UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549










FORM 10-Q










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



For the quarterly period ended September 30, 2012



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                                                       | 14-1961536                          
|-------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or
Organization) | (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. YesxNo ̈



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



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



There were  30,084,883 shares of the Registrant’s
Common Stock issued and outstanding on November 9, 2012.











TABLE OF CONTENTS



Lihua International, Inc.

Index to Form 10-Q



|                               |  |                                                                                        |  | Page
|------------------------------ |  | -------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                        |  |     
|PART 1 — FINANCIAL INFORMATION |  | 1                                                                                     
|                               |  |                                                                                        |  |     
|Item 1.                        |  | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                  |  | 1   
|                               |  |                                                                                        |  |     
|Item. 2.                       |  | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS |  | 23  
|                               |  |                                                                                        |  |     
|Item 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                             |  | 38  
|                               |  |                                                                                        |  |     
|Item 4.                        |  | CONTROLS AND PROCEDURES                                                                |  | 38  
|                               |  |                                                                                        |  |     
|PART II — OTHER INFORMATION    |  | 40                                                                                    
|                               |  |                                                                                        |  |     
|Item 1.                        |  | LEGAL PROCEEDINGS                                                                      |  | 40  
|                               |  |                                                                                        |  |     
|Item 1A.                       |  | RISK FACTORS                                                                           |  | 40  
|                               |  |                                                                                        |  |     
|Item 2.                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                            |  | 40  
|                               |  |                                                                                        |  |     
|Item 3.                        |  | DEFAULTS UPON SENIOR SECURITIES                                                        |  | 40  
|                               |  |                                                                                        |  |     
|Item 4.                        |  | MINE SAFETY DISCLOSURES                                                                |  | 40  
|                               |  |                                                                                        |  |     
|Item 5.                        |  | OTHER INFORMATION                                                                      |  | 40  
|                               |  |                                                                                        |  |     
|Item 6.                        |  | EXHIBITS                                                                               |  | 40  
|                               |  |                                                                                        |  |     
|SIGNATURES                     |  | 41                                                                                    



ii







PART 1
—FINANCIAL INFORMATION





Item
1.UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

LIHUA
INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS EXPRESSED IN US DOLLARS)



|                                                                                                                                                                                                                                   |  | September 30, |             |   | December 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------ | -
|                                                                                                                                                                                                                                   |  | 2012          |             |   | 2011         |  
|ASSETS                                                                                                                                                                                                                             |  |               |             |   |              |  
|CURRENT ASSETS                                                                                                                                                                                                                     |  |               |             |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                          |  | $             | 130,485,201 |   |              | $
|Accounts receivable, net                                                                                                                                                                                                           |  |               | 42,380,509  |   |              |  
|Prepayments for raw material purchases                                                                                                                                                                                             |  |               | 16,896,047  |   |              |  
|Other receivables, deposits and prepayments                                                                                                                                                                                        |  |               | 1,050,111   |   |              |  
|Prepaid land use right – current portion                                                                                                                                                                                           |  |               | 402,472     |   |              |  
|Deferred income tax assets                                                                                                                                                                                                         |  |               | 24,540      |   |              |  
|Inventories                                                                                                                                                                                                                        |  |               | 22,163,524  |   |              |  
|Total current assets                                                                                                                                                                                                               |  |               | 213,402,404 |   |              |  
|OTHER ASSETS                                                                                                                                                                                                                       |  |               |             |   |              |  
|Property, plant and equipment, net                                                                                                                                                                                                 |  |               | 47,086,905  |   |              |  
|Construction in progress                                                                                                                                                                                                           |  |               | -           |   |              |  
|Deposits for plant and equipment                                                                                                                                                                                                   |  |               | -           |   |              |  
|Prepaid land use right – long-term portion                                                                                                                                                                                         |  |               | 18,484,925  |   |              |  
|Intangible assets                                                                                                                                                                                                                  |  |               | -           |   |              |  
|Total non-current assets                                                                                                                                                                                                           |  |               | 65,571,830  |   |              |  
|Total assets                                                                                                                                                                                                                       |  | $             | 278,974,234 |   |              | $
|                                                                                                                                                                                                                                   |  |               |             |   |              |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                               |  |               |             |   |              |  
|CURRENT LIABILITIES                                                                                                                                                                                                                |  |               |             |   |              |  
|Accounts payable                                                                                                                                                                                                                   |  | $             | 7,185,703   |   |              | $
|Other payables and accruals                                                                                                                                                                                                        |  |               | 4,917,883   |   |              |  
|Income taxes payable                                                                                                                                                                                                               |  |               | 5,893,096   |   |              |  
|Dividend payable                                                                                                                                                                                                                   |  |               | -           |   |              |  
|Warrant liabilities                                                                                                                                                                                                                |  |               | 253,000     |   |              |  
|Total current liabilities                                                                                                                                                                                                          |  |               | 18,249,682  |   |              |  
|Total liabilities                                                                                                                                                                                                                  |  |               | 18,249,682  |   |              |  
|                                                                                                                                                                                                                                   |  |               |             |   |              |  
|STOCKHOLDERS' EQUITY                                                                                                                                                                                                               |  |               |             |   |              |  
|Preferred stock: $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding                                                                                                                                      |  |               | -           |   |              |  
|Common stock, $0.0001 par value: 75,000,000 shares authorized, 30,084,883 shares issued and 29,820,836 shares outstanding as of September 30, 2012 (December 31, 2011: 30,036,481 shares issued and 29,772,434 shares outstanding) |  |               | 3,008       |   |              |  
|Additional paid-in capital                                                                                                                                                                                                         |  |               | 79,189,141  |   |              |  
|Treasury stock, at cost, 264,047 shares as of September 30, 2012 and December 31, 2011                                                                                                                                             |  |               | (2,126,597  | ) |              |  
|Statutory reserves                                                                                                                                                                                                                 |  |               | 13,362,964  |   |              |  
|Retained earnings                                                                                                                                                                                                                  |  |               | 155,573,315 |   |              |  
|Accumulated other comprehensive income                                                                                                                                                                                             |  |               | 14,722,721  |   |              |  
|Total stockholders' equity                                                                                                                                                                                                         |  |               | 260,724,552 |   |              |  
|Total liabilities and stockholders' equity                                                                                                                                                                                         |  | $             | 278,974,234 |   |              | $



See accompanying notes to condensed consolidated
financial statements.



1







|LIHUA INTERNATIONAL, INC.
        CONDENSED CONSOLIDATED STATEMENTS OF
        INCOME AND COMPREHENSIVE INCOME
        (AMOUNTS EXPRESSED IN US DOLLARS)
|--------------------------------------------------------------------------------------------------------------------------------------------------------





|                                              |  | For the Three Months Ended September 30, |              |   | For the Nine Months Ended September 30, |  
|--------------------------------------------- |  | ---------------------------------------- | ------------ | - | --------------------------------------- | -
|                                              |  | 2012                                     |              |   | 2011                                    |  
|                                              |  |                                          |              |   |                                         |  
|NET REVENUE                                   |  | $                                        | 238,793,030  |   |                                         | $
|Cost of sales                                 |  |                                          | (213,536,628 | ) |                                         |  
|                                              |  |                                          |              |   |                                         |  
|GROSS PROFIT                                  |  |                                          | 25,256,402   |   |                                         |  
|                                              |  |                                          |              |   |                                         |  
|Selling expenses                              |  |                                          | (741,135     | ) |                                         |  
|General and administrative expenses           |  |                                          | (2,059,027   | ) |                                         |  
|                                              |  |                                          |              |   |                                         |  
|Income from operations                        |  |                                          | 22,456,240   |   |                                         |  
|                                              |  |                                          |              |   |                                         |  
|Other income (expenses):                      |  |                                          |              |   |                                         |  
|Interest income                               |  |                                          | 138,081      |   |                                         |  
|Interest expenses                             |  |                                          | -            |   |                                         |  
|Exchange expenses                             |  |                                          | 40,686       |   |                                         |  
|Gain on extinguishment of warrant liabilities |  |                                          | -            |   |                                         |  
|Change in fair value of warrants              |  |                                          | 451,000      |   |                                         |  
|Other income (expense)                        |  |                                          | (538         | ) |                                         |  
|Total other income (expenses), net            |  |                                          | 629,229      |   |                                         |  
|                                              |  |                                          |              |   |                                         |  
|Income before income taxes                    |  |                                          | 23,085,469   |   |                                         |  
|Provision for income taxes                    |  |                                          | (5,858,831   | ) |                                         |  
|                                              |  |                                          |              |   |                                         |  
|NET INCOME                                    |  | $                                        | 17,226,638   |   |                                         | $
|                                              |  |                                          |              |   |                                         |  
|OTHER COMPREHENSIVE INCOME:                   |  |                                          |              |   |                                         |  
|                                              |  |                                          |              |   |                                         |  
|Foreign currency translation adjustments      |  |                                          | (683,771     | ) |                                         |  
|                                              |  |                                          |              |   |                                         |  
|COMPREHENSIVE INCOME                          |  | $                                        | 16,542,867   |   |                                         | $
|                                              |  |                                          |              |   |                                         |  
|Net income per share                          |  |                                          |              |   |                                         |  
|Basic                                         |  | $                                        | 0.58         |   |                                         | $
|Diluted                                       |  | $                                        | 0.58         |   |                                         | $
|                                              |  |                                          |              |   |                                         |  
|Weighted average number of shares outstanding |  |                                          |              |   |                                         |  
|Basic                                         |  |                                          | 29,820,836   |   |                                         |  
|Diluted                                       |  |                                          | 29,891,994   |   |                                         |  





See accompanying notes to condensed consolidated
financial statements.



2







LIHUA INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY

(AMOUNTS EXPRESSED IN US DOLLARS)





|                                                |  | Common Stock
    Outstanding |            |  | Additional |   |       |         |  |   |            |  |  |          |            |  | Accumulated
     Other |   |            |               | 
|----------------------------------------------- |  | ---------------------------- | ---------- |  | ---------- | - | ----- | ------- |  | - | ---------- |  |  | -------- | ---------- |  | ---------------------- | - | ---------- | ------------- | 
|                                                |  | Number of                    |            |  |            |   |       | Paid-in |  |   | Statutory  |  |  | Treasury |            |  | Retained               |   |            | Comprehensive | 
|                                                |  | Shares                       |            |  | Amount     |   |       | Capital |  |   | Reserves   |  |  | Stock    |            |  | Earnings               |   |            | Income        | 
|At January 1, 2012                              |  |                              | 29,772,434 |  |            | $ | 3,003 |         |  | $ | 78,564,128 |  |  | $        | 10,418,476 |  |                        | $ | (2,126,597 | )             | 
|                                                |  |                              |            |  |            |   |       |         |  |   |            |  |  |          |            |  |                        |   |            |               | 
|Net income                                      |  |                              | -          |  |            |   | -     |         |  |   | -          |  |  |          | -          |  |                        |   | -          |               | 
|Foreign currency translation adjustment         |  |                              | -          |  |            |   | -     |         |  |   | -          |  |  |          | -          |  |                        |   | -          |               | 
|Exercise of warrants                            |  |                              | 48,402     |  |            |   | 5     |         |  |   | 311,704    |  |  |          | -          |  |                        |   | -          |               | 
|Share-based payments to employees and directors |  |                              | -          |  |            |   | -     |         |  |   | 313,309    |  |  |          | -          |  |                        |   | -          |               | 
|Appropriation of statutory reserves             |  |                              | -          |  |            |   | -     |         |  |   | -          |  |  |          | 2,944,488  |  |                        |   | -          |               | 
|                                                |  |                              |            |  |            |   |       |         |  |   |            |  |  |          |            |  |                        |   |            |               | 
|At
    September  30, 2012 (Unaudited)          |  |                              | 29,820,836 |  |            | $ | 3,008 |         |  | $ | 79,189,141 |  |  | $        | 13,362,964 |  |                        | $ | (2,126,597 | )             | 







See accompanying notes to condensed consolidated
financial statements.



