supply of raw materials, which primarily consist of CCA raw
material wire and scrap copper.




The price of our primary raw materials
varies with reference to copper prices, and changes in copper price affect our
cost of sales.  However, we are able to price our copper and CCA
products based on our material procurement costs plus a fixed mark-up, which is
essentially our gross profit.  Therefore, despite the implications of
copper price movement on our gross and net profit margin figures, during the
past three years the mark-up, or our gross and net profit in absolute dollars,
have not been materially affected by the change of copper
prices.




Product
mix and effect on gross margins




Our gross
margin is also affected by our product mix. We produce and sell products
according to customer orders.  CCA magnet wire and CCA tin plated wire
are final products from which we will derive the highest production markup, or
gross profit, and these products account for a majority of our
sales.  However, we also generate a significant portion of revenue
from the selling of semi -finished products such as CCA raw wire at a lower
production cost markup, or gross profit.




The
launch of our scrap copper refinery business will further change our product mix
and gross margins.  Generally Fire-Refined High-Conductivity (“FRHC”)
copper rod contributes a lower gross profit margin compared to finished wire
products.  At the initial development stage of this new business, we
believe that we have to sell more FRHC copper rod at lower profit margins while
we expect a gradual ramping up of our wire production
facilities.  Depending on the amount of FRHC copper rod sales, we
expect our overall gross margin to decline in the near future.





PRINCIPAL
INCOME STATEMENT COMPONENTS




Sales




Our sales
are derived from our sales of CCA wire, FRHC copper rod and wire produced from
refined scrap copper, net of value-added taxes.




The most
significant factors that affect our sales are shipment volume and average
selling prices.




Our
collection practices generally consist of the collection of cash payment at the
time of delivery. We extend credit for 30 days to 60 days to certain of our
established customers. Our accounts receivable as of March 31, 2009 totaled
$5.5 million.  For the three months ended March 31, 2009 and 2008, our
five largest customers represented 13.9% and 22.4% of our total sales,
respectively. Our largest customer for the three months ended March 31, 2009 and
2008 accounted for 4.9% and 6.4% of our total sales, respectively.




- 29
-




Cost
of sales




Our cost
of sales primarily consists of direct material costs, and, to a lesser extent,
direct labor costs and manufacturing overhead costs. Direct material costs
accounted for approximately 65.3% and 63.1% of our total revenues, and accounted
for approximately 94.1% and 93.2% of our total cost of sales, for the three
months ended March 31, 2009 and 2008, respectively.




Gross
Profit




Our gross
profit is affected primarily by the cost of raw materials, which is defined with
reference to the cost of copper.  We are also able to price our
products based on the market price for materials plus a fixed mark-up, which is
essentially our gross profit.  Despite the implications of copper
price volatility on our gross and net profit margins, in percentage terms during
the past three years, the mark-up, or our gross and net profit in absolute
dollar terms, have increased with our growing scale of production.




Operating
expenses




Our
operating expenses consist of selling, general and administrative expenses, and
research and development expenses.




Selling,
general and administrative expenses




Our
selling, general and administrative expenses include salaries, shipping
expenses, and traveling expenses for our sales personnel, administrative staff
costs and other benefits, depreciation of office equipment, professional service
fees and other miscellaneous expenses related to our administrative corporate
activities.




Our sales
activities are conducted through direct selling by our internal sales
staff.  Because of the strong demand for our products, we have not had
to start to aggressively market and distribute our products, and our selling
expenses have been relatively small as a percentage of our
revenues.




We
anticipate that our selling, general and administrative expenses will increase
with the anticipated growth of our business and continued upgrades to our
information technology infrastructure. We expect that our selling, general and
administrative expenses will also increase as a result of compliance,
investor-relations and other expenses associated with being a publicly listed
company..




Other
income




Other
income includes interest income, interest expense, change in fair value of
warrants, and other income.




Our
interest expense consisted of interest expense with respect to our short term
bank borrowings. Interest costs incurred for the three months ended March 31,
2009 and 2008 were $113,126 and $76,769 respectively, of which none was
capitalized as part of the cost incurred in the construction of property, plant
and equipment.




Change
in fair value of warrants




The fair
value of the Company’s issued and outstanding Series A Warrants to purchase
1,500,000 shares of Common Stock and Series B Warrants to purchase 500,000
shares of Common Stock increased to $2,430,903 as of March 31, 2009. As such,
the Company recognized a $124,215 loss from the change in fair value of these
warrants for the three months ended March 31, 2009.