3







LIHUA INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

(AMOUNTS EXPRESSED IN US DOLLARS)



|                                                                              |  | Nine Months Ended September 30, |            
|----------------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                              |  | 2012                            |            
|CASH FLOWS FROM OPERATING ACTIVITIES                                          |  |                                 |            
|Net income                                                                    |  | $                               | 42,148,316 
|Adjustments to reconcile net income to cash provided by operating activities: |  |                                 |            
|Depreciation and amortization                                                 |  |                                 | 2,374,465  
|Share-based compensation                                                      |  |                                 | 313,309    
|Gain on extinguishment of warrant liabilities                                 |  |                                 | (73,291    
|Change in fair value of warrants                                              |  |                                 | 23,000     
|Deferred income tax benefits                                                  |  |                                 | 175,444    
|(Increase) decrease in assets:                                                |  |                                 |            
|Accounts receivable                                                           |  |                                 | (11,538,283
|Bills receivable                                                              |  |                                 | -          
|Prepayments for raw material purchases                                        |  |                                 | 4,866,964  
|Other receivables, deposits and prepayments                                   |  |                                 | 823,965    
|Inventories                                                                   |  |                                 | (6,784,994 
|Increase (decrease) in liabilities:                                           |  |                                 |            
|Accounts payable                                                              |  |                                 | 1,162,203  
|Other payables and accruals                                                   |  |                                 | 224,537    
|Income taxes payable                                                          |  |                                 | 1,319,696  
|Net cash provided by operating activities                                     |  |                                 | 35,035,331 
|                                                                              |  |                                 |            
|CASH FLOWS FROM INVESTING ACTIVITIES                                          |  |                                 |            
|Purchase of property, plant and equipment                                     |  |                                 | (2,357,375 
|Addition to construction in progress                                          |  |                                 | (5,942,533 
|Net cash used in investing activities                                         |  |                                 | (8,299,908 
|                                                                              |  |                                 |            
|CASH FLOWS FROM FINANCING ACTIVITIES                                          |  |                                 |            
|Repurchase of common stock                                                    |  |                                 | -          
|Proceeds from exercise of warrants                                            |  |                                 | -          
|Dividend paid                                                                 |  |                                 | (992,846   
|Net cash used in financing activities                                         |  |                                 | (992,846   
|                                                                              |  |                                 |            
|Foreign currency translation adjustment                                       |  |                                 | (895,003   
|INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |                                 | 24,847,574 
|CASH AND CASH EQUIVALENTS, at the beginning of the period                     |  |                                 | 105,637,627
|CASH AND CASH EQUIVALENTS, at the end of the period                           |  | $                               | 130,485,201
|                                                                              |  |                                 |            
|MAJOR NON-CASH TRANSACTIONS:                                                  |  |                                 |            
|Share-based compensation to employees and directors                           |  | $                               | 313,309    
|Issuance of common stock to settle warrant liabilities                        |  | $                               | 311,709    
|SUPPLEMENTAL DISCLOSURE INFORMATION                                           |  |                                 |            
|Cash paid for interest                                                        |  | $                               | -          
|Cash paid for income taxes                                                    |  | $                               | 13,490,647 



See accompanying notes to condensed consolidated
financial statements.



4







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 1 | DESCRIPTION OF BUSINESS AND ORGANIZATION
| | ------ | ----------------------------------------



Lihua International, Inc. (“Lihua”
or 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, Danyang Lihua Electron Co., Ltd. and Jiangsu Lihua Copper
Industry Co., Ltd.



On September 4, 2009, the Company’s
common stock began trading on the NASDAQ Capital Market under the symbol “LIWA.”



As of September 30, 2012, details of the
subsidiaries of the Company are as follows:



|Subsidiaries’ names                                        |  | Domicile and
        date of
        incorporation           |  | Paid-up capital |            | Effective
        ownership |  |     | Principal activities
|---------------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------- | ---------- | --------------------------- |  | --- | --------------------
|Ally Profit Investments Limited (“Ally Profit”)            |  | British Virgin Islands
        March 12, 2008                |  | $               | 100        |                             |  | 100 | %                   
|                                                           |  |                                                              |  |                 |            |                             |  |     |                     
|Lihua Holdings Limited 
(“Lihua Holdings”)                 |  | Hong Kong
        April 17, 2008                             |  | HK$             | 100        |                             |  | 100 | %                   
|                                                           |  |                                                              |  |                 |            |                             |  |     |                     
|Danyang Lihua Electron Co., Ltd. (“Lihua Electron”)        |  | People’s Republic of China (“PRC”)
        December 30, 1999 |  | $               | 10,500,000 |                             |  | 100 | %                   
|                                                           |  |                                                              |  |                 |            |                             |  |     |                     
|Jiangsu Lihua Copper Industry Co., Ltd. (“ Lihua Copper ”) |  | PRC
        August 31, 2007                                  |  | $               | 46,000,000 |                             |  | 100 | %                   



5







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 2 | SUMMARY 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 have been 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, which are of a normal and recurring nature, 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 (a) condensed consolidated balance sheet as of December 31, 2011, which was
derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note
disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that
the disclosures made are adequate to make the information not misleading.  These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of the Company for
the year ended December 31, 2011.



Use of estimates



The preparation of these financial statements
in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these
financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company bases its
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Accordingly,
actual results may differ from these estimates under different assumptions or conditions.



Cash and cash equivalents



Cash and cash equivalents consist of all
cash balances and highly liquid investments with an original maturity of three months or less.  Because of the short maturity
of these investments, the carrying amounts approximate their fair value.  Restricted cash is excluded from cash and cash equivalents.



Accounts receivable



Accounts receivable are stated
at cost, net of an allowance for doubtful accounts.   The Company maintains allowances for doubtful accounts for
estimated losses, if any, resulting from the failure of customers to make required payments. The Company reviews the
accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual
balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including
the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. The
Company does not accrue interest on its accounts receivable.



6







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
| | ------ | ------------------------------------------------------



Inventories



Inventories are stated at the lower of
cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing
the products to their present location and condition. Market value is determined by reference to selling prices after the balance
sheet date or to management’s estimates based on prevailing market conditions. Management will write down the inventories
to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving
and obsolete inventories to determine if a valuation allowance is required.



Property, plant and equipment



Property, plant and equipment are stated
at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as
gain or loss in the year of disposal. The cost of improvements that extend the life of buildings, machinery and equipment are capitalized.
These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs
are expensed as incurred.



Depreciation for financial reporting purposes
is provided using the straight-line method over the estimated useful lives of the assets as follows:



|                                  |  | Useful Life | 
|--------------------------------- |  | ----------- | 
|                                  |  | (In years)  | 
|Buildings                         |  | 5-20        | 
|Machinery                         |  | 5-10        | 
|Office equipment & motor vehicles |  | 5           | 



Construction in progress



Construction in progress includes direct
costs of construction of buildings and equipment.  Interest incurred during the period of construction, if material,
is also capitalized. Construction in progress is not depreciated until such time as the assets are completed and put into service.



Prepaid land use rights



Prepaid land use right represent lump sum
payments for land use rights in the PRC.  The amount is expensed over the period the of land use rights of 50 years.



Impairment of long-lived assets



The Company reviews and evaluates its long-lived
assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
Impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying
amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future
cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows
that are largely independent of future cash flows from other asset groups.



7







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
CONTINUED
| | ------ | ------------------------------------------------------



Derivative financial instruments



The Company evaluates all its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of income.



The Company’s warrants have been
classified as derivatives in accordance with the guidance provided in FASB ASC 815-40-15-7I, because they are denominated in U.S.
dollars, which is different from the Company’s functional currency (Renminbi).The Company accounted for the exercise of these
warrants as extinguishment of debts in accordance with ASC 815-10-40-1, “Derivatives and Hedges – Derecognition”
and ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition”.



Revenue recognition



Revenue is recognized when the following
four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed
or determinable, and collectibility is reasonably assured.



Sales revenue is recognized net of value
added tax, sales discounts and returns at the time when the merchandise is sold and delivered to the customer. Based on historical
experience, management estimates that sales returns are immaterial and has not made an allowance for estimated sales returns.



Research and development costs



Research and development costs are expensed
as incurred, and charged to general and administrative expenses. For the nine months ended September 30, 2012 and 2011, research
and development costs were $1,355,119 and $148,665, respectively. For the three months ended September 30, 2012 and 2011, research
and development costs were $619,039 and $49,172, respectively.



Advertising costs



The Company expenses all advertising costs
as incurred. The total amount of advertising costs charged to general and administrative expenses was $856 and $17,036 for the
nine months ended September 30, 2012 and 2011, and nil and $3,277 for the three months ended September 30, 2012 and 2011, respectively.



Shipping and handling costs



Substantially all costs of shipping and
handling of products to customers are included in selling expenses.  Shipping and handling costs for the nine months
ended September 30, 2012 and 2011 were $1,737,112 and $1,503,913, and for the three months ended September 30, 2012 and 2011 were
$584,627 and $513,899, respectively.



8







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  –
CONTINUED
| | ------ | -------------------------------------------------------



Foreign currency



The Company has its local currency,
Renminbi (“RMB”), as its functional currency.  The Company’s subsidiaries maintain their books
and records in their functional currency, RMB.  The consolidated financial statements of the Company are translated
from RMB into United States dollars (“U.S. Dollars” or “US$” or “$”). Accordingly, assets
and liabilities are translated from RMB into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet
dates.  Items on the statements of income and cash flows are translated at the average exchange rates during the
reporting periods. Equity accounts are translated at historical rates.  Adjustments resulting from the translation of
the Company’s condensed financial statements are recorded as accumulated other comprehensive income.



The exchange rates used to translate amounts
in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published
on the website of People’s Bank of China and are as follows:



|                                                 | September 30, 2012               |  | December 31,2011
|------------------------------------------------ | -------------------------------- |  | ----------------
|Balance sheet items, except for equity accounts  | US$1=RMB  6.3410                 |  | US$1=RMB  6.3009
|                                                 |                                  |  |                 
|                                                 | Three months ended September 30,
|                                                 | 2012                             |  | 2011            
|Items in the statements of income and cash flows | US$1=RMB  6.3344                 |  | US$1=RMB  6.4176
|                                                 |                                  |  |                 
|                                                 | Nine months ended September 30, 
|                                                 | 2012                             |  | 2011            
|Items in the statements of income and cash flows | US$1=RMB  6.3170                 |  | US$1=RMB  6.4975



No representation is made that the RMB
amounts could have been, or could be, converted into U.S. dollars at the above rates. The value of RMB against U.S. dollars and
other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions.
Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.



Recent accounting pronouncements



In July 2012, the FASB issued
2012-02 Intangibles — Goodwill and Other (Topic 350): The amendments in this update will allow an entity to first
assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these
amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the
entity determines, based on a qualitative assessment, that it is not more likely than not, the indefinite-lived intangible
asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the
qualitative assessment. The amendments are effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed
as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim
period have not yet been issued. The Company does not expect the adoption of the provisions in this update will have a
significant impact on its consolidated financial statement.



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







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



NOTE 3	FAIR VALUE MEASUREMENTS AND FINANCIAL
INSTRUMENTS





ASC Topic 820, Fair Value Measurement and
Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and
unobservable inputs when measuring fair value. 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 using significant observable inputs (Level 2) from January 1, 2012 to September 30, 2012 are summarized
as follows:



|                                          |  | Warrantliability (Level 2) |         
|----------------------------------------- |  | -------------------------- | --------
|Balance at January 1, 2012                |  | $                          | 615,000 
|Change in fair value included in earnings |  |                            | 23,000  
|Exercise of warrants                      |  |                            | (385,000
|Balance at September 30, 2012             |  | $                          | 253,000 



The Company did not identify any other
non-recurring assets and liabilities that are required to be presented in the condensed consolidated balance sheets at fair value
in accordance with the relevant accounting standards.



The carrying values of cash and cash equivalents,
trade receivables and payables approximate their fair values due to the short maturities of these instruments.



10







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



NOTE 3	FAIR VALUE MEASUREMENTS AND FINANCIAL
INSTRUMENTS – CONTINUED



The Company estimates the fair value of
its warrants as of September 30, 2012 using the Black-Scholes option pricing model using the following assumptions:



|                                     |  | September 30, 2012 |         |   | December 31, 2011 |  
|------------------------------------ |  | ------------------ | ------- | - | ----------------- | -
|Series A and B Warrants              |  |                    |         |   |                   |  
|Market price of common stock:        |  | $                  | 3.56    |   |                   | $
|Exercise price:                      |  | $                  | 3.50    |   |                   | $
|Remaining contractual life (years):  |  |                    | 1.08    |   |                   |  
|Dividend yield:                      |  |                    | -       |   |                   |  
|Expected volatility:                 |  |                    | 60.52   | % |                   |  
|Risk-free interest rate:             |  |                    | 0.16    | % |                   |  
|Fair value – Series A and B Warrants |  | $                  | 229,000 |   |                   | $
|Underwriter Warrants                 |  |                    |         |   |                   |  
|Market price of common stock:        |  | $                  | 3.56    |   |                   | $
|Exercise price:                      |  | $                  | 4.80    |   |                   | $
|Remaining contractual life (years):  |  |                    | 1.93    |   |                   |  
|Dividend yield:                      |  |                    | -       |   |                   |  
|Expected volatility:                 |  |                    | 60.63   | % |                   |  
|Risk-free interest rate:             |  |                    | 0.22    | % |                   |  
|Fair value – Underwriter Warrants    |  | $                  | 24,000  |   |                   | $
|Fair value – Total                   |  | $                  | 253,000 |   |                   | $



During the nine months ended September
30, 2012, 125,000 warrants were exercised on a cashless basis to purchase 48,402 shares of common stock. In accordance with ASC
470-50-40, “Debt – Modification and Extinguishments – Derecognition”, an aggregate gain of $73,291 was
recognized.  For details, please refer to the following table.



|Exercise date:                                |  |   | February 7, 2012 |  
|--------------------------------------------- |  | - | ---------------- | -
|Market price of common stock:                 |  | $ | 6.44             |  
|Exercise warrants:                            |  |   | 125,000          |  
|Exercise price:                               |  | $ | 3.50             |  
|Remaining contractual life (years):           |  |   | 1.73             |  
|Dividend yield:                               |  |   | -                |  
|Expected volatility:                          |  |   | 39.43            | %
|Risk-free interest rate:                      |  |   | 0.21             | %
|Fair values:                                  |  | $ | 3.08             |  
|Gain on extinguishment of warrant liabilities |  | $ | 73,291           |  



11







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 4 | ACCOUNTS RECEIVABLE, NET
| | ------ | ------------------------



Accounts receivable consisted of the following:



|                                   |  | September 30, |            |  | December 31, |  
|---------------------------------- |  | ------------- | ---------- |  | ------------ | -
|                                   |  | 2012          |            |  | 2011         |  
|                                   |  |               |            |  |              |  
|Accounts receivable                |  | $             | 42,380,509 |  |              | $
|Less: Allowance for doubtful debts |  |               | -          |  |              |  
|                                   |  |               |            |  |              |  
|Accounts receivable, net           |  | $             | 42,380,509 |  |              | $



| | NOTE 5 | PREPAYMENTS FOR RAW MATERIAL PURCHASES
| | ------ | --------------------------------------



Starting from the second quarter
of 2011, the Company initiated purchases of scrap copper from overseas via a third-party import-export company. Pursuant to
the terms of the Company’s purchase agreements with that third-party, the Company was required to make prepayments
in advance of delivery of the purchased scrap copper to the Company’s production facilities. As of September 30, 2012
and December 31, 2011, such prepayments were $16,896,047 and $21,882,997, respectively.



12







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 6 | OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
| | ------ | -------------------------------------------



Other receivables, deposits and prepayments
consisted of the following:



|                                                 |  | September 30, |           |  | December 31, |  
|------------------------------------------------ |  | ------------- | --------- |  | ------------ | -
|                                                 |  | 2012          |           |  | 2011         |  
|Prepaid research and development costs           |  | $             | 506,784   |  |              | $
|Prepaid insurance                                |  |               | 378,000   |  |              |  
|Other receivables                                |  |               | 86,475    |  |              |  
|Utility deposits                                 |  |               | 78,852    |  |              |  
|Recoverable input VAT                            |  |               | -         |  |              |  
|Other prepayments                                |  |               | -         |  |              |  
|Less: Allowance for valuation and doubtful debts |  |               | -         |  |              |  
|                                                 |  |               |           |  |              |  
|                                                 |  | $             | 1,050,111 |  |              | $



In 2011, the Company signed various research
and development contracts with Shanghai Electric Cable Research Institute. The service periods of the contracts varies from approximately
1.5 years to 3 years, with installment payment terms. Prepaid research and development costs as of September 30, 2012 represented
aggregate installment payments made upon execution of the contracts, net of amortization in 2012 and 2011, pursuant to the terms
of these contracts.



| | NOTE 7 | INVENTORIES
| | ------ | -----------



Inventories by major categories are summarized
as follows:



|                     |  | September 30, |            |  | December 31, |  
|-------------------- |  | ------------- | ---------- |  | ------------ | -
|                     |  | 2012          |            |  | 2011         |  
|Raw materials        |  | $             | 12,585,392 |  |              | $
|Work in progress     |  |               | 814,952    |  |              |  
|CCA and copper wire  |  |               | 4,818,748  |  |              |  
|Copper rod and anode |  |               | 3,944,432  |  |              |  
|                     |  |               |            |  |              |  
|                     |  | $             | 22,163,524 |  |              | $



| | NOTE 8 | INTANGIBLE ASSETS
| | ------ | -----------------



|                               |  | September 30, |         |   | December 31 |  
|------------------------------ |  | ------------- | ------- | - | ----------- | -
|                               |  | 2012          |         |   | 2011        |  
|Computer software, cost        |  | $             | 11,613  |   |             | $
|Less: Accumulated amortization |  |               | (11,613 | ) |             |  
|                               |  |               |         |   |             |  
|                               |  | $             | -       |   |             | $



Amortization expense for the nine months ended September 30,
2012 and 2011 was $170 and $2,711, respectively. Amortization expense for the three months ended September 30, 2012 and 2011 was
nil and $875, respectively.



13







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 9 | PREPAID LAND USE RIGHTS
| | ------ | -----------------------



The Company has recorded as prepaid land
use rights the lump sum payments made to acquire long-term interests to utilize the land underlying the building 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.



The amounts expensed on prepaid land
use rights were $302,940 and $294,524 for the nine months ended September 30, 2012 and 2011, respectively, and $100,673 and
$99,483 for the three months ended September 30, 2012 and 2011, respectively.  The estimated expense of the prepaid
land use rights over each of the next five years and thereafter will be $402,472 per annum.



As of September 30, 2012,
prepaid land use rights included RMB 32,399,100 ($5,109,462) representing payments made by Lihua Copper to a local authority
to acquire a 50-year right to use a parcel of land which is used for expansion of its manufacturing facilities. As of
September 30, 2012, RMB 2,399,100 ($378,347) remained unpaid and is included as other payables and accruals. Apart from the
payment of $5,122,468 to the local authority, the Company also paid $5,721,627 primarily as compensation to the local
communities in connection with the Company’s acquisition of these land use rights.



The Company has completed all the formalities
in relation to the acquisition of the land use rights, except for paying the last payment of RMB 2,399,910 ($378,347). Based on
the Company’s understanding of the process, each year the local government allocates certain area (mu) of land to selected
local manufacturers. However, the physical land use right certificates are not issued to those manufacturers until the local government
receives the formal annual land quota from the state government. The Company received a land use rights certificate in November
2011 for 100 mu out of a total of 180 mu of land allocated to the Company, and management expects to receive the land use rights
certificate for the remaining 80 mu in 2013. Upon receipt of the land use right certificates for the remaining 80 mu of land, the
Company will pay the remaining land use payments.



Based upon the local government practice,
as well as the Company’s prior experience obtaining land use rights after going through the same process, management believes
that the risk of losing the already allocated land use right is extremely low. In the unlikely event that the local government
is unable to issue the physical land use right certificate for the remaining 80 mu of land, management believes the Company would
have the right to receive a refund of the payment it made to the local government with respect to the land use right and, request
to receive additional monies from the local government for construction costs incurred to date on the land.



14







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 10 | PROPERTY, PLANT AND EQUIPMENT, NET
| | ------- | ----------------------------------



Property, plant and equipment, net consisted
of the following:



|                               |  | September 30, |            |   | December 31, |  
|------------------------------ |  | ------------- | ---------- | - | ------------ | -
|                               |  | 2012          |            |   | 2011         |  
|Cost:                          |  |               |            |   |              |  
|Buildings                      |  | $             | 33,981,353 |   |              | $
|Office equipment               |  |               | 381,794    |   |              |  
|Motor vehicles                 |  |               | 689,923    |   |              |  
|Machinery                      |  |               | 21,553,204 |   |              |  
|                               |  |               |            |   |              |  
|Total cost                     |  |               | 56,606,274 |   |              |  
|Less: Accumulated depreciation |  |               | (9,519,369 | ) |              |  
|                               |  |               |            |   |              |  
|Net book value                 |  | $             | 47,086,905 |   |              | $



Depreciation expense was $2,071,355 and
$1,286,494 for the nine months ended September 30, 2012 and 2011,  respectively, and $935,252 and $193,722 for the three months ended September
30, 2012 and 2011, respectively.



| | NOTE 11 | CONSTRUCTION IN PROGRESS
| | ------- | ------------------------



Construction in progress was related to
the construction of the new production plant and consisted of the following:



|                          |  | September 30, |   |  | December 31, |  
|------------------------- |  | ------------- | - |  | ------------ | -
|                          |  | 2012          |   |  | 2011         |  
|Construction of equipment |  | $             | - |  |              | $
|Construction of buildings |  |               | - |  |              |  
|                          |  |               |   |  |              |  
|                          |  | $             | - |  |              | $



| | NOTE 12 | OTHER PAYABLES AND ACCRUALS
| | ------- | ---------------------------



Other payables and accruals consisted of
the following:



|                                |  | September 30, |           |  | December 31, |  
|------------------------------- |  | ------------- | --------- |  | ------------ | -
|                                |  | 2012          |           |  | 2011         |  
|Accrued staff costs             |  | $             | 570,044   |  |              | $
|Other taxes payable             |  |               | 1,222,606 |  |              |  
|Construction cost payable       |  |               | 1,950,747 |  |              |  
|Advance from an unrelated party |  |               | 500,000   |  |              |  
|Other payables                  |  |               | 674,486   |  |              |  
|                                |  |               |           |  |              |  
|                                |  | $             | 4,917,883 |  |              | $



15







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



NOTE 13	    COMMON STOCK AND COMMON STOCK PURCHASE
WARRANTS



During the nine months ended September
30, 2012, 125,000 warrants were exercised on a cashless basis to purchase 48,402 shares of common stock, which would have been
exercisable in cash for $3.50 per share.



Warrants issued and outstanding at September
30, 2012, and changes during the nine months then ended, are as follows:



|                            |  | Warrants Outstanding        |          |   | Warrants Exercisable            |  
|--------------------------- |  | --------------------------- | -------- | - | ------------------------------- | -
|                            |  | Number of underlying shares |          |   | Weighted Average Exercise Price |  
|Balance, January 1, 2012    |  |                             | 408,956  |   |                                 | $
|Granted/Vested              |  |                             | -        |   |                                 |  
|Forfeited                   |  |                             | -        |   |                                 |  
|Exercised                   |  |                             | (125,000 | ) |                                 |  
|Balance, September 30, 2012 |  |                             | 283,956  |   |                                 | $



On January 24, 2011, the Board of Directors
approved a one-year share repurchase program of up to $15 million of the Company’s common stock, pursuant to which the Company
was authorized to repurchase its outstanding common stock from time to time, depending on market conditions, share price and other
factors, on the open market or in privately negotiated transactions. Repurchased shares may be retired immediately and will resume
the status of authorized but unissued shares or they may be held by the Company as treasury stock. In 2011, the Company repurchased
264,047 shares of its common stock under the share repurchase authorization at a weighted-average price of $8.05 per share for
an aggregate purchase cost of $2,126,597. The share repurchase program expired on January 23, 2012.



| | NOTE 14 | SHARE-BASED COMPENSATION
| | ------- | ------------------------



Options granted to Independent Directors
and Employees



On April 26, 2012, the Company granted
options to each of its independent directors, Mr. Robert Bruce, Mr. Jonathan Serbin and Mr. Kelvin Lau to purchase 20,000 shares
of the Company’s common stock at a strike price of $5.63 per share, in consideration of their services to the Company. The
options vest and become exercisable in equal installments on July 14, 2012, October 14, 2012, January 14, 2013 and April 14, 2013
and will expire 10 years from the date of grant.