Income
taxes




Under the
current laws of the Cayman Islands and British Virgin Islands, we are not
subject to any income or capital gains tax and dividend payments we make are not
subject to any withholding tax in the Cayman Islands or British Virgin Islands.
Under the current laws of Hong Kong, we are not subject to any income or capital
gains tax and dividend payments we make are not subject to any withholding tax
in Hong Kong.




- 30
-




Our two
operating subsidiaries are governed by the PRC income tax laws and are subject
to the PRC enterprise income tax (“EIT”).  Each of the two entities
files its own separate tax return.  According to the relevant laws and
regulations in the PRC, foreign invested enterprises established prior to
January 1, 2008 were entitled to full exemption from income tax for two years
beginning from the first year when enterprises become profitable and have
accumulative profits and a 50% income tax reduction for the subsequent three
years.  Being converted into a sino-foreign joint equity enterprise in
2005, Lihua Electron was thus entitled to the EIT exemption in 2005 and 2006,
and was subject to 50% income tax reduction during the period from 2007 to
2009.  Set out in the following table are the EIT rates for our two
PRC operating subsidiaries from 2006 to 2011:




2006
                
                
                2007
                
                
                2008
                
                
                2009
                
                
                2010
                
                
                2011Lihua
      Electron
                
                
                -
                
                
                
                12
                %
                
                
                12.50
                %
                
                
                12.50
                %
                
                
                25
                %
                
                
                25
                %Lihua
      Copper
                
                
                -
                
                
                
                25
                %
                
                
                25
                %
                
                
                25
                %
                
                
                25
                %
                
                
                25
                %




RESULTS
OF OPERATIONS





THREE
MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008





Our
business for the three months ended March 31, 2009 continued to demonstrate
robust growth as we grew revenue by 109.4% compared to the same period in 2008.
This growth was primarily driven by strong market demand for our CCA products
and our new facility for superfine copper wire produced from refined copper
materials, which started operation at the beginning of March.





Selected
Financial Data:





Increase/
                          
                          
                          For the three months ended(Decrease)
                          
                          
                          March 31, 2009
                          
                          
                          March 31, 2008Net
      sales
                          
                          
                          109.4
                          %
                          
                          $
                          20,550,327
                          
                          
                          $
                          9,812,937Gross
      Profit
                          
                          
                          86.6
                          %
                          
                          
                          5,698,520
                          
                          
                          
                          3,053,101Operating
      Income
                          
                          
                          78.7
                          %
                          
                          
                          4,953,138
                          
                          
                          
                          2,771,196Net
      income
                          
                          
                          68.8
                          %
                          
                          
                          3,975,977
                          
                          
                          
                          2,355,651Gross
      Margins
                          
                          
                          
                          
                          
                          
                          27.7
                          %
                          
                          
                          31.1
                          %Net
      Margins
                          
                          
                          
                          
                          
                          
                          19.3
                          %
                          
                          
                          24.0
                          %




Net
Sales


Sales
revenue for the three months ended March 31, 2009 was $20.6 million an increase
of $10.8 million from sales of $9.8 million in the same period of 2008. Our
sales increase was primarily attributable to strong market demand for our CCA
products and our new facility for superfine copper wire produced from refined
copper materials started operation at the beginning of March. As of March 31,
2009, our copper refinery capacity is approximately 20,000 tons per annum and
our copper wire production capacity is approximately 6,000 ton per
annum. Total tons shipped increased 221.1% year-on-year to 3,741 versus
1,165 tons in the same period of 2008. The increase in tons shipped was not only
a result of the increase of the capacity of CCA wire but was also primarily
driven by the shipments of refinery copper products. During the three months
ended March 31, 2009, the average selling price per ton was $5,493, compared to
$8,423 in the same period of 2008, representing an decrease of $2,930 or 34.8%.
The average selling price decrease year-over-year resulted primarily from the
decrease of our raw material price (i.e. copper price) as we price our products
by adding a fixed mark up onto the purchase price of our raw material. The
average copper price was RMB29,907 per ton in the first quarter of 2009,
compared to the average copper price RMB64,561 per ton in the same period of
2008, representing an decrease of RMB34,654 or 53.7%.





- 31
-




The
following table breaks down our sales, gross profit and gross margin by
products:





Three months ended March 31, 2009CCA wire
                    
                    
                    Refined copper
                    
                    
                    TotalNet
      revenue from unaffiliated customers:
                    
                    $
                    16,313,595
                    
                    
                    
                    4,236,732
                    
                    
                    
                    20,550,327Gross
      profit:
                    
                    
                    5,310,089
                    
                    
                    
                    388,431
                    
                    
                    
                    5,698,520Gross
      Margin:
                    
                    
                    32.5
                    %
                    
                    
                    9.2
                    %
                    
                    
                    27.7
                    %





The
following table breaks down our products by categories and by tons shipped and
as a percentage of total sales volume:


For the three months ended March 31, 2009shipment (tons)
                          
                          
                          % of total sales volumeCopper
      Clad Alumium (CCA)CCA
      Magnet Wire
                          
                          
                          1,114
                          
                          
                          
                          29.8
                          %CCA
      Raw Wire
                          
                          
                          253
                          
                          
                          
                          6.8
                          %CCA
      Tin Plated Wire
                          
                          
                          47
                          
                          
                          
                          1.3
                          %Refinery
      Copper (Copper)Copper
      Magnet Wire
                          
                          
                          981
                          
                          
                          
                          26.2
                          %Copper
      Raw Wire
                          
                          
                          217
                          
                          
                          
                          5.8
                          %Copper
      Tin Plated Wire
                          
                          
                          27
                          
                          
                          
                          0.7
                          %Copper
      Rod
                          
                          
                          1,102
                          
                          
                          
                          29.5
                          %Total
                          
                          
                          3,741
                          
                          
                          
                          100
                          %





The
following table sets forth our five largest customers for the three months ended
March 31, 2009 and 2008, respectively:




TOP
      FIVE CUSTOMERS (Industry Focus)
                    
                    % of Net Sales for the
                      three months ended
                      March 31, 2009
                    
                    
                    % of Net Sales for the
                      three months ended
                      March 31, 2008Customer
      1 (Power Cable)
                    
                    
                    4.9
                    %
                    
                    
                    N/ACustomer
      2 (Home Appliance)
                    
                    
                    2.9
                    %
                    
                    
                    6.4
                    %Customer
      3 (Electronic Motor)
                    
                    
                    2.1
                    %
                    
                    
                    4.9
                    %Customer
      4 (Marine wire)
                    
                    
                    2.0
                    %
                    
                    
                    3.5
                    %Customer
      5 (Electronic Motor)
                    
                    
                    2.0
                    %
                    
                    
                    3.6
                    %Customer
      6 (Electronic Motor)
                    
                    
                    N/A
                    
                    
                    
                    4.3
                    %Top
      Five Customers as % of Total:
                    
                    
                    13.9
                    %
                    
                    
                    22.7
                    %





During
the three months ended March 31, 2009, our five largest customers accounted for
13.9% of total sales, down 8.5% compared to 22.4% of the three months ended
March 31, 2008.





As of
March 31, 2009, the receivable balance due from these five customers represented
9.9% of total accounts receivables, down 18.6% from 28.5% as of March 31,
2008.  We routinely extend unsecured credit to large or regular
customers with good credit history. Management reviews its 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 60 day trade credit to our
largest customers, which tend to be well-established, large businesses, and we
have not seen any accounts receivable go uncollected beyond 60 days or
experienced any write-off of accounts receivable in the past.





- 32
-





Cost
of Goods Sold





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.





Cost of
Goods Sold was $14.9 million for the three months ended March 31, 2009, compared
to $6.8 million for the three months ended March 31, 2008, representing an
increase of $8.1 million or 119.7% as a result of the increase of the tons
shipped of CCA wires and the commencement of operations at our facility for
refined copper in March. Cost of Goods Sold measured by percentage of net sales
was 72.3%, compared to 68.9% for the same period of 2008. Our raw material
accounted for about 94.1% of the total cost of goods sold and the price of raw
material typically changes with the fluctuations of copper and aluminum prices.
However, our product pricing system utilizes fixed mark ups to our raw material
to avoid the commodity risk of copper and aluminum price fluctuations. As such,
we are able to pass along commodity price fluctuations to our customers. During
the three months ended March 31, 2009 the average cost of good sold per ton was
$3,970, compared to $5,802 in the same period of 2008 representing a decrease of
$1,832 per ton, or 31.6%. The decrease was primarily caused by the decrease in
the price of copper, our main raw material.




Gross
Profit





Gross
profit for the three months ended March 31, 2009 was $5.7 million, up 86.6% from
gross profit of $3.1 million for the same period in 2008. The gross margin
decreased to 27.7% from 31.1% year-over-year, principally due to the production
of refined copper products, which have a lower margin compared to our CCA
products, but are more profitable in terms of volume sold and a larger market
size.