In accordance with the guidance provided
in ASC Topic 718, Stock Compensation, the compensation costs associated with these options are recognized, based on the grant-date
fair values of these options, over the requisite service period, or vesting period. Accordingly, the Company recognized compensation
expense of $313,309 and $98,834 for the nine and three months ended September 30, 2012, respectively.



16







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



NOTE 14	    SHARE-BASED COMPENSATION – CONTINUED



Options issued and outstanding at September
30, 2012 and their movements during the nine months then ended are as follows:



|                                  |  | Number of underlying shares |         |  | Weighted-Average Exercise Price  Per Share |   |      | Aggregate Intrinsic Value (1) |  |   | Weighted-
Average Contractual Life Remaining in
Years | 
|--------------------------------- |  | --------------------------- | ------- |  | ------------------------------------------ | - | ---- | ----------------------------- |  | - | ----------------------------------------------------- | 
|                                  |  |                             |         |  |                                            |   |      |                               |  |   |                                                       | 
|Outstanding at December 31, 2011  |  |                             | 715,000 |  |                                            | $ | 5.16 |                               |  | $ | 213,300                                               | 
|Granted                           |  |                             | 60,000  |  |                                            |   | 5.63 |                               |  |   |                                                       | 
|Exercised                         |  |                             | -       |  |                                            |   |      |                               |  |   |                                                       | 
|Expired                           |  |                             | -       |  |                                            |   |      |                               |  |   |                                                       | 
|Forfeited                         |  |                             | -       |  |                                            |   |      |                               |  |   |                                                       | 
|Outstanding at September 30, 2012 |  |                             | 775,000 |  |                                            | $ | 5.19 |                               |  | $ | 40,800                                                | 
|Exercisable at September 30, 2012 |  |                             | 205,000 |  |                                            | $ | 6.87 |                               |  | $ | 40,800                                                | 



| | (1) | The intrinsic value of the stock options at September 30, 2012 and December 31, 2011 is the amount
by which the market value of the Company’s common stock of $3.56 and $4.76, as of September 30, 2012 and December 31, 2011,
respectively, exceeds the exercise price of the option.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | NOTE 15 | STATUTORY RESERVES
| | ------- | ------------------



The Company is required to make appropriations
to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based
on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”).
Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with
the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Appropriations
to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP.
Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to a welfare
fund. In accordance with the Chinese Company Law, the Company allocated 10% of income after taxes to the statutory surplus reserve
for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, statutory reserve activity is as follows:



|Balance – December 31, 2011    |  | $ | 10,418,476 | 
|------------------------------ |  | - | ---------- | 
|Addition to statutory reserves |  |   | 2,944,488  | 
|Balance –September 30, 2012    |  | $ | 13,362,964 | 



17







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 16 | OTHER INCOME (EXPENSE)
| | ------- | ----------------------





|                     |  | For the Three Months Ended September 30, |      |   | For the Nine Months Ended September 30, |  
|-------------------- |  | ---------------------------------------- | ---- | - | --------------------------------------- | -
|                     |  | 2012                                     |      |   | 2011                                    |  
|                     |  |                                          |      |   |                                         |  
|Government subsidies |  | $                                        | -    |   |                                         | $
|Other                |  |                                          | (538 | ) |                                         |  
|                     |  |                                          |      |   |                                         |  
|                     |  | $                                        | (538 | ) |                                         | $





| | NOTE 17 | INCOME TAXES
| | ------- | ------------



The Company is subject to income tax on
an entity basis on income arising from the tax jurisdiction in which they operate.



The Company’s two operating
subsidiaries, Lihua Electron and Lihua Copper, are generally subject to PRC enterprise income tax
(“EIT”). Both Lihua Electron and Lihua Copper are subject to an EIT rate of 25% for 2012 and 2011 under
China’s Unified Enterprise Income Tax Law (“New Tax Law”).



The New Tax Law also imposes a 10% withholding
income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China for distribution
of earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings generated prior to January 1,
2008 is exempt from the withholding tax. As management does not anticipate that the subsidiaries in the PRC will distribute their
earnings to the Company for the year ending December 31, 2012, and no dividends were distributed in the years ended December 31,
2011 and 2010, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries through September
30, 2012. Total undistributed earnings of these PRC subsidiaries at September 30, 2012 was RMB1,199,223,491 ($189,122,140).



No provision for other overseas taxes is
made as neither Lihua, Ally Profit or Lihua Holdings has any taxable income in the U.S., British Virgin Islands or Hong Kong, respectively.



The Company’s provision for income
taxes consisted of:



|                |  | For the Three Months |           |   | For the Nine Months |  
|--------------- |  | -------------------- | --------- | - | ------------------- | -
|                |  | Ended September 30,  |           |   | Ended September 30, |  
|                |  | 2012                 |           |   | 2011                |  
|PRC income tax: |  |                      |           |   |                     |  
|Current         |  | $                    | 5,863,804 |   |                     | $
|Deferred        |  |                      | (4,973    | ) |                     |  
|                |  |                      |           |   |                     |  
|                |  | $                    | 5,858,831 |   |                     | $



18







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 17 | INCOME TAXES – CONTINUED
| | ------- | ------------------------



A reconciliation of the provision for income
taxes determined at the local income tax rate to the Company’s effective income tax rate is as follows:





|                                                                         |  | For the Three Months |            |   | For the Nine Months |  
|------------------------------------------------------------------------ |  | -------------------- | ---------- | - | ------------------- | -
|                                                                         |  | Ended September 30,  |            |   | Ended September 30, |  
|                                                                         |  | 2012                 |            |   | 2011                |  
|                                                                         |  |                      |            |   |                     |  
|Pre-tax income                                                           |  | $                    | 23,085,469 |   |                     | $
|United States federal corporate income tax rate                          |  |                      | 34         | % |                     |  
|Income tax computed at United States statutory corporate income tax rate |  |                      | 7,849,060  |   |                     |  
|Reconciling items:                                                       |  |                      |            |   |                     |  
|Loss not recognized as deferred tax assets                               |  |                      | 237,951    |   |                     |  
|Change in fair value of warrants                                         |  |                      | (153,340   | ) |                     |  
|Rate differential for PRC earnings                                       |  |                      | (2,103,517 | ) |                     |  
|Other                                                                    |  |                      | 28,677     |   |                     |  
|Effective tax expense                                                    |  | $                    | 5,858,831  |   |                     | $





Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of deferred income tax assets are as follows:



|                                            |  | September 30, |            |   | December 31, |  
|------------------------------------------- |  | ------------- | ---------- | - | ------------ | -
|                                            |  | 2012          |            |   | 2011         |  
|Deferred income tax assets:                 |  |               |            |   |              |  
|Net operating loss carry forward            |  | $             | 4,469,232  |   |              | $
|Unrealized intercompany profit in inventory |  |               | 24,540     |   |              |  
|Accrued R&D expenses                        |  |               | -          |   |              |  
|Less: Valuation allowance                   |  |               | (4,469,232 | ) |              |  
|                                            |  |               |            |   |              |  
|                                            |  | $             | 24,540     |   |              | $
|                                            |  |               |            |   |              |  

As of September 30, 2012 and December
31, 2011, the Company’s U.S. entity, Lihua International, Inc., had net operating loss carry forwards of $13,144,800 and
$10,679,801, respectively, available to reduce future taxable income which will expire in various years through 2030. Management
believes it is more likely than not that the Company will not realize these potential tax benefits as the Company’s U.S.
operations will not generate any operating profits in the foreseeable future. As a result, the full amount of the valuation allowance
was provided against the potential tax benefits.



As of September 30, 2012 and December 31,
2011, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future
periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the
next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the nine months
ended September 30, 2012 and 2011, and no provision for interest and penalties is deemed necessary as of September 30, 2012 and
December 31, 2011.



According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made
by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are
not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of
limitations in the case of tax evasion.



19







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 18 | EARNINGS PER SHARE
| | ------- | ------------------



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:



|                                          |  | For the Three Months |            |  | For the Nine Months |  
|----------------------------------------- |  | -------------------- | ---------- |  | ------------------- | -
|                                          |  | Ended September 30,  |            |  | Ended September 30, |  
|                                          |  | 2012                 |            |  | 2011                |  
|Income available to common shareholders:  |  |                      |            |  |                     |  
|- Basic and diluted                       |  | $                    | 17,226,638 |  |                     | $
|Weighted average number of shares:        |  |                      |            |  |                     |  
|- Basic                                   |  |                      | 29,820,836 |  |                     |  
|- Effect of dilutive warrants and options |  |                      | 71,158     |  |                     |  
|- Diluted                                 |  |                      | 29,891,994 |  |                     |  
|                                          |  |                      |            |  |                     |  
|Net income per share                      |  |                      |            |  |                     |  
|- Basic                                   |  | $                    | 0.58       |  |                     | $
|- Diluted                                 |  | $                    | 0.58       |  |                     | $



| | NOTE 19 | RELATED PARTY TRANSACTIONS
| | ------- | --------------------------



| | 1. | Sales
| | -- | -----

For the nine months ended September
30, 2012 and 2011, sales included nil and $620,295, respectively that were made to Tianyi Telecom.  The controlling stockholders
of Tianyi Telecom are related to Ms. Yaying Wang, the Company’s COO and one of the Company’s directors.



| | 2. | Loans
| | -- | -----

On May 19, 2011, Magnify Wealth
Enterprise Limited (“Magnify Wealth”), a British Virgin Islands corporation and an entity affiliated with Mr. Jianhua
Zhu, the Chief Executive Officer and Chairman of the Company, agreed to loan the Company up to $4 million pursuant to the terms
of a demand promissory note (the “Note”) to partially fund the Company’s previously announced $15 million stock
repurchase program to make open market purchases of the Company’s common stock (the “Repurchase Program”) (See
Note 13 above). While the Company’s operating subsidiaries in the PRC have substantial cash reserves available, the laws
of the PRC restrict the conversion of RMB to US dollars, such that the Company has encountered difficulty funding the Repurchase
Program with US dollars from cash held by its PRC subsidiaries. The Company explored possible alternative arrangements for funding
the Repurchase Program in US dollars with financial institutions, but Company management determined that such alternatives would
have been costly or otherwise not appropriate for the Company.



On January 9 and March 15, 2012,
in order to partially fund the 2011 special dividend payment and U.S. dollar operating expenses, upon Board approval, Magnify Wealth
loaned $1 million and $0.6 million, respectively, under the Note, of which RMB 6.3 million and RMB 3.8 million were repaid on January
9 and March 31, 2012, respectively, in RMB, at the average rate of 6.3126 RMB per US dollars, based upon the exchange rate between
US dollars and RMB as set forth by Standard Chartered Bank in Hong Kong. The loans under the Note were unsecured, payable on demand
and bore interest at 2% per annum.



20







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 19 | RELATED PARTY TRANSACTIONS – CONTINUED
| | ------- | --------------------------------------



On
April 6 and April 26, 2012, in order to partially fund the 2011 special dividend payment and U.S. dollar operating expenses, upon
Board approval, Magnify Wealth loaned $0.5 million and $0.9 million, respectively, under the Note, of which RMB 3.15 million and
RMB 5.65 million were repaid, respectively, in RMB, at the average rate of 6.2916 RMB per US dollars, based upon the exchange
rate between US dollars and RMB as set forth by Standard Chartered Bank in Hong Kong. The loans under the Note were unsecured,
payable on demand and bore interest at 2% per annum.