Selling,
General and Administrative Expenses





Total
selling, general and administrative expenses, which principally include sales
staff salary and commissions, statutory welfare benefits, and travel expenses,
was $745,382 for the three months ended March 31, 2009, compared to $281,905 for
the three months ended March 31, 2008.  As a percentage of net sales,
selling expenses increased to 1.0% from 0.9% compared to the same period in 2008
as we increased the number of our sales offices in China.  General and
administrative expenses, as a percentage of net sales, increased to 2.6% for the
three months ended March 31, 2009, compared with 2.0% for the three months ended
March 31, 2008.  Factors which caused this increase were higher
administrative and professional fees associated with the Company being a public
reporting company. R&D expenses, which are included in general and
administrative expenses, for the three months ended March 31, 2009, were $23,570
an increase of $11,267, as compared to the three months ended March 31,
2008.





As we
prepare to increase our production capacity and more aggressively address market
opportunities, we anticipate an expansion of our sales force and an increase in
the number of our sales offices in China to better respond to
demand.





Going
forward, we anticipate that general and administrative costs will increase in
the next three quarters as we are required to satisfy additional requirements
related to being a US public company including the professional fees related to
Sarbanes-Oxley compliance.





Interest
Expense





Interest
expense was $113,126 for the three months ended March 31, 2009, compared to
$76,769 for the three months ended March 31, 2008. The increase is largely due
to accrued interest from additional bank loans utilized during the
period.  The loans were used for working capital and capital
expenditures for the expansion of production.




- 33
-




Income
tax





For the
three months ended March 31, 2009 provision for income tax expense
was $764,065 as compared to $341,477 for the same period in
2008.




Our two
operating subsidiaries are governed by the PRC income tax laws and are subject
to the PRC enterprise income tax (EIT). Each of the two entities files its own
separate tax return. According to the relevant laws and regulations in the PRC,
foreign invested enterprises established prior to January 1, 2008 were entitled
to full exemption from income tax for two years beginning from the first year
when enterprises become profitable and have accumulative profits and a 50%
income tax reduction for the subsequent three years. Being converted into a
sino-foreign joint equity enterprise in 2005, Lihua Electron was thus entitled
to the EIT exemption in 2005 and 2006, and was subject to 50% income tax
reduction during the period from 2007 to 2009.  Set out in the
following table are the EIT rates for our two PRC operating subsidiaries from
2006 to 2011:





2006
                
                
                2007
                
                
                2008
                
                
                2009
                
                
                2010
                
                
                2011Lihua
      Electron
                
                
                -
                
                
                
                12
                %
                
                
                12.50
                %
                
                
                12.50
                %
                
                
                25
                %
                
                
                25
                %Lihua
      Copper
                
                
                -
                
                
                
                25
                %
                
                
                25
                %
                
                
                25
                %
                
                
                25
                %
                
                
                25
                %





Net
Income





Net
income for the three months ended March 31, 2009 was $4.0 million, or 19.3%
of net revenue, compared to $2.3 million, or 24.0% of net revenue, in the
same period last year.





Foreign
Currency Translation Gains





During
the three months ended March 31, 2009, as a result we recognized a foreign
currency translation loss of $8,438.




- 34
-




LIQUIDITY
AND CAPITAL RESOURCES





We have
historically financed our operations and capital expenditures through cash flows
from operations, bank loans and fund raising through issuing new shares from
capital market. However, up to March 31, 2009, neither our cash flows from
operations nor our bank loans had been sufficient to keep pace with the growth
of our business and provide sufficient working capital to meet increased demand
and production expansion.





As of
March 31, 2009, we had approximately $25.3 million in cash, down $0.7 million
from $26.0 million at December 31, 2008.The following table summarizes our cash
flows for each of the periods indicated:


For the three months endedMarch 31, 2009
                                      
                                      
                                      March 31, 2008US$
                                      
                                      
                                      US$Net
      cash provided by operating activities
                                      
                                      
                                      2,215,110
                                      
                                      
                                      
                                      3,086,393Net
      cash used in investing activities
                                      
                                      
                                      (2,552,128
                                      )
                                      
                                      
                                      (3,782,569
                                      )Net
      cash used in financing activities
                                      
                                      
                                      (370,326
                                      )
                                      
                                      
                                      (253,067
                                      )Effect
      of exchange rate on cash and cash equivalents
                                      
                                      
                                      (4,456
                                      )
                                      
                                      
                                      421,468Cash
      and cash equivalents at beginning of period
                                      
                                      
                                      26,041,849
                                      
                                      
                                      
                                      3,213,649Cash and cash equivalents
      at end of period
                                      
                                      
                                      25,330,049
                                      
                                      
                                      
                                      2,685,874


Operating
activities





For the three months ended March 31,
2009, cash provided by operating activities totaled $2.2 million compared to
$3.1 million in the same period of 2008.This was primarily attributable
to our net income of $4.1 million, adjusted by an add-back of non-cash expenses
mainly consisting of depreciation and amortization of $0.3 million and a $2.2
million decrease in working capital. Specifically, the working capital decrease
was primarily due to i) a $0.4 million accounts receivable increase driven by
revenue growth; ii) a $3.8 million inventory increase, principally in copper
rods, to support planned expansion and sales growth in copper wire; iii) a $0.8
million increase in input recoverable value added tax; iv) a $1.9 million
increase in account payable as a result of an increase in the purchase of raw
material to accommodate growing demand.





Investing
activities





For the
three months ended March 31, 2009, cash outflow for investing activities was
approximately $2.6 million, primarily as a result of capital investment in new
equipment and machinery, and in office building improvements, all being part of
our planned expansion.  The capital investment on new equipment and
machinery related to the construction of the new Lihua Copper production
facility, which began production in March 2009.




Financing
activities





Financing
activities provided net cash outflow of $0.4 million during the three months
ended March 31, 2009 primarily as a result of paying off $1.2 million in bank
loans and receiving $0.8 million from an escrow account as we met all of the
post closing conditions for the PIPE financing in 2008.




Capital
expenditure





Our
capital expenditures are principally comprised of construction and purchases of
property, plant and equipment for expansion of our production facilities. In
2008, we funded our capital expenditures primarily through cash flows from
operating activities and the proceeds of bank borrowings, and equity issuance.
We intend to fund our future capital expenditures through cash flows from
operations and possible equity issuances.




- 35
-




In 2009,
as we accelerate to expand, we expect continued capital expenditure for
maintaining existing machines and adding manufacturing equipment in our new
facility, which is adjacent to our old facility. In the new production
facilities we currently have two horizontal smelters, which can produce 25,000
tons refinery copper per year, we plan to have one new vertical smelter in 2011
while increasing our refinery copper capacity to 100,000 tons per year. With our
current capacity of production lines, we can produce 6,000 tons of CCA wire and
6,000 tons of copper wire. Therefore, we plan to have six new production lines
in production by the end of 2009 while increasing our copper wire production
capacity to 14,000 tons per year. Of that capacity, 10,000 tons per year will be
copper magnet wire and 4,000 tons per year will be copper fine wire. We also
plan to have another four production lines in production by the end of 2009,
increasing our CCA wire production capacity to 7,500 tons per year. Of that
capacity, 5,500 tons per year will be CCA magnet wire and 2,000 tons per year
will be CCA fine wire. We believe that our existing cash, cash equivalents and
cash flows from operations, and our revolving credit facility, will be
sufficient to meet our presently anticipated future cash needs to bring all of
our facilities into full production. 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.




Item 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




As a “smaller reporting company”, the
Company is not required to provide this information.




Item 4T.
            CONTROLS
      AND PROCEDURES




Disclosure
controls and procedures




We
maintain controls and procedures designed to ensure that we are able to collect
the information we are required to disclose in the reports we file with the SEC
and to record, process, summarize, and disclose this information within the time
periods specified in the rules of the SEC. Based on an evaluation of our
disclosure controls and procedures as of the end of the period covered by this
report conducted by our management, our chief executive and chief financial
officer have concluded that our disclosure controls and procedures are
effective.




Internal
control over Financial Reporting




There
were no changes in our internal control over financial reporting during the most
recent quarter that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.




PART
II — OTHER INFORMATION




Item 1. LEGAL
PROCEEDINGS




There
have been no material developments in the Company’s legal proceedings from those
previously disclosed in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.




Item 1A.
            RISK
      FACTORS




As a
“smaller reporting company” the Company is not required to provide information
required by this Item.




Item 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




None.




Item 3. DEFAULTS
UPON SENIOR SECURITIES




None.




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




None.




Item 5. OTHER
INFORMATION




None.




Item 6. EXHIBITS




(b)           Exhibits


Exhibit
                    No.
                  
                  Document
      Description31.1
                  
                  Certification
      of Chief Executive Officer pursuant to Rule 13A-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
                  
                  Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of
      the Sarbanes-Oxley Act of
2002).




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SIGNATURES




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





LIHUA
      INTERNATIONAL, INC.May
      14, 2009
                    By:
                    /s/ Jianhua ZhuJianhua
      Zhu Chairman and Chief Executive Officer(Principal
      Executive Officer)May
      14, 2009
                    By:
                    /s/ Yang “Roy” YuYang
      “Roy” Yu Chief Financial Officer(Principal
      Financial
Officer)




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