As
of September 30, 2012, there was no outstanding loan under the Note.



NOTE 20	CERTAIN RISKS AND CONCENTRATION



Credit risk and major customers



As of September 30, 2012 and December 31,
2011, substantially all of the Company’s cash including cash on hand and deposits in accounts were 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 a bank’s
failure. However, the Company has not experienced any such losses and believes it is not exposed to any significant risks on its
cash in bank accounts.



For the nine months ended September
30, 2012 and 2011, all of the Company’s sales were generated in the PRC.  In addition, all accounts
receivable as of September 30, 2012 and December 31, 2011 were due from customers located in the PRC.



Two customers accounted for 29.4% and 12.5%
of the Company’s revenue for the nine months ended September 30, 2012, respectively, and three customers accounted for 24.9%,
12.2% and 10.4% of the Company’s revenue for the nine months ended September 30, 2011, respectively. There was no other single
customer who accounted for more than 10% of the Company’s revenue for the nine months ended September 30, 2012 or 2011.



Two customers accounted for 34.7% and 14.7%
of the Company’s revenue for the three months ended September 30, 2012, respectively, and one customer accounted for 34.1%
of the Company’s revenue for the three months ended September 30, 2011. There was no other single customer who accounted
for more than 10% of the Company’s revenue for the three months ended September 30, 2012 or 2011.



Two customers accounted for 45.3% and 11.6%
of total accounts receivable of the Company as of September 30, 2012, respectively, and one customer accounted for 33.6% of total
accounts receivable of the Company as of December 31, 2011. There was no other single customer who accounted for 10% or more of
the Company’s accounts receivable as of September 30, 2012 and December 31, 2011.



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.



21







LIHUA INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2012 AND 2011



| | NOTE 21 | COMMITMENTS AND CONTINGENCIES
| | ------- | -----------------------------



Lease commitments

The Company has entered into tenancy agreements
for the lease of factory premises and warehousing facilities with independent parties. The Company’s commitments for minimum
lease payments under these operating leases for the next five years and thereafter as of September 30, 2012 are as follows:



|Payable within:                                       |  |   |       
|----------------------------------------------------- |  | - | ------
|- remainder of fiscal year ending December 31, 2012   |  | $ | 14,666
|- fiscal year ending December 31, 2013                |  |   | 61,189
|- fiscal year ending December 31, 2014 and thereafter |  |   | 20,817
|                                                      |  |   |       
|Total                                                 |  | $ | 96,672



Capital commitments  –
contracted but not provided for



|                                                           |  | September 30, |           |  | December 31, |  
|---------------------------------------------------------- |  | ------------- | --------- |  | ------------ | -
|                                                           |  | 2012          |           |  | 2011         |  
|                                                           |  |               |           |  |              |  
|Acquisition or construction of buildings - within one year |  | $             | 31,541    |  |              | $
|Purchase of machinery - within one year                    |  |               | 1,387,794 |  |              |  
|                                                           |  |               |           |  |              |  
|                                                           |  | $             | 1,419,335 |  |              | $



Other commitments



During 2011, the Company
signal various research and development contracts with Shanghai Electric Cable Research Institute with a total contract
amount of $3 million. As of September 30, 2012, the Company has paid $2.2 million. The Company expects to pay the remaining
$0.8 million within one year.





|NOTE 22 | SEGMENT DATA AND RELATED INFORMATION
|------- | ------------------------------------



The Company operates in one business segment,
the manufacturing and sale of refined copper rod and copper anode, as well as copper clad aluminum (CCA) wire and copper wire produced
from refined copper rod. The Company also operates in only 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) wire manufacturing, consisting of (a) CCA fine and superfine wire, which is an electrical conductor consisting of an outer
sleeve of copper that is metallurgic ally bonded to a solid aluminum core, and (b) copper fine and superfine wire, manufactured
from recycled copper rod; (2) refined copper rod; and (3) refined copper anode, the latter two of which are fire refined from scrap
copper.



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



|                                         |  | For the Three Months |             |  | For the Nine Months |  
|---------------------------------------- |  | -------------------- | ----------- |  | ------------------- | -
|                                         |  | Ended September 30,  |             |  | Ended September 30, |  
|                                         |  | 2012                 |             |  | 2011                |  
|Net revenue from unaffiliated customers: |  |                      |             |  |                     |  
|Copper and CCA wire                      |  | $                    | 101,242,664 |  |                     | $
|Copper anode                             |  |                      | 118,235,921 |  |                     |  
|Refined copper rod                       |  |                      | 19,314,445  |  |                     |  
|                                         |  | $                    | 238,793,030 |  |                     | $
|                                         |  |                      |             |  |                     |  
|Gross profit:                            |  |                      |             |  |                     |  
|Copper and CCA wire                      |  | $                    | 12,791,911  |  |                     | $
|Copper anode                             |  |                      | 11,425,027  |  |                     |  
|Refined copper rod                       |  |                      | 1,039,464   |  |                     |  
|                                         |  | $                    | 25,256,402  |  |                     | $





22







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



This Quarterly Report on Form 10-Q, including
the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions,
that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied
by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,”
“targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions
are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that
could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities;
statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections
of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management
for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting
business in China; any statements of belief or intention; any of the factors and risks mentioned in the “Risk Factors”
sections of our Annual Report on Form 10-K for the year ended December 31, 2011 and subsequent SEC filings, and any statements
of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information
available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements,
except as required by law.



23







In this report, the “Company,”
“we,” “us” and “our” refer to Lihua International, Inc. and its subsidiaries.



OVERVIEW



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



We manufacture and sell four major types
of refined copper products and copper alternative products: copper anode, pure copper rod, pure copper wire and CCA wire. Copper
anode, pure copper rod and pure copper wire products are produced from refined scrap copper utilizing our proprietary scrap copper
recycling and cleaning technology and process. Currently 63% of the copper rod volume we produce is used internally as a
raw material for copper wire production.



In the first quarter of 2009, with the
completion of a 25,000 ton per annum capacity smelter, we introduced a new production process and product line which enables us
to produce pure copper products from scrap copper. The new production process involves the fire refining of bulk recycled copper
into high purity, low oxygen content copper rods (also known as fire-refined high-conductivity rods). We then either sell these
large diameter (8mm) copper rods into a range of markets, or further process these rods into much smaller diameter (e.g., 0.03
mm) copper wire. We believe this recycled copper wire is generally a more cost effective product for our customers, compared with
pure copper wire manufactured from newly mined copper. We added a second 25,000 ton per annum capacity copper smelter in July 2010,
which doubled our recycled copper refining and manufacturing capacity to 50,000 tons per year. We use this second smelter to produce
another new product, copper anode, which is the fundamental building block for almost all pure copper products and has a wide range
of potential end market uses. In October 2011, we completed capacity efficiency improvements to our two smelters and increased
annual production capacity of copper anode and copper rod to 35,000 tons and 50,000 tons, respectively. In June 2012, we started
production of copper anode from two new smelters, which were constructed on our 30-acre new plant site. The two new anode smelters
each have production capacities of 25,000 tons per annum. As of September 30, 2012, our scrap copper refinery capacity was approximately
135,000 tons per annum.



Currently, we have three different CCA products:
CCA fine wire, CCA magnet wire and CCA tin plated wire. CCA fine wire is the raw material for CCA magnet wire and CCA tin plated
wire. In the case of CCA magnet wire, we coat the CCA fine wire with a special magnetic coating, while in the case of CCA tin plated
wire, we plate the CCA fine wire with a very thin layer of tin. The value added nature of our CCA superfine wire products lies
in our ability to draw down from much larger diameter CCA raw wire, and further process it to produce super fine CCA magnet wire
and CCA tin plated wire, based upon our proprietary technology. As a result, CCA magnet wire and CCA tin plated wire command higher
market prices and higher gross margins than plain CCA fine wire.



We draw pure copper wire from the refined
pure copper rod we produce. The pure copper wire we produce has three main sub categories of products: fine wire, magnet wire and
tin plated wire. These three copper wire products have similar characteristics as the three CCA wire products mentioned above.



We have expanded our business from the
CCA superfine wire segment into the scrap copper refinery business because we believe that the scrap copper refinery business allows
us to sell into the much bigger pure copper products market and offers us the ability to grow more rapidly while utilizing the
proprietary equipment and technology that we possess relating to both the scrap copper cleaning as well as superfine wire drawing.
We believe that the ability to sell into the large and growing copper and copper replacement products market in China offers us
substantial opportunity to increase our sales in the future. We anticipate that we will continue to expand production capacity
in both refined copper products and new CCA products. Since 2009, the majority of our investment, and resulting sales volume growth,
occurred in the refined copper products business, which caters to a much bigger pure copper products market, compared with the
CCA wire market.



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



24







Our market for copper anode is very large
and diverse, as copper anode is the raw material for copper cathode, which in turn is the foundation for most pure copper products.
With respect to our other three main product categories (copper rod, copper wire and CCA wire), our markets overlap to a degree,
and are characterized by their breadth and depth, with a large number of current and potential customers for each product category.
Copper rod is a raw material used in wire and cable production. Our refined copper products (copper anode, copper rod and copper
wire), which are manufactured from recycled scrap copper, compete directly with copper products made from “virgin”
(e.g. newly mined) copper. To date, our raw material costs for bulk scrap copper have been lower than prices for “virgin”
copper, which provides us with a pricing advantage in the market for the refined copper products we produce from scrap copper.
Since inception of copper anode sales, we sold copper anode to a few copper conglomerates, which use our product to produce copper
cathode. We utilize copper rod produced as raw material for the copper wire production and sell the excess copper rod to outside
customers, most of which are producers of smaller diameter copper wire used in power cables ranging in size from high voltage power
transmission cables to white good applications such as internal wiring in household appliances and consumer electronics. Our copper
wire, which is sold in a variety of diameters and may have undergone further in-line processing such as coating with plastic, is
sold to many of the same types of end-use customers who purchase copper wire from our copper rod customers. These include manufacturers
of a wide range of power cables and products that incorporate wiring, such as household appliances, automobiles, consumer electronics
and telecommunications equipment. Our CCA wire is sold to many of these manufacturers as well. CCA wire sells at a lower cost per
unit of weight than pure copper wire, due to the relatively lower density of the aluminum core which makes up most of the volume
of CCA wire. Our CCA wire offers conductivity performance characteristics that are only marginally below those of pure copper wire,
which means they are attractive in a wide variety of product applications where a slight reduction in conductivity standards is
tolerable (such as most of the household appliance, automotive, consumer electronics and telecommunications applications). Examples
of relatively high tolerance product applications where our CCA wire would not provide an acceptable replacement option for pure
copper wire would be military/space equipment and wiring in nuclear power plants. One low tolerance product category that requires
pure copper wire rather than our less costly CCA wire is electric motors, which require pure copper wire windings. The markets
for each of our product lines are growing rapidly, due both to growing demand in China for copper products including all types
of basic wire raw materials and the relative cost advantages our product lines carry over “virgin” pure copper competitor
products. We believe that our pricing advantage on our refined copper products can be maintained regardless of fluctuations in
the commodity price of copper.



We believe that we are well positioned
to continue to capture further market share in the copper and copper replacement product industry. Our refined copper products
produced from recycled copper and CCA wire are increasingly being accepted as cheaper alternatives to pure copper products. As
a result, our sales and net income have increased substantially during the last three years. We generated sales of $161.5 million,
$370.5 million and $637.1 million for the years ended December 31, 2009, 2010 and 2011, respectively. We achieved net income of
$13.7 million, $38.5 million and $53.1 million for the years ended December 31, 2009, 2010 and 2011, respectively. In 2009, we
had a non-cash charge of $11.9 million, which resulted from the change in the fair value of the warrants issued to investors in
conjunction with the Company’s issuance of convertible preferred stock in October 2008. Excluding the impact of this non-cash
charge, net income for 2009 was $25.6 million, up 118.7%. In 2010, we had a $0.2 million non-cash gain on extinguishment of warrant
liabilities and a non-cash charge of $1.4 million, which resulted from the change in the fair value of the warrants. Excluding
the impact of these non-cash charges, net income for 2010 was $39.7 million, up 55.1% from 2009. In 2011, we had a $0.1 million
non-cash gain on extinguishment of warrant liabilities and a non-cash gain of $3.1 million, which resulted from the change in fair
value of the warrants. Excluding the impact of these non-cash warrant related items, net income for 2011 was $50.0 million, up
25.8% from 2010. For the three months ended September 30, 2012 and 2011, no warrant liabilities were extinguished. For the three
months ended September 30, 2012 and 2011, we recognized a non-cash gain of $0.5 million and $0.6 million, respectively, from the
change of fair value of warrants. Excluding the impact of these non-cash items, net income for the three months ended September
30, 2012 was $16.8 million, up 29.9% from the same period last year. For the nine months ended September 30, 2012 and 2011, we
recognized $0.07 million and $0.09 million, respectively, non-cash gain on extinguishment of warrant liabilities. For nine months
ended September 30, 2012 and 2011, we recognized a non-cash loss of $0.02 million and a gain of $3.18 million, respectively, from
the change in fair value of the warrants. Excluding the impact of these non-cash items, net income for the nine months ended September
30, 2012 was $42.1 million, up 13.4% from the same period last year.



25







Our capacity to sell our copper anode,
copper rod, recycled copper wire products (drawn from copper rod) and CCA wire products (drawn from larger diameter CCA wire) is
limited by the quantity and capacity of the equipment we have installed to produce these products. Our copper anode and copper
rod are made from bulk scrap copper, which is cleaned, purified and smelted in large capacity smelter units. At the present time
we have four smelting facilities, one of which is allocated to copper rod and the other three to copper anode production. Two of
the copper anode smelters were newly constructed in 2012 and commenced production in June 2012. The copper anode smelters have
a total annual production capacity of 85,000 tons and the copper rod smelter has a production capacity of 50,000 tons per annum.
During the three months ended September 30, 2012 we sold 15,431 tons of copper anode, 12,050 tons of CCA and copper wire products,
and 2,490 tons of copper rod. As of September 30, 2012, we operated approximately 80 high speed wire drawing machines, which draw
larger diameter copper rod or CCA rod into much finer diameter wires, with a total capacity of approximately 7,500 tons per annum
of superfine CCA wire and approximately 20,000-25,000 tons per annum of superfine copper wire, with a diameter range of 0.03mm
to 1.60mm. The above referenced copper wire production capacity does not include the production of the thickest class of copper
wire, with a diameter range of 1.65mm to 1.75mm. These drawing machines are manufactured to our design and specifications by custom
equipment manufacturers located in China. We expanded our copper wire production capacity in the first half of 2010, at which time
we added six new wire copper drawing production lines, expanding copper wire production capacity from 18,000 tons per annum to
20,000 – 25,000 ton per annum depending on the thickness of the copper wire we produced. As noted above, in October 2011,
we completed capacity efficiency improvements to our copper anode and copper rod smelters and had increased annual production capacity
of copper anode and copper rod to 35,000 tons and 50,000 tons, respectively. We started construction on a new plant, adjacent to
the current plant, in November 2010, where we initially planned to add two new copper anode smelters with an annual capacity of
25,000 tons each. The construction of the two new anode smelters was completed and production began in June 2012. We have constructed
more facilities on site to house production equipment for our new CCA cable and wire product, as well as warehousing of materials.
We expect to complete the construction of the entire new plant site in 2013.



Significant Factors Affecting Our Results of Operations



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



•	product
mix and impact of gross margins

•	supply
and costs of principal raw materials;

•	copper
prices and supply and demand of copper;

•	production
capacity; and

•	economic
conditions in China.



Product mix and effect on gross margins



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



Generally, copper anode and copper rod
products contribute a lower gross profit margin compared to the wire products, which in comparison are further processed downstream
products. However, given the quick turnover and large volume production of the refined copper products, as well as primarily cash
on delivery payment terms with our customers, the return on invested capital for the refined copper products and working capital
turnover are better than that of the wire products.





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 consist primarily of scrap copper and CCA raw material wire.



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 dollar mark-up, which is essentially our gross profit.
Therefore, despite the impact 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, has not been materially affected by the change of copper prices.



26







Copper prices and supply and demand of copper



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



We price our refined copper and CCA wire
products based on the market price for materials plus a fixed dollar mark-up, which is essentially our gross profit. As copper
prices rise, our fixed dollar mark-up per ton processed represents a relatively lower percentage of our gross sales (which is generally
based on tons processed) and therefore our gross profit margin as a percentage of sales is relatively lower; as copper prices decline,
the inverse is true and we report relatively higher gross profit margins on a percentage basis. Despite the implications of copper
price volatility on our gross and net profit margins in percentage terms, during the past three years, because of our fixed dollar
markup, our gross and net profit in absolute dollar terms, has not been materially affected by the exchange of copper prices. Shanghai
Changjiang Commodity Market, one of the major metals trading markets in the PRC, 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.



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 and net income.



Economic conditions in the PRC



We operate our manufacturing facilities
in the PRC and derive the majority of our revenues from sales to customers in the PRC. As such, economic conditions in the PRC
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. The PRC has experienced significant economic growth, achieving a CAGR of 14.8% in gross domestic
product from 1999 through 2011, according to National Bureau of Statistics of China. Domestic demand for and consumption of copper
and CCA products have increased substantially as a result of this growth. We believe that economic conditions in the PRC will continue
to affect our business and results of operations. Over the last few quarters there has been a slow down in the PRC’s economic
growth. At this time, we don’t foresee that our copper anode business will be negatively impacted by the slow down in domestic
economic growth, however, we have experienced and anticipate some continued pressure in the profitability of our wire and rod products
as a result of the slow down.



PRINCIPAL INCOME STATEMENT COMPONENTS



Sales



Our sales are derived from sales of our products 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 cash payment on delivery. However, we also extend credit for 30 days to 60 days to certain of our established customers in the
CCA wire category.



Cost of sales



Our cost of sales primarily consist of
direct material costs, and, to a lesser extent, direct labor costs and manufacturing overhead costs. Direct material costs generally
accounted for the majority of our cost of sales.



Gross profit



Our gross profit is affected 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 dollar mark-up, which is essentially our gross profit.



Operating expenses



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



27







Selling, general and administrative expenses



Our selling expenses include shipping expenses,
salaries and traveling expenses for our sales personnel. Our general and administrative expenses include 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 as well as a result of our R&D efforts, and compliance, investor-relations and other expenses associated
with being a publicly listed company.



Other income and expense



Other income and expense includes interest
income, interest expense, merger costs, foreign currency translation adjustments, and other income.



Our interest expense consists of expenses
related to our short term bank borrowings. We expense all interest as it is incurred.



Change in fair value of warrants



The fair value of the Company’s issued
and outstanding Series A Warrants and Series B Warrants, and the Warrants issued to placement agents in conjunction with the Company’s
initial public offering in September 2009, was $253,000 as of September 30, 2012 and the Company recognized a $23,000 charge, which
is a non-cash charge from the change in fair value of these warrants for the nine months ended September 30, 2012. In future periods,
we may experience significant gains or losses, as the value of these warrants fluctuates in response to changes in our stock price.
All of the Series A Warrants have been exercised and none remain outstanding.



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.



The PRC’s New Tax Law imposes
a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside
the PRC for distribution of earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings generated
prior to January 1, 2008 is exempt from the withholding tax. As we do not anticipate our subsidiaries in the PRC will distribute
their earnings to the Company for the year ending December 31, 2012, and no dividends were distributed in the years ended December
31, 2011 and 2010, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries through
September 30, 2012.



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 PRC 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 the 50% income tax reduction for the period from 2007 to 2009. Set out in the following table are the EIT rates
for our two PRC operating companies from 2006 to 2012:



|               |  | 2006 |   |  | 2007 |  |    | 2008 |  |  | 2009 |   |  | 2010 |      |   | 2011 |  |    | 2012 | 
|-------------- |  | ---- | - |  | ---- |  | -- | ---- |  |  | ---- | - |  | ---- | ---- | - | ---- |  | -- | ---- | 
|Lihua Electron |  |      | – |  |      |  | 12 | %    |  |  | 12.5 | % |  |      | 12.5 | % |      |  | 25 | %    | 
|Lihua Copper   |  |      | – |  |      |  | 25 | %    |  |  | 25   | % |  |      | 25   | % |      |  | 25 | %    | 



28







Critical Accounting Policies



Management’s discussion and analysis
of its financial condition and results of operations is based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection
and application of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our
condensed consolidated financial statements, “Summary of Significant Accounting Policies”. Management bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical
accounting policies that currently affect our financial condition and results of operations.



Revenue recognition
Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery
has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.



Sales revenue is recognized net of value
added tax, sales discounts and returns at the time when the merchandise is sold and delivered to the customer. Based on historical
experience, management estimates that sales returns are immaterial and has not provided an allowance for estimated sales returns.



Accounts receivables
Accounts receivables are stated at cost, net of an allowance for doubtful accounts. We maintain allowances for doubtful accounts
for estimated losses, if any, resulting from the failure of customers to make required payments. We review the accounts receivable
on a periodic basis and provide allowances where there is doubt as to the collectability of individual balances. In evaluating
the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customer’s
payment history, its current credit-worthiness and current economic trends.



Inventories

Inventories are stated at the lower of cost, determined on a
weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to
their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or
to management’s estimates based on prevailing market conditions. The management will write down the inventories to market
value if it is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and
obsolete inventories to determine if a valuation allowance is required.



RESULTS OF OPERATIONS



THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2011



Sales



Our business for the three
months ended September 30, 2012 continued to demonstrate growth. Net sales increased by 53.5% from $155.6 million in the
three months ended September 30, 2011 to $238.8 million in the three months ended September 30, 2012. This growth in sales
was primarily driven by: i)  strong market demand for our products, resulting in increased production volume; and ii) the addition
of copper anode and copper rod sales as a result of the smelter production capacity increase that we completed in June 2012
for copper anode and in October 2011 for copper rod. The increase in sales revenue was, however, negatively impacted by the
reduction of copper prices during the third quarter of 2012 relative to the same period last year. However, robust sales
volume led to an overall increase in sales for the third quarter of 2012.



The overall sales volume increase
of 82.6% for the three months ended September 30, 2012 over the same period last year is the result of additional production
and sales of all of our products. Sales volume of CCA and copper wire in the third quarter of 2012 increased 50.6% from the
same period last year as a result of additional production quantity, as well as additional production and sales of the
thicker fine copper wire, which was semi-processed from copper rod, as a result of increased copper rod smelting capacity.
The sales volume growth of 86.1% of copper anode in the third quarter of 2012 compared to the same period in 2011 was
primarily due to increased copper anode production capacity as a result of the addition of two new copper anode smelters
which started production in June 2012. As a result of capacity increase in October 2011, we started sales of copper rod to
outside customers in fourth quarter of 2011, which to contributed the sales increase of copper rod in the third quarter of
2012 compared to nil in the same period of 2011.



We sell our products based on the prevailing
market price of the underlying product at the time of the sale. Factors impacting average selling prices of our products are copper
price fluctuation, and in the case of the wire products, the average diameter of the wire products sold during the time - the thicker
the wire diameter the lower the sale price, and vice versa.



29







The table below sets forth more details regarding the
product sales breakdown by specific category.



|                    |  | Three months ended September 30, |            
|------------------- |  | -------------------------------- | -----------
|                    |  | 2012                             |            
|                    |  | Sales                            |            
|CCA and copper wire |  | $                                | 101,242,664
|Copper anode        |  |                                  | 118,235,921
|Copper rod          |  |                                  | 19,314,445 
|Total               |  | $                                | 238,793,030



Cost of Sales and Gross Margin



The following table sets forth our cost of sales and gross profit,
both in amounts and as a percentage of total sales for the three months ended September 30, 2012 and 2011:



|                    |  | Three Months ended September 30, |            
|------------------- |  | -------------------------------- | -----------
|                    |  | 2012                             |            
|                    |  |                                  |            
|                    |  | Cost of Sales                    |            
|CCA and copper wire |  | $                                | 88,450,753 
|Copper anode        |  |                                  | 106,810,894
|Copper rod          |  |                                  | 18,274,981 
|Total               |  | $                                | 213,536,628



|                    |  | Three Months ended September 30, |           
|------------------- |  | -------------------------------- | ----------
|                    |  | 2012                             |           
|                    |  |                                  |           
|                    |  | Gross Profit                     |           
|CCA and copper wire |  | $                                | 12,791,911
|Copper anode        |  |                                  | 11,425,027
|Copper rod          |  |                                  | 1,039,464 
|Total               |  | $                                | 25,256,402



* Percentage of sales of respective product category



Total cost of sales for the three months
ended September 30, 2012 was $213.5 million, reflecting an increase of 56.9% from the same period last year. As a percentage of
total sales, our cost of sales increased to 89.4% of total sales for the three months ended September 30, 2012, compared to 87.5%
of total sales in the same period last year. Consequently, gross margin as a percentage of total sales decreased to 10.6% in the
three months ended September 30, 2012 from 12.5% for the same period last year, principally due to the additional production and
sales of lower margin products including copper anode, copper rode, and fine copper wire.



Gross profit for the three months ended
September 30, 2012 was $25.3 million, up 29.8% from gross profit of $19.5 million for the same period in 2011.



Selling, General and Administrative Expenses



The following table sets forth operating expenses and income
from operations both in amounts and as a percentage of total sales for the three months ended September 30, 2012 and 2011:



|                                  |  | Three months ended September 30, |            | Change in three months ended September
30, 2012 compared to three months ended September 30, 2011 |           
|--------------------------------- |  | -------------------------------- | ---------- | ------------------------------------------------------------------------------------------------- | ----------
|                                  |  | 2012                             |            | 2011                                                                                              |           
|                                  |  | US$                              |            |                                                                                                   | % of Sales
|Gross profit                      |  | $                                | 25,256,402 |                                                                                                   |           
|Operating Expenses:               |  |                                  |            |                                                                                                   |           
|Selling expenses                  |  |                                  | (741,135   | )                                                                                                 |           
|General & administrative expenses |  |                                  | (2,059,027 | )                                                                                                 |           
|Total operating expense           |  |                                  | (2,800,162 | )                                                                                                 |           
|Income from operations            |  |                                  | 22,456,240 |                                                                                                   |           



30







Total selling, general and administrative
expenses were approximately $2.8 million for the three months ended September 30, 2012, an increase of 31.3% compared to approximately
$2.1 million for the same period last year.



Selling expenses were approximately $741,000
for the three months ended September 30, 2012, an increase of approximately 17.0% compared to the same period last year. The increase
was attributable to:



•	Increased
costs related to product distribution and insurance as a result of expanded business volume; and



•	Increased
shipping and handling costs as a result of business growth during the period.



Included in selling expenses were shipping
and handling costs of approximately $585,000 and $514,000 for the three months ended September 30, 2012 and 2011, respectively,
representing an increase of 13.8%, while tons of products sold by us increased 82.6%. Depending on customer requests on a case-by-case
basis, shipping and handling costs may either be borne by us or by our customers. The lesser percentage increase in shipping and
handling costs compared to the percentage increase in tons of products sold during the quarter ended September 30, 2012 is attributable
to fewer customers requesting us to bear these costs compared with the same period last year.



General and  administrative expenses
were approximately $2.1 million for the three months ended September 30, 2012, an increase of 37.4% compared to the same
period last year. The primary factor that caused this increase was the increase in research and development expenses of
$569,867 incurred on new technology and product research and development.



Interest Expense



Interest expense was nil for the three
months ended September 30, 2012, compared to $39,000 for the same period last year. During the quarter ended September 30, 2012,
the Company did not incur any bank borrowings.



Income Tax



For the three months ended September 30,
2012, income tax expense was $5.9 million, reflecting an effective tax rate of 25.4%. The effective tax rate for the same period
in 2011 was 24.6%. Excluding the non-taxable gain/loss on warrants and the operating loss of the US entity, the effective tax rate
was 25.1% and 24.9% for the three months ended September 30, 2012 and 2011, respectively.



Commencing in 2010, both Lihua Electron and Lihua Copper have
been subject to an EIT rate of 25%.



Net Income



Net income for the three months ended September
30, 2012 was $17.2 million, or 7.2% of net revenue, compared to $13.5 million, or 8.7% of net revenue, up 27.3% from the same period
in 2011.



Foreign Currency Translation Gains And Losses



During the three months ended September
30, 2012, the RMB declined against the U.S. dollar, and we recognized a foreign currency translation loss of $0.7 million. During
the three months ended September 30, 2011, the RMB rose against the U.S. dollar, and we recognized a foreign currency translation
gain of $3.6 million. RMB at September 30, 2012 declined against the U.S. dollar by less than 0.25% when compared to June 30,
2012. RMB at September 30, 2011 appreciated against the US dollar by about 1.8% when compared to June 30, 2011.



31







NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2011



Sales



Our business for the nine
months ended September 30, 2012 continued to demonstrate growth. Net sales increased by 30.3% from $459.5 million in the nine
months ended September 30, 2011 to $598.9 million in the nine months ended September 30, 2012. This growth in sales was
primarily driven by: i)
strong market demand for our products, resulting in increased production volume; ii) the addition of copper rod sales as a result of the copper rod smelter production
capacity increase that we completed in October 2011; iii) tbe addition of copper anode sales as a result of the addition of
two copper anode smelters completed in June 2012. Sales growth was, however, negatively impacted by the reduction of copper
prices during the first nine months of 2012 relative to the same period last year. However, robust sales volume led to an
overall increase in sales for the first nine months of 2012.



The overall sales volume increase
of 55.7% for the nine months ended September 30, 2012 over the same period last year is the result of additional production
and sales of all of our products. Sales volume of CCA and copper wire in the first nine months of 2012 increased 42.9% from
the same period last year as a result of additional production quantity, as well as additional production and sales of
the thicker fine copper wire, which was semi-processed from copper rod, as a result of increased copper rod smelting
capacity. The sales volume growth of 38.2% of copper anode in first nine months of 2012 compared to the same period in 2011
was primarily due to increased copper anode production capacity as a result of the addition of two new copper anode
smelters, which started production in June 2012. As a result of capacity increase in October 2011, we started sales of copper
rod to outside customers in fourth quarter of 2011, which contributed to the sales increase of copper rod in the first nine
months of 2012 compared to nil in the same period of 2011.



We sell our products based on the prevailing
market price of the underlying product at the time of the sale. Factors impacting average selling prices of our products are copper
price fluctuation, and in the case of the wire products, the average diameter of the wire products sold during the time - the thicker
the wire diameter the lower the sale price, and vice versa.



Please see the table below for more details regarding the product
sales breakdown by specific category.



|                    |  | Nine months ended September 30, 2012, |            
|------------------- |  | ------------------------------------- | -----------
|                    |  | 2012                                  |            
|                    |  | Sales                                 |            
|CCA and copper wire |  | $                                     | 291,287,470
|Copper anode        |  |                                       | 251,407,291
|Copper rod          |  |                                       | 56,192,422 
|Total               |  | $                                     | 598,887,183



Cost of Sales and Gross Margin



The following table sets forth our cost of sales and gross profit,
both in amounts and as a percentage of total sales for the nine months ended September 30, 2012 and 2011:



32







|                    |  | Nine months ended September 30, |            
|------------------- |  | ------------------------------- | -----------
|                    |  | 2012                            |            
|                    |  |                                 |            
|                    |  | Cost of Sales                   |            
|CCA and copper wire |  | $                               | 255,149,809
|Copper anode        |  |                                 | 225,840,504
|Copper rod          |  |                                 | 53,294,442 
|Total               |  | $                               | 534,284,755



|                    |  | Nine months ended September 30, |           
|------------------- |  | ------------------------------- | ----------
|                    |  | 2012                            |           
|                    |  |                                 |           
|                    |  | Gross Profit                    |           
|CCA and copper wire |  | $                               | 36,137,661
|Copper anode        |  |                                 | 25,566,787
|Copper rod          |  |                                 | 2,897,980 
|Total               |  | $                               | 64,602,428



* Percentage of sales of respective product category



Total cost of sales for the nine months
ended September 30, 2012 was $534.3 million, reflecting an increase of 32.4% from the same period last year. As a percentage of
total sales, our cost of sales increased to 89.2% of total sales for the nine months ended September 30, 2012, compared to 87.8%
of total sales in the same period last year. Consequently, gross margin as a percentage of total sales decreased to 10.8% in the
nine months ended September 30, 2012 from 12.2% for the same period last year, principally due to the additional production and
sales of lower margin products including copper anode, copper rode, and fine copper wire.



Gross profit for the nine months ended
September 30, 2012 was $64.6 million, up 15.3% from gross profit of $56.0 million for the same period in 2011.



Selling, General and Administrative Expenses



The following table sets forth operating expenses and income
from operations both in amounts and as a percentage of total sales for the nine months ended September 30, 2012 and 2011:



|                                  |  | Nine months ended September 30, |            | Change in nine months ended September 30, 2012 compared to nine months ended September 30, 2011 |           
|--------------------------------- |  | ------------------------------- | ---------- | ----------------------------------------------------------------------------------------------- | ----------
|                                  |  | 2012                            |            | 2011                                                                                            |           
|                                  |  | US$                             |            |                                                                                                 | % of Sales
|Gross profit                      |  | $                               | 64,602,428 |                                                                                                 |           
|Operating Expenses:               |  |                                 |            |                                                                                                 |           
|Selling expenses                  |  |                                 | (2,168,129 | )                                                                                               |           
|General & administrative expenses |  |                                 | (5,991,326 | )                                                                                               |           
|Total operating expense           |  |                                 | (8,159,455 | )                                                                                               |           
|Income from operations            |  | $                               | 56,442,973 |                                                                                                 |           



33







Total selling, general and administrative
expenses were approximately $8.2 million for the nine months ended September 30, 2012, an increase of 30.9% compared to approximately
$6.2 million for the same period last year.



Selling expenses were approximately $2.2
million for the nine months ended September 30, 2012, an increase of approximately 18.8% compared to the same period last year.
The increase was attributable to:



●	Increased
costs related to product distribution and insurance as a result of expanded business volume; and

●	Increased
shipping and handling costs as a result of business growth during the period.



Included in selling expenses were
shipping and handling costs of approximately $1.7 million and $1.5 million for the nine months ended September 30, 2012 and
2011, respectively, representing an increase of 15.5%, while tons of products sold by us increased 55.7%. Depending on
customer requests on a case-by-case basis, shipping and handling costs may either be borne by us or by our customers. The
lesser percentage increase in shipping and handling costs compared to the percentage increase in tons of products sold during
the nine months ended September 30, 2012 is attributable to fewer customers requesting us to bear these costs compared with
the same period last year.



General & administrative
expenses were approximately $6.0 million for the nine months ended September 30, 2012, an increase of 35.8% compared to the
same period last year. The primary factor that caused this increase was the increase in research and development expenses of
$1.2 incurred on new technology and product research and development.



Interest Expense



Interest expense was nil for the nine months
ended September 30, 2012, compared to $109,000 for the same period last year. During the nine months ended September 30, 2012,
the Company did not incur any bank borrowings.



Income Tax



For the nine months ended September 30,
2012, income tax expense was $15.0 million, reflecting an effective tax rate of 26.2%. The effective tax rate for the same period
in 2011 was 24.2%. Excluding the non-taxable gain/loss on warrants and the operating loss of the US entity, the effective tax rate
was 25.2% and 25.0% for the nine months ended September 30, 2012 and 2011, respectively.



Commencing in 2010, both Lihua Electron
and Lihua Copper have been subject to an EIT rate of 25%.



Net Income



Net income for the nine months ended September
30, 2012 was $42.2 million, or 7.0% of net revenue, compared to $40.4 million, or 8.8% of net revenue, down 4.3% from the same
period in 2011. The net income for the nine months ended September 30, 2012 was impacted by a $73,000 non-cash gain on extinguishment
of warrant liabilities and a non-cash charge of $23,000 as a result of the change of the fair value of the warrants. Excluding
the impact of these non-cash warrant related items, net income for the nine months ended September 30, 2012 was $42.1 million.



Foreign Currency Translation Gains And Losses



During the nine months ended September
30, 2012, the RMB declined against the U.S. dollar, and we recognized a foreign currency translation loss of $1.7 million. During
the nine months ended September 30, 2011, the RMB rose against the U.S. dollar, and we recognized a foreign currency gain of $7.7
million. RMB at September 30, 2012 declined against the U.S. dollar by less than 0.64% when compared to January 1, 2012. RMB at
September 30, 2011 appreciated against the US dollar by about 4.21% when compared to January 1, 2011.



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 in the capital
markets.



We have not transferred cash between our
operating subsidiaries and the U.S. parent company. As of September 30, 2012, total cash held in Renminbi and U.S. dollars was
RMB827.4 million (or $130.5 million based on the conversion rate of US$1 = RMB 6.3410 on the same date). We maintain cash in U.S.
dollars in an offshore account in Hong Kong and the U.S., to pay for U.S. related expenses such as legal fees and external investor
relation firm fees as a result of being a public company in the U.S. Currently we do not have any need to transfer cash between
our operating subsidiaries.



As of September 30,
2012, we had approximately $130.5 million in cash, up $24.8 million from $105.6 million at December 31, 2011. The following
table summarizes our cash flows for each of the periods indicated:



|                                                     |  | Nine Months Ended September 30, |            
|---------------------------------------------------- |  | ------------------------------- | -----------
|                                                     |  | 2012                            |            
|                                                     |  | (US$)                           |            
|Net cash provided by operating activities            |  | $                               | 35,035,331 
|Net cash used in investing activities                |  |                                 | (8,299,908 
|Net cash used in financing activities                |  |                                 | (992,846   
|Effect of exchange rate on cash and cash equivalents |  |                                 | (895,003   
|Cash and cash equivalents at beginning of period     |  |                                 | 105,637,627
|Cash and cash equivalents at end of period           |  | $                               | 130,485,201



Operating activities

For the nine months ended
September 30, 2012, cash provided by operating activities totaled $35.0 million compared to $21.4 million in the same period
of 2011. This increase was primarily attributable to: i) $42.1 million net income; ii) a $4.9 million reduction in
prepayments for raw material purchases, which resulted from an advance payment for the importation of our raw material from
overseas; iii) a $1.2 million increase in account payable; iv) a $1.3 million increase in income taxes payable; offset by
i) a $11.5 million increase in accounts receivable; and ii) a $6.8 million increase in inventory, resulting from the
expansion of production capacity and revenue growth.



Investing activities

For the nine months ended September 30,
2012, we had a net cash outflow of $8.3 million for investing activities for the addition to construction in progress and purchase
of property, plant and equipment, primarily as a result of capital investment in new equipment and machinery and building of new
workshops, all of which was part of our planned expansion.



Financing activities

For the nine months ended September 30,
2012, we had a net cash outflow of $1.0 million from financing activities, as a result of the payment of two special dividend distributions
approved by the Board of Directors.



In October 2011, the Board of Directors
approved two special dividends. The amount of each special dividend was $0.03 per outstanding share of Lihua common stock on the
respective record dates. The first dividend was paid on January 13, 2012 to Lihua shareholders of record on December 31, 2011 and
the second dividend was paid on April 13, 2012 to Lihua shareholders of record on March 31, 2012. The per share amount of each
special dividend was calculated on an annualized method based on 5% of the Company’s full-year GAAP net income of $38.5 million
for the twelve months ended December 31, 2010. Magnify Wealth Enterprise Ltd. (“Magnify Wealth”), the Company’s
largest shareholder and an affiliate of Mr. Jianhua Zhu, the Company’s founder, Chairman and CEO, had agreed to waive payment
of the two special dividends. Accordingly, the two special dividends were distributed among approximately 16.8 million shares.
The first dividend payment of $0.5 million was made in January 2012 and second dividend payment of $0.5 million was made in April
2012.



35







On May 19, 2011, Magnify Wealth, an affiliated
entity of Mr. Jianhua Zhu, agreed to loan us up to $4 million pursuant to the terms of a demand promissory note (the “Note
”) to partially fund our previously announced $15 million stock repurchase program to make open market purchases of our
common stock. While our operating subsidiaries in the PRC have substantial cash reserves available, the laws of the PRC restrict
the conversion of RMB to US dollars, such that we have encountered difficulty funding the repurchase program with US dollars from
cash held by our PRC subsidiaries. We explored possible alternative arrangements for funding the repurchase program in US dollars
with financial institutions, but our management determined that such alternatives would have been costly or otherwise not appropriate
for us.



On January 9 and March 15, 2012, in order
to partially fund the 2011 special dividend payment and operating expenses, Magnify Wealth loaned $1 million and $0.6 million respectively
under the Note, of which RMB6.3 million and RMB3.8 million were repaid on January 9 and March 31, 2012, respectively, in RMB, at
the average rate of 6.3126 RMB per US dollars, which was based upon the exchange rate between US dollars and RMB as set forth by
Standard Chartered Bank in Hong Kong. The loans under the Note were unsecured, payable on demand and bore interest at 2% per annum.



On April 6 and April 26, 2012, in
order to partially fund the 2011 special dividend payment and U.S. dollar operating expenses, upon Board approval, Magnify
Wealth loaned $0.5 million and $0.9 million, respectively, under the Note, of which RMB 3.15 million and RMB 5.65 million
were repaid, respectively, in RMB, at the average rate of 6.2916 RMB per US dollars, based upon the exchange rate between US
dollars and RMB as set forth by Standard Chartered Bank in Hong Kong. The loans under the Note were unsecured, payable on
demand and bore interest at 2% per annum.



As of September 30, 2012, there were no outstanding loans under
the Note.



Capital expenditures



Our capital expenditures are principally
comprised of construction and purchases of property, plant and equipment for expansion of our production facilities. In 2009, 2010
and 2011, we funded our capital expenditures primarily through cash flows from operating activities, the proceeds of bank borrowings,
and equity issuance.



In 2012, as we accelerate our expansion,
we expect continued capital expenditures for maintaining existing machinery and adding manufacturing equipment in our new facility,
which is adjacent to our existing facility. With two new copper anode smelters added in June 2012, we currently have four smelting
facilities, which can produce a total of 135,000 tons of refined copper products per year, up from 85,000 tons of capacity per
year. With our current capacity of wire production lines, we can produce 7,500 tons of CCA wire and 20,000-25,000 tons of copper
wire with the diameter range of 0.03mm – 1.60mm. For the 2012 capacity expansion, we believe that our existing cash, cash
equivalents and cash flows from operations 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.



Accounts receivable



For the nine months ended September 30,
2012, we sold 34,213 tons of CCA and copper wire, 32,194 tons of copper anode and 7,123 tons of copper rod. In the same period
last year, we sold 23,940 tons of CCA and copper wire, 23,300 tons of copper anode and nil tons of copper rod. As CCA is an emerging
product in the PRC, we extend credit terms to some of our larger customers. However, pure copper products, such as our copper anode
and copper rod, are in such high demand that we do not have to extend credit terms. Our customers often purchase more than one
type of product from us (for example, one customer may purchase both CCA wire and copper wire). CCA wire purchases are generally
accorded 30 to 60 day payment terms, depending upon the creditworthiness of the customer, while the copper anode (and copper rod)
purchases are 70% payable upon delivery to the customer, which may occur two to seven days after we ship the product and recognize
our revenue, with the remaining 30% generally collected within 30 days after the delivery. This decision to extend terms or to
collect payment upon delivery, is based primarily upon the product type. We may extend terms for CCA purchases to a credit-worthy
customer, but for that same customer require 70% payment upon delivery for purchases of copper rod and/or copper anode.



36







The table below shows the breakdown of accounts receivable by
product:



|                         |  | As of September 30, |           
|------------------------ |  | ------------------- | ----------
|                         |  | 2012                |           
|CCA Wire and Copper Wire |  | $                   | 13,539,353
|Copper Anode             |  |                     | 24,100,673
|Copper Rod               |  |                     | 4,740,483 
|Total                    |  | $                   | 42,380,509



Off-balance sheet arrangements



As of September 30, 2012 and December 31, 2011, we had no off
balance sheet arrangements.



37







ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK



Foreign Exchange Risk



Substantially all of our revenues and expenditures
are denominated in Renminbi. As a result, fluctuations in the exchange rate between the U.S. dollars and Renminbi will affect our
financial results in U.S. dollars terms without giving effect to any underlying change in our business or results of operations.
The Renminbi’s exchange rate with the U.S. dollars and other currencies is affected by, among other things, changes in the
PRC’s political and economic conditions. The exchange rate for conversion of Renminbi into foreign currencies is heavily
influenced by intervention in the foreign exchange market by the People’s Bank of China. From 1995 until July 2005, the People’s
Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately 8.3 Renminbi per U.S. dollars.
On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S.
dollars. However, the Renminbi is restricted to a rise or fall of no more than 0.5% per day versus the U.S. dollars, and the People’s
Bank of China continues to intervene in the foreign exchange market to prevent significant short-term fluctuations in the Renminbi
exchange rate. Nevertheless, under China’s current exchange rate regime, the Renminbi may appreciate or depreciate significantly
in value against the U.S. dollars in the medium to long term. There remains significant international pressure on the PRC government
to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation
or depreciation in the value of the Renminbi against the U.S. dollars.



Any devaluation of the Renminbi against
the U.S. dollars would consequently have an adverse effect on our financial performance and asset values when measured in terms
of U.S. dollars. On the other hand, the appreciation of the Renminbi could make our customers’ products more expensive to
purchase because many of our customers are involved in the export of goods, which may have an adverse impact on their sales. A
decrease in sales by our customers could have an adverse effect on our operating results. In addition, as of September 30, 2012
and December 31, 2011, we have cash denominated in Renminbi amounting to RMB827.4 million ($130.5million) and RMB665 million ($106
million), respectively. Also, from time to time we may have U.S. dollars denominated borrowings. Accordingly, a decoupling of the
Renminbi may affect our financial performance in the future.



We recognized foreign currency translation adjustments of approximately
$(0.7) million and $(1.7) million for the three and nine months ended September 30, 2012, respectively.



Very limited hedging transactions are available
in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in
an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully
hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into foreign currency.



Inflation



In recent years, the PRC has not experienced
significant inflation, and thus inflation has not had a material impact on our results of operations. According to the National
Bureau of Statistics of China, the change in Consumer Price Index in China was -0.7%, 3.3% and 4.1% in 2009, 2010 and 2011, respectively.



Item 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange
Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including
the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.



38







In connection with the preparation of the
quarterly report on Form 10-Q for the quarter ended September 30, 2012, our management, including our principal executive officer
and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which
are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.



Based on this evaluation, our principal
executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September
30, 2012.



Changes in Internal Control over Financial Reporting



There have been no changes in our internal
control over financial reporting that occurred during the third fiscal quarter of 2012 covered by this Quarterly Report on Form
10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



39







PART II — OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None.



ITEM 1A. RISK FACTORS



There have been no material changes in the
Company’s risk factors from those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2011.



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



None.



ITEM 3. DEFAULTS UPON SENIOR
SECURITIES



None.



ITEM 4. MINE SAFETY DISCLOSURES



None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS



(b) Exhibits



|Exhibit
        No. |  | Document Description                                                                                                                                                                                                         
|------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1                |  | Certification of Chief Executive Officer (Principal 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 Chief Financial Officer (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 Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).                                                                                                         
|101                 |  | Interactive Data File                                                                                                                                                                                                        



40







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.
|---------------- | -------------------------
|                 |                          
|November 9, 2012 | By:                      
|                 |                          
|                 |                          
|                 |                          
|November 9, 2012 | By:                      
|                 |                          
|                 |                          



41